Don't know the medical edge of this, but the economic one may best be measured each Thursday morning in the weekly new unemployment claims #s, which should help separate truth from bs in the economic effects with timely, relevant data.

Peter Ringel writes: 

Yes, the first real-time data of the economy under the virus/under quarantines–everything else is too full of emotions (including equities).

Yesterday the market felt more rational for the first time, even during down-legs.

Gary Phillips writes: 

Indeed, Peter. It's rational in the sense that the panic and deleveraging is probably over with and the market has become very mechanical. That is, with VIX continuing to remain above 50, options are too expensive to roll, so every time they get in-the-money, they're monetized and we get these violent squeezes. And of course, these rallies are sold into, perpetuating the feedback loop. And, will continue to be sold, until VIX resets lower. So, I don't know if the market is out-of-the -woods quite yet, but it is getting close to where a rally will be sustainable. Perhaps, we hold the current low; but imo, the market will provide one with another chance, sometime between now and opex. If we take out the current low, we could see 2535. However, that would only add fuel to the upcoming rally as the embedded options shorts are joined by new shorts deep-in-the hole. In any case, expected value is to the upside.

anonymous writes: 

The deleveraging is not over from the panic, it is over because individuals and business are going to drawdown their lines of credit fully to make sure they can still operate. Look at BA today. Tapped all their lines for 13 billion.

The drawdown at prime brokers will continue for the same reason. No one wants a capital call in this environment. I just had a treasury trader tell me he's seeing +8 tick bid-ask spreads. The street will deliver as the banks do the opposite. Regulatory capital ratios will be adjusted/waived there.

There is no liquidity. No liquidity, no upside. CB's are going to have to fund a month of negative cash flow….globally.

BTW, watch out for Canada. There's nothing going right there…the place scares me, especially the banks. I've never liked big banks based in small countries.

Gary Phillips writes: 

True, credit markets are not looking well. And, that may be where our next shock emanates from. But vol targeters, CTAs, L/S funds, retail, et al have hit the exits. Models have probably turned short and will be pressed on the next shock down, and when the market turns, they will be racing the others in a massive FOMO rally.

anonymous writes: 

I differ Gary. The street is not short; they have just deleveraged somewhat.

Think of it this way. Pretend for the month of February, every company received nothing in revenue. Zero.

They're likely to do two things, draw on their credit and cut back spending. Smart companies build this into the new amortization schedule; poorly managed companies spend time and resources trying to figure how long it will last (which they have no control over).

In December, I told a company I was advising that this was the perfect wind to sail in and buy a competitor but only if you had the balance sheet to do so. That turned out to be accurate, and it still applies. Just as in 2008, size matters in your cost of funds. Large companies are supported because they are not immediately replaceable.

A few minutes ago, I had a strong discussion with someone. They wanted to use their opportunity in a non-essential endeavor. It is the time to either get customers or buy them. You can't do that with debt or leverage. Robinhood's app is a good example. I consider this early in this cycle, as the strong have not begun to eat the weak, and few weak have acknowledged their position. BA, OXY and a few others have. There's more to come.

What is essential, is for the regulatory capital ratios to be loosened. A dollar of loss removes ten dollars of loans. Mid-tier banks have a bunch of sketchy loans right now (a lot in energy). So watch the OCC, watch the Fed's regulatory game, watch the state regulators. They invent useable capital as much as the Fed creatures liquidity in NYC.

P.S. - many loans and bonds have short time windows starting around 30 days, where they can miss a payment and make it up later without legally defaulting. Unfortunately, I expect that window to close right around quarter end, when banks will have to move them into special assets and reserve against the expected loss (at the same time as they assign a value to the loan for capital ratio purposes).


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