Double Double Toil and Trouble

Macbeth is arguably one of Shakespeare’s best works.  There is nothing better than a story of someone who wants to be King, then runs into three witches which portend his future.   The saying, Double, Double, Toil and Trouble is from the Song of the Witches and could be Shakespeare’s most famous line.  (Over the years the saying has changed. Now, many people say Trouble, Trouble, Toil and Bubble which is just as apropos!)  In the play, the future King originally wanted to know his future from the witches and when he heard that he would be king, but his heirs would not-he was concerned.  He then killed all of his foes which brought on more trouble-hence the saying.  The saying indicates, if you do something-like kill your enemies- you will have to pay the price.  The saying is now our favorite line too.   If you do something-engage in buybacks, print money-trouble will ensue.   The Fed, our elected government and regulators continue to ‘change’ the rules of capitalism.  Large corporations are not allowed to fail.   Markets are now paying the price in several areas.

-First, in the Repo market.  Since the financial crisis, large banks have been out of control.  We won’t discuss the Felony convictions that JPM and Wells Fargo have experienced here-maybe in other musings.  But in a nutshell, the big banks also made bad loans and leveraged their balance sheets via derivatives.  Today, a major bank, or two, is in serious trouble.  The banks toil has not worked since rules have been and are currently changing.  Since September, the Fed first pumped 700 Billion into the market.  The financial piece of the corona virus crisis started then.  In a Sunday evening surprise one week ago, (when a scheduled meeting would have taken place a few days later), the Fed added $1.5 Trillion to unclog the plumbing in the repo market, (to allow banks to function and trade with one another.)   Then, this morning, the Fed announced open ended QE and changed their official mandate to be able to purchase corporate bonds both from the primary and secondary markets.   The corporate bond market was part of the clog in the financial market plumbing….

 The public will know which bank(s) are the major culprits down the road-they are not being disclosed now.  The Fed has not announced the fact that the money injected into the banks also went to several large hedge funds of the likes of Citadel.  So large hedge funds, like large corporations are also essentially being bailed out.    The usual bank culprits include: Deutsche Bank, Citigroup, JPM, BoA and Wells Fargo and others.    Yet today, all we know is despite over $2 Trillion dollars added to the repo market, along with a new $700B in QE is that it is still unclear whether bank balance sheets can cover losses.   Our research estimates that it could take over $7T stabilize the markets.   The Fed also took the reserve requirements for the large banks, from 10% to 0 for the Primary Dealer banks.  (One tiny win for the’ little’ guys is that eight of the largest banks have now discontinued buybacks-a concession for taking the reserve requirement down to 0.

This did not stop the largest drop ever in markets last Monday, when all major indices were down well over 10-12%.  The market DID not react well to the liquidity the Fed through into the market.  The Dow Jones Industrial Average sat at 19,827 when Donald Trump took office; and as of tonight-Sunday the 22nd of March, investors that stayed in the market have had no return in three years.   The futures are sitting at just over 18000 at 7pm this evening.  The Senate did not pass the fiscal stimulus bill needed to get money into the hands of the ‘little’ people today.  We do expect a fiscal bill to pass sometime next week, which will include helicopter money-approximately $1K plus for households earning less than $75K AGI.  This fiscal stimulus will increase the deficit from about $1T to over $2.5T.  How will we ever pay it back?   Double Trouble.

-Second, our readers know buybacks have been an issue, which is why the big banks discontinued them.  Companies should have been using the cash for R&D, capital expenditures, as a cash cushion and the like.  As the buyback issue grew and grew, the market was inflated and on shaky ground for years.     As a matter of fact, our letter titled “The Printing Press” was written in Q4 2015.  This piece discussed how dangerous money printing and buybacks over the long run.   Here is a quote from the piece; “The

financial engineering undertaken by many major corporations, (i.e. stock buyback programs), has

given the illusion that companies are doing better than they actually have been. We will not repeat the

in depth analysis of this phenomenon reported in our Q4 2014 Outlook, but that piece is well worth a   re-read and we feel confident we will continue to reflect back on that piece as many of the companies

participating in the buy-backs will struggle in the near term due to increasing debt loads, weak revenue

and earnings and lack of investment for the future. Real earnings and revenues have been anemic

across the board over the past five years.”   Unlike the Witches in Macbeth, we did not need to be clairvoyant to see the future.  It was obvious to us that the unlimited money printing and insane number of buybacks would eventually be detrimental to the market.  One just needs to do the research.

We are vehemently opposed to major corporations that indulged in buybacks from receiving bailouts.  It is high time we let Capitalism work the way it is intended too work.  Perhaps new corporations would emerge from the ashes that would be better able to manage corporate finances; not just make their own executives wealthy.

The S&P is now in the channel between 1800-2350.  We shall see if the stimulus package will be enough to pull the market into a higher channel.  The market can not depend on stock buybacks to push it higher, as many companies continue to decrease both buybacks and dividends.  Fire burn and cauldron bubble!

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