Corona Crash Conference Call

Thank you to everybody who joined last night’s subscriber conference call. I enjoyed gathering live for a change, sticking together through this crash.

I apologize if you could not get into the room. It filled up quickly. I will announce the next one farther in advance.

In this note, I will recap the call with added details.

I provided an overview of the virus situation, how the death count remains low and the rate of new cases is dropping off in Asia and even Italy. We should not be naive, but it is okay to notice good news in the flow.

The Fed’s discount window rate-cut should keep credit available to businesses and households. This is critical in an economic shutdown because revenue dries up. 

One example I provided was the coffee shop I co-own with my sister in Colorado, Red Frog Coffee. Sales were lethargic for the past week, and starting today the shop will shut down entirely for 30 days per a directive from the state governor. Multiply this by millions of businesses coast-to-coast and it’s easy to see why recession is probably a given at this point.

It is an odd one, though, akin to turning off the heater in a room that you can turn on again. The economy hasn’t crashed. It’s on pause and will be unpaused.

We cannot yet be sure which version of the 30 down rule would have been better through this, despite it looking appealing in retrospect to have followed the big sell signal in January. Every investor wishes they sold in January.

We are almost out of buying power, but we can switch IJR and MVV to higher leveraged versions of themselves, i.e. IJR could go into URTY or TNA, MVV could go into UMDD or MIDU. More on this in upcoming letters.

Beware becoming depressed by percentages required for recovery. It might seem like a 135% gain is out of the question, but it doesn’t seem crazy for TQQQ to get back to $87, where it closed December 31.

___________________________________

Q&A HIGHLIGHTS FROM THE TRANSCRIPT

Question: 
In this downturn, would it be good to switch from IJR to an inverse small-cap fund (which goes up as the market goes down)?

Answer:
No.

This deep into a decline, I discourage shorting. That’s what you would be doing with leverage when buying an inverse fund. The time to have started that was four weeks ago, and you were not wrong to have missed it. Nobody saw that. I certainly didn’t. 

But to respond now after being limit-down as much as we have, more and more chaos day after day, with a short position—it’s speculation, pure and simple, and it’s going to require you to have fine-tuned timing to take that short off at the right moment if we get an explosive rebound.  

If the Fed, for example, starts a QE program that buys stock funds directly, I would hate to see you leveraged short into the rebound after you’ve gone down this much with the rest of us.

Follow-Up Question:
I was thinking of going in a little bit at a time.

Answer:
I advise this for everybody. We just can’t know where the bottom is, and running gradually and building a low average price paid will work because the market will come back. 

And building a long position, gradually through this low price range, is going to be a lot healthier long term than trying to time the rest of the way down to a bottom and then take that hedge off and then go long before it starts up. I think you’re likely to miss that. So no matter what you do—but I hope you do this to the long side—I do encourage moving gradually.

Question:
Would we benefit by trying to sell in order to buy in again at a lower price?

Answer:
No.

I don’t think it’s going to work. 

I mean, I don’t know how much farther we could go before, before something would be done to stop the slide. And my reason for that is that it doesn’t make much sense for the Federal Reserve, the government, to allow the stock market and everybody’s retirement plans, the whole financial backbone, to collapse down to—not zero but let’s say something really close—to go down 95% and then put everybody through that just to restart the economy and have it zoom right back up to where it was with this, this ungodly amount of volatility. …

I think we can’t be too far [from at least a temporary bottom], with the VIX up where it was in October 2008 and greed and fear bottoming out the scale, everything pretty much pointing to buy, buy, buy as much as it can be. It seems like we’re going to be getting reflexive bounces, if nothing else, and if you try selling ahead of time or you try going short and then we get a reflexive bounce—even if it’s a dead cat bounce of a few days—with with these funds we’re in you could miss dozens of percentages of profit in a few days. …

Try to imagine a bullish scenario that nobody wants to talk about. It’s always just how the virus is going to grind everything to a halt and how long this recession is going to last. 

