Valuentum Exclusive Analysis for the Discerning Investor

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Mar 26, 2020

US Congress Is Getting Ready to Pass a Massive ~$2.2 Trillion Fiscal Stimulus Bill
Image Shown: US equities have started to recover some of their lost ground as the likelihood that the US Congress will pass a massive ~$2.2 trillion fiscal stimulus and emergency spending package, dubbed the CARES Act, has increased significantly over the past week as seen through the bounce in the SPDR S&P 500 ETF Trust. President Trump has clearly indicated that he intends to sign such a bill into law as soon as possible, with the US House of Representatives expected to take up the legislation this upcoming Friday morning on March 27. On March 25, the US Senate worked late into the night to secure a bipartisan compromise on a massive ~$2.2 trillion fiscal stimulus and emergency spending bill to offset the negative impact of the ongoing novel coronavirus (‘COVID-19’) pandemic. The bill passed 96-0 after several senators forced a vote on an amendment on that bill that would have changed the nature of the “beefed up” unemployment benefits (that amendment failed 48-48, and would have needed 60 votes to pass). As of this writing, there are over 65,000 confirmed cases of COVID-19 in the US according to Johns Hopkins University, and we sincerely hope everyone, their families, and their loved ones stay safe during this pandemic. A vote in the US House of Representatives is expected this upcoming Friday morning on March 27. The House is expected to convene at 9AM EST and the goal of each party’s leadership is to secure passage of the bill via a voice vote (please note that this differs from unanimous consent, which requires every member of the House to agree to such a legislative process in order to pass a bill without having the majority of lawmakers return to Washington DC, but this is easier/faster to achieve than a recorded roll call vote that would force every member of the House to return). Assuming the House swiftly passes the bill that was approved in the Senate, President Trump has clearly communicated he would sign the bill into law right away. Please note this bill is formally known as the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act.

Mar 26, 2020

Jobless Claims Spike; Restaurants, REITs In Trouble
Image: DOL. “The advance number of actual initial claims under state programs, unadjusted, totaled 2,898,450 in the week ending March 21, an increase of 2,647,034 (or 1,052.9 percent) from the previous week.” On March 26, the Department of Labor reported a surge in jobless claims for the week ending March 21 to 3.28 million, a number that “shatters the Great Recession peak of 665,000 in March 2009 and the all-time mark of 695,000 in October 1982,” according to CNBC. The economic situation remains dire as the White House struggles to contain COVID-19 amid what could become one of the worst economic periods since the Great Depression, or one that can turn into the next Great Depression. We also address a couple questions from members regarding Cracker Barrel and the REITs, more generally. Our team is monitoring the stimulus bill in Congress, which just passed the Senate last night. We’ll have more to say about restaurants and REITs as our team pours over the bill and assesses long-run implications. We think this bear-market rally may be short-lived, as we don’t think we’ll see stabilization in the markets until about 6-9 months before a vaccine is widely available, and that may imply a market bottom that may still be 3-6 months ahead. Moral hazard continues to run rampant. The market is bouncing back on what looks to be expectations of an unlimited Fed/Treasury/Congress put, as well as new expectations for hyperinflationary pressures in the longer run in the midst of runaway government spending. Stocks are therefore in demand. We remain skeptical of the sustainability of this bounce, however.

Mar 23, 2020

US Fiscal Stimulus Update
Image Source: frankieleon. The US Congress is debating and working on a massive multi-trillion dollar fiscal stimulus package to mitigate the negative impact the ongoing novel coronavirus (‘COVID-19’) pandemic is having on the domestic economy and to provide for additional healthcare funds to cash-strapped entities to combat the virus.

Mar 20, 2020

Op-Ed: Bail Out Boeing, No Other Publicly Traded Companies
Image: Boeing B-17E Fortress 41-2599 "Tugboat Annie"; took part in the Battle of Midway in Jun '42; later ditched at sea on 16 Jan 43. Source.Dear Uncle Sam: Please stop bailing out the competition of small business. We need a changing of the guard. Let capitalism work.

