Nature of the Selling Pressure?
Updated: Mar 20, 2020
SUMMARY. Just a quick note on the nature of the selling this week in markets. The unprecedented intervention of BOTH monetary & fiscal policies over the last several decades and last Fall has encourage the use of leverage to purchase assets across the board. That process is now unwinding particularly across the investment community as well as effecting share buy backs from corporate America which have dominated the trading in markets. The process of unwinding can create dislocations from fundamentals as funds are forced to RAISE CASH and indiscriminately sell regardless of fundamentals. This panic selling or forced selling has occurred in the last 2 bubbles and is occurring now. The share back phenomena and higher leverage maybe exaggerating the selling. In the last 2 it marked the last phase of selling and maybe the mark as "everything bubble" pops. Remember the virus was the excuse to reverse the excesses that existed and have been ignored over last several years. The good news the Price to Earnings ratios (the primary valuation metric of public cos.) has been reduced considerably resulting in valuations much more attractive and in some cases extremely low. In sum, forced selling can mark the turning point in markets and it clear this week panic selling was tied to those being forced to sell to raise cash.
INVESTMENT IMPACT. We continue to view the virus as blip on growth not the end of it. We remained focused on growth resuming in 2H20 vs the near term economic slow down as markets remain headline driven focused mainly on virus cases/death growth outside China. As a reminder the window before China's cases peaked was 8 weeks from when cases first accelerated thus we will likely see negative news flow for at least the next month on this front. As mentioned before, drug trial results will begin to get reported over next couple of weeks which may alleviate fears. In fact, as reported today a US drug company has entered into human clinical trials for a vaccine which should last for next 45 days. These generally take 12-18 months before approval, but given the national emergency we suspect that maybe considerably shorter. The administration has indicated potentially a vaccine maybe available by next flu season or 9-12 months away.
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