Happy Holidays from The Ignorant Investor

Best wishes to you and yours for a safe and happy holiday season. This year, like many other people around the world, The Ignorant Investor is also grounded- but this beautiful scene from one of my favorite places is a great reminder of what we have to look forward to (photo was taken by yours truly several years ago). Best wishes for a prosperous new year as we farewell 2020 and welcome  in 2021!

A Shout of Joy Comes with the Morning: Investors look ahead to a Coronavirus-Free World

Pfizer-BioNTEch, Moderna are pulling back the curtain on a post-coronavirus world- and investors are cheering!

And just like that, the Santa Claus Christmas rally came early! More than a month early, in fact, beginning with the stunning November 9th announcement that a vaccine co-developed by the pharmaceutical giant Pfizer and Germany’s biotech company BioNTech had an astonishing efficacy rate of 90%. Clearly biotech companies were benefiting from massive cash infusions, streamlined pipelines, and readily available patient response data from compassionate use programs to expedite testing results. Then, if that were not enough, Moderna soon followed with their own announcement that their own vaccine was also 90% effective. Markets roared higher as fund managers and trading algorithms scrambled to ingest the information and then position accordingly.

The results were spectacular. Since the start of November – a little over a month ago – the S&P 500 has risen 12% to just below the all-time closing highs set on Tuesday. Still not impressive enough? The Russell 2000, far more representative of the broader market, rose 24% in that same time period. Absolutely incredible gains across the board amid a seismic shift from the so-called stay-at-home trade into cyclicals and value names. Breaking it down further, S&P 500 energy names rose 41%, followed by beleaguered Financials and Industrials, up 19% and 17%, respectively. The Ignorant Investor and many other investors who had been positioning for a bullish turn to the market saw very substantial gains (well north of 40% for multiple beaten-down names The Ignorant Investor had picked up) just in time for Christmas!

What's Ahead

The stock market continues to have substantial tailwinds in coming months, leading The Ignorant Investor to remain quite bullish. However, as is usually the case, quality, well-positioned companies will again be expected to strongly outperform the broader market. Be sure to coordinate closely with your financial advisor to come up with a good game plan that fits your investment strategy!!

Driving Bullish Sentiment

1. The coronavirus Covid-19’s days are numbered. With several high-efficacy vaccines already in production and numerous other potential treatments and vaccines in the pipeline, there is certainty that the virus will be brought to heel in 2022, and life will likely resume a semblance of normalcy in the United States by end of year 2021 (likely sooner with smooth vaccine production and rollout).

2. Economic recovery continues to plod forward. Economic data from across the manufacturing and services sectors have seen broad if uneven recovery since the March lockdowns and employment numbers continue to improve. Subdued economy activity is to be expected, however, until the vaccine becomes widely available; in the meantime, support from the Fed (see point 3) and stimulus from Congress (see point 4) will help bridge that gap.

3. Heavy monetary support from the Fed will sustain the economic recovery. This will also drive moneyed people and institutions further out on the risk curve in search of yield (sound familiar? The story from the old QE days is becoming relevant again!).

4. Stimulus discussions have resumed in earnest. Following a widespread, bipartisan rebuke from the American people, Congress will likely be able to put aside their differences post-Presidential election and come up with a package solidly in middle ground. Non-farm payrolls coming in below expectations in early December should help nudge bureaucrats forward.

5. Political uncertainty is fading fast. Uncertainty around the Presidential election dissipated after Biden picked up enough votes to secure the Presidency, with the Electoral College expected to certify these results when they meet on Monday.

Clouds on the Horizon

1. The coronavirus is running rampant across the United States. This week, the sobering data emerged that 200,000 Americans are testing positive for the coronavirus every single day. The great news is a vaccine is coming, the less-great news is that the general population needs to maintain careful social distancing norms until a majority of the population has received the vaccine. Winter is coming, and people need to remain cautious to firstly save lives, and secondly avoid forcing a second wave of economic lockdowns.

