05-04-2020: Positive but Realistic

No investor hires an asset manager to lose money for them. Investors (well, maybe I should say 'most investors'), generally understand that not every trade works and their portfolio will not go up every day. All investors expect their money manager to keep risk of loss (size of loss, actually) within certain limits of their clients' risk tolerance. My clients understand this (at least I hope they do) and expect me to grow and protect their capital to the best of our ability within those general guidelines. This is one reason why we are in cash this week. The market sold off pretty hard this morning and then rallied into the close to end up about 0.4%. That's just too much risk exposure right now. We need this market to settle into a trend of more than a day or two.


But, not all asset managers have investment strategies designed to protect their clients from major losses in bear markets. In fact most asset managers have a hard time protecting, much less, growing client capital in a bear market. Chief among the buy-and-hold asset managers is Warren Buffett; often touted as one of the greatest portfolio managers... ever.


But... this quarter (Q1), Berkshire Hathaway had the worst performing quarter in its history. BRK-A lost over $30,000 per share and is down nearly 20% while the S&P 500 is down about 12%; that is 8% worse than a buy-and-hold of the SPY ETF that mirrors the S&P 500.


The bottom-line is this: Buy-and-hold strategies are not designed to do well in bear markets and the average time for a buy-and-hold investment strategy to get back to even after most major bear markets is 19+ years. This is why I am not now, and never will be, a buy-and-hold asset manager.


Take a look at this statement from MarketWatch:


The Federal Reserve said it would start buying corporate bond exchange-traded funds in early May, as it offered up further details on its planned purchases of debt from U.S. businesses on Monday. Soon after, the central bank will start purchasing debt issued by companies directly, and from the market. The Fed also said it could buy an entire sale of corporate bonds by itself. Even without having yet bought bonds, the central bank's announcement of the lending programs have been enough to arrest turmoil in corporate bond trading, and has allowed businesses like Boeing to issue debt to raise cash.


And, how about another one from CNBC...


The Treasury Department announced Monday it is borrowing a record $3 trillion this quarter. Just since March 1, the national debt has grown by $1.5 trillion to $24.9 trillion, a 6.4% increase. The budget deficit through March, or the first six months of the fiscal year, totaled $744 billion, on pace to easily eclipse the biggest shortfall in U.S. history.


This is Quantitative Easing on steroids. I can only assume the Fed thinks the economy, the bond market and now stocks are on the brink of collapse and they are doing everything they can to prop these segments up. But... a price will have to be paid for this faux money at some point. These epic insertions of capital are creating winners and losers based on who gets the money and who doesn't. This is a paradigm that even Warren Buffett is struggling with.


You see, the bulk of the money management industry is banking (literally) on the hope that this pandemic will be short-lived sell-off and that Uncle Sugar will come riding to the rescue with trillions upon trillions of dollars printed out thin air, and put a floor in this market. But, they have no plan to handle what happens next if the mere printing of money doesn't solve the problems of restarting the economy.


If you are not a client of mine, you might want to call your advisor (I assume he/she has not been calling you recently) and ask them what their plan is for your money if the market tanks another 20% or 30% or 50% or more? Listen carefully to their answer. They probably have only one answer... and they hate to say what that one answer is... "We plan to stay the course because the market always comes back." Translation: You need to be prepared to lose a LOT more money if the market crashes.


We have another approach and I think, a far better approach. This week, we are almost 100% in cash and plan to stay that way at least for this week, or until we see these massive whipsaws subside and a real trend (up or down) ensues. If the market is, indeed, on its way higher, we will get in on the long side. If, on the other hand, the market is teetering on the brink of another massive sell off (and does), we will get in on short side via inverse ETFs.


I am optimistic about the fact that the market will, eventually, find its footing in spite of the artificial stimuli that it is getting. But, I am also a realist and it 'looks' to me that the big banks and big companies (Boeing comes to mind) are still "too big to fail" and they know it; this is why they aren't worried in the least about failure. Uncle Sugar is standing by and loaded up with all the sugar (capital) that these big firms might need or want. I am very skeptical, however, that there is enough sugar and the desire to spend that sugar on the backbone of this country... the small businesses. Small businesses don't have multi-million dollar lobbyists working for them to make sure the sugar trickles down to the little guy; and they are in real trouble.


The market rallied today with the market knee-deep in sugar. I wonder what today's market would look like if the bail-outs were not happening at the big-boy level?

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