Party On–Well Maybe Not?

Watching equity indexes earlier today made me think ‘am I crazy’? I’m looking at not just the current economic conditions, but at what I think is likely a year out. I am super conservative, but I am trying to take the optimistic view of the global economy.

I see 15-20% unemployment (current) and at least 5-8% unemployment a year out–how does that translate into equity prices that are only 15% off all time highs?

I see earnings releases from some of the drug companies that are pretty good–I see 3m being pretty good–no surprises here. But who is buying cars–a lot less folks than a month or two ago. After an initial pop as folks rushed to set up home schooling sales of electronics, appliances etc have dropped off a cliff–Best Buy said after this initial pop sales were going to off 30% in April–a year from now are they going to gain all of the sales back?–I don’t think so. A company like Best Buy runs on very skinny margins sales off 5 or 10% means long term layoffs.

Talk about a disaster–unemployment. Folks still haven’t gotten payments in many (most?) states. I know people in Minnesota that applied in March and a month later they have no clue whether they will see some money. Folks are running out of money–the $1,200 helicopter money lasted about 1 day–and now since folks have been trained to get a personal bailout everyone wants more.

Some businesses have reopened, but folks did not flock back to them–maybe those businesses got some PPP (payroll protection) money–but the rent, taxes, utilities and other overhead continues and if sales end up down 50% for the next few months those small businesses are toast–some that are getting PPP money are already toast–but everyone wants money, whether they survive or not is a different story.

In spite of the ominous outlook I have done some nibbling this week. I bought the Annaly Capital NLY-G, another taste of Hersha Hospitality HT-E, some Two Harbors TWO-D, and some WR Berkley WRB-B. Not much of any of these issues and some were additions to current positions. Some are already redeemable–but as long as they are under $25/share it is not a problem.

I remain in the 65-67% invested range–and honestly I would be surprised if I go above 70% in the next few weeks. I need realism in the marketplace and until we start getting a 2-3% loss in equities week after week I don’t think there is realism–we remain in the ‘don’t fight the fed’ market—-these are ‘fake markets’.

66 thoughts on “Party On–Well Maybe Not?”

  1. The “stock market” is usually defined by the large cap stock indexes, the SPY has 22% comprised by only 5 stocks. Deeper down there is much more pain the market, the median stock is down 28% — so over 50% of stocks are down more than 28%, and it’s not difficult to find these stocks. For example, Wells Fargo stock is down more than 40%, A rated Simon Property Group down more than 50%, etc. So it’s a tale of many markets, and pain is being heavily felt in many of the expected sectors.

  2. Tim, how is the residential real estate market by you? Are you still as busy in your day job as you were at this time last year? Here in the Portland suburbs prices seem pretty stable, but we’re still in the early innings of the downturn.

    1. Citadel–my business is 100% above last year, which is why I have been limited on here for months. I would rather it was not this busy–if my wife would retire I would get the business cut back. As near as I can tell values are stable, but I think it will be a couple months before I can tell for sure as there was so much in the pipeline from before Covid. I am just outside the Minneapolis/St Paul metro, but my guess is the very small town in southern Minnesota are going to be hurting as far as property values–they haven’t caught up since the last collapse and there is alot of meatpacking being shut down in the southern part of the state.

  3. One other way to play sds is with call options.
    you can do a call spread which reduces the upfront amount required and limits the risk. I have doing this as a hedge


  4. It looks bleak for the middle class– many of whom have very little directly invested and self managed in the stock market. However, a lot of stimulus money of the ppp program was granted to companies in sums of over 1 Million dollars (45% of the total). In addition, the health care industry received over $100 billion in eft payments recently. The wealthy are getting there funds and they are the likely investors into the market as evidenced by increasing stock and bond prices since the fire sale in March. Contrast rural Minnesota where Tim sees big problems and real estate prices are likely to fall with the Hampton’s where rental prices are surging with demand from the New York city elite. If the bond and preferred market was owned by middle class and poor people, I would anticipate major reductions in value– but its owned by wealthier people who have large sums of wealth they do not want to place into banks for months at one half percent or less.

