Where we are now. Better said, where we might be now.

I was a soldier during the Vietnam war. My first duty station was in Colorado, with the 10th Mechanized Infantry. My company had maybe 30 armored personnel carriers that we went on practice maneuvers in all the time. Or at least we tried to. But we’d start out with the full complement and arrive in the field with 20, if we were lucky. Later it came out that the government massively understated the materiel losses in Vietnam and made up the difference by taking all the spare parts from combat units in the US and Europe and secretly sending them to Vietnam. So even though we were classified as combat ready, we were nowhere close to that.

In ranger school, my class field-tested new shovels, ponchos and rucksacks we were told the Army was thinking about buying for combat troops because they were lighter than older models. But the shovels only worked in sand, the ponchos dissolved in water and the rucksacks raised giant welts on our backs. We all wrote the most negative possible reviews and patted ourselves on the back for having saved the Army from dreadful mistakes. Several months later, on line to get equipment in Vietnam, I saw ahead of me big piles of the same shovels, ponchos and rucksacks. Nothing to match the Colt M-16 scandal, but still…

My point? I’d forgotten about all this until reading about the apparent surprising ineptitude of the Russian army in Ukraine. My take is that Moscow is afflicted with a gigantic case of the corruption that plagued the US all those years ago. Not just that, but Putin seems to have had no clue about his military’s shortcomings.

About stocks, though? The question is what areas of economic weakness are there in Russia that we don’t know about.

Oil is the biggest area I’d be concerned about. On the one hand, in every case of price controls or sanctions I looked at during the better part of a decade as an oil analyst (though admittedly a long time ago), the sanctioned oil was relabeled as something else by middlemen and sold to customers who were not vitally concerned with its origin.

My question about oil from Russia, however, is how much of its output is lifted by, and therefore depends on access to the expertise of, international oilfield services companies. Yes, the withdrawal of BP is an issue, but I suspect this is mainly an access to capital question. Suppose half of Russia’s typical oil output stays in the ground because there’s not enough domestic expertise.

Two implications: maybe considerably higher oil prices in the near term, and increased impetus on making the switch to electric cars and trucks.

Banks and other financial companies are another. Banks that have lent to Russian clients, even in dollars or euros, have two big issues. One is that the collateral backing loans has likely fallen due to ruble depreciation. The second is that governments facing the kind of balance of payments deficit developing in Russia typically end up imposing capital controls, so that borrowers aren’t legally able to service debt to foreign banks, even if they want to.

World stock markets seem to be shifting away from economically sensitive stocks. Thinking in the simplest terms, economic problems in Russia are somewhat like an emerging markets debt crisis–e.g., Brazil or Argentina. Currency depreciation hits both firms with plant and equipment in the country, because their balance sheet value is reduced, as well as firms that make things elsewhere that they sell in the affected markets. Turmoil lowers the wealth of the emerging market buyer, resulting in lower ability to pay for foreign goods and services. The companies typically most affected are the industrials that investors have been buying over the past six months or year to defend themselves from the weakness in tech. My sense is that investors are at least searching through the tech rubble for names that have been excessively sold off.

more tomorrow


Major tops and bottoms in the stock market are never, in my experience, totally rational. Rather, they’re all about groupthink and about emotion. In today’s world, there’s also a pinch of rules-based, but still loony, AI action. (The AI stuff may actually be rational, but, if so, the aim may well be to get human investors’ animal brains into a higher gear.)

At any rate, the major US stock market indices–S&P 500 and NASDAQ–both made significant lows on January 24th.

We’re right back at those lows as I’m writing this. Typically, in Western markets, important lows are followed by a bounce that lasts six-eight weeks before petering out. The market returns to “test” the previous lows, usually dropping slightly beneath the previous low before turning around (for no apparent reason other than the charts), putting the previous plunge behind it and beginning a significant advance. Technicians (you can identify them by their buckskin jackets) call this a double bottom.

If my account is correct, the issue with current price action is that, less than a month after 1/27 it is coming too soon to be a legitimate test. Arguably, Russia and Ukraine are unusual factors in today’s markets. On the other hand, there’s always something different about every situation.

My guess: this is a test but not the test. Still, I raised about 10% cash as the Ukraine situation began to develop and put about a third of that back to work this morning. So I must be thinking that the remaining market issue is time rather than the market level. Of course, there may be another half-hearted bounce followed by a return to current levels again. That’s a triple bottom. I don’t ever recall experiencing one, though.

PS. For what it’s worth, I think that the violation of the prior low ends up most often being a buy signal in the US, and maybe Europe. In Asia, in contrast, where just about everybody takes charts much more seriously, it’s a strong sell signal.

looking at a chart of Roku (ROKU)

I’ve just been looking at a chart of ROKU. I had a ROKU box years ago and own a tv with Roku installed. Otherwise, I know very little about the company.

The stock was $160 two years+ ago, in early November 2019. It entered 2020 at $121, before falling to $87 during the worst of the covid market panic in March.

It exited 2020 at $389 and peaked–intraday–at $490 in July 2021, less than half a year ago.

It’s $107 as I’m writing this, down 26% on the day, after reporting disappointing earnings overnight. That’s a total fall of 78%, during a time the S&P is off by about 5% and NASDAQ a bit less than 10%.

The issues, which I probably don’t understand fully, are that: there’s a supply chain-related slowdown in the manufacture of tvs with Roku inside them; advertisers of consumer goods, faced with similar shortages, think (duh!) that it’s foolish to advertise to create extra demand for the goods they don’t have to sell; and other streaming tv services are parts of conglomerates that can prop them up in bad times, whereas Roku is out there alone as a pure play.

