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Six Downside Risks

Six Downside Risks



Six Downside Risks Tyler Durden Sat, 06/27/2020 - 14:00

Authored by Lance Roberts via,

Market Corrects As COVID Cases Surge

Three overriding catalysts were driving the correction this past week:

  1. The market had gotten a good bit ahead of fundamentals.

  2. The surge in COVID cases is undermining the V-Shaped recovery narrative.

  3. End of the quarter portfolio rebalancing, which managers postponed in March.

We will go through each of these in more detail. However, let’s start with where we left off last week and update our risk/reward ranges.

Currently, the risk/reward dynamics have become slightly less favorable. The good news is that the 50-dma and 200-dma are so close there is strong support short-term. Such should give the bulls a bit of optimism. However, a breakdown below that level and things will get ugly quickly.

  • -2.2% to consolidation highs vs. +3.1% to the top of the current downtrend. (Positive)

  • -8.9% to previous consolidation lows vs. +7.7% to previous rally peak (Negative)

  • -13.1% to March bounce peak vs. +12% to all-time highs. (Negative)

  • -18.4% to April 5th lows vs. +12% to all-time highs. (Negative)

As shown, with the sell-off on Friday, the short-term oversold condition, a reflexive rally next week would not be surprising. Given that COVID concerns are escalating, it may be wise to use any rally to reduce risk further and increase hedges.

The Market Is Well Ahead Of Fundamentals

Part of the correction over the last two weeks is coming partially from the realignment of stocks back to reality. We specifically mentioned some of the more visible issues last week, but it was interesting to watch the “Daytraders Favorites” crash back to Earth (No pun intended.)

As we addressed on Tuesday, it is hard to justify paying current valuations.

“Furthermore, given the depth of the economic crisis, 49-million unemployed, collapsing wages and incomes, and a resurgence in the number of COVID-19 cases, estimates are still too high. During previous economic downturns, earnings collapsed between 50% and 85%. It is highly optimistic, given the current backdrop, that earnings will only decline by 20%.”

6 Downside Risks

With States now beginning to back off of reopening plans, it is highly likely current earnings estimates will need to be guided lower over the next couple of months.

The most significant risk to investors currently is a “reliance on certainty” about future outcomes, when, in reality, there is no certainty at all. As Mike Shedlock pointed out just recently, there are numerous risks still present.

Six Downside Risks 

  1. The future progression of the pandemic remains highly uncertain.

  2. The collapse in demand may ultimately bankrupt many businesses.

  3. Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors. 

  4. Disruptions to global trade may result in a costly reconfiguration of global supply chains. 

  5. Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.

  6. Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.”

Again, the market is trading well ahead of underlying fundamentals. While the “Fed Put” may indeed put a “floor” below stocks, that doesn’t mean they can’t correct to realign with economic and fundamental realities.

COVID Makes A Second Appearance

As we discussed previously, the market rallied from the March lows based on 4-underlying premises:

  1. There would be no second-wave of the virus.

  2. There would be a vaccine available by year-end. 

  3. The economy would fully recover back to pre-pandemic levels.

  4. And, of course, “The Fed.”

While the bullish fantasy indeed prevailed over the last couple of months, suddenly, the world has shifted. The hope was that cases in the U.S. would slow into the fall before the potential onset of a “second wave” during a more traditional “flu season.” Unfortunately, the spike in cases in the still ongoing “first wave” will delay economic recovery longer.

In Texas, where I live, the Governor has shut-down bars again, is keeping businesses at reduced capacity, and potentially will reverse more if needed.

My wife went to the doctor recently for a test, and she received the “ole’ swap up the nose.” While the test came back negative. The doctor told my wife that COVID lives in the lungs and not the nasal cavity. Therefore, while her test was negative, it could be a false negative. If the doctor is correct, the real numbers of infected could be 10x higher. Such confirms a recent Reuters article:

“Government experts believe more than 20 million Americans could have contracted the coronavirus, 10-times more than official counts, indicating many people without symptoms have or have had the disease, senior administration officials said.

