And The Jack Jumped Out Of The Deck

Summary

• Those who followed the advice of the calls for a demise have been sadly mistaken.
• Those who went a step further, and shorted the equity markets, are living in the House of Pain.
• In equities or risk assets I expect further improvement.

One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider.

- Guys and Dolls

It was a few months ago. I had been on TV several times and I had been contacted by the Press. This one and that one were calling for declines in the equity markets of twenty, thirty, forty and even fifty percent. Armageddon was upon us. Everything was going to Hell. Choose your hand basket. The Jack was going to jump out of the deck.

I kept saying I didn't see it. I stood up and felt like a lone wolf, at times. Not that I was calling for what we have gotten, but I certainly wasn't advising people, or institutions, to remove money from the markets or to head for the hills. Those who followed the advice of the calls for a demise have been sadly mistaken. Those who went a step further, and shorted the equity markets, are living in the House of Pain.

It doesn't matter what the press says. It doesn't matter what the politicians or the mobs say. It doesn't matter if the whole country decides that something wrong is something right. Republics are founded on one principle above all else: The requirement that we stand up for what we believe in. No matter the odds or consequences. When the mob and the press and the whole world tell you to move. Your job is to plant yourself like a tree beside the river of truth and tell the whole world:

"No, you move."

- Mark Twain

In the last 30 days the DJIA is up 11.42%, the S&P 500 up 9.02% and the NASDAQ is up 7.59%, according to Bloomberg data. The country is re-opening. People are going back to work. The economy is mending, not mended yet, but certainly in a much better place than it was several months ago, as our pandemic winds its way toward lower levels.

Then, in the bond markets, risk assets were jumping like the frogs in Calaveras County. You may recall the famous story by Mark Twain. Airline bonds were up six points, and more, in a matter of hours, hotel bonds were reflective of their elevators heading for the penthouse, travel bonds were reminiscent of the old advertising adage, "Up, up and away." The compression to Treasuries was unreal as the markets seemed to finally realize that the American economy was going to be the "Comeback Kid."

Much of all of this has been caused by the Fed. The politicians will point to Congress but, in my opinion, the real driving force has been the Fed. U.S. investment-grade borrowing costs have retreated to near all-time lows, while companies have sold $1 trillion of bonds at the fastest pace on record. Heck, merely announcing a plan to pump liquidity into corporate debt markets has helped ease strains before barely a dollar of central bank money was deployed. It is just amazing what you can do when you are the people that print the money. Forget the Press, when you now hear the famous words, "Roll the presses," think of Jerome Powell, no newspaper editors in sight.

The Primary Market Corporate Credit facility is about to be launched, buying bonds directly from companies, as well as slices of syndicated loans. That program is expected to launch in the next couple of weeks, according to people familiar with the matter. The Secondary Market facility buys exchange-traded funds of investment grade and high-risk, high-yield junk bonds, in addition to bonds already trading in the market. Only the ETF purchases are underway with $4.3 billion in the Fed's portfolio as of June 2 and more on the way, perhaps significantly more on the way.

The Fed has set a floor. Investors should stand on it!

"Before they bought a single bond or ETF, the liquidity crisis was over," said Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp. "The Fed doesn't need to do more. It's a done deal."

So, equities or risk assets. I expect further improvement. Those that are calling for corrections just do not understand the power of the Federal Reserve Bank or of the money that they have spent, or are about to spend, supporting the markets. The Fed has done an about face from their traditional role and are "full on" to support the economy, the markets, and the U.S. government. Keep in mind that the government, with all of their borrowing, just can't afford higher rates and so the Fed has stepped in to make sure that higher rates will not be happening, anytime in the near future.

I would also comment on the oil market. Our negative downtick, was nothing but a blip, as I have stated several times in my commentary. When oil was in the mid-twenties, I said we had a long way to go on the upside. I advised buying both equities, debt, and closed-end funds, as ways to play the upward cycle. With WTI oil now encroaching on $40.00, I believe that my call was a good one. I continue to think that there are opportunities left in this space as many people and institutions have not fully warmed up to what is underway yet.

All in all, America is recovering. Those that take the opposite bet, in my view, will find themselves in regret. These days, it is often fashionable to bet against America. Forget fashion. Climb into your work clothes.

Don't end up with an ear full of cider!

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.