INVESTMENT STRATEGY LETTER #732

WHAT SHOULD YOU DO? (FULL DISCLOSURE)

Because I have been right about this decline, a lot of people are asking me what should they do, buy or sell? I wish I knew! For one thing, just because I have been right lately, doesn’t mean I have a special direct line to the answer. For one thing, I have been wrong for a long time. I issued the first Lone Bear Letter 1/23/2015, when the Dow was 17,672. Had you listened to me then, you would have missed out on the entire second half of the Great Bull Market from 2015 to 2020. However, if you had instead invested in a CD’s at 3% a year, that would have offset every 500 points in the Dow per year and for five years that’s 2,500 point. That would leave you about even now, with a current 20,100 Dow. But like me, you would have missed out on the thrill of making all that money on paper, but avoided the agony of defeat, that most investors now feel.

Anyway, what you should do now, depends a lot on your age, what kind of cash flow you have to meet your expenses and how diversified you are in other asset like  cash (money markets, CD’s etc.). So, ask your professional investment adviser, what is best for you.

If you read my blog page titled In a time of universal deceit, telling the truth is a revolutionary act” which is a quote by George Orwell; you will see that I believe that the Financial Industry has not truly fully disclosed stock market risk to the investing public.  Instead the Financial Industry gives the false advice that, “on the long term, the stock market will always recover.” Keynes has a famous quote that states “in the long run, we will all be dead.” The point being, if you are older and depending on the stock market for retirement, the stock market may not recover from any decline, in time for when you need the money.  During the period between 2000 and 2008 the stock market went down more than 50% twice, which was devastating for people who were retiring or sending their children to college. If you invested in the Dow in 1998, it wasn’t until 2011, that you got your money back. Therefore, in full disclosure, I believe I should tell investors that investing in the stock market is dangerous and that most people, ‘the average American,’ should treat stock market investing only as a speculation and not as a form of savings. Simply stated, most people should not gamble with their savings in the stock market.

I would like to see the Federal government sponsor a ‘Retirement Savings Fund’ that guarantees a 3 ½% return. (The rate would go up if the Fed fund rate goes higher). A Federal government sponsor a Retirement Savings Fund is needed. It would really help with the average American and their saving planning and keep the ‘average investor’ out of the stock market.  This would make retirement planning a lot easier and safer.

So, my answer to the question, of what should you do, is for most older people to not invest in the stock market, or if you are older, treat stock investing as a speculation with money you can afford to lose. For you younger people and you older people that qualify, the opinion of what I say in this blog does not take in consideration your personal financial situation or your goals. My opinion is just that, my opinion of what I think the stock market will do, based on my questionable expertise.

NEW INVESTMENT STRATEGY-

Federal Debt May Stop Any New Recession

ONLY FOR THOSE WHO ARE YOUNG ENOUGH OR CAN TAKE RISK I suggest  a new ‘Investment Strategy Program’. Besides  investments in gold and the Bitcoin,  Set up a program’ to be ‘fully invested’ as follows:  Choose 21 of the best performing stocks like Amazon and 21 stocks that have big dividends and hold up well in down markets like Exxon. This portfolio should be updated every quarter.

3/20/2020

DOW 19,175  Down 913 Down 4.55%%

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

INVESTMENT STRATEGY LETTER #731

A RALLY IS OVERDUE- USE IT TO SELL

Up 1,049! Hurrah! Maybe we can get a few more up days in before the new cases of the virus start flooding in. Results from the tests can take a while and also until now, there have been few test kits made available. I expect that for those who were exposed, (airports, foreign travel etc.), new cases will begin to show up in the next couple of weeks and will show an exponential grow of US cases.

WORST CASE SCENARIO: Yesterday’s New York Times Reports: “Scientists tracking the spread of the coronavirus reported on Monday that, for every confirmed case, there are most likely another five to 10 people in the community with undetected infections.” The C.D.C.’s scenarios were depicted in terms of percentages of the population. Translated into absolute numbers by independent experts using simple models of how viruses spread, the worst-case figures would be staggering if no actions were taken to slow transmission. Between 160 million and 214 million people in the United States could be infected over the course of the epidemic, according to a projection that encompasses the range of the four scenarios. WORST CASE SCENARIO:That could last months or even over a year, with infections concentrated in shorter periods, staggered across time in different communities, experts said. As many as 200,000 to 1.7 million people could die.

