Volatility is picking up once again, which we should expect given the extreme conditions the world is seeing.  Yesterday, the Federal Reserve chair said that interest rates were likely to stay near zero through at least the next year or so.  I don’t see that as surprising whatsoever, given the focus will be on reducing unemployment, but the market seemed to grasp on it as a reason to take profits from the recent rally.  There is also a bit of talk about a second wave of Covid-19 infections in states like Arizona and Texas.  Keep in mind that these states had a very small first wave and we should fully expect infections to increase with testing and reopening.  What matters is hospitalization capacity and it seems doubtful there will be a problem there.

Several European countries have reopened prior to the U.S., including the opening of schools, and they are doing quite well without a major resurgence.  Most the United States is seeing decreasing positivity rates on testing.  We are in a media cycle, which will do anything it can to find and report bad news.  It has been continuous for several months as we all are more than aware, and it can create immense panic and fear.  Don’t let that fear impact your decision making.  We’ve seen a major rally off the lows and we have great positions with improving fundamentals.  Our cash-secured puts and covered calls, should add a material amount of money to our accounts as we get closer to expiration, many of which occur in late January.  Remember, that is key to the strategy. We aren’t 100% invested in stocks, so the time and volatility dropping on the options is essential to seeing where we are at, which is why we mention that frequently.

Other great news is some of our largest and most important states economically are finally reopening.  We are talking about New York and California, etc.  AMC is planning to reopen 1000 movies theaters, Disneyland is reopening, countless retail stores are reopening, gyms are reopening, and that means jobs coming back.  For instance, AMC furloughed nearly all of its thousands of employees including the CEO.  The NBA is coming back in July and hopefully the MLB and the NHL will too.  These jobs coming back should create fantastic economic growth in the second half of 2020 and into next year.

I’ve been reading the bank conference calls where it is a bit of a mixed bag in the 2nd quarter as expected.  Investment banking is up huge, which is great for companies like Citigroup, Morgan Stanley, JPM, and Goldman Sachs.  Provisions will be high as expected, in some cases higher than in the 1st quarter, as the economic situation obviously escalated.  With that said, this should be the worst of it and historically these stocks have rallied materially after the worst of the reserves are in place.  Credit card companies have been reporting that in some cases, 80% of those that requested furloughs or delays in their payments have resumed making them.

Realistically, the economy probably needs at least one more large fiscal stimulus and that seems likely to be forthcoming.  Both sides want to spend money, although they differ on the main goals of course, so no doubt it will be contentious.  With all this going on, keep your focus on time horizons.  6 months ago, everything was great and we had a banner year, the economy was humming, etc.  3 months ago the world changed dramatically in a way that has never happened with the lockdowns, causing the most rapidly declining severe bear market in history, worse than 1987 or 1929.  As we head into the 2nd half of 2020, things have gotten quite a bit better although we still have work to go of course, but the opportunity set is massive.  There are high quality stocks that should easily climb 50-100% over the next 2-3 years, with just a normalization of the economy in my opinion.  We have option positions, which we need to let work for us and do what they are intended to do over time.  It has been a wild few months but I do see quite a few green sprouts emerging.