Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
Home on the Range (Bound Market)
Hello, friends! We hope everyone is holding up well as another strange week in the world draws to a close. This note is a little more segmented than normal with topical bullet points for you to peruse. The reason being is we wanted to discuss an investing concept referred to as “mosaic theory”. Now, before you get too excited about how abstract and fantastic that sounds, let us explain. Essentially, the “mosaic theory” is a get-out-of-jail free card for insider trading. Well, that took an unexpected turn, but hold on. If one were defending themselves against having material, non-public information (insider trading), they could use a “mosaic theory” defense, meaning that they did not have the material information from a single, direct source, but rather it was collected in bits and pieces from here, there and everywhere, compiled together and used to draw an actionable conclusion. Each piece of information represents a little tile or piece of glass that contributes to the finished art. The traditional use definition obviously doesn’t apply here but we have always applied the spirit of “mosaic theory” investing. It is amplified in the current environment, but the idea of piecing together small bits of information from here, there and everywhere to create sound investment decisions is at the core of what we do. As you can see with the broad range of topics below in this note and notes past, there are a lot of pieces – endless amounts. Almost none are actionable on their own, but they do all have the potential to fit into a mosaic. Hopefully that adds a little more color to our thought process when considering how we get to investment decisions. Thanks for hanging in there through that winding road of explanation of why this note is more segmented than others. 😊
While the headlines didn’t take a break, the stock market did take time to catch its breath this week. There was still considerable movement and volatility compared to more stable periods, but not nearly the frantic behavior of the past two months. That could be interpreted in a variety of ways: institutions that needed to sell for cash got it, a bottom is forming, or everyone is exhausted. More important than any of those thoughts is that we had continued stability in the bond market. Even with the Federal Reserve’s firehouse of cash flooding the market there is still a global demand for dollars and US Treasuries. This is a good thing.
We understand that everyone is in search of a move higher in stocks. We get it. Nobody likes to ever see accounts go down or not go back up. However, trading sideways at this level for a while would be encouraging. You’ll hear the financial media refer to a “range bound” market like it’s a curse. Range bound is simply when the stock market bounces between two close levels for a period without any big moves up or down. This is a headline killer, so it’s often discussed with more disdain than needed. As we all sit (whether in this business or not) waiting for answers, we have very little information to build a clear, actionable mosaic so the market really shouldn’t be going through extreme daily price moves at this point. The hope, and this is why it is so dangerous to time a bottom, is that as soon as there is news that the FDA approved a vaccine or therapeutic drugs or anything of the like, the stock market will clear the runway for takeoff and launch sharply vertical in a matter of days, if not hours. The plane will be full and there will be no time to jump on the wing. Each day that we wait, the attitude is hope for the best but plan for the worst. That continues to be our strategy and we are set up for either scenario.
- This chart illustrates the point above about being ready for takeoff. It shows the one, three and five-year returns following a big sell-off (“drawdown”). The move higher can be gradual like 2009 but more often than not, it is rapid and extreme.
Chart Courtesy of Ritholz Wealth Management, NYC.
Updates on Tuesday Topics:
- Cruisin’
Welp. Not only did Carnival Cruise sell out the bond buffet of $3 Billion but they had $17 Billion total in the order books, so they quickly did the dishes, reset the tables and served an extra $1 Billion. This red-hot demand from investors even brought the rate down from 12.75% to 11.5%. This tells us a couple of things: 1. That is CRAZY demand, so there is plenty of money in the system looking for opportunities. 2. Said money is betting they get back to sailing late summer/early fall. Carnival has a monthly cash burn, with no scheduled cruises, of…uh hum…$1 Billion. Here’s a fun fact – it costs $2-$3 Million per month to keep a boat sitting in dock ready.
- Berkshire Giveaway?
We have been waiting anxiously to see what Uncle Warren may or may not have been doing in the craziness of the past 6 weeks. Well, we found out right after market close and let’s just say if you had unlimited guesses you’d still be guessing. Buffet has been asked on numerous occasions about his investing timeline when he buys stock to which he has always responded, “forever”. So, he had to find some beat up deals to buy that nobody thought of, right? Or maybe he worked out a preferential deal with a major bank on a structured note? Nope. Instead, we learned that HE SOLD 13 MILLION SHARES OF DELTA AIRLINES STOCK NETTING $314 MILLION. He also sold 2.3 million shares of Southwest Airlines for $74.3 Million. What?! Interesting for sure. Before anyone pushes the panic button, there is certainly more to this story, but Berkshire declined comment. This is wild speculation but here are some logical guesses. 1. He owned just over 10% of Delta, so he needed to sell to get under that threshold so they could participate in a government airline bailout. Or, he is buying all of American Express, which is a long story but could be a conflict with the Delta/Amex partnership. 2. There is some airline merger/combination in the works. More on this when we hear.
COVID-19 VIRUS UPDATE
- When does it end?
