The “Out Front” Maneuver


You have to recognize that every “out-front” maneuver is going to be lonely. But if you feel entirely comfortable, then you’re not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature at the center of the herd. Only if you’re far enough ahead to be at risk do you have a chance for large rewards. ~ John Masters, Australian oilman, via the book Hedgehogging

That warm sense of everything going well is usually the body temperature at the center of the herd… That’s a great line. Reminds me of the Ralph Wagner bit about inside and outside zebras.

In yesterday’s piece, we talked about where I think we are in this bear market rally and how the near-term path forward is back to being skewed to the downside.

There are a number of things that make me uncomfortable with the short-term bearish take though and I thought I’d share them. Let me walk you through some charts and show you what I mean.

Recession is the consensus take amongst the journos. News stories containing “Recession” have spiked to their highest levels since 09’, right around the time the market bottomed.

Investors Intelligence Bull & Bears Sentiment gauge hardly moved last week. It’s still signaling extreme bearishness (chart via Yardeni).

The 10-day moving average of the put/call composite shows that investors are still buying lots of protection. Markets don’t typically sell off hard when everyone is hedged.

Japanese consumer sentiment hit its lowest level on record this week (chart via Bloomberg).

I look at markets through the framework of a swinging pendulum. Price moves drive sentiment and positioning changes that drive further price moves in a constant positive feedback loop. This goes on until everybody is standing on one side of the boat. Everything that can be priced in, has been. At which point it only takes a marginal piece of contrasting information to swing the pendulum in the other direction.

This is a fractal process. On all timeframes, there are pendulum swings and feedback loops at work.

In early February, investors were tripping over each other to see who could be the most bullish. A little over a month later and we have recession talk dominating the news.

I write all this to say the obvious, that this is a difficult environment. While my fundamental outlook seems to be more bearish than most, it does seem that more sentiment and positioning need to be wrung out in order for the market to make another major advance lower. That means stocks up in the short-term.

Who knows, maybe we just chop sideways from here for the remainder of the year. That wouldn’t surprise me at all. In this environment, anything is possible and we must maintain an open mind.

Pay attention to the herd and watch out for that warm sense

Oh, and one more thing before I sign off.

One of the sentiment/positioning data points that I like to check in on each month is TD Ameritrade’s Investor Movement Index or IMX for short.

According to TDA, “The Investor Movement Index, or the IMX, is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors’ portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets.

“The IMX does this by using data including holdings/positions, trading activity, and other data from a sample of our 11 million funded client accounts.

“We create a monthly sample from all of our retail (individual, self-directed) investor clients who have traded recently. Then we use a proprietary methodology based on the holdings and positions in each portfolio to create an individual score. The process is similar to beta weighting (a method of analysis which considers the percentage of each position in a portfolio to create a view of profit and risk), but instead relies on our proprietary models. The median of the individual scores is the overall, or official, IMX.”

I like it because it’s hard data. Tells you what retail investors are actually doing, not just what they say they’re doing.

Anyways, their March numbers are out. The IMX score “decreased by 19.38%, moving to 4.16, down 1.00 from the previous period and reaching the lowest point in over seven years” according to the release.

On the surface, this is a bullish development. I’m not aware of many instances in which retail investors perfectly timed the market. But the indicator can be a little deceiving because the IMX indicator adjusts for relative volatility of the positions each account holds.

And it turns out that retailers were actually net buyers in the month of March. They just bought lower volatility stocks with the most popular ones being: DIS, BA, DAL, AAL, MSFT, AAPL, XOM, and CCL… Yes, retail is jumping in and buying when there’s blood on the streets. And Carnival cruise ships of all stocks… I mean, come on…

Time To Start Reloading Shorts?


The bear market bounce that I said was odds on two weeks ago in “Bulls Fighting to Save March” has happened. The SPX has jumped 25% off its 3/23 low.

The question now is whether the bounce is: only getting started, midway, or run its course? Since we don’t yet have a crystal ball, we have to look at how past bear market retraces have played out in order to make some inferences.

Going all the way back to the 1920s, the index that would eventually become the S&P 500 has registered 14 bear markets as defined by a 20% fall from a record high. Within these bear markets, the market has staged a bear market rally in excess of 15% on 19 occasions.

Here’s the list of each of these bear market rallies along with their duration in days and their percentage increases from trough to peak.

The median bear market rally lasted 35 days and rose 19%. But within that data, there’s a lot of dispersion. The duration of rallies ranged from just 2 days to over a year, with 1947’s rally lasting 393 days. And while some rallies stalled out at just 16% one bear market retrace ran up as much as 46% in 1929.

This bear market retrace can go either up or down from here. It’s still well within the normal range of bear rallies. At 12 days its duration is on the shorter end while its rise is already above the average bear rally return.

I’m of the opinion that the outcomes are skewed to the downside from here. Maybe we get a dip followed by one more run higher to suck in the last of the bulls. But this move is starting to look heavy.

Most of the major indices are up against their upper Bollinger Bands. See the chart below of the SPX (you can click on charts to enlarge). The next 2-3 days will be the tell… can the market pullback from here and make another push past yesterday’s high? Or has it sucked in enough eager bulls to corral into round 2 at the slaughterhouse?

I’m looking at getting long bonds and long gold if the answer is the latter. I think the 10yr yield is going to zero. I remain of the opinion that the market is still vastly underestimating the destruction that’s occurring right now to the real economy.

15%+ unemployment is in our very near future and that’s a lock. I think it’s crazy that a large swath of the market thinks that we’ll be able to just magically restart the economy once these lockdown phases end and get everybody back to work.

Go and talk to any real business owner and you’ll hear a whole other story.

The selloff that we’ve seen in the market so far is the start of the bear market, not the end. The median bear market lasts 81 days past the initial 20% drop to trough and experiences an additional selloff of 18.41% on average.

So while we could very well run a little higher from here. The odds very much favor another retest if not a full-on break to the downside of this broadening wedge top.

Stay safe and keep your head on a swivel.