    1. I think demand for goods and services will be down significantly for at least the balance of this year. Accordingly, the stock market is overpriced now. I have been selling many of the “crash bargains” I picked up in the last couple days and have been adding to SDS. Even if effective drugs come out in the near future the global economic damage won’t repair itself quickly. I think more volatility is just around the corner. I’m more in Tim’s camp as I’m 64 and if my portfolio crashed hard I could end up greeting customers at Wal-Mart.

      1. JHsky–age is a major factor. I am not certain if I will even need the stash–but I want to have options and not have to become a walmart greeter.

        1. I have been selling the rally, mostly getting rid of reit stuff. I may have made more back if i stayed fully invested. I am probably ~80% in cash and currently 3.5% down since the crash. I will wait until things stabilize but that might take a while.

      1. Thanks Tim for the reply.

        Thank you also for all of the work that you do on this site. I have pointed out your site to many younger people and some older people on how your site provides a wealth of knowledge. As one wealth manager told me after I talked with three other wealth managers (aka one percent wealth fees salesman), there is not a lot of fees we can charge you when your doing your own investing and research on preferred stocks and baby bonds. I owe you a large debt of gratitude for all of your efforts. I am taking my profits and helping others who need help especially all my four legged friends.

  5. I think all of the analysis on the economy, unemployment and bankruptcy is missing the point. Today’s broad market largely has nothing to do with any of that. The March downdraft was mostly due to margin calls on leveraged positions, fundamentals be darned. The April uptick is mostly due to the Fed pumping semi-infinite funds into the markets. They have proven if you throw enough money at it, you can move the market higher. Plus when they stopped the margin calls, most of the downward pressure was relieved. As Marty Zweig often said “Don’t bet against the Fed.”

    1. Tex the 2nd – You left out something what you wrote: You said, The March downdraft was mostly due to margin calls on leveraged positions, fundamentals be darned.” Then shouldn’t you have said, “The April uptick is mostly due to the Fed pumping semi-infinite funds into the markets, [fundamentals be darned]? lol

  6. An alternative viewpoint Tim.

    1. Everyone and their brother expects horrible results for the next couple quarters – that was priced in
    2. Far too many people out there, even on this site, were heavy in cash expecting that we retest the lows. Some still are. Now that money on the sidelines earning near zero is looking for a place to go
    3. Yes, tons of people are currently unemployed – and some states unemployment payment systems are a cluster****. But given the industries many of these were in, and the enhanced unemployment payments, many are or will be earning as much or more being unemployed than when they were working.
    4. As states start to re-open, businesses start to bring employees back so unemployment will decline.
    5. States are re-opening sooner than the gloom and doom scenarios many people had. Other countries are doing the same.
    6. The medical models haven been proven wrong and as more and more data comes in, it seems this virus can be managed going forward on a much different basis
    7. While I don’t expect people to flock back to malls and stores in a huge rush, I would not be surprised to see a steady increase as long as the virus conditions are managed well.
    8, You can see and feel the pent up nature of the American public. All you have to do is look at pictures of people headed to beaches, parks, etc. People want to go back to their normal routines.
    9. The market is looking forward. Some may say perhaps too optimistically but with the actions of the Fed and the Federal government, one can understand why.

    As I have posted several times over the last few weeks, after I filled up on quality preferreds, upholding some of my portfolio. I have been adding a number of common stock bargains for the long haul. There were a few I was till legging into before the gains the past several days so I have them on pause. But the ability to buy solid companies with good dividends that I wouldn’t buy before due to valuation has been great. At the same time, I bought some SPY puts as downside protection for a portion of my portfolio in case the market dives. I am ok giving up the cost of the puts if the market continues to rise because my gains overall will still be a lot more.

    I believe for the most part, trying to time the market is a fool’s game. I should note that my philosophy developed over many years is that yes, there are times to be cautious and raise a little cash and times to be aggressive and spend it down but I don’t know many people who are successful long term trying to time the market by going big – to over 50% cash and back at different intervals. I suppose some have but most who sold on the way down have watched from the sidelines on the way up.

