Coronavestment Ideas? Is the market like Wile E. Coyote?

by philg

At least with the only people who matter, the most popular TV show in our household is Wile E. Coyote and the Road Runner.

Rule #1: the Road Runner cannot harm the coyote.

A big topic of discussion among friends is how the stock market can be so far out of sync with their perception of the health of the real economy. Is the market, like Wile E. Coyote, already doomed, but it won’t actually fall until someone looks down?

From a Harvard MBA friend, forwarding some content from a discussion group among investment bankers:

This is the standard “bull trap” rally. We saw this in 2007-2009 crash. It took 17 months from top to bottom and along the way there were multiple rallies lasting up to 8 weeks. The end result was a 58% drop in the S&P-500. 58% from January would bring the S&P-500 to around 1500.

The market was already way overvalued whether by Shiller’s CAPE, Buffett’s indicator, price-sales – all were in nose-bleed territory.

The 1929 crash lasted over 3 years with big rallies every few months. 80% of workers do NOT work for S&P-500 cos. They will be sleeping in their cars, defaulting on mortgages, etc., etc. Treasuries will look awfully good compared to stocks.

She also sent “Stock Market Collapse An Avalanche Waiting to Happen” from April 5, which relies on more recent data.

My response to her was that investors are not betting on the health of the U.S. economy, but rather on the tendency for U.S. politicians, of both parties, to want to stay in office. Their reelection would be at risk if the stock market goes down in nominal terms. Maybe a share of the S&P 500 will buy less in terms of Shanghai hotel stays or African safaris or beachfront property on Nantucket (i.e., indexed for inflation in the goods and services that people with money actually spend significant money on). But even the Democrats can’t afford to have the S&P 500 be lower than it was in 2016. The government did not have the tools and willingness to intervene in markets back in the 1930s that it does today.

She responded that her company is cutting pay, that she sees all of the small businesses that her big company supplies going under (being acquired for pennies by bigger competitors and/or simply disappearing), and that everything looks like a full-scale Depression. I reminded her that she is biased by being part of the private/market portion of the economy, which is only about half of the U.S. economy, the other half being direct government spending or government-regulated and taxpayer-subsidized (e.g., health care).

Readers: (1) Who is right? Her Harvard MBA friends who say the market will collapse to match the collapsed U.S. economy, or me who says that the government will rig the market until the numbers look good? (2) what is worth buying right now?

Turning our attention to what is worth buying right now… my friend’s MBA husband (example of assortative mating that exacerbates income inequality; the working class can bust into this, though, with a bit of creativity in states such as Massachusetts) wanted to find some airline stocks to buy. A mutual friend said that the credit default swap rates on airlines showed that investors expected a substantial probability of bankruptcy within five years (and remember that bondholders are ahead of shareholders; “[CDS rates] were around 20% in early April, which implies a 20-25% default probability per year for the next five years”). I personally hate airlines as an investment because if they do well, the union workers will take the profits, but if there is a downturn, the only way to get out of the union contract is a bankruptcy that wipes out the shareholders.

How about private prison companies? With millions of Americans currently on unemployment and not all of them eligible to transition to a lifetime of welfare, there are going to be a lot of residents of the U.S. with no way to get money other than stealing. The U.S. also has millions of inflexible alimony and child support orders (see “Litigation, Alimony, and Child Support in the U.S. Economy”) that can’t be modified without what might be years of court procedures and $100,000+ in legal fees. If the defendant in a family court lawsuit is ordered to pay money and doesn’t have it, the standard American solution is prison (because the defendant has violated a court order to pay) and additional debt to the plaintiff continues to accrue while the defendant is imprisoned. When the economy was basically stable, and the typical defendant was likely to keep earning whatever had been earned previously, roughly 1 in 7 child support defendants were eventually imprisoned. That number has to go up, which should increase demand for prison cells.

(See “What to do if you’re struggling to pay child support or alimony during the coronavirus crisis”:

Those obligations are calculated based on your income and assets at the time the amount is determined, and the agreement can stretch for many years. And typically, unless there’s been a material change in your income, it can be hard to alter.

Additionally, with many court systems either shut down or running in a limited capacity, getting immediate relief from a judge’s ruling could be challenging, depending on where in the country you’re located.

“The court will look not only at your income stream but also your assets,” said Shaknes. “If you’re sitting on a $2 million brokerage account, even if it had been at $3 million, you’re not getting relief.”

If you have filed for unemployment, be aware that those benefits are considered income — meaning not only is it subject to certain taxation, it counts toward your ability to pay. In some states, depending on how your support payments are typically paid, they may automatically come out of your unemployment benefits, Shaknes said.