Gold: The Least Bad Alternative


Back in March 2019, I wrote a post titled “A Golden Macro Opportunity” discussing the extreme compression in volatility we were seeing throughout the precious metals complex and how this portended an equally extreme expansion in vol and a major move on the horizon.

A little over a month later we saw gold break out giving rise to a new bull trend. 

Since that was roughly a year ago and quite a bit has changed *understatement* I figured now is a good time to update my thoughts on the barbarous relic. 

To kick things off, I’ll quickly summarize my fundamental lens for analyzing gold. 

    • The total size of the “investable gold” market is a pittance relative to the global capital stock (equity + debt). Think $1-2trn vs $250-300trn.
    • Demand is what drives price in this equation, not supply.
    • Since gold is not a productive asset it’s the expected real return of other financial assets (stocks and bonds) that drives its marginal demand.
    • When the expected returns for stocks and bonds is high, gold does poorly. When they’re low, gold outperforms everything else. 

Inflation/deflation and crisis insurance are, for whatever reason, the things most people talk about when looking at gold. But, when it comes to the yellow metal, it’s a matter of relativity. Gold is seen as a steady store of value in times when the expected returns for all other alternatives are low. And since the supply is tiny compared to the potential demand, it doesn’t take much of a change in investing preferences to significantly move the needle. 

What are the expected returns for stock bonds then? 

GMO’s 7-year forecast has US large caps averaging -4.9% real returns and US bonds at -1.8%. 

The expected annual nominal returns for the S&P over the next decade is roughly 1.1%. 

Needless to say, these expected returns leave one wanting.

Enter gold.

Gold has been in a technical uptrend for nearly a year now  (chart below is a weekly). It’s currently working through a big supply overhang in the 1,600-1,800 zone. The move is being helped along by the fall in real yields which we can see in the bottom panel (lower real yields reflect lower future returns).

US 10-year yields are following in the footsteps of its peers who are a tad bit further along in their long-term debt cycles. Japan has led the way and I fully expect we’ll see zero rates across most of the curve and some form of yield curve control before this is all said and done — our mountains of debt all but ensure it. 

This, of course, makes gold that much more of an attractive asset. 

The short-term technical chart is shaping up well, suggesting another leg may be getting underway. It just completed a continuation inverse H&S pattern and closed above the 1,700 level which had been acting as resistance. 

I expect gold will take out its all-time high made in 2011 within the next six months. After that, the sky is the limit.

I have high conviction on this trade over the long-term. However, over the short-term anything is possible if the market were to go into full-on liquidation mode again. I’d step back on the sidelines should the price dip below the right shoulder near the 1,550 level.

Monday Dirty Dozen [CHART PACK]


You don’t really trade the market. You trade your beliefs about the market. ~ Van Tharp

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Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at current estimates of the severity of the coming recession, look at how those compare to past downturns going all the back to the 1700s, check-in on liquidity and sentiment before diving into the oil glut and what it means, plus more.

***click charts to enlarge***

  1. The ECRI’s US Weekly Leading Index has been in free fall for 9-weeks. The index, which is a composite of high frequency data points, including: money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. ECRI commented on the WLI in a recent post writing

“A recession’s severity is measured by its depth, diffusion and duration, or what we call the 3Ds. In terms of depth, this recession looks extreme, and will likely be the deepest in living memory. It’s also exceptionally widespread in terms of industries affected, so in terms of diffusion, as well, it’s a severe recession…Historically, the vigor of a recovery – at least in its first year – has been proportional to the depth of the preceding recession. But this time around, a sustained “V” shaped recovery is improbable.

“Sure, it might start with a little bit of a “V” as existing businesses get employees back to work. But so many small and medium size firms are going out of business that it might actually require rebuilding rather than restarting business relationships to really get things going. In any case, people may not be so eager to get out there to restaurants and entertainment venues and mingle – not until they feel safe. That could take a while, and will hamper the services side of the economy.”

I concur.


  1. BofA covered the drop in real GDP they’re expecting in a note last week (emphasis by me):

“This degree of weakening in the economy should translate to a significant amount of job cuts which will happen over the next two months. We think that between 16 and 20 million jobs could be lost, sending the unemployment rate to a peak of 15.6%. We also think there will be additional stimulus. The CARES Act is the first step but will likely be augmented by other policies.

“We think that total stimulus will likely equal between 15% to 25% of GDP, in total. We could see additional spending in short order. This will leave growth down a cumulative 10.4% in this recession, exceeding the prior post WWII record of 4% in 2008. This translates into a roughly $2tn annualized decline in GDP (Chart 2). The shock is unlike anything we have experienced before with part of the economy effectively put into an induced coma.”


  1. To give this a little more historical context, here are the largest annual economic contractions in the US going all the way back to 1790 via DB.


  1. There’s a few things we need to keep in mind as we move forward into this sharp contraction (1) the market is forward-looking. It discounts future growth so what is happening now and a few months from now is already baked into the price (2) the economy is not the market. Stocks, can and do, often move in counterintuitive ways as Druckenmiller likes to point out and (3) the duration of this slowdown is the most important variable here. It’s also the one we have the least visibility on at the moment.

One bright spot for risk assets is that financial conditions are the easiest they’ve ever been according to MS’s FCI **Sarcasm**.


  1. I’ve been pointing out over the last two weeks that we’re likely to see a bounce. We’ve already gotten a bit of a retrace and now the question is whether we’ll see any followthrough. If this were a more normal environment (ie, there wasn’t a virus shutting down half the world) I’d be positioning more aggressively for a short-term bounce. But, I’m not fully sure of whether the standard technical toolkit works in this environment, so I’m focusing less on equities and more on other markets where I think the opportunities are more asymmetric.

Sentiment and positioning are making extremes. BofA’s Bull & Bear Indicator hit 0 last week. A level reached only a few other times.


