A Comment -- General Comments From an Expert (A Commentary)

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.

Not a homogenous market, every preferred share has its own terms and conditions. You really need to know what you're buying. Can they be called away if rates go lower? Terms are usually in the company's favour to give it more flexibility than the investor.

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.

Believes gold prices are going higher. Stocks are overbought, and getting more overbought. He wants to buy into weakness. From his understanding, the costs are rising at a faster clip than revenues for a lot of mining companies. That's why valuations are remaining relatively depressed compared to the price of the underlying commodities today.

He'd defer a more detailed analysis to someone much better versed in the fundamentals of the sector.

Tech was good last week for a trade in the rally. Right here, he doesn't like it; very overbought. That's what happens when the volatility is as high as it is now. Lots more upside in the next 6 months, buy the dips. It's all tech, tech, tech. If you're a growth investor looking years ahead, that's where you want to be.

Sector's cheaper than it was months ago, but still not cheap enough yet. You'll get another opportunity.

Psychology of a Bear Market

Lots of indicators and forecasters are saying the economy's slowing and it's time to start worrying. His chart today depicts the S&P 500 since the US election. 

Right after the election, there was a gap up and celebration as the S&P rose above 6000. That held until President Trump started rattling the tariff sword and gave the US "liberty" on April 2. It may well happen 2-3 years from now, but not yet. For a while it's going to be uncertain.

Lots of ways to define a bear market in terms of moves from peak to trough. But by the time you're down 20%, we officially call it a bear market. We came from 6100 to 4835, so technically we're there.

What happens in a bear market? You get lower lows and lower highs for some period of time. The rising 200-day MA starts to roll over, and we're starting to see that. The 50-day MA also starts to roll over; it will break below the 200-day MA this week, which officially defines a longer-term change in momentum. Stocks will typically fail at resistance. Biggest resistance right now, calculating a 50% retracement of the rally, would be around 5500. That just happens to be the old low that we made in March; it's also where the market opened on April 3 as we gapped down. Also where the market had a super-rally, and failed, on April 9. In a few weeks, the 200-day MA will start to roll over into the 5500 range. 

If he's wrong and this isn't a bear market, just noise, the market should be able to get above 5500 and keep going. Something to watch in the next few weeks. If we are in a bear, the market will retest the low of 4835 at some point and likely go lower. This can go on for quarters or months. He thinks we need to see economic decay from a recession that would make the Fed aggressively start to cut interest rates without worrying about inflation. That's a couple of quarters, at least, from here.

More than likely, for the next quarter or two, we're going to be in a trading range. Volatility will be high. Don't look for it to break to the upside. In a standard recession, earnings fall 11%. Earnings targets have been brought down to no earnings growth this year.

Questions to Ask During a Trade War: Is the company I own impacted by tariffs?

Obviously, based on recent events, this is the big question one needs to ask. Some companies, such as auto manufacturers, steel producers and metal fabricators, are far more affected than others, depending on the extent of their sales to the U.S. But some companies, such as Canadian firm Well Health Technologies Corp., have made announcements saying there will be little impact. Well on Feb. 3 noted “it has no exposure to U.S. tariffs” and “does not expect any material supply chain impacts to any of its operations.” This news, though, has not stopped a 32 per cent slide in its stock since then. Other companies, such as Canadian utilities, may see little impact from tariffs as well. Fortis Inc., for example is a regulated utility, providing electricity to customers in Canada, the U.S. and the Caribbean. While it has some U.S. business, in company press releases it has not mentioned the word “tariff” in 17 years (according to Bloomberg LP data). Its stock is up about 5 per cent this year, well ahead of markets in general. Take a close look at the companies you own to try to ascertain whether there is a cause to be worried about tariffs, or not.
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He doesn't know that we are heading for a recession, and we're getting conflicting data. Employment has remained particularly strong, which is unusual in the face of all the other data. Consumer confidence surveys are unexpectedly worse than normal. 

If we look to the bond market for some indication of where we are in this whole scenario, we're missing a couple of things for a pending recession. The yield curve -- instead of steeping it's re-inverting. Credit spreads in high-yield are widening, which is a risk-off scenario. The silver and gold ratio is spiking, again risk off.

Is this a normal growth shock, and you should buy the dip? Or this a real recession where you get real damage to growth portfolios in the 30-50% range? There's no confirmation of the latter yet, so he's still marginally on the side of the bulls.

The time to prepare for the earthquake and get insurance is before the earthquake, and there's still time. But today it's incredibly important that investors make sure that portfolio risk aligns with their risk tolerance. Need to have sufficient liquidity in the short term to withstand volatility. 

Be diversified by asset class like gold and geography. Perhaps today isn't the day to get into gold, though. Drawdowns have been far less in Europe. As well, not as much pain in non-market-cap-weighted US securities. Managed futures are also a strategy that does well in recession-type declines.

Most importantly, stay engaged. The tendency during these declines is to stop watching what's going on. Volatility often creates opportunity. Now, if you're one of those laid-back investors who never sweats the daily moves, keep on doing that ;)  Whatever your playbook was before, don't just disregard it now.

We had this huge 10% day, along with a spike in volatility, which can often happen within bear markets. There's a possible opportunity there. But we haven't see the follow through yet, where the bottom's in and then some days later there's another surge in volume with maybe a bit more breadth across the markets. Those types of signals would be a little more green for him.

Multiples Needed to Breakeven from Drawdowns

One of the most often misunderstood concepts in investing is the difference in percentages from a drawdown against an increase. For example, if a stock declines by 10%, a subsequent increase of 10% will not bring the investor back to breakeven, but rather an 11% increase in the price is required to break even. For example, a $10 stock declines by 10% to $9, a subsequent 10% rise from $9 brings the stock up to only $9.9. Below we have listed various drawdown percentages in increments of 10%, and the subsequent percentage increases needed to break even, along with their respective ‘multiples. For example, a 90% drawdown in the price of a $10 stock requires a 10X to bring the stock back up to $10. 
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