April has definitely been a month which has seen our lives showered with so many moving pieces for almost all of us. Many of us started April without any state mandates to "shelter in place", "quarantine", or "stay at home" requests. For others, some of those requests were put into place not long before April came into view. Some clients were trying to figure out how to be a parent, teacher, principal, and a technology coordinator when previously the only ZOOM they had been aware of was the speed of the hours in a day and that speed was about to go from 60 down to 0 due to having to "stay put" for the next many many weeks. Others of us were out simply looking for an unspoken for roll of toilet paper to bring home.
This month we will briefly review some market details, but in less detail than we normally do (I can almost here the applause now...).
AS OF LATE
Our graph here below, shown in our standard format, illustrates the U.S. markets since day one of January 2020. We show the Long Term U.S. Gov Bonds, the S&P 500 Index and the Russell 2000 (small cap stocks). Once markets began to sense fear from the spreading of the virus, stocks overall ran down, hard and fast. The S&P 500 lost almost -35% in 21 trading days. Meanwhile, U.S. Government bonds, which staggered in March, held steady in April and even nudged higher in price. You can see this decline for stocks setting in due to the fear, beginning around mid February and then hitting a low just over a month later in the second half of March. Amazing how quickly things can unravel. More on that in our side column to the right.
The U.S. Stock & Bond Markets from January 1 - April 30.
The economy is not fragile because of the virus. The virus exposed the fragility of the economy." -S. Henrick.
Usually we discuss a theme or two here with some length. To break things up due to all the news flow as of late about the virus, and to look at a myriad of aspects some of the impacts are currently having, let's take a look at a few numbers which came to life in April.
$7 Trillion - This is the amount of new money, so far, that The Fed has thrown at the COVID 19 problem SO FAR, in just the last 6 weeks! They are trying to save or "float" the economy with money. The Fed will no doubt release floods of money again to try to save the financial lives of so many companies and thereby feel they are helping people. They can provide liquidity but they cannot provide solvency. My dad more than once told me, "If people are throwing money at a problem, money isn't the problem!" (Cartoon)
340,000 - This is the number of cars coming off lease each month in the U.S. Remember, first, car dealers have been closed for the last six weeks or more. Second, Consumers lease cars from MANUFACTURERS at dealers, but do not lease cars from dealers. There is a big difference here. Think about that. <--Read this. In three months that is a million cars. We are in the third month now.
56.6 Million-The number of children being home schooled. Six weeks ago they were not home schooled. Now they will be home till August or September. One parent now home schooling was heard saying, "Who do I need to talk to about getting this student of mine transferred to a different class?" Here is another view.
1:55 - A doctor from a hospital in NYC said this is the ratio of patients who were in desperate medical situations and who had written down their wishes for end of life medical care. One out of every fifty-five people had conveyed their end of life medical wishes. He stated that this creates a huge burden on families and loved ones, as well as on the medical staff trying to arrive at decisions for those in their care who were critically ill. He was basically begging people to have the hard conversations, write down those wishes and make decisions easier on everyone NOW.
187 - This is the number of countries who have instituted some kind of stay at home requests, wishes, mandates on their citizens during the infection growth of this virus.
30.3 Million - The number of Americans who have filed for unemployment just during the last six weeks. This does not include the Americans who filed previous to the pandemic and it is estimated by the some that another 9 million to 14 million had not filed or would not file for various reasons. This has wiped out every job created all the way back to 1988, a full 22 year history of job creation. This is a true tragedy for all these Americans who have now been fully displaced from earning their incomes.
123/500 - Currently, 123 of the S&P 500 companies have reported earnings for Q1 of 2020. In this reporting so far we are seeing a -17.6% drop in earnings. We believe this number approximates the jobless rate in the U.S. at this time coincidentally. As we have stated in past newsletters, S&P earnings PEAKED in the 3Q of 2018, 18 months ago. So in our view, a slow lazy decline has been underway since then and the quarterly numbers give us that view. It is simple math, not opinion. Nothing dramatic in terms of the drop, until now. We had only seen about a -2.7% drop in the previous 15 months but now, the drop is in full swing downward at -17.6%.
