Lot’s of Support, Not a Lot of Confidence!
Please, make sure you do your part in the global pandemic. Not to participate would be selfish. Sacrifice is needed by all to preserve as much life as possible. Take care of yourself and your loved ones.
The 2008 post Lehman playbook is still in effect. Congress dropped the ball in their first attempt at TARP. Seems they did it again this week. This time, while a blank check policy is needed, it will not get done without checks and balances. Last week I wrote that this would take 5-10% of global GDP ($3.5-7.0 trillion) of fiscal measures to get us through this period. I may have been wrong by a factor of 2 or 3. I wrote that we need nothing less than a blank check policy. I believe that more than ever.
Q2 US GDP hit:
- JP Morgan -14%
- Goldman Sachs -24%
- Morgan Stanley -30%
Worse than the great depression or the US Civil War.
This is what I would do:
Forbearance (the action of refraining from exercising a legal right, especially enforcing the payment of a debt.) Individuals and businesses who are suffering here through no fault of their own need to keep their incomes and make their payments. So the lender of last resort (central bank money printing) should cover all payments for as long as it takes. Here is a good report on what might be needed. This, in a major way, should limit the worst of the credit contraction. But make no mistake, there will most certainly NOT be a “V” bottom most still expect. This will be a “U” at best, but most likely an “L”. Not unlike the 2000-2003 bear market, there will be many tradable rallies. But like we noted last week, VIX needs to fall below 40 for at least one week to suggest the bottom is likely in.
Governments should provide unlimited access to unemployment insurance for as long as it takes. I don’t love the idea of dropping checks to everyone. If you were not working before or if you have ample resources, you do not need the support. The support should get to those that need it the most as fast as possible. This will mitigate personal stress and health side effects. Inequality will become a major social issue coming out of this crisis. Policy needs to help the bottom half more than the top half. Any policy seen helping large companies will not likely be politically palatable.
Companies (see list here in holdings of SPYB) the share buyback gang that needs help, should either have to take preferred equity support from private equity (lots of cash here) or government or be forced to dilute the shareholders to pay back their debt. Some may go bankrupt. I will highlight the Airlines as the worst abusers of financial engineering that enriched the officers and directors. They should not be allowed to buyback stock or pay dividends until creditors are paid off or 10 years. The C-Suite should take an 80-90% pay cut. No stock options for 10-years. I’m sure they will find lots of qualified people willing to work for only $1-2MM per year. This basket remains a SHORT against good quality ZUQ companies with clean balance sheets.
So were do earnings bottom? This is the next phase of the cycle for markets. It took 2-4 years for earnings to recover in 2008-09. This is a reasonable expectation this time around too. But it’s where the multiple settles that is the key to the bottom. Earnings will likely fall about 50% give or take at the trough.
Prior to Trump’s tax cut, the S&P 500 earned $120. A huge part of earnings growth post 2018 were tax cuts and share buybacks. So at a minimum, we should see $120 at a 16x multiple is 1920 on the index. Those looking for when to start buying stuff you like, this is my minimum target. BUT…hang on to your seats.
My worst-case scenario–you may want to look away on this math. Earnings fall 50%, but not from $150 “fake earnings”, but from the $120 real earnings. That leaves $60, about the same as the bottom in 2009. If the multiple is 11x like back then, we go back to 666. If 16x is the bottom, it’s 960.
Technically, the 2000-2007 highs of 1550-1575. The 61.8% retracement is 1708. Somewhere in that zone you plug your nose, buy your favorite companies and come back in 3-5 years you’ll be quite happy.
We are getting close, but we are not there yet. Congress will likely fumble the ball and Mom and Pop Smith need to open their Q1 statements first and panic. Some time in April or May perhaps. Subject to revision, follow me on Twitter @LarryBermanETF for more timely thinking.
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