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Skipping over all political statements,
I'm more interested in Pretzel Logic's view of the market:
Therefore, as of yesterday, March 15, PL's opinion:
"Since last update, SPX captured its 3820-45 target (from March 8), exceeded it by about 10 points, then bounced. That's potentially 3 waves up off the 3808 low (to 3937), so bears can take it back below 3808 from here if they want.
Given where we are in the big picture, this market is very possibly hanging by a thread, so countertrend trading (i.e.- bullish trades) should be kept on a very tight leash unless and until there are more bull signals. The most bearish case is that we've already entered Blue 3 -- and frankly, there's nothing currently in the charts to suggest otherwise. That can, of course, always change tomorrow, but this is what's in front of us right now."
http://www.pretzelcharts.com/
My position? I don't like to trade bear markets as one of their characteristics is that they are always too volatile and it's too easy to make the wrong trade (AKA getting myself caught in the bear trap), therefore I am 100% cash and sitting on my hands until a new bull market is confirmed (and I don't care how long that takes).
Banks this and that ...
I'm a retired electronics engineer that focused on wireless communication technology (because I'm curious about things invisible), but I took a couple elective college courses in economics and banking while in college and developed the belief that there are more than enough regulations and regulators and computers that know everything, and have all the data they need, such that if current regulations are followed then that would guarantee a robust banking system that could not fail.
With that in mind, when a bank fails I would blame the regulators and not the bank itself. So I'm thinking that a good number of regulators (government employees) are spending too much time going to parties. I know for a fact that all bank activities during each working day are transmitted to its assigned regional federal bank overnight. So there is no excuse for regulators not having sufficient data to complete any of their assignments.
While I was still working as an electronics engineer a technician and I had to go to Washington DC to talk to some standards group about wireless communications standards and regulations. During the evening we went to some of the local bars. That's were we found a good number of our public officials getting drunk as a skunk. That state of mind probably interferes with their regulating, and that might be where they cook up some of their excuses.
NCLH Annual Net Income
See table at bottom. Du last three years have been a bear because of du flue.
Note: There is also another reason NCLH is showing some negative numbers lately ...
"Norwegian Prima is the first of six vessels from Norwegian Cruise Line's Prima Class, the Brand's first new class of ships in nearly 10 years. Launched in August 2022, Norwegian Prima is the industry's most spacious new cruise ship with the most outdoor deck space and expansive accommodations of any new build."
(Millions of US $)
2022 $-2,270
2021 $-4,507
2020 $-4,013
2019 $930
2018 $955
2017 $760
2016 $633
2015 $427
2014 $338
2013 $102
2012 $169
2011 $127
2010 $23
https://tinyurl.com/4wt8yyyu
"With Bookings at Historical Levels,
Norwegian Cruise Line Stock Is Worth a Closer Look."
The Motley Fool
https://tinyurl.com/2n2axvzu
No,
I haven't bought anybody's book on technical analysis, and I don't need to because I use my own methods (and they are all programmed into Excel) and they work just fine. In fact one of my favorite charts is a 3-D chart that I can produce in Excel but you (and I) cannot duplicate in a browser.
I also haven't tried to prove anything here. If you think I have, that's just in your imagination.
You wrote "$SPX corrected. Why didn't nclh correct?".
Answer: NCLH did correct. You will see that if you stack an $SPX daily chart over an NCLH daily chart, both starting at January 2020. That was an example of a correction that I was referring to. Granted, that's quite a distance in the past, but I refer to it because I'm sure it had a strong effect in the heads of a lot of traders and I suggest that it still affects the way they trade today.
Sorry, you are wrong again.
I'm trying to help -- if not you then others that visit this site.
I suggest you look at three daily charts simultaneously, all stacked vertically so that dates coincide: one for $SPX one for NCLH, and one for JETS (a US Global Jets ETF).
Set the starting date for all symbols to the beginning of 2020, and the total range for each should extend to today's date. What do you see?
I see a huge correction in $SPX early in 2020, and the same thing happened to NCLH and JETS as one would expect. Do you recall why that happened? I do.
I know little about anything??? Really?
