As I was thinking about what to write, I realized I wanted to write a bullish piece. I wanted to write about how we are close to the worst being priced into this market. I wanted to highlight how Trump is no longer minimizing the severity of the crisis, but instead being frank about the challenges America is facing. I wanted to highlight how governments like Canada are no longer reacting to each development, but actually getting ahead of this crisis.
I wanted to remind everyone that; once the governments start panicking, the markets can stop.
But I realized I was scared. Maybe scared isn’t the right word, but “apprehensive” to stick that view out there. Previously, every time I had thought we were close, another wave of selling hit us. In fact, I almost wrote a bullish article a couple of days ago, but instead just highlighted how shrewd guys were starting to buy. I know - chickenshit.
But in reality, I wasn’t yet fully bullish.
Yes, I too started nibbling with some small buys, but yesterday was FUGLY.
Every time I put my hand out to buy something, I lost another finger.
Yet, we have finally hit that point where governments have not only acknowledged the seriousness of the situation, but have hit the “we will do WHATEVER it takes” moment.
Powell started it with a surprise rate cut and more QE. When that didn’t work, he followed up with a commercial paper purchase plan. The Federal Reserve will provide whatever liquidity the market needs. Period. Full stop.
We had the Europeans saying they will institute a massive fiscal program. Look at the German bund over the past week.
The yield has rallied from -90 basis points to -43 bps. This is a monster move (so much so that I took some of my bund puts off this morning).
And it’s not just German bunds that have figured it out. Have a look at this chart of US 30-year yield (white line) vs. the S&P 500 future (orange line):
Since the 9th of March, bond yields have been creeping higher - even as the S&P 500 has been hitting new lows.
The bond market has figured it out. Stimulus is coming. Big time. They are throwing a massive wave of monetary and fiscal stimulus at this problem.
Could the stock market go lower? Sure. A good trader never says never.
But we have finally hit that point where governments are not only panicking, they are undertaking the world’s greatest financial experiment.
The risk/reward no longer favours being short. We are now down 30% from the high a month ago.
I won’t go over all the oversold indicators. The truth of the matter is that they have been screaming oversold for so long, they are virtually useless.
This is a unique moment in history. We have never dealt with a pandemic before, so everyone is flying blind.
However, we have dealt with monster QE and fiscal spending by governments before. And the one thing we have learned - they can send markets much higher than almost anyone can imagine.
I will make this post short and sweet, but before I do, let me tell you - I was almost not going to write it because I was so worried about appearing bullish. Yet, over the years I have found that posts where I cringed as I wrote them, the ones where I was scared to hit publish, are often the best trades.
I think there is a decent chance we have bottomed.
I have no desire to fight the Fed, the ECB, the BoJ, the US government, the Canadian government, and the Germans. In fact, virtually every Central Bank and government in world. They are all stimulating like their lives depend on it.
Will they be successful? Who knows?
But I don’t think betting against someone with an unlimited stack of blue tickets, and the moral justification to spend that money is a wise idea.
What am I buying?
I love my buddy Harris Kupperman’s (Adventures in Capitalism) tanker story. I know previously there was a bullish narrative going around about changes to the environmental requirements that got many hedge funds bulled up, but nothing like a complete drubbing to sour their appetite. However, there has now been a huge change in the fundamentals with the Saudis leasing every tanker they can find to ship oil to the Western economies in an attempt to kill American shale. This means that tanker lease rates are going through the roof. Right now, no one cares. But they will. I am buying STNG and TNK.
Then, homebuilders. Although the bear narrative says we are going into a massive recession, I think it will be more V-like than L-like.
The ITB homebuilder ETF is off almost 50% in the past few weeks. They are being WAY TOO PESSIMISTIC about this crisis.
In terms of single homebuilder names, I love CCS. I will go into more detail when I write up this theme, but I am buying the builders down here.
I haven’t spoken about it in a while, but I am still long US breakevens (much to my detriment). Today, they are lambasting the 30-year breakeven - which I think is dumb because, if anything, the stimulus is more certain today than it was last week. I don’t usually like buying this ETF, but the TIPS are soooo illiquid, I have decided to also pick away at the RINF inflation breakeven ETF.
Although the news seems bleak when it comes to the virus, the governments have finally acknowledged the situation.
I am starting to lean long. I am scared, but if I wasn’t, it probably wouldn’t be a good trade.
Thanks for reading,