BEST CASE SCENARIO: If I am wrong and there is not an exponential growth of cases, the markets may go through an early elongated bottoming process (not a V), with a 20,000 DOW IND being the bottom. However, all indications are, that the worst it yet to come.

I continue to worry about the 80% of people who live from pay check to pay check. It looked as though for a while that Mitch and Pelosi were going to get along and pass some comprehensive measures to help these people. As of now, it appears that chaos will prevail and any help will be delayed and misspent.

THERE ARE FIVE GROUPS OF STOCK PERFORMERS (Examples)

Group 1 (Best) only fell to 2019 levels:  Apple, Dow Utilities, Walmart, Netflix and Facebook

Group 2 (Average) fell to 2017-2018 levels: Dow Ind, NASDAQ, S&P, Russel index , Emerging Markets Index, JP Morgan, Caterpillar, Hong Kong Index

Group 3 ( Below Average) fell to 2016 levels: Dow Transports, Russia RSX, Japan N225.

Group 4 (Bad) fell to 2010 levels:  England  FTSE, Germany DAX, General Motors, Wells Fargo Bank. BNP Paribas bank, IBM, Boeing

Group 5 (Worst) fell to 2002 levels and below: Deutsche Bank, Credit Swiss, Barclays bank, Ford, HBC bank,

The big question is, will the performance slide up or down? I think they will slide down as follows:

Group 1 will slide down to the 2017- 2018 levels,

Group 2 will slide down to 2016 levels

Group 3 will slide down to 2010 levels  

Group 4 will slide down to 2002 levels and

Group 5 will slide out of existence or be saved with massive bail-outs.

CARL M BIRKELBACH

3/17/2020

DOW 21,237 up 1046 +5.2%

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

 

 

INVESTMENT STRATEGY LETTER #730

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!

CORPORATE DEBT WAS A PROBLEM BEFORE 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 CAsE 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

INVESTMENT STRATEGY LETTER #729

The Corporate Debt Bubble

Over the past decade governments and bankers have tried to redesign the financial system so that it acts as a buffer that absorbs economic shocks rather than as an amplifier that makes things worse. Banks now face a stern test from the covid-19 virus and the economic ruptures it has triggered, not least a Saudi-led oil-price war. My concern is in the world’s ocean of corporate debt, worth $74trn. 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 WAS BEFORE THE CORONA VIRUS!

From Julia La Roche Yahoo Finance March 14, 2020, titled:Bankruptcy expert Ed Altman: ‘A lot of marginal companies are going to be forced out of business’ Altman, who is a professor emeritus at NYU Stern School of Business added that even before the virus, the fundamentals of companies and markets were already showing “a lot of warning signs.” Altman told Yahoo Finance, pointing out that the average economist is now forecasting “around a 60% chance of a recession” within the next 12 months, up dramatically from before the outbreak. That means a lot of companies kept afloat by cheap borrowing costs could be in real trouble. Altman contended that many of them should actually go bankrupt, because “they are zombies and have been kept alive” by historically low rates.

Altman, who pioneered the financial-distress sniffing ‘Z-Score’, a formula he created more than 50 years ago for predicting bankruptcies , suggested ratings agencies are often slow to recognize when companies need to get downgraded. “We ran a Z-Score test on BBB companies in the United States year-end 2019. And, in a downturn, a big downturn which happened in ’08 and 2002 etc. , maybe 10% the rating agencies say get downgraded,” he said. “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 downgrade” Altman told Yahoo Finance. “And that’s going to happen…and when that happens, a lot of marginal companies are going to be forced out of business” THIS WAS BEFORE THE CORONA VIRUS!

From March 12 edition of the Economist Magazine: Companies came out of the 2007-09 financial crises in a relatively sober mood, but since then have let rip. Global corporate debt (excluding financial firms) has risen from 84% of GDP in 2009 to 92% in 2019, reckons the Institute of International Finance. The ratio has risen in 33 of the 52 countries it tracks. In America non-financial corporate debt has climbed to 47% of GDP from 43% a decade ago, according to the Federal Reserve. Underwriting standards have slipped. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. Outside America the figure is 39%. Firms that you might think have rock-solid balance-sheets—AT&T—have seen their ratings slip, while others have been saddled with debts from buyouts. Naughty habits have crept in: for example, using flattering measures of profit to calculate firms’ leverage.

In China over the past months, financial distress and forbearance has been widespread. One multinational says China has relaxed its payment terms with suppliers in China. HNA, an outrageously indebted conglomerate than runs an airline, has been bailed out. 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 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 near-certainty of rating downgrades and defaults in the travel-related and oil industries, and the possibility of a broader crunch, is of concern. Credit derivatives, ( 5 x more than 2008), the most actively traded part of the fixed-income markets, have recoiled. The CDX Index, which reflects the cost of insuring against default on investment-grade debt, is at its highest level since 2016, as is the ITRAXX crossover, which covers riskier European borrowers. Out of the public eye, privately traded debt may now only change hands at heavily discounted prices. (NO liquidity)The issuance of new debt has “dried up”, says the head of a big fund manager. This could fast become a serious problem because firms need to refinance $1.9trn of debt worldwide in 2020, including $350bn in America.”

“Who, then, can act as a source of stability and fresh lending? Some big cash-rich firms such as Apple could grant more favorable payment terms to their supply chains. Private-equity firms have capital to burn. But in the end, much will rest on the banks, which have the relationships and flexibility to extend credit to tide firms over. America’s banks have their flaws (see above). Some banks like Goldman Sachs is sitting on $180bn of loans and lending commitments with ratings of BBB or below. Outside America the picture is less reassuring. Europe’s banks make puny profits, partly because interest rates are so low; Italian banks had a return on equity of just 5% last year. Since the virus struck, the cost of insuring their debt against default has flared up, hinting that they could yet become a source of contention. State-backed banks in China and India will do as directed by politicians. But they are already laboring under large bad debts.”

In my opinion, unless the U.S can avoid a recession (not with the corona virus shutting down the economy), or can legislate a massive bank bailout (Which is also doubtful. See ISL Letter #727 HAS EVERYONE FORGOTTEN ABOUT ONE OF TRUMPS FIRST EXECUTIVE ORDERS  “PREVENTING TAX-PAYED BAIL-OUTS”), the upcoming economic recession maybe worse than the ‘Great Recession ‘of 2008!

The Fed Acts

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.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent. Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. Since then The United States’ central bank has funneled roughly $500 billion into the repo market in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

On Wednesday March 11,2020, the Fed said it would increase the amount of overnight repo operations from at least $150 billion to at least $175 billion. In addition, it extended the date for a $45 billion two-week repo operation that was supposed to end  April 13. Finally, there will be three $50 billion one-month term operations, the first of which happened Thursday.

On Thursday March 12, 2020 The Fed announced a bold new initiative in an effort to calm market tumult amid the corona virus meltdown. In all, the new moves pump in up to $1.5 trillion into the financial system in an effort to combat potential freezes brought on by the corona virus. This was the second day in a row and the third time this week the Fed has stepped in. Stocks staged a sharp turnaround from earlier losses, though some of those gains were pared.

One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills. Under the new regime, the Fed will extend its purchases “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.The purchases start Thursday and will continue through April 13.The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program. In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.

The extraordinary moves came amid extreme market turmoil created by uncertainty over the corona virus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession. However, questions remain whether the Fed can arrest the market’s issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.

On Friday March 13, 2020 President Trump announced ‘A National Emergency’ and the Dow shot up 1985 points!

The question now is, when is enough too much?

As Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. , “If they (Fed) overdo it, then we’re going the other way” — economic downturn. “If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash. Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity. Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process. “I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said. With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee. The banks were being stressed before the corona virus. Now what?

Now What?

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.

As stated above I worry about defaults on corporate debt and loans.  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. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40.That’s a 35 year low! DB was as high as 149, now 5.97. Each rally is met with another new low! What are these falling bank charts telling me? Trouble!

On a longer term basis, the real economic fallout from the ‘corona virus’ outbreak won’t begin to be seen until the Second Quarter. A lot depends on government action and the extent of how many people in the US get the virus. I think the figures will be big, because there are many people without a health care provider or can’t afford the deductible and don’t forget the 11 million undocumented immigrants that won’t dare see a doctor. I think the markets will say affected for the rest of the year, as weakness in the BBB bond market and banks will have a sobering effect on the markets.

Remember ‘Don’t grab a falling knife.’  Hopefully there will be a lot of rallies. Use them to sell and go short. Our first goal of 22,500 has been achieved. 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! 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.

Once again, 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 23,185    3/14/2020

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

 

 

 

 

INVESTMENT STRATEGY LETTER #728

3/13/2020 

DOW UP 1,985! BE CARFUL! I WOULD NOT WANT TO OWN STOCKS OVER THIS WEEKEND. I EXPECT MUCH MORE BAD NEWS ABOUT THE INCREASE OF THE VIRUS IN THE US. EVEN TRUMP. PENCE, BARR AND IVANKA HAVE BEEN EXPOSED.

A NATIONAL EMERGENCY? HAS EVERYONE FORGOTTEN ABOUT ONE OF TRUMPS FIRST EXECUTIVE ORDER ISSED “PREVENTING TAX-PAYED BAIL-OUTS”??????? 

EXECUTIVE ORDER 2/3/17

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,
February 3, 2017.

3/10/2020

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 are 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.

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

 

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 are 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 Fed Acts

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.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent. Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. The United States’ central bank has funneled roughly $500 billion into the repo market since then in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

Update March 14, 2020

On Wednesday March 11,2020, the central bank said it would increase the amount of overnight repo operations from at least $150 billion to at least $175 billion. In addition, it extended the date for a $45 billion two-week repo operation that was supposed to end  April 13. Finally, there will be three $50 billion one-month term operations, the first of which happened Thursday.

On Thursday March 12, 2020 The Fed announced a bold new initiative in an effort to calm market tumult amid the coronavirus meltdown.In all, the new moves pump in up to $1.5 trillion into the financial system in an effort to combat potential freezes brought on by the coronavirus.This was the second day in a row and the third time this week the Fed has stepped in. Stocks staged a sharp turnaround from earlier losses, though some of those gains were pared.

One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills. Under the new regime, the Fed will extend its purchases “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.The purchases start Thursday and will continue through April 13.The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program.In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.

The extraordinary moves came amid extreme market turmoil created by uncertainty over the coronavirus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession.However, questions remain whether the Fed can arrest the market’s issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.

On Friday March 13,2020 President Trump announced ‘A National Emergency’ and the Dow shot up 1985!

The question now is, when is enough enough?

Or as Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. , “If they overdo it, then we’re going the other way” — economic downturn. “If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash.

Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity.

Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process.“I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said.

With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee.

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.

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

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,
February 3, 2017.

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

 

Lone Bull Letter # 14

WHAT STARTS A BEAR MARKET?

I have been writing about a new Bear Market, since the Dow broke above 18,000. Yes I was wrong and maybe I am still wrong. However, all the negatives I have seen since Bear Market Letter # 1 are more prevalent now than ever. I have consistently been saying, that I don’t know what will start a Bear Market, but when it comes it will be one of the worst in our history. Now with the coronavirus, our economic weakness will be exposed. What is worse, is that we have used all our ‘bullets’ to prop up the 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.

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate debt bubble,’ problems in China, lower GDP forecasts at 2% etc. and all the ‘Pages’ Lone Bear Letters 1-13, Downside Projections, etc.  All can still apply, only worse.  Because the markets went so high for 10 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.

Carl M Birkelbach

2/25/2020

Dow 27,128

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

Reprint. The Debt/REPO’s/Manufacturing Problem

The reprint of three articles that spells out the problem.

The Corporate Debt Bubble|

 Seeking Alpha Reprint August 14, 2019
Ariel Santos-Alborna
Value, portfolio strategy, macro
Summary

Corporate 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 recession will stop buybacks and lead to insolvency in the junk bond market.

This may lead to another wave of bail outs and increased sovereign debt.

Increased sovereign debt will lead to Japanese and European-like economic malaise unless the U.S. creates inflation.

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S., and excess credit and leverage the primary driver of recessions. The two charts below demonstrate this process. Real wages have remained stagnant since 1973. Around that time we begin to see increases and violent swings in consumer credit change. The reason? Without wage growth, the credit economy must be pumped up to increase consumption (and therefore GDP).

(Source: Economic Policy Institute)

(Source: Trading Economics)

Home ownership, created with debt, increased drastically before the savings and loan crisis of the 1990s and the subprime mortgage crisis of 2008. When homeowners began defaulting, the crisis shifted to banks. Then credit froze as banks held worthless mortgage backed securities until the government stepped in. Government balance sheets assumed most of the banks’ debt and the Fed provided easy credit and ample liquidity through low interest rates and Quantitative Easing to spurn lending. Thus, the seeds were sewn for the excesses we see today in corporate and sovereign debt.

This article demonstrates how an economic slowdown will likely burst the corporate debt bubble. With limited room for increasing sovereign debt levels, the crisis may shift to currencies.

The Corporate Debt Bubble

This bull market’s excess is undoubtedly in the corporate debt sector. Corporate debt has doubled since the 2008 crisis. Corporate debt to GDP is at its highest level in all of recorded history. Naturally, too much debt lowers your credit quality. This is evident by the fact that roughly 50% of the corporate debt market is BBB, or just one level above junk. The explosion of BBB debt can be seen in the second chart below. AT&T has amassed $191 billion of total debt. Ford has $157 billion of debt but a much less manageable 450% debt/equity ratio. General Electric and General Motors are two other companies with debt levels putting them at risk of downgrade.

(Source: St. Louis Fed)

(Source: Bloomberg)

Corporate buybacks through issuing debt and cash flows is propping up equity markets. As the chart below shows, corporations have made up for the reduced demand from institutions (who are net sellers), households, and rest of world. If and when a recession occurs, expect a flight to safety from foreign buyers, pension systems, and financial institutions. This means less buyers of corporate debt and less buybacks.

(Source: Atlas Wealth Management)

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. Additionally, the junk bond market is less than half the size of the BBB market and typically faces a lack of liquidity at the first sign of recession. A nearly illiquid junk bond market cannot absorb a wave of BBB downgrades, especially from blue chip companies listed above. A major downgrade will make the junk bond market insolvent, high yield spreads will widen, and companies that rely on junk debt financing will be at risk of defaulting.

Likelihood of a Recession

With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global PMI at its lowest level in seven years, and the 2s-10s curve only 160 bps from inverting, we are certainly in the midst of a growth rate cycle slowdown. Despite this, the possibility of a recovery still exists with a dovish Fed cutting amidst these warning signs. I do not believe the Federal Reserve can kick this can down the road and prevent recession for another several years. The reason? They told us the probability is low.

The NY Fed probability of recession index has reached 31.4%. Only one time in history has this index reached 30% and a recession not occur in the next twelve months, and that occurred in 1967. A reading above 30% has preceded every other recession in history as the chart below shows. When the NY Fed tells us there is a high probability of recession, investors should listen.

(Source: NY Fed)

Endgame

The U.S. will be forced to bail out overleveraged corporations. With Japan’s debt to GDP ratio at nearly 250% as a precedent, there is no doubt in my mind that the U.S. can take on more debt to prevent a collapse in the high yield corporate sector. However, two issues come to mind: 1) the political will to bail out large corporations. 2) the economic drag of high debt as interest payments consume a higher portion of federal expenditures. Not to mention the $122 trillion dollars of unfunded liabilities that the U.S. will have to finance with deficit spending.

The U.S. has several options. They can ride this monetary experiment ad infinitum and experience several years or decades of economic malaise like Europe or Japan. They can default on their debt. They can enact austerity to get the budget in order. They can grow out of the debt (decreasing debt as a percentage of growing GDP). Or they can inflate the debt away by monetizing it or devaluing the currency.

In a blog post here, I discuss Ray Dalio’s article on macroeconomic paradigm shifts. He believes in a combination of the above: “So there will have to be some combination of large deficits that are monetized, currency depreciations, and large tax increases.” With Modern Monetary Theory at the forefront of economic debates, this likelihood of this outcome has never seemed higher. I believe the second act of unconventional monetary policy will look something like what Dalio describes above.

Risk and Reward by Asset Class

This hopes to answer the so what. If the U.S. erases its sovereign debt through currency devaluation, the prices of gold and bitcoin will skyrocket. I also firmly believe that long term interest rates will reach zero, becoming a boon for bond prices. Disinflation is highly intact, which is why I’m currently neutral on commodities, yet recommend a portion of one’s portfolio in commodities for diversification. I also recommend long volatility positions as a hedge against sharp downturns.

The Fed’s recession index is too strong a sign to ignore. I recommend being underweight U.S. stocks and am neutral emerging market stocks though long-term bullish. This depends on price action of the U.S. dollar, which I cannot determine with certainty. This dynamic may take years to come to fruition, if at all. Yet the possibility makes gold and bitcoin attractive buys at the moment. With gold and bitcoin price action despite global disinflation, I believe investors are beginning to price in the possibility of currency devaluation.

Fed Adds $63.5 Billion to Financial System in Repo Transaction

Latest transaction seeks to relieve funding pressure in money markets

The Federal Reserve Bank of New York added $63.5 billion to the financial system Monday, 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.

When the Fed adds money to the financial system through the repo market, it is acting as a lender. In typical repo market transactions, lenders can include money-market mutual funds, banks or hedge funds that are seeking to earn a slightly higher rate of interest than what is available from holding very short-term government securities. The borrowers are often banks, securities firms or hedge funds that use the cash to finance positions in the market.

Banks and hedge funds borrow or lend depending on their needs and investment goals.

The Fed began offering repo loans two weeks ago after a shortage of available cash in the financial system led repo rates to climb as financial companies scrambled for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such actions.

September 2019 Manufacturing ISM® Report On Business®

New Orders, Production, and Employment Contracting

Supplier Deliveries Slowing at a Slower Rate; Backlog Contracting

Raw Materials Inventories Contracting; Customers’ Inventories Too Low

Prices Decreasing; Exports and Imports Contracting

(Tempe, Arizona) — Economic activity in the manufacturing sector contracted in September, and the overall economy grew for the 125th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The September PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. The New Orders Index registered 47.3 percent, an increase of 0.1 percentage point from the August reading of 47.2 percent. The Production Index registered 47.3 percent, a 2.2-percentage point decrease compared to the August reading of 49.5 percent. The Employment Index registered 46.3 percent, a decrease of 1.1 percentage points from the August reading of 47.4 percent. The Supplier Deliveries Index registered 51.1 percent, a 0.3-percentage point decrease from the August reading of 51.4 percent. The Inventories Index registered 46.9 percent, a decrease of 3 percentage points from the August reading of 49.9 percent. The Prices Index registered 49.7 percent, a 3.7-percentage point increase from the August reading of 46 percent. The New Export Orders Index registered 41 percent, a 2.3-percentage point decrease from the August reading of 43.3 percent. The Imports Index registered 48.1 percent, a 2.1-percentage point increase from the August reading of 46 percent.

“Comments from the panel reflect a continuing decrease in business confidence. September was the second consecutive month of PMI® contraction, at a faster rate compared to August. Demand contracted, with the New Orders Index contracting at August levels, the Customers’ Inventories Index moving toward ‘about right’ territory and the Backlog of Orders Index contracting for the fifth straight month (and at a faster rate). The New Export Orders Index continued to contract strongly, a negative impact on the New Orders Index. Consumption (measured by the Production and Employment indexes) contracted at faster rates, again primarily driven by a lack of demand, contributing negative numbers (a combined 3.3-percentage point decrease) to the PMI® calculation. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in September, due to inventory tightening for the fourth straight month. This resulted in a combined 3.3-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports contraction slowed. Overall, inputs indicate (1) supply chains are meeting demand and (2) companies are continuing to closely match inventories to new orders. Prices decreased for the fourth consecutive month, but at a slower rate.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth,” says Fiore.

Of the 18 manufacturing industries, three reported growth in September: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. The 15 industries reporting contraction in September — in the following order — are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Wood Products; Electrical Equipment, Appliances & Components; Textile Mills; Paper Products; Fabricated Metal Products; Plastics & Rubber Products; Petroleum & Coal Products; Primary Metals; Transportation Equipment; Nonmetallic Mineral Products; Machinery; Furniture & Related Products; and Computer & Electronic Products.

WHAT RESPONDENTS ARE SAYING…
  • “Second month in a row in which shipments have outpaced new orders.” (Computer & Electronic Products)
  • “Continued softening in the global automotive market. Trade-war impacts also have localized effects, particularly in select export markets. Seeing warehouses filling again after what appeared to be a short reduction of demand.” (Chemical Products)
  • “Business outlook remains cautious. Orders seem to be decreasing, but luckily not as sharp of a decrease as we were expecting.” (Transportation Equipment)
  • “Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China.” (Food, Beverage & Tobacco Products)
  • “General market is slowing even more than a normal fourth-quarter slowdown.” (Fabricated Metal Products)
  • “Demand softening on some product lines, backlogs have reduced, and dealer inventories are growing.” (Machinery)
  • “Business has been flat for us. Year-over-year growth has slowed dramatically.” (Miscellaneous Manufacturing)
  • “We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10 percent.” (Plastics & Rubber Products)
  • “Incoming sales are sluggish for this time of year.” (Furniture & Related Products)
  • “Economy seems to be softening. The tariffs have caused much confusion in the industry.” (Electrical Equipment, Appliances & Components)