Do you know who developed the first commercial Cell Phones for the US market? You couldn't possibly know. The lead group was Bell Labs, a branch of AT&T. Bell Labs subcontracted the designs for both the cell sites and the end-user equipment for both the technical trail and the final market trial. Guess who wrote the proposals that got those contracts then took the lead in designing that equipment.
I'll tell you who it was: me.
You're barking up the wrong tree.
The condition that all the travel related companies are in (NCLH included) has everything to do with the flu pandemic. It's really just that simple.
Slowly that is being taken care of and all of this will eventually be history.
You also don't pay attention to what I've written. I have traded NCLH several times and all but the last trade have been profitable. The last trade I entered wasn't developing the way I wanted so I closed that trade days ago with minimal damage.
So, as of several days ago I am not in any trade. I continually monitor a group of stocks within groups of sectors that I might trade, but the decision to select a specific stock and open new trades simultaneously in both accounts (IRA & IND) is price pattern dependent on the stock I choose to trade within a specific sector and also dependent on the entire market.
Well,
if you're not at this board because you're trading NCLH, then you're here because you are a stalker?
Buy more NCLH?
Hey, I should double up ... weeeeee!!!!
The way I always trade is to first determine what is a good buy in terms of stock selection and entry price then go all in ... both Ind and IRA accounts. I'll buy the stocks then sometime afterward, but not too far away in terms of time, I'll sell weekly Call options against all shares in both accounts until they are assigned. But I'm not stupid so I closed both NCLH trades several days ago and have been at 100% cash since then.
In other words, I see no reason to be in any stock right now, so I'll just be a market observer until it's time to get back in.
Patience young grasshopper and yee shall be rewarded ... it's a simple system but it works for me.
My wife's brother was a bank branch manager.
For that reason I used to know quite a bit about those guys and bank branches.
Even in good times some branches can and will be closed.
But, in those days (and I think it is still true) all bank branch managers are given the title of Vice President of the bank. So if nothing's changed, all banks have a lot of Vice Presidents. But their salary doesn't reflect that, and they have virtually nothing to say about anything. The bank's computer is his boss.
The problem with giving bank branch managers such lofty titles is that they have next to nothing to do. They don't even have to know how to manage a bank because they are only allowed to do what the bank's computer tells them to do. They are left with nothing to do other than trying to keep employees (who are also nothing other than bank robots) happy.
So why have a bank branch at all? Well, probably to keep customers happy with human contact while paperwork is being properly filled out and stamped.
As I recall (as all this happened decades ago) my wife's brother quit that boring job and went to work for Sears where he got a new job managing a section of a Sears store such as outdoor furniture and tools (which is probably just as boring, but he probably gets employee discounts on anything he wants from Sears).
handful of banks ... ?
"... handful of banks in Northern California shutting down."
I heard of only two banks in the news and I don't know how large they were or where their headquarters is (or are), and I don't know how many branches they had, but it would be stupid to count the branches as separate banks. Also, it is not uncommon that some bank branches are shut down by the Fed while the mother bank and their other branches are still able to operate.
At any rate I have no interest in or curiosity about that subject even though I had two college level courses in economics while my main interest was in wireless communications (you know, designing radio equipment that operates anywhere from tens of KHz up to a few GHz). In fact I worked as an RF engineer under contract with AT&T Bell Labs in their development of the first U.S. cellular phone system before they were commercially available. I modified their base station equipment (as it had some faults) and I designed the mobile phones for the technical trials. Once the technical trials were done, I also designed the first commercial units (cell site equipment and mobile units).
Several years after I graduated from college, I started my own company. I designed and sold the first computer software for doing RF designs with the aid of a Smith Chart (an incredibly complex chart utilizing both Real and Imaginary numbers during RF circuit design).
Have you ever seen a James Bond movie wherein he carried a mobile phone in a brief case? Not counting military phones, those were the first commercial phones for making wireless phone calls. The first ones required that the user had to go through an operator for all calls going out. They were called MTS (Mobile Telephone System) phones. The next version (and I designed one of those) no longer required an operator. They were called IMTS (Improved Mobile Telephone System) phones.
So you think I have no grasp of reality?
