Is This the Tiger King Market?

April 13, 2020

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9 min read

Fred Imbert and Pippa Stevens of CNBC report the S&P 500 jumps more than 1%, capping off its best week since 1974:

Stocks rose sharply on Thursday, wrapping up a big week of gains, after the Federal Reserve detailed a bevy of programs to support the economy during the shutdowns from the coronavirus pandemic.

The S&P 500 gained 1.5% to close at 2,789.82 while the Dow Jones Industrial Average advanced 285.80 points, or 1.2%, to 23,719.37. The Nasdaq Composite closed 0.8% higher at 8,153.58. The U.S. stock market will be closed Friday due to Good Friday.

For the week, the S&P 500 surged 12.1%. That was its biggest one-week gain since 1974, when it rallied more than 14%. The Nasdaq had its best week since 2009, jumping 10.6%. The Dow soared more than 12% for one of its biggest weekly gains on record.

“It’s been a strong week in equities and probably for good reason,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “Many stocks were widely considered to be in oversold, and then you’ve got policy assistance that’s in motion at the Fed and in fiscal policy.”

“That’s clearly helping sentiment, but we still find it difficult to get overly bullish when the duration of COVID-19 remains unknown,” Sandven added.

The Fed announced a slew of programs, including loans geared towards small and medium sized businesses, that will total up to $2.3 trillion. The central bank also gave more details on its plans to buy investment-grade and now even junk bonds.

“This Fed is the most aggressive Fed. They do not want to be known as the reason why we went into a depression,” CNBC’s Jim Cramer said on “Squawk Box” on Thursday. “I’m very impressed. The Fed is on its game and this is what is needed because we got to fight off a depression, we got to get America open for business.”

Thursday’s announcement was enough to outweigh another massive jump in weekly jobless claims. More than 6 million Americans filed for unemployment benefits last week. Economists expected an increase of 5 million. The latest data built on the record-shattering prior two readings of 6.6 million and 3.3 million.

Virus outlook improves

Wall Street’s weekly surge came amid increasing hope that the situation around the coronavirus was improving. In recent days, the number of new daily confirmed cases has dropped globally and in the U.S. New York state has also reported a decline in its virus-related hospitalization rate.

Treasury Secretary Steven Mnuchin also told CNBC on Thursday the U.S. economy could be re-opened in May. He noted the department was doing “everything necessary that American companies and American workers can be open for business and that they have the liquidity that they need to operate their business in the interim.”

But some believe that stocks are now getting ahead of themselves and investors should exercise caution.

“I think this is kind of buy the rumor and potentially we sell the news when reality sets in of what we are going to see what’s on the other side,” billionaire investor Mark Cuban said Wednesday on CNBC’s “Closing Bell.”

“I think people are naturally optimistic right now in terms of the market. I just don’t think they’re really factoring in what we’re going to see on the other side,” he added.

JPMorgan Chase jumped nearly 9% to lead the Dow higher on Thursday. Dow Inc gained 5.1% while Goldman Sachs advanced 4.1%. Financials were the best-performing sector in the S&P 500, gaining more than 5%.

After Thursday’s rally, the Dow is up more than 27% from its March closing low, but still down 16.9% this year.

“The stock market is at a very uncertain point now. The impact of the coronavirus on future earnings is yet to be determined. We aren’t out of the woods,” said Nancy Davis, chief investment officer at Quadratic Capital.

And Nathalie Harrison of Bloomberg reports that US junk bonds rally the most in two decades with the Fed now a buyer:

U.S. junk bonds rallied the most since 1998 after the Federal Reserve’s historic move to begin buying some of the speculative-grade corporate debt.

The extra yield investors demand to own the securities instead of Treasuries narrowed 86 basis points Thursday to 785 basis points, the lowest level since March 13, according to the Bloomberg Barclays U.S. Corporate High-Yield index.

The Fed’s announcement that it would buy a limited amount of recently downgraded junk debt gave the market its biggest boost since spreads surged to distressed levels last month amid a pandemic that has shut down large parts of the economy. Average yields on the debt fell by almost a percentage point to 8.48%, index data show.

Spreads had reached 1,100 basis points on March 23, the widest level since the global financial crisis.

To keep credit flowing, the central bank is expanding a corporate bond-buying program to include debt that was investment-grade as of March 22 but later downgraded to a rating of no lower than BB-, the third-highest junk grade.

In doing so, the Fed is essentially opening up its balance sheet to potentially hundreds of billions of dollars worth of notes that are expected to fall into speculative grade in the coming months as the impact of the pandemic hits corporate cash flows.

The Fed can also buy exchange-traded funds that track speculative-grade debt. Those funds surged the most in a decade following the announcement. All together, the programs will support as much as $850 billion in credit.

It’s Good Friday, so let me wish everyone celebrating Catholic Easter a nice Easter weekend. Our Orthodox Easter is next week and it will be a very quiet one.

Anyway, earlier today, I had a chat with Aaron Vale of CBRE Caledon and we had a great conversation about life under COVID-19, markets, infrastructure (their specialty), and central planned capitalism.