$0.89 - The cheapest gas in the U.S. which we are aware of. Kentucky and Ohio usually battle it out for the lowest price on gas at the pump. Gas is so cheap due to people being at home, not driving much, not getting on airplanes and fewer goods and services being trucked back and forth across the U.S. The world currently is afloat in oil. There is no place to ship it, to sell it or to store it. This is what is looks like off the coast of S. California currently. There are 160 million barrels of oil sitting floating at sea currently. They were ready to give it away for free and then the price went NEGATIVE. Toilet paper became more valuable than a complete barrel of oil.
9.807 m/s² - This is the gravitational pull of the earth on everything. Markets cannot escape the gravitational pull on prices, lack of earnings, credit quality, slowing cash flow to companies, and the drop of customers due to many, many causes. Markets are still subject to substantial downturns due to all these gravitational pulls.
-19.8% - This is the drop in mortgage applications to PURCHASE a home from one year ago. More recently, mortgage purchase applications are down -33% from late January, -24% from late February and are basically unchanged from late March which was down -21% from February. Refi's are up nicely and yet in our view, cheaper rates lay ahead so some may get to refi again.
$50 Billion - This is the amount of money lost in the first 90 days of 2020 by the famed Berkshire Hathaway Co., led by none other than Warren Buffett. While $50B is a large sum of money to lose, Berkshire now sits on top of $138 Billion in cash which is $11B more than they started the quarter with. Buffett is a renowned "bottom fisher", one who waits till the value of a company falls and is often in deep financial trouble before making an entrance with life sustaining cash to buy the troubled company or lend to them. He waits at the bottom often and goes fishing for hungry fish. His adage is, "Be fearful when others are greedy and greedy when others are fearful."
Stimulus packages have been passed ($7 trillion worth) and surely there will be more to come. Of this continuance of stimulus, there is little doubt in the view of CRA. But think about this. If you are running a business, does it really help you BUILD that business if an armored car pulls up once a week or once a month and drops money off? Is that helping you build a healthy business? I completely understand why they are passing stimulus packages but is it really the answer to what businesses and the employees need in the longer term? The economic expansion which began in 2009 and began it's reversal in late 2018 (we are talking economics here, not strictly the stock market) is the SLOWEST economic expansion in U.S. history. It is also the economic expansion which put the U.S. Government in their chosen position of taking on the most debt and added to the national debt in the largest percentage ever. This started in 2009 and today, it continues happening still! We, all of us, individually and nationally, have to greatly curb our debt appetites and we need to demand that of those who spend OUR tax dollars.
All the changes we need to undertake, be it social distancing or being more aware of infection safety or relying on debt less, these changes will take time. I would again encourage all of us to be one of the patient, one of the tolerant, and one of the giving. Slow or fast in our changes and in our comeback, it will help all of us come back from all of this well and likely partaking in life more enjoyably.
Let's all try to remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages- We said the rates would start declining. And they have!!
"We stated last month; Mortgage rates are holding steady but they will be dropping. Our outlook is that there will be a quite noticeable drop in rates between now and the end of 2020. Waiting for the latter is probably better. They will move steadily lower as time marches forward toward the end of the year."
Watch these rates please. They are dropping and the CRA view is that they will continue to drop. Here is a wild guess.....the 30 year rate might get below 2.5% within 12 months. It is a guess but seems a lot of motivation for that to happen over time and there is some math behind that "guess".
A Recession or A Depression?
I somewhat hate to say this but last August, we clearly stated in our newsletter that the view at CRA was the U.S. would celebrate July the 4th of 2020 in a recession. While there was a lot of calculation behind that "call" for a recession, we never imagined what would be going on in the world today to bring about the fulfillment of that statement we made. A recession is one thing but what is happening in markets and economies currently is hugely beyond what was behind our view at the time.
