Code RED--PROTECING PROFITS and CAPITAL

Dear Subscriber,

Like I said yesterday--  "When the facts change, I change my mind. What do you do, sir?”

The facts have changed.  BASE CASE is now pandemic--It's not time to panic--but its time to preserve capital and build cash--this is unknown territory.  
 
Actions to Take: BUY Enough SPY June Put Options to Protect Your Portfolio 
Take Profits on NVDA AMD CLDR MORL SMHB to Build Cash 
SELL AMZA or Buy Enough XOP (Energy) Puts to Protect $3.50 Value

Base Case Assumption: A) US Central Bank Will Cut-rate 50 BPS when the GDP data goes south but they can't create a COVID-19 vaccine which creates a BIG day but does not hold.  
B) Stocks Retreat to 200-Day Moving Averages as Pandemic is acknowledged
 

10-YEAR TREASURY YIELD FALLS TO FOUR-YEAR LOW... The weekly bars in Chart 1 show the 10-Year Treasury yield ($TNX) falling 9 basis points today to 1.37% which its lowest level since July 2016; and close to record territory. The 30-Year Treasury yield has already fallen to its lowest level in history. Today's drop put the TNX back to previous lows ranging from 1.39% in 2012 to 1.33% formed during 2016. That makes for an important test of those previous support levels. Whether or not those previous lows hold may tell us more about confidence in the global economy. Today's plunge in stocks and riskier assets shows that confidence being shaken.

Chart 1

SHORT-TERM LEVELS BROKEN... Several short-term support levels were broken today; and others are being tested. Chart 2 shows the Dow Industrials losing -1031 points today and closing below its late January low to turn its short-term trend lower. And it did so in very heavy trading. As did the other two major stock indexes. Chart 3 shows the S&P 500 trading below its 5o-day average all day; and threatening its late January low. Technical odds of that support holding don't look very good. Chart 4 shows the Nasdaq Composite Index closing just below its 50-day line; and just above its late January low. Heavy selling in technology stocks, led by semiconductors, helped make the Nasdaq the day's biggest percentage loser. Today's heavy selling suggests that its January low could be severely tested.

Chart 2

Chart 3

Chart 4

VOLATILITY INDEX SURGES TO ONE-YEAR HIGH... Another sign that investors are growing increasingly nervous about the stock uptrend was today's 46% spike in the Volatility (VIX) Index. The daily bars in Chart 5 also show the VIX rising above its August peak to end above the 25 level for the first time since the end of 2018. That upside breakout also suggests that there's probably more stock selling to come.

Chart 5

Corona Virus Base Case: Inevitable Pandemic

#1 Health officials in the United States warned Tuesday that the spread of the novel coronavirus in the country appears inevitable, marking a significant change in tone as global travel disruptions continued to worsen, South Korea neared 1,000 cases and Iran reported at least 15 deaths.
https://www.washingtonpost.com/world/asia_pacific/coronavirus-china-live-updates/2020/02/25/f4045570-5758-11ea-9000-f3cffee23036_story.html?utm_campaign=wp_post_most&utm_medium=email&utm_source=newsletter&wpisrc=nl_most

#2 Noted Australian virologist Ian Mackay writes that it is “past time to tell the public” that this thing is probably going to go pandemic and that we should prepare now. Mackay quotes from a long memo that a crisis communication team wrote to guide officials and others in preparing the public for what’s coming. What I’m quoting here is from that team, Jody Lenard and Peter M. Sandman, quoted on Mackay’s blog.

Their advice is basically that we should stop saying “if it goes pandemic,” and accept that this is going to happen, and we need to get ready to be as resilient as possible under conditions of a pandemic. More:

One horrible effect of this continued “stop the pandemic” daydream masquerading as a policy goal: It is driving counter-productive and outrage-inducing measures by many countries against travelers from other countries, even their own citizens back from other countries.  But possibly more horrible: The messaging is driving resources toward “stopping,” and away from the main potential benefit of containment – slowing the spread of the pandemic and thereby buying a little more time to prepare for what’s coming.