  1. One of the markets I’m paying close attention to is crude. Below is a weekly chart of WTI crude oil futures. Price bounced last week after hitting the $20 round number which also happened to be at its lower channel support line. It bounced as expected and we could see a little more upside but the odds favor a break of the $20 level and a move into the teens…


  1. A lot of fuss is being made over the Saudi/Russia price war and talk of a potential — though incredibly unlikely imo — collective production cut, but it’s the large drop in demand that is really driving the supply glut, as this chart below shows (chart via BBG).


  1. BofA’s commodity team recently talked about the significance and severity of this fast building supply glut in black gold, saying (emphasis by me):

“There is no amount of agreed cuts in supply that can offset the tsunami of physical crude in the market. This has started the debate on storage as the limiting factor on price. While our commodity team coined the term ‘supercontango’ to describe the expected collapse at the front of the curve, no one predicted the scale of the oil market imbalance that is now expected to push oil prices below cash costs.

“This is already happening as although benchmark prices stand at $20 – $25 per barrel for WTI and Brent, realized prices in key producing areas of the US / Americas are already significantly below these levels . Between them, Russia and Saudi produced 20mm bpd before the production deal fell apart on March 6th. At that time Saudi saw COVID-19 as a threat to demand with OPEC calling for additional production cuts of 1.5mm bpd. Russia’s position was that it needed more time to study the impact. Though we are under no illusion that Russia expected this scale of a collapse in demand. But with demand now expected to decline by >25mm bpd there is no amount of production cuts that would offset a storage led collapse in oil prices.”

The play here? Tanker stocks: TNK, EURN, DHT, STNG


  1. From that same report, BofA goes on to note that “Per our discussions with Kayrros, global storage capacity is estimated at just ~2/3rds full. That may be true – but we suggest the forward curve points what is expected to happen next, with regional prices a lead indicator of what can be expected across the industry: spot oil prices that are forced below cash costs to force production shut-ins. Discussions with Rystad suggest the scale of shut-ins may need to be as high as 13 mmbpd, with less than 1mm bpd announced, by global producers to date.


  1. And more from BofA, “There are no precedents for the demand destruction expected to come (>20mm bpd). Within the energy sector refiners are the supply response, and are slashing operating rates to a minimum, which is having severe repercussions across the oil patch. While it’s true that E&P’s have already cut capex, the production response (3-6mths) won’t be fast enough to achieve market equilibrium. The cuts required will need to be deeper with the only option to shut down existing production.

“But shut-ins more than a few hundred thousand barrels is an unprecedented situation, which will have its own chain of events (for context only 100,000 b/d’s were shut-in during the 2014 downturn.) It’s not clear how shut-in’s will play out, but in North America, ‘stripper wells’ (500mbd – 1 million bd) and Canadian oil sands (and particularly crude by rail) are the weak links with operating costs in the $15-20/bbl range, and are therefore the first places to consider.”


  1. It’s too early to start buying the likely survivors of this washout but it’s not a bad idea to put together a list of those with strong balance sheets, good assets, and low production costs. These plays will pay out big once the dust begins to clear and we move into a new world of constrained supply.


  1. Bitcoin (BTCUSD) is at a critical technical inflection point. The below chart is a weekly. The price is currently consolidating on its 200-week moving average (white line), a line that it has respected in the past. It’s also being squeezed by significant resistance in the 7,000-8,000 level (horizontal white line). A break above/below either is likely to signal the start of a new major trend. I lean bullish…


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Stay safe out there and keep your head on a swivel!

Unpacking The Bill Ackman Saga


Bill Ackman’s on a crusade. No, he’s not parading his latest stock pick nor touting his next Herbalife short. Rather, he’s parading around in his global health professional/emergency crisis strategist hat.

His cries reverberated through the walls of FinTwit. But not in a good way. Many investors called Ackman’s antics repulsive, childish and a sign of “the bottom.”

Whether Ackman’s right in his global health crisis calls isn’t the point of this article. I want to highlight a broader issue. One of particular importance within the investment/finance community.

Here’s the issue: It’s great if you have an opinion on something, but you should disclose in advance if you stand to profit from that opinion.

Ackman could very well be spot on in his analysis of the situation. If that’s true, we should praise investors like him for going on-air and spreading “their truth.”

But what if he’s wrong? If he’s wrong, hindsight will show Ackman as a fear-mongering short-seller with no business engaging in national health conversations. It goes further. Ackman’s interview was a win-win for his portfolio. If he goes on air and preaches the end of the world, his short bet gains value. If he goes on the air and turns out to be wrong about the virus, his long book takes off.

No matter where Ackman falls on the “being right” spectrum, he is without a doubt a polarizing figure.

How We Got Here

You’re probably wondering how we got here. Why is Ackman all over my Twitter feed?

It all started with this CNBC interview.

28 minutes of heart-felt, tear-jerking cries for a global shutdown and wide-spread American spring break.

This interview set FinTwit on fire.

Twitter’s Reaction

Don’t believe Ackman’s polarizing? Check out some of the tweets below. Published the day Ackman went on CNBC.

Grant Cardone


Ramp Capital – Negative/Humorous


Open Outcrier


Kyle Kelly


Brian Norgard

Where Do You Stand?

Argument 1: Bill Ackman delivered a great message, and although it seemed extreme, that’s exactly what we need at this moment.

This stance makes sense. Especially when viewed through an evolutionary perspective. I’m paraphrasing Nassim Taleb when he said: “Throughout evolution if you panicked and nothing happened, you lived. If you panicked and something happened, the odds of survival increased. But, if you didn’t panic and something happened, you almost always died.”

Looking at COVID-19 through evolutionary lenses, it makes sense for humans to panic. It’s in our DNA.

If we heard ruffling in the bushes and always assumed it was a lion ready to eat us, we usually survived. But if we assumed that every ruffling of the leaves was a quaint mouse that wanted to be our friend, we’d die at our first wrong inference.

Argument 2: Bill Ackman shouldn’t go on CNBC and scare the financial community with his fear-mongering slander and worry. He should stick to investing in stocks, not peddling apocalypse stories.

