April 14, 2020

Careful Participation

The markets have performed very well for the past week with hails of praise from gurus and pundits. However I prefer to listen to the more modest characters, some of whom I’ve worked with. And many of them seem eager not to miss the recovery but are nonetheless suggesting that never has finding the right company been just as important as finding the best balance sheet. In today’s environment the choosing of investments requires strong discipline, not to simply assume that the same old sack of Big Cap Stocks will come alive when this crisis is over.

The oil industry is under tremendous pressure. Started with the fight over production between the Russians and the Saudi’s, the price of West Texas Intermediate (WTI) is having a hard time recovering. And while the brief recovery that has been seen since the low of broad indexes in March was based more on rumor rather than fact, when fact emerged with an agreement between the two countries, oil stopped going up. Even in talks today between the domestic energy companies, no decision came out of the meetings. We sold energy early last month, I see no reason to reinvest, other than for short term speculative potential.

Financial institutions released earnings today and the ones I watch closely, JP Morgan (JPM) and Citibank (C), both released reasonably favorable numbers. This was in part because it was mostly a back look, but also because the companies have strong capital reserves to challenge potential loan defaults and temporary challenges in the distribution of recent government stimulus cash. My lack of enthusiasm has more to do where interest rates are, removing the crucial need for interest income, and the history of commercial banks doing poorly in a recession.

Real Estate
Real estate, in the form of Real Estate Trusts (REIT) came up immense pressure when the threat of mass unemployment threatened rent and mortgage payments on properties. While much has been helped by the Fed, most of the benefit will come to less and non-leveraged REITS over those more highly leveraged. It’s complicated, but a good reason to watch and be patient, it’s a good source of income.

For obvious reasons the sectors that have the most potential in and out of the crisis begin with technology. Alphabet (GOOGL) and Apple (AAPL) are going beyond their global phone related product demand to engage in a project to create an app to help people know when they are near another infected person. Privacy is an issue, when is it not when it comes to tech, but they promise security. Media and Game Software and Cloud industries are also huge beneficiaries of a quarantined society.

Other areas of strength have come to the Healthcare sector. This sector had been struggling for the last two years as threats coming from promises of nationalizing the industry kept prices at bay. Flash forward and the virus has presented a demand on many top pharmaceutical names such as Johnson & Johnson (JNJ) and Abbott Labs (ABT), and healthcare providers such as United Health (UNH) have seen new life, protecting life. Worth noting the upcoming election season does bring uncertain external challenges, but I remain confident of the sector.

Consumer Staples
What can be said, people need toothpaste and soap. But they also need treated wipes and other sanitizing items that has kept the sector alive and will probably continue to. I remain careful with new ideas and comfortable with current holdings

Consumer Discretionary
The only other equity sector that, in my opinion, requires careful choices is consumer discretionary. Industries such as Airlines, Cruise lines, restaurants & bars have been shut down because of the virus, but to add injury is the mass unemployment that has almost certainly kept much needed cash away. But while company stocks like Amazon (AMZN) and Costco (COST) are doing extremely well, others such as media giant Disney (DIS) and fast food company YUM Brands (YUM) have struggled. But both Disney and Yum have exposure to China, and with an increasing number of cities opening in that country, they will get the benefit that may take longer to occur domestically. Another beneficiary of Chinese recovery is Starbucks (SBUX). I’m Holding current positions in this sector, until a domestic recovery is recognizable.

Lastly there is always a good reason to own US Treasuries for defense, this isn’t one of the good times. That said, recent repositioning served to rebalance exposure to Treasuries and place the proceeds into active High Credit Intermediate Bond ETF PIMCO Total Return (BOND) and active High Credit Short Term ETF from PIMCO (MINT) to take advantage of Fed purchases while at the same time staying in the high credit space for yield.

There are as many reasons to be participating in the capital markets right now, and after all that has occurred, and it still evolving, reasons not to be. That adds up to careful participation, such as spending, but also raising cash when the broad indexes go up, spending it when it goes down. Not always convenient, but it’s a strategy that complements volatility.