NCLH earnings by year:
Link is at bottom showing historical earnings during and prior to the flue. I suggest you look at it.
Obviously NCLH has been operating at a loss during the flu pandemic.
Prior to the flue (May 14, 2020 and earlier dates) every quarter was profitable all the way back to Aug 04, 2015. Prior to that date there were some losses but that's ancient history and I don't want to spend the time to figure out what was going on then.
https://tinyurl.com/3mu45324
You must of heard of the flu pandemic ...
Above everything else, that is what brought down the cruise lines and airlines and everything else related to travel. That pandemic is withering away. As a result of that, the craving and addiction of travel around the globe will return to normal along with plenty of profits related to that travel. Duh!!!
Regarding "NCLH is a loser galore and nothing can fix it, PERIOD".
Given that NCLH is a cruise ship company (which would certainly get hit hard by a flue pandemic as its business requires putting crowds of people on a ship) of course it got hit hard by the flu pandemic (as did all the airlines, and motels and hotels, and all other things tied to travel or handling crowds of people). Prior to that, NCLH was a very profitable company.
Put in perspective, the economic chaos caused by that illness is becoming history, and those companies that suffered the most (i.e. any company related to travel or creating crowds of people) will be (and are now) the best trades during their recovery.
Given that logic, both airlines and cruise ships are all that I have traded for a very long time and I have not had one bad trade.
I have also insured that I never have bad trades: I buy shares of stock in a company at the beginning of a week (if I don't already have shares), then I sell Covered Calls (that expire on the Friday after that purchase) against those shares. Wash, rinse, repeat every week until the stock is assigned. Once assigned, buy it back on Monday and continue the journey via the same process.
Using that process, it very often does not matter which specific company one uses for their trade. Why is that? Answer: check and see if that company is a component within an ETF that tracks its sector. If it is, then the managers (spelled computer) of that ETF will be trading that stock.
Actually ...
I pay no attention to insider and institutional trading and I don't give a rat's ass about inflation or deflation. I have no clue where your thoughts about all that came from. All those things are not worthy of any attention, so I pay them no attention. I suggest you just follow price patterns (historical support and resistance reversal levels) and leave it at that because that will tell you what is going on; then commence on making all your trades Buy/Writes: after you buy the stock, sell that Friday's Calls against it using the strike just above the cost of your shares. In that way you are literally starting the trade with a profit (the Calls you sold). If your shares are not assigned at the end of the week, sell more CCs on Monday. Wash, rinse, repeat till your stock or ETF is assigned or you see another stock that would be a better choice because of its price as it relates to support and resistance levels.
One other suggestion: do not hold a stock during earnings release no matter how you think it's going to turn out afterward.
Laugh all you want, but I've made a ton of money off of NCLH (and the airlines, primarily AAL) by doing buy/writes on those stocks over and over and over. Every one of those trades end by having my stock being assigned because of the calls I sold. My response: wash, rinse, repeat buy/writes with that same stock or ETF or another symbol I follow that might be in a better position.
You might think that you do not want to do Buy/Writes on AAL because it's badly managed. You might be right about it being poorly managed, but that won`t matter. Why? Because for safety sake institutional traders want to be very careful about what they trade, so they may trade an airline index but they will not trade an individual airline. The airline index will want to be representative of all airlines, so it will be compelled to trade shares of AAL.
Following that process (trading weekly buy/writes on individual stocks or sector symbols) will result in 100% of your trades being profitable.
There are a lot of people with money and they want (crave) recreational travel. Their pent up demand (which often becomes an addiction due to restrictions) eventually has to be fed. That's why I've often concentrated on trading airline and cruise ships ETFs.
However, ...
revenue rose more than 225% to $1.57 billion, beating expectations of $1.5 billion, driven by strong ticket pricing and onboard sales.
"Norwegian said it expects to post an adjusted loss of 45 cents a share in the first quarter, and full-year 2023 profit of 70 cents a share. Both missed the expectations of analysts, who see a loss of 35 cents a share in the first three months of the year and a profit of $1.04 a share for the full year."
Of course the stock drops as "bad news" comes out.
