Lone Bear Letter #15

Awaken! Goldman Sachs calls for the end of the Bull Market

To quote David Kostin chief U.S. equity strategist at Goldman Sachs, he writes that the historic fall in interest rates is unlikely to prevent a “collapse” in second- and third-quarter profits. “After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.” The stock strategist slashed his midyear S&P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday’s close to levels not seen since December 2018. That is, the bank now sees the market down another 15% on top of its 14% loss incurred over the last month. Of course , just to keep you patriotic hubris investors in the market,  Kostin did add that he expects, ”a rebound in the back half of 2020 to boost the S&P 500 to 3,200 by year’s end, 11% higher from current levels.” Yea Sure! And Warren Buffett says, “The market collapse in 2008 was much more scary.” So far! Of course in 2008, we had the collapse of the banks. However, some bank stocks have already collapsed!

Collapse of the banks stocks.

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 9.25. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 6.04. That’s a 35 year low! What are these falling bank charts telling me? Trouble!

HBC was at 16 in 2000, now 5.49 a 11 year low. The worst chart is that of Deutsche Bank. Reaching a high of 189 in 2007, it is now at 6.75! This is of course, is the bank that loaned Trump $175 million dollars before the election, when no one else would. This loan saved Trump from his 5th bankruptcy and allowed him to run for President. Do you know why DB gave him the loan? In a New York Time’s article dated September 29, 2018, “Retired Supreme Court Justice Anthony Kennedy’s son loaned President Donald Trump over a billion dollars for his real estate projects, The New York Times reported. Justin Kennedy was the head of Deutsche Bank’s real estate capital markets division and loaned to Trump when other banks wouldn’t.”  Could this be why Justice Kennedy’s retired and gave Trump an opportunity to shift the balance of the Supreme Court to the right. Did Russia have anything to do with the Trump loans? DB has big Russian connections and loans with Russian oil and gas companies. The Russian Oil and Gas companies cannot services their deb with oil below $50 per barrel. VanEck Russia ETF (RSX) was at 59 in 2007, now at 19.97. Watch out below for a lot of US and worldwide corporate debt.

The Corporate Debt Bubble

In October 2019, I quoted form an article titled Seeking Alpha, a Reprint August 14, 2019 by Ariel Santos-Alborna. What he said, is now truer than ever. 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. This may lead to another wave of possible bank bail outs and increases in sovereign debt. A big recession now, could lead to a  Russian, Chinese, Japanese and European  economic recession.  The same is true in the US. In my opinion, unless the U.S. creates inflation, (which it is doubtful that we will or can) or can legislate a massive bank bailout (which is also doubtful), the upcoming  economic recession maybe worse than the 2008 ‘Great Recession.’

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S., and the default of excessive credit is the primary driver of past recessions. With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global mortgage rates at its lowest level in seven years,  the yield curve inverting and the yet to be felt economic effect of the corona virus,  there appears to be a certainly of a growth rate cycle slowdown. I believe the bull market’s excess is undoubtedly in the US corporate debt sector. Corporate buybacks through issuing debt and cash flows has been propping up equity markets. So when cash flows decrease in the next recession, less net buyers of BBB debt in a flight to safety and many BBB corporations become downgraded to junk (the % depends on the severity of the recession), the share buybacks currently propping up the equity market will come to a screeching halt and nothing will be left to support current equity prices. Worldwide debt is even a bigger problem, (See comments on Russia above), as China has flooded the debt market with worthless loans to unsuccessful national corporations and Europe and Japan appear to be facing an economic slowdown because of the corona virus. Merkel says, as many as two thirds of the German population may eventually be affected!

The Coronavirus Effect

Now with the corona virus, our economic weakness worldwide will be exposed. What is worse, is that in the US, we have used all our ‘bullets’ to prop up an already robust economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

On Sept. 30, 2019 The Federal Reserve Bank of New York added $63.5 billion to the financial system, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets. Banks asked for $63.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of U.S. Treasury and mortgage securities. In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities—frequently Treasury bonds—in exchange for a short-term loan. The term of these loans can be as short as overnight. The banks were being stressed before the corona virus. Now what?

Dow projections

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate debt bubble,’ problems in China, lower GDP forecasts at below 2% etc. and all the ‘Pages’ Lone Bear Letters 1-14, Downside Projections, etc.  All can still be applied, only worse.  Because the markets went so high for 11 years without a correction, the current correction, I believe, will be devastating.

Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short. I am looking for markets to get to 2018 Dow lows of 22,500 and if thing get as worse, as I think they will, real support wont develop until  at least the 2016 Dow lows of 16,000-18,000 and maybe lower!

STAY FULLY INVESTED? The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in and out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false sense of contentment. Everyone I talk to, is not worried. That makes me worry! They are all saying they are going to ride this decline out and ‘the market always bounce back.’ Trained like Pavlov’s dog by the Big Financial Industry,to just hold while professional short the market, some investors may not outlive this Bear Market or a long economic recovery period! The Dow in 1998 was 9,000 and was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

Won’t it be ironic, that if a Democratic wins the Presidency, it will be the second time in a row (2008), that the Republicans leave him an economic disaster?

Carl M Birkelbach

Dow 25,018

3/10/2020

 

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