what Monday’s market action is saying

Over the weekend Governor Cuomo of New York said that new coronavirus hospitalizations (that is new patients admitted minus patients discharged) may be plateauing.  Similar news came from Italy and Spain this morning.

While this doesn’t imply that more negative consequences of the pandemic won’t continue to build up, it suggests that the doomsday scenario of the creaky national health care apparatus imploding won’t occur.

 

Wall Street took this news as the occasion for a rally, which continues to strengthen as I write this.  (Is the worst in stock market terms over?   ,,,I have no idea.)

A day like this is chock full of information, most of it general concept stuff rather than specific buy/sell signals.

Stocks are up by 5% plus.  One should expect that the most heavily beaten down stocks should be rebounding the most and that the relative outperformers should be lagging.  No news there.  But where are the outliers?  For example:

–hotels and resorts seem to be up close to 15%, cruise lines, too, but airlines aren’t moving

–the Russell 2000 is leading the major indices up, but even though the NASDAQ has significantly outperformed on the way down, it’s even with the S&P 500 so far today

–Zoom (ZM) continues to play its contrary role–the worse the virus news, the better ZM has been performing.  But the stock is down today, and way off its high of $160+ a short while ago.  I haven’t paid much attention to ZM but it seems to me a holder (I was one but no longer) should be figuring out how much valuation support there is for it

–oils are flat to down, despite Mr. Trump’s (dubious, in my mind) claim to have brokered a production reduction deal between Russia and Saudi Arabia (more on this tomorrow)

 

What to do?  I look for two things:  individual holdings that aren’t acting the way I think they should, and changes in market leadership, which often come when the market begins to heal itself after a sharp decline.

 

 

 

 

 

 

 

looking for a bottom

A reader asked about my Monday comment on a possible “double bottom” in the US stock market.  I thought I’d elaborate.

 

What often seems to happen at market lows in the US is that stocks plummet sharply in a frightening way and then for no apparent reason other than that panic selling stops reverse course almost as sharply.

double bottom

Many times the selling stops at, or maybe slightly below a point where stocks bottomed before or where they have meandered around without much net movement for a considerable period of time.  For us, the two possible stopping points seem to be the point where stocks reversed themselves in December 2019 (just below 2400) and the period in 2015-16 when the S&P meandered around 2100.

Typically, the initial rebound lasts for about six weeks.   The market  then returns to–or somewhat below–the past lows before starting back up for good.

My observation Monday was that I’ve heard so many commentators predicting that we’re in a double bottom situation now that it may have become the consensus view.  That itself is a worry.  In my experience, the consensus view rarely comes to pass.  Sometimes everybody is wrong; more often by the time the news has passed down to TV talking heads, it has already been fully factored into stock prices and stocks will be influenced by something else.  I have no idea what the something else might be.

This shouldn’t be our most important concern as investors.

what we should be looking at/for, in my opinion anyway

The reality is that predicting the ups and downs of the US stock market accurately is very hard to do.  In 28 years as a professional investor, I never met anyone who could do it consistently–and plenty of people who lost their shirts–and their clients money–trying.

Market timing is riskier that it might seem, as well.  If I remember the number correctly, 40% of the gains in a market cycle come in 10% of the days–the lion’s share of that in the early stages of a bull market (which is just when the conventional wisdom is most bearish).

At a scary time like this, we all are getting a check on our risk tolerances.  If you can’t get to sleep at night, you now know you’ve taken on too much risk.  Not necessarily all at once, but over time you should readjust your holdings.

Everybody has stocks that blow up on them.  This is a good time to analyze clunkers you may have among your holdings, look for patterns in your decision-making that caused them and make changes.  This is harder to do than it sounds.  But it’s crucial.

If you own non-index funds, look at how well they’ve done versus the market.  Don’t just look at the past six months, look back at the fund record for as long as it has been around.  Be careful, though, to make sure that the long-term record isn’t just from a big bet that paid off a decade ago.

When I was training new analysts, I’d ask–“Suppose you bought a stock at $50 that you thought could go to $65 and it has fallen to $40 instead.  You’ve just found another stock with the same risk profile that you have the same level of conviction in.  It’s selling for $50 and you think it could go to $100.  But you have no extra money.  What do you do?”  Invariably the answer would be–“I’ll wait for the first stock to go back to $50.  Then I’ll sell it and buy the second one.”

That’s crazy.  Stock A can go up 60% and Stock B can double.  Why wouldn’t you sell some or all of A now to buy B?  The reason is that newbies don’t want to take a loss.  Their ego gets in the way of making money.  If your portfolio needs to be reshaped, in my experience the sooner you start the better off you will be.  Another reality is that the best professionals aspire to be right 60% of the time   …and they spend a lot of time trying to minimize the damage from the inevitable land mines.

the stock market now

The only thing I can see to hang my hat on is time.  I have no idea about the level at which stocks stabilize.  I think it’s reasonable to figure that the worst of the pandemic will be at least in sight by the end of June, particularly as China seems to be going back to work now.  Presumably the oil price war will still be on, which is bad for oil companies of all kinds, though particularly so for frackers, but probably a net plus for everyone else.

Three key questions:  will tech firms continue to lead the market during any recovery?  how will consumer behavior change in response to the fact of quarantine?  what struggling companies will be unable to survive a several-month shutdown?

 

 

 

 

odds and ends

talking directly with customers

Before the financial crisis, equity portfolio managers rarely talked directly with retail customers.  The central marketing concept was to create “third-party endorsements” by appearing on financial television programs.  Oddly, in my view, but I’m confident it’s correct, retail clients were more powerfully convinced to invest by a portfolio manager’s appearance on CNBC than by a fundamentally sound approach, a strong analytic staff and a long record of outperformance,

That strategy no longer works.  I’m not sure about the dynamics, but in today’s world the talking heads fancy themselves to be the real experts, even though few if any have ever been professional investors and they all by and large spout nonsense as far as I can see–entertaining nonsense, but still nonsense.

What I find interesting about the current market decline is that I’m seeing mutual fund and ETF providers conducting online presentations/client meetings with their fund holders.  I think this makes a lot of sense.  It may turn out to be one of the (many, I think) fundamental business changes that occur as a result of our current unusual circumstances.

 

reading stock prices

When I started my second job as a portfolio manager, Australia was the area I was responsible for.  Every morning my boss would call me into her office and grill me about the course of the market overnight.  She would say a ticker symbol.  I had to tell her the high/low/close; the volume if it was unusual; the brokers (and clients, if possible) most involved; and whether or not the movement was in line with other names in the relevant industry or not.  If not, why not.

It was pretty awful.  And the practice lasted until I knew more than she did about what was going on.  But I learned a valuable lesson–that many times the prices talk.

The US market is big enough that no one can listen to all the prices. But I think there are times when the prices are unusually informative.  This is one of them, in my view.  What I see is that the market is trying to separate post-pandemic winners from losers.  My read is that weak stocks now are expressing the market’s first pass at what will continue to be weak from here on.

 

market cliché of the day

The cliché:  when the market recovers from a serious decline, the old leadership is left by the wayside and new leadership emerges.

The “old” leadership is multinational firms without extensive manufacturing located in the US, tech and especially software, in particular.

Will this happen now?  My guess is no.

 

double bottom?

That’s the way it usually works.  The market bottoms the first time (the consensus seems to be forming that that’s what’s happening now) at the time of the utmost bad news.  It then rises for six weeks or so   …before returning to “confirm” the bottom by touching the former low, or maybe a tad lower, before motoring ahead for good.

I’ve written about this process now and again, including just recently.  But I’ve heard and read so many predictions of a double bottom–“don’t buy now, wait for the second bottom”–that I’m beginning to think that won’t happen this time.  I have no idea, though, what might take its place.

 

 

 

 

today’s news

 

I thought three items were interesting:

 

hotels

Hotel occupancy in New York City is currently at 20%.  How low is that?

–at 70% occupancy, hotels make tons of money

–at 60%, they’re at breakeven on a financial reporting basis

–at 50%, they’re at breakeven on a cash basis.   Normally this is where they are this time of year

–at 30%, they give off an eerie “empty” vibe and people are nervous about staying

 

population

Population growth in the US during the year ending July 2019, at +0.48%, was the lowest in the past century.

The recent trend had been for a population increase of about 1.5% annually, composed of equal parts new births and immigration.  The birth rate has fallen off since the financial meltdown in 2008, however.  Also, the current administration is suppressing immigration, both at the borders and through a white racist tone that makes foreigners (at least my friends) fear to come/remain here.

This makes a difference because in its simplest formulation GDP expands either by having more people working or having workers become more efficient.  The poster child for the consequences of an anti-immigration stance combined with an aging population  is Japan, which hasn’t shown much growth for the past thirty years.