The estimate, from the Centers for Disease Control and Prevention, is based on serology testing used to determine the presence of antibodies that show whether an individual has had the disease, the officials said.”

If true, the ramifications could substantially impair the bullish thesis.

Timing Couldn’t Be Worse

Without a bill to extend more Federal Aid via Payroll Protection Programs and increased unemployment benefits, the ongoing restriction on trade will likely lead to a further surge in bankruptcies and layoffs.

“According to Bloomberg data, no less than 13 U.S. companies sought bankruptcy protection last week, matching the global financial crisis’s peak. The filings, led by the perennially weak consumer and energy sectors, were the most for any week since May 2009.”

There is a virtual spiral between job losses and bankruptcies. As more individuals lose their jobs, they have less to spend. Since consumption is what drives earnings for businesses, they have to lay off workers to stay in business. Pay attention to the “continuing claims,” which will tell the story of the economic recovery. (That doesn’t look like a “V”)

End Of The Quarter Rebalancing

There was one other factor which has weighed on stocks this past week, which was noted recently by Zerohedge:

“When adding all the other possible sources of the month- and quarter-end forced rebalancing, the total amount ‘for sale’ soars to an unprecedented $170 billion according to calculations by JPMorgan.

In the latest Flows and Liquidity report from JPM’s Nikolas Panagirtzoglou, writes that after correctly pointing out at the market lows on March 23rd that there is a massive $1.1 trillion in rebalancing flow into equities, all of that has since balanced out, and three months later, we are looking at a substantial outflow of about $170BN before month-end, resulting in a ‘small correction.'”

This rebalancing of portfolios was postponed by pension and mutual funds in March as they did not want to sell at market lows. That decision worked out well then, but now they need to rebalance portfolios by selling equities and buying bonds. We can see this action by looking at the performance between the S&P 500 index and Treasury Bonds over the last two weeks.

This rotation is either likely close to completion, or will complete early next week. As we stated previously, this is why we hedge our equity portfolios with fixed income. The risk offset reduces downside volatility and allows the portfolio to weather tough patches in the market.

With the market very oversold short-term, it would not be surprising to see a reasonably decent reflexive rally into the start of July. However, that rally will likely be an excellent opportunity to rebalance risk and rethink exposures accordingly.

Portfolio Positioning Update

As stated last week, with our portfolios almost entirely allocated towards equity risk in the short-term, we remain incredibly uncomfortable.

Our positioning in fixed income and gold has hedged the portfolio against the latest decline in the very short-term. Still, with the market getting very oversold short-term, as shown below, we expect a reflexive rally off of current support next week.

Most likely, we will use any counter-trend bounce to reduce equity risk a bit, rebalance exposures, and focus our attention on capital preservation for the next couple of months. With the virus resurfacing, the potential risk of disappointment to the earnings and economic recovery story has risen.

While it is easy for the mainstream media to write articles and post comments about the markets, it is an entirely different matter when you manage money. Currently, there is a battle raging between the fundamental and “hope” driven narratives.

On the one hand, it’s easy to see the fundamental problems in the market and the economy, which argues for much less risk exposure. However, on the other, you have the Fed and a Government, ready to throw money at, and “jawbone,” the markets at a moment’s notice.

Trying to navigate the two is like trying to thread a needle, in a moving car, on a bumpy road, with your eyes closed. Given we aren’t prescient, we will have to resign ourselves to doing the best job we can for our clients with the information we have available.

That is a fancy way of saying, “we are going to give it our best guess.”

The goal remains the same as always, protect our client’s capital, reduce risk, and try to come out on the other side in one piece.

Sometimes, however, it just gets messy.

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Why it May be Time to Start Stocking up on Weed

There’s an important change coming that may force users to change their behavior.



There's an important change coming that may force users to change their behavior.

While inflation has already ruined many people's plans for a summer trip cross-country, the impact of rising prices may soon hit some people where it'll really hurt.

