Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
Happy April, everyone! We hope you are busy mastering your newfound quarantine hobbies and enjoying your “bonus” home time. Quickly, before anything market related, we did want to mention again that the entire team is all set up and working safely in their homes. We are fully cloud-based with our technology so besides getting to sit physically across the table from clients, we are fully operational (which we think you already knew). And, as the fallout from the virus continues to mount, we are very grateful to have something to work on which we couldn’t do without you. From the entire team, we sincerely appreciate your partnership and trust. We will continue to work relentlessly to navigate everyone through this trying time.
We assume at this point many of you have someone in your orbit who has either tested positive for COVID-19 or is working on the front lines at hospitals. We have three people in our circle that have contracted the virus. Luckily, they are all young and healthy individuals who worked through the symptoms and are on the other side. But it is scary and it does put a lot of things into perspective. Our thoughts are with you if this is hitting close to home. With that, let’s jump into some market updates…
You know that we are in strange times when an intraday stock market move of 3% feels calm. That’s what we had today with the market bouncing from +1.5% to -1.5%. Over the past two months we have been averaging closer to 6% a day which is without comparison historically. After two days this week, we are slightly above where we closed on Friday and very close to the levels of 03/17 with all sorts of rollercoaster rides in between. We are still about 11% off of the bottom for those who are following along.
What has been noticeable the last 4 or 5 trading days is that the market moves on the virus news cycles have been muted. They don’t appear to be completely disconnected, however the market seems to be processing the economic news more so than the test results, confirmed cases, etc. Given the interconnection and unknowns, there is still not a path to solid economic numbers, but each day that goes by we get closer.
Ultimately, the stock and bond markets are forward-looking, discounting mechanisms. An esoteric thought, yes, but we find it relevant now. What we mean is that the market is essentially trying to figure out one of two things – how much a company will make and retain as profit for the next year (stocks) or can the company/city/country pay the interest on their loans for the next year (bonds). What the heck is all this talk? Let’s think about it this way – if we had to value an airline or cruise company today based on the money they will make in the next month their value would be what? Zero? Negative, because we would have to organize a garage sale? Well, not quite zero, but for the most part next to nothing. But the stocks didn’t go to zero. Why? Because market participants are making assumptions/predictions/guesses that there will be profit a year from now. The same idea goes for bonds. If you apply for a mortgage and have bad credit, the bank will stick you with a much higher interest rate as they need extra compensation for the risk that you cannot make the payment. On this topic, we have a fascinating note below on the interest rate that Carnival Cruise lines is about to pay.
Okay, enough of that. The point was that economic data is starting to pop out from behind the massive shadow the coronavirus has cast on the financial world. The data might not be great, but as you know, the market likes bad news better than no news. Here is a deeper dive on a few things that we are watching… If you are on Twitter, don’t forget to find us @highnotewealth. We will continue to expand it, posting relevant content throughout the days ahead.
HIGH NOTE QUICK HITS:
Price-to-Earnings Ratio Minus Earnings Equals “Just Price”?
- P/E is a high-level market valuation method. In layman’s terms, it’s the price you will pay for $1 of earnings per share (so P/E of 15 means you pay will $15 for every $1 the company profits). Over a multi-decade timeframe, the average is about 17 for the S&P 500. Right before the bottom dropped out, the P/E was approximately 20. This ratio can be helpful in determining where a market bottom may lie. The missing piece is that many companies have officially pulled their forward earnings guidance. Those companies that haven’t as of yet most certainly will because they really have no idea given the scope of a global pandemic. Not that forward earnings guidance is reliable enough to base an investment on, but it does paint a picture of what the company thinks they might do in the next year. Without any kind of earnings rutter, the market ship has been sailing around lost. At today’s market level, participants are estimating an approximate 20%-30% drop in earnings for the next year. If you are of the opinion that earnings will be down 40%-50%, this puts the market down another 20%. There is no projection here, but simply illustrating how some of these valuations are starting to form as information on company financials starts to piece together. Pro Tip: If you want to avoid talking about politics at your next virtual happy hour, you can ask people where they have earnings coming in for the year.
