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Goldman is bearish, so what?

Our first-quarter rebalancing went without a hitch yesterday.

We locked arms and held the line. Nobody in our group sells low.

By chance, the market rose immediately after we bought. I have since received emails wondering if I think it will be all up from here, that the stock market is already looking ahead to peak virus and the release of pent-up economic demand.

There’s no reason it cannot go that way. Emotionally, however, it’s best to brace for imperfection.

The team led by David Kostin at Goldman Sachs thinks so.

While they expect the S&P 500 to reach 3000 by year-end (a 14% rise from yesterday’s close at 2627), they “believe it is likely that the market will turn lower in the coming weeks, and caution investors against chasing this rally.”

They suggest that the following three criteria must be met before investors can feel confident that a new bull market has begun:

  1. The virus spread in the United States must begin to taper.

  3. We must see evidence that “extraordinary measures” taken by the Federal Reserve and Congress to support the US economy are working. Will bankruptcies be avoided? Will people return to work?

  5. Goldman’s US Equity Sentiment Indicator must bottom out.

Bulls can counter all three:

  1. On a semi-log plot, worldwide cases of the virus are already leveling out. We’re not out of the woods yet, but we can envision getting there—and the stock recovery will beat us out of the woods.

  3. Anybody waiting for confirmation that bankruptcies will be avoided is going to miss the recovery. How many bankruptcies are fine by Goldman? Surely more than zero, so when does the green light for bankruptcy avoidance go on? Probably about the time the S&P 500 reaches the firm’s 3000 target level.

  5. Maybe Goldman’s sentiment indicator has not bottomed (Although, how can they know?), but others have shown grim sentiment. CNN’s Fear & Greed Index already reached the extreme fear levels it bottomed at in the fourth-quarter 2018 crash. The CBOE Volatility Index (VIX) reached the same panic zone it reached in the subprime mortgage crash.

If you are not simply following our quarterly plan, remember from Sunday’s letter that I recommend building your positions gradually, and with time spans instead of moving average levels or some other metric:

“A time span gets around speculation and emotions involved in other approaches. If you set your limit orders too low, they might not fill. Will you have the emotional resolve to move them higher, then the emotional rigor to not punch a hole in the wall if your original limit-order prices are hit later? Who knows, and who needs to know? Go with a time span.”

And remember:

As long as you are buying and/or holding, you will be fine.

Posted in Stock Market Forecasts | Tagged , | 2 Responses

Powell Agrees: This is Temporary

Guess who agrees with yours truly that economic damage in reports and forecasts is only temporary? None other than Federal Reserve Chairman Jerome Powell.

He said yesterday on the Today show:

“This is a unique situation. People need to understand, this is not a typical downturn. What’s happening here is people are being asked to close their businesses, to stay home from work, and to not engage in certain kinds of economic activity. And so they’re pulling back.

“At a certain point, we will get the spread of the virus under control and at that time confidence will return, businesses will reopen, and people will come back to work.

“So you may well see significant rises in unemployment, significant declines in economic activity, but there can also be a good rebound on the other side of that, and that’s actually one of the main things we’re trying to do by assuring the flow of credit in the economy and keeping rates low, is to ensure that that rebound, when it does come, is as vigorous as possible.”


Federal Reserve Chairman Jerome Powell on the Today Show, 26 March 2020


When asked whether we are already in a recession or if it’s inevitable we will soon be in one, Powell answered:

“We may well be in a recession, but again I would point to the difference between this and a normal recession. There’s nothing fundamentally wrong with our economy. Quite the contrary. The economy performed very well right through February. We’ve got a 50-year low in unemployment the last couple of years. So we start in that position. This isn’t something that’s wrong with the economy. This is a situation where people are being asked to step back from economic activity.”

He agrees with Dr. Anthony Fauci that the virus will dictate the timetable.

