By Simple Simon
Big Jolly Times
March 16, 2020
Bad 2Q financial results almost always spell doom for the sitting President or the candidate from the party holding the White House during the 2Q even if there is a recovery in the 3Q. Ask Bush-43 or John McCain. The only President since 1920 to buck this trend is Harry Truman. Trump is no Harry Truman.
It is fanciful to think there will be a recovery by 3Q or even by 2Q 2021.
1. We were in an unprecedented Bull Marker that began shortly after the banking collapse in 2007-2008. Historically Bull Markets last for about 6 years before there is a correction. We were living on borrowed time.
2. The 2017 Tax Reform was used mostly by corporations for stock buybacks and not capital purchases. Stock buybacks to raise the price of stocks, which is a good thing for company executives and guys like me who are investors. At least as long as you don’t get too starry eyed and sell out before the inevitable happens. There was a little meat on the bone in the Tax Reform for the middle class, but this was used up in spending instead of saving.
3. The PMI (Purchasing Manager’s Index) was flagging a slowdown in the economy almost a year ago. Companies were already tightening their belts.
4. The inversion of the Yield Curve in October of 2019 was the first alarm of what was about to happen. Bond Yields are a leading indicator whereas Stock Prices are lagging indicators. The decreasing Yields clearly indicate investor thoughts about the future.
5. Extreme Market Volatility always precedes a market correction. Remember March of 2000? We had three big “Dead Cat Bounces” before everyone finally figured out the valuations were smoke and mirrors.
6. The virus problem will not be over by April as Trump once touted. A line parroted by his surrogate spokesmen at Fox and Rush Limbaugh. It was not a hoax nor is any reasonable person buying that the relatively unorganized Democrats are capable of accomplishing such a feat when they cannot run a simple caucus. Trump has suffered a permanent loss of credibility with the voters who were not exactly in love with him.
7. The Oil Companies were in a downward trend before the virus problems. The ongoing snit between the Russians and the Saudis accelerated the trend and try to remember what things were like in 1982. We are headed to the same place. Oil Company collapse always signal the end of a bull market.
8. Corporate Debt is astronomical. Google “Corporate Debt versus GDP” and you will see some pretty interesting charts. We are drowning is debt. After the market collapse I started looking for stocks to buy. Specifically stocks with low PE (PE <=12) ratios and relatively high dividends as Bonds do not look so good right now. A closer look at the financials revealed the probable cause for the low PE ratios. These guys and most are market stalwarts had Debt to Earnings ratios of 60% or better. These guys will not be able to sustain their dividend yields and do any significant capital spending. They will have to cut costs and layoff people. It has already begun.
9. The low interest rates right now are great for borrowers, but not so much for fixed income investors. Worse, most of the state and local government pension programs were already in trouble. The cities and states were having to makeup the shortfalls since ALL of the pension programs are not fully funded. These pension programs rely heavily on government securities to fund their payments. Think bankruptcy (Detroit) and higher state and local taxes to cover these pension programs.
I could go on. We will recover and things will get better, but a strong cup of reality is in order. Trump engages in fanciful thinking too often and when he can't deliver on his promises the voters will turn him out along with anyone who stands too close to him.
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