How low can we go?

[JBME]

UGH. dow futures up again today, lol. I wanted to a do a in-plan roth conversion to convert after Q2 started while things were on sale and I told myself I'd do it when the S&P dropped below 2300 again. futures up again this morning. I wonder if I should have converted sometime between April 1-3. You just can't time the market. maybe I should convert and get it over with since things are still about 20% on sale

[Jack_Sparrow]

Saudis tanked the oil market and bought a ton of Oil/Cruise line stocks yesterday(well 1.5 days ago their time). I wouldn't be surprised if some of the other big boys bought in Yesterday as well (Warren Buffett, etc.). Also New York did indicate some flattening of the curve (alteast I can see where a non-medical person might view this as it being over with). I had gotten back in, but I'm going to sell now. S&P 500 only down 15% from highs considering where we are at the moment. (it was already 15% inflated to begin with). Look at China, restarting the economy over there appears to have alot of growing pains ahead (and that's only what they allow you to see).

[Tangler]

I wonder what will happen?! I have no clue. I keep thinking it is going to tank and then it does not. I just don't see how it cannot go down more, but I can never tell.

[Dont_know_mind]

Maybe I am too pessimistic, but I tend to think that unless the Fed buys common stock or normal business and junk rated debt, there is still a good chance that there will be a cash crunch in the next 3 months.

Every company that didn’t raise cash will be looking at doing it. About 5% of businesses have enough credit terms to sustain 6 months with little revenue. I don’t know anyone who has a cash buffer of 6 months of expenses in their business currently.

In my mind, insolvency risk has increased a lot. This I don’t think has been priced in. Conservation of cash seems to me to be likely to result in 1. Dilution through equity raisings, 2. A cut in dividends to conserve operating cashflow.

I hope I am wrong but nothing announced to date makes me think that the above is likely to be mitigated.

On a micro level, I have not sold any risk assets but I am conserving cash, reducing expenses and increasing cashflow buffer in my business from 3 to hopefully 6 months worth of expenses before capital injections would be required. I am also
looking at new loan facilities, but am not relying on that at all.

I am not interested in the day to day or even week to week fluctuations in the stock or risk markets. But I am interested in covering bases so that I can hold risk assets under any adverse conditions that may arise.

I tend to think large listed firms will need government funding or assistance as much as small business to stay afloat, but conditions will be more onerous and dilution more of a possibility.

I would need to see very compelling valuations to trade in cash buffer at the moment. I might miss out on being overweight a rally but I’m ok with that.

[CordMcNally]

record breaking rises and falls are just volatility and that's not good

What you're seeing is that nobody can predict the market short term. People alive today haven't been in a situation like this before so they don't know what to do so they overreact to every bit of news, good or bad. The long term play is the correct (and easy) one.

[Nysoz]

The market hates uncertainty. Until yesterday, it was uncertain how long the exponential growth would happen. Once Italy and New York reported the hint of flattening the curve, it defined the risk in that regard and either algorithms or itchy trigger fingers/optimism went crazy. Now does that mean a 7+3% run up make sense? I don't think so. We still have to figure out the rest of the country and recovery after, not to mention the economic damage of closing everything and disruption of global supply chain. The US national debt quietly went to $24T now and no one's really making a big stink about that.

With that being said, no one knows what the market is going to do lol. Trying to time the market is going to be a fool's errand, finding bargains for the long term investor is the only thing that may make sense. Volatility is here to stay until we get back to normalcy though.

[Lordosis]

Watching this and messing around with a small amount of play money during this is solidifying the belief in my head that the market cannot be timed. I forget who started the thread stating that everyone should get burned on stocks to learn but they were right. The rapidity and magnitude of this is just making it happen much faster.

I also think the market will go lower. My little play bet of SDS is getting creamed. But it is so small I am going to let it ride for now. I can absolutely see how if someone did this with real money and by this time lost faith and sold low to try to catch the upswing. Then possibly get punished with another downturn. This is all so enlightening that staying the course and having a diverse portfolio that you can stick with and continue to invest in all markets.

I am really glad this is happening so early in my investing career.

[Zaphod]

Idiotic if you ask me but I am sure they are not alone.

Oh, they are not. Perhaps you've seen a documentary called Idiocracy?

[Zaphod]

I think its important not to get too caught up in day to day. Everybody was emotionally drained, we hit a bottom (long or short term who knows), and now on flattening of many growth curves worldwide there is hope. So we've bounced. I think technical levels make this easier at these times. According to expert market technicians and followers, 2800-3000 isnt out of the question for a routine bear market rally.

[Lithium]

I also hate seeing the market soar this week. I wanted it to wait another week when I reinvested all the money I TLH'd on 3/13.

