My investment thesis is unchanged that current prices are artificially elevated and gravity will have its day; my portfolio is cash rich in anticipation. However, this morning with futures up again, there were moments of FOMO …. YIKES!
Dr Duy posted his view this morning and it helped put some rationality and gravity in my thinking. It is totally worth the read …
His take-away puts the risk exactly where it belongs – the US government (that’s HIGH risk imho), quote:
Bottom Line: On a certain level this shouldn’t be that hard, at least from a macro-policy perspective. Keep pumping money into the economy to support incomes as you build out the public health infrastructure to contain the virus while gradually ramping back up the economy. We just can’t fully commit to that program. That lack of commitment leaves us with a few more downside risks than I would like.
I have to give credit to the authors for their attempt to use data and academic rigor to articulating a possible post c-19 jobs picture. It’s not an easy read, and I came away with two key points to help my portfolio management.
First, the post c-19 recovery is probably going to take longer than current equity prices assume. This article suggests 2H ’21 the earliest GDP could return to pre C-19 levels; but that does not suggest nor imply same levels of employment, revenue and profit – currently unknowable?
Second, a number of 77% of lost jobs are assumed to be either kept, returned or relocated. That leaves 23% lost until economic growth creates them … sometime AFTER 2H ’21 based on above. The absolute numbers are less important than the levels (~20% lost jobs) and one can easily do the math.
If the authors analysis and assumptions hold, then consumption driven activity will be reduced by some number close relative to that 20% – and, higher government support for unemployed, underemployed … discretionary spending will take a hit almost certain and local governments will be further stressed.
C-19 death rates change senior housing investing risks
Early on the C-19 days, even before US had acted, I predicted that senior housing and the companies that provide those services were going to be challenged in the longer term. The business model future was questioned in my mind. Hence, I sold all my shares in REITs holding those properties, e.g., WELL and LTC. (disclosure, I did NOT sell at the top and ignored my intuition; i sold later at profit, but with less than possible).
Some data on C-19 deaths and ‘where’ they occurred supports the thesis that this business model will be challenged moving forward. Will folks stop using long term senior care facilities … NO! Will people use them less or consider more options (opening up new business models) before signing that lease / agreement, YES!
The business model will be challenged, but the how, when and who remains open. That level of ‘unknown’ is just beyond my portfolio risk tolerance given all else going on … Eventhough, the LTC management is absolutely top-notch, and under most circumstances I would take the risk w/ them … but C-19 is different.
One of my always read authors posted a good balanced view on C-19 impact to economy and investing. Dale helped me a couple of years ago in taking solid positions in 10yr bonds that have proven out so far, e.g., MSFT, AAPL, BRK, KR, etc. The majority of voices at the time were calling a bottom on yields and putting fear into bonds … I took the plunge in part based on Dale’s analysis.
My portfolio strategy remains anchored in risk mitigation is foremost; don’t worry about ‘beating the market’ and resist any and all temptation to succumb to FOMO. My capital can remain very conservatively placed until I have confidence in investable value with commensurate risks. – Not much in it today, imho.
His closing is worth the full text, quote:
So yes, there’s hope
That said, even given the best possible miracle outcome and timing, it’s quite likely that economically, the damage will have already been done. And it will be a challenge for a rushed vaccine to change our already ingrained new normal behaviours. It may take a while for most of us to leave the fear at the door.
We have been asked to be too scared for too long, and that was for our own good. And mostly for the good and health of healthcare workers and the at-risk populations.
But I certainly hope that we begin that economic rebuild as quickly and safely as possible. To protect the health of workers, the vulnerable and the healthcare workers we will need to do this economic restart in very slow and measured fashion. If we step on the accelerator too hard the virus will take us into oncoming traffic.
We cannot afford a failed restart. This is the most dangerous economic experiment in human history.
Be safe. Be well. Be generous.
In summary I’d suggest we have a scared consumer, scared business owners, businesses that are going away; businesses that won’t be able to survive the new normal. There is that ceiling on how much we can fight back economically. All while the virus attempts to make things worse and more challenging at every stage.
There are many headwinds that will make a V-shaped recovery more than unlikely.
—not much here but the comments were heavy with high debt fears (looking across the landscape, hard to put D in ‘worse off’ than others – high debt is systemic – key question is who will pay the piper, and when?)
—Here’s my take – thru q3 a slog; prices could be restrained so a buy out would be less likely from management perspective. Watch and look for entry point early q3 after q2 results – due diligence required
–— a good start but overall generalized to pick out segment demand
Commented: Memory is a decent indicator but I disagree with the aggregate normalization. I would like to see size breakout so one could see larger capacity vol – server usages generally – this gives a window into CSP demand that is hard to follow in cpu or systems vol
—worried about key fallacy in Brian Gil work – estimates are not yet refreshed sufficiently so it’s a garbage in / out – could assume that many with the most opaque view are those NOT updating – what would they update with?
—Today, tenant quality lease term safety, and stability are once again the predominant focus of the investment community at large. This is just the most recent of many examples illustrating why it is important to stick to strategies that have worked well over the long-term, as opposed to succumbing to short term trends that may appear to work in any given moment until so sooner or later the proverbial tide goes out, and business models truly get tested
Worth more investment at right entry – both P and common
Commented – “Another generic comment but applicable here. The article is a ‘stock’ analysis – financial metrics, not a ‘business’ analysis. I would like to see more deep dives into products, technology, supply chain, and operations to balance the financial work. For investors like me (older who leaned investing from depression survivors we buy businesses, not stocks)”
— key point here n the longer term, though, I see clear opportunities and fixed moving faster to fiber and more robust IP and transport. There’s no point of all this traffic explosion, if your IP and optical network is not up to scratch. So it’s sort of – this is where our end-to-end portfolio really helps from a long-term perspective
I did not find it as actionable as her regular internet updates, but she and team definitely put down things that a) need to be included in my framing of investment opportunities and risks, and b) are going to require additional research / work and time to provide actionable insights.
