FEAR: STOP FEEDING, START FADING (March 8, 2020):
There are two ways investors can respond to the coronavirus panic. The first one is the overly obvious wrong one: pile into long-dated U.S. Treasuries; buy shares of companies like Clorox and drug-related corporations which will allegedly benefit from a vaccine or some kind of cure; massively sell energy and travel shares and anything else which would be negatively affected by virus fears. Taking these actions has been widely popular as you can immediately see as yields on the 10-, 20-, 30-, and related U.S. government securities have plummeted to their lowest levels ever recorded since U.S. debt was first available in 1791. Many of these yields are not only all-time records but are roughly half the previous lows while representing the greatest-ever negative real yields (i.e., after adjusting for inflation) in U.S. history. Meanwhile, already-undervalued shares in sectors like energy and travel have become even more illogically depressed.Second-level thinking is essential to profit in the financial markets. If they act early enough, first-level investors may sometimes be ahead in the short run but almost always lose in the intermediate and long run.
If taking panic action like piling into U.S. Treasuries is obvious even to the average pre-K investor who has barely learned to recognize the letters in the symbol names then probably it is not going to be a successful approach. More importantly, successful investing is almost always not about recognizing the obvious but gauging the most extreme overreactions by others who have recognized the obvious as a thundering herd. If media headlines about a virus lead to less travel then perhaps travel shares should drop by a tiny amount but not by fifty, sixty, or seventy percent. Even in an unusually volatile year like 2008 actual energy supply and demand fluctuated by only a half percent as prices quadrupled and then plunged below their pre-quadrupling levels. After the 9/11 terrorist attacks analysts were confident that flying and other forms of travel would remain depressed indefinitely. It is the absurd extent of the most exaggerated overreactions which provides most worthwhile buying and selling opportunities. Just as we adjusted after 9/11 to the knowledge and responsibility regarding occasional terrorist attacks, one way or another society will adjust more rationally to the existence of coronavirus. People will want to travel as much as they had done before and otherwise live fully again while knowing what do do in case they exhibit certain symptoms characteristic of coronavirus. Doomsday scenarios of "never doing so-and-so again" have always proven to be false in past decades and centuries.
Full credit must be given to Howard Stanley Marks for popularizing the concept of second-level investing. Like myself he has also become a recent heavy buyer of the least-popular shares worldwide.
The incredible level of worldwide stimulus in response to coronavirus is the main financial story and one which has been woefully underemphasized.
The financial media are rife with speculation about how this or that asset will allegedly react to coronavirus. The fact is that the market has already reacted, overreacted, overreacted some more, and then ridiculously way overreacted again. What almost no one is emphasizing is how governments around the world have been cutting overnight lending rates, pouring record billions into their economies--at least one or two trillion overall eventually--and how this is occurring not during a severe recession but near the end of an eleven-year global economic expansion. The real dilemma is that the worldwide economy is likely to generate rising inflationary expectations rather than deflation or contraction. The end of any lengthy economic expansion will eventually be a worldwide recession, but coronavirus has invited massive stimulus which other than an initial brief negative GDP impact has likely postponed the arrival of such a recession by more than a year.
The media know they will get more viewership by hyping the coronavirus and making it seem personally imminent, rather than responsibly reporting on current advanced efforts to develop cures and how people should avoid irrational overreactions.
Energy shares are trading near two-decade lows with some of them near three- and four-decade bottoms.
The sector with by far the most insider buying for an extended period of time has been traditional oil and gas shares and companies which service and are connected with those producers. Profits are generally much higher now than they had been in past decades so their price-earnings ratios and other fundamentals have become amazing bargains even when compared with past recession nadirs. In 2008 we had irrationally undervalued energy followed by the highest overpricing in history followed by a second irrational undervaluation, all within a single calendar year. Investors who are currently overreacting to the downside will be wildly speculating and pushing prices of energy shares to multi-year highs perhaps two years from now. Exactly why the shares of energy companies are so volatile and tend to fluctuate roughly in two-year swings is unclear but what has been the case in the past will almost certainly continue into the future.
Worthwhile funds in this sector include FCG, OIH, XES, and PSCE. PSCE is especially unpopular since it consists of small-cap energy names, and small-caps worldwide are out of favor at the same time that energy companies are unpopular--thus providing you with an attractive double play.
As I am writing this Sunday night, March 8, 2020, West Texas intermediate crude oil just dipped briefly to 27.90 U.S. dollars per barrel which it had not touched since the early weeks of 2016. Regardless of what it does in the short run, this price will roughly triple within about two years.
Travel shares have become as irrationally oversold as they had been after the 9/11 terrorist attacks.
Other than energy the heaviest insider buying during the past several trading days has been for companies which are connected directly or indirectly with travel. The assumption is that because of coronavirus--that excuse again--people will permanently travel less for business and pleasure than they have done in the past. Those who remember 9/11 remember similar forecasts; just two years later we had new all-time records for flights and vacations. This time it may not even take two years to rebound strongly because a partial cure might be found any day or warming weather could greatly reduce the virus' spread or a vaccine could be developed--or all of the above. Insiders don't have special knowledge but they recognize that when valuations have become their cheapest in decades it is usually worth gradually buying especially when so many investors are selling first and asking questions later if at all.
