Stillwater Capital, LLC

Known Knowns and Unknown Knows      


World of Known Unknowns…

With the massive confusions and lack of clarity surrounding just about any of the ways, shapes, or forms we navigate ourselves out of the current mess, we are beginning to think the words of Donald Rumsfeld might be saying it all right now.

Never before, and probably never again, will the markets have to navigate the world going from a far right tail position, to one that is pushing three sigmas on the left side. Our call, and one that was echoed on Monday by Mohammad El-Erian, is that the ‘sell everything’ moment is over, and it’s time to now go shopping for high grade equities that can weather whatever comes next. Merrill Lynch is saying similar things now that their contrarian indicator basket is saying it’s time to put dry powder to work.

 ‘Living a Tail Risk Moment’ 

The best analogy we can think of in terms of examples, for a less esoteric and real world manner, is when the probability screen pops up during a football game showing what the mathematical chances are of one team winning over the other. A better example still, is when one of the World Series of Pokers games is going on and player A is holding a next to impossible hand to beat. Then suddenly in a flip of a card, he is out, and player B takes home the chips. In this case, Mr. Manion goes home empty handed. This is the case this time, and the bull market was holding an unbeatable hand coming into mid-February.

'You Never Count Your Money...'

The Economy

In tough news for the economy, and more importantly humanity and our fragile psyche right now, the man at the tip of the spear, Dr. Anthony Fauci, passed along the grim news that while curve flattening will happen eventually, it’s not before a high end estimate that a quarter million Americans die. To give you an idea of how in the cross hairs this former basketball player who recently conducted a Q&A session with Steph Curry is right now, even his slight hand gestures are openly criticized and debated over their potential secret meaning

'Bless Me Please'

Several stories ran over the weekend that spoke to the fact that Covid-19 is no longer a problem on the coasts and that it has made its way into the core of the country. And with that, the ugly political blood sport of who is to blame begins. Veteran business journalist Trish Reagan, was last week’s high profile causality as she was told to pack her bags for calling the now dire situation an ‘impeachment scam’ on March 9th. 

Not a 'Scam'

Currently, New York is such a hotspot, that threats of quarantine are on the table, and other states in the region are attempting to ban those attempting to travel from the Empire State into their borders. The three state combination of Connecticut, New Jersey, and New York crossed over 1,100 deaths this weekend, half of the total for the entire United States. CNBC provided a series of photos from there, and around the world, showing what desertion looks like. Included is this stunning image of an empty 6th Avenue in Manhattan.

Sixth Avenue Heartbreak  

We don’t want to overuse the phrase ‘what can we say that hasn’t already been said’, but honestly, that’s how it feels right now. Case in point, late Sunday President Trump declared that the guidelines for social distancing were being extended from April 12th to April 30th. Trying to keep up with that kind of fluidity is a challenge, and every breathless analytical or news outlet is going to parse every development seven ways to Sunday, and twice on the weekend, as the saying goes. 

Please Do

One of the few things we know, is that the March employment report to be released this Friday, is going to be one for the record books, and not in a good way. Get ready for the ‘tsunami’ of bad readings on the economy that Treasury Secretary Mnuchin thinks are ‘not relevant right now’

Bad Omen

Eric Peters, the very astute founder of One River Asset Management and observer of markets and risk, wrote over the weekend, the one thing he does know is, ‘no one else knows’ when it comes to the multitude of potential outcomes and what the future looks like with a fresh deck of cards. We would counsel everyone who reads his piece on a weekly basis to subscribe to his ‘wknd notes’ by submitting their name, firm, title, and role to wkndnotes@oneriveram.com. Good luck out there. 


Markets 

Looks like our non-consensus call that the Fed could start buying stocks in ETF form is starting to gain more credibility. Because if everything is going to be theoretically on the table, then equities need to be included. Turns out all the Fed needs is the approval of Congress to open the wallet and start buying the most common asset class in the world. Boston Fed Chair, Eric Rosengren, said as much a month ago, and now a future ten trillion dollar balance sheet is in a position to do so. If you think your member is going to stand in the way of that, I will happily take the other side. .

