Special Update - Monday, April 13th 2020
Lord knows we all need some good news in this time of crisis, and stocks and bond prices started off April rallying with the markets now up about 25% off the March lows after a 34% nosedive off the highs! The main reasons that markets are rallying is because of unprecedented central bank stimulus. In the last 40 plus years that I have been advising clients, the market price action and moves have compressed dramatically and are also more violent with the recent decline being the quickest drop in prices since the 1930s. However, the rebound for the week ending the Easter holiday saw the biggest rise in the markets in almost 50 years!
For the first quarter of 2020, the S&P 500 index declined about 20% and the DOW dropped about 23% from the shocks of this ongoing pandemic. We also saw an unusual 20% decline for the 60% stock and 40% bond balanced portfolio which has only occured three times going back to the 1970s. However, our client accounts held-up better than the general markets mainly because of our tactical overlay approach incorporating the All Terrain Opportunity Fund which was only down 3.3% in the first quarter of 2020. Castle Financial serves as co-advisor on the fund which is rated 5 Stars by Morningstar and is managed to reduce drawdowns in bad markets and also potentially make money in any market environment.
I was part of a group that conceived and launched the All Terrain Opportunity Fund as a result of the 2008 financial crisis because we wanted to have the ability to expeditiously create true counter balance in down markets and also potentially make money in any markets conditions. You can view the fund atwww.allterrainfunds.com and clients’ portfolios are also comprised of leading funds from some of the best performing money managers in the world. We also hold gold directly in client accounts through ETFs (Exchange Traded Funds) and/or gold is held in select mutual funds in client accounts. Gold gained about 4% in the first quarter of 2020 and I believe that with all the fiat currencies being created around the globe, gold will continue to perform well as it is a true store of value and the true currency of the ages. The Bank of International Settlement now also recognizes physical gold as a Tier 1 asset of central bank holdings.
We have all borne witness to how this insidious coronavirus (Covid-19) from China is impacting our families, our communities and our very way of life. What we are facing is daunting, but I am heartened by the moments of triumph in everyday acts of courage, humanity and love. Although these are trying times for us all, I remain optimistic that our world will ultimately thrive once again. As the Covid-19 virus spread across the globe and became a global pandemic that threatened the people of the world’s health and economic well-being, nearly every asset class of investments experienced challenging liquidity, market dislocations, and record-setting selling pressures.
To further create chaos, towards the beginning of the pandemic in America, Saudi Arabia and Russia orchestrated a phony oil price war to crash oil prices in an attempt to bankrupt the US oil and energy industries which require higher oil prices to remain profitable. Make no mistake, America is in a new type of war killing our citizens and destroying our economy. Our government and other countries did not get the true facts from the communist China leaders about the severity of the Coronavirus and China intentionally withheld vital information from other countries which is causing death and destruction in many ways around the world. Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases in the USA has stated that in late December 2019, Chinese officials mislead him by stating that the virus transmission was just animal to human and not human to human which China knew was a blatant lie as their citizens had already been passing the virus to each other with many fatalities.
I have been reading many articles regarding the origin of the coronavirus and on February 22nd 2020, the New York Post published an article titled “Don’t buy China’s story: The coronavirus may have been leaked from a lab. The fact is that the virus originated from China’s only level 4 microbiology lab which handles coronaviruses, located in the Chinese City of Wuhan, the epicenter of the epidemic. This lab is part of the Wuhan Institute of Virology.
It appears to me that China’s Communist Party leaders are retaliating for the restraints put on China from the tariffs and also the curtailment of China’s ability to steal corporate intellectual property. China is also retaliating for the restraints put on Huawei, one of China’s most important technology companies which has been hiding spyware in electronic components being sold around the world. In retaliation, I believe that China intentionally unleashed their man made bio-weapon covid-19 virus on the world in order to bring down their competitors in the global economy. Further, I believe China’s next move will be to disclose to the world that they have secretly accumulated dramatic reserves of gold far greater than what they have been reporting which they will use to back the renminbi which is their currency (the Yuan is a unit of their currency, the renminbi).
China held its first ever Chinese Gold Congress several years ago sponsored by the Chinese Communist Government and 5 large gold companies including state owned companies at which the president of China National Gold stated that the renminbi, which was becoming nationalized, should have a gold backing. The Shanghai Gold Exchange is trading gold internationally with gold traded and now settled in the renminbi. Accordingly, I believe that part of China’s quest for global dominance will be to weaponize the renminbi by backing it with gold to replace the US dollar as the world reserve currency.
With the coronavirus, China has successfully crashed the US economy and forced the Fed to further debase the US dollar to counteract this pandemic, so China’s scheme is proceeding according to their diabolical plan. Also, in a recent interview, Dr. Fauci stated that when we get control of the coronavirus we will go back and investigate how the virus originated. I believe that the truth will ultimately prevail and the Communist leaders in China will have a hefty price to pay in the future. President Reagan called the Soviet Union the evil empire and I think we have a another candidate regime for that title.
