playing cyclical recovery

Yet another slow-motion human catastrophe seems to be starting to play itself out in the US. Yes, Trump’s strange attempt to undermine the finances of the American university system, one of our crown jewels, by barring its highest-paying students from attending, disappeared almost as soon as it was unveiled (to be fair, my guess is Trump had no idea what he was doing; he just wanted to burnish his xenophobe credentials). But the real economic/social issue is the rolling start to the national school year next month. Just as with mask wearing, Trump appears to be insisting on resuming school in person and on schedule, which seems to me to be a recipe for another surge in coronavirus cases, similar to the one resulting from Trump’s urging southern and western states to reopen too early.

I think the stock market reaction to this will be twofold: to stop the rotation away from secular growth to domestic cyclicals, and to reconsider whether or not the latter’s current prices are too high.

What I have tended to forget is that, possibly ex the UK, the US response to the coronavirus has been by a mile the worst in the world. Europe and Asia are already starting to rebound at the same time equity investors are coming to grips with the fact that Washington–and a number of state governors–are about to inflict another round of damage to GDP.

Anyway, my thought is to reduce my exposure to what I see as very expensive tech names and build up cyclical exposure–in the EU and Asia.

random-ish musing (ii)

Alarming reports about the spread of the pandemic in the south and west have stopped the stock market in its tracks over the past few days. The bad news is coming primarily from states that decided to believe the wishful thinking of the administration rather than the country’s health experts. One consequence of this has been a new round of economy-damaging moves–proposed new tariffs, for example–by Trump as he tries to distract attention from the human tragedy he has created.

Taking off my hat as a citizen and putting on my investor cap, the main stock market issue is that the spread has reached prime vacation destinations, where local governments have made no preparations for its arrival. Therefore, summer travel is dead and, unlike many overseas areas, the US consumer economy is not going to reopen soon. Are we back to the buy NASDAQ/sell R2000 (or buy NASDAQ/sell the Dow) trade that has been the key to stock market success for most of the Trump administration?

A problem: NASDAQ is expensive and the degree of its outperformance over R2000 is very, very large by historic standards. So it’s a reasonable first guess that the spread won’t get much wider. In fact, the gap had started to close before news of the virus spread came out. On the other hand, the domestic economy is being handed another setback by bungling governors and typical summer vacation travel destinations have become virus hotspots. So it’s also reasonable to conclude that the NASDAQ/R2000 spread will get wider and that the R2000 rebound will just be more ferocious when it happens sometime down the road.

Where do I come out on this?

–One of the first things any successful portfolio manager learns is that you don’t need to have an opinion about everything. Just the opposite. You need to have strong (and correct) opinions about a few non-consensus things that you shape your portfolio around. For now, I’m choosing not to change what I hold to bet on what will happen to the NASDAQ/R2000 spread.

–Regular readers will know that a while ago I made a small shift to reduce the size of my very large pro-NASDAQ overweight. That hasn’t worked out well so far, but I don’t care. I want to do more–which I look at as locking in some of the outperformance I’ve achieved so far this year. But I’m guessing that I may have a better chance to do so over the summer. In other words, from a short-term-tactical point of view (sort of like betting on whether the next pitch will be a ball or a strike) I think the economically sensitives go down as NASDAQ more or less treads water.

A related topic (for tomorrow): how will the current situation ultimately play out? I think a lot hinges on the election in November.

today’s market

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.

are stocks overvalued?

data registering with market observers

frothy individual stocks For instance, Zoom (ZM), a stock I owned a while ago but have sold, reported a blowout quarter after yesterday’s close ($.20 a share vs. analysts’ estimates that averaged $.09, but ranged from a loss of $.16 to a gain of $.12). Thanks to this stellar earnings performance the stock’s PE, has shrunk to 1224x trailing earnings, according to Fidelity, or 38x its anticipated growth rate. ZM has tripled since February. Nevertheless, analysts are overwhelmingly bullish.

(Why have I sold? I’m a frequent user of the service and I like it. I imagine, though, that ZM will end up as a feature of someone else’s app. This could happen through a high-priced takeover, which would mean shareholders would make money from here …or it could happen by rivals making their services better, which would be a less happy outcome. And I didn’t have a strong conviction about which way things would go.)

the trailing (that is, based on pre-pandemic results) PE on the S&P 500 is a higher than average 23x+, even though earnings reports for index companies over the next six months or more are likely to be ugly

–the continuing economic, pandemic response and now civil liberties, train wreck of the Trump administration. My sense is that the stock market, which normally pays little attention to politics, is focused on the here and now of an inept leader beginning to channel his inner George Wallace. I don’t think the potentially disastrous long-term economic consequences of his policies are fully in today’s prices, nor the chillingly real possibility that he will be reelected in November. But his epic dysfunction is impossible to ignore.

So why is the market going up every day? More tomorrow.

…and picking up steam

I’m on the sidelines and watching.

There is information in today’s trading, even if nothing more than my holdings are really getting beaten up.

For one thing, tech names continue to sell off even though the rally in business cycle-sensitives (maybe reopening-sensitives would be a better term) is fading, for the moment at least.

Another is the difference in performance between tech heavyweights like MSFT and AMZN, which are down by about 2% as I’m writing this, and smaller, more “concept” names like SHOP and BYND, which are off by 4x as much.  To my mind, this underlines the risk in the latter.  Imagine if the market were falling instead of being just flattish.

It’s also interesting to see the resilience of the airlines and cruise lines, despite what I regard as their bleak earnings prospects.

The clear delineation between winners and losers suggests this rally has a lot further to run.