2. Political risk remains since control of the Senate is not yet certain. A split Congress would be a nice gift to the equity market by keeping the government policy more balanced and tempering the capabilities of fringe players for either party to influence policy. Two runoff elections for Georgia in early January will determine how this goes down. Markets have not priced in the potential for political risk stemming from stronger regulatory and tax policies should a single party control both Congress and the White House.

3. From a valuation perspective, the stock market is looking expensive. From a traditional vantage point, the S&P 500 is trading at an elevated level to historic norms. For the current market, however, this seems to be a relatively minor worry (see “Bullish Sentiment” point 3 and also consider the huge amount of cash sitting around). For some specific investments and companies however, massive bubbles may already be forming (*ahem* hydrogen).

Notable Stories from November and early December

Investment Euphoria Around IPOs is Worrisome

Doordash has been a Godsend during the pandemic, helping get food to people in their homes in the midst of lockdowns. But let’s get real: it’s a delivery service with a very shallow moat. So, is it really worth $55 billion? After all, Fedex is valued at $77 billion. Then Airbnb opened at an eye-watering $145/share before dropping slightly to Friday’s close of $139/share- but still the question must be asked, is it really an 84 BILLION dollar business? The less sexy Marriott International, which manages and franchises everything from The Ritz-Carlton to Sheraton hotel brands, has a total market capitalization of $42 billion dollars. And while this isn’t a fair comparison (enabling people to rent out houses and apartments is different from a traditional hotel chain), Marriott does make a profit. For some more "under the hood" information, see Reuters analysis of how retail traders are driving a majority of the IPO-trading frenzy.  

Rebalancing Ahead: Tesla is joining the S&P 500

After the S&P 500 declined to include Tesla in September, the stock experienced a short-lived decline. Since that time, the index has reconsidered and Tesla is now set to join the S&P 500 in December. While adding a stock to the index (which usually floats near, but not exactly at, 500 companies) is typically a small affair, Tesla is very volatile and has become quite large thanks to retail investors bidding the company up in recent months. Now, funds of all shapes and color that promise to track the S&P 500 in some way will also need to own Tesla- and get any fair share of the volatility that the stock might bring. This could be an easy process, or it could get a bit bumpy. Barrons has a good article summarizing the challenges facing both the S&P 500 as well as fund managers who track that index.

Goldman Sachs has some stock pick suggestions for 2021

There is no better time to prepare for the future than the present! And in case you have missed out on part of the rally, be sure to meet with your investment professional and consider your buying options! After developing your investment strategy and your buy list, only then are you indeed ready to invest. Business Insider has outlined some potential recovery-trade stocks suggestions by Goldman Sachs here.

Since when was September so scary? A tale of Bulls, Bears, and Uncertainty

The Bears certainly wrestled back control of the narrative from the Bulls in September! Or did they?

Since late June, the stock market has been an unstoppable juggernaut, with the S&P 500 mostly cruising upwards to new heights. That is, at least, until early September, when things began to grow downright ugly and some investors were seemingly caught off-balance by the vehemence of the selloff. The bears certainly got revenge for the bulls trampling them over the last several months as the S&P 500 briefly saw all of 2020’s gains erased. Breaking it down further, we see that the S&P 500 and Nasdaq fell -3.9% and 5.2%, respectively. This was not a pleasant month for anyone, but this selloff was more nuanced than it appeared on the surface. Let’s dive into some of the trends behind the headlines!

Prevailing logic following the immediate selloff panic around the coronavirus-related shutdowns (March and April) rightly decided that Big Tech companies are more or less fortresses, staying profitable and generating positive cash flow regardless of social distancing measures. Some of these companies were also perfectly positioned to grow (think Amazon with its domination of online marketplaces). Therefore, in the following months, even as some other sectors sold off or were bought up, tech remained a crowded trade among investors, all clamoring to own a safe piece of the action. August saw tech names move sharply higher – diverging with underlying fundamentals, some might say, to become quite expensive by traditional metrics – as some unknown entity snapped up large quantities of options contracts in large technology companies (the option whale was finally outted as none other than the Japanese company Softbank. Read about the bet and a decent analysis of the option market activity backdrop at the Financial Times), which may have helped drive the companies’ near-term paper valuations still higher.

