What if you lose $6+ Billion?

The coronavirus pandemic has spared no one, not even the genius master investor Buffett! If someone told you that his stocks are immune to this sudden market crash, he or she must be a liar. Sure you can make some money by shorting stocks but for the vast majority who only long stocks, the pain can be felt every where. But before you feel too depressed about the paper loss of your stocks, think about what you would feel if you lost more than $6 Billion virtually overnight? Feel better please that you will never lose this much money😋 Believe or not, it is Buffett who has just experienced this draconian loss on paper! What happened? Well, if you don't know yet, Buffett loves and has been investing in airlines major way. In total, Buffett has invested more than $10 billion in four different airlines (see the chart below). I guess you don't need me to tell you what the airlines are doing these days, all down big time. At the worst just days ago, they crashed in average by about 60%, fighting for survival at the moment. So Buffett got a haircut for about $6 Billion off his book at least for now.  

What do you think Buffett will do for this kind of fast losing stocks? I bet nothing, if not adding more shares. After all, this is not a normal crash due to immediate fundamental problems for the airlines. It is an unexpected non-economic health crisis that is temporarily pushing all the airlines to a full stop. With the much needed governmental rescue funding coming, they should stabilize. As such, I won't be surprised to see Buffett to even add more shares if he sees the worst is over. 

Before I finish, let me share what Ben Bernanke, the former Federal Reserve chairman, thinks about this crisis.  

Bernanke told CNBC on Wednesday the coronavirus economic halt is more like a "major snowstorm" than an economic depression."This is a very different animal than the Great Depression," Bernanke stressed. "The Great Depression, for one thing, lasted for 12 years, and it came from human problems: monetary and financial shocks that hit the system.""This has some of the same feel of panic, some of the feel of volatility," he said in a "Squawk Box" interview. "It's really much closer to a major snowstorm or a natural disaster than it is to a classic 1930s-style depression."Bernanke said he does expect a "very sharp" U.S. recession, but also a "fairly quick" recovery.

Two histories made within days

Well, it is really too fast! The damn COVID-10 virus hits the world in an extremely fast fashion and accordingly, everything in the world is also moving extraordinarily fast, too, including the market. We have just witnessed two historical events occurred within 10 days time: first, Dow Jones crashed over 2000 points never seen since 1930s since Great Depression. This triggered me to openly make a bold prediction that we might see a quick 20% jump pretty soon. Based on the feedback I got, virtually no one had agreed with me and thought possible. Well, we got it within 3 days, another biggest percentage hike by Dow Jones since 1930s again!! Sure, my perfect timing is just a coincident but I'm not surprised to see this kind of "rip your face off" oversold rally in this kind of pessimism.   

I'm sure you all know that FED has fired a bazooka, no, actually a nuclear bomb to basically institute an open-ended unlimited QE to finance the whole economy now. Usually I'm never a fan of any QE but not this time. I must say I'm applauding for FED's bold action for this unprecedented move to save the economy and people's life. This is not a usual recession that is due to the economic cycle or financial crisis that triggers it. It is actually a government mandated recession, i.e. by order, all the businesses must stop working to fight the health crisis. In this kind of situation, the FED's rescue QE can bridge the gap to provide the whole country much needed time to go through this crisis and get the economy back to normal.  Let me use an analog to explain this that may be easier to understand. Let's say the whole country's economy is like a gigantic tree and we people are the leaves that rely on the survival of the tree. At the moment, due to the natural disaster, all the sudden the water line (cash flow) is abruptly cut off, which is endangering the life of the tree and accordingly the lives of all the leaves as well. What FED is doing now together with the government $2 trillion rescue program is just to reestablish the water line for the tree so that it can survive to nurture the dependent leaves. Without it, the whole tree will collapse, i.e. the fundamentally strong economy will not stand up again. No one wants to see this happen, I'm sure!

Just for your information, below is the summary of what the major central banks and governments around the globe are doing in fighting for this pandemic:      Government rescue programs  

Central banks' QEs

When things get extreme.....