Aaron is a very sharp guy and very well informed. We talked about the trouble this pandemic has caused in certain transportation infrastructure assets like airports where traffic is down over 96 percent:

“You have never had a global synchronized shutdown of economies. Depending on when they mark them (end of March or end of June), some of these assets will be technically insolvent.”

He said they have been focusing on data storage and fiber assets but see great long-term potential now in airports. “As in all crises, people tend to overestimate the long-term impact on some assets.”

I asked Aaron to follow up with a more detailed comment on infrastructure which I’d like to post on my blog.

We also talked markets and he’s just as bearish as I am, raising these points:

The psychological effects of this pandemic are widespread. Even when governments reopen economies, it won’t be business as usual, many small businesses are going to go bankrupt.
The rally from March lows was all liquidity driven but there’s trouble ahead as earnings will crater and the earnings yield will fall to zero.
There’s not enough fear out there, the buy-the-dip mentality still rules the day.
The weakest companies going into this crisis are the ones that got a lifeline from the response to the pandemic. We are wtinessing the zombification/ Japanification of our economy.
The bailouts and latest Fed measures once again benefit the financial elite and will exacerbate inequality even more.

I told Aaron I was thinking of my market comment today and think I will call it “The Tiger King Market” based on the Netflix hit Tiger King.

If you haven’t seen Tiger King, no worries, it’s definitely not for everyone and is basically the story of large private zoos in the US with large cats and the people behind them. The central characters are “Joe Exotic,” the flamboyant, gun-toting owner of the Greater Wynnewood Exotic Animal Park in Oklahoma and Carole Baskin, owner of Big Cat Rescue in Florida.

Joe Exotic has a long feud with Carole Baskin and eventually goes to jail for plotting to kill her.

The whole series is outrageous and completely surreal. No doubt, its popularity is based on the strange underground world of big cat conservationists and collectors and it’s perfect mindless television to get people’s mind off of the coronavirus crisis.

But it’s also the central characters and the drama between them which has captivated millions who are eager for more.

Anyway, I was telling Aaron, I feel like we are living a real life tiger king market, it’s a bit surreal that unemployment in the US and elsewhere is skyrocketing to levels we haven’t seen in decades and yet stocks are rallying during a week where coronavirus is exacting its highest toll on humanity.

I know the mantra, don’t fight the Fed, and stocks always lead the economy, but I worry people are smoking some real bad hopium thinking this will be another “buy the dip opportunity” and stocks will rally right back up in the greatest V-shaped recovery ever.

Here’s some food for thought, reopening the economy isn’t like turning on a light switch. Even if the US economy reopens in May, it will be a depression-like economy:

And plans to reopen are downright scary:

What else? There’s still a lot we don’t know about COVID-19 and there are legitimate concerns that low antibody levels might mean higher reinfection risk:

“Yes, all this is true, but the Fed and Congress will just keep pumping trillions into the economy and everything will be just fine.”

Maybe… but I’m willing to bet a lot of money that this isn’t going to be a V-shaped recovery, it will be more like an M-shaped recovery, so prepare for the worst as we enter a very tough period ahead:

I also agree with those who rightfully think if the Fed bails out everybody, it’s not really bailing out anyone:

Lastly, I agree with those who rightfully point out how insane it is to bail out hedge funds and private equity funds when millions of people are losing their jobs:

As I keep telling you, if you really want to understand capitalism, you need to read C. Wright Mills’ classic, The Power Elite. If you’re too lazy to read, just watch George Carlin’s classic skit on The American Dream. He nailed it years ago!

Anyway, enjoy your Easter weekend, stay safe everyone.

Below, among the eccentrics and cult personalities in the stranger-than-fiction world of big cat owners, few stand out more than Joe Exotic, a mulleted, gun-toting polygamist and country western singer who presides over an Oklahoma roadside zoo. Charismatic but misguided, Joe and an unbelievable cast of characters including drug kingpins, conmen, and cult leaders all share a passion for big cats, and the status and attention their dangerous menageries garner.

But things take a dark turn when Carole Baskin, an animal activist and owner of a big cat sanctuary, threatens to put them out of business, stoking a rivalry that eventually leads to Joe’s arrest for a murder-for-hire plot, and reveals a twisted tale where the only thing more dangerous than a big cat is its owner. Watch the trailer below, and yes, I think Carole Baskin fed her former husband to her lions!

And CNBC’s “Halftime Report” team is joined by Social Capital CEO Chamath Palihapitiya to discuss his view of the markets amid the coronavirus pandemic. Listen carefully to what he says.

Third, Dallas Mavericks Owner Mark Cuban joins “Closing Bell” via phone to discuss the state of the markets and the economy, as well as when the NBA season may resume.

Lastly, short-seller Jim Chanos, Kynikos Associates founder, discusses the state of private markets amid the coronavirus pandemic, why he is still bearish on Tesla Inc. and the sectors he is shorting with Bloomberg’s Scarlet Fu and Joe Weisenthal on “Bloomberg Markets: What’d You Miss?”