June 12, 2020

They’re Back!

The corona virus and a generous fed are back. But as I suggested last week in my impatience with the sterling rally in companies without revenue sources and damaged balances sheets, the culprits were the usual Algochums, but another joined the parade, those who play the market as a game to make a quick buck, I call them Pinplayers , and they’re back!

Last week when I wrote about the aggressive purchases of stocks that for all fundamental reason should not have been bought, I was referring to the cruise lines and airlines having been decimated by the pandemic and have had to borrow aggressively from the government but more importantly from the bond market, taking on enormous amounts of debt that only a resurgence in riders has little chance of recouping anything near their financial condition before the pandemic. This in large part is why the 30 stocks in the Dow Jones Industrial Index went up so much recently and why it came down so much today. But just as in other market corrections the same incentives emerge and ETF’s are the lowest hanging fruit, hence all stocks appear to move lower with further help from the Pinplayers and Hedge Funds. The latter which I believe are the elitist of Pinplayers who have stood out this year by ranting to the media that the world was ending. It didn’t’, they were wrong, and the markets have an angry feel to them.

My reasons are straight forward. The markets have been overbought for a few weeks. This shouldn’t come as a surprise to anyone who has read the news or have skin in the game themselves. These days the use of countless crystal balls to suggest this is or isn’t the case are all useless compared to a simple relative strength indicator. Likewise, the uncertainty that has entered the market is still considered a premium in so much as there are assumptions that should be taken in stride. First, Fed Chairman Powell said yesterday that the Fed would unlikely raise rates before 2023. The press took this as scary; I take it to mean they’re going to stay out of the way and let the bond markets do its own thing, which it always does anyway. There is also growing talk of the second wave of the pandemic. This is expected, and since the protests were occurring very little was said about the virus, but few were lost on the masses of people, shoulder to shoulder, and many not wearing masks. Does this mean something worse than the first wave? In my opinion I don’t know, but what I do know is everything from wearing masks to social distancing has become a near commonality for millions of people, testing is far more accessible, and as of today three pharmaceutical companies are cautiously hopeful for  a vaccine by the first quarter of 2021. All three are signs of preparedness and a well-informed community that didn’t exist the first time around and could provide a buffer the second time around.

And in the end the markets are going to predict what will happen in the future. The reopening of the economy has been cautious and carefully executed. Companies such as Starbucks (SBUX) have changed the rules of business themselves and while it’s going to take some time to get to normal there’s cash for opportunities and Treasuries to buffer some of the volatility. And the companies that have weathered the real problems in the economy such as Amazon (AMZN) will continue to serve a diversified portfolio well when corrections such as we’re experiencing come to an end. When that happens is an unknown, but when it does, they’ll be back, and so will we.

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