MANUFACTURING AT A GLANCE
SEPTEMBER 2019

Index Series Index Sep Series Index Aug Percentage Point Change Direction Rate of Change Trend* (Months)
PMI® 47.8 49.1 -1.3 Contracting Faster 2
New Orders 47.3 47.2 +0.1 Contracting Slower 2
Production 47.3 49.5 -2.2 Contracting Faster 2
Employment 46.3 47.4 -1.1 Contracting Faster 2
Supplier Deliveries 51.1 51.4 -0.3 Slowing Slower 43
Inventories 46.9 49.9 -3.0 Contracting Faster 4
Customers’ Inventories 45.5 44.9 +0.6 Too Low Slower 36
Prices 49.7 46.0 +3.7 Decreasing Slower 4
Backlog of Orders 45.1 46.3 -1.2 Contracting Faster 5
New Export Orders 41.0 43.3 -2.3 Contracting Faster 3
Imports 48.1 46.0 +2.1 Contracting Slower 3
OVERALL ECONOMY Growing Slower 125
Manufacturing Sector Contracting Faster 2
Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.
*Number of months moving in current direction.

Carl M. Birkelbach

 ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Carl 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. Carl, 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

THE INVESTMENT STRATEGY LETTER #727

IS THE GOVERNMENT LYING ABOUT THE ECONOMY? The Committee for Responsible Government (CRFB) just announced that new jobs didn’t grow as fast as President Trump and the Bureau of Labor Statistics reported.  The CRFB reports that new jobs did not grow at 223,000 monthly, but more like 170,000 to 180,000 a month. That is about the same grown as the Obama years.  Interestingly, this announcement quickly disappeared from my news summary on my phone. This makes me wonder about other government reports such as GDP.

Maybe growth has been slower than reported for 2017-2018? Forecasts show that GDP growth for the next 3 years will grow at only about 2% annually. the current forecast calls for slower growth along with increased spending, which will cause the annual deficit to grow at about $1 trillion a year according to the Congressional Budget Office. If we see slower growth than this, the annual deficit will be larger than $1 trillion!

NOW WHAT? According to Keynesian economic theory, during period of increased growth a government is to increase interest rates, lower deficits, increase taxes and decrease spending. During ‘bad times’ a government stimulates an economy by lowering interest rates, decreasing taxes, increases spending and thereby increasing the deficit. The Trump administration has already done these things. Spending and the deficit are at record highs, interest rates are at record lows and the largest tax cut in history has been given to corporations and the top 1%. That tax cut only gave a 2 quarter upside blip to growth. Now what?

LAYOFFS AND RETAIL CLOSINGS! GM has ordered plant closing in Oshawa Ohio and Lordstown that will eliminate thousands of jobs. US Steel announced it will close down blast furnaces in Detroit and Gary. Money Wise indicates that 43 major stores will be closing retail stores, including Nostrums, Macey’s, Target, Kohl’s, Lord and Taylor, Barneys and Walmart. All are closing anywhere from 4 to 17 retail stores. Malls and retail are a thing of the past.

OUT OF BULLETS?  I believe the rising wave of red ink  limits the federal government’s ability to provide stimulus in the event of an economic downturn. There are no conservative left in the Republican Party. They are all Trump Republicans and will rise and fall with his success on the economy and jobs, jobs, jobs!

Carl M Birkelbach

From Letter #726 Revised

Bear Market Alert! Credit Swiss hit a 30 year low at 10.23 Barclays PLC Bank just hit a 10 year low at $6.78. BNP Paribas Bank is right at its 5 year low at 39.55.. Deutsche Bank has been the canary in the coal mine as it has gone from 146 in 2007 to a low of 6.61 in June and is now 6.95!  Wells Fargo bank is close (45.33) ino breaking a 5 year low at 44.31. FXI China Large Cap is now at a new 2 tear low at 38.12. Caterpillar is at its five year low 116.07. Exxon is close (69.33) to breaking below a 5 year low at 68.12. Gold has a new 5 year high.

What’s going on? US GDP growth forecast for 2019 is now up only 2.1% and up only 1.9% in in 2020 and up only 1.8% in 2021. The surge in GDP in 2018, as predicted, was only temporary due to the $1.5 trillion tax cut to the top 1% and large Corporations.  This is in reaction to worsening economic conditions forecast because of Brexit and the tariff war with China. China now thinks it can outlast Trump because of the oncoming election, but is facing unprecedented protests in Hong Kong.

Former White House director Andrew Scaramucci, just withdrew support for Trump’s re-election. As he said on the Bill Maher show on Friday “If you keep on hitting a rock (Thumps base), sooner or later if will crumble into pieces. So there are lots of uncertainties. Remember when in 2007 the Fed kept on forecasting the GDP lower and lower every month?

Once things start falling apart, they are hard to stop.

