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“QE4, put in a floor!”

It looks like we’re in for another volatile week.

Last night the Federal Reserve held an emergency session in lieu of its meeting scheduled for later this week. 

It was part of a coordinated action with other central banks.

Fed Chairman Jerome Powell announced several steps to support the economy as it weathers “disruptions caused by the coronavirus.” The Fed will:

+ Cut the fed funds rate a full percentage point to zero.

+ Cut the discount window rate for bank loans by 1.5 points to 0.25%.

+ Buy at least $500B of Treasuries.

+ Buy at least $200B of mortgage-backed securities.

+ Expand overnight and term repurchase agreement operations.

This looks like the Fed’s 2008 playbook. QE4 is here.

The Journal wrote that it is far from certain “whether the methods deployed against a financial solvency panic in 2008 will work against a pandemic-caused liquidity panic.”

The discount window rate-cut is probably the most significant step. 

It enables banks to borrow from the Fed without sparking rumors that they are having financial trouble and could not find help anywhere else. With a rate this low, every bank will borrow for the great deal. Nobody will stand out.

This gooses liquidity, which is the name of the game in a flip-out like this. The low-rate discount window keeps credit available to businesses and households.

If stocks tank even after the Fed’s move, you can be sure pundits will say the Fed failed and is impotent, but it’s an unfair accusation. 

The Fed is getting ahead of a financial system lock-up, not curing the coronavirus. Stocks, it seems, are pricing in months of flatlined economic activity, which is outside the Fed’s purview.

Also, in a joint statement yesterday the Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and Swiss National Bank said they would cooperate to make sure dollars keep flowing unimpeded around the globe.

Applied Finance co-founder Rafael Resendes provided helpful comments to The Market last night:

“While analysts expected 10% EPS growth, now the market is pricing EPS declines for 2020 and 2021, before resuming a 10% growth path. This drop in earnings expectations compares to the 15% drop in 2007, followed by a 78% drop in 2008 during the Great Recession. 

“At this stage, we don’t believe Covid-19’s economic path will compare in intensity or duration to the Great Recession. As such, this initial market reset seems extreme. …

“Short-term market movements are irrelevant to long-term results—unless you miss big upswings after panic selling. Panic selling and missing the upside returns as markets return to normal set back wealth accumulation by years if not an entire decade.”

Hang tough, my friend.

Posted in Federal Reserve | 3 Responses

China Has ‘Curbed’ the Virus

The Kelly Letter Weekday Digest

  1. Virus Update: Xi visited Wuhan. China has "curbed" the virus. 
  2. Demographics Don't Lie: 3,158 Chinese have died from the coronavirus since Jan 20—and 1,391,284 have died from other causes.
  3. Stimulus and Sentiment: There is a 99.6% chance of a three-quarter-point cut in the fed funds rate. The BOE cut today. The Vix is at 52.
  4. My Interview on IdeaSphere: I spoke with Guy Rathbun about the virus being a temporary setback, and this being a fine time to buy or hold—not sell.


1. Virus Update

In the March 1 Kelly Letter, I wrote that Bill Bishop at Sinocism suggested we need to see three unmistakable signs in order to believe that China's Communist Party thinks victory really is at hand:

1. Xi visits Wuhan.
2. A date is announced for the “two sessions.”
3. Kids return to school.

The first one appeared yesterday: President Xi Jinping visited Wuhan, the epicenter of the coronavirus outbreak. Here is the current status of Bishop's three signs:

1. Yes
2. No
3. No

+ Reuters: Xi arrived on the same day that Wuhan shut the last of 14 temporary hospitals that had been opened to manage a surge in coronavirus patients … China said it had just 19 new coronavirus infections on Monday, down from 40 a day earlier. That also marked the third straight day of no new domestically transmitted cases in mainland China outside of Hubei province, where Wuhan is located.

+ MarketWatch: “The spread of the novel coronavirus disease (COVID-19) has been basically curbed in Hubei province and its capital city Wuhan,” Xi said.

+ Bill Bishop at Sinocism: Things are starting to look up for Xi, China, and the Chinese economy after an awful start to the Year of the Rat.

We are not out of the woods, but we see light through the branches.


2. Demographics Don't Lie

According to China's National Bureau of Statistics, China had per day on average in 2019:

40,137 live births
27,342 deaths

Since the virus became widely covered on January 20 (51 days through yesterday), these are China’s death figures:

       3,158 coronavirus deaths
1,394,442 total deaths

Only 0.23% of deaths were due to the virus.