We’ve seen this argument in droves on social media. But again, is this just par for the course with Ackman? I like Yaron Naymark’s tweet thread on this idea:

Maybe people like hating on Bill Ackman? But why? Sure he’s a bit egotistical, but I’m reminded of that Seth Klarman quote (paraphrasing):

“Investing is both the most arrogant and humbling profession. You have to believe that the person you’re buying (or selling) from doesn’t know as much as you. But at the same time you have to understand that you could be wrong.”

Regardless of what you think about Ackman’s recent stance and publicity, one thing’s for certain: we all want to see us come out stronger.

Ackman’s $2.6B Payoff

And then there’s Ackman’s $2.6B profit from his put positions on the market. We should talk about this. On one hand, it looks sketchy as hell to go onto CNBC, paint doom-and-gloom until you (literally) cry — and subsequently profit from those fears. So, Ackman lays out his reasoning in his six-page letter.

According to the letter, Pershing sold around half of their short position prior to Ackman going live on CNBC. Ackman then unwound the rest of the short over the next three days.

Did Ackman move markets? I don’t think so. In his words, it’s a rather “dubious” claim. But this whole payoff brings another important question: financial disclosures on CNBC. During the interview, Ackman failed to mention his large short position on the market. Isn’t that important for viewers to know as Ackman spews end-of-the-world jargon? Again, even if he’s right and vindicated, shouldn’t CNBC viewers know his profit at-stake?

Concluding Thoughts

I don’t think Ackman’s 100% in the wrong. But something about profiting from a short bet on the US markets after preaching doom-and-gloom on CNBC. It rubs me the wrong way. I’m torn. I applaud Ackman for his passion and (clear) love for the country and those that live in it. Ackman’s not the problem. Financial media is the problem. Ackman’s merely the canary in the coal mine.

Monday Dirty Dozen [CHART PACK]


The people that I know who are the most successful at trading are passionate about it. They fulfill what I think is the first requirement: developing intuitions about something they care about deeply, in this case, trading… They develop a deep knowledge of whatever form of analysis they use. Out of that passion and knowledge, their trading ideas, insights, and intuitions emerge. ~ Charles Faulkner

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Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the broadening top in the SPX and add to the case that we’ve put in a short-term bottom and cover some of the liquation values on offer in global markets. We then talk about the troubling signs of a global recession on the horizon and what to keep an eye on as we go forward. And finish with a look at the global fiscal response, what it means, along with what the Fed’s done to relieve USD pressure, plus more. Let’s dive in…

***click charts to enlarge***

  1. Last week I wrote about the deeply oversold levels, consensus negative sentiment, and how we should expect a bear market rally to soon begin (link here). The chart below shows the primary technical pattern I’m tracking. The S&P is bouncing off the bottom support of a large broadening top pattern. The percent of stocks trading above their 200 day moving averages fell below 5% for only the second time in 25+ years.

That marks extreme oversold conditions. Markets don’t move in straight lines. And especially now that the Fed has largely fixed the plumbing issues, minimizing liquidity gap risks. It makes me think we’re about to see a large multi-week rally from here. Watch to see where the monthly bars close on Tuesday. That will be a big tell as to where things are headed for April.


  1. To add to the short-term bullish case, I’ve been seeing an across the board improvement in breadth and under-the-hood technicals to support a run higher. For example, the chart below shows the smoothed average daily advancers volume ratio for the Russell 3000. The red circles show the points which mark past selling exhaustion points followed by strong recoveries. Each time created at least a temporary bottom.


  1. It’s wild looking at many of the valuations around the world right now. I can show chart after chart of entire country indices selling for 2stdev’s below their long-term average multiples. MSCI Asia Pacific stocks, for instance, are trading at liquidation levels, last seen at the depths of the GFC.


  1. The Investors Intelligence Survey Bull/Bear spread turned negative for only the 6th time this cycle (h/t @Not_Jim_Cramer). The graph below from Bloomberg shows the following returns after the II spread turns negative.


  1. While I’m positioning for an extended tactical bounce I’m expecting a severe recession and a new low in the market within the next 12-months. The market-implied probability of the US slipping into recession within the next year is now 92%.


  1. Global car sales have fallen way below their long-term trendline as you’d expect. This trend had turned well in advance of the virus, driven by some changes to environmental standards in both China and Germany, along with just overall weakening demand in China. Thinking through things now, the big question is how long will this virus hang over us? Even if we can get R0 down to 1 or below within the next few months, will we have to worry about a second wave in the Fall? How will this affect consumer behavior, will we save more and spend less? Will companies hold back on CAPEX and slow hiring plans? (chart via Bloomberg).


  1. According to Bloomberg, “Overdue credit-card debt swelled last month by about 50% from a year earlier” in China (link to the article here). The virus is having ripple effects throughout a very leveraged global economy. The article goes onto point out that “ In Australia, which has the highest household debt levels among G20 nations, the country’s largest lender said on Thursday that its financial assistance lines are receiving eight times the normal call volume. A similar surge in queries has flooded lenders in the U.S., where credit-card balances swelled to an unprecedented $930 billion last year and 3.28 million people filed for jobless benefits during the week ended March 21 — quadruple the previous record.”


  1. If you look at total US market returns relative to NIPA profits, things still appear to be quite stretched; even after our recent haircut. I don’t see any reason why this chart couldn’t revert back to somewhere closer to its longer-term average, which would entail a much deeper bear market than what’s already occurred (h/t Macro Man).


  1. Since the amount of BBB rated corporate debt is at all-time record levels here in the US. I think it wise to keep a close eye on BBB spreads as not just a gauge of sentiment but also a measure of where we are in the risk cycle. If I am right and we are indeed in the early innings of a bear market then we should see spreads continue to widen, even if equities go on extended rallies.


  1. The fiscal and monetary responses to the virus have so far been impressive. I suppose that’s the benefit of policymakers still living in the event echo of the GFC and so are quick on the trigger. These are certainly bullish developments and why those of us who are of a more bearish bent at the moment, must hold our opinions weakly and update our views often. The chart and graph below from GS show the fiscal responses so far.


