Fed Will Not Save You

Those betting on the Fed saving them if the economy stays bad don't understand who the Fed works for.  Their main constituent is not retail traders, or even long term stock investors.  They are working for the money center banks, big hedge funds that dabble in Treasuries, MBS, credit markets, and now private equity firms that need their junk bonds bailed out.  Powell is a private equity guy, he will never let them down.  He will do whatever it takes to guarantee that private equity firm owners (not necessarily clients) get big bailouts after the dust clears.  Mnuchin is the guy who hand picked Powell for Trump, so they are in this together.  Mnuchin is a vulture, he will do whatever it takes to enrich himself, and that usually doesn't mean letting current shareholders tag along for the ride. 

For a lot of the big banks, having companies restructure their outstanding loans and  debt so that banks get a big cut of the equity at the expense of current shareholders is very much in play for a lot of sectors such as energy, travel/leisure, restaurant chains, retail, commercial RE, etc.  The Fed will not come to the rescue of those shareholders when the money center banks stand to benefit from the fallout of these fragile broken companies. 

This stock market is whistling past the graveyard as the investing crowd has been conditioned over the past 11 years that any dips are buying opportunities and eventually it goes up, to new all time highs.  But the toxic combination of high valuations and horrible fundamentals in the stock market is not something even the Fed with unlimited QE can save. 

We are back to the US/China trade war angst levels of August 2019, or even worse, the FOMO "hot" economy top on January 26, 2018.  This market is expensive, and a lot of firms are facing solvency risk on a scale that hasn't been experienced since the Great Depression. 

There will always be doubters who get scared of shorting after big rallies, expecting an even bigger rally.  All I can go by is years of experience trading SPX based on news flow and gut feel.  Last Friday's opex euphoria in the overnight session on a "miracle cure" for the coronavirus did it for me.  The scale has been flipped from fear and loathing to irrational exurberance.  SPX 2880 was close enough to 2900 for me to enter the short side, especially with the opex peak usually followed by the post opex hangover as put protectionless equity holders suddenly realize that their portfolios are no longer hedged to potential huge downside risks in this bailout dependent crap economy and In Fed We Trust rally. 

Wall Street and newbie traders are putting lipstick on a ugly fat pig, rationalizing the rally with Fed unlimited QE, Congressional bailouts, and a V shaped recovery in the 2nd half.  Rushing the reopening of the economy is the worst thing Trump could do, because that will just keep the coronavirus lurking around, ever present, without ever really getting of the threat.  Doing a half baked lax lockdown is the worst of both worlds.  Killing the economy and not eliminating the virus. 

Trump's short term thinking will probably mean the economy reopens in May, which the equity market, with its own short term thinking, believing that will help the economy in the long run.  But apparently no one learns from history.  Here is the infection graph for H1N1 in 2009: 

 With the coronavirus more widespread now, the second wave of infections will probably be even greater than the first wave if the economy reopens and people go back to work.  This risk is definitely not priced in at current levels, and it will be absolutely devastating for investors to see countries go back into lockdown, and under such a scenario, a big revaluation lower in stocks would occur.

The last 2 big rally days have been followed by big gap downs in the SPX.  You think the suckers are gonna push their luck again and try to squeeze the market higher to see if there are greater fools up there willing to buy?  I wouldn't put it past US stock investors, they seem to be the most resilient group I've ever seen.  But with the biggest buyer of US equities over the last 10 years (corporations) suddenly looking more cautious when it comes to stock buybacks, the supply/demand picture for stocks is suddenly looking a lot worse than at any other time over the past 10 years.

Of course, Wall Street will never tell you that, and say that expect a V shaped recovery based on pent up demand and Fed/Congress bailout money, never mind that millions of small businesses will be closed with masses of unemployed workers, and the global economy will be just as bad, putting a big dent into international earnings for the multinationals. 

Fundamentals are so bad, and downside so big, risk/reward is very lopsided in favor of shorts here.  We probably chop between last week's lows and last week's highs (~2730-2870) for the next couple of weeks, get bulls complacent, and then roll over to lower levels.