There’s a lot going on in the markets. Some dynamics are linear and pretty easy to interpret, others not so much. It’s important to walk through them and then we’ll revisit via a video the important difference between Tactical investing and Buy&Hold.
Before we dive into the variables, take a look at this chart, because it’s why I titled this blog: Buying on the Dips is a great way to make money…until it isn’t.
Notice the red circles. Because we can look backwards and measure, we know that these were all buying opportunities throughout 1999 and mid-2000. Now look at the red square. If you made that trade, hoping that the dip was going to rebound, you had substantial regret…for a while. Especially if your investment strategy was Modern Portfolio Theory or Buy & Hold.
Here’s the thing. It’s easy to tell the difference between a circle and a square when looking backwards. It’s REALLY hard to do when you’re in the moment. As we look at the last week, every money manager is in the same boat, asking the same question: Is this a buyable dip, or is it the start to a new TREND. Defining ‘trend’ is what we’ll cover in the video, so let’s jump into the pieces that are causing uncertainty.
With the Fed continuing to raise rates, the 10-year treasury, which is at 3.16%, is nearly double the S&P 500 average dividend yield. We briefly touched this level of interest rates in October of 2013, but really haven’t had this sustainable level since 2009 and before. Everything is Risk vs Reward. If you’re not going to be paid a decent rate for relative safety (Band CD’s, etc.), then you hold your breath and keep everything in equities. There comes a point, and north of 3.0% approaches that, when investors diversify and spread their risk. To do that you sell stocks. If a lot of people sell, then markets go down.
A couple months ago I wrote a blog about ETF’s and liquidity: 3-major-differences-between-todays-market-and-2008, where we discussed how the explosion of Exchange Traded Funds over the last decade has created substantial pressure on money managers because they create massive liquidity opportunities. Liquidity on its own is a great. However, much like how day-traders cause volatility, some would argue unnecessarily, some of the newer leveraged ETF’s can cause a massive overreaction during times of uncertainty.
By now, everyone knows what the FANG’s are. Facebook, Amazon, Netflix and Google, who have collectively contributed a bulk of stock returns over the past 6 years. It’s pretty challenging to knock Amazon and Google’s economic skillfulness, but we’re definitely seeing flaws in Facebook and Netflix’s balance sheet and sustainability of revenue. If you think it’s time to take a breather from the FANG’s, you could sell and take profits. What if you thought there was going to be a decline in these stocks and you wanted to advantage of that? You could short the stock; we’ve always been able to do that. But, because of how the mechanics work with an ETF, you can create an inverse fund, meaning if a stock went down $1, then you would make $1.
What would happen if you added leverage to this fund? Meaning, position the ETF so that if the stock went down $1 you actually make $2. Cool, right? Of course, if you’re wrong and the stock went up $1, you would then lose $2. This leverage is labeled 1x. You can find a bunch of 1x, 1.5x and even some 2x leveraged ETF’s sprinkled across the spectrum. Most of them started on pretty large targets like the S&P500.
But, recently a new frontier was established: 3x. That’s right, if the target goes down $1 you would make $3. You know what the ETF holds? You guessed it, the FANG’s. The symbol is FNGD. The reason I bring this up, is that during volatile times like we are in now, an instrument like this would be like throwing gasoline on campfire. I hope Smokey the Bear is paying attention…
Executives selling stock and corporations buying back stock.
Using a high stock price to take shares off the street and in effect increase your earnings, has been a long-time strategy. It’s natural to see more of this when the stock value is above the norm. So, this doesn’t bother me as much as seeing Insiders shedding positions. In August alone Executives sold $10.3 billion, which we haven’t seen a level this stout in over 10 years. Um, what year was it 10-years ago? Oh, that’s right: 2008.
The reason this bothers me is not the individual reason why a Corporate Head might want to sell the main lever of compensation they receive from their company. But, rather the concentrated pack of people selling. Why? It shouldn’t be the economy. No one would argue that the steam is letting out. It shouldn’t be the market high (meaning taking profits, Buy low – Sell high), because that goes against the corporate responsibility they have to the true owners of the company – all of the other shareholders.
Could it be that the corruption we’re seeing in Hollywood and D.C. also appears among some corporate elites? One could argue that the Trump draining the Swamp isn’t limited to politicians. What if misconduct (criminal or civil) was found in Board Rooms and C-Suites? Since November 2017 there have been over 5,170 resignations from Executive positions, which is an incredibly high number. Some of these are in Federal/State Political Positions and Churches, but regardless, we’ve never seen this many in such a short period of time.
Speaking of ‘never seen’, connected to this notion of corruption, is a stunningly high number (57,051) of Sealed Indictments: Master List
I’m not saying all of these are corporate executives, I’m sure that’s a smaller percentage. And it doesn’t mean there are 57,000 individuals being indicted; one person could have 3 or 4 filed against them. So, if you’ve asked yourself “what ever happened to Jeff Sessions?”, this should shed some light. He and John Huber, US Attorney for the District of Utah, have a staff of 470 investigators. Keep the Huber name in your memory over the next month or so.
Like any negotiation or political deliberation, we don’t see all the cards each side is holding. We also don’t know what short-term concession is given in order to obtain stronger leverage for a long-term goal. Dealing with China is frustrating. We know their long game is global economic dominance and given their population, manufacturing prowess and examples of substantial financial investment across the world, we have to take them seriously. But, the challenge is trusting their numbers.
It’s like being out with an acquaintance; they flash the platinum credit card, buying dinner and drinks; wearing an expensive suit and a Rolex; drive away in the latest model Benz. But, what if you followed them home and it was a dump?
That’s the corollary to China, expect there’s one problem: We can’t follow them home to really see what the house is like. We’re seeing Trump successfully negotiate with other countries, re-establishing our economic sovereignty. No doubt much of the market caution is linked to the uncertainty surrounding a trade war with China. But, its exasperated because China has the added leverage over us because they are consistently the largest purchaser of our debt.
I believe Trump has some yet to be revealed leverage over China. Stay tuned to see if it materializes.
I don’t want to be overly partisan here, so I’ll just ask: if anti-Trump components put the entire country in a captive grip while exercising an agenda against a Supreme Court Justice, can they not exercise the same vitriol against the primary win of the Trump presidency? Meaning the rise of both the stock market and economic agenda.
There are plenty of people and institutions that have substantial assets that they could sell in order to trigger a market crash. None of us like to ponder such an incitement, but we can’t be Pollyannaish either. So, before I dive too deep here, let’s jump to the video and cover Tactical investing: