on New Year’s Eve

First of all, Happy New Year.

I really don’t have many detailed, high-conviction thoughts about how 2021 will play out. But I do have a few more general observations:

— the key to 2021 is figuring out when economic recovery in the US will commence and how strong it will be

–current high PEs are a function of near-zero interest rates. As/when they begin to rise, which they will at some point after domestic recovery is firmly established, overall PEs will begin to contract. Investor interest will likely shift, for a while at least, away from secular growth names to beneficiaries of cyclical recovery (e.g., banks, industrials). The smallest-cap, most speculative names will likely be hurt the most

–my guess is that recovery in the US will be later to arrive than elsewhere. I don’t just mean that China is posting its tenth consecutive month of GDP expansion or that the Pacific in general is in decent shape. I think we all substantially underestimate how deeply Trump has wounded the domestic economy through his tariffs, his strong preference for industries of the past and his pandemic denial. So although I’m slowly moving away from 2020’s winners, I’m hesitant to make a big pro-cyclical bet

–the US$ has been steadily declining against other world currencies for the past nine months or so. This bout of weakness coincides with the spread of the pandemic. I’m reading it as being caused by Trump’s hoax narrative. If so, the change of leadership may stabilize the currency. On the other hand, the decline may be a reaction to the large increase in Federal debt. I don’t think that’s going to change much. What’s at issue: weak dollar = higher dollar value for the foreign earnings of US-based multinationals. Stronger foreign economies would also be a plus

–at some point in the next few months I think there’s likely to be a selloff in the big winners of 2020. This would likely affect smaller companies much more than the FAANGs, because the former are perceived as riskier and many smaller names have left the FAANGs in their dust. There’s no way I know of to time this. I think it’s a mistake to try to do so. My approach is to try to separate long-term winners from more iffy names and to gradually shift the latter into more cyclically sensitive areas. Your thoughts on US recovery will determine speed and extent of this shift

–Zoom (ZM). This is the quintessential covid stock. I owned it for a while but began to think that there’d be a time when the market would want to distinguish between apps and features (i.e., things that would fail as stand-alone entities and would end up as part of something else–vintage 2000 internet selloff). I put ZM in the feature category. Maybe that won’t be the case. And of course I missed a good part of the upward movement. The important thing, though, is that the stock peaked in October at $588 and is now $347, a 40% drop since the high. I have no idea what’s going on with ZM. I just think it’s an interesting movement and that we should keep our eyes out for similar occurrences–which would imply the start of the winnowing I wrote about in the preceding paragraph.

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