But, as would be expected, if you wait to buy the stock when the good news starts to come out, then you will be paying too much for your shares.
In other words, you came too late to the party.
My suggestion: buy the stock when you think it's too early to get in (because it's cheapest then), then feed off of that by selling some weekly covered Calls against your shares while you wait for the beginning of the recovery trend going higher.
Bingo!
My thoughts of the overall market?
My first thought about the current market is that it has become spasmodic.
With a market like that it's probably best to stay out of it (AKA hold cash) because any future price movement is difficult to predict.
Bull, Bear, makes little difference to me.
I buy stock. That's bullish. Then some time later I sell weekly Calls against that stock. That's bearish.
It's the initial price of the stock and the management of the Calls that determines how the total trade finally turns out, and that is determined by the velocity and direction of stock price during the trade.
If the Calls are not assigned at the end of the week, I sell more Calls on Monday. Sometimes, I'm able to get a greater return on the Calls by transitioning strikes during the week, but I rarely do that.
From: POKERSAM 3201 of 3210
(different message board)
There is no doubt you are right. At no time in the past for over a hundred years there has never been a bear market that has not been followed by a new all-time high. That goes for every cyclical and secular bear market. It will be the same for this bear market.
What is in debate is how deep will this bear go before it bottoms. Many think, in error I believe, that this bear has bottomed. Also, in debate is how long will this bear last. Several years will be a minimum IMO.
This is a secular bear and they last many years.
https://www.siliconinvestor.com/readmsg.aspx?msgid=34187700
Or ...
based on the market today, it doesn't really care what the numbers are going to be and therefore is just coasting along ...
yawn .....................
I always do buy/writes on the stock I choose to trade, and I usually don't waste much time selling those Calls after buying the shares. I made an exception today: I bought the stock I'm interested in but I stopped with that as grasshopper whispered "wait, wait" in my ear.
I'm hesitant to accept that.
Whatever the cause (or reasoning) that would trigger a huge number of stock and option trades, which are mostly done by computers now (and not by floor traders).
Look at NCLH, for instance. I would be trading that but haven't touched it for a few days (AKA staying in cash). I use 1-min charts intraday all the time so not much gets by me. I also use Medved Trader for my charting and it's been very reliable. What I see at end of day just doesn't make sense. There is no correlation between its intraday data (including before and after close) and the daily candle, yet they both utilize the same data.
A little off topic ...
... but this chart just blew my mind. I trade this and have made a good income from it with little effort. Just lucky I wasn't in it when this happened ... I think my eyes might have popped out!
The only way to explain this is that somebody with too much money in their pocket, and little gray matter it their head, paid too much for this stock. Or ... an intelligent person was at the keyboard, then he had to go take a piss then his toddler came into his room and pushed a few buttons on the keyboard!
Otherwise, it boggles my mind -- I'm not posting the chart as that ruins the surprise:
OOPS, I was laughing so hard I hit the send button twice (and I can't delete the copy).
https://tinyurl.com/4amat6b8
A little off topic ...
... but this chart just blew my mind. I trade this and have made a good income from it with little effort. Just lucky I wasn't in it when this happened ... I think my eyes might have popped out!
The only way to explain this is that somebody with too much money in their pocket, and little gray matter it their head, paid too much for this stock. Or ... an intelligent person was at the keyboard, then he had to go take a piss then his toddler came into his room and pushed a few buttons on the keyboard!
Otherwise, it boggles my mind -- I'm not posting the chart as that ruins the surprise:
https://tinyurl.com/4amat6b8
Being up in the air is ...
the foundation of being nasty.
"The funny part is this whole thing is that a majority was convinced, bull and bear alike, that we would see some nasty drops the first half of this year and now it is all up in the air".
For that reason, I'm sitting on cash.
Quick and dirty market shakeout, ...
or beginning of new trend?
Kinda risky ...
There aren't a lot of traders that want to trade after hours. That makes your market quite small (spelled risky).
The number of traders that want (or even try) to trade after hours is quite small. That means you are putting yourself at high risk of getting a result you don't want.
FWIW all my trades are buy/writes on a weekly basis. It just keeps adding up.
being wary, like a fox ...
