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Market Corrects As COVID-19 Cases Surge – The Bear-Case Is Still Valid

Market Corrects As COVID-19 Cases Surge – The Bear-Case Is Still Valid

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Market Corrects As COVID-19 Cases Surge - The Bear-Case Is Still Valid Tyler Durden Sat, 06/13/2020 - 14:20

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Correction

As I wrote previously, the break above the 200-dma had changed the complexion of the market.

“If the markets can break above the 200-dma, and maintain that level, it would suggest the bull market is back in play.

However, in our Tuesday follow up, we discussed how the market rally had gotten to an extreme. As such, we noted the need to become more defensive in the short-term. To wit:

“Regardless, the markets are bullish biased, and we must be respectful of that reality. No matter how you slice the data, the markets are back to more extreme overbought conditions on a short-term basis.

The break above the 200-dma triggered a parabolic advance in the market over the last week. The market is making a 3-standard deviation move to the upside. With indicators very overbought, short-term corrective action is likely. (Note the market was just 3-standard deviations BELOW the 50-dma in March.)”

That correction came swiftly on Thursday. The surge in COVID-19 cases in the U.S. undermined the “V-Shaped” economic recovery meme. As we noted, the market had rallied into overhead resistance, and the correction found support at the 200-dma.

We can now update the risk/reward parameters from last week.

  • -2.9% to the 200-dma vs. +4.9% to previous high. (Positive)

  • -2.9% to the 200-dma vs. +9.1% to all-time highs. (Positive)

  • -5.6% to 50-dma vs. +4.9% to previous high. (Neutral)

  • -11.21% to consolidation lows vs +9.1% to all-time highs (Negative)

  • -15.2% to March bounce peak vs. +9.1% to all-time highs. (Negative)

The market achieved the retracement to the 200-dma support on Thursday during the most intense sell-off since March. Importantly, it was a good reminder of just how brutal markets can be when there is a complete lack of liquidity.

Correction Reduces Short-Term Excesses

Previously we discussed the more extreme levels of optimism in the markets. These indicators have historically corresponded with short-term market peaks and corrections.

The first was the large level of short-positions non-commercial speculators were carrying on the S&P 500. (These are contracts on the S&P 500 in the futures market used for hedging long market positioning.) Net-short positioning had reached a more extreme level, which historically aligns with short-term peaks and bear markets. The correction last week reduced some of that excess.

The same goes for the total put-call ratio, This ratio measures the total of option contract buying. Investors had gotten extremely aggressive in buying call options betting the market would only go higher. At extremes, retail “call option” buyers generally wind up on the wrong side of the trade. The quick rout on Thursday reduced some of those excesses.

Note, however, the 10-day moving average of the put-call ratio remains in more “bearish” territory, suggesting we may not be done with the correction just yet.

The issue remains that the markets have priced in a “V-shaped” recovery, which is well ahead of what the economic data suggests. 

A Note About The Fed

There were two catalysts that ignited the sell-off on Thursday. The first, as stated above, were headlines of a surge in COVID-19 cases. (As discussed in this week’s #MacroView below)

The second, and probably more important reason, was what the Fed didn’t say following this week’s Fed meeting. While the markets were hopeful for announcements for more stimulus to support the markets, the Fed simply reiterated their current stance.

More importantly, the Fed stated that QE would remain at $40 billion per week or $120 billion per month. This is substantially less than the current level of Treasury issuance. As Tavi Costa of Crescat Capital noted this week:

As noted previously, while the Fed is doing a massive amount of QE, the “hole” they are trying to fill is substantially larger. In what I call the “PacMan” chart below, the “economic deficit” will consume more than the Fed has currently committed. (Economic deficit is the estimated loss due to ongoing unemployment, reduced growth, and impact of debt and deficits.)

The Worst Economic Forecasters Ever

The Federal Reserve must qualify as the worst economic forecasters ever. Despite annual promises of stronger economic growth, such has yet to be the case. Ever.

While the economy will indeed recover in 2021 and 2022, the Fed is likely overestimating the outcome. However, in the short-term, they have little choice.

“Unwittingly, the Fed has now become co-dependent on the markets. If they acknowledge the risk of weaker economic growth, the subsequent market sell-off would dampen consumer confidence and push economic growth rates lower. Therefore, they have to be overly optimistic.”

As discussed Friday, the surging levels of debts and deficits, combined with demographics, will suppress economic growth below 2%. Such leaves very little room for the Fed to make a policy mistake.

“Before the “Financial Crisis,” the economy had a linear growth trend of real GDP of 3.2%. Following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Instead of reducing the debt problems, unproductive debt, and leverage increased.”

