While we anxiously await the vaccine that a great percentage say they won’t take — the market reached all-time highs last week. The preventative stay at home economy, with one in four (25%) workers engaged, has supercharged the gig economy and the Amazon Prime membership. This has come at the expense of local communities and businesses, regarded as less essential and less able to reach customers through the web.

Forced isolation to mitigate the virus’ spread has been a boom for shareholders of the recognizable giants: Amazon’s profits have doubled, followed by Walmart and Target increasing 80%, Lowe’s 74%. Following suit, those stocks have reached record highs along with booming tech and cloud services.

Largely operated on a month to month basis, small business has suffered unsustainable revenue declines of ~30% (vs. 20% in 2008) leading to 20%+ closures. Yelp expects fewer than half of restaurateurs to survive 2020.

The letter ‘K’ has been drafted to symbolize our economic condition, indicating a sharp separation of winners and losers, a sharp contrast to the stock market’s snap-back 50% ‘V’ shaped recovery. Blue collar labor, whose wage gains led during the recent economic uptick (Feb. 2020) now lags, while white collar, with its home office survival option, has held up.

California’s July unemployment rate came in at 13.3%, comparing unfavorably to the ~10% national average. August registered at an improving 8.4% with state numbers due out shortly. Keep in mind these figures don’t reflect the self-employed themselves, only for their employees for which they contribute to the state insurance fund.

Social themes: Exodus from urban to rural. Folks  escaping cities and their burdensome taxes and regulations. With the add of crime/covid accelerants, vacancies are skyrocketing. Expanding high speed broadband has enabled Zoom-casts to become ubiquitous in our daily lives. The spare bedroom has replaced office towers, with spatially limiting elevators, in seamless fashion. Some say productivity has also increased, yet the social/psychological downside must also be acknowledged.

Going forward, Covid will wane while the November election will keep stocks on edge. The market run-up has pushed valuations to extreme. Support as ‘buyer of last resort’ from the Fed last March restored confidence, but nonetheless remains only a band-aid on our economic wound. Give it a year or two to get everyone back on board…and the markets to dodge and weave accordingly.

2020 will not end soon enough.

Of personal note:
Back to the ‘ole laundry building, where my dad had draped a towel over the wounded pipe (see previous e-blast).  Property had been vacant, until recently, when word had it that a woman was seeking space to re-start her dance studio. A deal was struck, with dear mother collecting rent, enabling the industrious owner to create an ‘out-of-home’ activity for both kid’s and parent’s sake, and a bit of profit to boot.  Win-win-win!!  But, state/county says – ‘no can do – outdoor activity only.’  One could argue fifteen kids confined to a 3,000 sq ft. open air building …is NOT indoors.

The blanket application of government agency – is served unfairly.

Dear Clients:

Below is an excerpt from finra.org, one of our regulating bodies:

• On June 5, 2019, the SEC adopted Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934. Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.
• Form CRS, to retail investors. As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary,

The intention of ‘Reg BI’ is to apply a ‘standard of conduct’ to brokers similar to that of a ‘fiduciary,’ which legislates that Investment Advisors put clients’ interests ahead of their own. Since we hold separate registrations as a Broker through Oak Tree Securities and as a Registered Investment Advisor, this rule may or may not apply to your accounts or financial relationship with us.

Please get back with any questions or clarifications on this new rule.

Many thanks
Eric
415.640.6770

The selling strategy called ‘panic’ employed a month ago, which sucker-punched the market’s 33% decline, is hopefully behind us. Small caps fared worse losing 40%. Optimism and cheap valuations have lifted stocks 28% off their lows (~12% from break-even) as investors began looking forward – rather than down.

Center stage is the ‘back to work’ vs. ‘virus mitigation’ debate, significant with 20M+ unemployed (and rising) and small business gasping. Both health and economics have extreme and life changing consequences, both being tightly intertwined.

A friend’s 40-person catering business in Oklahoma let go all but 5. These things snowball. With the price of oil falling to single digits, for every sidelined rig crew, another two dozen field workers get furloughed.