Cannabis, and many of its related products, has so far largely escaped the kind of double-digit increases seen in many food products such as chicken to avocados — one analytics firm even reported that the price of marijuana flowers, edibles and vaping products fell by a respective 16.7%, 11.8% and 12.4% between January 2021 and 2022.

But for interconnected reasons having to do with everything from lack of available materials to supply chain disruption, prices for most things have been rising steadily and at a rate unseen in 40 years. 

Even if the main item hasn't increased in price, rising costs for packaging material has left almost no industry unaffected.

Between June 2021 and 2022, the consumer price index rose by 9.1%.

Has Inflation Finally Come For People's Weed?

And, as the latest report from cannabis industry and accounting firm GreenGrowth CPAs shows, inflation may have finally started coming for the cannabis industry.

Amid rising cost of labor and materials necessary to make ready-to-consume cannabis, one in every four retailers that produce it reported that they have either raised or plan to raise prices by more than 10% in the next year.

"The COVID-19 pandemic had a comparatively limited impact on cannabis operators," reads the report. "According to last year’s data set, the top two reported issues, supply chain and difficulty hiring, affected nearly all sectors in 2021. [...] In addition, the most common issue impacting operators today are supply challenges."


The survey examined over 700 companies in states where either recreational or medical marijuana use is legal. These include both start-ups and large multi-state operators.

While 70% of operators said they would try to absorb rising costs instead of raising prices, 30% plan to raise prices preemptively to prevent losses.

Pointing the Finger 

The study's respondents split over who to blame for rising inflation, with 40% citing Biden administration policies, and 30% citing carryover effects from Trump administration policies.

Other reasons cited by operators include supply chains, conflicts with countries like Russia and China and impact from petroleum companies' way of doing business.

Nationwide numbers rarely tell the whole picture since cannabis use and production are currently illegal at a federal level. But even with rising prices, demand has been strong both during the COVID-19 outbreak and after. Some online delivery services in California reported a 500% rise in sales since the start of quarantine.

"After two years marked by crisis and uncertainty following a global pandemic, financial operators in cannabis find themselves navigating a list of new complications and business obstacles," reads the report. "But it isn't all bad news. Many operators benefited from a surge of demand and used this new windfall to enact ambitious growth plans."

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Spread & Containment

Sex work is real work: Global COVID-19 recovery needs to include sex workers

Societally, we need to recognize that sex workers have agency and deserve the same respect, dignity and aid as any other person selling their labour.



Globally, sex workers have been left to fend for themselves during the pandemic with little to no support from the government. (AP Photo/Bikas Das)

During the pandemic, business shifted from in person to work-from-home, which quickly became the new normal. However, it left many workers high and dry, especially those with less “socially acceptable” occupations.

The pandemic has adversely impacted sex workers globally and substantially increased the precariousness of their profession. And public health measures put in place made it almost impossible for sex workers to provide any in-person service.

Although many people depend on sex work for survival, its criminalization and policing stigmatizes sex workers.

Research shows that globally, sex workers have been left behind and in most cases excluded from government economic support initiatives and social policies. There needs to be an intersectional approach to global COVID-19 recovery that considers everyone’s lived realities. We propose policy recommendations that treat sex work as decent work and that centre around the lived experiences and rights of those in the profession.

Sex work and the pandemic

The United Nations Population Fund (UNFPA) recently reported that apart from income-loss, the pandemic has increased pre-existing inequalities for sex workers.

In a survey conducted in Eastern and Southern Africa, the UNFPA found that during the pandemic, 49 per cent of sex workers experienced police violence (including sexual violence) while 36 per cent reported arbitrary arrests. The same survey reported that more than 50 per cent of respondents experienced food and housing crises.

Lockdowns and border closures adversely impacted Thailand’s tourism industry which relies partially on the labour of sex workers.

Read more: Sex workers are criminalized and left without government support during the coronavirus pandemic

In the Asia Pacific, sex workers reported having limited access to contraceptives and lubricants along with reduced access to harm reduction resources. Lockdowns also disrupted STI or HIV testing services, limiting sex workers’ access to necessary healthcare.

