March 11, 2020

Good Afternoon To All Clients:

North American markets have slipped into official BEAR MARKET territory today dropping down -20% or more from the mid-February highs.

The longest Bull market in the stock market history has ended at 11 years!

The most pressing question for investors is whether this BEAR MARKET will now be accompanied by a ??

This distinction has a major influence on how low equities will go and dictates my plan of action with your DRY POWDER stash!!

If this is “just” a Bear Market and no recession than the average down side is about -28% (so we are almost there) BUT if we also see a recession than the average decline since 1929 has been -42%!!! That is a big difference!!

You should therefore all be happy to know that I have moved my RECESSION call from 90% to 98%!

This means that our two years of patience and defense could very well be rewarded three fold:

1. Firstly, we will not see the same portfolio declines that the general markets will see (or the poor slops using mostly ETFs)

2. And our “Bay Day” scratch and save sale could very well provide us a whopping 42% sale (rather than 28%)!

3. And the high possibility of a recession bear market now allows me to tweak our TRANCHE BUY LOW strategy in a more favorable way which I will explain below.

So for those not following along, the TSX is now down -21% (closed at 14,270) from its Feb 20 high of 17,944 and both the DOW and the S&P 500 are also down -20% and the NASDAQ is down -22%.

The equity bubble that has been in place for two years has finally ended because it has taken TWO LARGE HITS over the last two weeks—the Corona virus and the oil crisis!!

The Global Economy was already unstable and fragile BEFORE Corona and the Oil Crisis but it is worth reviewing some of the background RISKS that existed making this market-economy so vulnerable:

#1 the enormous financial engineering schemes implemented by Trump and the FED have now come home to roost i.e. the last two years of monetary and fiscal policy was one for recessionary times NOT bull markets!!! This action has allowed for terrible froth to accumulate in many markets e.g. tech stocks, corporate markets and these are now imploding!!

#2 because of the low interest rates corporate debt is now at all-time record high levels and servicing and rolling this debt will become a problem in short order…expect defaults to soar such as in the sector…this will hurt banks +++

#3 more worrisome is the endless cheap debt that allowed Zombie companies to survive long past their expiry dates…so even more (massive) defaults are coming our way shortly… #4 CEOs also got swept up in the financial engineering schemes of SHORTERISM and opted for Share Buy Backs over Cap ex spending further adding froth to this bubble as this FALSELY pumped up earnings…that will now stop and exacerbate the equity market decline when Q1 earnings start

#5 then we had the passive ETF investing BUBBLE which encouraged CHEAP brainless buying of TECH stocks (NO matter how expensive!!!!) such that they are now at levels close to the dot.com bubble…that will now unwind just like before with the tech darlings dropping 50-60%...this panic selling of ETFs will start very soon is my hunch…

#6 because of this 11 year bull we have a wrath of junior investment advisors who have seen nothing but “buy the dip” for 11 years… I suspect they will exacerbate this panic selling in very short order now that a “bear market” is here…just wait until more analyst start talking about the recession odds…then we will see the phase 2 of this selling begin

#7 so between the implosion of ETF bubble and the inexperienced over confident younger advisors I suspect we will see continued “panic selling” over the next few weeks which will cause extreme volatile markets and ongoing declines

#8 and recall that the global economy was already weak just before Corona/ oil crash over the Trump- conflict and so corporations are already in a tuff spot

#9 finally, we just had a whole year of flat to negative earnings and now this will be extended for at least 2-3 quarters and stocks must now FINALLY reflect this ongoing earnings recession…wait until we see the earnings numbers for the first quarter—they will be weak BUT it will be the downward revisions that will scare many/most to bail

#10 -I was going to comment on the and the Curve but my readers know all about this as the bond market has signaled this BEAR market now for many months…but few equity investors listened…maybe now that high yield spreads are exploding equity investors will reflect on this risks in the debt markets

THE “TWO PINS” THAT POP THE BALLOON:

Pin #1 –was of course Corona and the US is at big risk here—they waited too long to test, millions have no coverage to allow testing ( offered free testing), I still cannot believe Trump down played it initially—this could be his nail in the coffin, the US health care system will be inundated more than other countries as the US flawed health care system has millions with no or weak coverage and they will wait until they are very sick and pass the virus along while waiting (at work), the US has among the lowest ratios of hospital beds to population among developed countries so their mortality will be much higher than South Korea (who acted earlier) simply because of bed shortages, the US middle class will really feel the pain as they are financially so fragile vs other developed countries having seen little wage growth and are sitting on so much debt that they will feel compelled to work (even while sick), ironically because income inequality in the US is the highest it’s been since 1910- this pandemic fall out may in some ways allow for better changes in the US going forward????...but first there will be a health crisis (my hunch)

Pin #2—is the crashing over plunging demand (re airplanes, less vacation driving, slowing economy etc.) and now and Saudi are in an oil fight and both are over producing oil (trying to hurt each other and the US Shale industry) which is adding massive excess supply…so prices are in free fall and we expect to see major defaults in the oil sector over this and massive job layoffs in the shale sector which kept the US out of a recession over the last few years , usually it is housing but this time was the shale explosion but this is now imploding

So the Equity Balloon might have continued floating if we had just one pin BUT two at the same time….nope…mu bet is a recession in short order!!!! CONCLUSION

I think we are now (or very soon will be) in a Global Recession including the USA.

The stock market is a leading indicator and is pricing this in wrt the extreme volatility and rapid daily declines! You never see this type of activity outside a recession!!

The bond market priced in a recession many weeks ago.

The macro assessment tells me that avoiding a recession in the face of these two big hits (pandemic corona and crashing oil) will be very difficult because of the pre-existing fragile economic back ground, the massive corporate debt bubble and because of the frothy bubble equity markets!!

If I am right and we see a recession, history tells me that we could easily see another 15-20% (at least) decline in the markets from these levels!!

I will be monitoring the recession gauges very carefully (e.g. initial jobless claims, High etc.) over the days ahead and will keep all clients well informed!

From a technical standpoint, if the S&P 500 breaks below 2600 (now 2741) than 2000 is the next target.

THE good news is that we have HAPPILY lowered all clients’ cash levels by about 4-5% over the last two weeks buying core positions that were on sale by 20% or more!!!!!

Most clients still have about 15-18% cash (and I can raise this more in many accounts as we all have a healthy dose of bonds that we can trim to raise more dry powder) and I will soon start the next round of tranche buying fyi.

Additionally, because I am now convinced that we are falling into a RECESSIONARY BEAR MARKET this offers me TWO “LUXURY” BUYING OPPORTUNITIES:

#1 we hopefully will see an even better sale down the road as stated above re the average down side being 42% (what a sale!!) so we do not want to rush matters and

#2 because recession bear markets are NOT short events I have time on my hands to do my research before we make our second and third round of tranche buying in LOW!!! I do not need to be a PANIC BUYER!!!!

WRT how we are doing thus far…overall with markets down -20% my book is ONLY down about -4% across the board for all clients…so the range is -3 to -5% depending upon asset mix allocation!!!

I will next see how much each core position is down and send that out to clients as that dictates where I am buying next.

Hardest hit sectors have been oil producers and pipelines—THANK goodness we had little exposure to the producers…but our pipelines have taken a hit.

Banks also getting hit hard and with more pain to come as defaults soar…so we are way under exposed to financials and may soon start to look at these….

Finally, thank you to all clients for your ENORMOUS patience with my “Invested but Defensive” strategy over the last couple of years...now is finally a time to get invested!! . Terry