Weekend  May 23 2020

Texas Re Opens

Never Fight the FED

Dr. Marty Zweig, Former Elf on Wall Street Week

I generally think that government interventions are futile, the money never goes where it is needed nor to the people in need of help.

But the FED is spending billions every day. I suspect that was the source of the 900 point DJIA rally last Monday, with zero follow through the rest of the week. But the FED is not going to run out of money. If the FED is buying Junk Bonds, I suspect they bought a few shares of Apple along the way.

The FANG stocks have all completed five Elliott Waves up. And most momentum indicators suggest stocks are fully priced and due for a pullback. This morning stocks are quiet prior to the three-day weekend.

Texas along with the rest of the nation is re-opening.   Apple has run back to its early February high around $320. Most stocks are still well below those highs, the rally has been concentrated in either FANG stocks or quarantine favorables. Those include Carvana and Peloton, as well as others none of which are making any money.

The Democrat rescue plan has instituted the $15 hourly wage which they have wanted, with the bonus that one gets the money without working! This expires at the end of July but the bill up for vote today would extend to January 31, 2021.

Bien is wooed to offer free college, the green new deal, and a guaranteed income. The next in line for largesse would be entire states of CA, IL, NY, and NJ. All have underfunded pensions and ever expanding budgets. Will the rest of America want to bail out those states? Oh, liquor stores are open in blue states but not the Churches. Will voters approve that social order?

Continental Resources cuts production 70%.

West Texas Intermediate closed at $33.92, up sharply from negative territory a month ago. Like stocks, momentum is peaking. And this price is still too low for real profits.   The fear of lack of storage has been overcome with lower production. Refiner prices have recovered in surprising fashion.

Meanwhile the markets have over looked the 38 million on unemployment payments. That is 14.5% of the work force, a Great Depression number though then we lacked unemployment payments.   And it seems unlikely all of them will be re-hired, especially given an in home wage of $15 an hour while watching television.

In a normal environment, stocks would need a pull back from these momentum peaks.

Given the closures in blue states and resulting protests, this might be a good time to locate Thoreau’s essay Civil Disobedience, written in the late 1840s. People are still disobeying government orders they dislike.

https://professorelam.typepad.com/markets/

Tuesday April 21 20020

Crude Oil Kicks off Deflationary Spiral

Definition of MacGuffin

: an object, event, or character in a film or story that serves to set and keep the plot in motion despite usually lacking intrinsic importance

The coronavirus is the McGuffin in the developing deflationary spiral. Alfred Hitchcock was the first to coin the term and used it in his movies. It is distracting attention away from the greater problem. The long economic expansion from the 1932 DJIA low of 42 ended February 12 at 29,586.

There have been three stock market contractions since March 2000. The first was the dot.com induced sell-off, the second was the sub prime mortgage and now we have what is believed to be a virus induced contraction. No doubt the virus is hastening the contraction. In 1929 and 1973 it took a year and then two years for the DJIA to sell off 50%. Since February 12 it only took until March 23,, about six weeks to collapse stock prices 37%.

The FED and the markets responded to the 2000 and 2008 crisis by lowering interest rates to zer and buying billions in US Government bonds As the US Dollar is the World Reserve Currency, the US can print all it wants. And that rate reduction and monetary injection rallied stock and real estate prices. That has not been the case in the rest of the world. Only the US stock markets hit new highs. All the others failed to do so, a mammoth non-confirmation.

The result of this ‘borrow for free party’ has been the creation of ‘too much stuff TMS.’

Leaf through any newspaper. Retail stores are bursting with unsold clothing. Tens of thousands of cars sit unwanted on dealer lots. That inventory will likely put a lid on re-opening car factories. And then there is oil.

Amidst all this excitement, Russia and Saudi Arabia decided to flood the world with oil, apparently hoping to put the US Shale Producers out of business. No one is making any money with oil prices under $40. Today is the expiration date for the current oil contract. As explained here Sunday, the exchange allowed prices to go negative. Typically speculators are not hedging but speculating. As the May contract unwound, those not taking delivery found there were no buyers. And so the price fell to minus $37.63 for the Friday close of $18.27.   That is a drop of $55.90, , the biggest one day collapse in the history of oil trading. But with over-supply and no demand from autos, cruise lines, and airlines, one was paying someone else to take the barrels of oil.

For now everything from real estate to sports event tickets are on sale. Supply of everything dwarfs demand. Monday’s close and the pre-market open today have more than wiped out Friday’s 704 point gain. The deflationary spiral collapse has begun.