There’s been a lot of blood spilt in the market since 20 February. But it’s only now that the first dead body is going to the morgue.
Freedom Oil and Gas Ltd [ASX:FDM] said yesterday it was calling in administrators. It needs cash to keep operating…and none is going to come.
It’s in the shale sector in the US. The low price of oil and collapsing demand means it will be the first of many.
But it’s not just the energy space under duress. The prospects for the entire market look bleak.
Last week I warned my subscribers against ‘bargain hunting’ for stocks in case of further operational shutdowns.
Rio Tinto Ltd [ASX:RIO] came out this morning and said its South African operation will shutdown under government directive. Its operation in Quebec is being deliberately slowed too.
And so we have another hit to earnings and outlook for Rio. Other miners won’t be ‘immune’.
That’s not all…
Why the market shutdown of 1914 could come around again
The price of iron ore is weakening now. It’s been resilient until now…surprisingly so. This is another hit to the ASX.
Right now, it’s not totally nuts to me that the government shuts down trading on the ASX. I don’t mean to sound alarmist. A stock market shutdown has happened before in history.
Stock exchanges all over Europe and the US shut for about four months during 1914. This had no precedent at the time.
In the grand scheme of history, four months is not a long time. The same is true today.
I’m not saying it should happen. Only it’s a potential scenario we must consider.
Some stocks are already in this state or heading there anyway — Flight Centre Travel Group Ltd [ASX:FLT] just put itself into a trading halt while it assesses the impact of COVID-19 on its business…whatever is left of it.
Yesterday, I told you my colleague Jim Rickards warned of a scenario called ‘Ice Nine’ where the financial world goes into lockdown.
There’s zero pleasure in saying so, but it gets closer every day.
Is there any hope amongst this? Of course.
The likely spike in unemployment is bound to hit both property and stocks for much longer yet.
That will provide those with cash to pick up attractive assets at a discount. It’s always been so in such scenarios throughout history.
Clearly, we have to watch for ‘war bride’ type plays too. What am I talking about?
‘War brides’ was the moniker given to US firms during the First World War that made massive profits from European orders for supplies.
The scale of this boom was historic for some companies.
Clearly COVID-19 is going to result in a vast shift across society in different ways and similar profits for some.
A greater consciousness around health and cleanliness is unlikely to dissipate anytime soon.
Firms that turbocharge remote sales, service and collaboration will likely benefit too.
The sector setting up for an astonishing boom
Another sector to watch long term is US housebuilders.
The US was already underbuilding relative to its population since the great crash of 2009. This shut down is going to put in behind even more.
It could take them over a decade to catch up from wherever we end up. But it’s not an idea for this year. More likely late 2021 or 2022 I suspect. Timing is important in all asset markets.
However, I remain extremely cautious in the short term.
One ray of hope in this mess was that China appeared to be moving out of the problem after its brutal lockdown.
Now COVID-19 is reportedly at risk of turning into a second outbreak.
I can see a potential rollercoaster for the next 12 months where each country shows sign of improvements…regresses…improves…stocks could swing as wildly as the data.
It’s not going to make for easy living or investing anytime soon. However, on the other side of this is going to be a wave of pent up demand.
I believe we’re likely in for a short, sharp recession…before gargantuan government spending and central bank monetisation rolls through the economy and asset markets.
Profit Watch will be with you every step of the way to help you take advantage of it all.
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