Uncharted Territory

The man in the cockpit when the world last seized up, Hank Paulson, is cautioning that the road ahead for Treasury and the Fed is not an easy one, as there will indeed be winners and losers. The biggest challenge to those two agencies is getting the money where it needs to go as quickly as possible. Paulson is a very credible source of opinion and in this downtime, taking the opportunity to read his On the Brink, is a worthy use of your time. It will also help normalize where we are today.

Witness to History 

Corporate Liquidity

As has been the case since the crisis started, companies are hitting their credit facilitates to have cash on hand to survive. Boeing’s massive drawdown of $13 billion from three weeks ago was a giant sign of things to come. Now it’s the more stable businesses that are hitting their revolving credit facilities to weather the storm. This is not good news for banks as these are low profit loans, and borderline loss leaders, for lenders. 

Toxic Borrowers 

If this at all concerns you, take a look at the following chart, as it tells a frightening story about the Chinese consumer, how much debt is on the books, slowing GDP growth, and as Bloomberg reports, the looming consumer default wave that is headed our way. 

Crushing Debt 

Final observation before we try to take our mind, and hopefully yours, off the minute by minute prognostication about where we are in the cycle of this crisis, is to emphasize removing the noise and getting focused on the few things that matter right now. 

High on that list, if not at the top of it, is the state of corporate credit spreads. While we are equity focused, this is the only reading we would want if given the choice of just one. If we can get this spike to settle back in, the market has a fighting chance of having already found a bottom. A move higher still, and there will be a further bull market for gold bars, canned beans, and bunkers in the Mojave Desert.  

Spreads Blow Out 

Diversions

As we are all doing the best we can, with what now looks like an even longer road ahead to normalcy. Stillwater will continue to push down the path of providing cinematic counsel to help pass the time, and perhaps remind everyone of better days. This week we focus on films from the sports world, as well as a boxing documentary that won Oscar gold. While we give you our favorite four, New York Magazine gives you a complete list of fifty that should help you last through April 30th.

Remember The Titans

This was a beautifully done film from 2000. It had a lesser known cast, with the one standout being Denzell Washington as Coach Herman Boone, who passed away late last year. This true story follows the path of a group of young men and their coaches who were trying to navigate desegregated Alexandria, Virginia in 1971. Being true to life, suspension of disbelief is not required, which for me is a relief. The film also provides one of the great quotes for sport and life, and that is ‘leave no doubt’. As a Disney film, it can be easily streamed.

The Titans 

The Bad News Bears

It’s hard to even begin to describe how connected those of us who played Little League baseball in the ‘70s and ‘80s are to this film. Every league, including Sunnyvale Southern where I played, had some version of these characters playing out in real life. To this day, you remember if you were a Tanner, Timmy Lupus, Kelly Leak, or the beautiful Morris Buttermaker.  The film can be streamed using Hulu. 

Beers for Young Bears 

Hot Dog, The Movie 

Since we are living in surreal times, might as well throw you one of the more surreal sports movies of all time. And one not likely to land on anyone else’s top fifty. With that, we introduce you to Hot Dog, the Movie. For those of us who grew up skiing Squaw Valley, this was more than a coming of age film, it was foundational to our love of the mountain. The pinnacle coming at the end when they ran the Chinese Downhill from the top of the Palisades to the Bar One at the base..

Twistin' Triple Anyone?

When We Were Kingss  

This film chronicles the lead up and actual fight between Mohammed Ali and George Foreman in the African country of Zaire known as the ‘Rumble in the Jungle’. Not only did it win Best Documentary Feature in 1997, it was also declared the greatest film ever made about Ali by Vice. There are also appearances by Norman Mailer, George Plimpton, and James Brown among others. All were witness to one of the greatest spectacles and upsets in sport. Twenty years after the film’s release it was made into a musical.

A Young Ali in Zaire  

As we sign off and hunker down for another long week of rough headlines and volatile markets, remind yourself that there is a future out there where some form of normal exists. While it’s not right now, it is indeed out there on the horizon. We’ve all been loaded up with negative triggers, my only counsel now is to load yourself up with thoughts of the positive, and get ready for better times ahead.


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