Down the Rabbit Hole
Posted on Sunday, October 20th, 2019
Why, sometimes I’ve believed as many as six impossible things before breakfast.
The White Queen, Alice Through the Looking Glass, by Lewis Carroll
Investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies – Bank of America
While believing the impossible may help foster the imagination and lead to new ideas believing the impossible in investing is a sure way to the poor house. Down the rabbit hole we go. In this low rate environment it is easy to think perhaps I will just buy IBM. It has a 4.3% dividend. That’s higher than I can get in bonds. That yield can disappear pretty quickly. IBM is down 26% from its highs in early 2017. Not picking on IBM or giving advice – just an example. Know what you own. If a dividend is high it is probably for a reason- and not a good one. The world is upside down and investors are chasing yield where they once chased return and return where they once chased yield. Reaching for yield is like reaching for that last apple far out on the limb.
According to the latest research from Goldman Sachs buyback announcements and purchases are declining year over year. This makes sense as the Trump tax cuts and repatriation has run its course. As you know we feel that buybacks have been THE fuel levitating markets. That fuel, while not running dry, is losing some punch.
The economic data continues to be sluggish as the trade wars create more ripples. Trump needs a win. He knows that he will not have a second term if the economy turns south in the next 12 months. A trade deal – any trade deal will be necessary. Due to the trade war with China the Fed has responded by pushing rates lower and a renewed QE. That is now wind at Trump’s back. Once he signs a trade deal with the monetary policy heroin flowing the economy should bounce. That is the pain trade anyway. Investors see the signs of recession right around the corner and have lightened up on risk yet the market refuses to yield. The trading range on the small caps and transports in the US is getting tighter and ready to break on way or the other. Gold is holding its own and digesting its gains. Europe and Japan, while stuck in the mud economically, are seeing some positive action in their markets. The US Dollar may be the next key. If the Dollar begins to fall that would help a host of assets that investors would then turn to.
We released our Quarterly Letter titled Character earlier this month. We hope that you have had a chance to read it. If not here is the link. It goes into greater detail where we think we are in the economic and market cycles and what we are doing about it. While the last two weeks have been full of noise and bluster nothing has changed. We are still firmly entrenched in our trading range between 2850 and 3030 on the S&P 500. We believe that small caps and transports hold the keys to the market here and must be watched closely. Their ranges are getting tighter and tighter and are due for a break out. We still think that the risk in stocks is to the upside for the moment even though we are firmly in the recession is coming camp. Strange days.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.