Weekday Digest

The Kelly Letter Weekday Digest

OVERVIEW
  1. Virus Update | The rate of spread is leveling off. The WHO seems optimistic, even as it considers declaring a pandemic.
     
  2. Virus Fears and Oil War Hit Financial Markets | Nice timing, Petrostates. Treasury yields and stocks are down. Fear is up.
     
  3. Our Portfolio Status | Buy or hold. Do not sell.

BRIEFING

1. Virus Update

China's National Health Commission said it detected 40 new cases of the virus in the past 24 hours, down from 44 new cases the previous day, and from about 4,000 new cases on some days last month.

Reuters reported that 36 of the 40 new cases are in Wuhan, the outbreak's epicenter and where the vast majority of the world's more-than-111,000 cases have been concentrated.

Although case counts are still rising, the worldwide tally is tapering off:

Total Coronavirus Cases Log Chart

This is unconvincing to many who focus on the virus spreading undetected. However, this has a positive aspect, as Dr. Tom Inglesby at Johns Hopkins pointed out in a Capitol Hill briefing last week:

Roughly 80% of known coronavirus cases were so mild that patients recovered without hospitalization or medical intervention. About 15% did require hospitalization and 5% needed critical care. Many probably didn’t even know they had it. This helps explain the understated case count.

Another pleasant byproduct of the understated case count is that it means the coronavirus death rate is overstated.

+ WHO: Now that the virus has a foothold in so many countries, the threat of a pandemic has become very real. But it would be the first pandemic in history that could be controlled. The bottom line is: we are not at the mercy of this virus. … 

Of the 80,000 reported cases in China, more than 70% have recovered and been discharged. … Of all the cases reported globally so far, 93% are from just four countries. …

Of the four countries with the most cases, China is bringing its epidemic under control and there is now a decline in new cases being reported from the Republic of Korea. … We’re encouraged that Italy is taking aggressive measures to contain its epidemic, and we hope that those measures prove effective in the coming days.

 

2. Virus Fears and Oil War Hit Financial Markets

Fears that the virus will cause a global recession began pushing the price of oil down from February 20. Last week, OPEC met to discuss production cuts to offset the pressure. Instead of cooperating, Russia refused and an oil war broke out.

Bloomberg Opinion Today provided a witty rundown this evening:

"Saudi Arabia and Russia, long bitter rivals in the crude trade, had become frenemies in recent years, teaming up to bolster sagging oil prices by cutting production. Then the coronavirus came along and took already-weak oil demand, tied it up in a sack with some rocks, and drowned it in the river.

"Saudi Arabia sought more production cuts in response, but Russia balked, and suddenly the 'fr' was gone from their 'frenemy' status. The Saudis said, fine, you want lower oil prices, you got ’em, and slashed prices dramatically to punish Russia, hoping to force it to play ball. Brent crude prices cratered this morning in response."

+ Meghan O'Sullivan: Moscow and Riyadh could still pull global oil markets back from the brink. Doing so, however, will require both sides to widen the aperture through which they are looking at the problem and bring geopolitics explicitly into the conversation.

A failure to do so will be a jolt to the world, but not without its silver linings. The first, which Washington should be thinking about how to exploit, will be an opportunity for the US—if it is so inclined—to regain some of the foothold it has lost in the Middle East, as regional actors reflect on what really constitutes a partner in that part of the world.

+ US stocks dropped the most in one day since the subprime mortgage crash of 2008. Large caps are closing in on bear market territory; small and mids are already there.

Today:
-7.8%  Dow
-7.3%  Nasdaq
-6.8%  Nasdaq 100
-7.6%  S&P 500
-9.1%  S&P 400
-9.7%  S&P 600

Year-to-Date:
-16.4%  Dow
-11.4%  Nasdaq
  -9.0%  Nasdaq 100
-15.0%  S&P 500
-20.8%  S&P 400
-23.2%  S&P 600

+ Barron's: A flurry of buying in government bonds sent the yield on the 10-year Treasury below 0.4% on Monday morning. It recovered slightly to 0.499% by the close, still an all-time low close and marking the 13th straight day of declining yields. That is the longest streak on record.

+ Fear is everywhere. The CBOE Volatility Index (VIX) rose nearly 30% to 54, its highest since the end of 2008. The CNN Fear & Greed Index is at 3. The most fearful it gets on its 100-point scale is 0. One month ago, a greedy 57.

Stimulus Countdown
Markets expect more help from the Fed and US government.

+ NYT: The New York Fed pledged to increase its daily offering of overnight repurchase agreements—essentially short-term loans to eligible banks—to at least $150B from $100B between Monday and Thursday. It is also increasing its offering of two-week loans starting tomorrow, to at least $45B from at least $20B. …

The Fed is widely expected to slash rates by another half point by March 18, the conclusion of its next meeting. Many investors anticipate that the Fed, which cut rates to near zero during the financial crisis, will return to that level by April.

+ The White House will meet tomorrow with congressional leaders to discuss a payroll tax cut, legislation to protect hourly employees who miss work because of the virus, and ways to help the travel industry.