In North America, sex workers have been excluded from the government’s recovery response. And many began offering online services to sustain themselves.

A woman stands backlit next to a dimly lit bus that reads 'Thailand' with green lighting.
Sex workers stand in a largely shut-down red light area in Bangkok, Thailand on March 26, 2020. (AP Photo/Gemunu Amarasinghe)

Government vs. community response

Globally, sex workers have been left to fend for themselves during the pandemic with little to no support from the government. But communities themselves have been rallying.

Elene Lam, founder of Butterfly, an Asian migrant sex organization in Canada, talks about the resilience of sex wokers during the pandemic.

She says organizations like the Canadian Alliance for Sex Work Law Reform are working in collaboration with Amnesty International to mobilize income support and resources to help sex workers in Canada.

Organizations in the United Kingdom, Germany, India and Spain have also set up emergency support funds. And some sex worker organizations have developed community-specific resources for providing services both in person and online during the pandemic.

Global recovery needs to include sex workers

The International Labour Organization’s “Decent Work Agenda” emphasizes productive employment and decent working conditions as being the driving force behind poverty reduction.

Sociologist Cecilia Benoit explains that sex work often becomes a “livelihood strategy” in the face of income and employment instability. She says that like other personal service workers, sex workers also should be able to practice without any interference or violence.

In order to have an inclusive COVID-19 recovery for all, governments need to work to extend social guarantees to sex workers — so far they haven’t.

As pandemic restrictions disappear, it is crucial to ensure that everyone involved in sex work is protected under the law and has access to accountability measures.

A woman stands wearing a mask with a safety vest on in front of a collage of scantily clad women and a sign that reads 'nude women non stop'
A volunteer helps out at Zanzibar strip club during a low-barrier vaccination clinic for sex workers in Toronto in June 2021. THE CANADIAN PRESS/Frank Gunn


As feminist researchers, we propose that sex work be brought under the broader agenda of decent work so that the people offering services are protected.

  1. Governments need to have a legal mandate for preventing sexual exploitation.

  2. Law enforcement staff need to be trained in better responding to the needs of sex workers. To intervene in and address situations of abuse or violence is critical to ensure workplace safety and harm reduction.

  3. Awareness and educational campaigns need to focus on destigmatizing sex work.

  4. Policy-makers need to incorporate intersectionality as a working principle in identifying and responding to the different axes of oppression and marginalization impacting LGBTQ+ and racialized sex workers.

  5. Engagement with sex workers and human rights organizations need to happen when designing aid support to ensure that an inclusive pathway for recovery is created.

  6. Globally, there needs to be a steady commitment towards destigmatizing sex workers and their services.

Despite the gradual waning of pandemic restrictions, sex workers continue to face the dual insecurity of social discrimination and loss of income support. Many are still finding it difficult to stay afloat and sustain themselves.

Societally, we need to recognize that sex workers have agency and deserve the same respect, dignity and aid as any other person selling their labour.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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OU researchers award two NSF pandemic prediction and prevention projects

Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its…



Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its Predictive Intelligence for Pandemic Prevention initiative, which focuses on fundamental research and capabilities needed to tackle grand challenges in infectious disease pandemics through prediction and prevention.

Credit: Photo provided by the University of Oklahoma.

Two groups of researchers at the University of Oklahoma have each received nearly $1 million grants from the National Science Foundation as part of its Predictive Intelligence for Pandemic Prevention initiative, which focuses on fundamental research and capabilities needed to tackle grand challenges in infectious disease pandemics through prediction and prevention.

To date, researchers from 20 institutions nationwide were selected to receive an NSF PIPP Award. OU is the only university to receive two grants to the same institution.

“The next pandemic isn’t a question of ‘if,’ but ‘when,’” said OU Vice President for Research and Partnerships Tomás Díaz de la Rubia. “Research at the University of Oklahoma is going to help society be better prepared and responsive to future health challenges.”

