Category: Uncategorized

On Wednesday, I had a conversation with someone who had lost their same job twice in the last 4 months. He had lost his job back in April and was put back on the payroll after his company received PPP money. He was let go again maybe for good this time. He is now receiving the extra $600 in his unemployment check until the end of the month. This extra unemployment money was actually allowing him to pay down his credit card debt.

JPMorgan’s CEO Jamie Dimon summed it up best when he said on this weeks quarterly call, “It’s just very peculiar times. In the normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that’s true here.” Instead, he said, “savings are up, incomes are up, home prices are up.”

I would add that people also are paying down their credit cards while unemployed! Citigroup CEO Michael Corbat told analyst that we are in a completely unpredictable environment for which there are no models, no cycles to point to. Bank of America CEO Brian Moynihan said on a call with analysts, “Right now we are seeing nothing that is consistent with an 11% unemployment rate.” JPMorgan CFO Jennifer Piepszak said that even if the government curtails aid, it may take at least several months for banks to get a sense of how many consumers and businesses will fail to repay debts. “I mean, first, we have to start seeing delinquencies.”

I listened to all of the bank earnings calls and reviewed their results. The one thing that is being missed by the financial press is how much deposits have grown. All of the major banks have seen an increase of over 30% on their balance sheets in the last 6 months. The trillions of dollars printed has increased the M1 money supply by over 35%. The chart below is a good visional why markets have rebounded.

The financial consequence from all of this money being printed, will likely be asset inflation. You ask yourself – do deficits even matter anymore? At a rally yesterday, Vice President Mike Pence argued Democrats were turning the country toward socialism. You also have to wonder, isn’t all this stimulus the largest giveaway in history? I’d like to tell the VP that when the government started buying junk bonds and giving away money to people and businesses that didn’t need it, he crossed the line towards socialism. The government is picking the winners and losers and would have bought stocks if the market fell low enough. Many people did need the extra money like the person I met with, but millions more didn’t need it.

With interest rates at 0%, there are trillions of dollars that have been slowly moving into investments that pay a higher dividend. Corporate bonds seem to go up every day as more and more buyers capitulate and take on more risk for a higher yield. The chart below shows the record cash on the sidelines. You can make a good case that this money is helping to support bond markets and investors are now placing a premium on owning equities.

Housing has benefited the most from low rates and stimulus checks. This week the 30-year fixed mortgage rate fell below 3 percent to the lowest level in history.  Mortgage rates have fallen to a new low for the fourth time in the past five weeks. I expect housing to remain hot as long as the stimulus benefits continue. This has become both a buyers and seller market. For buyers, interest rates are at an all-time low and there will be opportunities in housing because of more people on the move. For sellers, you need to thank the Fed for the increase in demand from lower interest rates.

I’m hopeful that there will be a vaccine in early to mid 2021 and that the government will extend unemployment benefits to only the people that need the money. If you are employed, I don’t think you need another $1,200 check in the mail to spend at Home Depot or pay off your credit cards. Some Home Depots can’t even keep up with the increased demand for lumber and concrete. With inventories low and demand so high, lumber prices increased over 60% in the past few months. This is a sign to me that inflation has returned. By the looks of the charts above, there already seems to be enough money floating in the system. At some point, when this pandemic ends, tax rates will go higher to pay for all of this. Once talk of higher taxes is on the table, it will be a discussion worth having to covert your IRA into a Roth.

I expect markets to become even more volatile (if that’s even possible) as the next stimulus package is debated in the next few weeks. I’ll leave you with an amazing statistic. This year has had more 5% moves in the S&P 500 than all of 2008. That’s volatility none of us want to relive, but here we are. I expect a few more of those 5% moves up and down before this year is over. Hold on and stay safe!

In case you missed it there were two stories of buried treasures recently found. This news serves as a much needed distraction from the nonstop news coverage of COVID and politics. The first story was about “Uncle Jimmy” to practically everyone who knew him — died at the age of 97 on March 8 and left his stunning collection to seven nieces and nephews.  ESPN wrote, James Micioni was born and died in the same place — a modest, two-story house on a hilly neighborhood in Boonton, New Jersey. He never married, never became a father and never owned a car. He walked to nearby jobs as a high school custodian and a chemical-factory worker, leaving his small, working-class town only when called to serve in Europe for the last three years of World War II. He was a die-hard fan of the New York Yankees, but also of Jackie Robinson. And he spent most of his life curating a treasure trove of baseball cards that experts believe to be one of the most extraordinary private collections in the hobby’s history.  It has all been separated into 2,000 lots that will be made available by Wheatland Auction Services through three different auctions, the first of which will begin at 7 p.m. ET on Sunday and span four weeks. Chuck Whisman, who owns the company alongside his wife, called it “a once-in-a-lifetime collection.” Micioni used to mail baseball cards to teams hoping for autographs from their star players, keeping a ledger that tracked every item he sent out. Shortly after his death, his nieces and nephews ventured into Micioni’s attic and found binders separated by decade and packed with autographs, including six Ruth cards from the famous 1933 Goudey set. Orlando, who helped to officially grade the cards for Professional Sports Authenticator, estimates that those half-dozen Ruth cards alone together are worth up to $1 million in total.

The second story was about a buried $1 million treasure chest that was found. People.com wrote, Forrest Fenn announced that the decade-long search for the prize was over on June 6, and that it had been found in the exact same spot where he hid it by a man who wanted to remain anonymous. Fenn has shared the first photos showing the contents of his buried treasure, which was found earlier this month in the Rocky Mountains 10 years after it was hidden. The art and antique dealer from Santa Fe, New Mexico, posted three photos that showed the bronze chest filled with gold coins, gold nuggets and more — a haul estimated to be worth $1-5 million, according to CNBC. In a third photo, Fenn appeared to take stock of the goodies as he laid out all the coins before him. He said the chest appeared darker than it did 10 years ago, when he “left it on the ground and walked away.” He said that some hunters have gotten within 200 feet of the prize, but ultimately walked away empty-handed. At least five people died while on the hunt, most recently a 58-year-old Colorado man in late March. Upon learning of the man’s death, Fenn told PEOPLE he “didn’t anticipate” the loss of any searchers, and that when he initially hid the treasure it was “an easy trip” for him — but now that a decade had passed, it would be impossible for him to go back and retrieve it. He said he left clues as to the treasure’s location in a 24-line poem featured in his 2010 book The Thrill of the Chase. He previously told PEOPLE that his goal was to get people to go out into nature, and to give working class Americans a shot at instant wealth.

I doubt Forrest Fenn’s family will be happy with him giving away $1.5 million and that five of the people who searched for the treasure died. But we all wish we had an “Uncle Jimmy” in the family! I know all of my baseball cards that I collected are worthless and I would have been much better off buying shares of Apple when I was a child instead of boxes of worthless cards. 🙂

Happy Father’s Day

Last week I wrote that John Rogers, co-CEO and chief investment officer of Ariel Investments, said on a recent call that value is extraordinarily cheap. “There are just extraordinary bargains there. I think it’s going to be a violent turn that will give value investors a great opportunity over the next decade.”

I agreed with what John had to say, but when he said “violent”, I didn’t realize it was going to be in the next 5 days!  It turned out to be a violent move that happened faster than even John could have imagined. I did rotate into some value stocks and my plan is to dollar cost average on the inevitable dip. Here are a few reasons why this rotation happened so fast.

The first reason is that the economists surveyed by the Wall Street Journal expected a job loss of 8.3 million in May. On Friday, The Labor Department reported that the U.S. instead added 2.5 million jobs in May. The jobs report was off by over 10 million jobs! How can economists be this wrong? In this day and age with computer simulations and AI you would think they could come within 1 million jobs. This proves that you can’t invest using any data that the economists are forecasting. I prefer listening to what CEO’s have to say about the economy. Last week Jamie Dimon of JPM said that things were not as bad as they seemed. He is much more in tune with the economy given that he sees the economic data in realtime.

The second reason why I believe markets rallied was that we went from a strict quarantine to thousands of people gathering at rallies. Many people were asking themselves that if thousands of people can gather together, then it should be safe to eat at a restaurant or go on vacation? The scenes out of Las Vegas also showed full casinos with no social distancing. Many people in this crowd were not even wearing masks and the casino was packed. They clearly didn’t care about catching Covid. I don’t want downplay the virus because we have seen an uptick in Covid cases and deaths nationally this week. And who knows if there will be a second wave because of the recent protests. The stock market could suddenly become concerned if cases begin to spike. For now, fear over the virus has been knocked off the front page, but it could return.