The Oracle of Omaha: Did He Buy Early Again?
- Warren Buffet and the Berkshire crew have been very quiet during the market correction. The quarter ends today, so we may get some information on if they were actively buying. During the financial crisis of 2008-2009, Buffett started buying aggressively during the first pullback only to go through another 20% down. So yes, arguably the greatest investor in the modern era missed the “bottom” by 20% which speaks to the difficulty in making a bottom call. Berkshire is sitting on billions of pure cash, so it will be very interesting to learn what they did.
Unemployment Estimates Keep Rising
- With continued layoffs in the service and retail industries, we are now seeing staggering projections in the 40 million range. The good news is that there is a concerted effort by companies and the government to make this as temporary as possible. Given how telegraphed the numbers are, it is unlikely that there is a number that will shock the markets.
Corporate Insider Purchases Are Strong
- We love to see corporate executives step in and personally buy their company shares when times are tough. It sounds logical, but it doesn’t happen as much as you would think. In the most recent data to come out, we can see a large sum of recent purchases. Chart below…
Mortgage Rates Moving Down
- Rates are moving back down. This is helpful for any of us looking to refinance, but also shows that the backstopping by the Federal Reserve is working. We discussed a couple of weeks ago that rates weren’t moving because the banks underwriting the loans couldn’t sell them in the secondary market. The liquidity added by the Fed has helped ease this up.
Carnival Cruise All-You-Can-Eat Bond Buffet
- Tomorrow, Carnival is looking to raise $3 billion with a bond offering. To say their credit isn’t good is too obvious for even Captain Obvious to say. They are going to market with an interest rate of 12.5% which is more or less payday loan rates. It will be very interesting to see if the entire number gets filled. We are guessing that it will which indicates that the bond market believes they will be able to pay their rent, but are going to gouge them for taking on the risk that they won’t.
One Person’s Rent Is Another Person’s Income
- Collectively, America has approximately $81 billion of rent due tomorrow. About $22 billion of that is rent in apartment buildings alone. We have heard from cities and states about eviction freezes and the like, but this was not addressed in the CARES Act. If tenants don’t pay, landlords can’t pay banks. If banks have bad loans on the books that’s a different problem altogether. Ultimately, the government is going to have to backstop some of this, but most is yet to be determined. It’s a little more complicated than the banks simply forgiving the interest or waiving the payments. It’s not worth getting into until we have more clarity, but it is something we are monitoring closely. Here’s an article if you would like to read more: https://www.bloomberg.com/news/articles/2020-03-30/nobody-knows-what-will-happen-when-the-rent-comes-due-on-april-1
CARES Act IRA and Qualified Plan Changes
- The filing deadline for 2019 income tax returns was extended to July 15. This includes the deadline for making 2019 IRA contributions.
- Required minimum distributions (RMDs) are suspended for 2020. This includes inherited IRAs and traditional IRA distributions.
- The 10% penalty for early distributions (before age 59 ½) from IRAs and 401(k)s is waived for distributions up to $100,000 taken between January 1, 2020 and December 31, 2020. In addition, income taxes on a coronavirus-related distribution can be paid over a three-year period and you have up to three years to recontribute the amount to the 401(k) or IRA.
- The maximum 401(k) loan amount has been increased to the lesser of $100,000 or 100% of the vested account balance and the due date for repayment of the loan is delayed one year if the distribution is coronavirus related.
As many of you know, Katherine and I are the children of a hospice nurse that spent 50 years taking care of very sick people. Needless to say, nurses and doctors have a very special place in our heart. It’s a difficult time for many of the health care professionals of the world. If you are one, thank you for everything that you do. If you are related to one or friends with one, please thank them for us.
More to come soon…
High Note Wealth LLC is registered as an investment adviser with the Securities and Exchange Commission (SEC). High Note Wealth LLC only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.