As I said many times before, betting against the extreme is usually a winning strategy. A few weeks ago, the general euphoric sentiment is getting wildly extreme to the point it seems there is no fear whatsoever and any tiny bit of drop would be bought up eagerly and swiftly. Then BOOM!, just a short few weeks, the sentiment has turned totally upside down. The depressing mood has reached to the point only seen at the deep turmoil time during the 2008 financial crisis. You may recall that I said before that we human beings have evolved for thousands of years and nearly everything has drastically changed except one thing: the herd behavior and sentiment alteration cycle. If we can learn to be contrary and bet against the herd at the end, it's often a rewarding experience. Two real life recent examples:

Recall my call for the recent topping of gold just a few weeks ago? Here is what I wrote:

I'm sure you will start to hear more headline news about gold and people will start to chase as well. But as a contrarian, I'm not so fast to jump into the FOMOs. While gold has indeed broken out for the 6 years high since 2013, I don't think it is ready to simply go up to challenge its all time highs....at least not yet although it is just a matter of time for sure! Two major reasons:

·       For one, the current $1650ish area is a very strong resistance for gold and technically it is very hard for anything to break out from a strong multi year resistance with the first attempt. I don't believe gold can either. We may see quite a few attempts before it can overcome the overhead resistance.

·       More importantly, the smart money has increased their short bet in the historically high level. As I said before, the smart money for gold, the Commercial Traders, have never been wrong on their bet although they tend to be early and therefore not a market timing indicator but rather a directional indicator. In other words, the smart money is betting overwhelmingly now for a correction of gold. I don't believe they will be wrong this time as well.

Here is the current chart of gold, a quick 15% plunge within days. 

How about the Treasury bonds? While I didn't publicly talk about it lately, I did a short trade on TLT lately that yielded a quick 300% gain within a week. See the chart here:

My point is not to convince you that every extreme point is easy to be pinpointed, but at least try to avoid FOMO in following the large herd to chase in either direction. 

Is a 20% jump possible?

What a week with washing down pessimism not seen since 2008!! What's going on right now is all unprecedented (some stats from a friend): the crazy day in the markets on Monday was the sixth consecutive day of the S&P 500 Index moving by at least 4%, the longest streak since November 1929. The S&P closed down 12% and has now fallen 29.5% from its all-time high less than four weeks ago. The Dow Jones had its second-worst day in its 124-year history. And the VIX, the fear gauge closed above 80, even topping its all-time high in late 2008. I'm pretty sure we are witnessing something historical and will be a very good case study for the financial history students. In that sense, we are all part of making history. Feel good about it!😇 

This is the moment that nearly everyone is thinking the world is ending. But the world has a habit of not ending, period! With all the major TA indicators showing an extreme oversold condition never seen before, it is a recipe for a "rip your face off" rally that may happen suddenly and quickly. With this in mind, I'll not be surprised to see a 15-20% jump for the market in the next few weeks. No, I'm not expecting we will be out of woods already but just a swift snap back rally to shake out those who are overly pessimistic. I know it sounds crazy and cannot be believed but I will show you tomorrow real life examples why betting against the herd on the extreme side may not be so crazy at all!

 

It's also important to understand that, for the vast majority of people, lower stock prices are good news. Warren Buffett explained why in his 1997 annual letter:  

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

It is not the time to sell but buy!

First ask yourself, do you agree with this statement 'The value of my home just fell 20%. I'd better sell it right now!'?
We know home prices fluctuate. However, I guess it's hard to imagine any homeowner would agree with this. I bet nearly 100% of homeowners will ignore such temporary changes in valuation as we tend to focus on the long-term value of our home. Agree?

And yet, this panic selling is exactly the same type of thinking being used by investors today who sell as the market officially enters bear market territory – down more than 20% – simply because stock prices have fallen. Well, there is no sugar-coating that it is really bad out there and the bear market has hit us now. This is a unique bear market in the making as there has never been a bear market developed without an imminent financial or credit crisis. The US economy is booming and fundamentally sound at the moment but the market has slipped into the bear market within 2 weeks, the fastest in history, truly unprecedented! But believe me, it will be over. This is a fear driven bear market that we mankind can overcome always. I don't know how soon it will be but I bet it won't be a typical bear market that usually takes about 18 months in average to go through. I think it is more likely it may take a few months to get it over. In the mean time, draconian gyrations will surely happen. See what we saw during the 2008-2009 financial crisis: After the three dramatic sell-offs they mentioned during the 2008 and 2009 bear market, the S&P 500 ripped higher every time...

