I know what many of you are thinking.” Friday was another bloodbath, he’s finally lost it”
This is a difficult time for the bulls, “Don’t Fight the Fed”, is taken to mean that the market is going to crater further because that is the aim of the Fed. This is not at all true, I won’t go into a complete personality analysis of Jay Powell, but I tell you this, Powell is aiming for a soft landing that keeps the current economy growing, and for further growth in the labor participation rate. Furthermore, and I acknowledge that I have professed this faith many times, he above all Fed Chiefs in the last half-century is the man to do it. All others had no Wall Street experience, having started in academe and then joined the Federal Reserve. If they were at all employed in the private sector it was as an economist, hardly a great leap into the private sector of finance. Even the great Paul Volcker could be described as such, though to his credit he understood that inflation was a money supply problem. We idolize Volcker because of his fortitude, courage, willingness to slam the economy to save it, by doing the unthinkable – raising interest rates to nearly 20% at one point.
Powell understands that this is not the 70’s
Powell understands that today is not the 70’s and that his bark has so far been more effective than his bite. Powell is stalling for time, eventually, the logistical supply problems will moderate. Already polling is showing that potential home buyers are halting their housing search, and car buying is slowing as well. If the economy takes a lower gear just as Powell is being egged on to raise 7 times and at 0.50% the first two times, that would easily throw not the economy into a recession. That ain’t happening. At the same time, Powell is being chided for only tapering bond purchases, and should immediately halt all bond-buying and go into reverse and start Quantitative Tightening – selling bonds. Signaling (his bark as it were) that he is shifting this rapidly would propel the 10-year over 3% in record time. Not only crashing our stocks (which he would do if it was necessary) but halt the lifeblood of a modern economy – credit. By halt I mean, such a jump would be stunning and all adjustors of credit would seize up, even the algo-driven robots out there, would need new algos. I am sure there are among you that are thinking “so what is the big deal if get above 3%, our economy has thrived at even higher levels.” To which I reply that it’s all about the delta. Remember only a few months ago stocks had a conniption that it hit 1.7% on the ten-year? It wasn’t the level, it was the speed that it got the indexes dropping to that level. We just saw last week that the long bond breached 2% and if you paid attention the market did not react at all. That is, until Bullard showed his talons, and stated that he wants to go up 100 basis points by July. I know I am referencing the stock market here, and that may not in your mind be exhibit A for the credit market seizing and doing unimaginable damage to the real economy. On most occasions, stock participants don’t put interest rates under a microscope but now precisely because there is very strong cause to watching it, this market is “the canary in the coal mine”. The interest rates hawks in the media are getting out of hand. As far as Bullard is concerned just because he made that statement does not mean that it is going to happen. Don’t believe the Fed’s own projections… Dot Plots and all. Interest rate projections are notoriously inaccurate. Powell during the Trump Admin was signaling 3 rate rises and instead, he cut 3 times in 2019. Powell may even be coordinating with Bullard. Either way, he is hanging tough, squeezing every last drop of rhetoric to tighten the credit without a single raise.
Right now the world is reopening and public companies are reporting hefty earnings.
Perhaps this jawboning is in an effort to counteract the current spate of good news which the market is choosing to give extra weight over the current bad news about inflation. We had the highest CPI in 40 years, the news of this slammed the market on Thursday and caused the 10-year to reach and exceed 2%. It then showed that it was taking this news in stride until Bullard stepped in. The more I think of it, the more it seems reasonable that this was coordinated with Powell. Friday morning the Futures from the night before predicted a bloody red opening, but instead, it quickly turned to flat and then amazingly got into the green, though with understandable volatility. That is, until the White House histrionically proclaimed that war was coming this very instant and that all Americans get out of Ukraine post-haste (sound like Afghanistan?). That was it for the rally, we’ll see what happens Monday when nothing happens. So what is the message of the market to my eyes? Simply that the market has faith that Powell will apply the lightest tap to the breaks, and even a 7.4% CPI is not going to deter the rally.
