THE FED IS NOT THE PROBLEM – IT’S THE VIRUS!

The Dow is down 2,000 points, and then is up 2,000 points! As I said in ISL #729, “On a short term basis, the market will probably continue to fluctuate back and forth by 500 to 1,000 point ranges. One must remember that over 80% of the market is controlled by algorithms of the Big financial firms.  They love the volatility; while the average investor detests it…Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short.”  My Downside objectives are 16,000 to 18,000. See below for a worst case scenario. It is the virus that has everybody concerned. We have NO idea of the extent of the virus, or its growth.

It seems pretty obvious by now that investors are not calmed by all the excessive actions by the Fed that are ‘desperately’ trying to add liquefy to the banking system and have driven interest rates down to zero. The key word here is ‘desperately.’ The Trump Administration used most of its economic bullets (tax cuts to the rich, low unemployment, low interest rates and increased corporate debt)  in order to stimulate an already overheated economy. The problem caused by the virus pandemic, cannot be solved by the Fed; it is the growth of the virus that is worrying everyone. Because of the lack of testing, we have no idea how many people in the US have it or how fast it is growing. The markets hate uncertainty! And unlike the 2008 crisis or the wars in Afghanistan, everybody is affected; from the sports fan to restaurant patrons and its owners.

It has been reported that the people occupying the bottom 40% of our economy have less than $400 to survive any economic crisis. Now suppose you are one of these millions of people and have lost your job, as many have or will during the many shut downs, or you have to stay home from your job because your children are home from a closed school. The income for many of these millions of Americans has stopped. How are you going to pay for food? Certainly your rent or mortgage bill will have to go unpaid. Let’s say you are an employer who has had to close your business and your income has stopped. How will you afford to pay for paid sick leave? New legislation is still pending in the Senate to help you. However, even if the legislation eventually passes, how do you apply for it and how long will it take, if you qualify, to get the money? In the meantime your negative cash flow (entrepreneurs also have to eat), will not be able to pay for employees who are not working or your rent. As daily life grinds to a halt, so will the US economy!

CORPORAT DEBT WAS A PROBLEM BEFOR THE VIRUS!

As reported in ISL #729 From Julia La Roche Yahoo Finance March 14, 2020, financial expert Ed Altman says: ‘A lot of marginal companies are going to be forced out of business’ “Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market…. We ran our tests looking objectively at the health of BBB companies at the end of 2019 when everything was going great, and we came up with more than 30% looked vulnerable to a downgradeTHIS WAS BEFORE THE CORONA VIRUS!

Also As reported in ISL #729 from the March 12 edition of the Economist Magazine: To get a sense of the potential damage in other countries The Economist has done a crude “cash-crunch stress-test” of 3,000-odd listed non-financial firms outside China. It assumes their sales slump by two-thirds and that they continue to pay running costs, such as interest, rent and wages. Within three months 13% of firms, accounting for 16% of total debt, exhaust their cash at hand. They would be forced to borrow, retrench or default on some of their combined $2trn of debt. If the freeze extended to six months, almost a quarter of all firms would run out of cash at hand.”

The US Corporate debt was in trouble before the Pandemic. The 2008 bail-out saved the banks, but caused 7.8 million foreclosures. The Trump Administration is to once again focus on helping the Big corporations, not poor income individuals or the Middle class! Before the virus, most low income individuals were barely getting by on minimum wages. Evictions are 6,300 a day. That is 4 evictions every minute. Today the United States, as ranked against other nations is 37th in Health Care, 35th in meeting basic human needs, 36th in basic education, has the highest first day infant mortality rate and the highest child poverty rate of 21% among industrialized nations.  That’s one in every five children living in poverty! We were in trouble before the pandemic. This virus pandemic will make life ‘desperate’ for many.

Making the crisis worse

From the very beginning, the Trump administration has blown any reasonable response to the pandemic. First the President downplayed the crisis by saying that this is no worse than the flu and to go to work. Then Trump overstated banning travel from Europe, not indicating that U.S. citizens and Green Card holders are exempt. This resulted in a panic at airports over the weekend, where thousands of passengers (all suspected carriers) were thrown together in an effort to beat the ban. Let’s say 1% had the virus. Because of the shoulder to shoulder crowds, how many have since spread it?  The figure is expediential. We don’t know how many people have the virus, because there is inadequate testing. Possible new legislation calls for free testing. Sounds like free health care for all.  Still, how many undocumented immigrants will show up for testing?

WORST CACE SENARIO

It is too early to tell, but this could be worse than the 2008 Great Recession. Then, we only had a crippling of the Economy, not a shutdown.  However, I believe, in a worst case scenario more than 10% of S&P 500 companies could file for bankruptcy, not to mention the thousands of small business that will go out of business. I obviously worry about defaults on corporate debt and loans to banks.

As I said in ISL #729 “What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 8.16 (today a low of 6,56 down 20%). My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40. (today a low of 4.03 down 25%). That’s a 35 year low! DB was as high as 149, now 5.97.(today a low of 4.99 down18%).  Each rally is met with another new low! What are these falling bank charts telling me? Trouble!”

If thing get as worse as I think they will, real support won’t develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a worst case scenario of 10,000 is a likely scenario. This Bear Market will probably last six to nine month, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year.

A worst case scenario could also call for President Trump to call for a complete Marshall Law shutdown of everything, including The House and the Senate. Yes, it can happen here!

 CARL M BIRKELBACH

3/16/2020

DOW 20,186 Down 2,999 or 12.94%—- A NEW BLACK MONDAY?

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com