Seeking Value

The swings of the stock market recently have been as much fun as a roller coaster ride for somebody who suffers from dramatic motion sickness. The ups are huge, and the downs are even worse. The market moved into correction territory faster than anytime in history, only to be followed by 2 of the biggest point increases the stock market had ever seen in the same week. (March 2nd and March 4)

However, the days in between have also been big drops. The market cannot seem to find it’s direction. While the Coronavirus is certainly the biggest catalyst for the turmoil, other factors are also weighing on the ups and downs we currently see.

Let’s address the Coronavirus first. Every day we get new news about this virus. And so far, none of it has been a confidence builder for investors. Countries have shut down schools, sporting events will be played in front of empty crowds, community outbreaks are becoming headlines and international economies are shutting down. The fear is also reaching into our daily lives, as staples such as toilet paper and hand-sanitizer are disappearing from retailer shelves as consumers fear for the worst. Also today, California has declared a state of emergency as it sees it’s confirmed cases moving up daily in such a populated area. So much about this virus is unknown, and I just finished reading an article about the virus my be mutating, making the ability to contain the virus even more difficult. How long will this go on? Who knows.

Other factors are also feeding into this volatility. Let’s start with the current election coming up. Wednesday’s stock market increase must, in some part, be credited to Joe Biden’s ‘Super Tuesday’ performance. Wall Street is terrified of what a Bernie Sanders presidency would do to the wealth of the country and to the companies who thrive in a capitalistic environment. Biden’s surge gave some relief that the Sander’s path to the presidency would be much more difficult than if he had just ran away with the delegates Tuesday night. Sanders did win the biggest prize of California, but southern states and other areas who do not lean far left showed Bernie’s message does not resonate with the entire country. Should be a very interesting couple of months while the Democrats decide who will face Trump in the next election.

The FED came out this week with an emergency rate cut of 50 basis points. Lower rates have usually helped prop up stock prices, and with the fear of Coronavirus being the top headline, they tried to relieve that stress with swift action. However, the market interpreted this move differently. This was the first Emergency Meeting rate cut the FEDs have done since 2008. The market took this cut as desperate, and the 50 basis points was double the amount of the FED’s previous rate cuts. Had they waited a few weeks for their normally scheduled meeting, or even just cut the customary 25 basis points, the move would have seemed less worrisome. Their move came off as fearful, while trying to express their message was that the US economy and fundamentals are still strong. The market was able to read between the lines and see the FED is concerned of the impact of the Coronavirus to both domestic but also the global economy.

In stable markets, volatility is usually very low. When stability goes away, we see the swings that we have been seeing lately. Investors are making their decisions based on the headlines they are reading for the day. News driven moves are ones made out of emotion or fear versus fundamentals. The market has been overpriced for some time now, so it’s not surprising to see investors ready to exit their riskier positions and wait for the things to calm down. Who knows what tomorrow’s headlines will bring, but if it’s more bad news, you can expect to see investors become less attached to their portfolios and lock in their values when they can. With so many unknowns right now (election, Coronavirus, FED actions etc) we would expect the volatility to remain heightened for the time being.

If the market swings have you worried about your account, please feel free to give us a call @ (303) 770-3030 to have a risk evaluation done on your portfolio. If you would like to see our previous newsletters talking about the risks currently facing the stock market (before the Coronavirus) please feel free to visit our website at http://www.valuefinancialadvisers.com.

Black Swan events are defined as an unpredictable event or circumstance that is beyond what is normally expected of a situation and has potentially severe consequences. Though rare, this phenomena can absolutely cause havoc and chaos to the environments at which they enter.

The Stock Market is currently experiencing this phenomena. While the market had grown used to low interest rates justifying over priced stocks, investors continued to buy overpriced assets to sell them at a higher price later. The FED has been very accommodating to this strategy as well, keeping interest rates artificially low despite stock market highs, record low unemployment etc. Investors felt the FED has their backs, and the FED did.