But what if, for example, we don’t see a surge in cases in Italy, we finally start testing a lot in the United States and it turns out, well, either half the country’s already infected and [a relatively small number are] dying, so what are we all worried about; or not as many people are infected as we thought? Or, for example, instead of a 30-day mandatory business shutdown in the state of Colorado, which is what is shutting down my sister’s coffee shop, instead it’s only going to be a two-week shutdown, because—surprise, surprise—the virus is not as bad as we thought. 

I don’t know any of these facts, I’m just saying what if this kind of data comes through, and when that comes through we see we’ve got zero percent interest rates, a new QE program going from the Fed, taxes are put on hold for businesses, and there’s an enormous fiscal spending package—and this is an armlock coordinated effort from central banks around the world? I just think that’s a recipe for a face-ripper of a rally. 

And if you have gone down this far and stuck to your guns this closely and then you miss out on that, it would just be a travesty. I am hoping to return back to that metaphor of a minute ago, that we just turned off the heater in a room and things are getting cold, but we can turn that heater back on. I believe when the heater of the global economy is turned back on these plans are going to roar back and the only possible move I’m thinking of making is upping the leverage in our 3Sig and 6Sig plans so that they benefit even more on the recovery that I have to believe is inevitable.

Question:
I know the bond funds went down the end of last week, substantially each day for a couple days there, and interest rates weren’t going up. What was the reason for that?

Answer:
It looked like a dislocation in the market.

I have heard from people that trade bonds that there was a lack of liquidity. And you’ve read about that in the financial media, that people wanting to transact simply could not find a counterparty for the transaction. And that creates a vacuum, and prices don’t do well in a vacuum. 

So, similar to some of the dislocations we saw in 2008, when money market funds broke the sacred $1 mark, I think we’re just seeing strangeness reverberate and I don’t have all the explanations. I don’t think anybody does. 

But what the Fed took away [from the situation] is that we’ve got a liquidity issue brewing on the sidelines, if not already creeping in here. And they wanted to get ahead of it. I take that as the primary reason for the emergency Sunday session from the Fed, that they wanted to telegraph clearly that we are providing a lot of liquidity here and we’re aware of the liquidity issue and our main job in a pandemic is to make sure that credit continues being extended and markets operate normally. 

I think what you’re seeing is that there have been moments when markets haven’t been operating normally because it’s just been such an unbelievably fast cascade. 

So it’s probably as simple as that, that things aren’t set up for this kind of speed and a few dots were not connected and now things are kind of getting back on track, and the Fed is now front and center. So I assume we’ll have fewer of those as this goes along because the market is adjusting as much as it can. How strange things have become.

NOTE:
This was corroborated by a subscriber who is a professional bond investor.

He said that the spreads they normally see are 10 basis points, but we are seeing 300 and 500 bp spreads now, and bond-fund trading prices are disconnected from the value of their underlying assets. It’s a disrupted market that the Fed is trying to get back under control.

In a follow-up email, he wrote: 

“Two things. First, while overall Treasury interest rates have come down, interest rates on some corporate bonds have risen more than Treasury rates have come down, due to perceived credit risk. 

“This spread is near as wide as it was in 2016. So Treasury rates can come down but a broad bond market ETF might not go up in price due to the counteracting rise in yields on corporate bonds during times of stress. 

“Second, the trading prices of some fixed-income ETFs has been at times moving away from the value of underlying assets due to heavy trading volume. (This should not happen but the sponsors of these ETFs are struggling right now.)”

Question:
Should we make moves now or on the quarterly schedule?

Answer:
I look at the quarterly schedule as being something we can fall back on to take away some of the stress from indecision during a time like this. 

I can tell you that the bargains are great right now. But honestly, I thought they were great two weeks ago, and I thought they were great one week ago. And they might be even even greater one week hence. 

So one way to take the pressure off yourself to get that timing right is to go with this quarterly schedule. It’s a godsend. It was made in advance, it works through everything, and it’s probably ready to help us right now. 

I doubt very much it is going to call the exact bottom, but one of the benefits psychologically, emotionally, of sticking with our quarterly schedule is it absolves you of responsibility if that schedule is not exactly right. 

