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CORONA SHOCK WAVES – Sail Financial Markets to Protect Your Money

Your money needs to be ready to surf the three economic shock waves caused by the Coronavirus crisis.

The first wave, the sudden shut down of credit markets. The second wave, a corporate earnings sharp decline. The third wave, most likely the quickest U.S. unemployment rise ever seen.

Coronavirus's first economic shock has frozen credit markets. The first sign of a recession is the inability to access funding. If companies are lucky, they might be forced to pay higher interest rates when you needed the most.

Most global credit markets quickly closed a couple of weeks ago. The Federal Reserve has repeatedly acted to provide funding to the U.S. government, banks, corporations, and small and medium businesses using multiple tools to open credit markets for them.

If we look at the price of debt assets, like money markets and corporate markets, we can see stress levels in their price declines. For a while, no one was willing to buy, and many were forced to sell to cover their margin debts or redeem investor's requests for funds.

The price of the debt ETFs and close-ended funds have been considerably lower than the assets they hold. Their market price is well below their net asset value or NAV. They are trading at a deep discount, even for liquid and usually considered conservative assets, like high-quality municipals debt.

The good news, the Federal Reserve this Monday morning March 23rd, for a third week in a row, said they would provide unlimited resources to buy federal and municipal government debt and investment-grade corporate debt. This Federal Reserve pledge might certainly keep credit markets open, so corporations might be able to surf this first wave.

Value investors, long term investors, and arbitrageurs earn their living, finding the gold nuggets others have forgotten.

The second economic shock wave, arriving in a couple of weeks, will be the start of the first-quarter corporate earnings season. The first-quarter results probably could be slightly below market estimates, as the impact of business closures due to quarantine during Q1 was implemented but not in full force. But the guidance of earnings for the second quarter, if corporations venture to provide any, most likely I expect will be quite drastic.

The name of the game here will be again “expectation vs. reality.” Almost on every asset, the prices have had already incorporated a deep recession, even a depression. Still, it does not look like right now that analyst's estimated earnings have reflected them in full.

It most likely might be a mixed bag of below average results for corporate earnings. How much is already baked in prices?. How much, if any, will be the price adjustment? As any earning season before this one, there will be plenty of opportunities coming our way if you are ready.

The third shock wave, the most critical but a little delayed, the U.S. and global economic indicators might crater. One of the most important ones, the unemployment level, even after the government and Federal Reserve pledge to help small and medium businesses, it might be starting to jump to the worst level in decades.

The small and medium businesses that support almost 50% of employment might not have other options than to fire employees to survive. Although the government is offering ample opportunities for credits, the credits might arrive too late for too many businesses.

This last event is not unexpected by markets. But there is a difference between believing it is coming and experience it. The initial reaction could be sharp. After the initial repricing, markets will keep revising price levels based on the advance on the coronavirus crisis.

There are already initiatives by the U.S. government and Federal Reserve to alleviate the economic impact. How fast can they agree on them? How big will the final government support?. Those two factors might help to inspire trust in markets quickly and alleviate the effect of the shock waves mentioned before.

At the very end, all these efforts are easing the impact of the isolation measures implemented to solve this terrible health crisis we are fighting. The isolation medicine is necessary, but the economic effects might be overwhelming to many.

Please, stay safe!



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