• After that first drop (-27.2%), the S&P 500 shot 18.5% higher in six trading days.
• After the next drop (-25.2%), the S&P 500 rocketed 19% higher in one week and continued to rise to a 24.2% gain in six weeks.
• After the final drop (-21.4%), the bear market ended. The S&P 500 jumped 23.1% in 13 trading days, 39.9% in three months, and 79.9% in 13 months.

It is a bit mouth-watering right now, at lest for me, to see so many quality stocks which were quite expensive just 2-3 weeks are now 30-50% down. Should I run away and hide in the hill these days or should feel really happy to add more or buy new such stocks for long term? Let me be clear, "not the time to sell" here means for long term investment, not for trading purposes. If you have specific stop loss set up for your stocks, then of course you should always respect it and sell as needed. Personally I don't have stop loss for my long term DRIP stocks and won't sell just because they correct or even crash during the panicky time like today. I may sell some of them if their fundamentals have changed to the worse. DRIP stocks are just like my rental properties that are generating income for me regularly. Actually I should be happy to see a lower price for such stocks as my "rental" (dividend) income will become bigger due to lower share prices. Isn't it great as the rental property owner when your rental income is increasing? Sure for me!!😋

Finally let me leave you with a few excerpts from a New York Times op-ed piece the master investor Buffett wrote in October 2008, as the financial crisis was gathering speed:

The financial world is a mess, both in the United States and abroad... In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So... I've been buying American stocks... Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense.

These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now.

What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over...

Over the long term, the stock market news will be good.

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain.

But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy...

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later.

In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been." 

Insanity everywhere

This is a poster from a local Mexican restaurant, which reads 'Day of the Dead', suggesting the danger of drinking Corona beer.

If you love bear, you must know the famous and beloved brand, Corona. But unfortunately, it is facing unexpected hate due to its name that makes people fear of its relation with the coronavirus. This is really a sign of the insanity out there: Americans are avoiding Corona beer amid coronavirus outbreak, survey finds. Excerpt:

Some American beer drinkers are avoiding Corona, the beer, amid the deadly coronavirus outbreak, according to a new survey. A surprising 38% of beer drinkers insisted that they would not, under any circumstances, buy Corona as the deadly virus spreads across the globe, according to the survey conducted by 5W Public Relations... In fact, 14% of respondents who said they regularly consume Corona beer admitted in the survey they would not order the beverage in public.

There was also some confusion as 16% of those surveyed said they were not sure whether the virus is related to Corona beer.
According to Art Hogan, former chief market strategist for investment bank B. Riley FBR, on a typical trading day, computers account for 50–60% of market trades. And they can make up to 90% of trades when the markets are extremely volatile – like they are now.
You see, computer programs execute buy and sell orders based on complex algorithms and formulas, without a human involved in the process.

Of course, the market is full of insanity as well these days. The gigantic gyrations over 1000 points day after day have become the new norm. But if you don't know, nowadays about 90% of trading each day is done by computer based on algorithms.  These algorithms scour news feeds and buy and sell based on headlines. Guess what, any positive news now?

Here is just a sampling of what greeted us on the front pages:

• Dow craters more than 2,000 points...
• Stock-market "circuit breaker" triggered...
• Historic flight to bonds...
• Russia fires first shots in oil-price war with Saudi Arabia...
• Crude prices plunge 30%...
• Coronavirus cases outside China triple...
• Italy quarantines 16 million people...
• Eight U.S. states declare state of emergency.

So when headlines are negative, the computers sell. When they're positive, the computers generally buy. And these trades happen in fractions of a second.
Now, if stocks go lower when they sell, the machines are programmed to sell even more – forcing markets down further. But if the markets push back on the pressure and go higher, the machines are programmed to reverse and start buying again.

Below is the picture of those stupendous computers that are driving you crazy if you are dancing with it😎   

Road map

As I said, the current market turmoil is quite similar to that in Aug 2011, we can learn a lot from that experience to extrapolate what may be the roadmap for the current market in the next few months. As we often say, the history may not repeat itself, it often rhymes. So don't take it literately as the exact course of moves but a rough pathway for the near term market price actions.

