Fed Driven Lunacy
Posted on Sunday, June 14th, 2020
We were able to see four different walls this week as we took the show on the road to Hilton Head Island. The wife and kids needed a break. I haven’t struggled as much I suppose because I have been so busy. Bored has not been anywhere on my list since February. Hilton Head was busier than I thought and virus precautions seemed a bit lax. We spent most of our time either on the beach or playing board games. The virus has been a gift in the respect that I have been able to spend so much time with my almost grown children – and that is priceless. No problems – only opportunities.
The lunatics are in charge of the asylum. There were several examples of lunacy on the floor this week but Hertz takes the cake. Hertz, the rental car company, filed for bankruptcy on May 22nd of this year. In the period since, its stock has skyrocketed from a low of 40 cents on May 26th to a high of $6.25 on June 8th. The lawyers from Hertz see an opportunity here to raise some fresh capital and are in the process of selling stock in the bankrupt company. The company is going to raise $1billion in capital from the stock sale. The stock is worthless!!! The company even states this fact in its filings. A company going bankrupt is raising a $1billion for the company by selling stock they know is worthless. Greed. Euphoria. Caveat emptor.
All of this lunacy is being made possible by the Federal Reserve and central banks around the world. The injection of liquidity has to go somewhere and why not financial markets. Recently unemployed day traders are helping to drive a bit of this lunacy. Markets may pull back here as saner heads prevail. Systematic traders jumped out of longs on Thursday and Friday was not enough to convince us the all clear signal has been given. Summer markets see less liquidity and day traders may push volatility higher. It looks like it’s going to be a long volatile summer. There are no problems – only opportunities.
Gaps in stock charts show violent moves. These gaps hold traders attention and become important signposts on the journey of stocks. The move lower in February was started by a gap down at the 3320 level. After Thursday’s action we have now gapped lower without surmounting that hurdle. That puts a check mark in the bear’s column. If the bulls can just hold their ground for a couple of weeks above the 200 Day Moving Average on the S&P 500 of 3014 that would be huge win and get momentum back in their favor. We think it’s time to cut back on risk and put some money on the bears but, keep in mind, the central bank put is alive and well. Pension funds and the like have not been aggressive buyers on this run as they bet that we would test the lows. I don’t think they will let a buying opportunity slip by this time without taking action.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.