1. Moving the markets

Last night, the futures fluctuated wildly with that theme continuing throughout today’s trading day with the major indexes swinging around their respective moving averages.

It appears that traders tried to figure out the possible consequences of the all-out “kitchen sink” approach by the global central banks. It’s hard to keep track of all their efforts to prop up the markets, but ZH managed to compile this summary:

1. Fed announced a new emergency program (MMLF) to aid money markets
2. ECB “no limits” bazooka (“Pandemic Purchase Program w/ $820B of QE)
3. RBA 25bps cut to ELB, introduces QE and targeted YCC
4. Japan discussing $276B packed including “cash payouts” to households
5. S Korea new $40B package
6. Brazilian 50bps rate cut
7. US Senate passes 2nd stimulus bill and negotiating the 3rd ($1.3T)
8. Fresh headlines from Bloomberg *GERMANY MAY AUTHORIZE EMERGENCY DEBT AS SOON AS NEXT WEEK
9. BOE emergency rate cut to 0.1% and GBP200BN QE expansion

The most recognized one was the ECB’s launch of Bazooka #2, but we’ll have to wait and see if this thing will really produce the desired result, or simply resemble a squirt from a water pistol.

The Fed, on the other hand, has now boosted its daily QE by 66% overnight to a record $75 billion, and that is in ONE day. For comparison, in the “good old days,” QE was less than that in ONE Month.

What this tells me is that the financial plumbing is showing some serious leaks, which means some big players, be it hedge funds or banks, are likely caught on the wrong side of a trade and are in dire straits of a bailout. I am sure we will find out soon who these suspects are.

Still, we remain in a bear market for the foreseeable future. While no one knows where the eventual bottom will be, a temporary stopping point in this slide could be once the S&P’s price matches up with reality, AKA US corporate profits, as Bloomberg presents in this chart. For the S&P, that would mean a level of around 1,700, which would be down another 30% from current prices. Ouch!

Looking at the big picture, not only have global markets seen $25 trillion of monopoly money, AKA “paper” wealth, erased over the past 4 weeks, the bear has also annihilated all gains from the December 2018 crash; that is for those in the buy-and-hold community.

In the meantime, the major indexes managed to eke out a small gain with the Nasdaq faring the best with +2.30%, but for the week, the Dow is the worst performer: Down by -13%.

1. Moving the markets

So much for yesterday’s rebound of “hope,” which got annihilated, as the major indexes took another step down. At one point, the Dow even lost its 19k level, while the S&P dropped below 2.3k, but both were pushed back up thanks to a bounce off their lows during the past 30 minutes.

Those buy-and-holders, which were hoping for the bond portion of their portfolios to bail them out, were disappointed again, as yields rose, with the 10-year being up almost 11 basis points to 1.19%, thereby exerting a double whammy loss on portfolios still exposed to this insanity.  

It’s no surprise that the cause of this upheaval is the fallout from the coronavirus, as nations are shutting down, major corporations and businesses struggling and looking for bailouts, while the banking sector is about to experience some major pain, and possible failures, as above businesses may not be able to survive a sharp drop in revenue, thereby increasing the possibility of defaults. Or, better said, bank failures may be on the horizon.

Of course, the underlying problems are the same we saw in 2008, as nothing has been fixed, with ZH summing up the problem like this:

And it may come as a shock to some, but ever since the financial crisis nothing has been actually fixed, and instead the Fed stepped in at every market stress event to inject more liquidity, aiding the issuance of even more debt, and kicking the can while helping mask the symptoms of the crisis, only made the underlying financial instability even more acute.

Meanwhile, conventional wisdom that the US banking system was rendered more stable now are dead wrong, with the public and countless financial professionals fooled by the nearly two trillion in excess reserves (we all saw what happened when this number dropped to a precarious “low” of “only” $1.3 trillion in September of 2019) injected by the Fed in recent years. All this liquidity upon liquidity has only made the system that much more reliant on the Fed’s constant bailouts and liquidity injections.

With market panic accelerating, and as I pointed out above, ZH confirmed that today was the worst day ever for a combined equity/bond portfolio, down -9.87%, as shown in Bloomberg’s chart.

The carnage may have a long way to go, so as trend trackers, we feel privileged to enjoy a front row seat on the sidelines.

1. Moving the markets

When I was watching the futures markets last night, I already knew that today would not be a good one to be in the markets. Despite the Fed unloading its biggest emergency bazooka ever, by announcing $700 billion in QE and a full 1% reduction in interest rates to “zero,” markets immediately went limit down.

We all know that the Fed’s FOMC meeting was scheduled for this coming Tuesday/Wednesday, and they could not wait 3 extra days to announce their decision?

So, they rushed to do it Sunday night just prior to the futures markets opening. This smelled like a panic move, and the markets took it as such and started the session limit down.

This morning, things did not look better, and the circuit breakers kicked in, as @GreekFire23 summed up:

1. 9:30am: Ding Ding Ding! Trading open!
2. 9:30:00001am: Halted

That represents the speed with which we hit limit down. In other words, Friday’s much hyped rebound turned into another dead-cat-bounce, with the major indexes getting slaughtered today by dropping around -12% with the Dow being the worst performer with -12.93%, or just about -3,000 points.

Or, looking at it from another viewpoint, Small Caps and Transportations are down -35% from their highs, and the rest of the majors down around -27%, according to ZH.

We have now seen 2 massive global monetary interventions, and they resulted in a total bloodbath for the markets—and this may only be the beginning.

The carnage was worldwide, with banking stocks in Europe now smashed to a level last seen in 1987, as Bloomberg shows.

The question now is, will the December 2018 lows of the S&P 500 hold? If not, we are bound to go a lot lower.

I am sure, this week will have a lot more surprises in store with many Buy-and-Holders wishing that they had joined us on the sidelines on 2/27.