We hope that governments and healthcare institutions are using this time wisely.  We know that ordinary citizens are not being asked to do so.  In most countries – including our United States and your Australia – ordinary citizens have not been asked to prepare.  Instead, they have been led to expect that their governments will keep the virus from their doors.

More:

Hardly any officials are telling civil society and the general public how to get ready for this pandemic.

Even officials who say very alarming things about the prospects of a pandemic mostly focus on how their agencies are preparing, not on how the people they misperceive as “audience” should prepare.  “Audience” is the wrong frame.  We are all stakeholders, and we don’t just want to hear what officials are doing.  We want to hear what we can do too.

We want – and need – to hear advice like this:

Try to get a few extra months’ worth of prescription meds, if possible.Think through now how we will take care of sick family members while trying not to get infected.Cross-train key staff at work so one person’s absence won’t derail our organization’s ability to function.Practice touching our faces less. So how about a face-counter app like the step-counters so many of us use?Replace handshakes with elbow-bumps (the “Ebola handshake”).Start building harm-reduction habits like pushing elevator buttons with a knuckle instead of a fingertip.

There is so much for people to do, and to practice doing in advance.

Read the whole thing. Seriously, do — it’s full of practical information and advice.

I’ve not quoted from their section on “emotional preparedness,” which is also hugely important. This is about preparing yourself, your family, and your community for weeks of quarantine at home — not only with food and medicine, but with other plans for how you are all going to get through it, and help your neighbors. Lenard & Sandman say that if you can come to emotional grips now with the possibility — and increasingly, the likelihood — that our lives are about to change in a radical way for a period of time, then when the virus hits, you won’t freak out. If it doesn’t hit — if we are spared — then you will have had the satisfaction of knowing you were ready. The risk of not preparing is too great.

In fact, I just saw that the CDC has, at last, adopted the “slowing, not stopping” line about the virus:

U.S. health officials are preparing for the COVID-19 coronavirus, which has killed at least 2,249 people and sickened more than 76,700 worldwide, to become a pandemic, the Centers for Disease Control and Prevention said Friday.

“We’re not seeing community spread here in the United States, yet, but it’s very possible, even likely, that it may eventually happen,” Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases, told reporters on a conference call. “Our goal continues to be slowing the introduction of the virus into the U.S. This buys us more time to prepare communities for more cases and possibly sustained spread.”

Messonnier said the CDC is working with state and local health departments “to ready our public health workforce to respond to local cases and the possibility this outbreak could become a pandemic.” The CDC is collaborating with supply chain partners, hospitals, pharmacies and manufacturers to understand what medical supplies are needed, she said.

Messonnier goes on to say that the day may come when the US will have to do the same thing China is now doing: shutting down business and schools indefinitely.

What would you do if it came to that? You had better be thinking it through right now, while there is time.
https://www.theamericanconservative.com/dreher/the-pandemic-is-coming-coronavirus/ 

China Shipping Flows Have Collapsed and Are In "Freefall"

Just how severely has the coronavirus curtailed cargo flows to and from China, the world's most important trade engine? Chinese government data is both after-the-fact and suspect, but Boston-based big-data company CargoMetrics is now providing a real-time answer.

CargoMetrics has spent the past decade amassing and analyzing ship-movement data, discerning patterns and developing quantitative predictive algorithms. It's now bringing its powers to bear on what's happening in China.

The company has just publicly released data that sheds new light on what transpired in the weeks following Chinese New Year (CNY). To better understand what the numbers mean, FreightWaves interviewed CargoMetrics CEO Scott Borgerson and Dan Brutlag, head of trading signal and data products.

Chinese Exports In "Freefall"

The first dataset tracks Chinese export tonnage, indexed in relation to CNY (1.0 = 5 days prior to CNY) for 2020 versus the 2012-2019 average.

