Category Archives: Strategy

is there really a counter-trend rally underway?

June 18, 2020 By in counter-trend movements, post-pandemic world, Strategy, Trading, Uncategorized Tags: , , Leave a comment

A short while ago, I began to think that what I considered extreme performance and valuation differences between the NASDAQ index vs. the Russell 2000 (large multinational techy companies vs. medium-sized domestic firms) had become so wide that there had to be a period of catch up, when the R2000 would significantly outperform NASDAQ.

I thought it was possible that the R2000 might outperform by, say, 15-20 percentage points over a two-month period. The trigger could well be evidence emerging that the worst of the pandemic in the US was behind us. I was also noticing that I was checking my stock accounts closely almost every day–something that my experience has taught me to be a reliable sign that my holdings are getting near-term toppy.

The turn toward domestic, business cycle-sensitive names started shortly after I wrote about the possibility. BUT the move has stopped dead in its tracks this week. My reading of prices says that the market no longer wants to make this turn.

Of course, I could be wrong, as portfolio managers often are. And I’m not removing the small pro-domestic economy bet I made based on my sense that a market rotation was imminent.

What has changed?

Keeping in mind that the “what” is less important than the “that,” it seems to me that the show-stopper has been the White House. It’s the fact that new coronavirus cases in states like Florida, Texas and Oklahoma, which have relaxed social distancing precautions at Trump’s urging–and against the advice of medical authorities, are spiking sharply upward.

Trump is also launching a series of his signature political rallies, even though such events appear to be prime breeding grounds for infection. The Trump campaign has booked a 20,000 seat arena for the event, but claims to have requests for over a million tickets–which would be about half the adult population of the state, and well ahead of the number of votes Trump garnered in OK in 2016. None of this makes a lot of sense to me, nor apparently to Wall Street.

My guess is that at least until this situation sorts itself out the pro-business cycle rally is on hold.

where to from here?

June 10, 2020 By in currency effects, deprecating currency, economics, Strategy Tags: , , Leave a comment

signs of excess

The US is now awash in money being pumped into it by the federal government, both through Federal Reserve buying bonds and offering overnight money to banks basically for free and Congress sending out trillions of dollars in stimulus money. Why? …to combat the enormous and unnecessary damage done to the economy by the pandemic (not by the virus itself but by Trump’s bizarre implosion under pressure–calling the pandemic a hoax, urging citizens to ignore medical advice, fomenting race conflict to cover up his failure).

For the stock market, most of this is in the near-term rear view mirror. There are clear signs that there’s no shortage of cash in circulation. Barstool Sports’ shift from sports betting to day trading stocks is one. The increasing popularity of Robinhood–and the response of traditional discounters in offering trading in fractional shares is another. The weird resurrection of the stocks of bankrupt companies like Hertz (I can’t think of an instance where common shareholders have ever come out of a Chapter 11 proceeding with anything at all).

it’s all about the money (supply)

Yes, these are serious warning. But healing at least some of the damage Trump has done during his time in office takes priority for now, as I see it. And until there’s a change in government policy to “take away the punch bowl,” stocks will likely continue to hold up relatively well. This was certainly the case during the gigantic bull market in Japan during the 1980s as well as in the runup in the US stock market during the Y2K/Internet bubble of 1999.

my biggest question marks today

–is the market rotation toward domestic economy-centric stocks that began in late March over? My guess is not yet.

The winning strategy for Wall Street since the positive effect of the 2017 corporate income tax cut began to wear off in early 2018 has been to hold the US-traded stocks that have the least to do with the domestic economy. From late March to late April, these laggards, as measured by the Russell 2000, began to keep pace with the broader market. For the past 6 weeks or so, thanks (I think) to Washington stimulus, they have been outperforming. A counter-trend rally, which is what I think this is, typically lasts about two months. I regard the start as the end of April, not the end of March. So even though price movement can be read as the R2000 rally being over, my guess is that it still has some weeks to run.

–will Trump be reelected? Former Wall Street economist, Stephen Roach, now teaching at Yale, is the first public figure to be talking about my Mexico-1980s analogy as a possible future for the US. He does so in a Bloomberg article that reads in part:

“Look no further than the Trump administration. Protectionist trade policies, withdrawal from the architectural pillars of globalization such as the Paris Agreement on Climate, Trans-Pacific Partnership, World Health Organization and traditional Atlantic alliances, gross mismanagement of Covid-19 response, together with wrenching social turmoil not seen since the late 1960s, are all painfully visible manifestations of America’s sharply diminished global leadership.”

He thinks a fall in the dollar of about a third is possible.

Although Roach doesn’t put it this way, a very big question to be answered in November is whether the US doubles down on the Trump anti-growth, anti-science, white supremacist agenda or tries to start to repair the damage done to date.

A final point: Mexico in the 1980s was a horrible place economically, where the currency lost 90+% of its value. But because the government did not permit citizens to move assets abroad the stock market there was the best-performing in the world over that period.

more tomorrow

Hong Kong, ironies and all

June 9, 2020 By in administration economic strategy, economics, Strategy, Uncategorized Tags: , , Leave a comment

The British seized Hong Kong in the mid-nineteenth century if furtherance of its plan to balance its trade accounts by forcing China to buy the opium it was cultivating in India.  When China announced it was not renewing the 99-year lease forced on them by British arms, Parliament vetoed the idea of granting Chinese residents of the colony citizenship.  The reason for the abandonment?   …England was too cold for Hong Kongers to feel comfortable.

Last month, however, Parliament is now responding to China’s effectively ending Hong Kong’s status as a Special Administrative Region 25 years earlier than promised by offering a path to British citizenship to all pre-Handover (July 1, 1997) Hong Kong citizens.

This at the same time Donald Trump is taking the opposite tack, fomenting anti-Chinese prejudice and apparently condoning race violence in Minnesota by quoting ur-racist George Wallace on Twitter.

The circumstances of the reintegration of Hong Kong into China are, strictly speaking, not a US diplomatic problem. The seizure of land and its return to China are an issue between China and the UK. There is a possible US connection, however. Xi may feel that both the White House and 10 Downing Street are occupied at the moment by epic incompetents, whose shelf life must be limited. So there will be no easier time than now to break the handover agreement and meld Hong Kong back into China.

Trump is framing his response to the Beijing move as opposition. In reality his opting to treat Hong Kong just like any other part of China is giving Xi exactly what he wants. Given that Trump has disavowed cooperation with international allies, he may have no choice.

In another irony, China is now discussing joining the Trans-Pacific Partnership. That’s the anti-China influence group created by the US that Trump withdrew us from early in his administration. If so, Trump will have transformed an anti-Beijing coalition into an anti-US one.

I do think the US and China are in a contest for world economic and cultural dominance. China has the advantage of a much larger population. The US has incumbency, global allies grateful for past support, the dollar, its research universities, its worldwide financial system and its dominance in semiconductor manufacturing. It seems to me that the effect so far, if not the intent, of Trump’s making America “great” again has been to blunt the US edge in all these areas without any thought of gain in return.

I think that this is forcing US-based multinationals to consider the possibility that they may not be able to remain both world leaders and American. Arguably, this train of thought runs much deeper in American society, and is the basis of the massive outperformance of NASDAQ over the Russell 2000 over the past several years.

it’s mostly about interest rates

June 8, 2020 By in administration economic strategy, economics, stocks vs. bonds, Strategy Tags: , Leave a comment

There are three big categories of liquid investments: stocks, bonds and cash. Typically, the progression for individuals as they begin to save is: cash first, then bonds, then stocks.

There’s also an age-related progression, generally from riskier stocks to the steadier returns of government bonds. The old-fashioned formulation is that your age in years is the percentage of savings that should be in bonds, the remainder in stocks. A 30-year old, for example, would have 70% of savings in stocks, the rest in fixed income.

A strong tailwind has been aiding bond returns in the US since the early 1980s, since after the Fed raised short-term interest rates to 20%+ to choke off an inflation spiral spawned by too-loose money policy during the Seventies. The financial collapse of 2008 required another huge dose of money policy stimulus. Recently, Trump has been badgering the Federal Reserve to push short rates below zero to cover up the damage he has done to the domestic economy since being elected, in addition to the big hole he punched in the bottom of the boat this year by his pandemic denial.

No matter how we got here, however, and no matter how bad the negative long-term consequences of Trump’s bungling, the main thing to deal with, here and now, is that one-month T-bills yield 0.13%. 10-year notes yield 0.91%. That’s because during times of stress investors almost always shrink their horizons very substantially. They’re no longer interested in what may happen next year. They just want to get through today.

My sense is that we’re bouncing along the bottom for both short and long rates–and that we’re going to stay this way for a long time. If so, not only is income from Treasures of all maturities substantially below the 1.9% yield on stocks, a rise in interest rates toward a more normal 3% will result in a loss for today’s holders of any fixed income other than cash.

So for now at least, for investors it’s all stocks, all day long.

Looked at this another traditional way, the inverse of the yield on the long Treasury should be the PE on the stock market. If we take the 10-year as the benchmark, the PE on the stock market should be 111; if we take the 30-year (at 1.68%), the PE should be 59.5.

We have to go back to the gigantic bubble of 1980s Japan to see anything similar. If the comparison is valid, then bonds are already in full bubble mode; stocks are halfway there.

today’s market

June 5, 2020 By in Strategy Tags: , Leave a comment

As I’m writing this at about 11:30 am est, the Russell 2000 is up about 5%, the S&P 3% and NASDAQ is lagging at just over +2%.

The trigger for this surge is the government’s monthly employment report, which shows a gain of +2.5 million jobs. The report is accurate to +/- 100,000 jobs, so it is a significant plus. Forecasters–my impression is they’re mostly trend followers, so not much use–had been forecasting another big job loss.

The big gainers so far are what one would expect. The back-from-the-dead cruise lines and air travel stocks are up by 15%+. Oils are similar winners.

I think the important names to look at on a day like this, however, are the losers. On my quote list, BYND, SHOP, ZM, and FSLY stand out. AMD, as well. This is because I think that during this rally, they will continue to lag.

From a tactical point of view, I think it’s way too early to roll out of economically sensitive stocks into lagging secular growth names. There is a second issue, though. Are these names true secular growth winners that will begin to perform again after “taking a rest,” as some Pacific Basin investors would describe their lackluster present? Or are they only winners so long as pandemic conditions persist? If the latter, we can either sell and chase the near-term winners (“chase” is almost always a bad word, but let’s not deceive ourselves about what’s going on) or we can upgrade to better secular growth names–or into a thematic ETF–while this kind of issue is being left behind. This will prepare us better for the time when secular growth comes back into vogue.

As for me, I’ve owned all of the above names at one time or another and, of them, I only hold AMD now. I’m very overweight secular growth, though, so I’m in no rush to add more. For the moment, I’m on the sidelines watching.