This is where things get interesting since the FAANG companies are represented in both the S&P 500 and the Nasdaq- meaning that as the companies’ combined market caps have expanded, they gained additional influence over BOTH indexes. Indeed, the tethering between the S&P 500 and tech companies has never been stronger (raising interesting questions for one to ruminate over like “Am I truly diversified?” or “Is my stock market bet on the S&P 500 too dependent on Big Tech?”). On many September down days, The Ignorant Investor saw the S&P 500 declining even in the face of relative strength from some of his own favorite non-tech companies. Of course, profit taking was also a big part of the equation, as investors sold expensive tech names and reinvested the principal and gains in the beaten down reopen trade. 

Okay, that IS interesting, but what can we expect in coming months?

Going forward, in the game of maximum return over the medium term, the story shifts from who is safest in the event of absolute disaster to who will benefit the most once a treatment and vaccine are approved by the US FDA (and make no mistake, this will likely happen in the first half of 2021). The economic picture so far is indicative of what was widely expected: a K-shaped economic recovery in the United States, where some sectors and industries recover much faster than others while other sectors and industries may never fully recover (i.e. return to what they looked like pre-coronavirus shutdowns). As always, some people will benefit more than others. 

Oh, and while we’re looking in the crystal ball, let’s not forget that the market is increasingly exposed to political risk around economic, regulatory and tax policies as a result of the upcoming US presidential elections- even as Congress punts a second round of stimulus around in their own private game of political football. And has a second round of the coronavirus already hit US shores? Will the USA be forced to lock down portions of the economy again? As should be expected from 2020 at this point, uncertainty from multiple directions will continue to buffet the US stock market.

It’s always a good idea to keep in close contact with your financial advisor and together develop a buy list of indexes or companies that fit your investment strategy. After all, this makes it easier to jump into the market and take advantage of the situation when you both feel the time is right. And as always, be sure to focus on quality over quantity (another way of saying diamonds in the rough continue to abound in the current market)!

Notable Stories from September

For brick and mortar retailers, the struggle has been for survival

This has been a difficult six months for retail companies. The Ignorant Investor has some long-term holdings in retail names that have thankfully been well-run enough that they will have no difficulty seeing better days ahead (several have even provided nice gains due to accelerating online sales). Not so with many others that were already struggling to fit in with the current fast-fashion trends and changing lifestyles of increasingly moneyed millennials. Opportunities may abound for survival stories, but the retail landscape has been forever changed as many companies disappear into bankruptcy- only a select few of which will be or have been "rescued" through private equity deals. The Wall Street Journal has a good article on the extent of US retail bankruptcies in the first half of 2020 here (note that a subscription may be requested).

Regional bankruptcy statistics are staggering

This year’s GDP declines came as no surprise to experts and actual data has been less bad than many had initially feared (yes, we again find ourselves in the place where bad news can be good news if it isn’t as bad as we expected). One big takeaway from close examination across many different metrics is just how severely the economic shutdowns affected the service sectors of the real economy. Since the time of the shutdowns, an uneven recovery has reared its head just as talk of a “Second Wave” of the coronavirus comes out of Europe. Bloomberg has a great article with a succinct title that discusses the dire situation for regional businesses: “New York Region Sees 40% Bankruptcy Surge…”

Wells Fargo has some portfolio suggestions for the US Presidential Election

In 2020, the presidential campaign has been unusual because of social distancing as well as extreme political rancor that, in all honesty, has no place in a modern society (civility, even in disagreement, should be a hallmark for a truly successful society). Be that as it may, some companies will benefit more from one presidential candidate than the other due to policy and regulatory differences. Wells Fargo took it upon themselves to come up with a Trump portfolio and a Biden portfolio, which CNBC has covered here.

