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What You Need to Know Now

What You Need to Know Now 

Things are moving fast in the financial markets. This is what you need to know right now in brief. 

The Federal Reserve Has Stepped Up to Support Bonds 

After taking interest rates to zero, and recognizing the ineffectiveness of that move, the Federal Reserve is turning to QE to infinity. They are becoming the buyer (lender) of last resort in a market that only knows sellers. They are now staging outright purchases of their own Treasury bonds, state muni bonds, mortgage-backed securities and as of this am, Investment Grade bonds. They are not (yet) doing so with High yield corporates – the risk is assumed for those who play in that game, or in anything leveraged like REITs. As a result, we are witnessing the Fed playing God with who will survive (Treasuries and investment-grade stuff) and who will die (junk corporate bonds, REITs, and other devices of leverage or poor quality). I have mixed emotions about all of this. I see their move as necessary but ultimately yielding out of control Federal debt with another possible downgrade. I see inflation, both real and persistent, and I see an environment of higher taxes for years to cover all of this spending regardless of who is in office. Short term gain for long term pain. Maybe that phrase should be printed on every US dollar from here as a reminder. Anyway, for those of us who took profits in bonds several weeks ago before they fell 10-15%, we have bought back knowing that the Fed has the firehose on full blast. 

Stock Markets Look Poised to Move Higher Now 

I like to think of myself as calm under pressure. I will admit that March 16th was a very high-pressure day for me. That was the worst of this decline. Since then, we’re seeing new pockets of strength and quiet accumulation. Despite the moves to new lows in the Dow and the S&P 500 in recent days, many things have stopped falling and we’re starting to see big green volume bars of buyers. This is how a short-term low develops and we are operating on the premise that this level will market a short-term low in stocks with a possible 15-20% retracement higher from here. I know you need to know why so I’ll tell you, because there are more buyers than sellers at this moment in time. That’s all that really matters. These are the ways that we are adding exposure to all portfolios now.  

  • Slowly – Seriously. Trying to anticipate the low with a big bet is a game in losing more capital very quickly. Any purchase now should be done methodically and following a well-tested system. This is what we’re doing now. If you don’t have a system, you’re guessing and probably going to lose a lot more money before this is over. 
  • Trading positions  

These are just pure index exposure and directional bets. Again, we are looking for some signs that selling is done and buyers are back in charge with the right types of price patterns. Honestly, there is not much to find here with prices still in a near waterfall decline but there are some indices showing strength.  We like the Nasdaq 100 (QQQ) as the best behaving of the index bunch and have begun building a position there in Worldwide Sectors. We also like parts of Asia and emerging markets which are holding up incredibly well in the last week. Europe, especially Germany, actually showed up on our radar today as well.   

  • Investing positions  

These are stock investments in the fallen angels' category. These might be stocks or sectors that are still driving the US economy, embedded in our everyday life but now trading at deep discounts. They might also be sectors that have been thrown out for dead. In the left for dead category, we have a long watch list ready including Energy MLPs paying north of 10% interest, infrastructure ETFs and other equity income options trading at deep discounts. We have not entered any trades here yet. 

  • Thematic positions  

These are mostly our COVID-19 positions which now dominate the New Power strategy for over 40% of assets.  Yes, we own Zoom (ZM) after buying it a few weeks ago. Clients can look at their New Power holdings for more examples. Today, we bought Electronic Arts (EA) and Activision Blizzard (ATVI), both are bouncing nicely off of long-term support. 

  • Building on non-Stock Asset Classes 

Today offered investors an opportunity to buy gold or add to gold in our case. Gold is in a new bull market interrupted by hedge fund forced selling to cover their margin calls. Silver may be tomorrows’ trade, we’ll see. As I mentioned above, we have rebuilt our bond positions in all strategies now – thank you Fed. We are also maintaining a position in the rising US Dollar as dollar-denominated debt held by foreign entities is in short supply. Our cash position is still absurdly high but we’re deploying some of that daily now as our options to do so expand. 

Something Nasty in Real Estate 

I couldn’t tell you more than I see with my eyeballs. Homebuilders, REITS and all real estate funds are falling dramatically, every day, relentlessly regardless of what happens in the broad market. Today the S&P closed down almost 3%, home builders and real estate funds lost another 5-6%! Most people I talk to aren’t money people, but they do own real estate or have incomes tied to that industry in one form or another. The common question is what will happen to Real-Estate now? Using only the market and the real estate sectors as a clue, I can only say, it will not stand tall in the face of this. Again, I don’t know why and it doesn’t make sense but the markets are telling us that real estate will track with the financial markets - as they always do with the normal 3-6 month lag. This time is not different. 

Stay tuned and stay strong because sellers may be washed out for now with buyers waiting to push prices higher, potentially much higher. A final word of warning. This market will make a new low before this is all over. The bear market pattern of this cycle is no different than bear markets of the past. We’ll unpack this pattern and what to expect in our next Solution Series Webcast on April 1st.  Any and all are welcome to join us.   

That’s it for now. 

Sam Jones