    1. Yes Maverick that is 1 view. Really depends on your age. I have no more chances to build the ‘stash’ if I lose a big chunk of this one—there is no next time. I have been pretty successful holding lots of cash (30% up to 40%)–just depends how you want to define success–for me if I can do 6-7% year in and year out I call that a success and I have been successful based on my metric. Many of the folks here are older than me–67 this year–so protection of stash is of utmost importance.

      I didn’t sell on the way down–like you because I held cash I was able to scoop up plenty of ute and cef preferreds at the bottom (or near) which I will hold long term.

      By the way I think there are folks that are still watching from the sideline from 2009–never to invest again.

      1. Tim – Thanks, I do agree one’s perspective depends on one’s age, needs from their investments, risk tolerance, etc. I have always said everyone is different. And there is no one size fits all solution for everyone. What may be a good opportunity for some may not be suitable for others and vice versa.

        Just wanted to share an alternative point of view because it seems lots of people here like to parrot just one viewpoint. I always think it is helpful to consider many viewpoints and not be locked into pre-conceived thoughts.

        Shoot – like I said, I was still legging into some of my last common picks but then some have started to rally hard the last 3 or 4 days so I have put them on pause only establishing a half or 3/4 position. Not complaining because some are up 10% or more in just in the last week – but I would have preferred they stay lower a bit longer. So i am cautious in adding more right now – but understand the rational driving the market. We all have to navigate it the best way possible to fit our own situation

        1. Maverick–absolutely agree with you. Different points of view are what helps everyone learn.

        2. Maverick61, We share very similar playbooks. Key here I think is in recognizing the futility of trying to time the market and instead focusing on the merits of individual issues.

          The “market” is an unqualified mess for many reasons and last month’s market collapse generated a lot of trepidation. Though depending on one’s objective and risk-tolerance, buying A/BBB+ paper at 25% or more under “par” last month and averaging down on others while simultaneously extending duration was a great option for some. Personally I loaded up. Some positions are up near 100%. Average held Moodys/S&P rating is now BBB+, average duration is 8/2024, average ROI (on cost basis) is 6% with overall account up low 6%s YTD after 17.4% last year.

          The point is not about the bragging rights of the success or failure of my, yours or anyone’s buy, flip or dividends. It’s that correct or incorrect, ignoring the fear-headlines and forgetting which channel CNBC blabs on and instead focusing on the merits of individual issues is key. And no matter how bad the downdraft, – or rather especially during the downdraft, the opportunities for all of us to exit “cash” are present. When the over-leveraged or panic-prone CNBC-ers are crowding the exits during these events, that’s when we all want to be in buy mode – having done the old-fashioned pencil and paper homework ahead of time.

          1. Alpha – yes, we certainly do seem to follow the same playbook. As you note, I focus on the merits of individual issues rather than trying to time the market. Now I may get more defensive or offensive at times – but it would be very very rare for me to go significantly into cash in the two accounts I am active in. Pro’s can’t consistently time the market, why should I think I can? Now I also have other funds outside these that I have mentioned before, including a chunk of laddered CDs to cover expenses for 4-5 years if need be. So I believe that gives me the freedom to have a longer term perspective with my two accounts I actively manage.

            Sounds like you did a great job loading up on quality issues the past month – kudos. Always nice to lock up quality holdings for the longer term at great prices. You are exactly right – ignore the headlines, turn off CNBC and instead investigate and buy issues on their merits that you yourself research. I have literally not watched CNBC since the tech crash in 2000-01 and I am much better off for it.

    2. Was it priced in? P/E ratios are still sky high, and the “E” part is going to evaporate in the next 3 months.
      The indexes are also dangerously concentrated in 5-6 of the biggest stocks (basically the trillion dollar club)

      1. Yes, it was priced in. Can you say that about every stock, probably not, you never can. There are always exceptions to the rule. But given the large declines of many issues, the market was pricing in the revenue and earnings decline and uncertainty.

