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Update on Coronavirus Impact and Federal Reserve Interest Rate Cuts

Stocks

Written by:

Irving Soh

Last night, the Federal Reserve (USA) announced an interest rate cut.

https://www.bloomberg.com/news/articles/2020-03-03/fed-cuts-rates-half-point-in-emergency-move-amid-spreading-virus?utm_source=telegram&utm_medium=msg&utm_campaign=telegram

Here is Jerome Powell’s explanation.

Why does it matter?

During the last financial crisis, the Federal Reserve was able to bring things back into balance through active lowering of the interest rates across the board.

This was a boost to the economy – simply because making money cheaper to borrow means companies, big corporations, and consumers can continue to borrow today and have a chance of earning enough money in the future.

This is of course, preferable to having companies, big corporations and consumers completely collapse and have zero chances to pay off their loans.

Image result for die hard

All told, like this guy above, I’m sure most of us would choose to be able to “live to fight another day” versus “die today, fight no longer”.

Previously, before the coronavirus

Prior to the coronavirus, we were already looking at yield curve inversions and feeling antsy. Then the Feds forcefully reversed the yield curve inversion. Then the coronavirus happened.

And now this.

So where do all of us stand right now after the crazy roller coaster ride?

Let’s look at some simple facts.

  1. The virus is now in the Iran, South Korean, and the US.
  2. Supply chains, which are a proxy for velocity of money to some degree (banking asides) remain broken and need fixing. Even though China is getting up on its feet again (w a massive financial stimulus btw, similar to the Feds), it will take time to get everything back up to speed
  3. No amount of financial stimulus or interest rate cuts can mask the fact that this will play out negatively on Q1 earnings for a lot of companies and possibly even Q2 earnings.
  4. Short term, I think markets rebound a little after the interest rate cuts and I think it gives businesses a little breathing room. Post virus, there’ll probably be a large rebound and we’ll look towards the last phase of the bull run.
  5. During the bull run, which can be fast and furious, we’ll probably start to see large amounts of inflation. Oil, natural gas, steel, etc cetera will start getting more and more expensive as demand outpaces supply. Ever recession (all 5!) post World War II have been largely because of rising gas prices. It’s one I’m watching very closely. You should be watching it too.
  6. When and as the markets correct, we can expect the Federal Reserve to have more limited powers. The last time around, they were able to suppress interest rates from 5% to sub 1% so that the economy could keep on going. This time around, there’s less of that to go about since interest rates are already low.

Should You Be Timing the Market Then?

Naturally, this leads all of you to thinking – “Shit, if things are so uncertain, shouldn’t I wait for a good time to enter?”

I’ll give you a cookie. There’s never a good time to enter.

There’s always a reason to sell the markets or stay out.

Our Intelligent Investor Immersive, or rather, our investing mindset, philosophy, and tendencies, have always been to ignore the market gyrations.

Image result for gif riding on a mechanical bull

No. Not like that.

More like this.

Image result for mechanical bull riding violent

We don’t really time the market.

To be more accurate, we use valuation as a “timing” to buy a stock.

  • When it’s cheap, it’s time to buy.
  • When it’s expensive, it’s time to sell.

It sounds simple, but it’s not quite that easy to do. Beyond checking for cheap, we also check for management skin in the game, likelihood of fraudulent practises, off balance sheet liabilities, etc cetera. But at least we have a system. We have a procedure we can use. My suggestion to readers is to also develop a good system of your own.

A Starting Point

Image result for quantitative value

An excellent starting point, is the book called Quantitative Value.

It gives readers a strong and tactical way to go about constructing their own processes for finding and investing in undervalued stocks.

Image result for quantitative value process

Naturally, a book needs to also translate towards practicality. What good is reading if you cannot practise it?

The book above is reasonably easy to put into practise if you have access to a bloomberg terminal.

In all, I’d say understanding the theory is harder since you can access a terminal for free at the National Library and you can do the rest of the process by hand or with a subscription screener online.

If that all sounds too hard, too bad. There’s no free lunch in this world. We too had to build our processes on this system, albeit w slightly different metrics.

But we too, paid the price. Hell we even buy data from FactSet and then have a programming team help us compile data for our own proprietary screener.

Yes. It’s a lot of effort, money, and pain. But that’s the level of resolve we have.

We offer introductory lessons free of charge. In it, we demonstrate key findings.

If at the end of it, and if you have went through the book and found it too difficult to implement, feel free to come for our course. But please, at least go through the free lesson to see if it’s suitable for you.

We have never been comfortable with people wanting to just go directly to the course because investing is a lot like religion.

Sometimes, you have a set thinking about the market. We are long term (holding period 3 years to forever) investors. Not short term traders.

In other words, you have to know yourself.

In summary;

  • Watch out for near term pain since the virus is now in US as well as Middle East
    • oil prices might explode here if production shuts down which can trigger the next recession much much earlier than any of us want it to be….well any of us except hard core deep value investors
  • Rebound is likely post virus if oil doesn’t go sky high in prices due to production cuts.
  • This next recession will likely be more painful than the last and be harder to escape from, it will be more important than ever for all investors to be able to decide for themselves what to invest in and have a system to do so.
    • There are plenty of profitable systems. Find your “religion” so to speak, and learn it obsessively. You will need it.
  • Resolve to spend time learning if you are serious about investing. Investing is not for the faint of heart and those who are uncommitted. Investing is a lifestyle, or even a hobby, but certainly not a passing interest.
    • Yes, you will likely do well even w passing interests if you strategy is proven, but the tendency to have long term consistent behavior is far less probable if your interests are not there. And long term investing is what leads to really big wealth gains. Not short term.
    • So perhaps, you should first learn WHY you want to invest more, BEFORE you decide to pursue this field of knowledge.

I hope this has been useful for you.

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