Brings to mind a learning event growing up. Dad owned a commercial laundry, big machines etc. Water pipe had broken, spraying half the building. Mac, the washer, had run around covering machines and clean linen with plastic…diligently. Pops walks in, sees the fountain and calmly drapes a bath towel over the wounded pipe…neutering its majesty straight down into the drainage ditch. Mac sighed.

A doctor client identified ‘vector control’ as the key for safe keeping elder populations, as their risk is more attributed to the number of ‘personal’ interactions, rather than age. My 94 year old mother needs the bath towel…and our healthy society needs to remove the plastic. For us long term investors we ask, how and when will ‘normal’ return? The clock is ticking….

“The right government policy response is to focus on supporting the small business sector, that have suffered from supply disruptions…  When businesses fail, jobs are lost, and consumer demand that was only postponed earlier gets destroyed permanently.”  Excerpts from Jim Walker: Chief Economist, Asianomics Group Hong Kong, via Forbes Magazine  3.23.20

Human ingenuity is on our side, with the ability to adapt that computer models can’t predict. We are inherently risk averse (well most) with ‘normal’ behavior currently being re-defined.

Although relatively expensive, blue chips (large) with more visible earnings and stronger balance sheets will hold up best while smaller economically exposed sectors will continue to be challenged. International turmoil with China supply chain disruption/withdrawal will become a nightly news event with increasing calls to relocate ‘essentials’ (and more) back to the US.  Globalism has become an expensive lesson, nonetheless one for which we too will adapt.

Financial markets give us the ongoing ability to reflect our risk and emotional sensitivity and apply that to our portfolio. If you have concerns or adjustments you believe necessary, please share your thoughts. Thanks! Looking forward to chatting.

The financial markets we learned (last week) are made of paper-mache: durable, attractive hanging from the ceiling, but soggy when wet and totally destroyed when struck by a 10 yr old with a stick.

This week, in order to avoid tears, the parent (the Fed) assured everyone there’s enough candy for all (i.e., they won’t let markets go to zero), while holding the jar high (Congress) to pass out such candy just in case.

Currently the market is up 20% for the week.  Shortest bear market in history.

Scolded were the Airlines, having recently repurchased millions of shares with billions of earnings, a mechanism to drive prices higher and their wallets fatter… soon to be broke WITHOUT Federal assistance.

We were also humored to learn making masks (deemed a medical device) is a lengthy approval process via the FDA.
https://www.fda.gov/regulatory-information/search-fda-guidance-documents/surgical-masks-premarket-notification-510k-submissions

The dark side of Covid is obvious.  The bright side is a cleansing (hopefully) of all things (as tragedies are want to do) that will allow a more efficient and protected society.  China will top that list, as well as dis-functioning financial markets and a more responsive government enterprise.

Not since WW II have we been asked to stop our daily deeds (for a couple three weeks) to focus on the enemy for the greater good.  Then, everything was rationed.  Today, toilet paper.

In the meantime, support your local small business where possible. I PayPal’d (family and friends) four haircuts to my hairdresser. She was very appreciative.

Back to the ’87 18% one-day selloff:  

Total value lost = $500B
Total value of transactions = $25B
Q:  Where’d the other $475B end up?      A:  It was never there.
Markets have a limited amount of cash, or liquidity in them. PANIC sends everyone heading for the door, but they discover the door is only so wide. Everyone can’t get out. Thus prices drop dramatically to find willing buyers at ever lower prices.
CALM prevails and normal functioning markets return.

Benjamin Graham > Pioneer – value investment sage (1894 – 1976) – advice that still applies today.

• “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”  –

I’ve heard this quote a few times, but yesterday it finally made sense. Long term, stocks are valued relative to their balance sheets, cash flow and business prospects. Short term, prices are determined by investors’ immediate needs, emotions (related to both fear and greed) and want for cash.

News of the day:  Congress squabbles on details of the aid package. The Federal Reserve expands its asset purchase program to now include corporate bonds and…

Other initiatives include an unspecified lending program for Main Street businesses…. There will be a program worth $300 billion “supporting the flow of credit” to employers, consumers and businesses and two facilities set up to provide credit to large employers. (See link below)

Once considered the lender of last resort, they have now become buyer of last resort to keep the dis-functional markets functioning.

3.20.20
Breaking news: Federal tax returns will be due 7.15.20, with the state likely to follow. Currently, the state is due 6.15.20.