While the Fed had an opportunity to disconnect monetary policy from the market, they failed to do so. Instead, they once again opted to bail out financial markets at the expense of economic prosperity longer-term.

By voting to avoid short-term pain, the Federal Reserve has locked the economy into a long-term economic malaise. Like a “frog in boiling water,” the vast majority of Americans will see their economic prosperity slowly fade.

The stock market is not the economy. It is a distortion of economics.

The Bear Case Is Still Valid

As my colleague Doug Kass pointed out on Friday:

Yesterday provided at least five reasons for the markets to decline:

  1. Federal Reserve Chairman Powell delivered a cautionary economic message for not only this year but for several years to come. To me, this renders the rosy EPS projections of the consensus, and many high-profile strategists (like my friends Dave Kostin and Thomas Lee) are unrealistic. 

  2. There was mounting evidence that Covid-19 is still not tamed.

  3. Wells Fargo CFO John Shrewsberry said second-quarter loan loss reserves would be higher than in 1Q-2020.

  4. The Robinhood traders’ objects of affection, stocks of bankrupt companies, took a sudden dive. Silly speculation is almost always evidence of a maturing bull market.

  5. Technical signposts are flashing red: Investor sentiment has increased as stock prices rose as a bull market in complacency has quickly unfolded from the depths of MarchMarket breadth has started to wane.

I agree with Doug and have been well ahead of the media in lowering forecasts. As noted previously:

“Given the horrific data we now have coming in, we already know our previous estimates of $100/share were too high. A more realistic, and still overly optimistic 50-60% decline in earnings, makes current valuations even more challenging to support. (Using the chart and table below, you can pick your price and valuation level.) “

What is essential to understand is that while Fed liquidity is currently fueling a “bull market,” the “bear case” still has teeth.

Eventually, the market will fill the gap between “fantasy” and “reality.”

Technical Review Remains Bullish

In the short-term, however, the technical backdrop of the market remains bullish. The market had gotten overheated over the last couple of weeks, but the correction successfully retested the 200-dma. Such establishes important support. Concurrently, the correction reversed most of the more extreme overbought conditions.

However, if we slow our analysis down a bit, we find that the current sell signal remains intact. Such suggests the market could still experience further corrective or consolidative actions over the next couple of weeks or months.

The short-term technical structure remains bullish and overbought currently. However, the longer-term fundamentals remain worrisome in light of the economic devastation. While the Fed’s monetary policies mitigated much of the downside risk, it can not be removed entirely.

As experienced on Thursday, “reversions happen fast.”

Portfolio Positioning For An Overbought Market

As I noted last week:

“With ‘coronavirus cases’ likely to rise sharply following Memorial Day celebrations and recent crowded protests, the risk of disappointment has risen. Such has been an exceptionally rally. All of our equity positions are now extremely stretched and overbought. Conversely, all of our hedges VERY oversold.”

That reversion happened this past week, with our hedges of Treasury bonds and the U.S. dollar offsetting the decline in our longs on Thursday.

This is a very risky market. Caution is advised.

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Economics

BRV China Holds Singapore Explorer Day at SMU

BRV China Holds Singapore Explorer Day at SMU
PR Newswire
SINGAPORE, Sept. 29, 2022

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America
SINGAPORE, Sept. 29, 2022 /PRNewswire/ — BlueRun Ventures China (BRV Chin…

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BRV China Holds Singapore Explorer Day at SMU

PR Newswire

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America

SINGAPORE, Sept. 29, 2022 /PRNewswire/ -- BlueRun Ventures China (BRV China), a leading early-stage technology-focused venture firm, yesterday hosted Explorer Day in Singapore in collaboration with the Institute of Innovation & Entrepreneurship of Singapore Management University and SGInnovate, a government-owned innovation platform in Singapore to support deep technology entrepreneurship. The event brought together more than 80 founders and pioneers – local entrepreneurs, government associations, academics and venture capitalists – who discussed the company's global investment strategy and emerging trends in the fields of artificial intelligence (AI), enterprise services, Web3, robotics and the global expansion plans of start-ups.

BRV China sees significant opportunity for technology investment globally and shared the following insights during the event:

  • Despite market volatility, BRV China remains confident in the fundamental value of many portfolio companies as high-quality start-ups capable of developing disruptive innovations have continued to demonstrate an ability to secure third-party capital.
  • BRV China remains bullish on the long-term prospects of key frontier areas such as AI, robotics, new energy solutions and biotechnology (powered by innovative algorithms).
  • Unlike internet services like mobile apps and e-commerce services that are specifically designed for a geographical region, deep technologies possess substantial business development potential with increasing demand in the global market that will lead to an expected rise in demand for deep technology talent.
  • BRV China believes there's significant long-term potential in the global market with investment flows into the region expected to bounce back following global economic recovery in the coming years.
  • With great changes unseen in a generation will come greater opportunities. Venture capitalists, entrepreneurs and startups were called on to re-evaluate the economic cycle and establish long-term plans so they are ready to "surf the wave" upon eventual recovery in the near-term.

