April 29, 2020

Literally or Seriously

“I still think cash is trash”
- Ray Dalio

I love listening to successful investors and this influential one in particular made the statement that cash is trash in 2020, a hot comment that was taken out of context and then picked up by more than a few pundits. First of all, I don’t believe cash is trash, but it can be a distraction and any distraction is the primary nemesis of the investor. When it comes to endless distractions, will the economy open or not open, does the drug work or not work, will the President say foolish things or will the endless debate over the severity of circumstances, continue to be ignored. I have a simple trick I learned when I was the age of a millennial. In a world pumped each day with hyperbolic claims and ingratiating displays in everything from technology to art I’ve found it served me well to take it all in seriously, but not literally. In the capital markets learning to navigate the constant barrage of distraction is to differentiate what not to take literally, what stimulus, drug trials and Fed activity will contribute to the future, and what to take seriously, that something is being done to return to normalcy. Translation, caution might be warranted, that’s why we keep cash while we remain involved.

This week was expected to be filled with earnings reports. So far, the 1st Quarter releases have been mixed, and as expected some releases were decent but widely void of guidance of where earnings are expected to be in three months when they report for the 2nd Quarter. And while the market has been doing well on the back of companies expected to perform well because of, or in spite of, the virus, it was companies such as Pepsi (PEP) that produced better earnings that saw its stock price rise while those companies that produced weaker earnings than expected saw their prices diverge. Two examples was United Parcel Service (UPS) saw a price decline while Alphabet (GOOGL) saw their stock price go up. This is a phenomenon that I think will continually favor the technology companies that have the capital to withstand whatever the length or breath of the economic outcome will be. I’m confident both companies will see improved earnings over time. Another push for the rise in the broad indexes this week was the release of the favorable outcome of studies by Gilead (GILD) regarding their drug Remdesivir. Interesting as lit was only last week that concerns were raised by a study of the same drug in China. So, overall, the market was looking for good news and got some. 

Today the Federal Reserve Board voted to leaving interest rates alone. Not surprising since the only rate they influence, the Fed Funds Rate, is already at .25%, leaving little room to do anything. Chairman Powel’s speech was filled with data about what the Fed has done and what remains at its disposal. He also stated the public health crisis still posed considerable risks to the economy over the medium term. This is an interesting comment in that it is a more cautious statement than provided at the last Fed meeting and it appears to accept that the economy will reopen before the evidence of economic revitalization will be released. On the same day, the 1st Quarter estimated GDP growth was -4.8% at an annual rate. The biggest drags on growth were consumer spending, business investment and commercial construction. However net exports were uncharacteristically positive as was the home building sector, the latter also a contributor to this week’s strong market. In total, predictions of the future of the economy are going to change from month to month while the market is ending the day having recovered nearly 60% of the late March low. No distraction there?

In Closing
An error too many investors make is perseverating over a dismal stock investment or gloating over a winning decision. The solution is easy, sell both. If one looks at cash as an investment rather than a defense against shouts of the coming end of the stock market, tracking performance along with a natural inclination to always look for better investments will steer the investor to tactically utilize a bed of cash rather than simply sleep on it.

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