  1. Bespoke Research published a great piece breaking down the actual dollar amounts that each income bracket will be getting from the announced US fiscal measures (link here). The short and sweet of it is, if you’re making below $50k then this is a great deal for you. If you were making above that, it’s less so. The expanded UI will make a huge difference to those at the lower ends of the income bracket.


  1. I’ve been getting a lot of questions about the US dollar and gold lately. The US dollar had caught a short-bid for a while as markets panicked and we saw a dash for cash. The reason for this dynamic is that the world is essentially very short US dollars. The reason why is because most debt is USD denominated and so when there’s a risk-off environment that could threaten the cash flows needed to pay that debt we see the dollar get bid up.

Well, the Fed has done a tremendous job in recent weeks being quick to respond and opening up swap lines and supplying the market with much needed USDs. The chart below shows that the widening in EURUSD basis swaps has been reversed and bullish pressure on USD has been relieved. At least for a while.

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Stay safe out there and keep your head on a swivel!

Bulls Fighting To Save March


***The following is an excerpt from a report sent out to Collective members Tuesday morning***

We have 5 trading days left in the month of March. As I pointed out in the Brief over the weekend, the bulls are trying to close the month above the 2018 lows (roughly 2,350 on the SPX) and reclaim the bull market trendline (2,350) if possible. If they succeed it would lead to a sizable tail on the monthly candle and raise the odds that we see a couple of weeks-to-months of sideways to up action in the US indices. 

click on charts to enlarge


A 60 min chart shows the SPX  has been in a month-long sell climax forming a sharp descending triangle. These setups often lead to sharp and powerful retracements higher.



Extremes have been reached across the board in technical, sentiment, and positioning data.

BofA’s Bull & Bear Indicator recently triggered a strong buy signal.

Their Flow data show a number of extremes were hit last week, indicating a potential short-term selling exhaustion event. 

Indicators of market breadth are hooking up from near-record oversold levels. Our Zweig Breadth Thrust Indicator (bottom right) is triggering its first buy signal in over 45+ days.


Credit markets are confirming the bullish action with Markit’s CDX IG index on track for its first multi-day rally in 5+ weeks (chart via Bloomberg).



There are two potential catalysts to drive an extended bear market rally here (1) is the likelihood the US senate soon passes a major fiscal stimulus bill and (2) Italy is finally seeing a consecutive decline in new daily cases.


A few quick thoughts before I get into how to play this.

  • Odds strongly suggests that we’re in the early innings of a cyclical bear market which will be accompanied by a recession starting within the next quarter. 
  • Bear markets last an average of 18-months and a second major low (double bottom/complex double bottom) is usually put in 12-months after the first major low.
  • The most explosive short-term bull rallies occur in bear markets, as crowded shorts are forced to cover as eager bulls buy thinking the bottom is in. 
  • Newton’s First Law reigns supreme as momentum begets momentum and sideways chop begets sideways chop. This is fractal and true across all timeframes.
  • Bear markets tend to spend more time trading sideways to up than they do going down as the selloffs occur much faster than the up/ranging action.

These are all just odds and probabilities. Today’s buy setup could very well fail, as they have tended to do over the last two weeks. 

This market has EXTREME tape bomb and overnight gap risk. Due to the uniqueness of the exogenous shock (virus and government-mandated shutdowns), there are no good historical parallels. Everybody is flying blind. Due to the above, along with the rise in daily volatility, it’s important to size positions small and maintain plenty of dry powder. 

Watch the close today. If we’re able to close near the highs, that’ll raise the odds we see further follow-through. We’ll probably need to see at least a few consecutive up days for the bulls to aggressively step back in and drive the rally significantly higher. 

Conversely, if the market sells off towards the end of the day — which is exactly what it’s done the last few “Turnaround Tuesdays”. Then we go right back into wait and watch mode. 

Here are the trades we’re looking to make if the market holds strong into the close…

***Click here to check out our Collective and see what we’re buying and selling right now***

The Volatility Machine


***The following is an excerpt from a report sent out to Collective members over the weekend***

As for what I think now, I believe that the health, economic, and market impact of the coronavirus will be much greater than most people are now conveying. For example, the profit losses for businesses are likely to be many trillions of dollars so that governments protecting just the companies would cost a significant percentage of that amount of money. Additionally, the amount of money to protect just those individuals who will be devastated by the virus will also be enormous.

To do that, fiscal policymakers (I.e., heads of state and legislators) will have to create massive amounts of spending and distributions of money that will be distributed as “helicopter money.” That is happening now in many ways such as President Trump’s $1,000 checks to people. Where will that money come from? The fiscal policymakers don’t have that money because they don’t create it (the central banks create it), so they will have to borrow that enormous amount of money at a time when lenders don’t have much money to lend because most people and companies are losing money. That will drive up interest rates, which would be even more devastating for everyone. Central banks will then have to decide if they will let interest rates rise or print a lot of money to buy those bonds.

As they are faced with that choice, they will have no choice but to print money and buy a lot of government debt to hold interest rates down the way they did in the war years. So now all eyes are on central banks to see if they will do that. This is the big paradigm shift that I previously spoke about.

Ray Dalio wrote the above in a post on Linkedin this past week (link here). While Dalio has become somewhat of a whipping boy on the Twittersphere these last few weeks due to the walloping his Pure Alpha fund has taken, he’s dead-on in regards to the seriousness of the economic impact this virus will have on the world.

And while the future is multi-path dependent, we now have enough data points to know that what we’re living through is extraordinary, it will be talked about in history books 50-years from now. It’s a major paradigm shift that will reshape the world in unfathomable ways, both for better and worse.

While we’re going to cover some of the more immediate impacts today, let’s first do a brief overview of where we’re at in the progression of COVID-19 and what the current best-educated guesses are as to how the next 3,6, and 12 months will look.

I updated the COVID-19 Cheat Sheet a few days ago with the latest numbers and resources I’m tracking (here’s the link).

