Your Tuesday Dirty Dozen [CHART PACK]

An old-fashioned bear doesn’t stab you with a sword, as in the crash of 1987 and the mini-crash of 1989. It nicks you with a thousand cuts. ~ John Dorfman

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at bear market stats, recessions, panic insurance buying, credit cascades and more. Let’s dive in…

***click charts to enlarge***

  1. The NYSE Index is down 32% from its all-time highs just two months ago. As a reference point, the index fell a total of 35% over the course of the 2-year long bear market in 2000. The second chart shows every peak to trough drawdown of the NYA over the last 60-years.


  1. This chart from BofA shows that this market peak to 20%+ decline has been one of the fastest in history.


  1. Apparently it’s the 3rd fastest flip from bullish to bearish trend in history, outdone only by the market selloffs of 32’ and 33’ (chart via BofA).


  1. The pain tends to linger following a 20% market drop. According to BofA, “The 25 bear markets from 1929 to-date saw corrections continue for 85 days on average (81 median) following the dip below 20% into bear territory on an average pullback of 18.41% (15.61% median)… While history does show us examples of quick turn arounds after moving into a bear market, the tendency is for pain to linger, with further downside, over the two to three months that follow the initial 20% drop”.


  1. BofA notes the historical context of SPX bear markets since 1929, writing:
    • Median peak-to-trough price decline of ~30% (we have seen 26.7%)
    • Peak to trough trailing P/E compression of 18x to 12x (we are at 13.9x)
    • Bear market historically lasted about a year and a half (it has been just over 3 weeks)
    • Peak of market has generally preceded an economic recession (if one occurred by three quarters).
    • EPS peaks have varied but have occurred on average two quarters after the market peak.
    • EPS recessions (which have not occurred in every bear market) have seen an average ~20% peak-to-trough decline.


  1. It’s looking ever more likely that this virus is going to push us into recession. Bloomberg’s Recession Probability Index is at its highest point of this cycle. It’s currently showing a 53% chance of a recession within the next 12-months. I’d say those odds are a bit on the low side too.


  1. The average recession lasts 13-months according to Deutsche Bank.


  1. The risks of a full-blown credit cascade (which I wrote about last week, here’s the link) are increasing. Even investment-grade credit spreads are blowing out and correlations are going to 1 as liquidity providers step back and de-risk their exposure.


  1. In another sign of increasing investor panic, BofA’s GFSI Skew Index which measures investor demand for downside protection just hit an all-time high.


  1. Companies with the most leveraged balance sheets have been getting hit the hardest. This list from BofA shows the top 30 S&P 500 companies with the most refinancing risks (ie, good potential short candidates).


  1. There is some good news though and that is that the data shows China’s economy is slowly trending up to more normal levels of activity. A stable and growing China is needed to help put a floor under commodity prices.


  1. And finally, you may have heard about the CEOs of US airline companies asking for a $54bn government bailout. Now, it’s understandable that airlines, one of the hardest-hit industries from this virus, would need some financing to help them weather the storm. But… at the same time, maybe US companies need to learn to keep a rainy day fund for such exogenous shocks. Instead of, say, spending “96% of free cash flow” over the last decade to buy back their own shares — which, just so happens to boost said CEOs takehome pay.

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

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.