When asked whether the Fed’s activity presents risks that will need to be faced later, such as inflation, Powell said he does not believe so:

“We don’t see that. What we see, though, is [businesses having trouble getting credit]. We step in and replace that. That’s a very health thing, a positive thing. We’re providing relief, we’re providing stability, we’re trying to create a bridge from our very strong economy to another place of economic strength. That’s what our lending really does. It’s very broad [helping businesses of all sizes, as well as state and local governments].”

Will the Fed run out of bullets? No: “When it comes to this lending, we’re not going to run out of ammunition.”

He said the main stimulus helping families and businesses now is the fiscal package that just passed Congress. That will provide immediate relief. The Fed’s part will become more critical in the rebound, which it is going to turbo charge:

“The help from the Fed will be when the economy begins to rebound, then we’ll be there to make sure that rebound is as strong as possible. …

“This is a unique situation, it’s not like a typical downturn. We’ve asked people to step back from economic activity really to make an investment in our public health, they’re doing that for the public good. This bill that’s just passed is going to try and provide relief and stability to those people.

“The Federal Reserve is working hard to support you now, and our policies will be very important, when the recovery does come, to make that recovery as strong as possible.”

Investors, take note.

Buy or hold. Do not sell.

Posted in Federal Reserve | 6 Responses

Stimulus, and Reconsidering Total Shutdown

It’s good news Wednesday.

Yesterday the Dow Jones Industrial Average rose 11.4%, its biggest gain since 1933.

Pessimists note the comparison date and point out the long slog of the Great Depression that followed the last such bear-market bounce, but time in the green provided investors with a nice break.

Then, last night, the Senate and White House agreed on terms for a $2T fiscal stimulus plan. It is the largest economic stimulus package in recent American history, and is expected to pass within days. It includes:

<> $1,200 checks to many citizens

<> $500B for industries and municipalities

<> $367B in loans for small businesses

<> $150B for state and local stimulus

<> $130B for hospitals

President Trump said he would like much of the American economy reopened by April 12, but received pushback from medical experts who say the still-rising case count makes such an aggressive schedule unwise.


On the virus front, The Kelly Letter has maintained through this pandemic that the key metric to watch was the death count, not case count. This is finally getting broader acknowledgment.

America is considering a shift from full shutdown to the targeted remedies that have worked well in Japan and South Korea.

Stanford University School of Medicine epidemiology professor John P.A. Ioannidis wrote in Stat on March 17 that we may be dealing not just with a once-in-a-century pandemic, but also “a once-in-a-century evidence fiasco … [which] creates tremendous uncertainty about the risk of dying from Covid-19.”

After running through various possibilities from the thin data set available, he conjectures:

“If we assume that case fatality rate among individuals infected by SARS-CoV-2 is 0.3% in the general population—a mid-range guess from my Diamond Princess analysis—and that 1% of the US population gets infected (about 3.3 million people), this would translate to about 10,000 deaths.

“This sounds like a huge number, but it is buried within the noise of the estimate of deaths from ‘influenza-like illness.’ If we had not known about a new virus out there, and had not checked individuals with PCR tests, the number of total deaths due to ‘influenza-like illness’ would not seem unusual this year.

“At most, we might have casually noted that flu this season seems to be a bit worse than average. The media coverage would have been less than for an NBA game between the two most indifferent teams.”

Making the rounds is a proposal by Dr. David Katz at the Yale-Griffin Prevention Research Center. In a New York Times op-ed last Friday, he cited South Korean data indicating that “as much as 99% of active cases in the general population are ‘mild’ and do not require specific medical treatment.”

He suggested that rather than snuff out every candle of our economy, “we could focus our resources on testing and protecting, in every way possible, all those people the data indicate are especially vulnerable to severe infection: the elderly, people with chronic diseases and the immunologically compromised. Those that test positive could be the first to receive the first approved antivirals.”

Posted in Coronavirus Digest | 10 Responses

Reasons to Feel Better

How about some good news?