If you make a move now, let’s say you sell out of IJR and move into a 3x leveraged fund and then the market goes down another 20%, then you’re kicking yourself for having made that move right then. And yes, it’s possible that this is the bottom and you’d say, “Look what a genius I am,” but more important than that feeling is the end result of your portfolio over the long term. We will get through this and you’ve got the rest of your life to manage this money. And I think the habit of sticking with the quarterly schedule is a great one. 

One thing that I’ve been a little bit regretful of recently is that our mid-quarter indicators seem to have introduced this idea that I’m trying to time the market because when those indicators go into the green, I always say this is a great time for newcomers. And it seems to have created this subculture within the letter community of people waiting for those indicators to go green and then to do mid-quarter trades, or go red and do mid-quarter trades. 

I never intended that.

It was mostly for newcomers to see whether it’s a nice entry point or it’s better to wait for the quarterly schedule. If you’re already investing with the letter’s plans, as almost everybody with the letter is, then I think that quarterly schedule is a good way to go. 

And it’s not because I believe the market is going to bottom precisely at the end of this month. It’s rather that none of us knows when it’s going to bottom and how having that as a calendar-driven event, rather than a speculation-driven event is, I think, going be good for your emotions later and it probably won’t be much different for your final performance numbers.

Question: 
I have about 40% in bonds in my plan. Would you recommend going all-in at the end of the quarter?

Answer:
Yes, I would follow the signal. Exactly. That’s why it’s there. …

I think this is a market where it’s critical to fall back on this as your safety harness. I mean, this is about as bad as the market gets. And we’ve got a system that has some rules in place to help us navigate tough times. And this is a very tough time. So if your signal tells you to go all-in—and it almost certainly will—I would follow the signal. 

…as far as the plans you’re running now I would run them as they are now because this is probably the worst time to start second-guessing and trying to time things because our emotions are so out of whack, given how things are going.

___________________________________

CODA

After the call, I spoke with a longtime subscriber and friend who is a professional investor in the short-term credit markets. He was on the call and wanted to share something with the group anonymously.

He said he’s been in the business a long while, studied extensively, and is good at trading. Even he, however, has been whipped mercilessly by this market. Prior to last weekend, he bought stocks ahead of the Thursday plunge and then sold them before the Friday spike and bought into them again ahead of today’s crash, which was the worst so far in this episode.

He seconds my advice to stick with our plans. If you are going to deviate in any way, do it gradually because this market is making fools of everyone.

Standing beside you,
Jason

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17 Comments

  1. Wayne
    Posted March 18, 2020 at 11:41 am | Permalink

    I plan on sticking to the 3%/6%/9% sig system, but I likely won’t have enough cash to buy enough for rebalancing the week of March 31. So here’s my plan. Not put anything in for March 31. I will instead up my rebalancing for Q2 to 6%/9%/18%. That allows me to watch the market hopefully bounce back in a big way, and by the week of June 30 maybe I don’t need that much more cash to hit the rebalancing. All crazy speculative I know but I’d rather wait and see with these heavier targets than put money I can’t afford into the March 30 version of 3%/6%/9%. If June 30 is worse, I’ll reset myself to newcomer status and go from there.

    • Wayne
      Posted March 18, 2020 at 11:44 am | Permalink

      Math error- my double down would be 6%/12%/18%.

    • Posted March 18, 2020 at 12:16 pm | Permalink

      Do what makes you feel good, Wayne — as long as it does not include escaping with a plan to perfectly time re-entry for the recovery. That’s a surefire way to miss it.

      Any type of buying is going to pay off. I’m happy to see you in the right mindset.

      Jason

  2. GEORGE
    Posted March 18, 2020 at 12:39 am | Permalink

    Jason,
    Keep up the good work during these trying times.
    Some of my observations after having been through 1987, 2008, Flash crash, etc…

    1. The Fed has just opened up a commercial paper lending facility. This should keep Money Market funds from “breaking the buck”.
    Thank you Fed for finally waking up.

    2. During the Great Recession, Credit Rating Agencies made things worse by issuing irresponsible downgrades. They are doing
    that NOW. Somebody needs to say “Let’s have a 30-90 day” moratorium on downgrades. “Bailouts” for troubled industries
    and sports stadiums (Revenue Bonds) could restore the credit worthiness. Wake up Fed and save the taxpayers and investors
    some money.