Next-Generation Surveillance

David Ebert, Ph.D., professor of computer science and electrical and computer engineering in the Gallogly College of Engineering, is the principal investigator on one of the projects, which explores new ways of sharing, integrating and analyzing data using new and traditional data sources. Ebert is also the director of the Data Institute for Societal Challenges at OU, which applies OU expertise in data science, artificial intelligence, machine learning and data-enabled research to solving societal challenges.

While emerging pathogens can circulate among wild or domestic animals before crossing over to humans, the delayed response to the COVID-19 pandemic has highlighted the need for new early detection methods, more effective data management, and integration and information sharing between officials in both public and animal health.

Ebert’s team, composed of experts in data science, computer engineering, public health, veterinary sciences, microbiology and other areas, will look to examine data from multiple sources, such as veterinarians, agriculture, wastewater, health departments, and outpatient and inpatient clinics, to potentially build algorithms to detect the spread of signals from one source to another. The team will develop a comprehensive animal and public health surveillance, planning and response roadmap that can be tailored to the unique needs of communities.

“Integrating and developing new sources of data with existing data sources combined with new tools for detection, localization and response planning using a One Health approach could enable local and state public health partners to respond more quickly and effectively to reduce illness and death,” Ebert said. “This planning grant will develop proof-of-concept techniques and systems in partnership with local, state and regional public health officials and create a multistate partner network and design for a center to prevent the next pandemic.”

The Centers for Disease Control and Prevention describes One Health as an approach that bridges the interconnections between people, animals, plants and their shared environment to achieve optimal health outcomes.

Co-principal investigators on the project include Michael Wimberly, Ph.D., professor in the College of Atmospheric and Geographic Sciences; Jason Vogel, Ph.D., director of the Oklahoma Water Survey and professor in the Gallogly College of Engineering School of Civil Engineering and Environmental Science; Thirumalai Venkatesan, director of the Center for Quantum Research and Technology in the Dodge Family College of Arts and Sciences; and Aaron Wendelboe, Ph.D., professor in the Hudson College of Public Health at the OU Health Sciences Center.

Predicting and Preventing the Next Avian Influenza Pandemic

Several countries have experienced deadly outbreaks of avian influenza, commonly known as bird flu, that have resulted in the loss of billions of poultry, thousands of wild waterfowl and hundreds of humans. Researchers at the University of Oklahoma are taking a unique approach to predicting and preventing the next avian influenza pandemic.

Xiangming Xiao, Ph.D., professor in the Department of Microbiology and Plant Biology and director of the Center for Earth Observation and Modeling in the Dodge Family College of Arts and Sciences, is leading a project to assemble a multi-institutional team that will explore pathways for establishing an International Center for Avian Influenza Pandemic Prediction and Prevention.

The goal of the project is to incorporate and understand the status and major challenges of data, models and decision support tools for preventing pandemics. Researchers hope to identify future possible research and pathways that will help to strengthen and improve the capability and capacity to predict and prevent avian influenza pandemics.

“This grant is a milestone in our long-term effort for interdisciplinary and convergent research in the areas of One Health (human-animal-environment health) and big data science,” Xiao said. “This is an international project with geographical coverage from North America, Europe and Asia; thus, it will enable OU faculty and students to develop greater ability, capability, capacity and leaderships in prediction and prevention of global avian influenza pandemic.”

Other researchers on Xiao’s project include co-principal investigators A. Townsend Peterson, Ph.D., professor at the University of Kansas; Diann Prosser, Ph.D., research wildlife ecologist for the U.S. Geological Survey; and Richard Webby, Ph.D., director of the World Health Organization Collaborating Centre for Studies on the Ecology of Influenza in Animals and Birds with St. Jude Children’s Research Hospital. Wayne Marcus Getz, professor at the University of California, Berkeley, is also assisting on the project.

The National Science Foundation grant for Ebert’s research is set to end Jan. 31, 2024, while Xiao’s grant will end Dec. 31, 2023.

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