The third reason is that the Fed has forced investors to choose between earning less than 0.50% or seeking out a higher yielding equity investment. I’ve written about this challenge a few times and spoken to many of you that dividend paying equities offered a better risk reward than bonds. With the Fed flooding the market with liquidity and the treasury printing trillions of dollars, equity markets had the advantage. I can buy a safe short-term corporate bond that is supported by the Fed, but that yield is now down to 1.15%. Next in line is a long-term corporate bond fund (10 year duration) supported by the Fed and that yield is down to 2.44%. On the other hand, I can buy a dividend paying stock with an average yield of around 3%. We know the risk and volatility with holding an equity investment. The question is how much risk does this bond ETF have with the Fed backing it? Since the Fed started buying these corporate bond ETFs, the price has gone up almost everyday, so at this point there seems to be no risk. On a 1k point up day for the Dow, the textbook would say that interest rates would rise sharply. Well you can throw out those textbooks because that didn’t happen. Instead corporate bond yields also fell.

The final reason why I believe that the markets went higher was the unemployment rate is still 13%.  The people out of work for no fault of their own still need financial help. There is another $3 trillion on its way and if it’s anything like the other $2.2 trillion in stimulus, some of that money will find its way into the stock market. My hope is that markets become more stable and recent gains are consolidated, but something tells me that the year 2020 still has a few more surprises for us.

The good news this week was Bank of America announced that it is making a $1 billion, four-year commitment of additional support to help local communities address economic and racial inequality accelerated by a global pandemic. Other companies have also given support to help and I expect that this trend will continue. There could be less focus on the bottom line and more businesses focusing on having a positive impact on the well-being of the communities they serve. There is no better investment than investing in a growing company that is also socially responsibility. The textbook is also wrong about only profits being important to a stock price. Socially responsible investments are trading at a premium in this market. Bank of America’s stock price could actually trade higher for giving away $1 billion in profits. More investors seem to care a little less about profits and more about socially responsible investments. Let’s hope this trend continues.

After this quarantine ends and the threat of Covid passes, will the roaring 20’s begin? Following the “Spanish Flu” in 1918/1919, the stock market went on a massive rally. Novelist F. Scott Fitzgerald marveled at the U.S. economy and wrote, “a fresh picture of life in America began to form before my eyes – America was going on the greatest, gaudiest spree in history.”

Tracy Alloway, who is a financial journalist at Bloomberg, gave a contrarian take: instead of Covid’s emotional economic scars taking the form of higher savings rates by consumers, people emerge from the crisis with a determination to spend like there’s no tomorrow. It’s not the base case, but will people exercise will power and save money vs. will people be impulsive and spend money?

Today, it’s hard to imagine a roaring twenties redux with 38.6 million people unemployed. It might all depend on whether or not Washington expands benefits beyond July. The last $2-3 trillion in stimulus helped to keep the economy going. It looks as though more money is on the way.

Last Sunday night Federal Reserve chairman Jerome Powell appeared on ’60 Minutes’ and the global equity rose an astounding $2.5 trillion in value the next day. He talked about the difficulties ahead and then went on to say the Fed has a large cache of tools available to keep the U.S. economy moving in the right direction. The phrase that took global markets 3% higher was, “we’re not out of ammunition by a long shot.” He went on to say the U.S. will need to repay these emergency debts. If this is true, the case for a roaring 20’s dedux is hard to imagine. I expect the Fed will have major difficulties removing any stimulus even when the time comes in 2021-2022.

The differences are stark between the economy in 1919 and today. Moreover, World War I had just ended and there wasn’t a Fed printing trillions of dollars. Today the country is also divided politically going into the election and who knows what that result will be in November. The U.S. stock market had already been roaring from 2010-2019 and the question that nobody can answer is will it roar after this pandemic ends. The one parallel that is the same as it was in 1919 is that people want to live the American dream and no force is going to stop them. People will eventually emerge from this and rebuild what they have lost. I believe people will go back to their old habits of spending. As all of us know, part of living the American dream is getting knocked down and getting back up.

But we couldn’t do it all without the sacrifices of the veterans who did everything possible to bring us peace and prosperity. Enjoy the Memorial Day weekend!