Nikola: a counterpart to or counterfeit of Tesla?

In the realm of companies behaving badly, which has been a topic of ours for some months now, let’s briefly touch upon Nikola: a publicly-traded company with no vehicles ever produced that promises to create cutting edge electric vehicles that briefly reached a valuation exceeding that of Ford (which actually makes vehicles). Over the last several months, the company signed a $2 billion deal, with General Motors no less, before the company’s stock sold off after the founder and chairman Trevor Milton came under withering criticism from a short seller accusing the company of fraud- literally drawing comparisons between Mr. Milton and his company to, *gasp*, Elizabeth Holmes and Theranos, no less. The Ignorant Investor follows the story with some passing interest in part because of Nikola's background as a SPAC. In any case, a tabloid seems to be a great place to follow along with this saga, and the New York Post has a great article summarizing the Nikola story here.

August Vacation: Nothing better than some rest and relaxation during a market rally!

Taking a few weeks for rest and relaxation can sometimes be exactly what the doctor ordered! And why not let your investments actually work for you every once in a while?

The US equity market has certainly been on quite a run! In August alone, the old technology trade (Information Technology and Communication Services sectors) joined with the Discretionary sector of the S&P 500 to all advance more than 9% for the month. The recent market rally is mostly spurred on by a relatively free money policy from the central banks of the world as well as better-than-expected second quarter earning results, although some froth is definitely visible (how on God’s good earth can Tesla be worth twice as much after a mere stock split?!? The fundamentals are unchanged in such an event, indicating that THAT momentum trade will likely be ending sooner rather than later).

The Ignorant Investor finds himself an early visitor to the land of the free (no, not the United States in this case) for some rest and relaxation in the midst of this crazy year- a country with almost no domestic spread of the Covid-19 virus and limited entries for international visitors. Considerable planning and market activity in recent months has led The Ignorant Investor to be remiss in his posting of the July market update. My apologies. The update was actually written up, but was not automatically posted as hoped. Posting will continue on schedule for September and coming winter months, with the usual absence for the Christmas holiday season in December.

The Ignorant Investor must here put down a “Gone Fishing” sign, because that’s almost exactly what he’s been up to over the past few weeks. In the meantime, happy hunting! It remains the belief of The Ignorant Investor that opportunities continue to abound in the current US equity market (and as always, consult with your financial advisor before taking the plunge!). 

Possibilities Abound in the Equity Market: Think Long Term, Sleep Soundly at Night

In a world full of endless possibility, following the financial news cycles can be an exhausting and generally fruitless – if not outright expensive – exercise for retail investors. There are better options*, after all!

The month of June certainly started out with a bang, with equities continuously climbing as long-term fund managers publicly capitulated their bearish theses while shaking their heads in disbelief at the resiliency of the US equity market. However, even as The Ignorant Investor titled his last post ("Jubilant Investors Ride the S&P 500 to Optimistic Heights"; click here to read the article), the broader indexes eventually faced a reality check as the legitimate challenges newly-reopened state economies faced from the coronavirus became clearer. That’s not to say this was a bad month. All major indexes advanced, and the Nasdaq continues to set fresh all-time highs. A quick overview of S&P 500 sector breakdowns shows that Technology and Discretionary names were the big winners here as investors continued to take refuge in the relatively safety of technology and grew less pessimistic of select retail names as economies were indeed reopening.

But what about July? And where will we end up when this quarter ends in September? There are many possible outcomes, and investors stand to benefit substantially in the long term if they manage to correctly identify the outcome that most closely represents reality. The themes mentioned in last month's post continue to hold true, and there is also rising political risk that the market has yet to fully understand and price in. The Ignorant Investor has his own thesis for the economy and corresponding quality companies of interest. Rather than theorizing openly here, let’s simply discuss the best approach to investing in a volatile market with many possible outcomes. Just remember that certain sectors - and certain companies within those sectors - will outperform others during the recovery. Please note this particular post is dedicated to non-professional ("retail") investors.

