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Morning Commentary

LOOKING FOR MORE CONFIDENT COMMANDER-IN-CHIEF

By Charles Payne, CEO & Principal Analyst
3/17/2020 9:48 AM

It's a cruel (cruel), cruel summer
Leaving me here on my own
It's a cruel (It's a cruel), cruel summer
Now you're gone
You're not the only one

-Bananarama

The drastic sell-off yesterday was exacerbated by investors looking for a repeat of last Friday when President Trump announced an array of positive developments (including the private sector) charging in like the cavalry. Yesterday, there were no such heroics as Trump hinted the situation could drag on to August, up from his earlier guesstimates of April or May.   

I also think investors were hoping for more news on the stimulus front, including fresh ideas for helping small businesses and those trying to make ends meet in the gig economy. The mainstream media praised the news conference for its somber tone, but I think Wall Street prefers a more bombastic Trump, looking to turn markets around rather than lament that “they take care of themselves.”

The combative element of the press conference, as well as the tone of some reporters, also gave it a greater sense of anger and panic as their focus continued to be on blaming than finding a resolution.   The ball is in the White House’s court, and Trump must pull off The Art of the Deal in ways Washington, D.C. has never seen before as local municipalities creep closer to martial law.  

The UK is focused on isolating folks 70 years and older, which is a step beyond social distancing. There is a feeling there to avoid shutting down the entire economy and building up mass immunity to the coronavirus to remove the risk of a future crisis. It’s a bold move, and it will be interesting to study in the postmortem, along with other moves as we learn of true mortality rates and other facts.

Meanwhile, in Los Angeles, the mayor has come as close to martial law as a city can with restrictions that will last to March 31st. The move was matched by the entire county later in the day. And San Francisco moved to ‘shelter -in -in place, which is a de facto government shutdown of the city.

The news didn’t help the stock market. Of course, if there was a way to hunker down, as Dr. Fauci advocates, to save the medical system from massive overload as tests become more widely available. But once hunkered down, many will worry about when the government would let the nation out of the giant foxholes.

The guessing game about the peak in COVID-19 infections, and when we can come out to play again, is hitting the market harder than anything else. What’s so compelling is that everyone knows the peak will be very soon, whether you consider it to be late May or early August, and it will come in a flash just like summers always do. The nitpicking over a recession or no recession is moot because the damage will be swift and harsh, but short-lived.

At some point, it will happen this summer or maybe before the market pivots higher. Nonetheless, the harsh, rocky ride between here and there will continue.

Keep in mind that there will be sessions where the Dow Jones Industrial Average (DJIA) rallies 3,000 points and the eventual bounce will see a one-week net gain of 4,000 to 5,000 points; after the initial wave higher, the best names will rally substantially higher. If you can continue to deal with the pain and be prepared to position for the bounce, you can take this period and avoid the fate of a cruel summer.

The market has tipped into freefall mode. Like a giant tsunami wave, it’s ripping everything in its path.  I have lived through several of these periods, beginning with Black Monday in 1987, and through more recent market crashes and economic recessions. I think this bout of panic will be short-lived, although the impact is sharp and painful. There will be strong pent-up demand, and even a sense of euphoric relief when conventional wisdom thinks the worst is over.

For now, investors must monitor the market closely and must be positioned to take advantage of the rebound, which will come in waves. 

The first wave lifts all stocks. The second wave further lifts the best names -and they will come back to their all-time highs in a matter of months.

Valuation Metrics

The price-to-book (P/B) ratio is coming down fast, as there is an array of more esoteric valuation metrics beyond the typical price-to-earnings (P/E)ratio. I like the price-to-book (P/B) ratio, and I use it for more in-depth research work, especially in my peer reviews. Stocks are nearing oversold levels using the price-to-book (P/B) ratio.

Price to Existence (PE Ratio)

Hang in there, folks. This market is oversold, even if we can’t guess the “e” in the price-to-existence (PE) ratio, because we have no idea how badly earnings will be impacted. At this stage, think of “e” like existence. Will these companies exist at the end of the year?  Will they grow over the next several years?  Heck, Amazon (AMZN) is hiring 100,000 people and raising its starting wages – it has a strong price to an existence proposition.

We aren’t at the most painful levels of 2009, or a post-tech crash, but there are already dozens of obviously oversold stocks in the market.  This is unquestionable. However, the real question is when to buy, and I’m using the coronavirus news and developments coupled with upside tests to stay informed.  

Portfolio Approach

Today’s Session

Very early this morning, equity futures were soaring but have since been talked down, as much of the economic coverage continues to focus on worst case scenarios and waste time on what might have been said on a conference call between President Trump and US governors.   The reality is the market must grapple with daily factual updates on coronavirus cases (including death and hopefully more attention on recuperation) and the curve around the world and the United States.

I continue to look at the Lombardy region in Italy as a potential barometer for the entire country where overall cases and deaths are increasing at a horrifying pace.

Meanwhile, testing kits in America are rapidly coming online with private sector players, including Thermo (TMO), coming up with kits.  We must get to that point where test confirm the breadth of cases but also adds relief on mortality rates and risks.

European Fiscal Actions

More fiscal action in Europe with France offering €45.0 billion to help the economy, €32.0 billion covers deferred corporate taxes and social security charges and €8.5 billion to help workers temporarily sidelined from government shutdowns and other responses to the virus.

The United Kingdom will also announce a major package as all of Europe increases travel bans and enhance border protections.