        I believe most people have written off the 2nd quarter knowing the results will be horrible – and looking forward to the 3rd and 4th quarters

        As to indexes – I care about what individual stocks do, not an index. As Alpha and I noted, it’s important to focus on the merits of individual issues rather than being fixated on an index and whether one thinks it should go up or down. By focusing on individual issues, you have a better chance of eliminating confirmation bias in your decision making

        1. look at the historical p/e chart.

          at 21 and change based on trailing earnings (which really haven’t had the new realities baked in yet)
          The last 2 recessions, P/E’s got over 30, even as the market tanked because earnings disappeared for 12 months.
          You may be right. (and I may be crazy) as the Billy Joel song goes.

          1. Justin, I think most would agree with your sentiment regarding “E” and the index futures. The enduring problem for us of course is that timing the market via an index is impossibly difficult. Similarly tortous to “obvious” market predictions as we know is that what “should” happen is frequently replaced by what “does” happen – even if it that outcome defies the physical laws of nature. The S&P over the last 12 years offers a good example I think.

            If 20 or 30-something years-old, and know what we all know today, I’d probably save a lot of time and start dollar-cost averaging into an index or two and (mostly) call it a day. But with less time, less interest in growth, more interest in income, a market that consistently over-leverages and media that consistently triggers stampedes; “priced-in” value-based propositions keep presenting themselves.

            Now on the other hand, if my RLJ-A position will get me back just a little closer to break-even…lol.

          2. Justin

            While I certainly understand where you are coming from regarding indexes, I guess my main point was I care more about what individual stocks do, not an index. I really focus on the merits of individual issues rather than being fixated on an index. While I think there are times one can become more offensive or defensive, I don’t believe anyone can consistently time the market.

        2. Mav61, Been a reluctant net-seller over the last week. Went off our playbook (or maybe used it) yesterday with some of that idol cash and picked up more of out-of-favor DAL at $24.32 based on future valuation basis. Being on the opposite side of the headlines helped on the entry price. It was meant to be a medium-term hold but sold that batch today near $27 for a 1-day 10%+. Back to the playbook.

          1. Alpha

            I hear you. I have stopped buying the last few days leaving some positions I started not full as this latest rise was too fast for my liking. And there is a temptation for me to take some short term profits on some of the common that are up 10% -20% since I bought them 7 to 10 days ago. But I bought them more for the long term and right now have nothing I am itching to buy to replace them so its a struggle, albeit a good one to have. Plus I have some preferreds I have been holding longer waiting for the right price that I plan to sell first. So really just watching right now

            Nice trade on DAL. Yeah, I am not sure how comfortable I would be holding that if I could get 10% gains in a day or two. I am debating on PRU which I bought 9 days ago and now up 20%

  7. Tim, while I like to be an optimist as well, I’m also a realist about the current situation and also cannot figure out why stocks are only 15% off their highs. Here in Pennsylvania, there are a huge amount of layoffs and people are unable to get through to the unemployment office – as the phone system is busy all day long. You can e-mail the unemployment office, but people are being told it may take up to 21 days to get a response. Sit-down restaurants and hotels are empty except for a few carryout orders. Unfortunately, some of the smaller businesses are probably not going to re-open. I live close to Gettysburg, PA which is normally booming with tourists in the spring – and it is like a ghost-town (no pun intended) over there now.

    At least for me, I’m fine sitting on a fairly large amount of cash because the economic picture does not look very optimistic over the next 12 months and I’m fine waiting for a dip in preferreds if it happens again. The large dip back in December 2018 was not that long ago and I’m fine waiting things out.

    1. alpha8,

      what does it mean to be “too rational”?

      With investing, is it better to try to be less rational?

      1. d, Guess I don’t get my comedian pay today as I lost you with the dry humor. Of course Tim is spot-on. The market is a giant mess with many cross-currents not the least of which is that investing fundamentals are being undermined yet again by massive fed interventions. Who the hell knows what’s really up or down net of those dollars.

