What to do?

I think the wrong thing to do would be to increase exposure to pandemic beneficiaries, if we assume I’m correct about what’s going on in the domestic economy.

A better thing would be to use the strength in pandemic beneficiaries to slowly prune the weakest of them and use the funds to increase exposure to the strongest recovery stocks.

Rivulets of brownish hair dye running down both sides of Guiliani’s face (‘Guiliani melting’) is the visual most in the news yesterday. Less obvious has been the stunning absence of any knowledge or skill in his recent court appearances. What I take from this is that no competent lawyer wants to be associated with Trump’s attempt to subvert the election process.

At the same time, Trump’s major priorities during his final weeks in office seems to be: spinning new conspiracy theories to aid in fund raising to fleece his supporters one more time; continuing to ignore the pandemic; and firing as many competent civil servants as he can–all, it would seem to me, to make things as difficult as he can for Biden. In other words, vintage Trump.

So, yes, we’ll have vaccines very soon. But no government work will be done for the next three months on how to get 600+ million doses distributed and administered. So recovery, which should also be just around the corner, will be, say, six months later in the US than elsewhere.

The stock market is absorbing all this negative news, not by declining–so far, at least–but by shifting back from emphasizing cyclical recovery to favoring pandemic beneficiaries. My guess is that this may continue through yearend.

It started when China unveiled its version of the Trans Pacific Partnership on Monday. Trump pulled out of the original TPP, a US-led coalition formed to check the influence of China in Pacific trade, when he became president. That (senseless, in my view) move put the US at a disadvantage in trade with the Pacific. Now the situation is worse for us, with the new coalition being formed by China to limit the influence of the US.

The pandemic is worsening in the US, threatening again to overwhelm hospitals’ ability to treat the infected. Two causes: colder weather, and Trump urging followers not to take elementary safety precautions. Continuing silence from Trump, however, including denying Biden’s transition team access to virus-related planning data.

Two low-level Republican officials in Wayne County, Michigan refused to certify election votes in the predominantly black city of Detroit–which had voted heavily in favor of Biden–while okaying them in predominantly white nearby towns. No credible reason why, except maybe that they were lauded by Trump for doing so. After three hours of non-stop criticism on the county Zoom call, the two reversed their stand and certified the ballots.

What to make of all this? For stock market investors, it’s that Trump continues to wreak economic havoc even in his final days in office. This implies to me that interest rates will stay near zero for longer than the consensus expects.

PS: less surprising, Trump fired the Homeland Security official who was responsible for election cybersecurity said the recent election was the most secure from cyberthreats ever.

Yesterday I was reading a brokerage report that was trying to lay out a conceptual framework for investors to use over the next few years.

The first part of the argument was relatively straightforward: that the key to future gains (my view: as always) is the level and direction of interest rates. That’s not true for stocks because they’re the funny kind of bond that academic finance makes them out to be. Rather, it’s because stocks, bonds and cash are the main kinds of liquid investment available to you and me. We may have a personal preferences that influence our willingness to switch among them. Nevertheless, changes in the price of any will exert an influence on the others.

An illustration–not so realistic, but the general point is still valid:

Let’s say the current return on cash, the riskless asset, is 1%; the return on bonds is 4%; and the return on stocks is 6%. For whatever reason, the return on cash rises to 10%, with expectations that it will remain there. What happens to bonds and stocks?

My answer: both stocks and bonds decline until their anticipated return reaches 10% plus a premium to compensate for the extra risk of holding them. Broadly speaking, bonds are total losers in this process. Why would you hold onto a bond that yields 6% if you can get 4% more from switching to cash? In the case of stocks, there may be offsets because the forces that are causing fixed income yields to rise (e.g., inflation) may also enhance cash flow and/or profit prospects. Even so, it’s a steeply uphill battle to avoid losing money in a rising interest rate environment.

Since rates are now at effectively zero, arguably the only way to go is up. In addition, since the principal cause of current economic weakness, an incompetent administration that has trashed the domestic economy, is in the process of being removed (kicking and screaming), chances are rates may begin to rise as early as next year.

The brokerage report investment solution? …alternative investments, like hedge funds, private equity and real estate.

Personally, I’m skeptical. Here’s why:

—alternative investments tend to be extremely illiquid. So it may be hard, maybe impossible, to reverse the decision

–the only pricing information may come from the promoters of the investment. It’s hard to know how accurate this will be

–there’s only infrequent pricing information. The fact that the promoters’ assessment of long-term prospects hasn’t change does not mean that the investment is still worth what it was in a lower interest rate environment

–except for a few years after the 2000 internet crash, hedge funds have consistently underperformed S&P index funds over the past quarter-century. Yes, there have been a few winners, but there’s no guarantee we’ll stumble into one

–my observation is that the fees to all but the top, top tier of wealthy individuals are high enough to reduce the net returns to pedestrian levels. I recall, for example, a private fund run by famous Hong Kong-based investors that bought mainland Chinese mid-sized growth companies, which was opening itself to new money. I got to see results to date. The results over the prior ten years for non-family investors was about the same as the return on the Hang Seng index. Maybe less, certainly not more

–early in my investing career I studied the small oil and gas companies that created and sold limited partnerships. The partnerships were typically filled with sub-standard drilling prospects and the limited partner got tax breaks but (my observation) nothing much else. One day early on I got up the courage to ask a successful partnership-selling company what the attraction of the product was …because I couldn’t see it. The answer: not the economics, which were bad, but the idea that the holder could hope to impress acquaintances at social gatherings by alluding to his private investment interests.

Moderna

Earlier this morning, Moderna announced that its anti-covid vaccine was not only as effective as the Pfizer candidate whose trial results were announced a week ago, but it apparently also doesn’t need the special refrigeration that the Pfizer vaccine requires.

In Asian trading overnight, US stock index futures were all up by about 1%, with NASDAQ slightly ahead of the S&P and the R2000. On the Moderna news, the R2000 spiked up to +2.3% and NASDAQ dipped slightly into the red. This echoes, albeit more mildly, what happened when Pfizer made its announcement.

Two possible trading patterns for this week:

–this week is a somewhat paler echo of last week, with return-to-pre-covid life beneficiaries rallying for a couple of days, followed by a rebound of pandemic beneficiaries on the idea that normality is a long ways away

–a normality rally without much of a pro-pandemic rebound. My guess is that this outcome is less likely. But it would be more significant, because it would imply the market thinks the pro-pandemic rally we’ve seen over the past eight months has passed its best-by date. For me, this would be enough to accelerate my slow motion shift away from pandemic beneficiaries

the election and its aftermath for stocks

My man-in-the-street read of the presidential election results is that the overall numbers are pretty much the same as in Trump’s self-described “landslide” victory over Hillary, but contain a sharp repudiation of Trump himself . Trump’s bizarre behavior since seems to me to be some combination of cognitive decline and the antics of an aging rocker who’s trashing his hotel room in a sad attempt to remain relevant.

As an American, I’m embarrassed. More worrying than Trump himself are the administration and Republican party officials who are abetting him in what the rest of the world regards as an attempted coup. Unfortunately, we the people own the hotel.

As an investor, I’m concerned that the economic damage he continues even now to do will cause the eventual domestic rebound to be shallower and farther in the future than expected. This complicates the calculus for portfolio repositioning. We might, for example, have a strong pro-cyclical rally driven by AI extrapolations of past experience, followed by a selloff as earnings are announced.

For the moment, however, the most important thing is to analyze how this week’s trading plays out.