What the market, or anybody else for that matter didn’t anticipate coming would be an pandemic sickness that would all but halt the world’s global supply chain (Black Swan). Even worse is the location of the origin; China. Most investors understand that China is major hub for the global supply chain, so this is even more cause for concern. Each day, more cases are discovered, including ‘Community Spread’ in Washington State, California and Oregon. Japan has closed all public schools. The streets in China are empty. The world has taken notice. With stock prices drastically overpriced, any indication that profits and production are going to be slashed for an extended amount of time could certainly cause investors to run for the hills.

The stock market had a terrible week last week. Sliding into correction territory faster than any other time in history. (A correction is defined as a 10% drop from it’s most recent high.) Nobody saw the Cornonavirus coming, and the fear that the global economy is going to slow down was enough to get many investors to take their profits and run.

Enter the FED. This morning (March 3, 2020), the FED announced an emergency rate cut of 50 basis points (.5%) on interest rates. Lower interest rates generally prop up stock prices, as they have done since the FED began their Quantitative Easing strategies since the Great Recession of 2008. The Market initially reacted positively, but soon slid back into negative territory and has stayed there since. Unlike other times of concern with the Stock Market, the FED may not be able to simply cut interest rates in order to get the confidence back. ‘Fully vested Bears’ may certainly look to lock in their unearned gains the Feds have handed them and flee to safety.

Black Swans are unpredictable. That, by definition is the problem. While the market grew complacent with higher prices supported by FED policies, an event that was not foreseen may be the straw that broke the camels back. There is no telling (nor am I willing to try to predict) how long and how disastrous this virus will impact the global economy. But when the bubble is so close to popping in the normal environment, the ramifications of this black swan may be too much to contain.

If you are interested in reading our previous newsletters to client’s regarding the bubbles we see in the current market, please visit our website http://www.valuefinancialadvisers.com. If you would like to discuss your current portfolio and determine how exposed to these bubbles your portfolio may be, feel free to contact us directly @ (303) 770-3030.

For the first time, U.S Household debt has topped $ 14 TRILLION. It is true also that the percentage of household’s income to service that debt is the lowest that it’s ever been (thank you low interest rates) but the pattern is concerning. Households run up credit card and other debt, then use the equity in their house to pay it off and start all over. It works until it doesn’t. (See 2008.)

Once house prices begin to taper off, the equity wont be there to bail out the borrower, yet the borrower has the pattern of living outside their means, as indicated with the amount of credit card debt the average US Household currently carries. As of February 2020 revolving consumer credit debt reached 1.03 trillion, up from 810 million in the 1st quarter of 2018.

Another variable will be if and when the FEDs begin to raise interest rates from their artificially low rates we currently see. If the payment they refinance into ends up being higher than their current payment, households will have to rely on their credit cards even more to make ends meet.

“Keeping up with the Joneses’ can be detrimental to the financial security of the household. We like new cars, big TV’s, nice houses, expensive vacations etc. But unless the household income rises to keep us living the lifestyles we’ve become accustomed too, soon the debt will be too much to handle.

As Bill Connors asked in his last Newsletter posting, ‘How Much Debt is Too Much?’

To read our previous Newsletters, please visit our site http://www.valuefinancialadvisers.com or call us (303) 770-3030 to be added to our free Newsletter list.

The Buffett Indicator

A common and well accepted measurement for market pricing is known appropriately as the Buffett Indicator since Warren Buffett created this ratio to analyze stock pricing (or overpricing.) It is a measurement of the total Market Cap of all US publicly traded companies against GDP. When this number exceeds 100%, the market is thought to be overpriced. This ratio hit 145% before the Dot.com bubble, and 110% before the financial crisis on 2008. Currently this ratio is 157%. We see this as a problem. Also a good reason why Warren Buffett’s company, Berkshire Hathaway, is holding more cash than ever.