UP YOUR ASSET ALLOCATION (February 6, 2022): Surprisingly few people recognize how dramatically the financial landscape has changed during the past year. Exactly one year ago the vast majority of global assets were in bull markets. Today, more than 40% of all Nasdaq shares have dropped over 50% from their 52-week highs while most global stocks, high-yield corporate bonds, cryptocurrencies, NFTs, and perhaps even real estate have been in downtrends. Some oversized percentage pullbacks have created worthwhile bargains at various points in recent months.
I have shifted my equity short:long ratio dramatically toward the long side while remaining 2:1 short to long.
My current total as of the close on Friday, February 4, 2022 was long 20.636% and short 42.13%, or almost exactly 1:2, not counting TLT. If the bear market continues for large-cap U.S. growth shares as I expect then I will likely be more long than short before the end of 2022. I list the exact percentages at the bottom of this essay.
TLT has become very unpopular as investors don't trust a forty-year bull market.
One of my very first investments was purchasing long-dated U.S. Treasuries in 1981. At that time there was a nearly unanimous consensus that U.S. Treasury yields would keep climbing indefinitely due to permanently high inflation and soaring budget deficits. Each year, often more than twice per year even in the early 1980s, there was a proclamation that the bull market for the 30-year U.S. Treasury had ended, and we have continued to experience this gloom and doom each year since then including right now. On Friday, February 4, 2022, TLT dropped to 138.78 at 10:52:28 a.m. Eastern Time. I made my most frequent purchases of TLT on Friday since it had been even more depressed during the late winter and early spring of 2021. The longest-tenured writer at Barron's, Randall W. Forsyth, penned a bullish column about long-dated U.S. Treasuries which is the lead article in this week's print edition and can be found below:
The online version has the same essay but a different title: "Forget About Inflation. Contrarians Expect a Recession and a Drop in Bond Yields." It is probably not a coincidence that The Economist has the following cover story:
Many investors confuse the Fed's overnight lending rate with long-term yields.
If we are heading toward increasing recessionary expectations, as the flattening U.S. Treasury yield curve has been telling us, then this would mean higher short-term yields and probably lower long-term Treasury yields to create additional flattening. I plan to keep buying TLT into weakness because it could be one of the top performers as it has been in the past whenever investors have gone from almost zero expectation of a U.S. recession, like now, to a majority of investors expecting such an economic slowdown.
U.S. housing prices may have begun to drop following a more extreme bubble in 2021 than we had in 2005-2006.
The price of the median U.S. house dropped about 34% following the housing bubble we had sixteen years ago. Average valuations were even higher in 2021 by Case-Shiller and many other reliable measures, so the overall pullback is likely to be greater. The U.S. Fed's data for new home prices experienced its first pullback in a long time:
Numerous sectors had become especially compelling in recent weeks including GDXJ, KWEB, and XBI.
In addition to my very recent buying of TLT, I have been accumulating GDXJ, KWEB, and XBI into weakness. GDXJ is a fund of mid-cap gold mining shares; this sector had been one of the largest percentage winners following the collapse of previous U.S. growth-stock bubbles in 1929, 1972, and 2000. KWEB is a fund of Chinese internet companies which has one of the highest ratios of profit growth to price-earnings ratio for any U.S.-listed exchange traded fund. XBI is a fund of biotech shares which recently had more than a 1.5 to 1 ratio of profit growth to price-earnings, according to the sponsor's web site, and which had also featured significant insider buying of several of its components. XBI and GDXJ traded near two-year lows while KWEB had fallen to a five-year nadir. T (AT&T) is sharply out of favor partly over confusion about its upcoming spinoff and related uncertainties. I plan to continue to purchase all of the above into either lower lows or higher lows, especially whenever we are experiencing dramatic net outflows from these and related funds along with continued above-average insider buying relative to insider selling.
Too many investors are waiting for nonexistent triggers.
Extreme deviations from fair value in either direction are sufficient reason for dramatic price changes to occur. People often ask "what is going to trigger a huge drop for QQQ" or "what will cause Chinese internet shares to rebound?" I often answer these kinds of questions with this question: what caused U.S. internet companies to collapse after 1999-2000? What caused the crash of 1929? What caused stocks worldwide to surge in the late winter and early spring of 2009? The answer in all three cases is that, even with years or decades of hindsight, there were no obvious triggers to either of these major trends. Any irrationally huge deviation from fair value will always resolve itself sooner or later.
The bottom line: we have dangerous overvaluations for large-cap U.S. growth shares combined with compelling bargains for several other sectors. Now is a good time to combine long positions in unpopular assets and short positions in the trendiest shares.
Disclosure of current holdings (most recent purchases in red):
Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 43.6% cash including I Bonds paying 7.12% guaranteed (available to anyone with a U.S. social security number), TIAA Traditional Annuity paying 2.758% to 3.519% (for legacy retirement accounts), and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents with retirement and ordinary savings accounts); 18.0% short XLK (112.7737); 17.3% long TLT (147.86); 15.9% short QQQ (309.7504); 6.4% short TSLA (494.9721); 5.9% long GDXJ (39.68); 5.0% long GEO (7.52); 2.54% long GDX (28.98); 1.68% long KWEB (35.19); 1.32% long EWZ (27.33); 1.23% long TUR (17.17); 1.05% long ASA (19.49); 0.90% short AAPL (125.5481); 0.74% long XBI (86.14); 0.62% long ECH (22.98); 0.53% short IWF (223.0119); 0.40% short SMH (170.7813); 0.27% long T (23.33); 0.12% long UGP (2.565); 0.10% long ITUB (3.83); 0.052% long BBD (3.39); 0.014% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.