"The data covers energy, dry, container activity, and other activity," explained Brutlag. "Our model is based primarily on the net mass transferred by a vessel." The mass is accounted for on the day it's transferred on or off the ship.

Asked whether the mass calculation is based on Automatic Identification System (AIS) signals – which include ship draft levels that indicate whether a ship is full, partially full or empty – or on algorithms, Borgerson replied, "Both. We're receiving over one billion AIS signals a day, and where you can't get that draft information, we have 10 years of point-in-time data and benchmarking and backtesting to inform the logic of the algorithms."

What CargoMetrics' data has uncovered is that Chinese imports "are totally in freefall," said Borgerson.

After Feb. 7, volumes began to nosedive, with the pace of declines accelerating through Feb. 17, the last day of the index data provided by CargoMetrics.

View photoschinese importsMore

Chart credit: CargoMetrics

The index declined by 27% between Feb. 7 and Feb. 17. Asked how this breaks down by segment, Brutlag explained, "It's mainly dry bulk – iron ore and coal – followed by energy and containers. There was actually a slight uptick in container imports in terms of mass being offloaded." Dry cargo volume is down around 40% compared to the month prior to CNY, he said.

Chinese Exports "Ugly"

Chinese exports are not showing quite the cliff-esque collapse as imports, but the trend line is "ugly" and diverging from the historical pattern, said Borgerson. Usually, at around the two-week point after CNY, export activity turns positive. This year, it just kept falling.

View photoschinese exportsMore

Chart credit: CargoMetrics

"On the export side, the drop is mainly being driven by container-vessel exports, which are down roughly 60% [versus the month prior to CNY]. We've entered the time when we would typically see a recovery and there is no sign of recovery right now, as far as we can tell," said Brutlag.

Australian Export Indicator

Australian export volumes are a key indicator for China, given the huge amount of iron ore and coal that's shipped. The CargoMetrics data shows that two weeks after CNY, this year's index pattern began sharply diverging from the 2012-19 average, falling steeply until Feb. 13

On a positive note, volumes have been going back up again from Feb. 13-17. It takes 10-15 days for dry bulk carriers to make the trip from Australia to China, implying that the Chinese import data could rebound when those cargoes arrive. "We're going to have to watch this [Chinese import] data closely in early March," said Borgerson.

View photosAustralian exportsMore

Crude Oil In Transit

CargoMetrics also tracks global crude oil flows. It has compiled data on the 15-day average of volumes departing the top 10 exporters to China, in relation to CNY timing. "The export data is agnostic to the destination so that volume is not necessarily going to China, although historically, a great deal of it has," said Brutlag.

What this dataset show is that the volumes are actually up, from 24.9 million barrels per day (b/d) on CNY to around 27.7 million b/d on Feb. 17.

View photoscrude oil exports to ChinaMore

Chart credit: CargoMetrics

How to resolve the conflict between this data and the nose-diving Chinese import figures? The answer is that it typically takes 30-40 days for the transport of crude oil to China. The ships are now in transit. The question is whether they'll be able to unload when they get there.

"The anchorages could start to get pretty filled up and the ships could become floating storage facilities," said Borgerson. "On one hand, that could have a counterintuitive [positive] effect on freight rates. On the other hand, if commodities can't get imported to China, which is the main driver of everything globally for freight and commodities, that is not good."

What's Next For China?

What happens in the next two weeks is "critical," asserted Borgerson.

"We're looking at this purely from the lens of the maritime perspective," he said. "Shipping moves 90% of the planet's trade, and while China is not literally an island, its economy is figuratively one because it imports nearly all of its raw materials and exports nearly all of its finished goods by sea. So, the lens we apply is very much a leading indicator for Chinese industry activity and productivity."

Pressure on the global trade network could be alleviated if "China gets people moving around and factories open up, supply chains can deal with the inventories that are building up, and all the ships that are sailing there can discharge," he said.

If not, warned Borgerson, "then we're in uncharted territory."