  8. Hey Tim, nice piece. I agree with the big picture, we have a horrible economic environment trying to be offset by the greatest Fed stimulation ever. A classic tug-of-war. Nearly every corporate CEO I hear is just starting to cut back and right-size their expense structure for a new normal with less demand. Everything looks like S&P earnings will be 10-15% lower in 2021 than it was in 2019.
    In Feb I had about 22% cash, took it down to 18% in early March, and now have it back up to 23%.

  9. At 69% cash and holding. What the market indexes and doing is not investing but gambling. If we find a way to effectively treat the virus, they may be right. But even then it will take time.

  10. A more conservative approach to SDS is Pro shares short S&P 500, symbol is SH. 1:1 inverse to the S&P 500. Profits and losses are more muted than SDS.

  11. Got tired of large cash position and nothing happening. So I bought bear funds to offset new purchases I can trade. Maybe I’m just addicted to the game.

    1. Martin, Things have slowed down for me too. Its fine though being up on the year. Sold a couple ancient $100 par preferreds for a quick $3-$4 gain. Sold my PW-A since it quickly spiked and is way above call price now. And finally finished an eternal slow mo trade. Sold 400 CNIGO (not quite half my stash) last month over $27. I had to be patient but finally got them safely back in the fold getting 300 back last week at 26.05 and last hundo at $26.10 yesterday.
      Back in small ball mode again.

        1. Tim, Just got in for a walk…Wow, the up volume is phenomenal on it today at 110k. I dumped 600 and 26.87 just now. Keeping the vast majority. Hit on some minor old ute illiquids today so I can part with a few. A bit too attached, probably should sell more, but need a core somewhere. My world of preferreds is a lot more shallower than yours is. I did buy some more LANDP also at 25.12. Needed more of them like I need a hole in my head though.

          1. Good for you–I only had a couple hundred for flipping purposes so steak dinners for 2.

            1. Tim, you have to learn to be blindly in love with your local utilities (if its a quality one and issues tradeable issues) and hit em hard when the opportunity presents itself! 🙂 My wallet would be a heckuva a lot lighter without Spire and Ameren preferreds. Its a married in heaven. I give them hundreds and they give me thousands, lol…
              Actually I am violating my trading rule… I call it the DUK-A price marker rule. Its too close to DUK-A now in price so that makes it a sell now. I did sell some though.

          2. Any guess as to why the huge spike up on very heavy volume?
            I sold my entire position at $26.80. Modest gain, but i expect to be able to buy back in lower. XD was a few days ago, so have time to wait for the pullback.

            1. I think that was very reasonable Inspy. I just bought my last small batch (which was basically my sell today) at 25.70 last week or so and also scalped the divi too. Some big player was buying today driving price up. Volume way too high today.

              1. end of month re-balancing has just started and many stocks had clear direction yesterday

  12. Tim great write up, I totally agree with you . SPG and Mac up huge the last two days, 20% plus. What does everybody think because the Malls are going to open that things are going back to the way they were? It’s hard to spend money in a Mall when you don’t have a job. Plus people have learned they don’t have to go to a Mall to get things they need. There will be a reset in retail IMHO.
    Im really considering shorting the S&P , but I don’t like shorting the Market with the Fed here. This market has a disconnect from reality.

    1. Max–you could consider one of the short ETFs (i.e. SDS)–but you have to be nimble or you will get spanked hard. It really is tough to fight a market that has a fed ‘put’ under it.

      1. I’ve noticed that the DOW equivalents in the long/short Proshares & others do somewhat better than the S&P types. DXD vs SDS , etc.

    2. There is a short mall ETF with the amusing ticker of EMTY.
      i always chuckle when I see the High Yield bond fund ticker JNK.

  13. My biggest challenge Tim is that I hate holding cash, especially with zero rates. I definitely paid for it in the last 2 months. My solution has been to steadily move higher in quality and try to maintain a decent yield. If things go south again, I should be in much better shape this time around. Of course that is easy to say when everything is rising!

    1. kapil–6 months ago at least we got 1.5% on our cash holdings and I see that is now down to .68% on the Gabelli US Treasury money market.