    • Posted March 18, 2020 at 12:14 pm | Permalink

      I agree, George. A financial system pause of sorts may be in order.

  3. joe smith
    Posted March 18, 2020 at 12:25 am | Permalink

    I began investing in the late 60’s when breaking the 1200 mark for the DOW was always the impossible dream. The economy has a hiccup but will recover. Construction projects are slowed or stopped. When this is over, those projects will be completed. People will return to work. There may be a labor shortage. Within 12 months TQQQ will be back. So we did not put any real buying power aside. In a year, who cares. We are strong and healthy again for the next leg. Jason’s guidance is really amazing!!

  4. Chris Misciagno
    Posted March 17, 2020 at 10:23 pm | Permalink

    Thank you Jason for the note, and I’m sorry I missed out on the call yesterday. It’s good to know that we’re all in this together.

    I run the 3-sig plan using different types of funds in 4 separate accounts, one of which is taxable, and I run 9-sig in my Roth IRA. I am over 95% TQQQ in 9-sig and tried to time the fall a couple weeks ago, pretty well actually, but got back in way too soon. I did manage to save a few bucks, but I won’t be trying that again! I also just TLH’d in my taxable fund, which will buy me about 5 or 6 years’ worth of $3k tax deductions on income. Aside from that, I’m just holding my breath and trying to wait out the recovery…

    Thanks for the awesome plans, newsletter, and moral support!

    • Posted March 18, 2020 at 12:13 pm | Permalink

      You’re welcome, Chris.

      Do not be too hard on yourself for imperfect timing. As you read in the recap, even professionals are getting whiplash.

      Eventually, the entire market will rise again, possibly at warp speed powered by massive stimulus fuel, and index-based investors are guaranteed to benefit.

      Jason

  5. Posted March 17, 2020 at 10:18 pm | Permalink

    As usual, your words are instructive, intelligent, realistic. Namaste

  6. Joe Petti
    Posted March 17, 2020 at 10:06 pm | Permalink

    Hi Jason:
    Thanks for the timely update. I would like to add a suggestion for the plan to cover cases like this, when the market falls out-of-bed and catches everyone off guard.
    1. Put an -8% floating STOP on the TQQQ, MVV & IJR plans, with a +3% BUY-STOP from the point of sale.
    This way you won’t lose more than 8-10% when the market crashes, and you can automatically get back into the market when it gets close to recovering.
    2. I realize that this may require additional plan monitoring – but I wish I had done that when I started the plan this past January….

    • Posted March 18, 2020 at 12:11 pm | Permalink

      Thanks, Joe.

      It’s tempting in all crashes to reverse engineer a way to have avoided them, but everything Roger and I tested reduced performance over the long haul. Once the dust clears on this, I will share some ideas I’ve had, but think that doing so now conveys the wrong message.

      Jason

  7. Roger Radke
    Posted March 17, 2020 at 9:34 pm | Permalink

    Great note! Thank you, Jason

    I stick with the quarterly schedule most of the time but can‘t help myself seeing TQQQ coming down like this. So I bought some shares at 65 last week and 38 last night, will try to catch some at 30. Very mindful of position size and using limit orders now. Discipline is key and I try hard not to be impatient or get greedy.

    • Posted March 18, 2020 at 12:09 pm | Permalink

      Excellent, Roger. Others should pay attention. Everybody remember: the quarterly schedule is a fine guidance tool through this, but if you are going to break the schedule, do it incrementally. Scale in, don’t pile in.

  8. David Finlay
    Posted March 17, 2020 at 8:14 pm | Permalink

    Been investing for over 20 years – made all the usual mistakes along the way and hopefully have learned something from them. In that context this an an excellent note.

    Key word for me is ‘gradually’. Gradually re-build equity exposure. Don’t do anything hasty. This market could fall a lot further – so keep enough in reserve to allow for that. But keep an open mind to the possibility that market will rebound and will do so with sharp rallies.

    Well done Jason – a calm head is needed here and that is certainly what u have.

    • Posted March 18, 2020 at 12:08 pm | Permalink

      Thank you, David. You add a valuable confirmation. We will all get through this together — gradually.

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