Retail Sales

US Retail Sales

The initial read on retail sales for February -0.5%, which appears to be a significant miss against consensus of +0.2%, but January revision doubled the final growth number to gain of 0.6 from initial read of +0.3.  This won’t be mentioned, but something to keep in mind with all economic data, so you can mitigate the noise.

The report mostly reflects cheaper gas and fewer auto sales.  The internet was solid, but more and more I’m intrigued with ‘miscellaneous,” which includes florist, pet stores and pet supply stores.  We sent a lot of flowers on Valentine’s Day and we love our pets every day.

The report is mostly inconsequential as all eyes are on the carnage in March and April (hopefully more businesses will resume next month).

Retail & Food Sales

February 2020

Month to Month

Year to Year

Total

-0.5

+4.3

Ex-gas

-0.4

+2.0

Ex-gas & motor vehicle

-0.2

+4.4

Motor vehicle parts

-0.9

+4.9

Furniture

-0.4

+3.8

Electronics

-1.4

-1.0

Building materials

-1.3

+5.1

Food & beverages

+0.0

+4.0

Health & personal care

-0.1

+0.6

Gasoline stations

-2.8

+2.7

Sporting goods

+0.1

+1.9

General merchandise

-0.1

+2.5

Department stores

-0.2

-5.8

Miscellaneous

+1.4

+14.8

Internet

+0.7

+7.5

Food & drinking places

-0.5

+5.2

 

Signs and Signals

Market breadth was horrendous yesterday, as there were only a combined 388 advancers on NYSE and NASDAQ Composite against 6,043 decliners.

On the NYSE, zero stocks hit 52-week highs; although, there were 2,002 new lows, it was fewer than several sessions last week.

Technical View

This downward channel covers a lot of ground, which makes seeking technical buy points very difficult.  For sure, escaping the channel will be a huge buy signal. But before then, some midway point moves will be very informative as well for long term investors looking to accumulate positions.

The S&P 500 could see buy programs kick in above 2,560 if markets make a stand today.

 

 

 

 

 


Comments
So there is a lot of selling
,so who is doing the buying ?

Nunzio Garzino on 3/17/2020 10:09:40 AM
You know who's buying.  The same folks talking market down and at some point (presumably much higher from here) will say the coast is clear.  CP

Charles Payne on 3/17/2020 10:37:22 AM
Spot on, Charles. Killing the American economy is a steep price to pay as our lawmakers overreact. The Wuhan virus is serious, but it’s a case of throwing the baby out with the bath water.

Deborah Manning on 3/17/2020 10:11:44 AM
Well, if we had closed down all travel out the gate not just China we could be doing business in the United States now.  I think when we look back the mortality rates will be very low and someone will say there had to be a better way - perhaps isolating those more vulnerable to dying.   The notion that we all live with our grandparents is folly, especially when  there is a big push to move away from the American nuclear family.  It's no coincidence that those places where several generations live under the same roof say more rapid spread and deaths.  For now we have to ride this out but citizens must make sure governments (state and local) know they cannot usurp our rights longer than a few weeks at a time.   CP 

Charles Payne on 3/17/2020 10:42:58 AM
I have rental property in LA; when Mayor Garcetti said that tenants could not be evicted for not paying rent he said nothing about owners not paying mortgage payments!

El Zorro Oro on 3/17/2020 10:19:36 AM
We are retired and thus living on a fixed income. Our investments are IRA and 401k accounts with some stock..a very small percentage my wife inherited. We have a ready cash account in local banks. We are of the mind to just ride it out...not making any changes or adjustments. Our investment accounts are balanced between stocks, bonds, both small and mid-cap, domestic and foreign. We believe this will be short lived as it appears to be politically motivated. Praying for everyone's safety. God bless!

Stewart Dearing on 3/17/2020 10:21:35 AM
Stewart I agree with parts of the panic built up through politically motivated reporting and actions or inactions.  That said I think our nation comes out of this stronger and wiser.  On that point letting it ride isn't the message of the market.   balance for the sake of balance means exposure to areas of investing that could be most vulnerable.  You've worked hard for you money and while taking emotionally driven losses would be a monumental mistake it's also a mistake to simply stay the course.    You have to take care and put more time into these decisions.   Be well and God Bless Charles V Payne

Charles Payne on 3/17/2020 11:00:35 AM
By watching FOX Business I learned of this weeks ago and pulled the plug on equities. I'm tempted to reverse positions and will stay tuned as to when and into what I shall, with your guidance, dive. Thanks and stay well my friend.

Andrew McLeod on 3/17/2020 12:21:48 PM
Deborah Manning go it right! The hysterical overreaction to this is mind boggling and though I feel empathy for those who lose loved ones to this viral disease I just cannot comprehend the Government's and Politicians positions to what will in the end be just another wave of diseases that visit our planet from time to time.

garro on 3/17/2020 3:46:19 PM
I've never been a "major player" in the markets but I have long been an observer, and what I've learned is this:
Generally speaking, investors are among the most paranoid creatures to ever exist on planet Earth! Overreaction is in their DNA! Now, I'm no Pollyanna (my motto is "Always expect the worst so as to be pleasantly surprised by any other outcome"), but the knee-jerk reaction toward fatalism to every event is the prime reason for instability in the stock market and it's a major reason why most people don't trade stocks.
If the people on Wall Street hear a pigeon sneeze, the indices would drop 1% in a matter of moments!
Within a few weeks - probably by early June - the Wuhan virus will be fading in our rear view mirror and in three years time it will be all but forgotten.


Chiron Venizelos on 3/20/2020 11:42:04 PM
 

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