We understand this is a frustrating time for everyone. We want to try to continue to give our clients more insight into what’s happening with markets, and where we see things going. There is opportunity out there!
Without the enormous CV-19 problem, we STILL would have been dealing with a big problem if it was solely the oil fight; Saudi Arabia v Russia (v US ).
The following is the flow of events over the last few weeks, so you have some background:
1. Oil production skyrockets as both nations refuse to cooperate; prices plunge;
2.This caused a dramatic US Treasury debt price volatility because certain hedges against the price of oil no longer worked;
3. This led to fixed income trading desks across the globe get caught on the wrong side of the trades without any notice of it coming;
4. These investors and traders ferociously had to begin to unwind their leveraged trades;
5. Liquidity began to dry up across treasury bonds, muni bonds and corporate bonds; which created massive selling in STOCKS since that was the only place left to raise cash;
In the last few days, the stocks markets were forming a base, and then when the oil market rolled over in the afternoon on Friday, the broader markets sank again. The reason for this move in oil was because various pundits were tossing around the idea of negative oil prices. Now, you and I know logically this can’t happen. And, essentially would mean that we would be paid for putting gas in our cars….and is a pipe dream!
In our view, the oil war needs to be shut down and in the meantime, the US Treasury, which has stepped up and provided enormous liquidity to the treasury and muni bond markets, has announced some bold new steps today – steps we have been hoping they would announce – essentially a massive quantitative easing as they did in 2008 and 2009. In our years of experience, once the credit market is restored to functioning normally, the equity markets will return to normal trading.
The broader markets can provide various discounts to the impact that the virus will have on the economics, so the sooner we get to the root of the problem (oil) and/or provide enormous stimulus to the corporate bond market, the quicker the markets will stage a rally from these levels. Then, once we are through the vicious part of the virus curve, the markets will stage another rally. Then, finally, the massive stimulus will drive GDP back to 3-4% and maybe higher, adding to corporate earnings across the board and fueling a market rally.
The results of the stimulus stage have many layers because it will help bring many essential manufacturing components back to the US and back to many countries that will demand local sourcing as a matter of national security, among other reasons.
This morning a sizable quantitative easing, bond buying program, without limits was announced. This includes:
- Buy Treasury and agency mortgage-backed securities in the amount needed to support the market in a smooth fashion.
- New programs to support and provide credit such as:
- Buying 4-year bonds directly form and or to US companies of investment grade credit.
- Companies will be eligible for credit up to 110%to 140% of their outstanding loans over the last 12 months.
- Buying investment grade bonds and bond exchange traded funds until 9/30/2020. It will buy up to 10% of each issuer’s maximum outstanding bonds. This is a HUGE help.
- Buying securities backed by auto loans, student loans, credit card receivables, equipment,auto floor plan, insurance premium, and small business loans.
- Expand commercial paper funding facility
- Municipalities will be allowed to sell short-term paper to a vehicle that the Fed created last week and extend this ability to lower-rated companies as well.
If Congress can do their jobs today and pass the stimulus bills needed…we expect stock markets around the world will level out and form a base.
Also keep your eye on the price of oil. The rapid decline in prices has wreaked havoc in other areas of the financial markets, as investors have been forced to sell other assets such as Treasuries or equities indiscriminately to cover losses in their energy positions. We see lots of opportunities as a result because of this!
Stay Well and please contact us anytime!
If you’re on Facebook, we have started a private group called Bell Rock Capital Group. Just reply to this email and we will invite you into this group. We will be doing a Facebook Live Q&A for clients and friends Monday to Friday at 4:30 pm for those that have general market and investment questions.
Stay well! The Bell Rock Capital Team