I check the next day's futures late every night.
It's currently 11:56 Pacific time and US Futures are significantly negative.
That suits me just fine as I'm rather bearish about the market and have been in cash since March 31.
But ...
why not show it with a current chart?
Otherwise, just seems weird -- or was it just a brain fart that he didn't show the result with a current chart?
Or show two charts -- before and after, timewise.
That's a very old chart.
It ends in early April. Last time I checked, this is late May.
It's not just a good plan ...
It's a great plan!
Once I got the hang of it, that's all I do and I've been doing it for years. I've gained so much confidence in how well it works such that I only use one stock symbol and go all-in using both my Individual and Retirement accounts.
The only caveat (which posed limits on what I could do years ago) was that one should (pronounced must) only trade stocks that have weekly options, which provides more opportunities to tweak the trades as the options come down in price quicker than they would if you were stuck with monthly expiration options. Using weekly options, I've had no trouble creating very high percentage gains at the end of every month and year.
I was born into a farmer family. My father had milk cows, and he also grew feed crops for those cows. That's a very smart way to run a farm because he didn't have to buy any feed crop from other farmers for the purpose of feeding his cows. Some of the grain that he harvested fed his cows, while the excess grain was sold to dairy farmers which didn't have sufficient land to grow all the feed that they needed. Bingo!
Buy all the stock you can afford. Choose one that is alive and well as shown by its pricing (feeding) habits. You know, like TEVA, as it goes up and down in relatively confined and predictable ranges so your stock might be assigned at the end of the first week or it might not in which case you sell Calls again during the next week, and maybe again during the following week. Hey, if you are going to own stock, at least milk it. If it gets assigned away at the end of the week, buy it back on the following Monday or a little later depending on how it's trending. You might get it cheaper than the price it was assigned at. Or buy that other milk cow you've been watching, then sell its Calls.
D'oh! ... smacks head ...
Homer Simpson
Works for me ...
My favorite way of making money on stocks is to buy the shares then sell weekly Covered Calls against the stock week after week.
When finally assigned -- wash, rinse, repeat. That's a steady 52 paychecks every year.
This method even compounds: once assigned, there's more cash to buy more shares and sell more CCs.
However, there's one thing I wont do, which is to chase it downward when it appears to be trending that way. I'd rather just sit on cash and wait for a bottoming pattern.
Got nervous about the total market last week.
Had the same CC trades in two accounts (IRA and IND) on a stock I like to trade often. All in, same stock -- both accounts.
Decided to not wait for the Close because it was likely the Calls would expire worthless and I would be holding the same stock today. My thinking was that it's been a long time since the market had a 20% decline, thus having a Bear Market.
So I paid up to close the Calls on Friday (giving up some gain I would get that day) then I sold the stock. So now I'm all cash.
Now that it's Monday, sure happy I did that. Not only did the stock open lower today, it gaped lower.
What I was considering was it's been a long time since the total market's last 20% decline, so few are expecting that to happen and that's most likely when it's going to happen -- too many newbies out there who don't have a clue what a bear market is like; or there are some but they forgot or they think it's unlikely. They become food for the Bear.
Well, got another few percent to get to the 20% ...
Pretzel sure has some strange conventions.
For starters, what on earth are "4/24/30", "4/22/30", "04/19/22", etc.???
They certainly can't be dates (unless he's in j-space).
Hoping you’re only on vacation ...
RCKS,
I'm in the thick of engaging annual (Federal and state) tax reports I must file for last year -- a process made very much more complicated because of the sale and purchase of residential properties early last year and the high volume of cash flow back and forth that process sucked me into at this (tax) time.
For that reason I've been totally out of the market for at least three weeks (which resulted in my missing out on bringing in a lot of profits by trading weekly Buy/Writes on one of my favorite stocks for the last few months -- TEVA).
I've also lessened the tax-filing pressure on myself by turning my tax problems over to H&R Block, but even doing that creates a lot of tension directed a little differently but it's still there. In that way I don't experience the tension in preparing the reports (while wondering if I did them correctly, thus causing mind-freeze), but I still won’t know what my cash level will be until the fat lady sings at the end of this opera.