3. Stimulus and Sentiment

According to the CME FedWatch Tool, there is a 99.6% chance of a three-quarter-point reduction in the federal funds rate at the FOMC's March 18 meeting.

+ BOE: The Bank of England cut its key interest rate to 0.25% from 0.75%. It will roll out a new term funding plan with additional incentives for small and medium-sized enterprises, backed by the issuance of central bank reserves.

+ CNBC: President Trump, in a meeting with Republican lawmakers on Capitol Hill Tuesday, pitched a 0% payroll tax rate that would last through the rest of this year. The White House is also considering federal assistance for the shale industry as oil prices have tanked.

+ The VIX is at 52, its highest since December 2008.

+ CNN Fear & Greed is at an extremely fearful 6.


4. My Interview on IdeaSphere

I joined Guy Rathbun for a 29-minute interview about this coronavirus stock market. From his summary:

Although people as well as the markets are rightly concerned, financial specialist Jason Kelly says it’s not a time for panic. “The virus will worsen in the weeks ahead,” he writes in his recent newsletter, “but it still looks like a temporary setback. For long-term investors, this is a fine time to buy or hold—not sell.”

Listen to the full interview at PRX.

Have a good day,

Jason Kelly

Posted in Weekday Digest | 3 Responses

Weekday Digest

The Kelly Letter Weekday Digest

  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.


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.

-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

-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

Posted in Weekday Digest | 9 Responses

Coronavirus Digest

The Kelly Letter Coronavirus Digest

  1. Rate of Virus Spread is Slowing | China's new case report is at its lowest since January 20. America's spending package is bigger than expected.
  2. Economic Impact | The OECD sees risk of global recession. China's manufacturing has collapsed. At least pollution is down.
  3. Portfolio Status | Yesterday's strong rebound in the stock market weakened our buy signals. Stimulus expectations took credit.


1. Rate of Virus Spread is Slowing

New infections are ticking higher rather than leaping higher. As of early this morning, 88% of worldwide cases and 94% of deaths were in China.

+ WHO: Chinese hospitals overflowing with COVID-19 patients a few weeks ago now have empty beds. Trials of experimental drugs are having difficulty enrolling enough eligible patients. And the number of new cases reported each day has plummeted the past few weeks.

“China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic. This decline in COVID-19 cases across China is real.” China’s successes so far should give other countries confidence that they can get a jump on COVID-19.

+ NYT: China recorded 125 confirmed infections of the coronavirus and 31 deaths in the previous 24 hours. It is the lowest number of officially confirmed infections since January 20, when China’s leader, Xi Jinping, issued his first public orders on the epidemic.

+ March 1 Kelly Letter: Bill Bishop at Sinocism suggests we need to see three unmistakable signs in order to believe that the Communist Party thinks victory really is at hand:

1. Xi visits Wuhan.
2. A date is announced for the “two sessions.”
3. Kids return to school.

Current status of the three signs:

1. No
2. No
3. No

The two sessions are significant markers on China’s carefully choreographed political stage. They are the annual meetings of the national legislature and the top political advisory body, which happen in early March every year. They were both postponed indefinitely this year due to the virus.

As for the kids, Bishop wrote on February 26 that “the political risk of sending kids into harm’s way is too high. And until it is safe for kids to go back to school it is hard to see the economy operating at anywhere near normal levels.” The next day Premier Li Keqiang said, “Universities, middle and primary schools, and kindergartens should continue to postpone the coming term.” Recovery remains on hold.

+ WAPO: American lawmakers are closing in on a $7.5B coronavirus emergency spending package, much bigger than the $1.25B requested by the White House. Most of the package will consist of bulked-up funding for the Department of Health and Human Services, which houses the Centers for Disease Control and Prevention and the National Institutes of Health.

+ MIT Tech Review: We are not out of the woods yet. Hawaii’s health department advised people to have two weeks’ worth of emergency supplies at home. Topping the coronavirus prepper’s shopping list: a month’s worth of shelf-stable food, medications, paper towels and other dry goods, disinfectants, reading material.

2. Economic Impact

The OECD said it expects global output to fall this quarter due to the virus, posing risk of recession. In its best-case scenario, the global economy would grow 2.4% this year, down from 2.9% last year, then rebound next year. From the report:

“Relative to similar episodes in the past, such as the SARS outbreak in 2003, the global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets. This magnifies the economic spillovers to other countries from an adverse shock in China. Even if the peak of the outbreak proves short-lived, with a gradual recovery in output and demand over the next few months, it will still exert a substantial drag on global growth in 2020.”

+ CNBC: On Monday, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 40.3 for February—the lowest reading since the survey was launched in early 2004. … Economists polled by Reuters had expected this private survey of China to come in at 45.7. January’s reading came in at 51.1.