Last night, China reported no new local infections for the first time since the outbreak began three months ago.

The Federal Reserve invoked its emergency backstop for prime money market mutual funds, a step that helped in the 2008 crash.

Congress and the White House are closing in on a $1T stimulus package that will include distributing cash to many Americans and propping up small businesses to help avoid layoffs. Airlines and hotels top the list for rescues.

The European Central Bank announced an $820B emergency bond-buying program.


Projections from Britain’s top modelers of infectious disease have the West bracing for a long battle against the virus.

In an interview with Sinclair Broadcasting, I provided the following commentary, which was not included in their story:

“It seems reasonable to close stock markets for the duration of the virus fight. How can stocks be valued if the short-term revenue and profit expectations of stocks go to zero during an economic pause? We humans know they’re not worth zero, but algos might not.

“Markets could stay shut down while the virus is brought under control, then businesses are reopened. After a couple of weeks of life like it used to be, markets could reopen with the economy operating at about the level it was prior to this singular phase.

“The stock market falling 10% one day, rising 10% the next, then falling 10% again is hard on people and the financial system. It would give everybody one less thing to worry about if it were put on ice for a while, as it was after 9/11.”

During World War I, the NYSE closed for four months beginning in July 1914.

Why can’t the government mandate that all payments stop temporarily? Nobody could be fired during this phase, nobody could go bankrupt because nobody would be collecting anything from anybody. It would all just freeze, with Treasury reserves used to keep utilities on and food distribution moving.

There is no sign of such action, and I have a feeling the reason for it is that authorities worry that people might like it too much. Nobody would want to go back to school, work, and bill-paying at the end of the freeze. Instead of pausing the economy, the government is leaning toward providing people with money to feed into it while it idles.

Those opposed to closing stock markets for the duration of this say that doing so would cause irreparable harm to the market’s reputation of operating free from government interference.

Treasury Secretary Steven Mnuchin said Tuesday that he thought it was crucial to keep markets open during the outbreak, but “we may get to a point where we shorten the hours.”

What good would that do? If I were in charge, I would pause the whole economy, markets included. This is a non-economic moment.


Our plans will continue running as ever—no changes.

I want to make sure this is understood by all.

I have recently discussed tax harvesting, moving capital from one plan to another, and changing non-leveraged funds to leveraged. All of this was from various ideas I have researched and thought about, not me making changes to the plans or implying that you need to do so.

The letter’s plans will run unaltered through this event. I will not change funds, I will not move money from one plan to another.

This removes stress you might have felt from indecision. Doing nothing but following the plans is not only acceptable, it is advisable. The letter is on a schedule and will stick with it.

First responders stress the importance of training for crisis times, because the mind is unreliable when under duress. Now is not a moment for more thinking, but less. It is time for autopilot to prove its worth. I am confident that it will.

Soon, the letter will go truly all-in.

It would have done so at the end of this month even if we had already been on a one-sell-skip version of the 30 down rule instead of the four-sell-skip version. Either way, we would have entered April all-in. The plans survived such a scenario in extensive testing. They recovered to new highs.

This is the first real-world, deep-stress test. The wrong reaction would be to alter the plans in the middle of it, so we won’t.

Count on it. No more variation discussions until this is behind us.


We are starting to see repeats of 2008 media memes.

Economists are lengthening their projections of worst-case scenarios. Investors are debating whether it will be a V- or L-shaped recovery. People are saying it’s 1929 all over again. All of this happened near the lows of 2008 and 2009.

People are also selling everything, including Treasuries and precious metals. There is a flight to cash, which is straining money markets and strengthening the dollar, spurring analysts to say it’s harder to borrow dollars.

This looks like the compressed spring set-up that I discussed in the letter as being the bullish case. Little could surprise on the negative side anymore, but plenty could surprise on the positive.

What if the West discovers, as Japan did, that most infected people never exhibit serious symptoms, and that a gradual reopening of the economy is acceptable? What if the 18-month timeline becomes instead two months?

