Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
The first full week of May is in the books and we have no shortage of updates to cover. The wild market swings have slowed a bit, but the news has not – no rest for the wicked. While the volatility is down from March levels, it has really only moved from the cheap seats to the lower deck, but it’s far from sitting court-side, so we expect continued turbulence. Speaking of court-side, we assume that everyone is watching ESPN’s “Last Dance” documentary series on the 1997 Chicago Bulls. If not, we highly recommend it.
Much of the discussions this week are more economy-focused as the news surrounding the virus continues to be perplexing. We know that new cases, hospitalizations, and deaths have hit a plateau which is good. We know that states around the country are trying to re-open, but data is limited, and testing levels still seem a little “light”, to be polite. What we still do not really have a handle on is the viability of therapeutic treatments or the arms race in creating a vaccine. Medical trials are in process and significant work is being done, but without any definitive answer we will have to wait (impatiently).
The brief market reset is that US stocks were up for the week, but still slightly under closing levels on April 29th. As we pointed out last week, we are continuing to move sideways while more information appears. Bonds are in a similar pattern with the trend arrow continuing to point down on interest rates. We did see the first glimmer of negative rates in the futures markets, but that’s not something to concern ourselves with at this moment. Simply put, it points to rates staying low for a long time.
Paradise City, Liberia
We can all agree that it has been a very different year. Devasting, sad, troubling, odd, uncertain, educational, emotional, and countless other words apply to 2020. This week we added another to the list – bizarre. In what can only signal “peak pandemic”, this week we were introduced to a feud to end all feuds when Secretary of Treasury, Steve Mnuchin, got into a Twitter war with legendary rock star, Axl Rose. For reasons unknown, Rose started it by calling Mnuchin an “a**hole” in a post to which the Secretary responded, “what have you done for America lately [American flag emoji]”. Except the emoji wasn’t the American flag it was the flag of Liberia. So Mnuchin thought better of it and deleted the post…only to change out the flags and repost the message. Perhaps, in 2020, everyone has a little too much time on their hands.
Buffetshire Sadaway
As has been tradition, the first Saturday in May is the Berkshire Hathaway Annual Meeting. Over the years this has become a huge event welcoming thousands of shareholders, celebrity speakers and an atmosphere that’s more rock concert than earnings call; often dubbed the “Woodstock of Capitalism.” Given the current circumstances, the event took place last Saturday in a much different manner. Warren Buffett spoke alone into the camera for nearly five hours on a variety of topics including the state of Berkshire, the sale of the airline stocks, and the market overall. The visual was tough and the tone was not optimistic. Buffett referred to the airline industry as being significantly different post-COVID when reasoning his sale of the holdings at market lows – losing billions on the investments. He confirmed that they did not buy any stocks at the bottom and seemed far from the man that once said his strategy was to be “greedy only when others are fearful”. Firmly carved into the Mount Rushmore of investors, Buffet is one of the most successful market participants of all time. That’s undeniable, so it’s hard to know what to make of it. Perhaps at 89 years of age his risk tolerance has reduced? Or the market moved down and up so fast that they were waiting for further damage before deploying the $135 Billion in cash at their disposal? Time will tell as we look back at this period down the road. While his actions wouldn’t indicate any level of confidence and the words felt uneasy, he did say, “never bet against America”, in a brief moment of optimism.
Alright, let’s get into some more details below. Before we do, please let us know if there is anything specific you would like to hear about in these notes or if there is anything that we can do to help. Otherwise, enjoy the weekend. Be safe and all the best from the High Note Family.
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Chart Breaking Unemployment
- The year 2020 has essentially rendered every future unemployment chart irrelevant (see below). With the weekly claims number on Thursday, we now sit at 20% of the labor force unemployed or 10% of the entire country. With these new numbers included, looking at a chart over any time period looks like a mistake. It looks like the chart maker fell asleep when they got to the year 2020 and pushed the pencil to the top of the page as their head rested on the desk. For fans of standard deviation calculations, this is your Super Bowl. Such a massive move makes it very hard to model and makes it very hard for the Federal Reserve to address. “Duration” continues to be the key word here. As in, not how MANY unemployed, but how LONG unemployed. The silver lining this week was that the pace of increase in jobless claims slowed down and we are starting to get some workers returning to jobs.