Meanwhile, during the financial crisis of 2008-2009, courts were not that forgiving when it came to requests for support modifications, Shaknes said.

“A lot of people who suffered job losses or severe income reductions tried to get their obligations reduced and were not successful,” Shaknes said. “We kept hearing ‘go get another job.’”

)

How about Silicon Valley firms? I am negative on those due to the “sell on good news” philosophy. The “good news” of mass home imprisonment of Americans has already occurred, so Netflix, Amazon, Zoom, et al. should already have gotten whatever boost they’re going to get.

Although I generally dislike commodities on the theory that nearly all previous arguments about scarcity and price bumps have proven to be wrong in the long run (example), what about copper? If we want to make a plague-proof country, don’t we need to coat almost all surfaces with copper?

21 thoughts on “Coronavestment Ideas? Is the market like Wile E. Coyote?”

  1. It s a foolish exercise to speculate on whether the market is priced right since how could you possibly test that assertion? As to why it is priced the way it is my guess is that the market, i.e., the collective judgment of people betting with real money rather than pundits gabbing, thinks that the economic effect of the corona virus on profitability will not in the long run be substantial — the price of a share of stock is a prediction of cash flow to eternity discounted to present value — so what a company earned at 30 March is irrelevant and what a company will report for 30 June is only marginally relevant & likely already priced in. Second, that there will be inflation given the massive increase in the money supply and if there is inflation the place you want to be is equity and real assets not cash or bonds. But time will tell.

  2. While I parse all of this and read the links (which takes some time, I’m dumb), I’ll just note that sometimes your arguments with friends remind of your debate with Dr. Webb about having decompression sickness: “I asked him to consider the possibilities that all of my symptoms were explained by a sinus infection or Scopalamine. Finally he crushed my resistance by saying “You don’t feel right, do you?”

    And I mean that in the best possible way 🙂

    https://philip.greenspun.com/health/decompression-illness

    About a week ago I saw a flash from Nomura saying that Q2 GDP in the US was forecast to be -49% from 2019.

  3. I’m more in your friend’s camp because of reading too many books on economics, but one has to admit there is also a huge amount of market rigging going on. More than I’ve ever seen. However, I thought we would see something worse in 2008, which failed to materialize, so I’m trying to keep an open mind.

    From what I recall reading, airlines spent the time between the last crisis/bailout and now with buying back stock. Seems a dysfunctional sector.

  4. Airlines – “if they do well the union workers take the profits”

    From 2014 through 2019, United spent a total of $8.57 billion for stock buybacks and paid no cash dividends. Southwest spent $8.53 for buybacks and $1.38 billion for dividends, for a total of $9.91 billion. American spent $11.895 billion for buybacks and $1.064 billion for dividends, for a total of $12.959 billion. Delta spent $10.08 billion for buybacks and $3.168 billion for dividends.

  5. On prisons and child support: I talked with a friend of mine last weekend.
    About a year ago he went through a hellish divorce ordeal and after truly Herculean effort was awarded custody of his two young girls (he appreciated RWD along the way, it gave him some courage and helped clarify a lot of his thinking during the War.) He had been working construction and selling motorcycles for a Harley dealership, among other things. Their stock cratered from 37.04 on January 1 to 15.04 in early March, rebounded about half since then, but they’re facing hurricane-force headwinds for the rest of the year unless things turn around. Spring is when people buy bikes for the summer.

    (https://www.autoblog.com/2020/04/28/harley-davidson-cuts-dividend-halts-buybacks-as-coronavirus-hits-sales/)

    Their dealerships have been hit with brass knuckles as middle class would-be motorcycle buyers are pulling back and staying home. Meanwhile his -ex has apparently defaulted on her child support obligations, stretching the rack even more. No word yet on whether she’s going request modifications. The courts are backlogged, right? He’s got very little in terms of assets to work with and is doing everything humanly possible to keep his head above water and provide for his girls, a tough enough task in ordinary times for a single father with two kids working wage jobs and construction in his late 40s. He’s a very determined guy. The bright spot is that this time he has a good stable GF and they have a strong relationship, but they’re all struggling together, and this is in the “second richest state in the U.S.” New Jersey. Needless to say he is not enjoying things one bit.

    • “The bright spot is that this time he has a good stable GF and they have a strong relationship”

      Your friend went through a hellish divorce and then was fool enough to jump into another relationship with a female.

    • @Mr Wonderful: Yeah I know, but can I do? He didn’t go into it with closed eyes this time, but yeah he’s a relationship kind of man. Stable. Hardworking. Doesn’t drink or anything else, not a total abstainer but close. He’s committed to his kids like you can’t believe. He really cares about them having as much of a normal childhood as he can provide.

