Futures Limit Down

[Spekulatius]

I agree with you re: going to all cash.  I didn't do that for the reasons you mentioned.  But I start adding much too early, before I understood the seriousness of the likely fallout from the virus.  So, I slowed my buying considerably (though I did buy a bit of WMB between 9 and 10 for the reasons you mentioned).  If I missed a buying opportunity with some of my cash, I'm OK with that, but I recognize I cannot time the bottom or perhaps even recognize it until it's long since past.  That's why I do have general price targets for many of the ones I mentioned.

 

The problem with investing based on fundamental  right now is that we have no clue what the fundamental are looking like right now, much less in the future. We can anchor on past valuations but that is a poor guide when the ground shift beneath our feet. It seems to me more like an environment where a trader or macro investor does well.

 

There will be a time when the bleak fundamental become clearer and most likely thats a better time for fundamental value investing.

 

[kab60]

I don't know about that, Spek. People always tend to think they live in extraordinary and uncertain times, and now it's a virus from China that is on everyones mind. All these lockdowns will obviously have an effect, some companies will go bust, but most will live on, and soon enough it'll be over and we'll probably find something else to fuss about. Or we'll all be dead!

[LC]

So I am no scientist but from the armchair perspective, I think a realistic possibility is by May June July (call it late spring/summer), COVID is on the retreat and life is returning to "normal". I put that in quotes because I don't really know what normal will look like, but for lack of a better term let's call it post-quarantine.

 

Then the flip side is that come November/December, what if we see the emergence of another related, highly infectious and deadly respiratory virus?

 

To me this is a higher-than-zero probability sequence of events. So IF we do see a waning over the summer, it may be prudent to hold off from taking full risk until we see what the winter brings.

[TwoCitiesCapital]

So I am no scientist but from the armchair perspective, I think a realistic possibility is by May June July (call it late spring/summer), COVID is on the retreat and life is returning to "normal". I put that in quotes because I don't really know what normal will look like, but for lack of a better term let's call it post-quarantine.

 

Then the flip side is that come November/December, what if we see the emergence of another related, highly infectious and deadly respiratory virus?

 

To me this is a higher-than-zero probability sequence of events. So IF we do see a waning over the summer, it may be prudent to hold off from taking full risk until we see what the winter brings.

 

That's part of my reason for not seeing a V shaped recovery. Social distancing works in that it helps to keep from overwhelming the healthcare system - it will also prevent herd immunity which means this comes back fall/winter barring a vaccine.

 

Each wave will be less impactful than the one before - but will still be impactful until a vaccine comes out or until we reach herd immunity.

 

Even barring bankruptcies and the slow rsmo up of the travel industry and etc, this will weigh in future growth and economic activity. The other stuff just exacerbates it.

 

We're not going back to 2019 economic activity, earnings, or multiples in the next 2-3 years IMO.

 

 

[kab60]

But is this virus even terrifying? Doesn't seem very frightening when looking at the numbers. And it seems the potentiel issue is bad prepping (like lack of sanizer, face masks, testing etc,) which risks overwhelming healthcare system. Pretty sure most countries will have stocked up and be 10xbetter prepared next time.

[TwoCitiesCapital]

But is this virus even terrifying? Doesn't seem very frightening when looking at the numbers. And it seems the potentiel issue is bad prepping (like lack of sanizer, face masks, testing etc,) which risks overwhelming healthcare system. Pretty sure most countries will have stocked up and be 10xbetter prepared next time.

 

Yup - we might not have to shut down the whole economy next time - though I imagine school closures and etc might still happen.

 

That being said, a large portion of the population is elderly and or immunocompromised. Even if it's just those people who stay home, you still have a massive reduction in economic activity.

 

[Enrico Pallazzo]

But is this virus even terrifying? Doesn't seem very frightening when looking at the numbers.

 

Which numbers?

[Spekulatius]

So I am no scientist but from the armchair perspective, I think a realistic possibility is by May June July (call it late spring/summer), COVID is on the retreat and life is returning to "normal". I put that in quotes because I don't really know what normal will look like, but for lack of a better term let's call it post-quarantine.

 

Then the flip side is that come November/December, what if we see the emergence of another related, highly infectious and deadly respiratory virus?

 

To me this is a higher-than-zero probability sequence of events. So IF we do see a waning over the summer, it may be prudent to hold off from taking full risk until we see what the winter brings.

 

As long as you have flare ups of substantial size anywhere in the country nobody will want to travel with an airplane, stay in a hotel and possibly not even go to a restaurant. Forget foreign travel where you may just spent a vacation in quarantine. We will be couch potatoes for a while. I think that will tear until spring/ summer next year and then slowly get back to normal.

 

Getting back to work will happen much sooner. I think probably 2 month from now tops. People get used to wearing face masks, gloves and keep some distance. It’s going to become a habit. Now where do we get the mask and enough gloves. LOL.