The Line to Bankruptcy Court is Around the Block
- Retail chains are feeling significant pressure. J. Crew and Neiman Marcus have filed bankruptcy. JC Penny and Macy’s are on the ropes. Nordstrom came into the mess relatively strong, but are proactively closing 16 stores because, like most of us, they hate waiting in lines. Many other retailers are believed to be ready to file, but need to wait for re-opening so they can liquidate merchandise. These are the big names that get reported. The smaller shops do not make the news so it’s hard to know the actual depths. Brick and mortar retail isn’t going away, but there is a significant shift in process – many will go away and the strong will get stronger.
To Forbear or Not to Forbear, Is a Trick Question
- Real estate data will always lag a little. This week we got the most recent update on mortgage forbearance number as of April 26th. The number is now sitting at 7.54% but we know that in real time it is much higher than that. The good news is that it shows borrowers being proactive in taking the option to forbear versus defaulting. The bad news is that the number is staggering. If all those opting for forbearance have their jobs in place on reopen, it can work, but it is hard to believe that is the case.
Not All States Are Created Equal
- Summary first, details later: States on the bottom = really good, states on the top = not good. This is the recent municipal bond spread comparison state-by-state. States like Illinois and New Jersey at the top must pay the most interest on bonds because their likelihood of default is the greatest. They are the kids with the credit card limit of $500 at 28% interest because they took a few years off from paying their cell phone bill. In contrast, Hawaii has limits they would never use, always pays their bills a month early and makes us all look bad. Minnesota is appropriately hanging out in the polite zone – not showing off by being the best but solidly positioned in the “nice” half. With the pandemic hitting states hard, there has been a lot of political barbs flying around DC about what happens if a state defaults and whether Uncle Fed would come to the rescue. How bad it would be if a state were to default is hard to say but we would rather not find out. Our guess is that if push came to shove, the federal government would have to bail them out, kicking and screaming the entire way.
I Didn’t Blow Up, You Blew Up
- There is a fascinating book called “More Money than God” that’s an historical account of hedge funds from the early days to the present. It gets into some investment concepts but mainly its about the people involved and the industry in general. What’s interesting, while also frightening, is the increase in size of these funds over the years. 1998 was the first lesson with the collapse of Long-Term Capital Management that almost brought the US economy down because of the seemingly benign event of Russia defaulting on bonds. After $4.6B evaporated into thin air, there was a coordinated bailout to prevent the fund from bankrupting a bank or two or three. I’m sure everyone learned their lesson, right? Not exactly. In true capitalist fashion, future hedge funds said, “I’ll see your size and raise you another layer of derivatives”. Bringing this back to today, one of our biggest concerns when the pandemic hit and the market starting selling off was that one of these giant modern day hedge funds would get caught on the wrong side of the trade, blow up, and cause a cascade of additional disfunction that couldn’t be absorbed. In the first days of the panic selling we made a few calls to see if anyone on the street had heard of a hedge fund liquidating. We were happy to hear that nothing out of the ordinary was showing up. Now some information is starting to leak out. We know now that an unnamed hedge fund unloaded a large amount of CLOs to Bank of America at pennies on the dollar. This might not sound like much, but it illustrates a couple of points and key comparisons to 2008-2009. First, Bank of America had the cash and appetite to take the deal (they would not have in 2008). Second, the selling was consistent and orderly enough that the hedge fund had time to actually make a deal before completely blowing up. So maybe we have learned a lesson?
A Picture Worth Ten Billion One-Hundred and Fifty-Nine Million and Change
- Shot recently, this is a picture of a Halliburton yard in Duncanville, Oklahoma. Fracking trucks sitting idle as far as the eye can see so it’s no surprise the company is worth $10,159M less than it was on 2/20. Even with prices recovering from the recent negative debacle, the pain in oil continues. Prices are still significantly lower than the cost to pull it out of the ground in Oklahoma, Texas and North Dakota.
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