If we assume that we can achieve steady 1% annual productivity growth (a lot), the ceiling for GDP growth in the US is around +1.5% a year.

Immigration suppression is one of the key ways the current administration is creating not-yet-fully-felt, long-term damage to the domestic economy.  Not felt, but not unseen on Wall Street, I think.  This and the tariff wars are the main reasons the US-centric Russell 2000 has lagged the other market indices by so much over the past two years.

 

 

 

 

the Dow Jones Industrial (DJI) average

Despite its media ubiquity and the fact it has survived all these years, the DJI is a weird index:

–it contains only 30 names out of the thousands of publicly traded companies

–although the index owners have tried to make it more relevant in recent years by adding Apple, Microsoft and Nike, it still by and large represents the big-cap names of America’s yesterday

–the weighting of a given name is a function of its per share stock price, not the size of the company.  As a result, Microsoft counts less than Visa, despite being 3x V’s size.  MSFT is about 1200% the size of IBM, but has only a third more weight (stock price of 150 vs 110).  While the ease of calculation this brings might have been important in the pre-computer age, it’s an anachronism now

–because of all this, using the DJI is a convenient signal to the listener that a speaker knows very little about stocks.  Odd that it should be used by media stock “experts”   …or maybe not.

 

Pre-APPL, MSFT, NKE, the DJI did have one important use.  When it started to outperform, that meant that a rally was near its end (and portfolio managers were buying the least interesting, but cheapest stocks) or that pms were seeking the safety of large, mature companies.  The additions above have lessened that appeal.

However, in the current climate, the DJI is an interesting collection of coronavirus losers.

Year-to-date, as of the close on Monday, the Dow was down by 35%, the S&P 500 by 30%, NASDAQ by 24%.  Since then, the DJI has been by far the best performer.  Interestingly, the Russell 2000, which measures mid-cap US, was down by 40% on Monday and has bounced by about 8% since, tying it with the NASDAQ for smallest bounce.

Two days isn’t much to go on, but one read is the market thinks the bailout will mostly benefit the large old-guard industrials.  A caveat:  the 57% rise in Boeing over the past two days accounts for two percentage points of the DJI rise.

 

 

 

a bear market in time? sort of…

In the middle of a garden-variety bear market–i.e., one orchestrated by the Fed to stop the economy from running too hot–I remember a prominent strategist saying she thought the market had fallen far enough to be already discounting the slowdown in profits but that the signs of recovery were yet to be seen.  So, she said, we were in a bear market in time.

We’re in a different situation today, though:

–most importantly, we don’t know for sure how much damage the coronavirus will do, only that it’s bad and we unfortunately have someone of frightening incompetence at the helm  (think:  the Knicks on steroids) who continues to make the situation worse (while claiming we’re in the playoffs)

–with most of the seasoned investment professionals fired in the aftermath of the financial crisis, and replaced by AI and talking heads, it’s hard to gauge what’s driving day-to-day market moves

–if we assume that the US economy is 70% consumption and that this drops by 20% in the June quarter, then COVID-19 will reduce GDP by 14% for those three months.  This is a far steeper and deeper drop than most of us have ever seen before

–on the other hand, I think it’s reasonable to guess that the worst of the pandemic will be behind us by mid-year and that people released from quarantine will go back to living the same lives they did before they locked themselves up.

 

It seems to me, the key question for  us as investors is how to navigate the next three months.  In a pre-2008 market what would happen would be that in, say, six or eight weeks, companies would be seeing the first signs that the worst was past.  That might come with more foot traffic in stores or the hectic pace of online orders for basic necessities beginning to slow.

Astute analysts would detect these little signs, write reports and savvy portfolio managers reading them would begin to become more aggressive in their portfolio composition and in the prices they were willing to pay for stocks.

 

How the market will play out in today’s world is an open question.  AI seem to act much more dramatically and erratically than humans, but to wait for newsfeeds for stop/go signals.  (My guess is that the bottom for the market ends up lower than history would predict and comes closer to June.  At the same time as the market starts to rise again, it will rotate toward the sectors that have been hurt the worst.  Am I willing to act on this?   –on the first part, no; on the second part, looking at hotels, restaurants…when the time comes, yes)

A wild card:  Mr. Trump now seems to be indicating he will end quarantine earlier than medical experts say is safe.  At the very least, this will likely bring him into conflict with the governors of states, like NY, NJ and CA, who have been leading efforts to fight the pandemic.  At the worst, it will prolong and intensify the virus effects in areas that follow his direction.  Scary.