Even after all the attention on the virus, only 9,000 people have died—worldwide. All reaction is to the what-if scenarios, which are doomsdayish, but they haven’t happened yet and we’re pretty far along. What if they don’t happen?

We would find an economy undamaged and heavily stimulated, every American packing an extra $1,000 from Uncle Sam dying to go shopping in excitedly reopened stores, and stocks at compressed prices with a world of cash rushing to get in before everybody else does.

Unleash the algos on that and let’s see what happens.


The next bull market will rise from ruins, not sunny commentary and solid data.

The March 2009 bull roared out of deadened corporate earnings, soaring unemployment, a rash of bankruptcies, and a global contraction that Nouriel “Dr. Doom” Roubini said would render 2009 “lost,” financially speaking.

He told the Guardian in January 2009, after the S&P 500 had declined 43% over the previous 15 months, that the housing crash was only halfway done. He then offered grimmer news:

“The losses now are mostly in mortgages; wait until it hits commercial real estate, the credit card companies, the auto loans, the student loans, the corporate bonds. There’s a whole pile of stuff. The financial system is insolvent. It’s technically bankrupt.

In March 2009, after the market bottomed, he wrote on his firm’s website: “Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally … don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.”

Stocks kept ripping 70% higher over the next year, and on from there, as you well know. Nobody heard much from Roubini again—until recently, and you can guess the disposition that media coaxed out of him. Sunny? Ha.

It can be distilled to one comment he made to Yahoo Finance yesterday: “For now, there is not much to be optimistic about.”

Among Roubini’s other recent contributions to punditry: He warned in January that US-Iran tensions would cause an oil-price spike. The price of West Texas Intermediate is down 63% this year.

This is not to pick on Roubini. He is one z-val among thousands, wrong half the time, but in a downturn people become vulnerable to the pessimism that he and others of his ilk build their careers upon. They will never say, “That’s probably enough bad news. I think things are about to get better.”

No, they keep saying it’s going to get darker all the way to the bottom and then all the way back up.

The next bull market will begin amid the darkest commentary yet, just like it did last time and the time before that.

The last message you hear before the reversal will be: If you think this is bad, just you wait.


Don’t forget that sunshine and fresh air are yours for the enjoying.

It does me a world of good to get out of the office and take a walk or a bicycle ride. Roger is working in his yard. Japanese friends are circulating early cherry blossom photos.

Spring did not get the shutdown memo.

Make this a good day!

Posted in Global Economy | Tagged | 6 Responses

Roger on Avoiding the Biggest Risk

Jason and Roger in Fussen, Germany

Roger Crandell is my longtime research partner and friend. 

Our picture shown above was taken last September at the Musiktheater in Füssen, Germany. The castle in the distance over my right shoulder is Neuschwanstein.

If you have been reading The Kelly Letter for a number of years, you will recall Roger’s name from my background research on 9Sig, the introduction of the strategy in January 2017, and updates to the strategy thereafter.

I thought you would like to hear how the mind of a veteran subscriber and master Sig System investor works in times like this, so I called Roger last night. This note provides highlights from our conversation.

Before I get into them, here’s background on Roger. He:

  • grew up on a farm in Nebraska.
  • began trading commodity contracts out of high school. 
  • has a degree in electrical engineering.
  • is a registered professional engineer.
  • branched into computer science and worked in cyber security at a US Department of Energy national laboratory that you would know by name.
  • has extensive experience trading futures contracts and options. After years of experimentation, he concluded that a quarterly approach using broad-based leveraged funds is the best way for long-term investors to go.

He began our conversation by telling me that it took him a lifetime of investing to feel in his gut what data tells anybody with an analytical mind: the stock market goes up

It’s possible to achieve extra profits and short periods of market-beating returns from swing trading, but you will eventually realize that you cannot consistently time the market and that broad-based portfolios are the foundation of success.