The situation is evolving quickly and there are so many opposing hot takes out there that it’s easy to get overwhelmed or point to data to confirm a bias. The reality is that no-one knows where exactly we’ll be in 6-months time, there’s just too much non-linearity to hold a hard opinion with confidence.

It’s a great time to put your Bayesian hat on and work on updating your priors daily because that’s how fast the information flow is changing. A useful shortcut for this is to regularly check in on the Good Judgement COVID-19 Dashboard (link here).

This is the forecasting project put together by Phillip Tetlock author of the must-read book Superforecasting. The predictions are updated daily and are “aggregated from forecasts by professional Superforecasters, who qualified by being in the most accurate 2% of forecasters from a large-scale, government-funded series of forecasting tournaments that ran from 2011-2015 and, since then, by being in the top handful of forecasters from Good Judgment’s public forecasting platform.”

This allows us to harness the wisdom of crowds, specifically the wisdom of a crowd that is particularly good at forecasting, to get a sense of how the severity skew of this thing is evolving. Here’s a summary of what the current median forecasts are projecting:

    • Between 53 million and 530 million total COVID-19 cases worldwide by March 31, 2021.
    • Between 800,000 and 8 million total COVID-19 deaths worldwide by March 31, 2021.
    • Between 2.3 million and 23 million total cases of COVID-19 in the US by March 31, 2021.
    • Between 35,000 and 350,000 COVID-19 deaths in the US by March 31, 2021.

These forecasts have been creeping higher over the last few weeks as more information becomes known. The range is considerable even within each bucket and that’s because the cone of plausible outcomes is wide and the situation is incredibly reflexive… much of the outcome is dependent on the actions we take now.

The most recent credible research points to two practical options for tackling the virus; neither of them painless. These are (1) mitigation and (2) suppression. Imperial College published a paper last week where they modeled the outcomes for each approach and discuss the pros and cons. Here’s a link to their paper as well as a link to a good laymen’s summary of their findings by MIT Technology Review.

I’ll explain the core of their findings here along with what we should expect as policy in the coming months.

    • Mitigation: This approach is focused on “flattening the curve” through targeted isolation of active cases and quarantining households.
    • Suppression: This approach uses a broad range of measures such as widescale shutdowns of non-essential businesses, forced at-home seclusion, and closing of all schools/universities.

Mitigation is intended to be a speedbump in order to buy the healthcare system precious time and spread out the onslaught of severe cases. Suppression aims to stop the virus dead in its tracks.

According to the findings of the paper, if the virus were just left to spread it would kill 2.2 million people in the US and 500 thousand in Britain by the end of summer. Using a mitigation strategy, they conclude that the two countries would at best be able to cut these numbers in half. And this doesn’t account for the higher fatality rate that would result from our healthcare systems being overwhelmed. Which, as the paper points out, would be catastrophic.

The Imperial College researchers found that even under the best mitigation strategy we’d still end up with a surge of critical care patients 8x larger than what the US or UK healthcare systems can cope with. The chart below illustrates this point. The red line is the current number of ICU beds.

This is why most countries are opting for the suppression strategy. Suppression is what China implemented in Wuhan and which brought the spread of the virus to a halt — at least temporarily and at a great economic cost.

One of the problems with this approach is that by keeping infection rates low it leaves many people susceptible to the virus. And as long as someone in the world has the virus, breakouts will keep reoccurring without drastic measures to control them.

Take the case of “Patient 31” in South Korea for example. South Korea did an excellent job of containing its initial outbreak but then a single infected patient unknowingly went on to infect hundreds of others, spawning another outbreak which led to the formation of many new clusters. The NYT has a great series of interactive graphs that show how easily this virus makes its way around the world (link here).

To avoid this, countries must ratchet up suppression measures each time the disease resurfaces. This is exactly what the team at Imperial College proposes doing. Every time admissions to intensive care units (ICUs) begin to spike, we enact extreme social distancing measures which we then relax once admissions begin to fall. Here’s how that approach would look.

MIT Technology Review explains the approach as the following (emphasis by me):

The orange line is ICU admissions. Each time they rise above a threshold—say, 100 per week—the country would close all schools and most universities and adopt social distancing. When they drop below 50, those measures would be lifted, but people with symptoms or whose family members have symptoms would still be confined at home.

What counts as “social distancing”? The researchers define it as “All households reduce contact outside household, school or workplace by 75%.” That doesn’t mean you get to go out with your friends once a week instead of four times. It means everyone does everything they can to minimize social contact, and overall, the number of contacts falls by 75%.

Under this model, the researchers conclude, social distancing and school closures would need to be in force some two-thirds of the time—roughly two months on and one month off—until a vaccine is available, which will take at least 18 months (if it works at all). They note that the results are “qualitatively similar for the US.”

As of right now, our baseline should be to expect roughly 18-months of rolling suppression measures. This is huge. Never in history has anything like this been done before. It’s going to stress the global economy and financial system in ways that’s never been seen. It’s also completely necessary as it’ll save the most lives and prevent our healthcare systems from total overwhelm.

Can this outlook change over the next month? Absolutely… we’re in unchartered waters and the situation is incredibly fluid. This is just the best guess we have at the moment and so should be our baseline; one we’ll continue to update daily as new info comes in.

The Volatility Machine: Small Business Balance Sheets

Macro is just an aggregate of what happens at the micro-level. And it’s at the micro where we’re most susceptible to cascading shocks.

Consider the following points.

The US economy is 80% service-based. This means much of our economy is dependent on in-person shopping, gatherings, face to face meetings etc…

Small businesses contribute roughly 45% to our GDP, comprise 88% of total businesses, and employ approximately half of the US labor force (charts from JPM).

Corporate debt as a percentage of GDP is the highest its ever been.

According to a study of US small businesses by JP Morgan, the median small business has less than 27 cash buffer days in reserve. And there’s a wide variance amongst industries. Healthcare services hold roughly 32 days of cash in reserve, while at restaurants just 16…

The study concludes that “Many small businesses may not have enough cash to continue operations in the face of a month-long loss of cash inflows due to an economic downturn or other negative shock”.