Cruise-line shares CCL, RCL, and NCLH have been especially out of favor in recent trading days and will likely all rebound significantly over the next several months.
Hardly anyone is considering the political impact of coronavirus as Democrats have a far greater chance of retaking the U.S. Presidency and the Senate while retaining control of the House of Representatives.
What does Donald J. Trump point to most often as the justification for having another four years in office? It is the way he has allegedly pushed the stock market higher. The problem with consistently taking credit for new all-time market highs is that you have to take equal blame for what may end up being one of the biggest-ever percentage declines from those highs in an election year. It's certainly not necessarily Trump's fault and if coronavirus is still around on Election Day then it may provide a convenient excuse for the decline. However, it is more likely that by November 3, 2020 coronavirus will have become a nagging background issue rather than continued headlines and that there will be several other reasons cited for weakness in U.S. equity markets. That will be especially true if we enjoy a multi-week rebound which I will expect will begin very soon time-wise.
Gold mining and silver mining shares have probably already completed key higher lows to point the way higher for commodity-related and emerging-market securities.
During the last bear-market bottoming cycle gold mining and silver mining shares mostly completed their respective nadirs at or near the opening bell on October 24, 2008. Most other commodity producers and leading sectors including semiconductors did so around November 20, 2008 while many other assets bottomed during the first quarter of 2009. It is likely that gold mining and silver mining shares were again among the earliest sectors to complete their coronavirus-inspired lows with GDXJ slumping to 35.25 on February 28, 2020 and making several higher lows thereafter. This has been followed by other commodity-related and emerging-market funds beginning to form additional higher lows with energy as usual being one of the last sectors in this category to rally strongly. Insiders continue to point the way by persistently buying into the lowest valuations with energy shares enjoying especially intense insider accumulation.
VIX keeps surging toward and occasionally above 50 but will not likely be able to remain above such levels for an extended period of time.
Fear is a powerful human emotion but it is not easily sustained. Whenever VIX is spiking as it has been doing lately it is warning that any stock-market downturn is likely to soon lead to an impressive intermediate-term rebound. I expect most global risk assets to enjoy uptrends which will be highly choppy but will generally last for at least several weeks until VIX is once again around 17, 16, 15, or perhaps even lower than that. If investors would learn to sell whenever VIX is forming key higher lows as it had done in February 2020, rather than when VIX is topping out as it is doing now, then they would enjoy far greater long-term success.
Buying on Monday morning has often been a successful strategy as weekend warriors upset by recent losses and above-average volatility finally surrender and place massive market sell orders which will be triggered at Monday's opening bell--an ideal time to add to your long positions.
The U.S. dollar index has quietly begun a two-year downtrend from a three-year top.
The U.S. dollar index rallied to 99.910 on February 20, 2020, its highest point in three years and not far below its zenith from the beginning of 2017, and has since formed numerous lower highs. The greenback will continue to choppily decline for perhaps two years and will eventually complete multi-year bottoms versus many global currencies. This process will encourage rising U.S. inflationary expectations which when combined with already-committed stimulus and foolishly-conceived interest-rate cuts will prove to be a potent reflating cocktail.
Summary: the biggest profits are made by taking the opposite side of the most extreme overreactions. We now have more such simultaneous extremes than probably at any time since the first several weeks of 2016.
When I wrote my last update in early February 2020 investors saw no urgency in selling and were eager to keep piling into the most popular technology shares when it was essential to aggressively reduce risk. Now when we have multi-decade lows for many sectors people are eager to sell rather than to capitalize upon numerous compelling buying opportunities. Most investors will keep buying high and selling low because they are subconsciously responding to media hype coaxing them not to miss out when prices are topping and to bail out from fear of further losses when prices are bottoming. In the long run the U.S. equity bear market which began with the Russell 2000's zenith on August 31, 2018 will continue for perhaps a few more years, but since so many are gloomy today we are going to enjoy a multi-week rebound. You will know when to start selling again whenever VIX has slid down into the mid-teens again and the media are telling you why you should get back into the market.
The bottom line: buy whatever the top corporate insiders are buying.
Most investors currently detest energy and travel shares while insiders have been eagerly buying them into weakness. You can guess which of those groups will again be on the right side of the market.
Disclosure of current holdings:
From my largest to my smallest position I currently am long GDXJ (some new from late February), 4-week U.S. Treasuries yielding 0.939%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX (some new), REMX (some new), LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, AA (some new), EWM, RGLD, WPM, SAND, SILJ, CCL (all new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of HDGE, EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.
I have again reduced my short positions to a very small short position in XLI, a small short position in SMH, and a very small short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 25.5% of my total liquid net worth.
"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).
The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.
Because there is so much gloom and doom today expect a multi-week rebound for stocks and corporate bonds worldwide over the next several weeks. Buy now and don't sell again until VIX is back down to the mid-teens.