    2. My worst habit is that I have CNBC all day and listen to all these GURU’S. LOL. Now having said that most of them are continually saying that the lows are in and we are NOT going back to the March lows of around 1,800 or so. Iam in that camp too. It seems to me there’s just too much money out there chasing these things. People that control the Huge Money obviously think the worst is over. I still see a very few Huge Mega Banks preferreds that I think present pretty good value. Nothing like they were back in March but there are a select few still available with decent coupons and good call provisions of 4 years. I now have full + positions in all the Mega Banks so won’t be adding but like I say there are a few that still look pretty good atleast to me. I definitely do NOT believe the S&P is going back to 1,800. All those writers over on S.A. are most likely very wrong. I was unable to get in on the Schwab 5.375% bond from yesterday and now its already trading at over 101+. That whole thing was handled so poorly by Schwab—I could write a novel on that cluster F—–.

      1. Chuck – if you ant to die broke follow the financial “advice” at CNBC. Just to make sure, follow the HDO group at Shrinking Alpha.

        Or, just mail me a check.

        Either way, you get to the same place.

    3. As for parking ‘cash’, I’ve done very well with the gov’t paper CEF: MGF — has been paying over 7% without eroding the NAV- have to watch for that. I also trade it in large volume, and make much more than the divs, on average. If I end-up holding some as it nears the ex date of 4-14, I’ll collect the div and try to trade it going forward.

        1. Their site is fairly informative-

          No secret sauce, but ~6% short on a couple areas, 84% Gov’t, 10% high grade corp & some misc. Low fee of 0.74% and NO leverage.
          It is a managed distribution of 7.25%, so they can use cap gains or ROC if needed. I am ok with those if the NAV is pretty stable- it has been – and rising. Even the div has been increasing this year. It does tend to follow the market/DOW trend since the end of Oct; before that is more like the inverse of the mkt.
          Hope this helps.

            1. Q-
              I’m not sure the small (if reliable- it’s dated 11/30/19) negative UNII info makes much diff here since ROC has been a large factor- but not destructive so far, since the NAV is in good shape & rising even as the div has risen. Note that the last div was all income, no ROC / cap gains.
              Caveat: it is small and fairly thinly traded- so patience can help if trading, otherwise just collect those pennies. I have some for sale right now 😉

              1. How does 60-70% return of capital year over year not completely destroy the NAV over time? (I just checked 2017-2019)
                i must be missing something.
                They are paying 7% but have income of 2.5%.

                1. I think normally it would be & has been destructive. However, the charts of price & NAV show we are a special situation. I think the fact that price and NAV are up, while last month they paid with income, shows that it is buyer driven- people are looking to the gov’t issues as a safe port- as am I. I think the price of the portfolio issues might be increasing, and sheer volume adds to the income & cap gains if need to be used.
                  But, trading it can work well. The price action yesterday and today are very unusual. Today, in a few min it spiked about 12¢ and declined in less than a minute- I was able to sell some at 4.77, but not 4.79. Vol is high- relatively.
                  I think whoever controls it is playing people, but I’ll take the profit when it leaps and buy back later.
                  That’s all I know- but will go with it until the NAV reverses enough to lose the div of almost 3¢
                  As usual- do your own DD too.

  14. Totally agree Tim. The market simply makes no sense at this point. I opened a position yesterday equal to 2.5% of my portfolio in SDS with the S&P at 2865. I intend to add .5% every time the S&P moves up 1.5%. I hate to “fight the Fed” but I’m willing to take the hit on a very limited upside IMO. I am 80% invested now and have my prioritized target list all ready. It’s coming……we just don’t know when.
    Cheers and good luck to everyone.

    1. Gary–yes I float in and out of SDS–it served me very well during the big fall, but since then has been a loser–I have forgone a bit of profit with the hedge, but at this moment I am happy for the trade off.

    2. Hi Gary, I am also thinking about buying SDS. There is a huge disconnect between market and real economy. Do you know if there is any tax implications for SDS other than pay taxes on capital gains and dividends?

      1. MFZ,
        I have always held my SDS positions in an IRA so I am not sure of the tax implications. Suggest you call Proshares directly as I know some of their other geared products issue K-1s.

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