Put it all together and we get an economy that is largely dependent on social in-person interaction. It’s the most leveraged it’s ever been. Ever. In History. The average small business, which is the backbone of the economy, not only carries a lot of debt but also has less than a single month in cash reserves. We’re about to practice extreme seclusion — meaning no non-essential in-person interactions outside the home and closure of all non-essential businesses that require a physical presence — on a rolling basis for possibly 18-months.

At an even more micro level, according to another report by JP Morgan, the typical US household — who’s also very levered up — holds less than $4000 in liquid assets. And here, just like small businesses, there’s wide dispersion and the data paints a stark reality. Nearly 30% of US adults have absolutely zero savings and only 1 in 4 have a rainy day fund but one that’s not enough to cover three months of living expenses.

At its roots, an economic system is just a collection of interlocking balance sheets. The more levered these balance sheets are the more dependent on cash flows the system is (ie, fragile). This is why it’s PARAMOUNT that governments act aggressively and quickly. Because it won’t take long for a feedback loop with disastrous effects to ripple through the system.

Even then, I’m not so sure they’ll be able to pull it off. The system is simply too large and too complex. And the potency of the cure that is needed will almost surely have unintended negative consequences — economic iatrogenic as Taleb might say.

I’ll be writing more on this in the weeks ahead. A particular point of interest and an area where I think will be the epicenter of this crisis, in more ways than one, is China. There are increasing signs that the property market may be beginning to falter. The government has exhausted its ability to leverage its way out of problems and the PBoC is buttoned in by the classic Mundell Flemming Trilemma.

Said another way, it’s going to be a long and wild ride in macro land. Better buckle up…

***The following is an excerpt from a report sent out to Collective members over the weekend***

Monday Dirty Dozen [CHART PACK]


[The] principal characteristic of a bear market is very sharp down movements followed by quick retracements… In a bear market, you have to use sharp countertrend rallies to enter positions. ~ Bruce Kovner

Click here to get the Dirty Dozen straight to your inbox every Monday morning

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the very precarious spot in which the global economy now sits, comb through the balance sheets of corporates, countries, and households. Check out some positioning and flow data and finish with a look at US GDP projections. Let’s dive in…

***click charts to enlarge***

  1. KPMG published a great slide deck on the economic risks posed by COVID-19. Here’s the link to the deck and a few of my favorite slides below.

As the title of the chart states, the global economy isn’t exactly meeting this virus on a strong footing.


  1. The record levels of debt globally make this a particularly capricious time to have to deal with widescale shutdowns of the global economy.


  1. And it’s not just that we’re extremely leveraged but US households are also very cash poor, with nearly 40% of US adults unable to cover a $400 expense.


  1. The interconnection of over-leveraged asset poor balance sheets dramatically raises the risks of credit cascades in the near future. Watch out for Fallen Angels…


  1. Emerging markets are in an even weaker position where a risk-off environment is leading to capital outflows and lower local currencies against the US dollar, of which much of their debt is in. This is creating an EM doom loop where a falling exchange rate leads to more expensive debt leading to more outflows ad Infinium…


  1. EM outflows are hitting truly extreme levels. The chart below shows fund flows out of the Philippines index (chart via Bloomberg).


  1. With crude toeing the line with pricing in the teens, the Brent curve is now in its deepest contango since 09’. Give this read from our friend Kuppy over at the Adventures In Capitalism blog to find out what this means for tankers (hint: it means a lotta money).Chart via Bloomberg.


  1. Here’s the latest CoT positioning z-scores (chart via Bloomberg).


  1. The forced shutdowns across the world are driving traffic lower and hence oil/gas consumption (chart via Bloomberg).


  1. The only bright spot is China who is a couple of months ahead of the rest of us in their response to the virus (chart via Bloomberg).


  1. But, there’s still a long ways to go before things return back to normal (chart via Bloomberg).


  1. JP Morgan’s GDP forecasts projects Q2 GDP in the US to be the worst on record. Goldman Sach’s forecasts QoQ annualized growth rates of -6% in Q1, -24% in Q2, +12% in Q3, and +10% in Q4, for a full year growth rate of -3.8% on an annual average basis and -3.1% on a Q4/Q4 basis.

Click here to get the Dirty Dozen straight to your inbox every Monday morning

Stay safe out there and keep your head on a swivel!

Coronavirus Cheat Sheet


Updated: April 8, 2020

In light of the many disparate and conflicting opinions out there, especially on the Twitters… I thought I’d put together a comprehensive coronavirus cheat sheet with the key numbers, best resources, and info that I’ll update regularly. 

What it is: The virus is a respiratory disease caused by a novel (new) coronavirus which was first detected in China and has now spread to more than 209 countries. The virus has been named “SARS-CoV-2” and the disease it causes is “coronavirus disease 2019” or “COVID-19” for short.


Key Numbers: These are the key metrics I’m tracking to discern the virus’s ultimate impact. 

Active Cases: This is the number of active coronavirus cases that are currently being treated globally. Why is this number important? Unlike the Total Cases number, which is what’s mostly being reported in the news, active cases leave out those who’ve died or have been successfully treated for the disease as they are no longer contagious.

Total active cases globally are currently 1,448,123 infected patients and climbing rapidly. This number should be expected to increase significantly in the coming weeks given the low levels of testing still available in the US and other parts of the world. 

This graph shows the arc of confirmed cases as well as the doubling period for each country. Total cases are currently doubling in the US every 2.5 days.


R0 (pronounced R-nought): Is the “attack rate or transmissibility (how rapidly the disease spreads) of a virus is indicated by its reproductive number, which represents the average number of people to which a single infected person will transmit the virus (worldometers).” For example, an R0 of 3 means that on average an infected person will infect 3 other people. As a rule of thumb, epidemiologist believe that any novel disease with an R0 believed to be over 1 should be taken seriously.

