Futures Limit Down

[Spekulatius]

To decide if the overall stock market is fairly valued (or cheap or expensive) at current levels you need to have an opinion of how deep the recession is and how long it lasts.

 

1.) china style - 6 week lockdown and slow recovery

2.) Longer lockdown (8+ weeks) and slow recovery

3.) 12 months of shitty economy until vaccine is available

 

My view is #1 is a pipe dream. #2 is possible but will depend on federal government leadership, coordination, planning and execution, so i only give it a less than 50% chance. The situation is very fluid.

 

The difference in perception how serious this epidemic is clearly split across partylines. I see it not just in this board, but also in other social media platforms I follow (FB, Nextdoor etc). I am trying not judgementAl here, but thats how I see it:

 

Republican leanings : This epidemic is just a flu and a media hoax and grossly overstated. US needs get back to work. The cure is worse than the disease.

 

Democrat leaning: This is not a flu, it is an serious epidemic . Highly contagious, without vaccine and it could kill hundred thousands if not millions in the US. Similar to the Spanish Flu and most likely worse.

 

I don’t know what to make of it, we look at at the same data , but based on our political leanings, we tend to disagree  on how to interpret it.

 

Personally, I was leaning to the flu thing until late February and then I changed my opinion, as I saw what happened in Italy and did some simple multiplications probabilities , infection rates, growth and morbidity rates and quickly changed my opinion.

 

To be fair, I also know of one Republican leaning friend, who is scared since late January. I attribute this to extensive extensive contact he has in China (he is product line manager for an US company doing a lot business in Asia including China) so he got some first hand accounts. Everyone else I can pretty much put in one bucket or another based on his political preferences.

[LC]

It's funny, I just made a post echoing a similar sentiment.

 

The last thing people should be right now is certain. We have a lot of poor data, and conflicting experiences in different countries.

[Spekulatius]

It is very clear that the folks who said “ it’s just the flu” were incorrect.

 

First of all, this is an investing board and this flu has just stole all the headlines and the stock market  is down 30%. I don’t think a flu has ever caused a stock market selloff of 30% so from an investing perspective it’s not a flu.

 

Second, the argument that the flu may kill 50k doesn’t hold water either. If that were the case, why did 9/11 which killed just 4000 people and destroyed some asbestos laced building caused such a reaction? Yet it caused a major recession and tremendous expenses to prevent this from repeating.

 

The Vietnam war killed 58k US military personal -  equivalent to a bad flu season? What’s the big deal? Why did a generation go up in arms about this?

 

Clearly context matters. Even if it doesn’t matter for you personally, but matters for everyone else, it is going to impact everyone.

[Jurgis]

It is very clear that the folks who said “ it’s just the flu” we incorrect.

 

First of all, this is an investing board and this flu has just stole all the headlines and the stock market  is down 30%. I don’t think a flu has ever caused a stock market selloff of 30% so from an investing perspective it’s not a flu.

 

Second, the argument that the flu may kill 50k doesn’t hold water either. If that were the case, why did 9/11 which killed just 4000 people and destroyed some asbestos laced building caused such a reaction? Yet it caused a major recession and tremendous expenses to prevent this from repeating.

 

The Vietnam war killed 58k US military personal -  equivalent to a bad flu season? What’s the big deal? Why did a generation go up in arms about this?

 

Clearly context matters. Even if it doesn’t matter for you personally, but matters for everyone else, it is going to impact everyone.

 

Emphasis mine.

 

Yeah, humans are very weird beings. (Some would say "irrational", but them's fighting words  8) ).

[Castanza]

It is very clear that the folks who said “ it’s just the flu” were incorrect.

 

First of all, this is an investing board and this flu has just stole all the headlines and the stock market  is down 30%. I don’t think a flu has ever caused a stock market selloff of 30% so from an investing perspective it’s not a flu.

 

Second, the argument that the flu may kill 50k doesn’t hold water either. If that were the case, why did 9/11 which killed just 4000 people and destroyed some asbestos laced building caused such a reaction? Yet it caused a major recession and tremendous expenses to prevent this from repeating.

 

The Vietnam war killed 58k US military personal -  equivalent to a bad flu season? What’s the big deal? Why did a generation go up in arms about this?

 

Clearly context matters. Even if it doesn’t matter for you personally, but matters for everyone else, it is going to impact everyone.

 

The partisan nature is primarily media driven in my opinion.