None of this is exactly news.

Why, then, is the stock falling so sharply?

Part of this, I think, is the way AI works, that it increases selling speed and power until it meets resistance. Potential buyers have learned to step out of the way and let the steamroller eventually run out of fuel.

Perhaps a more important part is how the discounting mechanism works across a market cycle. In good times, when economic skies are blue and stock prices are rising, investors become increasingly willing to factor into today’s prices earnings that will only come years in the future. In an average market, investors in the US tend to begin to look at next year’s earnings in June or July. At market highs, investors typically are willing to look two or even three years ahead.

In a bad, i.e., downtrending, market, this process shifts into reverse. At or near market bottoms, investors are no longer interested in the future (unless it’s bad) and are therefore only willing to discount yesterday’s earnings into prices. As estimates turn into actuals, stocks get pounded again, even on small shortfalls. No credit any more for possible future plusses; punishment, however, for future minuses. The latter are discounted and re-discounted repeatedly.

I started out as a portfolio manager being a value investor–good at down markets and not so great in up ones. After migrating to international markets, I found I’d somehow turned into a growth investor, i.e., good in up markets and not so hot in down ones. This is a preface to–how to defend yourself in a down market.

First of all, my assessment is that it’s too late (maybe this is my hope) for a serious overhaul of holdings. For what it’s worth, and for future reference, though, there are several simple defensive things one can do:

–get the portfolio to look more like the market, meaning reducing concentration by having exposure in most/all sectors, and by having more positions to lessen the pain from the inevitable stock-specific blowups

–gravitate away from startups and toward larger, more mature companies

–on an individual company basis, the risks of negative cash flow or earnings and also of high financial leverage, are greater in stormy economic waters. All other things being equal, then, positive cash flow and lower financial leverage should be prioritized

reacting to super-strong GDP numbers

The other day, the Japanese government announced that its economy there expanded at a 5.4% annual rate during 4Q21.

The last year Japan came close to reaching that level was1988, thirty-four years ago. During the current century, 1.5% economic growth as been about the best the Land of the Rising Sun has been able to do–even after a mammoth devaluation of the currency aimed a keeping export-oriented manufacturing competitive.

We all know the reasons: an aging (in Japan’s case, shrinking) workforce; a strong bias against allowing immigrant workers into the country; political gridlock; immense government support/protection for industries of the 1980s, like autos, chemicals, or machine tools. And, of course, Tokyo initially bungled its handling of covid.

Sort of like the Ghost of Christmas Future for Europe and the US.

What I find new–and striking–about this situation is that no one in the Japanese press is writing or saying that the country is on the cusp of runaway inflation. Quite the contrary. What I’ve been reading is a litany of reasons why this strength is likely to fade relatively quickly. Way different from the US, where the media consensus is that the inflationary death spiral of the late 1970s is upon us.

How so? One reason is that Japanese journalists have far greater economic knowledge and experience than their US counterparts, in part because their main task is to inform rather than entertain. Another is that the population of Japan is ten years or so older than Western Europe’s, which is something like a decade older than us in the US. And not only are we younger, we only slapped on import tariffs and closed the borders–halving the potential GDP growth rate, in so doing–a couple of years ago. So we have seen economic expansions and can conceive of the economy spiraling out of control to the upside, even though you’d have to be 60+ to have lived through the late Seventies as an adult. For Japan, in contrast, there’s been almost nothing but stagnation for 30+ years. So it’s easier to imagine that any whiff of growth–much less +5.4%–is only transitory.

So Japan says the boost to growth for them is already beginning to fade. The US consensus, I think, is that any gearing down in inflation is a 2023 affair. Why not split the difference and figure we’ll see some evidence of a return to 3%-ish inflation around the Fourth of July?

oil futures

In a Financial Times opinion piece yesterday, Gillian Tett (I’m a fan) calls attention to the apparently extreme near-term bet in the oil derivatives market that the crude price will continue to rise. Referencing oil maven Philip Verleger, she points out that this outsized position has been built up, not directly by humans, but indirectly through AI-driven computers. The motivation for continuing the buildup? …price and volume momentum built up by previous AI activity. The fact that prices are rising, and on high volume, are enough for others to join the crowd.

Put a different way, the fact that prices are, say, 20% higher than a week ago and that many have already piled in, are both buy signals. This even though the winter heating season is for all intents and purposes over and the spring driving season has not yet begun–why February/March is traditionally the weakest season for oil demand.

This is the world we live in today. I presume at least some AI strategies make money. They may not make the most money, and their gains may come at the expense of other, slower AI rather than you and me. On the other hand, AI doesn’t need high-priced industry-expert humans, steeped for years in the lore of a given investment domain, so costs must be low. So AI-induced extra market volatility is likely here to stay. The safest–and most sensible, I think–course is to try not to be influenced by AI forays into and out of areas we’re interested in.

Still, at the very least we probably want to think out in advance what we’ll do if, out of the blue, AI moves into an area we’re heavily invested in and pushes prices to what we judge is an unsustainable high. Do we hold no matter what? What, if anything would cause us to sell a portion of our holdings, intending to buy back later at a lower price? How much would prices need to decline for this to be an acceptable course of action?

I’ve also been thinking about the apparently relentless year-long selling that’s been going on in early stage tech stocks. I think there’s a wheat vs. chaff issue with this sector. And investor sentiment continues to be bad. On one hand, I’ve been noticing names that have declined enough to be trading at close to tangible asset value. On the other, while surprising, this is no guarantee that such stocks won’t continue to decline–my guess is that AI isn’t considering asset value at all. The British don’t call trying to time a bottom “catching a falling knife” for nothing.