Current estimates put the coronavirus’s R0 somewhere between 2 and 2.5 though some early estimates put it as high as 3.8, which would be catastrophic. For comparison, the R0 for the common flu is 1.3 and the R0 for the 1918 Spanish Flu epidemic was thought to be around 1.8-2.0. 

Influenza viruses are genetically variable, and transmissibility difficult to predict especially early on in an epidemic. The RO value can change significantly over time and vary greatly across geographical locations.

Fatality Rate: The Case fatality rate refers to the “proportion of people who die from a specified disease among all individuals diagnosed with the disease over a certain period of time. The case fatality rate typically is used as a measure of disease severity and is often used for prognosis (predicting disease course or outcome), where comparatively high rates are indicative of relatively poor outcomes (Encylopedia Britannica).”

Estimates of the coronaviruses case fatality rate have so far varied widely, from a low of 0.5% to as high as 8%. Today the World Health Organization announced that the virus’s fatality rate is 3.4% but this rate is likely a huge overestimation due to “severity skew” in the reporting.  The credible consensus is that the rate will move lower as testing becomes more broad-based and cases of milder under-reported symptoms are factored in. The fatality ratio also differs greatly across age groups and initial health, with the ratio being much higher amongst the older population and those with a compromised immune system.

Ben Thompson, of Stratechery, made an important observation about the virus, writing: “It seems likely the fatality rate is lower than what was reported in China. Consider the failed quarantine of the Diamond Princess cruise ship, which allowed for a controlled sample. According to the latest numbers from Japan, of the 3,711 passengers and crew members on board, 705 were infected; of the 705 infected, 392 were asymptomatic; six have died. That is an infection rate of 19.0% (10.6% with symptoms), a fatality rate of 0.8%, and a mortality rate of 0.2% (fatality rate is what percentage of the people who are infected die; the mortality rate is what percentage of the overall population die)… This is mirrored in South Korea, which is experiencing the largest outbreak outside of China — at least the largest outbreak that we know about. This is an important caveat both because some countries may be worse (particularly Iran), but also because the South Korean numbers, thanks to the country’s excellent infrastructure, health care, and free press, are likely to be amongst the most reliable in the world. There the fatality rate is 0.4%, even lower than the Diamond Princess.”

Thomas Pueyo’s analysis of the most recent data suggests that the Fatality Rate will vary from 0.5% (South Korea) to 0.9% (China exl. Hubei) for countries that are prepared. For countries that are not prepared (ie, have limited medical capacity/supplies, are slow to act etc…) will have a fatality rate between 3% and 5%.  For comparison, the fatality rate for seasonal flu is less than  0.1% in the US


The fatality rate varies greatly by age (source). 

You can use this interactive graph from NYT to see how many fatalities we should expect in the US with various infection and fatality rates and how those compare with other major killers.

Here’s a chart showing the projected deaths per 300 million US population with various case fatality rates and R0s (chart via CDC).

And historical comparisons via the NYT.

Risks:  A critical risk here is that the US healthcare system is already taxed during flu season and an additional widespread virus could create a “double flu pandemic

We have roughly 800k staffed hospital beds in the country. This finite capacity already becomes maxed out during a bad flu season. If the coronavirus spreads quickly in the US while the flu season is still in full swing then it’ll likely result in severe flu cases not receiving ideal treatment and a  tick up in the fatality rate.

This same idea holds for medical supplies, the NYTimes points out that “Public health experts are also closely watching reserves of vital medical supplies and medications, many of which are made in China. Some hospitals in the United States are already “critically low” on respirator masks, according to Premier Inc., which secures medical supplies and equipment on behalf of hospitals and health systems. And China is the dominant supplier of the raw ingredients needed for penicillin, ibuprofen and even aspirin — drugs taken daily by millions of Americans and dispensed routinely to hospital patients.”

For those of you in our Collective, I highly recommend reading the threads by @Jdavidr who’s an MD with decades of experience in this area, talk about the potentially massive stresses that this virus represents to our healthcare system and how we can best prepare. 

 The positive news is that March is the last month of peak flu activity. 


Additional Color:

  • Vaccine: Credible estimates put a vaccine for the coronavirus 18-months out at the earliest.
  • Warm weather: Scientist suggests it’s too soon to know how the virus will behave in warmer climates.
    • But “Viruses that cause influenza or milder coronavirus colds do tend to subside in warmer months because these types of viruses have what scientists refer to as ‘seasonality’”. This is due to a number of suspected reasons, such as: 
      • “Studies outside the lab show similar results, though some tropical regions have more cases of flu during rainy season, when people also cluster indoors.”
      • “Scientists hypothesize that low humidity, which often occurs in winter, might impair the function of the mucus in your nose, which your body uses to trap and expel foreign bodies like viruses or bacteria. Cold, dry air can make that normally gooey mucus drier and less efficient at trapping a virus.”
      • Ian Lipkin, director of the Columbia University’s Center for Infection and Immunity, has been studying the novel coronavirus. He says sunlight, which is less abundant in winter, can also help break down viruses that have been transmitted to surfaces. “UV light breaks down nucleic acid. It almost sterilizes [surfaces]. If you’re outside, it’s generally cleaner than inside simply because of that UV light,” he says. Via NationalGeographic.
  • Second  Wave: Many epidemics have more than one peak. This is because following the initial outbreak, authorities work hard to restrict movement and limit the spread of the virus. Eventually, they relax these restrictions as people need to work to keep the economy from going into a tailspin. A second wave typically follows. Pay close attention to China where authorities have started to put greater emphasis on restarting the economy versus containing the virus.

H7N9 Bird Flu illnesses and deaths from Feb 2013 to Feb 2014 (link here).

H1NI positive tests reported to the CDC in the US from April 2009 to Nov 2009 (link here).

Spanish Flu: “There were 3 different waves of illness during the pandemic, starting in March 1918 and subsiding by summer of  1919. The pandemic peaked in the U.S. during the second wave, in the fall of 1918. This highly fatal second wave was responsible for most of the U.S. deaths attributed to the pandemic.”