 

Conservatives don’t want to feel like morons who overreact to a “little old flu.”

 

And Democrats don’t want to be left feeling like a “selfish asshole” who has no sympathy for the struggling family.

 

There is probably a good quote to sum that up.

 

Personally I’m back and forth with it. I try to avoid the bandwagon herd mentality and approach stuff with some level of skepticism. I also can’t get past the idea of building models on flawed numbers or insufficient data. I said it before but if I had to guess this will end up being between H1N1 number infected and SARS deaths.

 

What I care more about is the approach and how it affects the economy and the future of this country. I think any type of lockdown beyond 1 month is going to be very difficult in the US. Both from a logistical and social acceptance standpoint. Some have said fear is a good motivator. It absolutely is, and every dictator would agree with that haha. But judging from the lockdown videos I’ve seen online in India and other countries. You’re going to end up with a lot of dead law enforcement if you have police beating individuals with sticks because they broke curfew. Have we forgotten the Hong Kong protests? Do we think the Wuhan approach was much different than that? For the record , I’m not against a lockdown of that duration (1mo). But beyond that I think it would be time to re-evaluate the situation and consider some type of “soft opening” for lower risk individuals.

 

I guess time will tell.

 

I like your insight into “context”. Makes sense on a societal level.

[drzola]

Anyone marine and or sailing experience and care to share ? Probably could give one some retrospective perspective on coping mechanism's.

[thowed]

Obviously this is all gross generalisations, but I feel that right-wingers tend to be more optimistic about things, and left-wingers more pessimistic.

 

It is tricky relying on models that we don't understand.  As investors, we know the old Buffett adage of preferring to be roughly right than precisely wrong, and it feels like too many people are taking the various models as gospel, when they are presumably relying on data that has limitations on its accuracy.

 

On the other hand, if the models are used as guidelines, understanding their limitations, they're more likely to be useful.

 

However, my feeling is that the internet (and twitter!) has reduced people's appetite for nuance...

 

[vinod1]

If someone had told me 3 years ago, that the economy is where it is right now and the SP500 at almost 2600, I would have thought this someone would be crazy.

 

Not wanting to sound super bearish , but that’s how I see it.

 

If you assume zero SP500 earnings this year, 163 earnings 2021, 5% earnings growth for 9 years, 15 terminal PE in 10 years, and discount rate (return to investor) 10%, SP500 fair value would be ~2400.

 

IMO these are not unreasonable assumptions, so expecting SP500 drop much below 2400 is not very probable. It could in a panic, but it would be quite a good buy there.

 

Of course, you are welcome to change the assumptions above. If you want 15% return on SP500 with the rest of assumptions above, then fair value drops quite a bit to ~1680.

 

It is helpful to get an idea of what the fair value of the market is. As it would give us a benchmark to evaluate the opportunity costs.

 

The above needs a few adjustments

 

1. Everyone knows this but still want to make it explicit. We can discount free cash flow not earnings and the assumption that earnings equals free cash flow is likely aggressive.

 

2. We want to really get to the long term normalized owners earnings i.e. free cash flow, not this year or next. To me normalized means, we already take into account a recession or two over a 10 year period. And also take into account profit margins.

 

Profit margins might decline slightly from the last few years for various reasons. So taking all of these into account, I would posit that normalized earnings are closer to $110 to $130. If I had to pick a number probably $125.

 

Assuming 2% GDP growth and 2% inflation gives nominal GDP growth rate of 4%. Assume corporate profits grow at this rate long term. Use an equity premium of 5%. Thus fair value for S&P 500 would be 2500.

 

If we assume 0% GDP growth, 0% inflation and 0% corporate profit growth, fair value would still be 2500.

 

Vinod

 

 

 

[orthopa]

It is very clear that the folks who said “ it’s just the flu” were incorrect.

 

First of all, this is an investing board and this flu has just stole all the headlines and the stock market  is down 30%. I don’t think a flu has ever caused a stock market selloff of 30% so from an investing perspective it’s not a flu.

 

Second, the argument that the flu may kill 50k doesn’t hold water either. If that were the case, why did 9/11 which killed just 4000 people and destroyed some asbestos laced building caused such a reaction? Yet it caused a major recession and tremendous expenses to prevent this from repeating.

 

The Vietnam war killed 58k US military personal -  equivalent to a bad flu season? What’s the big deal? Why did a generation go up in arms about this?