On a more positive note, in this time of crisis, we are blessed with many of our citizens and companies that are stepping forward to meet the many needs of our wounded nation. We are grateful for the many doctors and health care workers on the front lines battling the virus and saving countless lives. Civil servants, municipal and government workers nationwide are keeping our communities operating and safe while our nation’s railroaders, truckers and their partners continue to do their part, continuing to deliver the goods that feed, support and power communities across the country which will also allow for a quicker recovery. Also, we cannot forget the brave farmers, food industry workers and delivery services that are bringing food and other essentials to our homes. I also believe our government task force led by our President is doing their part to lead us all out of this crisis. This pandemic is traumatic, but the following chart notes past epidemics and the ensuing stock market rallies that followed so, if history repeats itself, the markets will eventually recover. Unfortunately, we will never recover the precious lives lost.
This downturn is unique with a fear-inducing health crisis leading to an economic crisis which are an unprecedented destructive combination. As I write this update, the benchmark S&P 500 index has ended its technical bear market with the surge back higher in stock prices, but some on Wall Street are worried that the stock market has not hit bottom yet. The S&P 500 surged from its March 23rd low ending the second-shortest bear market in history, surpassed only by one in 1929, according to Dow Jones Market Data. Of concern to me is that looking at markets since 1929, it would be highly unusual if the S&P fails to re-test its March 23rd low, given the size of the recent drawdown (minus 34% off the highs), the coming recession and predictions that the U.S economy will experience its sharpest economic contraction of the post-World War II era. On the other hand, some market technicians are projecting that the S&P 500 may rally as high as 3,000 and still may tumble back and test the March 23rd 2020 lows.
With stock markets pressing higher, many investors have become more optimistic as the number of hospitalizations due to covid-19 appears to be plateauing in some of the hardest-hit areas of the U.S. which is promising. However, I am concerned that the current stock market rally may not last as many traders are being forced to exit bearish bets and are seeing their short positions squeezed which has been one of the driving forces pushing stocks higher and, in time, we will lose this prop under the equity markets, not to mention corporate stock buybacks which will not be as prevalent as many companies are more focused on survival.
Assuming a recession firmly built into consensus, this year's drawdown would be an extreme outlier if the S&P ends up not testing the recent lows. However, we are truly in unchartered waters with unprecedented monetary stimulus from our FED and other central bankers around the world with interest rates near zero and even negative in many parts of the globe. In addition, central bankers around the globe are creating trillions of fiat currencies out of thin air, flooding markets with unprecedented liquidity, buying up distressed debt in many sectors and the coming simulative government fiscal policies will also foster eventual growth. The President has noted that a infrastructure program would make sense now financed by historical low interest rates. My son-in-law, John, is a structural civil engineer and he has attested to the fact that many of our bridges, roads and tunnels are in grave need of repairs.
I think that all of this unprecedented global stimulus will remain in place and be present when a vaccine for the coronavirus becomes available. As I am writing this update, more great news has been reported that the FDA-approved Drug Ivermectin is an inhibitor of the COVID-19 causative virus (SARS-CoV-2) in vitro with a single treatment able to effect at 5000-fold reduction in virus at 48h in cell culture. Ivermectin is FDA-approved for parasitic infections, and therefore has a potential for repurposing and the drug is widely available, due to its inclusion on the WHO model list of essential medicines. We are witnessing an unprecedented worldwide coordinated effort by the leading minds and companies in the global medical community to battle and come up with a cure for the coronavirus.
Perhaps the markets are that forward looking for an explosion of growth, the likes of which we may never have seen, once a vaccine is produced. We need to remember that markets are forward looking which is why stocks sometimes move higher in the thick of a crisis. For example, as a result of the financial crisis of 2008, more than 400 banks failed by 2011, according to the Federal Deposit Insurance Corporation. But massive bail-outs helped other banks survive. After plummeting 50% in 2008 and seeing a fifth of its members removed, the KBW Bank Index fell less than 4% in 2009 before jumping 22% in 2010 and later the gauge was up 180% from its lows. In this crisis there will be many businesses and companies that will fail, however those who survive will likely go on to dominate their marketplaces. We will certainly be watching for investments with greater long-term potentials to enable our valued clients to reach their long-term financial goals.
If you are a valued client of Castle Financial, you are in good hands and we are making tactical moves to preserve capital and are also attempting to positon clients for future profits. If you are not a client of our firm and are reading this update, feel free to contact us at 732-888-4994 or visit us atwww.castlefinancial.com. We offer a free portfolio review and valued second opinion. Castle Financial serves as co-advisor on the All Terrain Opportunity Fund which we employ as a tactical overlay in client portfolios to help preserve capital and the fund is also managed to potentially make money in both up and down markets. A full prospectus on the All Terrain Opportunity fund can be found at www.allterrainfunds.com. The fund is rated 5 Stars by Morningstar.
Our hearts and prayers go out to all those affected by the Coronavirus (COVID-19). Many of our clients are senior citizens living throughout our nation and we would strongly encourage everyone to be especially considerate of our seniors’ risk to the virus and make every effort to provide assistance in any form, if possible. Sometimes even a simple phone call to “check in” goes a long way in these difficult times. We owe a lot to our senior generations. They were there for us and now it is our turn to support and keep them safe.
Special Update - Monday, April 13th 2020
April 13, 2020