+ CNBC: Satellite images from NASA show a surprising effect of the coronavirus outbreak in China: less air pollution.


3. Portfolio Status

Sig Plan Mid-Quarter Indicators

Plan Status Signal
3Sig -13.6% from Target Strong Buy
6Sig -24.3% from Target Strong Buy
9Sig -9.2% from Target Weak Buy

Stocks roared back yesterday:

Dow 26,703 +5.1%  
Nasdaq 8952 +4.5%  
Nasdaq 100 8878 +4.9% TQQQ +13.7%
S&P 500 3090 +4.6%  
S&P 400 1875 +3.4% MVV +3.6%
S&P 600 908 +2.6% IJR +2.6%

Over the weekend, 3Sig was 15.7% below its quarterly target, under the bottom of its deep green buy zone. Now it's at -13.6%. 6Sig went from -26.9% to -24.3%. As usual, the biggest mover was 9Sig, which went from -18.6% to -9.2%, almost out of its buy zone and into its neutral zone.

Volatility is immense now. After last week's waterfall crash, yesterday's big spike gave investors whiplash. Those who bet on downside at the end of last week now face the tough decision of whether to cover and lose money back-to-back, or risk losing even more as the market moves higher while they hope for another leg down.

+ Shares of Apple (AAPL $299 +2% YTD) gained 9.3% yesterday, the stock’s largest one-day move in more than 11 years. Eric J. Savitz wrote at Barron’s last night that “many analysts think that Apple is only seeing demand delays, rather than demand destruction, with no fundamental changes to the company’s long-term outlook.”

+ The Hill: Traders are betting on the Fed to cut rates even before the next formal policy meeting later this month, pushing the central bank to shift course on rates to soothe financial markets. The Fed can also expect steady pressure from President Trump, who has extended his frequent calls for lower interest rates as his administration responds to the public health emergency.

+ CNBC: Global financial ministers and central bankers held a conference call on Tuesday morning to coordinate the financial and economic response to the coronavirus. The teleconference call was led by Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell to coordinate a global financial and economic response to the virus.

+ Jared Dillian at The Daily Dirtnap: “I hesitate to say that the lows are in, but my gut tells me the lows are in, or close to it. … We could get a retest of the lows on some awful tape bomb about a bunch of coronavirus in NYC, but I think (knock on wood) that we’re in the neighborhood of the lows for this move. … Coronavirus is a natural disaster. Generally, you don’t worry about natural disasters in the market—you worry about the man-made ones.”

Things are looking up,
Jason Kelly

Posted in Coronavirus Digest | 2 Responses

2016 NIRP Did Not Matter

Kelly Letters Past
From The Kelly Letter Note 7 sent February 14, 2016:

The age of NIRP [negative interest-rate policies] sent Martin Armstrong, of Armstrong Economics, into a tirade last week. He wrote:

“We are on the precipice of what can only be described as a rising systemic risk for all markets. The Fed is now hinting that banks should prepare for NEGATIVE INTEREST RATES. This insanity of following the crowd is undermining the entire world economy. The increasingly unstable footing that we find ourselves standing on is reflected in widening credit spreads that demonstrate that CONFIDENCE is indeed collapsing. … Even the Japanese 10-year bond has gone NEGATIVE, demonstrating the total collapse in CONFIDENCE. Why, you ask? Because this time, the defaults will engulf all governments at all levels.” The all-caps emphasis is his.

That’s a good encapsulation of the current fear. The perspective to keep is this:

People claiming with confidence to know the dangers lurking before us are the same ones who steered investors wrong half the time in the past.

It’s sheer arrogance to claim to know why the yen went where it went, where it will go next, what this will mean to Japanese consumers, what that will mean to Japanese stocks, how governments will respond to whatever defaults happen, and what the effects of those responses will be in their immediate economies, much less the US stock market.

Remember, these experts didn’t even get the US bond market right. Now, they know what’s going to happen to the yen and what it will do to stocks in America? I don’t think so.

NIRP will have consequences. Not going NIRP would have had consequences.

Eventually, the price of oil will stabilize, currencies will reach an equilibrium, what needs repricing will get repriced, and the usual recovery will follow the drop. Sticking to our signal systems will ensure that you participate in it.

Paying attention to the pundits will increase your odds of missing out.


In the two years following Armstrong’s warning, the S&P 500 gained 46%.

From his warning through last Friday, it gained 62%.

Yours Very Truly,

Jason Kelly
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Posted in Kelly Letters Past | Leave a comment
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