 

Clearly context matters. Even if it doesn’t matter for you personally, but matters for everyone else, it is going to impact everyone.

 

I think no question this is largely media driven. I don't have a strong opinion on whether which party is right or wrong but the media typically is very liberal so if democrats are taking it more seriously, and more afraid its not surprising the nation is a shaking mess as that's whats on when you turn on the TV. I think you made a good point spekulatius a while back when you posted a picture out of your back yard. Your level of fear would be way lower I believe if facebook/twitter/TV wasn't in your face 24/7. I also think it makes people feel better when they are "woke" and aware of worst case scenarios so naturally as humans we are drawn to this. Better to mentally model out a worst case scenario and get a joyful surprise then a terrible downside surprise! Its self preservation, aware of present danger stuff. Your at risk of dying if your not in the know. Remember, "winter is coming. "

 

For those that have read the book Sapiens there are a lot of parallels to what is going on today to what allowed us to survive hundreds of thousands of years ago. If you were not aware of present danger, or preparing for upcoming danger you died. Those that did prepare learned and passed those genes down. If everyone else is scared, you feel weird that you are not too. I recently talked to an intelligent coworker of mine who bought very large amount of paper products on a trip to the store for food. When I asked why he said bc everyone else was even though he had an abundant supply at home. Not the most rational reason. People are scared. Scared people don't spend money.

 

I don't think there will or is a direct correlation to the number of deaths as much as these traumatic events we experience as a nation change peoples behaviors. There is no question peoples behaviors will be changed going forward. Those recent missed paychecks will hurt and be remembered for a while. Cruise ships/airplanes/travel will suffer due to stigma. Those who venture out early after the all clear will be called naive, stupid, and ignorant of the risks. There are those who will never trust "_____" again. These precautionary attitudes will limit spending going forward, risk taking, etc. For the economy's sake I hope this all over sooner then later but I fear it wont be, and these behavior changes will be more cemented every day. 

[Viking]

Orthopa, have you spent any time looking at what happened in China the last 3 months. The liberal media had nothing to do with their outbreak and the human catastrophe that followed. Read this last line again and think deeply :-)

 

And today, China is far, far from returning to normal. I know, liberal media hysteria is responsible for that too :-)

[SharperDingaan]

Some observations .....

 

Ask your neighbours how much time they spend listening to the media/news these days?, have they cut down the amount of time? and why? Most folks aren't listening more than an hour/day, and because it's too negative. It is widespread, and it is an active changing of the channel. People moving on.

 

Most people use spreadsheets to substitute for experience. You have a brain for a reason, it is time tested, highly adaptable, and it works extremely well in changing conditions. You exist because many, many prior ancestors used their brains to avoid getting killed before passing on their genes. So if someone is reaching for spreadsheets, versus brains ...... what does that really tell you?

 

An economic restart, the day after Easter isn't going to happen.

It is little more than distractive false hope, and Pablum for the masses. You can't make people do business. You can't shut down media coverage, the 'death cafe' jokes, the pictures from the ICU's and the morgues.

 

C'mon 'granny killer' show us how this economy versus a few deaths thing works, by DEMONSTRATING it!

If Bo Jo, and Trudeau can do it, why can't you?

 

SD

 

 

 

 

   

[orthopa]

Orthopa, have you spent any time looking at what happened in China the last 3 months. The liberal media had nothing to do with their outbreak and the human catastrophe that followed. Read this last line again and think deeply :-)

 

And today, China is far, far from returning to normal. I know, liberal media hysteria is responsible for that too :-)

 

I have watched some TV at night this past week and it will scare the shit out of you.  Some things I have seen this past week....

 

1.Discussion of number of ventilators in the country and possibility that there maybe not one for you.

2. Constant up to date coverage on death counts.

3. Constant coverage that there are not enough masks to protect healthcare workers and normal people.

4. Discussions that the people in charge are making mistakes

5. Scary music leading in and out of segments

6. Bright bold lettering highlighting words and phrases like "NOT ENOUGH", "TOO LATE", "MORE TIME", etc on CNBC markets in turmoil (the name alone my god)

7. Highlighting a break in agreement between those in charge and the medical experts, and saying they may not listen.

8. Questioning the CDC decision making and highlighting their failures and their refusal to listen to other experts.

9. Showing multiple curves, including best case, but then saying its too late for that.....

10. Discussing possible food chain disruptions and best times to go to the grocery store and what products run out first

11. Having survival experts on to discuss at home options during a pandemic if you lose electricity and have no water.

12. Day to day coverage and discussion that if the recent bill didnt pass, millions would be out of work with no options. 