Mar 19, 2020

Extreme Volatility and Crisis Economics
Image: The Dow Jones has now registered 8 consecutive trading days with a 4% move in either direction, from March 9 through March 18. This is the most volatile time in history, a streak that is longer than the 5 consecutive days registered in November 1929 (Great Depression), 4 consecutive days in 1987 (Crash of 1987), and 4 consecutive days in 2008 (Great Financial Crisis). The worst of the declines may still be ahead of us. The S&P 500 still is trading within our fair value estimate range of 2,350-2,750, and we wouldn’t be surprised to see panic/forced selling all the way down to 2,000 on the S&P. Expect more volatility, and please stay safe out there as the world declares all out war on COVID-19. Our best ideas remain in the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio, and Exclusive publication.

Mar 9, 2020

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?
From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as downside probabilities such as a liquidity event are baked into the market price and at a higher probability. Because debtholders are higher up on the capital structure than equity holders, shareholders can sometimes get nothing in the event of a bankruptcy filing. Entities that are extremely capital-market dependent, or those that require ongoing access to new capital to fund operations, often face the greatest risk of the worst equity price declines during deteriorating credit market conditions.” Value Trap: Theory of Universal Valuation, published 2018

Mar 5, 2020

2,350-2,750 on the S&P? Could the Coronavirus Catalyze a Financial Crisis?
Image: We think a rather modest sell-off in the market to the target range of 2,350-2,750 on the S&P 500 is rather reasonable in the wake of one of the biggest economic shocks since the Global Financial Crisis. The chart above shows how far markets have advanced since 2011, and an adjustment lower to the target range of 2,350-2,750 is rather modest in such a context and would only bring markets to late 2018 levels (note red box as the target range). The range reflects ~16x S&P 500 12-month forward earnings estimates, as of February 14, adjusted down 10% due to COVID-19. When companies like Visa talk about a couple percentage points taken off of growth rates, one knows that the decrease in spending is very real, and we’ve yet to see the brunt of the impact yet. We have written extensively about our valuation expectations and target on the S&P 500 in the past, so please don’t mistake this reference as the extent of our thinking. We do not think a sell-off on the S&P 500 to the range is 2350-2750 is too far-fetched, as it really only gets the broader markets back to late 2018 levels (a mere year ago or so), and reflects a reasonable 16x forward expected earnings, as of February 14, hair cut by 10% as a result of the impact of COVID-19. The Fed put may not matter much anymore in the wake of this “biological” crisis, and increased fiscal spending may not be enough to offset what could be sustained weakness across the global economy.

Mar 4, 2020

A ~0.1% Probability Since 1896
Image Source: Wikipedia Commons. "The market crash in the past two weeks has been truly historic: its probability of occurrence is ~0.1% since 1896; the velocity of the plunge and of the VIX surge is the fastest on record; and the 10-year [Treasury yield] is at all-time low. (Hao Hong, BOCOM International, a subsidiary of Bank of Communications, March 1)" -- Howard Marks' memo, Nobody Knows II

Mar 3, 2020

Fed Cuts 50 Basis Points, Expect More Market Volatility Ahead
Image Source: FOMC. The emergency 50-basis point Fed rate cut announced March 3 was largely expected by the marketplace in light of growing economic concerns due to COVID-19, but it does nothing to immunize against COVID-19 and little to stabilize the situation. We continue to monitor the situation closely, and we expect ongoing volatility in the coming days and months as the situation with COVID-19 remains fluid. Having moved to defensive positions in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in January and having capitalized on the “crash protection” put, we are preparing for our next move. For now, we’re watching and waiting, and we encourage readers that have not yet picked up their copy of Value Trap to do so.

Mar 1, 2020

COVID-19 Crisis Intensifies
Image Source: CDC. Coronavirus Disease 2019 (COVID-19). The world is being challenged today by what some including Bill Gates believe might be a "once-in-a-century pathogen." We do not know the eventual outcome, whether the impact of this illness ends up being as profound as the Spanish Influenza of 1918-1919 (which inflicted a death toll in the tens of millions), but we maintain our view the markets have yet to come to grips with the impact of COVID-19 on economic activity and potential ramifications on the global economy and the banking system. What is currently a "biological" crisis may turn into an all-out global financial crisis, one that could end up worse than the 2008/2009 mortgage meltdown. Instead of toxic mortgages putting a halt to lending activity across the globe as they did over a decade ago, today's crisis stems from an illness that very few of the top health officials in the world know much about--not only in the duration of COVID-19's incubation period, but also in how easily it seems to be spreading, and how deadly it may eventually become, particularly if health systems around the world become overwhelmed.