While judging by the severity of the current depressing sentiment, I truly believe we are very close to the bottom, if not already in it. Also, please be aware, the bottoming is a process, not a specific price point. It usually takes a few weeks at least to complete the bottoming process. The chart below represents the S&P prices around Aug 2011. As you can see, the market got into a very volatile period with a wide swings for quite a few weeks before it finally started to establish an uptrend. We are likely just at its very initial phase of the volatility (the green circle). There is a good chance we are going to see a low testing in the days or weeks ahead (the red circle). The true bottom is usually established when a low testing accompanied by a positive divergence from the TA perspective, which is something we haven't seen clearly on the daily chart. It will probably take a few more up and down wide swings to complete this process.  This week's wild swings have stimulated a lot of volatility with DOW moving 1000+ points a few times. It felt like there was a big move for the market but actually the market virtually did nothing for the week.  The two obvious support levels (2950 closing low and 2850 intraday low) are important to be held for a solid bottom to be built up. If it fails, then more severe downside will kick in. For the moment I believe they will hold but I can be wrong. In a highly emotion-charged market, anything can happen. So take my assessment with a grain of salt😷😎 

What is killing the roaringmarket?

The answer seems easy: the coronavirus! But if I'm telling you that it is not much to do with the virus but most of us who are really bringing down the market, what is your reaction? I'm sure I will be cursed as an insane guy who has no clue what I'm talking about. But I'm very sane and know for sure this is very little, if not nothing, to do with the coronavirus outbreak. Be clear, I'm talking about the real underlying cause for the selloff, not superficial temporal relationship. As I have warned for many weeks that something big to the downside was coming and coronavirus is just giving an easy excuse to trigger the selloff. If there were no coronavirus outbreak this time, something else would have filled in to trigger this bloodbath, maybe a "flatvirus" or other sort of crisis somewhere in the world. Do we lack of  crisis in the world right now?😵

The real causality for this harsh selloff is rooted in the greed of the market composed of all the people involved in buying and selling, including you and me of course. When most of us become FOMOs that make the euphoria to the absurd level, a crash will come for sure sooner or later. You see, we were in a situation where the S&P 500 hadn't seen a 2% sell-off in 124 days – the eighth-longest streak in 30 years. The index was up more than 30% in 2019 and had conditioned investors to believe that every smaller sell-off presented a tremendous buying opportunity. So people in general were blindly chasing highs or buying each tiny dip. This was a market where stocks like Tesla (TSLA) and Virgin Galactic (SPCE) were doubling – and then doubling again – in a matter of weeks. I saw a chat talking from someone a few weeks ago who basically said he did not see any potential issues that could push down the market meaningfully at the moment. I could only shake my head more when I saw this. I saw a vivid analogy that can perfectly describe what is happening now (analogy from my friend):

Think of it like this... You're on a raft heading down a river full of rapids. In the beginning, only a few investors are on the raft, and you can easily navigate the rapids. As more folks climb onto the raft (i.e., more investors pile into the stock), it becomes less stable. Suddenly, even hitting a small series of rapids may send a bunch of folks flying off the raft (i.e., the stock falling).

Actually in this kind of extreme euphoric mood, the market can even turn upside down without apparent reasons. We saw this happened in Aug 2011 in a very similar scale. The market was doing great in the months before Aug 2011 as the market rarely had a 2% down day in over a year back then. Sounds familiar?! Then all the sudden, S&P started to drop by 3%, 4.8%, and 6.7% within a week, which brought the five-day decline in the S&P 500 to 13%... It was worse than the 1987 market crash and worse than all but three periods right after Lehman went bankrupt. During this period, there was little economic news of any real consequence. But of course, the pundits would always identify some culprits to blame, e.g.  the U.S. credit rating downgraded from "AAA" to "AA+", or concerns about European sovereign credits or weak industrial production, to name a few.

If you are one of them who have the habit to chase highs, then just remember, there is no such things as risk free investing or trading. You don't need to know what is the exact risk that can derail a roaring market but you can reasonably be sure that the risk is increasingly higher when the sentiment becomes extreme either way. Please engrave this statement into your brain: low volatility is always followed by high volatility! Of course, same is true vice versa: high volatility is always followed by low volatility!!

 

So right now, we are seeing a widespread depression sentiment and I'm pretty sure we are very close to the bottom than to the top at the moment. Tomorrow, I will show you a road map how the bottoming process will likely evolve in the next few weeks.