3.19.20
News of legislation to provide direct monetary support for the populace was announced, which includes a ‘rebate’ of $1,200 per person (with incomes of less than $75K).  Also mentioned were programs geared at helping small businesses, including a delay of payment for employer payroll taxes, a delay of estimated tax payments for corporations, and modifications for net operating losses.

Loan guarantees of $208 billion to distressed sectors of the economy, including $50 billion for commercial airlines and $8 billion for air cargo carriers, and $150 billion for other eligible businesses were also introduced.

3.18.20
The market fell ~10% again today with every asset class selling off….a PANIC demand for cash. Personally I think the markets should be closed until the ‘new normal’ (health and economic) is better known (~1-2 weeks.) This type of freefall of all assset classes does historically portended a market bottom.

Good news on potential new treatments, including application of existing drugs (now), antibody therapies (3-4 months), and, of course, a vaccine next year.

3.17.20
Didn’t expect to re-live the ’87 experience (worst one day 18% sell-off.) Fed rate cuts didn’t stop last Tuesday’s 13% $3.5 trillion dollar decline that was exacerbated by President Trump’s comments last week that the…. “wash-out would come in the July/August timeframe.” The term wash-out was mis-understood to mean peak infection rate (expected to come much sooner), which is when we anticipate better days for the market.

The economic effect of ‘stay at home’ orders as well as gathering limits, travel restrictions, and shutdowns of food and drinking establishments is pure speculation. The unknown feeds the market’s fear. Also announced today were the first human injections of a potential vaccine.  ‘Eh’, the market said.

The ’57 flu epidemic was short-term 10% sinkhole, so best guess is a similar decline of 5% to 10%. Shocking, but a small dent when viewed over the long-term. The bounce-back from pent up demand will mirror the downturn. Large companies will sluff off the revenue loss, but smaller and privately held businesses will certainly suffer.

Being negotiated is a ‘fiscal’ stimulus (tax cut) to keep the money flowing. Discussed is a temporary social security payroll cut similar to the 2011 2% reduction as well as direct payments to taxpayers and loan facilities to small business.

How ever the stimulus comes, and the virus goes…faith and trust in our free market system will generate a vaccine and long lives for most affected. This will burn our psyche, similar to what the Great Depression did to our parents and the ’87 Crash did to traders.

-From 2.29.20
“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But at the moment, no one can tell how long this will last and how severe it will get.”

So, easy to imagine the markets continuing to bump and skid along for a quarter or two, but any sign of a let up in rate of infection will bring a sense of value and money flows back into stocks, and out of the safety of bonds.

The sell buttons were pushed hard late Thursday. What seemed to be a moderate down day turned into a water fall event sending the broad averages decisively negative for the year with the S&P 500 standing at a negative/minus 7.5%. The 12% decline from the peak puts the market into an ‘official’ correction (decline of 10% or more), similar in depth to past market sell offs.

The market was due.

This is the CNN Business Fear/Greed Index, determined by a dozen technical indicators that measure market movements. I’m not at all surprised that pandemic fears on business activity translated directly into the sell-off in equities and stampede into the safety of bonds.

Although the economy hums along at a 2%+ growth rate, valuations were stretched from the ~30% run-up in 2019. The introduction of the pandemic sent sell signals into the machines and ‘sell-everything’ orders into the market, reducing prices to more reasonable and historical levels.

December ’18 witnessed a similar straight down market move…that being related to a Federal Reserve destined to kill the economy with higher rates. Reason prevailed with calmer tones and eventually two rates cuts in early year ‘19.

The diversity of the US economy brings both strength and durability. Here locally, owing to a tight labor market and demand for spirits, Napa county’s unemployment rate dropped below 2%. 2%! The tight labor market has driven warehouse wages to $20 – $30 / hour, or $40k – $60k per year. Remarkably, blue-collar wages have experienced the highest rate of growth in the US during the past 2 years (see chart below.)

“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But, at the moment, no one can tell how long this will last and how severe it will get.”

So, easy to imagine the markets continuing to pump and skid along for a quarter or two, but any sign of a let up in rate of infection will bring a sense of value and money flows back into stocks, and out of the safety of bonds.