Having first-mover advantages in deep technology and a strong track record across market cycles, BRV China shared its experiences on the opportunities and challenges faced by early-stage startups in areas such as accessing financing solutions and commercialization of technologies ultimately helping promising companies be fully prepared for the many hurdles they face on their growth journey.

"We continue to witness a rapid transition towards a digitalized economy that was accelerated by the pandemic leading to a gamut of opportunities for start-ups that continues to contribute to the growth of the technology sector," said Jui Tan, Managing Partner of BRV China. "To help Chinese start-ups survive a crisis of such unprecedented magnitude, BRV China has been providing continuous support helping many companies adapt and reconfigure their business models while speeding up their R&D and commercialization processes."

The event also featured guest speakers from startups such as Gaussian Robotics and HPC-AI, two fast growing portfolio companies, who shared their journey to success.

"China has leading competitive advantages in deep technologies such as robotics, new energy, AI infrastructure and applications, consumer technology and semiconductors which are in hot demand across the world," said Terry Zhu, Managing Partner at BRV China. "To go global, it is necessary for startups and entrepreneurs to leverage the country's competitive edge and weigh between political influence from different markets while formulating their plan of development. BRV China will help China start-ups to achieve their goal, seizing development opportunities as they arise due to the digital transformation of supply chains, growth in market size and globally distributed Chinese talents."

"Singapore has a flourishing ecosystem as it has a fertile ground for start-ups which are supported by a forward-looking government, a strong research base and a skilled talent pool. BRV China will leverage its experience and help connect researchers, entrepreneurs and investors in order to build a robust ecosystem for innovation," said Jui Tan.

About BRV China

BlueRun Ventures China (BRV China) is a leading early-stage venture firm in China with offices in Beijing and Shanghai. Having its heritage in Silicon Valley since 1998 and entered China in 2005, BRV China has managed over $2 billion through multiple USD and RMB funds, with over $1 billion cash distributions. BRV China focuses on investing in entrepreneurs who create a sustainable impact through technological innovations across enterprise services, transportation and smart machine, digital healthcare, and consumer technology sectors in China. The firm has invested in more than 150 portfolio companies, including Li Auto (NASDAQ: LI), QingCloud (688316.SH), WaterDrop (NYSE: WDH), Energy Monster (NASDAQ: EM), Mogujie/Meilishuo (NYSE: MOGU), Qudian (NYSE: QD), Ganji/58.com, PPTV, Guazi, Meishubao, Nanyan, Shanzhen, Gaussian Robotics, Yi Auto, Pinecone, etc. The firm has been recognized as the "No.1 Early-Stage Investment Firm" in China by Zero2IPO and ChinaVenture, and "Consistent Performing Venture Capital Fund Manager" by Preqin. For further information, please visit https://www.brv.com.cn/en/.

View original content to download multimedia:https://www.prnewswire.com/news-releases/brv-china-holds-singapore-explorer-day-at-smu-301636758.html

SOURCE BRV China

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Butter, garage doors and SUVs: Why shortages remain common 2½ years into the pandemic

The bullwhip effect describes small changes in demand that become amplified as they move down the supply chain, resulting in shortages. The pandemic put…

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Consumers have been seeing empty shelves throughout the pandemic. Diana Haronis/Moment

Shortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.

Want a new car? You may have to wait as long as six months, depending on the model you order. Looking for a spicy condiment? Supplies of Sriracha hot sauce have been running dangerously low. And if you feed your cat or dog dry pet food, expect empty shelves or elevated prices.

These aren’t isolated products. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal and many more items have also been facing shortages in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon.

In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began.

I have been immersed in supply chain management for over 35 years, both as a manager and consultant in the private sector and as an adjunct professor at Colorado State University - Global Campus.

While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.”

What is the ‘bullwhip effect’?

The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages.

Imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end.

The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount and that gets amplified by wholesalers, distributors and raw material suppliers.

The onset of the COVID-19 pandemic, which led to lengthy lockdowns, massive unemployment and a whole host of other effects that messed up global supply chains, essentially supercharged the bullwhip’s snap.

How the bullwhip effect works.

Cars and chips

The supply of autos is one such example.

New as well as used vehicles have been in short supply throughout the pandemic, at times forcing consumers to wait as long as a year for the most popular models.