[Dont_know_mind]

I just follow what I perceive to be valuation and insolvency risk. Maybe it doesn’t matter but to me government stimulus measures to date do not counteract the following probable scenario (hopefully not but base case currently):
- q4 2020 ? -15% yoy ? Most severe US economic contraction since Great Depression ?
- unemployment peaks at ? 25%

However, currently universally forecast to be milder than GFC in terms is Stockmarket effect.

I think the market is more overpriced now than before the virus. I wouldn’t short it though because who knows what crazy stimulus they might think of next, it might work but at some stage the market may raise the authorities or at least call their bluff.

I wouldn’t say this is a compelling valuation point but maybe it will turn out to be. Happy to be proven wrong as I’ll do well either way.

One thing I would note, using myself as a barometer, is that I’m more fearful at this point (% decline) than during the GFC and in the GFC I had around 2M debt and this time I have 800k in cash. The prospect of possibly having little income for 6 months is pretty scary, even though it should not be. I’m not sure what this means.

[Dont_know_mind]

I was thinking about it recently.
I think the next period will be defined by the liquidity and solvency effects of this on companies.

I would be surprised if most listed companies have enough cashflow to last 2 or 3 months with revenues at 30% previous levels.
So I think it will be how many would then be pushed into chapter 11.

Even though interest rates are low, banks maybe unwilling to lend because their problems are not just liquidity but also solvency if revenue is affected for over 3 months.

Consider hospital owning company/entities. How many are prepared for 30% reduction in revenue for 3 months and how many could survive?
I’m still pessimistic as I suspect debt levels were optimised and never factored in this type of black swan event.

[Tim]

Six months scares you? Six months is a STANDARD metric for BLS. That is the point that a “stigma” sets in: way underemployed, not the right fit, short term that won’t stay, overqualified, etc. They actually then track “left the labor force”.
The vast majority of the employees during GFC faced substantial pay cuts and a very real possibility of zero income followed by reinventing a way to make a significantly reduced living.
Healthcare employment dodged the significant risks of the GFC. Damage was confined primarily to financial capital for healthcare. The human capital damage extensive.

https://www.frbsf.org/economic-research/publications/economic-letter/2012/january/unemployment-duration/

[Dont_know_mind]

Six months scares you? Six months is a STANDARD metric for BLS. That is the point that a “stigma” sets in: way underemployed, not the right fit, short term that won’t stay, overqualified, etc. They actually then track “left the labor force”.
The vast majority of the employees during GFC faced substantial pay cuts and a very real possibility of zero income followed by reinventing a way to make a significantly reduced living.
Healthcare employment dodged the significant risks of the GFC. Damage was confined primarily to financial capital for healthcare. The human capital damage extensive.
https://www.frbsf.org/economic-resea...ment-duration/

In some ways I was lucky to get through the GFC pretty well being in healthcare. It’s amazing how you survive what seems to be rather crazy risk taking with youth.

Individuals are probably more resilient to revenue cliffs (unemployment) than businesses.

I think people incorrectly equate the Stockmarket valuation with GDP. They don’t think about the substrata which is the debt structuring overlay.

Say for instance the airline industry - say there is 6 months where revenue is 20% of normal. The valuation of the sector becomes 10% of what it was because the probability of insolvency becomes 90%. In that situation the bondholders become equity holders. This is a completely rational price fluctuation. When companies become insolvent equity holders get wiped out. In that sense equity is a claim on future profits with a strike out option in the case of insolvency.

People look at the future profits of a company or sector and think it will only be less for 1 out of the next 50 years so valuations should only be affected by 2%. But they don’t take into account insolvency risk - equity doesn’t get any claim on future profit if they enter chapter 11.

So in that sense the gyrations in stock valuations (including indexes) makes sense. It is pricing in what people think are implied future probabilities of equity holders being wiped out. Today people are more confident that government stimulus will prevent mass bankruptcies perhaps...

[Tim]

Liquidity is a risk. During GFC there was zero available. Great companies with were locked in to normal refinancing and the cupboard was bare.
Structural imbalances. Cash flow wasn’t the problem from earnings but would lead to drastic unwise business moves.
I don’t anticipate credit to dry up. I anticipate a bridge loan facility to be available to virtually all businesses to ease the liquidity problem. Most companies and the financial system are way more robust and have temporary problems. Could be wrong. Some deep pocketed investor just picked up $2 trillion of those bridge loans. Don’t think we will see buyouts except in the interest of national security. The ability to make aircraft and air travel falls under national security.
Liquidity is not a structural issue now. Profitability definitely is. I don’t think large scale bankruptcy is as probable as you do. Certainly some will fail, most likely it will simply be those that would have eventually faded anyway. Seems like bridge financing will be available. Purely a guess.