In the past I've regularly read all of Mauldin's reports, and the reports of a couple of his friends, but I also skipped most of those for several months; so right now I'm not sure what his view of the market is.
If everything goes as I hope within the next two or three weeks, I'm hoping for a larger correction downward. Why? Because of the crap that's been going on that Putin started. This war could turn out to be a much larger war. In their beginnings, nobody took seriously what turned out to become known as WWI and WWII. Or even the Korean War, as most thought that would be over in a few weeks then months. The Korean War lasted three years.
There is one more difference, Putin has made it clear that he is not afraid of using nuclear weapons. If he did use only the "small" tactical nuclear weapons, what do you think that would do to the market?
According to John Mauldin ...
Brace for (Recession) Impact
By John Mauldin | Mar 19, 2022
John Mauldin
“A Significant Decline”
Looking for Value
Lengthy Transition
Larry Summers Weighs In
SIC Time!
Feeling the Need for Travel
The Strange Recession we are now entering is strange for another reason beside those I described last week. The last “normal” recession ended in 2009, almost 13 years ago. As with most unpleasant experiences, we don’t put a lot of energy into remembering what it was like.
The problem is we need to remember it in order to prepare for the next one, which is now upon us. Today we’ll remind ourselves of what happens in a typical recession, both to the economy and the financial markets. We’ll also look at some of the ways this one probably won’t be typical. It certainly has the potential to be worse.
This week saw some volatility (the good kind) as stock prices recovered and oil retreated a bit. The basic facts haven’t changed, though. Recession was already a strong possibility even before the shooting started… and the genie is out of the bottle even if the shooting stops. The Russian sanctions will continue, which means the global realignment will continue, too.
Another factor is China’s growing COVID outbreak, which is already closing some factories and may lead to more supply chain snarls. Some interpret this bullishly, thinking a China slowdown will reduce energy and commodity prices. That may be correct, but not for more than a few weeks. We face recessionary forces that are much harder to suppress.
Really, I can only imagine one scenario that would make all this better. That would be if Vladimir Putin loses power and is replaced by someone of a sharply different philosophy and that person quickly leads Russia in a new, more democratic direction. Then the war and sanctions could end and Russian exports resume. Possible? Yes. But not likely.
That being the case, recession is where we are headed. So let’s review what it will be like.
“A Significant Decline”
According to the National Bureau of Economic Research, the referee of such things, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.” That’s as good a definition as any but still leaves room for interpretation. What is “significant?” How many months are “a few?”
My friends at Investopedia point to four specific markers of recession.
Loss of jobs
Declining real income
Production and manufacturing slowdown
Lower consumer spending
All those are bad individually and worse together. If they persist for months then I, for one, would call it a recession. Remember, though, this will be a strange recession. It doesn’t have the normal causes and may not have the normal effects.
Let’s start with employment. Here is the latest US jobs picture.
Source: FRED
The total number of nonfarm jobs was growing steadily until the brief COVID recession, fell hard, and still hasn’t fully recovered. It has been making good progress, though.
A longer-term look at this same data series shows employment tends to peak just as recessions (the vertical gray bars) begin. But notice, since 1940 every pre-recession peak was higher than the last pre-recession peak. If the same doesn’t happen this time, we’ll have yet another reason to call this recession strange.
Source: FRED
Unfortunately, I think that scenario is possible. Today’s higher energy prices and war-related disruptions will start to bite soon. Businesses who are desperate to hire right now will see slower sales and stop adding staff. That’s the first step to reducing staff.
As for the second marker associated with recessions, declining real income, it’s already happening. But here again, it’s a strange picture. (Remember, this is inflation adjusted.)
Source: FRED
The chart (not shown here) shows income popping sharply higher in three peaks, which correspond to the three COVID stimulus bills. If you extrapolate the pre-COVID trend forward, today’s level is about where it should be. But it’s been declining for several months despite higher nominal wages, partly due to rising inflation. But whatever the cause, people change their behavior when they perceive it is becoming steadily harder to make ends meet. Consumer sentiment surveys have been showing sharp drops, likely due to rising prices caused by supply chain issues and inflation.
