Opinions
James Telfser A Comment -- General Comments From an Expert A Commentary COMMENT Jul 25, 2024
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Tariffs are one thing, and a big thing. But there's lots going on in the market, and tech has been going through a shift since June of last year. Tariffs have accelerated moves in some sectors. But reality is that whether you're looking at semiconductors, the Mag 7, or growth stocks in general, the market's been rotating. So there are headwinds.
At the end of the day, this giant buildout for AI is a big deal. However, the infrastructure that's been built is going to weigh on tech companies for some time; a lot of depreciation will have to be written off. It's possible that there's been some overbuild.
Don't have FOMO (fear of missing out) right now. There's no indication that tech will return to leadership anytime soon. His firm has 0% in tech right now.
He's a big believer in tracking breadth across the market -- which sectors have the highest percentage of stocks performing well? Where is it improving, where is it weakening? When you get into a tough decline almost everything is impacted, and this decline has been similar to that.
The last group to break down was financials. Within that group, P&C insurance companies were strongest, have not broken down, and have done pretty nicely on the bounce over the last couple of weeks. Wherever you look in the world, financials are the best-performing sector aside from precious metals.
We're in an inflationary environment, likely to have a second wave of inflation especially due to tariffs. Financial services companies benefit from an inflationary environment.
Problem with regional banks is they're probably most closely tied to the US domestic economy. When he looks at market signaling, such as what's happened with crude and other commodity prices, there is a risk we are headed to recession.
Regional banks have a lot of real estate exposure, hold a lot of treasury bonds (and that market has not been very friendly), and it was the first group in the financials to break down technically. RSI weakening since November. Don't be a hero.
He's being very cautious right now. Has about 35-45% cash in portfolios, and that's a lot. Precious metals make up 10-15%. Also 10% global, but ex-North America.
Strangely, global stocks are performing better than US stocks, even though global stocks are the target of tariffs. Part of that is because 31% of the MSCI world index is financials.
Holding cash gives you flexibility. It could be one of those times when we get a quick reversal in the market. But his guess is that a lot has changed in the last month in how we look at the world, and it's going to take some time to sort out.
To be successful over cycles, you have to be a good seller. Of the 20-30 companies in a portfolio, out of 6000 to choose from, it's OK if one doesn't work. Your success depend on holding your winning positions, and getting the heck out of Dodge on the ones that don't work.
For every position, he sets a stop loss limit. As stocks do well, he ratchets up the stop loss in behind the stock price. Every security has a different personality with some being more or less volatile. He looks for a change in this personality to indicate when caution is needed and an exit may be near. For example, a stock that was making higher highs and lows starts making lower highs and lows.
He uses point-and-figure charts, an old-fashioned technical chart made of X's and O's. You could also use the 150-day or 200-day MA. As a short-term investor, you could use the 50-day, but you'll get stopped out a lot.
Unlikely that the market will forget about tariffs tomorrow, make a V bottom, and everything reverses from here. There will be time to see what's stronger, and what doesn't pull back when the market makes a new low.
Last week, indicators showed that stocks were in the opportunistic zone and investors should start to look for opportunities. On Wednesday we saw a face-ripping rally. But the level of volatility is still very elevated, and we're in the very early innings of this.
Seems that one day there's good news, then the next it leans against that. Mixed messages coming out of the White House. That level of uncertainty doesn't portend the beginning of a new bull market. There's a lot more to go and still a degree of caution. All this volatility increases trading, which is great for companies like GS and MS.
So while at 4900-5000 on the S&P there was opportunity, there isn't at 5400-5600 because we won't be able to sustain these levels looking out 3-6 months.
It's going to be lower than what we've already made, but we need to see the economic decay and job losses that the market's worried will tip us into recession. If we don't see that, then he's wrong and the market can go higher.
Remember that we started from a place of extreme valuation relative to history. So it's not as though the market got cheap last week; it didn't and is still very expensive at a 21-22x multiple. Earnings would have to grow phenomenally, which is going to be tough in this environment of uncertainty. We're starting to hear from companies as earnings season begins. Earnings from retailers and those with global channels will tell us whether to be conservative.
Last week we saw volatility in the interest rate markets. Normally your bonds are safe. We saw bond yields at the long end blow out in a big way, and that was one of the catalysts for the Trump administration to kick the tariff can down the road. Larry likes long bonds that high, and he and his team were nibbling last week.
Where do you run for safety if interest rates are rising and we're worried about inflation? There aren't a lot of safe havens. Gold has been one of them.
There isn't a company in the S&P 500 that doesn't use leverage. A lot of advisers who don't understand the private markets, or who don't have access, will speak out against it. It's naive for someone to say that private equity's future returns will be depressed due to leverage.
Private markets are illiquid, and that's the biggest distinguishing factor. As an investor, if you want something you can trade into and out of all the time, then private markets aren't for you. If you understand the benefits of earning the illiquidity premium, then you should allocate a portion of your portfolio to it. 90% of the investing universe is in private securities, not public markets. Pension funds around the world have been doing this for decades.
Investing in companies like KKR gives an investor access to the profitability from private market and private credit investments, but not actually to the private market and credit themselves. The two situations are very different.
Buy high-quality, small- and mid-cap stocks, especially in Canada. Lots of great assets trading at depressed prices. Take a barbell approach in your portfolio -- have some large-cap or ETF coverage, but start to sprinkle in some of these higher-quality smaller-cap names, and you might get a nice premium over the next year or so if they're acquired.
He has a lineup of stocks where he thinks there's a high probability of this happening. But if not, you want to make sure you own high-quality names where the fundamentals will help the multiple expansion.