      It’s a very American tragedy. His ex-wife really screwed herself and her kids more than anything else, because she was too selfish to realize what a prize he was, or she didn’t care. He’s a good-looking dude, too. Full head of hair, fit, handsome features, good teeth. He cleans up real well, looks great in a suit. He wouldn’t be doing construction in his late 40s if he wasn’t in good shape. He looks like a cross between Harrison Ford and a young Willem Dafoe. I saw a recent picture of him and said: “You know, you look better than all of us after all this time. You’d still make a pretty good gigolo if you had better luck.” But you know how people are. There’s only so much you can tell them, and they listen to what they want to hear.

  6. I totally agree that you should stay away from any highly indebted company with a large union workforce. I had a GM bond and Obama took me to the cleaners in 2009 when he gave the company assets to the union employees and shafted the bond holders. My GM bond that was due to mature in 2013 is currently valued at $0.00 in my brokerage account and the bankruptcy still hasn’t settled.

    I’ll never, ever buy another bond of ANY company that has a large unionized workforce.

  7. I wonder if the diet industry/ gyms (at least ones that look solvent enough to survive a few more months) would be good to invest in. Almost everyone I know is dealing with a serious case of #coronapudge on top of #coronaplague. I know that I will be signing up for a few weeks of personal training as soon as Inslee says it’s legal…

  8. It’s a spender trap. If you need the money in the next 3 years, you’re going to lose in the stonk market. If you can afford to put away the money for 20 years, you win in stonk market a lot more than in bonds. Of course, people who need money tend to already be poor & people who can afford to put money away tend to be rich.

  9. What percentage of the markets are 401k investments? It must be substantial. Most of the people I know take a passive role in their 401k investments–they choose a plan once when hired and do nothing after that, putting complete faith in the investment companies and plan managers. These passive 401k investors must act as a huge buffer/accumulator for the stock market. Slow acting and consistent Even if someone is proactive with their 401k, it’s a challenge to find a safe place for your money. Out of the 30 or so plans available to me, there were 2 short term options of a bonds fund and a money market fund, and it’s not obvious that these are available and what their purpose is. Active investors must benefit from the giant 401k buffer that soaks up huge losses. I don’t think it’s a coincidence savvy investors promote passive investing: park your money and don’t try and time the markets, while they do the exact opposite.

  10. @Senorpablo makes a good point about passive vs. active investors. Of course, we also don’t know the dimensions of the next stimulus package, which might keep the fire under control for a while longer. If things don’t start turning around shortly after that, replacing hope with something solid, we’ll be in the “capitulation” period of the Blow Off Phase at your second link.

    Remember that the last stimulus legislation made it much easier for people to raid their 401ks, and people who are worried about them are now in a real quandary, because the Q2 results are coming and the first round of stimulus has done everything it’s going to do.

    https://www.cbsnews.com/news/coronavirus-stimulus-bill-retirement-accounts-401k-ira-early-withdrawal/

    Beyond that, I’ve got nothing very good to say. I do know that after three months, one of my customers (a car dealership) called in a few days ago with an emergency, last-minute job mailing 10,000 special financing pieces to their most promising potential customers. We bent over backward to turn it around for them in 48 hours, so it would hit before Memorial Day. That means I’ve done about 1/15th my usual business with them through Q1 and Q2.

  12. It’s nothing but drama in the upcoming action-packed blockbuster over the next few months. To list just a handful of things that have never been done / have to go right / can’t believe it’s happening?:

    1) $483 million for Moderna’s mRNA vaccine based on preliminary results from just 8 people and a promise to have a working vaccine in “a couple of months” from a company that has never made a product that worked.
    2) Social distancing orders are being relaxed or ignored all around the country as people head outside for Memorial Day weekend. Let’s see what happens to the infection case data three weeks from now.
    3) To drive the point home, the New York Times decided to list 1,000 names of deceased COVID victims covering its entire Sunday front page.
    4) The next round of free money stimulus is coming “sooner rather than later” – because everybody knows how bad the Q2 economic results are going to be. The Optics are going to be hard to spin. https://www.forbes.com/sites/ryanguina/2020/05/23/trumps-economic-adviser-proclaims-another-stimulus-bill-coming-sooner-rather-than-later/#7827817b2994
    5) SpaceX is launching its Dragon capsule with the first astronauts to fly from American soil in a decade on Wednesday at 4:33pm from KSC. This is Trump’s Moon Plan at stake.
    6) Iran has sent gasoline tankers to Venezuela (the first of which has already arrived) and Washington is not expected to respond directly or attempt to interdict them. Success here will hand Iran and Venezuela a big PR victory over the “impotent” U.S. in our hemisphere.
    7) Kim Jong Un has emerged from quarantine, but not his white horse, to run a meeting of the Central Military Commission. They still have 0 cases of COVID and nobody wore a mask, but Rocket Man still has a lot of rockets.
    8) Mail in voting! It’s never been done at anywhere near this scale. A colossal roll of the dice. I guess the stimulus bill is going to include money to keep the USPS from going broke in the interim?