Marker three, a manufacturing slowdown , is harder to measure with COVID and supply chain problems in the mix. But it seems almost certain to decline as the war makes components and materials even harder to obtain than they are now.
Note, too, it doesn’t take much to disrupt production. The Financial Times had an interesting story last week about automotive wiring harnesses . Many European manufacturers source these from factories in Ukraine. It’s simply a little device to hold the various cables that snake through your car’s engine. They’re made to very precise specifications. Unable to get them, BMW and Volkswagen have idled entire plants since the war started. That means lost sales, profits, and wages.
Another example is increasingly scarce and expensive diesel fuel. In the US, diesel prices have almost doubled from the pre-COVID level, with inventories at multiyear lows.
Source: Bloomberg
Europe’s diesel problem is even worse. Quoting from the Bloomberg article:
“The loss of Russian supplies is particularly acute for northern Germany, which receives seaborne Russian cargos directly via Hamburg and other ports. In a reflection of the crisis, benchmark wholesale European diesel prices hit a new high last week. The premium for diesel for immediate delivery exploded—at one point, it was 100X more than usual—in a sign of extreme tightness.
“The situation is made worse because Europe doesn’t just import finished diesel from Russia, but also semi-processed oil that it further refines to make diesel. The lack of that feedstock, including vacuum gas-oil and straight run fuel-oil, is forcing some refiners to cut supplies. Both Shell Plc and OMV AG have started to restrict their wholesale supplies. OilX, a consultant, has told clients it sees ‘a real risk of physical shortages of diesel in Europe.’ Privately, oil traders and oil companies say the same. No one wants to raise the alarm, fearing a run on gas stations, but everyone is quite worried.
“If nothing changes, by early April, some European countries may need to restrict diesel sales to conserve supplies.”
We’ll see more such interruptions as the war’s direct impact as well as the sanctions reverberate through the economy. The microchip shortage was on the mend but may now get worse again. All this has snowball effects, one of which will be lower output.
The fourth and last inflation effect is lower consumer spending. This is also murky because the spending mix matters a great deal. When people have to spend more on food, fuel, and utilities, they have less to spend on other things. We saw with COVID how these shifts can devastate certain sectors. A non-COVID recession will look different but may not be much better.
Looking for Value
How does recession affect your investments? Obviously, it depends on how you are invested. But broadly speaking, recessions hurt. Stock and real estate prices fall, interest rates rise, and companies often cut or suspend dividends.
Here’s an interesting long-term look at the connection. [not shown here] The line is the S&P 500 since 1945 on a log scale. The blue bars are recessions and the brown bars are bear markets.
Source: The New York Times
You can see recessions and bear markets usually coincide, but not always. Nor are they always of the same duration. In theory, we could have a recession but stocks continue higher, or at least hold steady. I would not bet on it. And note carefully: What look like small blips on this very long-term chart are 40% to 50% declines, followed by years making up lost ground. This isn’t a case for buy-and-hold index fund investing.
The table below [not posted here] shows the maximum drawdowns during major recessions since World War II. The 2001 and 2007 bears were particularly ugly.
Source: Market Sentiment
Massive QE helped the stock market recover in 2020?21. Note below the extraordinarily high correlation between stock prices and quantitative easing, beginning on March 23, 2020.
Source: FRED
We can safely assume everybody on the FOMC is aware of this correlation. It’s why they only gave lip service to reducing the balance sheet. It will be interesting to see how rapidly (or not) the Fed’s assets actually fall. Like a junkie coming off a drug high, it could drag on stocks and make the bear market normally associated with recessions even worse.
The best way to “play” a recession, in my opinion, is to view it as a buying opportunity. That means hold cash and look for value. The tricky part is you never know where the bottom is, so today’s value could be an even bigger value next week. That’s frustrating but inevitable. And hopefully, you’re not buying to sell next week anyway. Better to get a good price and sell in the next bull market when it is absurdly overpriced. And make no mistake, I fully believe there will be another bull market, it may just not have the rocket fuel of quantitative easing for several years as the Fed continues to fight inflation.