 

 

 

 

[kab60]

But is this virus even terrifying? Doesn't seem very frightening when looking at the numbers.

 

Which numbers?

3k deaths in a Country with plus 1b people. Diamond Princess numbers. Numbers out of Sweden. So far nothing to speak of in Denmark where I live. Italy is somewhat scary but seems like an outlier. Seems like it's possible to handle with the right actions. And if one is a cynic, if it isn't handled well, perhaps it'll be over pretty soon. The World is a peaceful place these days compared to history - pandemics or not, people live longer.

[ukvalueinvestment]

Put another way - it's not terrifying if it's dealt with in the right way and maybe get some luck as well.

 

It is terrifying (for the health service and old people) if that's not the case.

 

I live in the UK and am terrified. 

 

If I lived in the US I would be terrified, given the shambolic response, and the fact that politicians are talking about re opening things before the pain has really even hit.

[kab60]

Put another way - it's not terrifying if it's dealt with in the right way and maybe get some luck as well.

 

It is terrifying (for the health service and old people) if that's not the case.

 

I live in the UK and am terrified. 

 

If I lived in the US I would be terrified, given the shambolic response, and the fact that politicians are talking about re opening things before the pain has really even hit.

I don't dispute that, that might be true. I just don't see how this is anything but another bump in the road nor why it should impact valuations much considering it'll eventually blow over and interest rates might be lower on the other side, thus increasing attractiveness of equities. For what it is worth, I'm not saying buy the index. I think a lot of stuff is still trading at nosebleed valuations - or at least I'm not smart enough to figure those cases out. But almost everything has been thrown out and discarded - some so much that it's probably the biggest buying opportunity since the GFC. If things settle here for 3 months, I'd expect private equity to come thundering with their 2 trillion plus of dry powder and go bargain hunting.

[thepupil]

I try to just focus on picking stocks and finding interesting things to do rather than make macro predictions or read the coronavirus thread. I tip my hat to everyone who saw this as a bigger deal than I did. But I will not change my policy of (personally) being fully invested at all times and just pressing on. I'm a net saver with a stable job.

 

The one thing that does give me a lot of pause with respect to corporate equities is I don't see how we come out of this without MATERIALLY higher corporate tax rates and individual tax rates. For this reason, I'm maybe a little more biased toward pass through vehicles* in non-taxable accounts (even more so than I already am), have considered using these values to do roth conversions (despite not being in a low tax bracket) and am including 30-40% corporate tax rates in a kind of "downside but back to normal operating environment" scenario. for the business i own.

 

We can't have wartime deficits without pretending to try to pay the bill, right?

 

From my perspective, this is a far greater risk to LONG TERM corporate earnings power than whether the coronavirus lockdown last 1 month or 3 months, or whether we enter a recession or a severe recession. Of course, if we enter a depression, then the tax rate won't really matter.

 

 

*of course they aren't necessarily immune.

[KJP]

 

We can't have wartime deficits without pretending to try to pay the bill, right?

 

 

Great question, with no obvious answers.  Assuming there is some limit here, the other alternative is an effectively slow motion default via inflation.  But where on whom an increased tax burden would fall is unclear. 

[rb]

 

We can't have wartime deficits without pretending to try to pay the bill, right?

Great question, with no obvious answers.  Assuming there is some limit here, the other alternative is an effectively slow motion default via inflation.  But where on whom an increased tax burden would fall is unclear.

Well the thing is that it is nothing magical about war time deficits. Deficits are deficits. The economy doesn't care about your intentions. So if you can do it in war-time you can do it in peace time as well.

 

In fact war-time deficits are the worst. In that case you're literally setting money on fire. In this case people are actually gonna benefit from it.

[chrispy]

Maybe it was the distraction of having a baby boy born on Friday but I did not expect this type of rally from a stimulus package

[Viking]

Maybe it was the distraction of having a baby boy born on Friday but I did not expect this type of rally from a stimulus package

 

Great news! Congratulations :-) Hope mom and baby are doing well.

[ERICOPOLY]

 

We can't have wartime deficits without pretending to try to pay the bill, right?

Great question, with no obvious answers.  Assuming there is some limit here, the other alternative is an effectively slow motion default via inflation.  But where on whom an increased tax burden would fall is unclear.

Well the thing is that it is nothing magical about war time deficits. Deficits are deficits. The economy doesn't care about your intentions. So if you can do it in war-time you can do it in peace time as well.

 

In fact war-time deficits are the worst. In that case you're literally setting money on fire. In this case people are actually gonna benefit from it.

 

The person who makes the gunpowder gets the money.  The gunpowder is literally set on fire.  Somebody still has the money and it is typically a US munitions manufacturer and remains in the US economy. 

 

Kind of like spending extra money on going out to watch a movie or eat at a restaurant when watching one at home is cheaper with home cooking.  People panic that it destroys the economy when we don't eat out or go to the movies, but neither is a best use of the dollar.