13. There are not enough tests for you and your family.

14. Constant discussion that the worst is to come, any day now.

15. on and on and on.

 

Im all for a free media, and my point is not partisan. Fox is likely very guilty of it too, but MSNBC, CBS, ABC, NBC, etc are not nearly as conservative as FOX and have a lot of viewership right now. 

 

You really believe content such as that above is not exacerbating panic in the every day american?

 

This is no different then the green, yellow, orange, red scale about terrorist threats that was on TV during the Bush administration. We heard about terrorists 24 hrs a day, 7 days a week, and saw planes flying into buildings over, and over, and over. No different.

 

[fareastwarriors]

Thought this thread is about the stock market...

[Gregmal]

Thought this thread is about the stock market...

 

There is a reason the market fell as it did and that the fear index was at 80. Its all related.

 

EDIT: to this I'd also add, just look around, here, everywhere. Almost everyone is panicking like hell, and those that arent are viewed as crazy. EVERYONE is currently a "short term trader" trying to predict what the market will do in the next 1-3 days....definitely a unique set of circumstances.

[orthopa]

Thought this thread is about the stock market...

 

It is, everyone is panicking, acting irrational, credit markets freezing etc. My point wasnt to derail the thread but in society they are alot of panicked people now. The markets reflect this.

[orthopa]

To pull this thread back on the rails it maybe the market has priced in the negatives of economic shut down, offset by the stimulus at this level. I do not think it has priced in the real world recession that may come with a stubborn level of unemployment as the dominoes fall down the line. I think many economists are predicting a strong economy again in Q420 or Q121. That maybe a bit optimistic at this point. My concern and I think we saw this with the extended benefits from the Obama administration is that people are going to stay on employment for the enhanced benefits. In New York if I read right its ~$400 plus $600 more? A grand a week is peanuts in NYC but not a bad gig in Syracuse or Rochester. How do you hire someone back to a server, waitress, hostess job that paid $16 an hour when they are getting $1000 a week on unemployment?

[Cigarbutt]

Today at the Fed:

NY Fed to the banks:  "Here - take all these reserves! We have an infinite amount available!"

Banks to NY Fed:        "Nah!  We're good!"

https://apps.newyorkfed.org/markets/autorates/temp

wabuffo

Some days I wish the Fed did not exist (at least for investment decisions).

The post implies that the Fed succeeded in bringing back the Global Financial System from the abyss (per Bloomberg).

From a humble perspective (especially very short term), they have met very unusual liquidity conditions and, as a lender of last resort, have been right to open the valves to the fullest and more. But apart from futures limit up or down being part of the landscape now, are there other long term considerations that may be relevant?

 

https://fred.stlouisfed.org/series/EXCSRESNS

What does the graph tell us (in a potentially schizophrenic way)?

-I've kept a file of articles from 2010 (including many from the Fed itself) discussing how unusual the situation was around 2010. (!)

-10 years into the 'recovery', the Fed hasn't been able to normalize

(in simpleton terms, they have injected money in the system but have forced (regulations and paying for reserves) money back at the Fed)

-Weird things started to occur last September (way before the virus appeared on the scene)

-The above graph needs to be updated:

    -yes, the Fed has seen some easing last week (net reverse repo action with rates closing in on the fed fund rates)

    -what did it take (dosage and type of financial drug) to get this relative ease?

    -the graph does not show the absolute vertical rise that happened after the last update; it was the most impressive vertical rise ever.

      (from the March 26 report, estimate of relevant number for the Fed graph (as of now), about 2,000B):

         

                                                                                        Mar 25, 2020    Wednesday      Wednesday 

                                                                                                              Mar 18, 2020    Mar 27, 2019   

Liabilities                                                                                                   

    Reverse repurchase agreements (12)                                    359,114      +125,168          +117,514

    Other deposits held by depository institutions                      2,347,747    +402,353          +714,959

 

    -the Fed graph does not show that once again, 3mo-LIBOR has completely disconnected (rising) the Fed fund rates (basically at zero).

 

It's impossible to know what the disconnect means but one can suggest that the Market wants more (financial) drug.