What we actually stated last August was this;
While we are not very keen on putting out forecasts for markets, I do believe we will celebrate next July 4th in the midst of a recession here in the U.S. and quite possibly a global recession which will actually create the one here in the U.S. "
Are we calling for a depression here in the U.S.? No. Not at all. I do believe there will be some numbers which will be similar to or reminiscent of depression numbers for a short while but we do not believe they will hold the economy under water long enough to bring on a depression.
Our view last summer that we would be in a recession by the third quarter of 2020 was centered on the idea of the recession being a mild one, not too deep and not too long. There are no "just right" recessions so this is no Goldilocks situation we had forecast and certainly not one we are entering into now at all. The depth of this situation we are in is staggering in terms of the seriousness of it as well as the complexity of it and our recession comments do not take into consideration how quickly this whole situation came about.
Back in 2009 I wrote a column which compared the credit crisis we were in the middle of at that time to a financial comet streaking toward the earth and it barely missed us. But we could clearly see the tail of that comet at that time and we were very fortunate to have the comet miss us back then.
While that 2008/2009 situation came on with some intensity, it basically rolled out and deepened over many months and as the severity grew, many people were discounting that pending severity till it was fully manifested and in their laps.
This current situation has come blazing in with amazing speed, has solidly hit and directly impacted so many situations, industries, countries all throughout the financial "water column". Even those industries not directly hit are now being softly paralyzed but the hit associated industries are having to deal with.
Here is how one, now very broadly based supply chain has been drastically impacted by this overall situation. The domino affect here is compelling in terms of one set of decisions long lasting and far underneath the surface impacts. As news began to roll out in late January that the virus situation in China was growing rapidly, corporate buyers in the U.S. and in Europe began to hurry and jam their orders into China to stave off the impact a slow down in manufacturing which might hit China. The idea was to order large supplies of goods now, get them produced and loaded onto cargo ships before factories in China were hugely negatively impacted by the virus. The fear was, if factories in China are hard hit, China produced goods would not be available if the buyers waited to long to order.
Fast forward a month and people begin to realize that the virus and the accompanying "shelter in place" orders going on in Europe and the U.S. meant a huge slow down in consumers buying the goods produced in China.
So all of a sudden, instead of wanting all these quickly produced goods delivered to Europe and the U.S., buyers were suddenly trying to cancel orders, reroute orders and push back delivery dates for who knows how long! The build just in time manufacturing which everyone has worked so hard to perfect was now becoming the drowning anchors to many businesses who had once benefited from this type of amazing supply chain management! It was truly Dr. Doolittles nightmare of the Push Me Pull You beginning to crush supply chain perfectionists!
In this recent port photo below (click on it to enlarge it), notice that ships are lined up at the docks, end to end but there is only ONE vehicle (circled in yellow - in the lower right corner). Ships are there but there is no real room to off load the cargo of these ships and COVID affected workers are absent from the loading docks even if there were places to put cargo. Also note, in the docking lanes parallel to the docked ships, no ships are seen entering or leaving.
And now another extremely large domino in this chain is crumbling. New cargo ship orders are being cancelled in very large numbers. The world’s top 10 liner companies, which collectively handle more than three-quarters of all of the world’s oceangoing container trade, are looking at steep losses from the falling business. They already have too much capacity so they are cancelling new ship orders.
Still there is an additional domino which almost seems unfathomable, ships are skipping canal usages! Some carriers are trying to preserve cash by taking longer trips around South America and Africa instead of crossing the Panama Canal and Suez Canal, saving on canal toll costs that can reach around $500,000 for a single big ship. But it is much cheaper to skip that toll and sail the extra 8,000 or 5,000 miles respectively since fuel is so cheap!
Two route maps, shippers are choosing to take the long road. It's cheaper!
So these and other domino effects will continue to trickle down into economies and markets. This is likely one time we will be satisfied we take on a recession and not take on a depression.