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.
Energy
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.
Finance
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.
Technology
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.
HealthCare
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.