The piece is worth the read
I will leave their insights to your harvesting, but the one point she closes on and I totally agree … “We will get thru this, but life will be different”
— CSCO was example from 2000 – I thought a great thought exercise and commented
Comment: A good thought exercise – another example – CSP sell elastic capacity – as new companies and existing companies reduce their demand the infrastructure to support elastic demand was in place – somebody now owns a under utilized capital asset(unless demand elsewhere surfaces) … who owns that capital asset? They are holding the risk without elastic demand staying even or positive. Enterprise corporates own less and less of those assets vs yr 2000. But somebody has those assets on their books
The ever rational and candid Mr Duy posted his views on the FOMC decisions and actions from yesterday’s presser.
Here’s the ‘bottom line’ quote: “Bottom Line: The Fed has pulled out all the stops to support the economy and will continue to use every tool at their disposal to minimize the tail risks to the outlook and support the recovery. Powell and his colleagues have not declared victory; they anticipate a long road ahead. Here’s the thing: Powell gets it. He understands the enormity of the situation. He isn’t going to stand by and let it all fall apart without a fight. And he isn’t going to walk away after the first round.“
For me, there were three things that hit me – 2 from Mr Duy and 1 from Mr Powell.
1 – Powell is the right person for this job and we almost lost him
2 – FED is in the game 100%; they have become the ‘pig’ at breakfast when so many others are hardly the ‘chicken’ (if you don’t know that little contrast, let me know)
3 – Powell made it very clear like at least 3 times – FED loans money, they (legally) do NOT grant money – that’s the job of fiscal lords (Congress and Treasury)
One more add to compliment Powell – (Heisenberg mentions it too in a rather cutting criticism of Powell’s critics) – he showed empathy to people suffering and to all of us dealing with this – something in short (very short) supply from current elected / appointed DC officials.
— no material change to strategy – q2 will be risk as expected C-19 and seasonally – comfortable with design win, momentum. Stock price may / may no fall further as Q2 unfolds, but additional capital should wait those results – better line of sight to 5G spends globally (delays).
—pretty high level but aligns with my views – supply chain will become more expensive eventually; not because of fundamental producer changes, but stocks within flows that today do not exist as everybody was working on J-in-T-I without any stocks.
— Div as safe as BMO, Mexico weak link – consumer still has high risk – too early – pacific strategy is sound but C-19 risks outweigh the entry point … after Q2 for me when better direction visible, especially vis-à-vis BMO and RY that I already hold
—sky is falling, but it’s really the old story imho – INTC is leaning in to servers, but CSP grow with lower margins and enterprise shrinks – so simple to see / evaluate. Until enterprise or non CSP server volume picks back up, margins will suffer
Heisenberg posted this yesterday … I have read it 2x top to bottom and found it one of the more interesting history lessons (financial scope) that I have had in a long time … it prompted about 3 other tangential reads / studies that are yet to be completed. I will update this post then
Heisenberg posted today on the job numbers which were a continuation of terrible. Two points struck me.
First, Heisenberg did a fabulous job (consistently over the last few weeks) of making sure we remember that behind those numbers are real people. I was often reminded when i managed teams and was required to redeploy human resources that there is a curse of dehumanizing it all due to the simplicity of spreadsheets and numbers – there are humans represented by those numbers; quote: “Obviously, one can extrapolate and otherwise work with the numbers to create a smorgasbord of alarming statistics, but, as I’ve been keen to emphasize, these aren’t just statistics – they are people”
Second, the stock markets took 4.4m jobless people as a positive as it was not even higher … what kind of world is that a rational response?
— his list is interesting but what the commentators are missing is his view of a tough q2 earnings- I think that will show where blood is flowing in the streets as well as where it is temporary and where it’s not discernible – too early for me to place big bets
— the article was a bit shallow, but there was 1 comment that is important, quote:
“You should have added a section analysing there balance sheet. The amount of long term debt they have taken over the years is too much. They went from 11B$ in 2015 to 17B$ in 2019 (+50% increase), while there operating cash flow has stayed relatively constant. It’s the same accross the industry, they are lucky to have Canadian government blocking competitors from entering the Canadian market.”
— echo chamber caution as his thoughts reflect most of mine at this point. Here is key point:
“This doesn’t mean we aren’t long equities. We are, but we are also carrying a much heavier exposure to cash, and have reduced exposure to fixed income. We continue to be selective buyers of quality companies opportunistically and will continue to prudently build our portfolios.”
— basically medical devices will be hit due to non-C-19 surgeries being postponed and equipment purchasing being delayed … unless hospitals get more funding from FEDS I am not sure this will quickly correct … hard to see others (unless some magical vaccine surfaces from JNJ) make up the loss – while not something to sell, not something to buy here either until things calm down; I trimmed off ~15% of my shares from DRIPs and am back to my original position.
— long rambling and mixed up set of information – C-19, BABA, etc … author knows their content and worth continuing to read, but not this article. I am still a fan of BABA but am still leaning to ETF for the play – IEMG and EMQQ being my favorites tho I do not hold EMQQ at this time.