Peter Boockvar Insights – Mon 30 Mar, 2020

Optimism with a big dose of realism

This is a post from Peter Boockvar’s site – The Boock Report. Peter does a great job of summarizing his thoughts on the progress of COVID-19 and how we all might start to come out of this.

Click here to visit Peter’s site – The Boock Report.

With the news flow still so difficult both on the health front and in turn for the economy, I still will try to make a point to talk about the optimistic side of where we are with this virus spread. This is not to be a Pollyanna but to be a contrarian with the mood already so dour. The news over the weekend from Abbott Labs that they can test within 15 minutes is considered a “game changer” according to Scott Gottlieb. To highlight the importance, I’ll leave it to the foreign minister of South Korea where we know they’ve been hugely successful on containing the spread. He said last week “Testing is central because that leads to early detection, it minimizes further spread and it quickly treats those found with the virus” and he cited the rampant testing as “the key behind our very low fatality rate as well.” Hopefully too we’ll get some good news in the weeks to come on the therapeutics currently being tested.

This all said, I also want to be VERY realistic about the situation we are in and for the purposes of my daily commentary, what it means for the economy and markets. While I’m hopeful that in May we will be passed the worst of the ‘curve’ and thus can begin the process of resuming our daily lives with big testing numbers a big part of this, it is obvious that until we have a vaccine and/or herd immunity and effective therapeutics, life will still be quite different. Just as we had to adjust after 9/11 in that security at the airports was beefed up, we had to go thru more metal detectors in more locations and even had to show ID to get into most places, things will change again. Restaurants will likely have less tables. Maybe for a time airlines won’t sell middle row seats and we’ll just have window and aisle. Those without the antibodies will be walking around with masks, we won’t be shaking hands, purell will be everywhere, there will be spacing on lines, ZOOM becomes the preferred choice of meeting venue, etc…

What this also means is that we won’t be seeing a V bottom economic recovery (and thus for the markets). It will be gradual as resuming life and our daily routines will be staggered in how it unfolds. There will be set backs but hopefully two steps forward. The restaurant that previously employed 20 people might only hire back 15. That easy flow of credit becomes more demanding. The household that realizes they didn’t save enough for a rainy day going into this, wants to spend less and save more. Corporate America realizes the importance of a strong balance sheet and we can say goodbye to many stock buyback plans, and there will be less hiring and capital spending until those balance sheets are restocked with cash. Going from a world awash in debt with good economic growth to one still awash in debt with much slower growth is a tough transition. That deleveraging is also why monetary policy in terms of trying to stimulate more borrowing, will be highly ineffective.

As for markets, at least for now say goodbye to an earnings multiple of 18-20 times. Say goodbye, as stated, to those debt fueled buyback plans. And with this oncoming downdraft in earnings and likely muted rebound, who knows how long it will take to see those 2019 earnings level again. And I want to repeat again that I expect higher inflation to follow due to the supply shocks that have taken place and that the demand side will come back sooner than supply. And add in all the monetary easing that we can be sure overstays its welcome. This will be a discussion I believe in the fall, an unfortunate environment of stagflation. But, at least that is an analyzable situation for portfolios that we can adjust for unlike now with the virus.

I talked a lot last week about the damage done to the mortgage market with part of that directly due to the Fed’s aggressive buying of MBS and them not realizing the huge negative side effects. Here is an article by Steve Liesman, with some quotes from my friend Barry Habib, which discusses how the industry is pleading with the Fed to dramatically slow the pace of their MBS purchases. https://www.cnbc.com/2020/03/29/mortgage-bankers-warn-fed-purchases-of-mortgages-unbalanced-market-forcing-margin-calls.html

Some March data came out of the Eurozone today. Economic confidence fell to 94.5 from 103.4 and that was actually 3 pts above the estimate though still the weakest since August 2013. While manufacturing was weak again, the main downdrafts came from services, the consumer and retail. We can only assume that this continues to weaken in the next few months until the rate of spread starts to slow. Construction softened too but is now the component with a plus sign in front of it. 

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Comments:
  1. On March 30, 2020 at 4:52 pm,
    Matthew says:

    Gold hit 83 barrels of oil today as well as fork resistance and a weekly RSI(14) reading of 95. This looks like a great long term opportunity for oil fans…

    https://stockcharts.com/h-sc/ui?s=%24GOLD%3A%24WTIC&p=W&yr=15&mn=0&dy=0&id=p58789348321&a=729961718

    • On March 30, 2020 at 6:27 pm,
      bonzo barzini says:

      Matthew, do you own any oil or oil service companies? What are your favorites?

      • On March 30, 2020 at 9:15 pm,
        Matthew says:

        Bonzo, I do not own any at this time and will need to reassess to determine my favorites with oil at these levels and possibly under pressure for a long time.
        I would not be surprised if oil has already bottomed and maybe even has a big bounce soon but there are too many factors that could keep oil way below last year’s average for longer than anyone expects, despite the Fed’s new QE to infinity.

        So I might trade an ETF like OIH until there’s more clarity or at least stick with the big names that have strong balance sheets. PSX, XOM and COP seem like relatively low risk candidates. At the other end of the spectrum, there’s the $1.5B Targa Resources with it’s 56% div yield if you like to gamble a little…
        https://stockcharts.com/h-sc/ui?s=TRGP&p=W&yr=3&mn=11&dy=0&id=p04841455469

        • On March 31, 2020 at 5:59 am,
          bonzo says:

          Matthew, I have owned Shell, XOM, and CVX for over 40 years, and SU and DVN for many years. At least I sold my PSX last summer@96 and my COP last month@48, and 30%of my XOM @76 last summer. I wish I had bought Shell @20 or XOM@ 30 last week, but I think we may be headed for a depression, so I may have enough oils for now. I think oil sold for 10 cents a bbl in the depression when gold was $20, so 1 oz gold cost 200 bbls of oil for a while, and might do so again.

          • On March 31, 2020 at 7:09 am,
            Matthew says:

            There’s mention of ten cent Texas oil in the following article but nothing close to that ever shows up in the long term charts. So I wonder what the details are. Whatever the facts are, you’re probably right to wait on taking any long term positions.
            https://www.winton.com/longer-view/price-history-oil

          • On March 31, 2020 at 7:13 am,
            Matthew says:

            The eia shows a low for the 1930s of 65 cents in 1931 but that must be the average for the whole year.
            https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F000000__3&f=A

          • On March 31, 2020 at 7:21 am,
            Matthew says:

            From the following article:
            “While you can see from the chart above that oil prices have had quite a bumpy ride throughout the less-than 200 years-long existence of the oil industry, the absolute rock bottom occurred during a perfect storm of unfortunate events, “when the opening of giant oil fields in the United States coincided with the Great Depression to create an enormous glut and sent prices tumbling to just 13 cents per barrel,” according to reporting by Reuters.

            https://oilprice.com/Energy/Oil-Prices/The-Cheapest-Oil-Ever-Sold.html

          • On March 31, 2020 at 8:18 am,
            bonzo says:

            Matthew, thanks for those interesting oil price articles. Last summer I also bought SLB@35 and then sold it@38. Last week it fell to 11. Someday I’d like to buy some HAL and SLB if they crash again. My grandmother bought some HAL back around 1960 but it got sold when she died. My grandfather had an unusual investing method. He worked for the Texas Co. for 43 years and bought Texaco stock whenever he could, and never sold a share or bought shares in any other company. If he had put his money into MO instead it would be worth billions now.

          • On March 31, 2020 at 9:35 am,
            Matthew says:

            Wow. That reminds me of Richard Russell’s story about Berkshire Hathaway. He owned it over 40 years ago but sold waaay too soon. That’s life. If only…

        • On March 31, 2020 at 9:40 am,
          Excelsior says:

          With Oil At $20, Texas Tells OPEC: “You Don’t Cut, We’ll Cut”

          Investing.com | Mar 31, 2020

          “After 40 years of demanding that the Saudis and the Organization of the Petroleum Exporting Countries keep their spigots fully open at all times and pump as much crude as possible, the United States is begging Riyadh and OPEC to do the opposite. If not, it’s willing to shut its own oilfields.”

          “Leading the American initiative on this is none other than Texas, the U.S. state with the largest amount of hydrocarbons output and reserves.”

          https://m.investing.com/analysis/with-oil-at-20-texas-tells-opec-you-dont-cut-well-cut-200520054

  2. On March 30, 2020 at 4:56 pm,
    Matthew says:

    I bet the miners will turn up again by Thursday or Friday…
    https://stockcharts.com/h-sc/ui?s=GDXJ&p=D&yr=0&mn=6&dy=0&id=p26768460271&a=732591236

  3. On March 31, 2020 at 5:32 am,
    cfs says:
  4. On March 31, 2020 at 6:27 am,
    CaliJoe says:

    Does anyone know if “Fluidsdoc” on SeekingAlpha is our DOC?

    • On March 31, 2020 at 8:35 am,
      bonzo says:

      I think Al and Cory have our Doc under an exclusive contract. That’s why he is never seen on Mad Money.

  5. On March 31, 2020 at 8:42 am,
    CaliJoe says:

    I think Doc signed a multi year, multi million contract with KER.

    • On March 31, 2020 at 9:09 am,
      CaliJoe says:

      I meant to say, multi million dollar contract*

    • On March 31, 2020 at 9:44 am,
      Big Al says:

      Interestingly enough, I talk with Doc very seldom. He is an interesting guy, but there are only so many hours in a day. He also does not want to talk about any political issues and that is very definitely my thing!

  6. On March 31, 2020 at 8:44 am,
    OOTB Jerry says:

    HYPER DRIVE>>>>>>>>>>TRUMP WANTS MORE>>>>$2 TRILLION>>>MORE
    https://www.zerohedge.com/political/trump-calls-2t-infrastructure-package-phase-4-stimulus
    GOLD GOING TO $10,000 easily…………..JMO

  7. On March 31, 2020 at 9:04 am,
    OOTB Jerry says:
    • On March 31, 2020 at 9:09 am,
      OOTB Jerry says:

      You can depend………there will be a lot of bankruptcies …Ch. 7 and 11 and 13 …
      Lawyers are loving it…….

  8. On March 31, 2020 at 12:52 pm,
    OOTB Jerry says:

    On March 31, 2020 at 12:32 pm,
    OOTB Jerry says:
    Like Duh………where is the GOLD
    https://www.zerohedge.com/commodities/comex-cant-find-any-400-oz-bars-its-new-gold-futures-contract

    Reply to this comment
    On March 31, 2020 at 12:37 pm,
    OOTB Jerry says:
    Fast forward March 30, and with the new ‘Gold Enhanced Delivery futures’ contract ready to start trading, the COMEX daily gold vault inventory report (which lists nine approved vaults in New York City and surrounding areas) has just been published showing a new set of lines items for 400 oz bars, but, and here is the punchline, there are absolutely no 400 oz gold bars listed on the entire report. Not one.

    Reply to this comment
    On March 31, 2020 at 12:38 pm,
    OOTB Jerry says:
    Hey DOC,……what do you think……?

    Reply to this comment