Lengthy Transition
Everything I said to this point is the “conventional” recession scenario. But we already know this one isn’t conventional. I don’t expect it to look like 2000 or 2008 at all. A better analogue is the 1970s stagflation era. That was an entirely different world, and certainly different kinds of markets. There were no ETFs back then. Mutual funds were a new idea and the 401(k) hadn’t been invented yet. Online trading was science fiction. So, it’s hard to visualize how that kind of recession will combine with today’s kind of markets. We haven’t seen anything like it.
I keep saying this but it bears repeating: Most recessions are deflationary events. Consumer prices decline as growth weakens. That’s one of the qualities that makes them bearable, though not pleasant. Your income falls but so do your living costs. Stagflation isn’t like that. Your income falls while your living costs rise — in this case due mainly to higher energy costs.
We will see this directly in fuel and utility bills, and indirectly in many other expenses. In some respects it will be like a value-added tax, tacked on to prices at every level of production. But this is hardly tax reform. All the usual taxes will continue, at current rates if not higher. Then we’ll have the new energy “tax” on top of them. It won’t matter what Congress does or how you vote. The tax will be there and you’ll have to pay it.
Larry Summers Weighs In
Larry Summers wrote a particularly somber Washington Post op-ed this week, gruesomely titled: “The Fed is charting a course to stagflation and recession.” Only a few weeks ago he was talking about how difficult the choices facing Jerome Powell would be. Now he feels the choices they’re making will have very ugly consequences. I’m going to quote a few paragraphs but the entire piece is really worth reading.
“Anything is possible, and wishful thinking can sometimes prove self-fulfilling. But I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely. The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5 percent over the next few years—and ultimately to a major recession.
“Powell has emphasized his admiration for Paul Volcker recently. Current inflationary conditions are not as bad as those Volcker inherited as Fed chair in 1979, but they are the worst since then. To prevent inflation from metastasizing, Powell and his colleagues need to be absolutely clear on two propositions that Volcker took as axiomatic.
“First, price stability is essential for sustained maximum employment, while overheating the economy leads to stagflation and higher levels of average unemployment through time.
“Second, there can be no reliable progress against inflation without substantial increases in real interest rates, which mean temporary increases in unemployment. Real short-term interest rates are currently lower than at any point in decades. They likely will have to reach levels of at least 2 or 3 percent for inflation to be brought under control. With inflation running above 3 percent, this means rates of 5 percent or more—something markets currently regard as almost unimaginable.”
Think about that for a moment. Summers knows full well what such a policy would mean to the economy. But he (and I agree) feels letting inflation get out of hand is an even worse option. The current go-slow, 25 basis points per meeting plan may have the desired effect of not spooking the financial markets, but it will also let inflation expectations increase and lead to wage and price spirals. I can’t emphasize enough how dangerous this particular environment is.
In fairness, numerous economists and analysts believe Powell has everything under control, and will taper the balance sheet more than expected. I hope they are right.
My belief is the Federal Reserve made its major monetary mistake well over a year ago. Arguing in August 2020 that letting inflation run hot wouldn’t be that bad, that inflation would be transitory, simply brings up the ghost of Arthur Burns. Combine inflation with supply chain issues, plus war-related energy and food shortages, and we have a very volatile mixture.
Eventually, inflation will be brought under control and we will be back to a disinflationary/deflationary environment under the weight of a heavy debt load. But the current path the Fed is on could mean “eventually” is more than a few years.
The saying in uncertain times is “hope for the best, plan for the worst.” I certainly hope the war ends quickly through some series of events that bring Russia back into the global economy quickly. I don’t anticipate it. I think we are transitioning to a new era and the transition could take some time—not months but years. Here in the US we aren’t feeling much pain yet. We will.
We are entering an extended period of sharply higher energy and food prices, which will raise the cost of everything else. Add to it the shortages we will see in the commodities that enable all our electronic devices and infrastructure, and higher financing costs as the Fed raises rates and may well overshoot.
It’s going to be difficult. But it will also bring opportunities, which I’m excited to explore. I do believe in the American entrepreneur and in the future of marvelous technology. But speaking of opportunities…
Does this mean ...
you just two-ted your horn?