October 16, 2020

Decisions Matter

 The person who claims to be indecisive is by definition decisive

-Me


When markets collapse or grow with irrational exuberance the narrative rarely falls on the importance of making a decision on both occasions. However, the narrative often ignores the scope of emotion that accompanies both circumstances if not outright distract from the question at hand. The unintended consequence of this condition is to lose perspective trying to understand the day to day descriptive. At its worst it also challenges your faith in what you thought you always understood. This is where, in my opinion, decisions matter. Why not be excited when markets go down and opportunities abound? Likewise, why not become skeptical when markets rise irrationally, and opportunities disappear? Every decision carries the risk of being wrong, allowing for the probability of an unexpected outcome of an investment whose validity can often come into question is where sometimes the best decision to make is no decision at all.

Markets

The broad indexes all finished the week in positive territory, supporting last week’s closing technical condition suggesting the market, as represented by the S&P 500, was overbought. Subsequently, it’s still overbought, and if the markets continue to trade higher the move will stretch some of those technicals just in time for the election. In the meantime, given the surge in GDP in the second quarter, reversing the first quarter drop, the expectations for earnings to be released in the next few weeks appear optimistic. It would be unsurprising that would result in a relatively flat market which should prevail until any earnings surprises pick up the volatility. Should that occur, while I’m currently looking for opportunities to add to exiting holdings, new ideas could always come along.

Economics

Since my last commentary, the economic scenario has shown continued lopsided growth. The consumer is strong, but not as strong, job growth is healthy, but there are still 10.018 million people continuing to claim jobless benefits. There is no arguing the condition of the economy is still controlled by the pandemic and the legislation that aims to address it, in some cases, irrespective of the economic outcome. But it’s hard to deny that spending is reasonably healthy as indicated in today’s Retail Sales data that saw a better than expected 1.9% increase. Much of the consumption included categories related to the booming housing sector along with sales at home improvement and furniture stores, both increasing last month as well. On the inflation front the Producer Price Index rose .4%, higher than expected.  Food prices rose 1.2% in September, while energy prices fell 0.3%. The Consumer Price Index (CPI) rose 0.2% in September, matching consensus. In both cases inflation is rising, along with steady growth in consumer demands, however, remains below the Federal Reserve’s goal of 2%, for now.

External Events

Bragging is in and I find it quite curious how many of my industries most notable pundits are sounding more and more like Pindudes, every day. The casual recommendation of stocks that appear more in line with short term jumps are the result of what’s referred to as operational thinking as opposed to strategic thinking. The process is fine for those with an outlook for the present, however I prefer to focus on the ends, as distinct from the means. Namely, I make an investment with the aim to capitalize on future outcomes while buffering short term distractions. In my opinion, investment choices can profit in either outcome is the strategic challenge the investor, not traders, focus on. I bring this up, because these days to simply speculate on a company that is consistent with any economic expansion that follows historical norms is ignoring the impact of  the pandemic and the current political climate will have an impact on how that expansion will unfold, which still remains to be a bumpy ride toward a cloudy horizon. And if a good idea doesn’t come along, cash, is nothing to brag about, but it’s always a good strategy too.


September 25, 2020

Value or Growth

The simple answer is neither. I’m occasionally asked if I’m a Value Manager (think dividends) or a Growth Manager (think tech), my immediate answer is neither, I’m an Event Manager. What I mean is, after macro analyzing the global economies in areas that include commodities, currencies, interest rates, employment, and consumer data, I then move to find the companies that are best equipped to provide future benefits. But my interest isn’t simply about a company that has fallen out of favor, rarely because of dividends and certainly not the call of the crowed. My strategies begin with what is referred to as event driven investment, meaning I look for mergers and acquisitions and other corporate events that are complementary to the needs of an economy perpetually in transition and also increase the competitiveness of the sector. Events can also be  a change in the overall social mood, for example the clear trend toward renewable investing has driven many companies such as Parker Hannifin (PH) to be available to growth in areas ranging from electric cars to solar or nuclear. Or an acquisition that takes an older company into new technologies, such as Jacobs Engineering (J) or XPO Logistic (XPO), both names also are poised for less certain, but more potential, infrastructure prospects. Predicting the future is less about analyzing and predicting the outcome of a narrative, and more about the outcome of an action.

Markets

The broad indexes closed the week in the positive. But just as it opened the week in the negative, looking at the week in total left the indexes at a slight negative with the exception of the NASDAQ. This isn’t necessarily a bad thing since the overall market is still oversold, and even some of the more onerous tech names are looking a little down and worthy of looking at for opportunity. Most technical indicators are showing weakness and, in my opinion, the back and forth of the indexes is a common sign of working off anxiety that comes with declines, just as it occurs in overbought conditions. If that sounds like a reason to be constructive, it is.

