Capital Wave Forecast: Risk On, and On, and On, And…

Shah Gilani May 26, 2020
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Summer’s not officially here yet, but the heat sure is. Markets are sizzling and investors are feeling it.

It’s Risk On, all the way.

Until of course the heat wave investors are enjoying gets dumped on by any number of named storms brewing out on the near horizon.

What storms?

Bella-Bankruptcy, Brad-Breadth, Elanor-Unemployment, Maggie-Mortgage, Ralph-Retail, and Ollie-Overpriced. They’re just tropical depressions according to bullish forecasters. At least they are for now.

So, get your Risk On!

Investors sure did last week. The Dow gained 770 points or 3.3% on the week. The S&P 500 gained 3.2%. And the Nasdaq Composite gained 3.4%.

What looked like an up-and-down week was anything but if you were looking behind the curtains.

The U.S. and China jawboning each other like high school bullies facing off got investors’ attention, for about a New York minute. Beijing bullying Hong Kong got investors’ attention, for about a second. After all, haven’t we seen this movie before?

What’s more important is the country’s opening, the economy’s opening, stores opening up and a three-day weekend was reason enough to get out and get on with getting on.

It didn’t matter to the crowds at beaches, in party pools, in long lines, shoulder-to-shoulder, to get ice cream cones or beers on the boardwalk. It’s Risk On across a good wide swath of the country.

Not to be Debbie Downer (maybe another named storm coming our way) but what if these people are wrong? What if all the anti-social distancing generates new waves of infections?

We all hope not. Because if there are no spikes about to show up in Georgia over the next couple of weeks, no spikes in Texas, no spikes anywhere over the next two-weeks to a month, the bulls are just getting started.

That’s what stock futures are telling us this morning. Risk On Baby!

Our backstop, of course, is the Federal Reserve. They’ve got our backs. They’ve backstopped the capital markets.

They’re even buying junk ETFs like High Yield Corp Bond iShares iBoxx ETF (HYG) and High Yield Bond ETF SPDR (JNK) to hold up the fallen angel, high yield, AKA junk market.

So now, if you want to buy a cheap car from Hertz, which declared bankruptcy last week, maybe you can get one on the Fed’s lot. Because the Fed’s now technically a creditor of Hertz, that’s because HYG and JNK owned Hertz bonds, and the Fed owns some HYG and JNK, which means if Hertz reorganizes the Fed will be an equity owner. Maybe they’ll set up a rental counter next to the Discount Window?

About that Bella Bankruptcy storm out there, I’m not going to ruin your day and tell you how many are coming, I’m just going to ask you to ask yourself, what’s going to happen when the Fed is an equity owner in thousands of bankruptcy reorganizations?

Just wondering.

About that Brad-Breadth storm out there, the Nasdaq Composite’s ten biggest companies have increased their market value by $900 billion thanks to the rally off the bottom. Meanwhile the remaining 2600 or so other companies in the Composite index have lost a collective $300 billion. That’s Brad Breadth.

And Brad’s cousin Ollie-Overpriced is bubbling up on account of those top ten stocks in the Composite trading at a whopping 29 times estimated 2021 earnings, while the rest of the gang trade at less than 16 times estimated 2020 earnings.

And the Ralph-Retail storm, that’s about retail investors at Robinhood, E-Trade, Schwab, and Fidelity piling into shares, even buying fractional shares because they can, and not paying commissions, because they don’t have to, to fill their time away from their other gambling or otherwise sporting endeavors.

Are retail investors right this time? We’ll see, they better be, because a lot of them used their stimulus checks and are using their unemployment checks to bet on “always buy the dip” and don’t “fade the Fed”.

As far as the Maggie-Mortgage storm, suffice it to say low rates are great, but not if lenders are raising their standards so you can’t get one. So much for cash out re-fis and money to shop with.

But those storms are on the horizon, so don’t worry.

It’s RISK ON, and on, and on.

So, “Get It While You Can.”

Until then,


Shah

4 Responses to Capital Wave Forecast: Risk On, and On, and On, And…

  1. Torreey N. Webb says:

    Love your analysis – as always

  2. Larry Heatwole says:

    Shah,
    I always love reading your comments they have just enough sarcasm to make them funny but at the same time as you really listen to what you have to say it is spot on.
    This story makes me a little nervous thinking about the fact that the Fed will probably end up having an equity share in several companies who go belly up because of this fallout from the virus. This country will never return to the old normal unfortunately and the government will own half the country. Well there goes the neighborhood as they say. Until next time

    Larry Heatwole

  3. Tony says:

    So, the Fed has breathed life back into the dead cat (and wounded my punts on QID and SPXY)

  4. JANET CRAPO says:

    You make too much sense. I think investors have blinders on.

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