Should I (we) boycott Facebook? After watching The Great Hack on Netflix I am seriously considering dropping Facebook. According to this believable documentary, the Facebook platform has been weaponized to mine our personnel data and sell it as a commodity. Facebook has at least 5,000 data points on each one of us that they sell to propaganda entities such as Cambridge Analytica without our consent. The original intent of Facebook which was to connect us is now being used by political campaigns to divide us. During the last election, Russia reached over 126 million Facebook accounts. Cambridge Analytical posted over 6 million anti-Clinton Facebook adds and coined the ‘Crooked Hilary’ tag. The methodology of these digital gangsters is to target only the persuadable people using fear, hate and anger postings, which will trigger an emotional response. In the last election it took only 70,000 votes in 3 states to turn the Electoral College against the popular vote. My concern is not about any singular election, but about the integrity of the democratic system worldwide, which is being delegitimized by exploitive Facebook postings, using the personnel data from their over 2 billion users.

Being a realist, I understand that one less account or even one million fewer accounts will not bring about the changes I believe Facebook should take. So, I am going to stay on Facebook and continue using Facebook to fight that battle. My future posing may therefore be more political and I understand if some of you may delete me. My suggestion to all of you is to watch The Great Hack on Netflix.

Carl M. Birkelbach

 ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Carl 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. Carl, 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

THE INVESTMENT STRATEGY LETTER #725

TRIPLE  TOP

The Dow Industrials, the S&P 500 and the NASDAQ have all formed a triple top. One top was formed in November 2017, the next in November of 2018 and now in May 2019. However, like ‘Pavlov’s dog’ everyone is conditioned to be bullish, as everyone thinks the economy will continue to prosper and President Trump will negotiate a good deal with China. What if that is not true?

I don’t know what will start the chaos of the next Bear Market or from where it will come and I don’t know when, but whatever it is, it will probably come as a surprise. Maybe it will happen from the surprise effect of early global warming or a surprise Chinese collapse. Maybe the world economic weakness is China?

China

George Soros has just been recently quoted as saying, “China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”  China continues to show lackluster economic growth. China’s rate of growth of its loans, is far above their growth rate of money supply. China’s debt is 2.5 times its GDP. China is using its currency to buy as many companies in the West as it can, while it can. Just as has happened to Japan in the 1990’s, the same deflationary scenario could begin to occur in China.

 The Chinese currency has dropped to its lowest level in many years.  Tariffs could toss China into a recession, where growth is already slowing. China’s banks have given loans to questionable government sponsored companies. Now, $1.3 trillion of corporate loans are owned by companies were profits will not cover their interest payments. The rating agencies think everything is fine. However, remember, these very same agencies rated worthless CMO’s in 1968 as AAA. The problem in China could trigger banks losses that could start a worldwide recession. Money is flowing out of China. Tariffs will increase the problem. While some manufacturing jobs may come back to the US as a result of the tariffs, more jobs domestically may be lost, because the average American would have less spending power. The Peterson Institute for International Economics estimated that rather than bringing back jobs, Trump’s proposed tariffs could ‘result in a trade war and cost our economy more than 5 million jobs and possibly lead to a recession’.

I believe China is a ‘paper tiger’ that is not as big or as strong as it appears and is hampered by cronyism and corruption. Although China has a supposed $375 billion trade deficit with us, the actual figure is much smaller. For example, the export value given to the Apple X I-phone is $378. China contributes only $14 of the total cost for assembly while the rest of the cost is run through supply chains in the US and the rest of the world. Our trade balance ignores the value created by other countries that have preceded China in the chain. Tariffs may kill more jobs than it saves. In fact The Foreign Policy Association estimates that one dollar spent on Chinese imports is about 75 cents that goes into the US economy and that every job created in the metal industry through tariffs, would eliminate 16 jobs in other industries.

China doesn’t even believe its own statistics, as China’s provinces are growing faster than the whole. The China inflation rate is a government secret as they print money indiscriminately to bolster its shaky growth figures. Our Federal Reserve estimates that the US net worth is $60 trillion larger than China and yet, China’s money supply is estimated to be 75% larger than the US.

With 20% of the world’s population they have only 8% of the world’s arable land and 10% of that is reported to be polluted. Coal still provides 70% of China’s power, creating 16 of the world’s most polluted cities. About 435 of China’s 660 large cities are suffering from severe water depletion. I fear China not because of its competition, but because of its vulnerability and possible effect on an upcoming economic crisis.

Carl M Birkelbach

 ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Carl 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. Carl, 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