Earnings are being treated with the most jaundiced eye in memory
The reports must be better than perfect, and even then they tend to drop back to where they started if not well under. Earnings reports so far have generally been good. Stocks have been severely punished for “only” meeting earnings, others even more severely punished for not giving very positive guidance. Woe unto thee for those that change plans and projections in mid-air. I am shooting daggers with my eye at you PayPal (PYPL). Thank goodness I tend to trim positions going into earnings but PYPL had already retreated so severely I figured it was all in the price right now. Well no, so I trimmed shares at 270 before, and all the rest at 240 after. I still think PYPL has value, but I am turned off in general with the whole Fintech payments area. From my perspective, the banks that they were taking action against, are slowly going to overcome the technology advantage. Banks have been software developers for years. There are also what I would call arms dealers that will enable the counterinsurgency, here are two, for example, nCino (NCNO), Blend Labs (BLND). There are probably dozens of public companies that would gladly offer the weapons needed to take back what was once theirs. A very visible new public company is earning praise precisely because it WAS a Fintech and became a bank. This gives it access to very cheap funds and applies all the technology already deployed against the community banks who are a few generations behind. My interpretation is that this tech-powered bank will beat the Fintechs at their own game. If you are muttering it’s got to be SoFi (SOFI), you would be correct.
Anyone who has bought it, or any other tech or tech adjacent stocks, if they are still hanging on have suffered for it. Probably without exception, unless you were frantically hedging. How did I go so far afield? Maybe I am losing it, Ok let me end this detour by saying if you can stay in the game, you should be rewarded. Otherwise, when would you get back in? Very often, people get in when the market has already made the move substantially higher. Then only to get shaken out of the market again. I have mentioned my current menu of tactics a number of times, but I decided to list them together to solidify them in my mind. As long as we have this level of volatility, we are having swings 1% to 2% or more nearly every day. Let me be even more clear, as long as the VIX is near 20 and above, I will look to adhere to this set of tactics:
Avoid stocks that are not well known names, unless you have the utmost conviction
If you must hold on to the lesser-known names limit it to a very small number of companies
Concentrate on the strongest known big caps like Microsoft (MSFT), Facebook (FB), and the rest of the fangs. I will give more details in My Trades
Make sure they and any other tech name that you choose has already fallen over +50% so that they are derisked by now.
Use the up and down motion of the market to your advantage. Sell the highest-priced shares at a big jump. Then wait for the dive, and buy shares of the stock when the market is approaching 1% down.
I continually add a few shares a day every day so I have a full range of prices. By extending this process you will find that you are maintaining your current level of profit in your portfolio while having a much lower cost basis, and more shares if you apply the excess back (selling high and buying back lower generates cash.
When the market finally rallies for several days in a row, don’t be complacent, trim a little bit from each position with the goal to have at least 10% in cash. This way you’ll be ready to buy at or near the bottom again.
When the market becomes favorable to tech names again your cost basis will be so much lower and the share count will be that much higher, then one would be way ahead of the game.
Strive to have a barbell approach. There was a short moment this week when WTI aka West Texas Intermediate Oil fell into the high 80’s. I used this opportunity to re-accumulate EnP again, I will also add to my banking stocks. I have been threatening to add regional banking names, I want to start this week. A barbell approach is a balance between technology and cyclical names that are clearly going to benefit from stronger economic growth and higher interest rates.
Protecting your capital is now the name of the game. Sell the rips, be careful on the dips
The funny thing that I noticed on Friday was when all my tech names were cratering, my oils just kept rising. My only regret was not using that small window to acquire more shares than I did. I think the financials have the potential to improve the performance of my portfolio. Right now the exercise for me is to not lose my principal that I already have. The above prescription of tactics has been helping me accomplish this.
So as I have been describing above, I am moving more of my funds to widely known entities. Towards the end of the day on Friday Microsoft (MSFT) broke under 300, I had already observed that once it breaks this level MSFT has fallen lower. So I bought a tiny bit of it to start. Clearly, MSFT is not down 50% as the other names that I hold, neither is Alphabet (GOOG, GOOGL). I expect them to hold their prices somewhat better than the other known names I hold; they are; Adobe (ADBE), Intuit (INTU), Advanced Micro Dev. (AMD), Twilio (TWLO)
Let me start by talking about what I sold and then bought.
