S H I T / Y O U / N E E D / T O / K N O W

The daasFQUpdate

M A Y 2 0 2 0 , I S S U E 7

Who's that UnMasked Man?

Welcome new followers! As always, I hope everyone is healthy, safe,

and hunkered down for the long haul. As more parts of America re-

open for biz, Mr. Fauci and Mr. Redfield reminded the US Senate that

if we f*ck this up, we are in for a world of hurt.

In the meantime, masks have become a new battleground - "To wear

or not to wear, that is the question." I do because, in this instance, I

choose life. But since I rarely leave my basement...

Earnings season is winding down and the markets are holding their

own just barely. Dovetailing on my last daasFQ update, I'm re-

balancing my portfolios, dumping under-performing sectors and

leveling up holdings in Tech and Health Care.

For some of you small business owners, sorry to say the near-term

future looks pretty dismal. Because, while the whole world could

theoretically open tomorrow, many folks, myself included, will think

twice (or 10 times) before joining anything resembling a crowd. And

by crowd, I mean one unknown person standing less than two club-

lengths away.

The New Normal Edition

THE FQ CORNER

The Stock MarketCracks are starting to show as reality

begins to set in.

Bonds, Gold, Oil, Etc.WTI Crude has stabilized around $25 but

expect another down leg. Gold, likewise,

trending sideways. The 10-year T-bill is

at 64 basis points - truly mind boggling!

The FedThe Fed chair suggested without more

Congressional action the economy could

suffer 'permanent damage.' Perhaps my

understanding of the word permanent

has been permanently damaged.

SentimentThe CNN Greed/Fear index slipped back

to 38 from 50 as Smart and Dumb money

confidence heads on a collision course.

As is my custom, I will resist delving too much into the US response other than to say, if the Covid crisis was a baseball

game, we would be in, oh, I don't know, the top of the 2nd inning? Maybe the 3rd? We'd be playing small-ball, bunting

guys over and trying to scratch out a few runs plus play solid defense. Sadly, our administration thinks it's the 9th; no,

it's not time to bring in your closer, assuming you have one. Speaking of, Major League Baseball is hatching a plan for an

abbreviated season - sans fans, of course - AND with a DH in the National League! Please tell me that's not a permanent

thing! Say it ain't so, Joe...

To wit, much of the recent jibber-jabbering on the Interweb has been around that very topic - the so-called 'New

Normal.' In fact, if you Google the term, you'll get 2,410,000,000 results, 2,409,999,999 pointing to the failed 2013 TV

series of the same name about a gay couple trying to adopt a baby. That seems quite the normal to me as gay friends of

ours did it 25 years ago! But I digress...

Urban Dictionary defines the New Normal as "The current state of being after some dramatic change has transpired.

What replaces the expected, usual, typical state after an event occurs. The new normal encourages one to deal with

current situations rather than lamenting what could have been." I find the last sentence particularly interesting as it

presumes those who adopt a new normal approach will stanch their reactionary urges and accept the idea that the new

whatever will NEVER be the same as the old whatever. Never as in permanent.

As if. Acceptance comes slowly if at all. Like when you refuse to wear a mask because it signals you accept the danger

as real when every molecule of your being wants to believe it isn't! True FQers accept what the world gives them and

don't tilt at windmills, with or without face covering. Right now, the world is giving us strange, discordant signals we

must sort through with no certainty of success. Which sucks.

So, what does this have to do with your financial well-being? Uh, everything? Because sort we must! Last update, I

mentioned the sectors of the market. While the market may not be the economy, the sectors that make up the market

most definitely are; every business you can think of fits into at least one category. Citibank? Financials. Boeing?

Industrials. Your local hair salon? Consumer staple albeit one look in the mirror tells me they're discretionary. You get

the picture.

Now, the 'normal' way folks look at the new normal is through a behavioral lens. How will people comport themselves

when faced with a seemingly permanent paradigm shift? While that might be worthy of deep, socio-economic

discussion offline, for FQ purposes, we don't really care why - we're only interested in the ramifications of this

behavioral change. Well, we actually do care but money doesn't.

So, let's explore some sectors to see how they'll be affected. First, here's a breakdown their one-year performance -

Information Technology 27.17%

Health Care 14.87%

Communication Services 6.13%

Consumer Discretionary 3.28%

Consumer Staples -0.21%

Utilities -5.22%

Materials -5.97%

Real Estate -13.77%

Industrials -19.28%

Financials -20.54%

Energy -41.17%

Bear in mind these are but the top-level categories. Financials includes the sub-categories Banks, Capital Markets,

Consumer Finance, Diversified Services, Insurance, REITs, and Mortgage Finance. Let's start there. Banks and Consumer

Finance, represent over $2 trillion of our $20 trillion economy and are down 32% and 37% respectively; they may be

significant contributors to the economic downturn.

What will the new normal look like? To get a sense, we can use the 2008 financial crisis as a guide. Before the

housing bust, I was able to secure are nearly $1 million mortgage with no income verification. Yup, true story.

Afterward, that went bye-bye and mortgage origination resembled a financial colonoscopy.

This time around the future is murkier. As a direct result of the Great Recession, big banks are now subject to a 'stress

test', a simulation using a hypothetical negative financial event to determine a given bank's ability to handle the

pressure.  Overt stress caused by the spike in unemployment and the permanent failure of many businesses both

large and small (Nieman's, J. Crew, J.C. Penney) makes that simulation very real and a ripple of defaults might turn

into a tsunami.

Some will argue the bankruptcies, especially in retail, were a long time coming. Much like the virus itself which has

decimated the frail and immuno-compromised (mostly) while sparing the young and healthy (mostly), the quarantine

only hastened the inevitable. Furthermore, this Darwinian thinning of the economic herd would ultimately make the

remaining that much stronger. Perhaps, but cold-comfort for the 30+ million unemployed.

I expect the new normal in Financial to resemble the old normal albeit I am constantly worried about a liquidity crisis

where lending standards become so draconian, they almost guaranty another deep economic malaise. It's up the the

Fed (confident) and Congress (not at all) to see that doesn't happen.

So, what will fill the void left by the collapse of retail? Technology! As shown above, they are the leader of the pack.

The so called FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) are responsible for the lion's share of the rise

(and the seeming steadiness of the musty, old SP500). Question is, will the Coronavirus represent a permanent sea

change in consumer spending habits, whose consumption represents 70% of the US economy? Uh, yeah, methinks

so.

This two-month shelter-in-place may have been the first opportunity for large swaths of the population to experience

living a 'home delivery' lifestyle. Having resided in NYC for a quarter-century, this is old normal; anything you wanted

delivered in the city, could be delivered. And would be. For a price. For decades. Think of the past 10-weeks as a grand

experiment in the Amazonification of America. Their stock price would confirm that this particular stress test was a

success.

So, to recap, I suggest for the foreseeable future, our collective relationship with banks and other financial

institutions will be tenuous. And it will stay that way. Our relationship to the consumption channel has been

irrevocably altered to where having items delivered is the new normal and going out to buy stuff, like going out to

eat, will be the exception. I'll admit, neither assertion is revelatory yet I feel it's important to demark nonetheless.

I'll dive into more NN stuff in the future but I can't sign off without at least one chart! This one comes courtesy of my

business coaching client, Jason. T. We've worked together for years and I guess some of my blathering has

resonated.

This chart shows Tesla charging around the globe. Takenote of the V bottom in China and the U-shaped recoveryin the US and EU. Curiously, Asia-Pacific sans China (APAC)was mostly unaffected.

I'll take this data with salt as Tesla owners are in the upperorder of the socio-economic stratosphere, but much likethe climate data I cited in February's post, these type ofinfographics help FQers cut through the noise .

That's all for now. Be well, stay safe and carry on...