    Looming over all this is the outcome of the Trump tax returns case and all it portends. And liberal legal scholars (are there any others?) are popping Xanax as they brainstorm about Trump derailing the election. “In the eight to 10 months I’ve been yapping at people about this stuff, the reactions have gone from, ‘Don’t be silly, that won’t happen,’ to an increasing sense of, ‘You know, that could happen,’” said Rosa Brooks, a Georgetown University law professor. Earlier this year, Ms. Brooks convened an informal group of Democrats and never-Trump Republicans to brainstorm about ways the Trump administration could disrupt the election and to think about how to prevent it.”
    https://www.msn.com/en-us/news/politics/trump-sows-doubt-on-voting-it-keeps-some-people-up-at-night/ar-BB14wnd2

    Some of these things only affect investors psychologically, but it’s still a lot to digest. Copper futures look like a bedrock of boring by comparison. Don’t look down. There are a lot of ways we could be looking at a heartache.

    • 8) Mail in voting! It’s never been done at anywhere near this scale. A colossal roll of the dice. I guess the stimulus bill is going to include money to keep the USPS from going broke in the interim?

      Massive vote fraud. I’m sure that will spice up the election a bit.

    • @Tom: Spicy like the scorching end of Pepper Joe’s heat scale ( https://pepperjoe.com/pages/hot-pepper-heat-scale )

      I know the USPS rather well and work with them all the time. They can theoretically deliver the mail volume, that’s not really the problem, assuming they’re still operating by that time. They can hire surge capacity in time to tote the trays, process the deluge and drive the trucks. They usually ramp up for the holiday season anyway, so they could factor in extra capacity if they get started reasonably soon. I’m not really concerned about that part of it.

      The big issues are rejected ballots, missing or incorrect signatures, and ballot harvesting. Nightmare sums it up pretty well at the WSJ:

      https://www.wsj.com/articles/a-vote-by-mail-nightmare-11590189749

      If it’s not all mapped out by August, it’ll be a disaster. And of course, the political parties are just about diametrically opposed on the issues.

  13. It’s a change of variables problem.

    Future Earnings are stated in Nominal dollars. Value is measured in Real dollars (“mini-bucks”)

    Scale Factor between the two is, by convention, an exponential function of risk free rate (“treasuries”) + various risk premia (“additive hand waving fudge factors”) times time.

    The individual components of the Scale Factor have declined dramatically. See for example AAA bond yields (although the declines began a year before – topic for another day).

    This has a two-part effect. (1) Scaling Factor moves upward, closer to 1, increasing present valuations. (2) The effect of this-year’s profits has very little effect on total valuation – so impact of the current plague year is small.

    Is the market overvalued in the sense of your chances of actually realizing the profits capitalized in valuations is negligible? Almost certainly. Does it matter to participants? Not yet.

    Received wisdom on Central Bank expansion of balance sheets (see Ed Yardeni’s Central Bank Balance Sheet Data[pdf] )is that it pushes non-Central bank capital into more risky assets in order to capture the yield needed to meet their obligations, whether pension commitments, retirement needs, childbearing obligations, etc. From treasuries into investment grade corporate bonds, from investment grade into junk, and from junk into equities.

    That’s the present belief-structure.

    I think there are some material problems with believing in it, but, inconsistencies won’t matter until they do. Keynsian Beauty Contest vs. reality.

    My own view, for whatever little it’s worth, is that interventions on this scale result in illiquidty , centralized planning in fact if not in law, demographic decline, and real economic contraction, even if nominal growth stays above zero. If you wanted, as a first order approximation, to view the markets are rigged, I think that would keep one out of serious trouble.

    >> me who says that the government will rig the market until the numbers look good?

    You’re right. Your IB friend is wrong.

    >> investments

    I still like FUN. They’ll reopen some parks and scrape through the season. LW still interesting. Fast food drive-throughs have been packed throughout plague here in a lockdown-state . Changed my mind on XOM – I think it’s a value trap (declining earnings + declining multiples). PNTG not as cheap as before but I still like hospice roll up. Post-plague regulations coming down the path are going to force consolidation in the industry.

  14. Excellent article Phil, this is what I have been waiting for.

    Knee high by the Fourth of July, ops that’s corn.

  15. OK OK, I’ll chime in, oil abs gas, but not in this country, Russian stocks for the next ten years, Gazprom and Lukoil, stay away from the Russian banks.

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