Cancellations can give us a little insight into how people are projecting a return to “normality”. The Open Championship is cancelled (was 7/16). Wimbledon is cancelled (was 6/29). The Democratic National Convention has been moved from mid-July to mid-August. Minneapolis already announced that they wouldn’t be running rec programs this summer and the beaches will be closed. Now, some of these things are a result of needing a plan by a certain date or needing to cancel to activate insurance claims. While this is noteworthy, the retail sector is a better indicator as they need/want to get open ASAP. Some of this is outside of their control with local lawmakers determining when cities and states may reopen. Interestingly, Apple announced that stores will remain closed until “early May” without committing to a reopen date. They have been out front in addressing the virus issue so for those hoping that certain areas of the country might open sooner, it doesn’t look good.
- Masks Are The New Black:
Eight meters is quite a sneeze. This study was a little unclear on if this is on the higher end of average or just average, but it doesn’t really matter because a “weak” sneeze still probably doubles the recommended social distancing standards of six feet. After giving out a very unclear message on this topic it now sounds like the CDC is going to recommend mask wearing for all in public. With all the additional free time, we are expecting to see some pretty rad bedazzled masks on the streets soon. Anything, no matter big or small, that can slow down the spread is a great thing from where we sit.
- Let’s Go Science!
There is so much going on in the virus news cycle that it’s hard to keep track of progress that is being made. We have heard about different testing techniques or so-and-so company is working on a vaccine, etc. Here is a story that I came across. A scientist in the San Francisco Bay Area thinks he does have something that might work. He has a pedigree of working on the SARS outbreak which is encouraging. This isn’t getting much national news attention but seems like the wheels are in motion. Here is the link.
UNEMPLOYMENT CLAIMS (NSFW)
- 90 Year Record in Jeopardy:
Jobless claims were 6.6M yesterday. That’s just short of 10M in two weeks. As of today, America has 10.1% of the 165M workforce unemployed. That alone almost reaches second on the all-time list. Next week we will probably see another 6-7M claims so the Great Depression number of 24.9% is clearly in sight with some economists projecting it gets to the 30-40% range. The total is significantly less important than the duration. The narrative continues to be that the jobs are there waiting so if the quarantine is short and effective this will be a blip on the long-term chart.
- Now Hiring:
Speaking of jobs, if you know any recent college graduates or those looking for a change, here is a list of companies that are still hiring and have active jobs posted. Link.
REAL ESTATE
- WeDidn’tWork
In an illustrative sign of the times, the founder of WeWork had an estimated net worth of $13.5 Billion in 2019. It’s $450 Million now. Not time to break out the GoFundMe, but it’s a startling reversal of wealth in a short period of time. Any decline in demand by companies like WeWork that have leases, own buildings, or need space, weakens the real estate market’s near-term outlook. With everything slowed, there are not enough new tenants/buyers to fill in the gaps.
- $16 Trillion Mortgage Market
I’m not sure that anyone can really know the size of the real estate mortgage market in the US. It’s an estimate because it’s not just the actual home loans that we all have, but also the various derivatives that circle around it. As 2008-2009 taught us, there are pieces of it sliced, diced and chopped up all over the global financial systems. It also taught us that it’s very important. To put it in context, it’s eight times bigger than the record-breaking stimulus package of last week. The size of the market makes it difficult for policy makers and the Federal Reserve to get their arms around. They are continuing to work on the liquidity of lenders which is good. However, besides trying to get short-term relief by way of cash, small business loans and payment freezing, there is not a plan for a spike in defaults this summer if that were to occur.
- JUMBO
The jumbo mortgage market is drying up a bit. Wells Fargo announced they are still doing them through their direct channel, however they stopped their affiliate writers from doing jumbo loans. We would expect others to follow suit as capital is in high demand and valuing an expensive house right now is a tall order. Banks need love to and need to make loans so when they are voluntarily opting out it means either the collateral or the borrower’s ability to pay is questionable.
BONDS
- Definitely Not Oil
Goldman Sachs compiled a little chart with investment returns for any investment strategy, style or sector you can dream up. Bonds are the bright spot. Oil is truly the “dark spot”.
- Macy’s Day Parade (of Sellers)
Due to recent selloff in Macy’s stock, the company got moved from the S&P 500 index to the S&P 600 index. That’s a direct move from large-cap to small-cap. Typically, there is an in-between move to mid-cap, but the outlook is so poor they went directly from Park Place to Baltic Avenue, didn’t pass Go, didn’t collect $200. This move hits their ability to borrow the hardest. You can see in the chart below that their bonds sold off so hard that they went from yielding 3% to 15% (as in, investors have significantly less faith in their ability to repay than Carnival Cruise).
PUBLIC SERVICE ANNOUNCEMENTS
- We’re Livin’ in a Scamster’s Paradise:
With people online more than ever and on edge with the news flow, the environment is ripe for hackers, scammers, phishers and overall bad actors. Let’s all be very careful with emails we receive. Reports of scams are way up. We have seen more questionable emails than normal in our personal accounts. If you have even the slightest doubt; don’t open it. We have even heard of fake doctor calls and fake emails offering COVID testing.
- Minnesota: What’s Actually Open:
The Star Tribune has a running list of what is and is not open that might be helpful for supplies and goods in April. Link.
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