Michael Steinberg

Market Meltdown

The stock market has been frothy for some time, pushed ever upward by a solid American economy and excess capital sloshing through the system from the Federal Reserve’s easy money policy. As I have watched the price earnings multiples being pushed to ridiculous levels, I have been waiting for an extraneous event to trigger a major correction or even a full blown bear market.

During the 1970’s I had occasion to study the course and progress of disease vectoring. Accordingly I have followed with both interest and trepidation the progress of the Coronavirus outbreak. It amazes me that White House officials are down playing the seriousness and pandemic nature of this outbreak. It is not merely the community spread aspects or the anticipated higher death rate than the yearly flu or the fact that the disease is spreading with more severity among the elderly, the immune compromised, those with diabetes, and individuals with heart disease. Rather, what is of greater significance is the international reaction to the spread of the disease. A new tribalism has set in as nations close borders in hopes of stemming the spread of the Coronavirus.

I do not intend to go over the numbers involved, suffice to say that once the disease has broken out of containment, a pandemic is inevitable. What is relevant is the economic ramifications from governmental responses.

The unbridled fear of contagion is causing demand destruction on an almost unparreled scale. It is one thing to delay a planned purchase of a manufactured good. It is an entirely different matter when concerts, sporting events, business conclaves, and many large gatherings are cancelled. The annciallary losses to hotels, airlines, anf cruise lines is economic activity lost, never to be regained. We have already seen smaller airlines go out of business. Hoarding has set in, which is ridiculous as the ill become unable to even get tissues or toilet paper.

Nor does this take into account disrupted supply lines for manufacturing, including base materials produced in China for medications. Ideas are being floated in Washington and other capitals concerning how to deal with these losses. Washington’s assumption is that the virus will dissipate or even disappear when the warmer summer months roll in.

I heartily disagree. I believe instead that we will just be hitting the peak global infection rate by mid-May. Pandemics do not conveniently disappear because we wish it so. I believe that the disruption caused by the virus will continue well into the third quarter.

Barring some kind of miracle I believe it is inevitable that the economic fallout will bring at least a short term end to the long running bull market. Further that when the first and second querter earnings start rolling in we will find that we entered a recession during the first quarter. Market drops feed on themselves as margin calls exacerbate selling and even safe havens such as gold are not immune as traders sell gold, which has been rising, as source of ready cash to meet margin calls and raise capital against a market bottom.

It is going to be a rather long wait.. Very nimble traders may make a lot of money playing the daily swings, often over a 1000 points on the Dow. As for me, I am sitting on my hands and creating a shopping list of options trades for when the market finally finds a floor.

Given my expectations, barring a flood of new money from the Fed, market volatility, fear of a looming recession, and earnings contraction could easily drive the Dow down to 15,000 or lower. The financial devastion and fear among the retiring baby boom generation will create a spreading fear of financial panic and demands upon Washington to do something, anything, to make things right. Unfortunaely given the size of the Federal debt, not even including contingent obligations, the Federal Reserve will have its hands tied unless they are willing to risk negative interest rates and possible default.

Hang onto your hats folks. The ride is going to be very bumpy with the possibility of huge losses and for the nimble, huge gains. When you create your buying list, look to the traditional defensive companies such as makers of medical supplies and necessary consumer items such as tissues, toilet paper and soap. Other areas to look at are the beaten down tech stocks that should spring back as their supply lines are reestablished.

If you must play this market, do it with options, but never, ever sell a naked call.

Michael14Steinberg March 12th, 2020

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