The key to sticking with a plan for the long haul is learning to ignore financial media noise. They’re paid to make that noise. It’s their business model. Noise attracts and keeps an audience; an audience attracts and keeps advertisers.

“If turbulent times like these test your fortitude, stop looking at your portfolio,” he advises. “If you don’t look at it, it makes it easier.” It’s fun to watch when it’s going up, because it makes you feel good. It’s no fun to watch when it’s going down, because it makes you feel bad.

“Unless you believe the whole world is going to end tomorrow, it’s going to work out,” he says. “If the world does end, investing won’t matter, anyway.” Telling yourself this and then tuning out is a perfectly acceptable bear-market strategy. You know that all of the Sig plan funds are diversified, so it will work out. They are not going bankrupt.

Obviously, the time frame of your money matters. If you had grocery money invested in 9Sig in January, oops. But you didn’t. Nobody who subscribes to The Kelly Letter allocated their grocery money to 9Sig. It’s long-term money, and because  of that it can be left alone through anything that comes.

I asked Roger if he worries during this corona crash, if he experiences sleepless nights. 

“Not because of my portfolio,” he replied. He worries about the health of his family and community, but not his investment account. “The portfolio will take care of itself.”

As for sleeping well these days—definitely, because he’s “been working in the yard.” He says thank goodness he’s not old or the work might tire him out, but as-is he gets through it and sleeps just fine, knowing his investing plan is successful and on autopilot.

If you don’t stay invested almost all the time, you miss the big moves. I don’t worry. I know what I have is going to go up again. I’m not concerned about it.”

He has found from talks with people he knows, including some in his former investing club, that the biggest risk with leveraged-fund investing is not the market, but the investor’s risk tolerance. The biggest risk is that the investor will puke at the bottom, just when buying more or holding is key.

“My wife and I met a smart kid in New York City last autumn, an investor, who told us he lost a ton of money in leveraged funds.” Turns out, the young man owned them into the crash of December 2018 and sold at the bottom. Upon hearing this, Roger shook his head and said, “Look where they’re at today.” The young man replied, “I know, don’t tell me about it. I don’t need the lecture.”

Roger remembers the anguished look on his face. “He couldn’t take the pain. That was the risk. Not the market.”

Some people worry that leveraged long funds will go to zero in a big enough market drawdown, but they won’t. The funds we use are behaving perfectly through this current bear market, no dislocation in sight. “The worst that would happen is that they would halt trading, reverse split, and eventually recover. The math will not go to zero.

Of course the recovery in a leveraged fund will take longer than the recovery in its underlying index, but this has always been the case and the much ballyhooed performance degradation that leveraged funds exhibit is eventually overcome. The indexes hit full recovery, and keep going. Then the leveraged funds hit full recovery, and keep going much higher. The time to recovery is shortened if you can buy into crash prices, but even if you can’t the recovery in the funds eventually happens anyway.

I asked Roger if he has trouble remembering the results of our research, and his personal experience, when the VIX soars and fear pervades the market as it is doing now. 

“No,” he said. “I think back to 2008 when Treasury Secretary Hank Paulson said on television that our economic world was basically ending. Did it end? No.”

Occasionally, Roger’s wife worries about their money but she has come to trust her husband’s investing skills. He reminds her of his research findings and that they “don’t need the money in the foreseeable future. Two years from now this will be a faded memory.

Roger is confident that “the virus is not going to kill enough of the world to cause long-term economic trouble.”

He is sure that the virus will pass and that he and his wife will be able to enjoy the maiden voyage of their new recreational vehicle, a Reflection 337RLS by Grand Design. It’s a 35-foot fifth wheel that Roger says is big enough to cause people to get out of his way when he’s merging.

Main takeaway from our talk: 

This will pass, markets will recover, and so will our plans. The biggest risk to long-term performance is an investor’s inability to stay put through a crash.

Posted in Leverage | Tagged | 7 Responses
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