In early 2020, when the pandemic put most Americans in lockdown, carmakers began to anticipate a fall in demand, so they significantly scaled back production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.

Computer chips aren’t one size fits all; they are designed differently depending on their end use. So chipmakers began making fewer chips intended for use in cars and trucks and more for computers and smart refrigerators.

So when demand for vehicles suddenly returned in early 2021, carmakers were unable to secure enough chips to ramp up production. Production last year was down about 13% from 2019 levels. Since then, chipmakers have began to produce more car-specific chips, and Congress even passed a law to beef up U.S. manufacturing of semiconductors. Some carmakers, such as Ford and General Motors, have decided to sell incomplete cars, without chips and the special features they power like touchscreens, to relieve delays.

But shortages remain. You could chalk this up to poor planning, but it’s also the bullwhip effect in action.

The bullwhip is everywhere

And this is a problem for a heck of a lot of goods and parts, especially if they, like semiconductors, come from Asia.

In fact, pretty much everything Americans get from Asia – about 40% of all U.S. imports – could be affected by the bullwhip effect.

Most of this stuff travels to the U.S. by container ships, the cheapest means of transportation. That means goods must typically spend a week or longer traversing the Pacific Ocean.

The bullwhip effect comes in when a disruption in the information flow from customer to supplier happens.

For example, let’s say a customer sees that an order of lawn chairs has not been delivered by the expected date, perhaps because of a minor transportation delay. So the customer complains to the retailer, which in turn orders more from the manufacturer. Manufacturers see orders increase and pass the orders on to the suppliers with a little added, just in case.

What started out as a delay in transportation now has become a major increase in orders all down the supply chain. Now the retailer gets delivery of all the products it overordered and reduces the next order to the factory, which reduces its order to suppliers, and so on.

Now try to visualize the bullwhip of orders going up and down at the suppliers’ end.

The pandemic caused all kinds of transportation disruptions – whether due to a lack of workers, problems at a port or something else – most of which triggered the bullwhip effect.

The end isn’t nigh

When will these problems end? The answer will likely disappoint you.

As the world continues to become more interconnected, a minor problem can become larger if information is not available. Even with the right information at the right time, life happens. A storm might cause a ship carrying new cars from Europe to be lost at sea. Having only a few sources of baby formula causes a shortage when a safety issue shuts down the largest producer. Russia invades Ukraine, and 10% of the world’s grain is held hostage.

The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and decreased production. A strong U.S. economy and consumers flush with coronavirus cash led to a surge in demand in 2021, and the system had a hard time catching up. Now the impact of soaring inflation and a looming recession will reverse that effect, leading to a glut of stuff and a drop in orders. And the cycle will repeat.

As best as I can tell, these disruptions will take many years to recover from. And as recent inflation reduces demand for goods, and consumers begin cutting back, the bullwhip will again work its way through the supply chain – and you’ll see more shortages as it does.

Michael Okrent does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Searches For “Real Estate Market Crash” Highest In Internet History

Searches For "Real Estate Market Crash" Highest In Internet History

Another milestone for the extremely confused elderly citizen in the White…

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Searches For "Real Estate Market Crash" Highest In Internet History

Another milestone for the extremely confused elderly citizen in the White House basement.

Analysis of Google Trends data reveals that searches for ‘real estate market crash’ exploded 284% in the United States as of September 2022 – the highest level in Google Trends history.

The analysis by the Malibu real estate experts at RubyHome reveals that search interest for ‘real estate market crash’ exploded within the past month, an unprecedented increase in Americans looking for information and prognostication about the real estate market, according to Google search data.

This comes at a time when the US housing market sees mortgage rates rising at the fastest pace in history, surging above 7% after touching 6% just two weeks ago!

Pointing out the obvious, RubyHome CEO Tony Mariotti said that “we know home sales are down. Tuesday’s report from Case-Shiller confirmed the broad price reductions, which also showed U.S. home prices continued their deceleration in July at their fastest rate in the history of the index. We're keeping an eye on this because market activity is seasonally low - we'll know a heck of a lot more about how soft the market is come next spring.”

“Mortgage rates continue to rise beyond the Federal Reserve’s reported 6.29% on September 22. However, we’ve seen this accelerate; mortgage approvals on 30-year fixed loans this week reached 7% for some of our buyers. Going forward, if this trend holds, buyers will afford smaller homes unless they are cash buyers.”

"Sellers who've been holding out for pandemic-inflated prices are going to have to eventually lower their prices. This is just a psychological shift taking place - one that takes a few months to play out."

Tyler Durden Thu, 09/29/2022 - 05:45

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