Who knows if this is going to be a V, a U or an L recovery but a lot of hope has been placed on the Fed. The Fed has done great for the liquidity and the 2007-8 episode has shown that it can ease the pain. However, the Fed cannot ultimately hinder price discovery. I hope your hope is right.

 

[SharperDingaan]

To pull this thread back on the rails it maybe the market has priced in the negatives of economic shut down, offset by the stimulus at this level. I do not think it has priced in the real world recession that may come with a stubborn level of unemployment as the dominoes fall down the line. I think many economists are predicting a strong economy again in Q420 or Q121. That maybe a bit optimistic at this point. My concern and I think we saw this with the extended benefits from the Obama administration is that people are going to stay on employment for the enhanced benefits. In New York if I read right its ~$400 plus $600 more? A grand a week is peanuts in NYC but not a bad gig in Syracuse or Rochester. How do you hire someone back to a server, waitress, hostess job that paid $16 an hour when they are getting $1000 a week on unemployment?

 

A great many small to medium sized business owners are in denial. They can see their businesses collapsing, have frozen, and it is costing them their life's work. Paying the minimum wage (or less) just buys you minimum effort, it does NOT give you the right to infect an employee with a virus. Your service staff just vote with their feet, and if this is your business, you go under. Collapse.

 

Of course there are always those on minimum wage, (or less), with little choice but to accept the virus risk. But if you want them, you now better pay up, as a great many other employers are paying their front-line staff an extra 15%+, in addition to providing protective gear. And if you're a bar, or a restaurant, you're a high risk employer ....... the market is telling you to temporarily shut down, and if you refuse to listen, the market will do it permanently. Collapse.

 

Many of these businesses are bedrock republican supporters, so the push for a rapid restart and an end to income support, is hardly surprising. Bribe your politician to 'do something', or collapse; how many you kill in the process really doesn't matter. Fortunately. enough other people disagree, to stall the process.

 

We saw the same denial around the 2007 mortgage crises. Authority (banking infrastructure) insisting that people wouldn't default (refusing reality) because it wasn't in their interests. The resultant implosion produced the GFC.

 

SD

 

 

 

[matjone]

Why will bouncing back from this be so much more difficult than spanish flu which killed huge numbers of working age people?

[Viking]

Why will bouncing back from this be so much more difficult than spanish flu which killed huge numbers of working age people?

 

Spanish flu also intersected with the end of World War I.

[matjone]

I understa

Why will bouncing back from this be so much more difficult than spanish flu which killed huge numbers of working age people?

 

Spanish flu also intersected with the end of World War I.

 

I understand that but are we sure it would have crashed the economy otherwise?  Also why would the war ending have saved it (sorry if that's a stupid question)?

[Spekulatius]

We have got a couple more hours until the futures open - anyone want to make a guess which way? I think it’s down, possibly limit down. Those who still work on Wall Street are probably in their helicopters or stretch limos and get out.

[montizzle]

Every single person I've talked to is thinking limit down. So I guess it'll limit up

[wescobrk]

What does the board think of Ben Bernanke making references that this isn't a depression and something similar to a natural disaster and will be a sharp but a short recession and a sharp rebound? If you take his comments along with Bill Gates of opening up the economy in 6-12 weeks then things could start to look somewhat back to normal in the summer.

If the market discounts the future and the market bottomed 3 months before the real economy in 2009, maybe the market could bottom as early as April. I would be surprised if we don't hit at least 40-45% down if not 50% before the bottom but if the duration is going to be months and not years, then maybe the bottom is as close as April.

On the other hand, it seems like sectors of this hit we will be feeling the after effects for years, at least for poor countries. Emerging markets looks particularly worrisome.

[Spekulatius]

What does the board think of Ben Bernanke making references that this isn't a depression and something similar to a natural disaster and will be a sharp but a short recession and a sharp rebound? If you take his comments along with Bill Gates of opening up the economy in 6-12 weeks then things could start to look somewhat back to normal in the summer.

If the market discounts the future and the market bottomed 3 months before the real economy in 2009, maybe the market could bottom as early as April. I would be surprised if we don't hit at least 40-45% down if not 50% before the bottom but if the duration is going to be months and not years, then maybe the bottom is as close as April.

On the other hand, it seems like sectors of this hit we will be feeling the after effects for years, at least for poor countries. Emerging markets looks particularly worrisome.

 

I agree with pretty much everything you wrote. I think it is crucial to keep the timeline to reopen the economy as short as possible and in order for that to happen, new infection rates will need to come down.