 

[wabuffo]

We can't have wartime deficits without pretending to try to pay the bill, right?

 

The US ran 13% deficit to GDP ratios after the GFC, and neither taxes nor inflation went up, net-net.  These CV deficits will probably a bit higher but will recede since they are either temporary measures or loans that need to be paid back.  I think the Fed balance sheet will expand greatly - perhaps to $10T.  But that isn't inflationary since it doesn't create new financial assets and is more asset swapping with the private sector.

 

We'll see, I guess, but I don't think you can predict with certainty what will happen.

 

wabuffo

[KJP]

We can't have wartime deficits without pretending to try to pay the bill, right?

 

The US ran 13% deficit to GDP ratios after the GFC, and neither taxes nor inflation went up, net-net.  These CV deficits will probably a bit higher but will recede since they are either temporary measures or loans that need to be paid back.

 

We'll see, I guess, but I don't think you can predict with certainty what will happen.

 

wabuffo

 

You're absolutely right.  But like the post-GFC period, government debt to GDP will presumably jump higher again.  The question no one seems to know is how high that ratio can go.  Indeed, is it even a relevant metric?  My understanding is that the last time debt to GDP was this high was post WWII:  https://tradingeconomics.com/united-states/government-debt-to-gdp  [i believe the U.S. government also has much higher off-balance sheet liabilities now than it did then.]

 

Debt/GDP fell quite quickly for various reasons, including, I believe, a few bouts of high inflation:  https://tradingeconomics.com/united-states/inflation-cpi  (Of course, high real GDP growth, helped higher population growth rates than we have today.)

 

So, today we appear to be going toward higher government debt to GDP ratios than we had post-WWII, higher off-balance sheet government liabilities, with significantly lower population growth.  I don't know where all of that leads, but I don't think it's ultimately headed towards a free lunch.

[Cigarbutt]

We can't have wartime deficits without pretending to try to pay the bill, right?

 

The US ran 13% deficit to GDP ratios after the GFC, and neither taxes nor inflation went up, net-net.  These CV deficits will probably a bit higher but will recede since they are either temporary measures or loans that need to be paid back.  I think the Fed balance sheet will expand greatly - perhaps to $10T.  But that isn't inflationary since it doesn't create new financial assets and is more asset swapping with the private sector.

 

We'll see, I guess, but I don't think you can predict with certainty what will happen.

 

wabuffo

"temporary measures"

https://en.wikipedia.org/wiki/Income_Tax_Act_1842

It is certain that we are going in a direction. The interesting part is to decide if it's the right one.

Wabuffo, I like to tease you and hope you don't mind. 8)

[james22]

Maybe it was the distraction of having a baby boy born on Friday but I did not expect this type of rally from a stimulus package

 

Nice to hear some good news. Congratulations.

[Xerxes]

Hey guys

Question for the collective you

 

If I don’t trust the current rally what would you recommend as an downside protection tool against the whole market.

 

Would you recommend puts on SPY or Dow. I think puts against Nasdaq is pointless as they would likely do well or less worse.

6 months period ?

 

Sorry for the simplistic nature of the question. I am an optimist so hard to think like a bear.

[RichardGibbons]

I have been buying SPY puts (in tiny quantities... not a serious hedge) because that's where the liquidity is. I'm not doing the VIX because it's too high to make bearish bets, and I'm not doing the Dow because I'd rather not bet on 30 stocks.

[matts]

I have been buying SPY puts (in tiny quantities... not a serious hedge) because that's where the liquidity is. I'm not doing the VIX because it's too high to make bearish bets, and I'm not doing the Dow because I'd rather not bet on 30 stocks.

 

Richard, would you mind elaborating on the vix? higher it goes the more attractive the bet no? or do you mean the option premiums are too high? Thanks.

 

[RichardGibbons]

I mean that I'm not buying VIX calls because the VIX is at 62, and it's unlikely to get much beyond 80.  What's more, the VIX options are European exercise, which means that they converge to intrinsic value only right at expiration, which makes them a bad speculative bet right now (because they won't move much compared to how much an American exercise option would.)

 

Betting on the VIX going down is perhaps a more reasonable bet, but it's also hard to make that bet because the timing's tricky.  And if you go way out in time--like a year out--the European exercise makes it hard to take profits quickly.

 

Oddly enough, I had VIX $16 Mar 18 calls that I bought for $1.90, and sold for break even a week and a half later in late Feb, right before the market plummeted.  I was getting cute, hoping the VIX would fall a point so I could rebuy slightly farther out in time for the same price. Didn't happen. 

 

I wouldn't have held all those calls to expiry regardless, but on the day of expiry, the VIX was above 80.  But a potential (80-16)/1.90 = 33 bagger was there.  Oops.

 

(New rule: if the market's obviously going to crash because of a massive pandemic, don't trade away your hedge in order to pick up pennies.)