Key Point: The worrying prospect that the coronavirus outbreak could become the first truly disruptive pandemic of the globalization era is renewing doubts over the stability of the world economy. With the death toll approaching 3,000, over 80,000 cases officially recorded and an outbreak in Italy now shutting down the richest chunk of its economy, some economists are beginning to war game what an untethered outbreak could mean for global growth.

Oxford Economics Ltd. reckons an international health crisis could be enough to wipe more than $1 trillion from global gross domestic product. That would be the economic price tag for a spike in workplace absenteeism, lower productivity, sliding travel, disrupted supply chains and reduced trade and investment.

Investors are already nervous, with U.S. stock benchmarks slumping more than 3% on Monday and 2% today the S&P 500 Index dropping the most since February 2018.

The Central Banks Can't Create Antidote For A Global Pandemic

For now, central bankers and governments continue to bet that the coronavirus will not damage the world economy by much, and perhaps allow it to enjoy a rapid rebound once the illness fades. But that confidence is being tested. While the International Monetary Fund currently reckons the virus will only force it to knock 0.1 percentage point off its 3.3% global growth forecast for 2020, IMF Chief Economist Gita Gopinath said in a Yahoo Finance interview that a pandemic declaration would risk “really downside, dire scenarios.”

The head of the World Health Organization called the new cases “deeply concerning,” but said the outbreak isn’t yet a pandemic.

Still, the protracted shutdown of Chinese factories that were supposed to be back online and the spread of the virus to South Korea, Iran and Italy’s northern industrial heartland raise the specter of much greater death and disruption. The virus risks tipping Italy into a recession that could hurt the rest of Europe too.

South Korea’s economy is being buffeted, with consumer confidence plunging the most in five years.

CHINA INSIGHT: Heading Below 3%? Tracking Estimates for 1Q GDP

UBS Group AG Chairman Axel Weber is already far more pessimistic than the IMF and warned global growth will experience a massive drop from 3.5% to 0.5% and China will shrink in the first quarter. “The much larger downside risk is that this continues to be a problem,” the former Bundesbank president told Bloomberg Television in Riyadh, where Group of 20 finance chiefs hinted at collective worries at the dangers of the virus.

How to assess the risk is complicated by doubt over how far the coronavirus will travell. In an analysis that predates the current outbreak, the World Bank reckons a destructive pandemic could result in millions of deaths, and points to how even conservative estimates suggest such an experience might destroy as much as 1% of global GDP.

Oxford Economics’s tally of the impact from a global pandemic stemming from the current outbreak suggests a cost of $1.1 trillion to global GDP, with both the U.S. and eurozone economies suffering recessions in the first half of 2020. It describes such a scenario as a “short but very sharp shock on the world economy.”

Aside from containment of the disease, one mitigating factor -- and a major unknown for economists modeling the outcome -- will be the actions of central banks and governments to cushion the effects.

“When we entered the year we certainly didn’t think that central banks would be as eager to cut interest rates and to become even more supportive,” said Credit Suisse Group AG’s Nannette Hechler-Fayd’Herbe. “Now, the answer is going to be quite dependent on how the coronavirus spreading is going to continue.”

Yet for Drew Matus, chief market strategist at MetLife Investment Management, monetary policy alone would probably be insufficient.

“My guess would be you actually can’t solve it with interest rates,” he told Bloomberg Television. “People are worried about their families, worried about their health -- 25 basis points doesn’t do it, in terms of encouraging people to go out there and spend.”

Final Points: The slowdown from the pandemic will PEAK and the global economy WILL bounce back.  IF you want to trade this sell-off to the 200-day lines, join the All Access service and we will actively trade this oncoming train wreck.

Other wise, my best advice is to take precautions, raise a LOT of cash, and hold your bonds. 100% of Europe bonds have gone to negative rates--that should tell you everything about the pandemic.

We will hold a conference call on Thursday for All-Access members. To join, go to www.transformityresearch.com and subscribe to the All-Access service.

Stay calm--but be smart.
 

Toby