As we all expected, the overload of negative headlines is registering off the charts. I’m going to keep all of my thoughts to business and investments. I completely understand that families are suffering from job losses or family members are sick or loved ones are dying. Nurses and doctors are saving lives. To be honest, it’s hard to write about investments, but that’s how I relieve my stress and it’s in my DNA.

The Federal Reserve and Congress is helping to build a bridge and supporting the economy until we all escape our houses and return to work. The scientists have done an extraordinary job creating antibody tests, developing therapeutics, and fast tracking a vaccine. Testing kits are ramping up, but the magic bullet won’t be until there is vaccine and then life will return to the new normal. The most positive news in all this mess is that the large U.S. banks are much better capitalized and they should be able to ride out this storm. The stock market volatility will continue because there is so much uncertainty. There are signs that investors have mostly written off 2020 and are becoming more focused on 2021 earnings. It will be interesting to see how stock prices react when companies begin to report earnings. The longer we all remain locked down, the longer the recovery will take. We are at war with an invisible enemy and going forward the most important question will be when the stay at home order ends. I expect this debate to heat up later this month.

I’m not going to predict what the stock market will do next week or next month. I have no idea and I don’t think any economist alive can predict what will come next. I don’t think anyone foresaw that the impact on small businesses would be so severe. Small business have been by far hit the hardest. I know firsthand from speaking with many of you who work at these very businesses.

When the time is right, the best opportunities will be investing in the very small businesses that are getting hit the hardest. I’m beginning to take a closer look at small cap companies. This will be a departure from my focus on large cap investments over the last 3 years. The highest quality blue chip companies have had the highest returns over the last 3 years. I believe that Vanguard Small Cap ETF will outperform most Large Cap ETF’s off the bottom. The hardest hit small cap companies that have the lowest debt will likely offer the greatest investment opportunity. I am being very patient and waiting until I see the bottom before investing in this area. I expect the negative news will continue to register off the charts. My hope is the future returns for the small cap American businesses will eventually have their turn to register off the charts when our economy gets back on its feet.

Stay Healthy!

I’m taking a break from writing about tariffs and trade wars. There is not much more to say other than trade wars are not easy to win, which is why the S&P 500 wiped out $4 Trillion in it’s second-worst May since the ’60s.  I’d estimate that half of my clients somewhat agree in principle of why we are fighting these trade wars, and half are counting the days until the next election day.  What we all have in common though, is the hope that the president forgets his password to his twitter account for the next few weeks. The negative news cycle has been unrelenting, but there are some very good things still happening.

One of these remarkable stories comes from one of my clients that recently left his job. He was tired of his long commute, working long hours, and he wanted to spend more time with his newborn baby and wife. He moved halfway across the country and settled in a small town in MA to plan his next move. He spent the next few months researching different businesses so that he could figure out a way to restart his career. He settled on a franchise opportunity. This franchise is not a name that you would recognize. He hit the ground running and in the last few months his revenue is now supporting his family.

The strong U.S. economy is opening up many success stories just like this. Technology has changed the economy and transformed society. Peter Lynch who achieved annualized returns of 29.2% over a 13-year period from 1977 through 1990 as the portfolio manager of the Fidelity Magellan Fund, was able to spot trends well before those on Wall Street.

I always watch to see how my children are spending their time. There are some unbelievable individual success stories from people leveraging the YouTube platform. The top 10 YouTube stars make over $14 million a year. The number one earner is on Ryan ToysReview. He’s a 7-year-old boy named Ryan who reviews toys for other kids. Forbes had him earning $22 million last year. My son follows someone called Pewdipie and he has 95 million followers. Pewdiepie lost in a race to 100 million followers verse someone called T-Series, but they are both winners. Pewdiepie makes foolish videos and pulls in $1 million dollars per month.

In my opinion, America is great when a 7 year old boy can make $22mm shooting videos of toys. It’s even better when one of my clients can go from earning $0 to replenishing his cash flow in just a few short months. I hope that this 7 year old boy can break $30mm next year and Pewdiepie can hit $20mm. The American dream is alive and well. I just hope that it doesn’t get destroyed by any Democrat or Republican sitting in the White House. If it does, you might find me one night selling gold on an infomercial at 2:00am. 🙂

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