3. Our Portfolio Status

Sig Plan Mid-Quarter Indicators

Plan Status Signal
3Sig -25.5% from Target Strong Buy
6Sig -41.7% from Target Strong Buy
9Sig -36.5% from Target Strong Buy

The Kelly Letter vs S&P 500 through 3/6/20

This is obviously a time for buying or holding, not selling.

Should it look advantageous at the next quarterly signal, there is a chance The Kelly Letter  will move funds from its 6Sig and/or 3Sig plans into its 9Sig plan, in a bid to catch a faster rebound in the recovery to come. More on this topic later.

+ From the "Opportunities" section of Note 10 sent yesterday:

"Consider shares of the Energy Select SPDR (XLE $43 -29% YTD) or closed-end BlackRock Energy and Resources (BGR $10 -21% YTD). The former charges a small 0.13% expense ratio but pays dividends quarterly. The latter charges a higher 1.1% expense ratio but pays dividends monthly."

Today afforded a buying opportunity, which persists. The funds fell 20.2% and 14.9%, respectively. Now:

XLE: $33.92 yielding 11.9%
BGR:  $8.02 yielding 11.6%

+ Remember that quick, deep market declines tend to recover quickly—particularly when the reason for dropping does not bring long-lasting, fundamental economic damage. Neither the coronavirus nor a weak oil price does so.

The bullish scenario is that the still-healthy economy receives massive monetary and fiscal stimulus, then the virus dwindles. We can add to this the further stimulus of cheap oil. It will help the travel industry, among others.

Today's drop subtracted about $2T from the market value of the S&P 500. Do you think $2T worth of business damage came out of nowhere? I don't. 

The virus will worsen data in the weeks ahead, but it still looks like a temporary setback, not a fundamental shift. Markets probably overshot to the upside in January, but they've since probably overshot to the downside. For long-term investors like us, this is a fine time to buy or hold—not sell.

Have a good rest of the week,

Jason Kelly

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9 Comments

  1. Tom Luciani
    Posted March 13, 2020 at 4:32 am | Permalink

    xle

  2. Tom Luciani
    Posted March 13, 2020 at 4:29 am | Permalink

    bot ole, and again when it dropped. Is this still a good recommendation Jason.
    ? looking at TQQQ if it gets close to a lower low than now.
    Sector Briefing: Energy
    11:24 AM ET 3/12/20 | Briefing.com
    The S&P 500 energy sector (-10.7%) is today’s worst-performing sector, bringing its week-to-date losses to 29.2% and year-to-date losses to 50.6%.
    The basis for the sharp selloff is much the same:
    Concerns about potential defaults for highly-leveraged companiesExpectations for an economic growth slowdown/downturn that will lower demand for oilSliding oil prices (31.40, -1.58, -4.8%), which are a symptom of the growth concerns and the price war between Saudi Arabia and RussiaThe likelihood of a rash of dividend cuts across the sectorTax-loss selling activity
    Everything ties back to earnings prospects, and right now, those prospects are deemed to be bleak for the energy sector.

  3. Mick
    Posted March 12, 2020 at 2:29 am | Permalink

    First off, love both books, I finally have the confidence to start to invest my money!!! THANK YOU.

    I was wondering if you can clear up a few questions I have so far.

    1) Does it make sense to put money in all three areas, meaning IJR/BND and MVV/SCHZ and TQQQ/AGG?
    2) Can you mix and match different bonds with stock, meaning TQQQ/BND or IJR/AGG etc
    3) Since bonds are at a all time high for all three stated above, does it make sense to put money into them? Would it be okay to put it into only IJR, MVV or TQQQ only?

  4. Joe D
    Posted March 10, 2020 at 9:00 pm | Permalink

    BATTEN THE HATCHES AND MAN THE TORPEDOS, FULL STEAM AHEAD!
    CHEERS JOE

  5. Karl
    Posted March 10, 2020 at 8:32 pm | Permalink

    Hi Jason,

    Couple of points;

    Firstly, I intend buying at the next quarterly rebalance. However, when you come to outline what you feel the best option will be can you mention whether we should adhere to the ‘buying throttle’ guidance this time and rebalance to the 60/40 default position or not. I too would like to take full advantage of a rebound.

    Secondly, I did not receive last Sunday’s letter. Was there an issue with sending it out? Could you please resend if possible.

    Cheers,

    Karl K

    • Posted March 11, 2020 at 7:29 pm | Permalink

      Hi Karl,

      Yes, I will provide the full signal guidance as usual at the end of this month.

      Regarding your newsletter non-delivery, I will resend last Sunday’s letter and a follow-up note. Please watch for them.

      Jason

  6. john
    Posted March 10, 2020 at 6:23 pm | Permalink

    If we have new funds do you advise to invest ALL now or do the normal 60:40 split or wait till end March? Thanks

    • Posted March 11, 2020 at 7:42 pm | Permalink

      John,

      A good compromise would be to move half of your new money now, and save the other half for the signal at the end of this month. That way, you can be happy no matter which way prices go in the next two weeks.

      Jason

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