I started cutting down some of my chip stocks, like Micron (MU) its upper range is the 90’s so I thought I’d take profits and put it into GOOG, I also sold Marvell (MRVL) it was struggling so once it did give me some alpha I sold that and put it into INTU since it fell on Friday. I am really hoping it falls further so I can build up this position. If I have a choice between building MSFT or INTU, INTU gets priority because I believe it has bottomed. I did a fast money trade, even though I cautioned you about doing that. Here is the set-up; NewRelic (NEWR) had a disappointing revenue number, Datadog is the newcomer and seems to be the winner in the space. So I decided to go long a small position going into DDOG’s earnings report. I did similar to Twilio since I sold it down when it couldn’t hold the mid-200s. As luck would have it my conjecture was correct and DDOG had a great report with a revenue beat and a better earnings picture. TWLO ran up 60 points in after-market trading and I sold most of my position. With DDOG I thought it has more room to run the next day. I sold it, made some decent money, and applied it to my stalwart positions. TWLO trade was a bit more convoluted. Since I sold out at 255, the next day when it dropped to 229 I thought I had a bargain, and of course, it fell and I kept buying only to give up at 197. It closed at 190. I’m ok, I think it will bounce back up in the next two-day rally and I will sell that 229 a share. I am only human, and I make mistakes too. Another human thing I did that I think will pay off but is not part of this tactical regime I listed above I bought Global Foundries (GFS) this is the only major independent chip foundry in the US and should do well once the government gives them cash to build more chips. Anyway, my logic was that this is a new IPO, I have been studying IPO patterns over time and I am taking the risk that GFS will go back to previous highs at least, and with any decent news flow could break out to new highs. Once it does that I won’t sit with it long term. I feel like I should move funds toward the Oils and Regional banks. So I sold down several stocks that I had small positions that wouldn’t amount to much anyway and put the rest of the cash back into oils. I bought Apache (APA), Coterra (CTRA), Denberry (DEN), Devin Energy (DVN), Earthstone (ESTE), EQT (EQT), Kosmo (KOS), Ovantive (OVV), and added to Tellurian (TELL). All of these are tiny and I plan to build them. Two things can crater the Oil price, everyone realizes Putin is bluffing or Biden makes a concession, and Iran is allowed to sell oil again. Longer-term the Permian basin operators in the US will accelerate their production with the notion the price can go to 120 in a year (it can). Finally, there is Upstart (UPST) it reports on Tuesday, and I have been frantically lowering my cost basis and building up shares. Now it is time to pay the piper, either I am correct and the stock will proceed to regain at least some of its altitude. Or even if it exceeds expectations, the sour mood of the market may yet sell it down to somewhere into the ‘90s. Or they somehow miss and then who knows. The latter is just an acknowledgment that earnings reports are binary events, and I hate binary events. Upstart will report its fourth quarter and fiscal year 2021 earnings on Feb.15, and big things are expected. Quarterly marks require a profit, earnings per share (EPS) of 51 cents, and revenue of $262.85 million. I suspect that the market will only raise the price of the stock if it substantially beats these expectations. That said I will abandon UPST only if their business model doesn’t hold up (highly unlikely). I am willing to sit with losses long-term in this name because I believe they can capture significant market share long-term.
In review, This week will be exciting. Just as a reminder there will be no mass casualty invasion in Ukraine by Putin’s army. The choppy market rally will continue upward punctuated by a sharp retreat on any sign that the Fed will make a mistake and ruin our economic expansion. This is a market so rattled it trades with no conviction, even the professionals have the yips. Use this to your advantage, sell the rips work towards at least 10% cash. Wait for the Nasdaq to be down 1% then start buying triple-A property. Rinse repeat, Good luck ladies and gents.
Please note: You should not take the above text as investment advice. I am not a broker, Registered Investment Advisor, or certified money manager, I cannot give financial advice. What I am doing is chronicling my thought process. Always do your own research and understand what you are buying, what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.