Economics

Much of the more constructive economic data that came in this week was overshadowed by the current jobless claims which showed a slight increase in new claims. This wasn’t surprising since there is no plan for any stimulus package and companies, especially those seriously hurt by the pandemic, such as Airlines have already announced a new spat of layoff as of October 1st. What’s more worthy of paying attention to is the upcoming end of the Third Quarter and the release of data that some economists are predicting will show a sharp snap back in GDP growth from the disastrous Second Quarter, with some estimates as high at 25% annualized. With the outcome of this week’s increases in industrial production, retail sales and housing starts, it should be a good number, although I don’t the anticipate the ensuing narrative to concur.

External Events

The highlight of this week was the comments from both the administration and Fed Chairperson Powell imploring action on negotiating another stimulus. Unfortunately, it was met with silence and there’s very few who anticipate any action. How the pandemic plays out over the fall flu season will determine the urgency, and with new layoffs on the horizon some may take notice. Outside of that, only the upcoming continuation of the election show should distract most from commenting on the stock markets and that’s not necessarily a bad thing. I’ll leave it there.


September 18, 2020

Undervalued Is Not the Same as Cheap

Selling stock that is overbought is not the same reason to buy a stock that is oversold. Selling a stock, either in part or whole is generally the outcome a various condition. Perhaps a company has unexpected poor earnings that cause concern or earnings that drive the value above my expectations. If the values level is unsubstantiated by the overall value of the company’s assets, such as we recently see in a few select technology names, or a better opportunity name from the sector or industry comes along that compels a swap. However, it works the sale has purpose that raises capital and capital that is both defensive and opportunistic. But now we come to the undervalued stocks in today’s markets. As we all know how the pandemic has affected the economy, those stocks that represent the sectors and industries most harmed, the current valuations suggest are good buys. But are they? Good value comes in many different conditions. Starting with the obvious fundamental conditions, is the value hurt through a correction of a recent overbought condition. Is the company’s service or product still relevant, is the company weighed down with excess debt, are there growing headwinds from new competition and importantly is the management efficient and productive in their governance? For example, energy companies had seen the decline in oil and gas prices even before the pandemic exacerbated the downtrend. Today those companies seem a potential good buy. But what about their rising competition in renewables, or the excessive debt, or the decline in free cash flow that fed their customary high dividends, the one thing that kept many investors loyal over the years and could easily begin to disappear in the coming years. And industries such as cruise lines and airlines all have adapted changes to their health standards in their respective environments. But with airlines, will it be enough to compel people to fly in the intermediate term. And even when the pandemic ends is it necessarily so that the consumer will want to go back to discomforts of packed flights, endless lines and other conditions that might be headwinds to growth as health conditions have given people a new  lift in terms of health safety measures for every day even in normal times. The point is that a company whose stock is undervalued has numerous reasons to be circumspect of, while an overbought company could have a reason to correct, still be highly valued, but no longer overbought from a technical standpoint. For me, research and the ensuing analysis has a few quantitative variables to consider such as what the global economy is doing, the  domestic currencies are doing, what the economic, political, and cultural climate is represented from the standpoint of confidence. And is strength of competition worth being feared. A lot to take in, but for some of us, sometimes more enlightening (and fun) than it sounds.

Markets

This week the behavior of the broad indexes was enlightening but far from fun. For starters, the week began rebounding from last week’s downtrend that left many technical oscillators oversold. But as soon as Tuesday rolled around the economic data showed continuing moderation, the downtrend continued except for a spate of strong Initial Public Offerings (IPO’s) that began with a company known for cloud-based warehousing called Snowflake (SNOW). By the end of the week the video game developer Unity Software (U) arrived and the moves higher in price for both companies was in excess of 50%. A familiar name that is in the works in Airbnb. Worth noting is the recent narrative on the decline that attributes, in my opinion, too much to politics and not enough to the reason for the selling. And a good reason that has been suggested by some institutional sources spoke of the need to raise cash to participate the IPO market and for that reason the lowest hanging fruit are the overvalued, overbought technology stocks.  Also interesting was the revelation that Marc Benioff  (CRM) and Warren Buffet (BRK.B) were early investors in this week’s offerings. This makes sense and suggests to me that a number of those companies have outperformed because of the pandemic, warranting acting as a source of cash, but may have also established themselves as a permanent fixture in the new economic world order. And soon to still be a good buy.

So, as uncomfortable as the markets may seem given the volatility and the external headwinds of politics and uncertainty that cause much of it, for now the potential for a clearer picture is what the  broad indexes need and with patience, will get it. In the meantime, Europe and Asia look interesting and adding to current investments with helpful yields and compelling valuations is the strategy.