Let’s Talk About Investing

Earlier this month The Ignorant Investor found himself watching an animated movie with some young nephews and nieces. In the film, the wise kung fu master Oogway tells his discouraged apprentice Po “Yesterday is history, tomorrow is a mystery, and today is a gift- that is why they call it the present.” Words to live by, as far as The Ignorant Investor is concerned. But investors must also necessarily live in both the present and the future. After all, assets an investor puts into play are expected to make future gains at some point! Any good investor will be looking six months, a year, or even ten years out to find opportunities that have the potential to generate high (or at least steady) returns.

Here, however, is the crisis: one week, financial networks and pundits are telling viewers (presumably the majority of whom are non-professional investors) that the future is golden, with analysts expecting the S&P 500 to hit some level perhaps 20% above today’s level by the end of the year. After all, are there are not more than 20 viable covid-19 treatments and vaccines currently progressing well through pharmaceutical pipelines? Then, several weeks later, doubt has crept back into the market, with one concerned investor after another talking about expensive markets and bubbles. Suddenly, the possibility of the virus creeping back into society and shutting down the economy is all too real once again and markets sell off. Whew! Enough to give the retail investor whiplash!

Currently, the US equity market is extremely sensitive to the regular news cycles since there are so many unknowns around the coronavirus Covid-19. As new data emerges, like the increase in rate of infections in some states or potential for quarantines being reintroduced, the market reacts with all the alacrity that computer trading algorithms can muster. In the near-term, this results in massive swings - sometimes daily - in individual company names and the broader S&P 500. Then of course, there is the nature of the news cycle as well. Breathless coverage of dry economic data leads to compelling viewer numbers but does not always translate to good advice for buy-and-hold investors (or indeed, for the statistically money-losing retail investors trying their hand at day trading; read this pertinent article by Forbes).

A Better Way to Guarantee Success

Why not take the easy route and maintain peace of mind? Instead of responding emotionally or with fear to market volatility, a better approach for retail investors is to instead take comfort in fundamentals. First, consult with investment professionals to identify solid, quality companies that may be reasonably expected to generate substantial gains over the next five to ten years. Next, identify attractive entry stock prices for these companies. These wise retail investors may now ease into these positions with confidence even as the broader market sells off.

Indeed, this is the secret to winning in the stock market: buying baskets (ETFs) or a select group of quality companies – as always, with the consultation of your investment professional – and holding on for the long term will (almost) always lead to impressive gains* (and yes, we managed to make this one asterisk relevant twice in one post!).

Notable Stories from June

High degree of pessimism in energy markets may be a bullish signal
Oil prices are expected to remain low with many exploration and production companies on the cusp of bankruptcy worldwide and especially concentrated in the offshore and US shale industries. Supermajors and other large producers worldwide have finally learned their lesson from recent oil market crashes and are reigning in expenses to conserve cash and ensure their survival, resulting in investment towards future production slowing to a trickle. In what may be viewed as a contrarian report, JP Morgan Chase believes these bearish conditions may portend the beginning of the next oil supercycle. This report wasn't widely covered by mainstream media in the midst of the epidemic, but CNN has a brief writeup on JP Morgan's oil thesis.

Executive management wanted to sell $500 million of worthless stock to naive buyers
Last month we discussed the controversial practice of executive management teams enriching themselves at the expense of investors despite a history of poor corporate governance decisions on the part of the company. In a tangential vein, towards the middle of this month, Hertz brazenly planned to issue another $500 million in worthless stock for retail investors to gamble away. After all, Hertz management posited, these daytraders were valuing the company at several dollars per share (even though every analyst and institutional investor believed it was worth $0). Even more astonishing is that banks were prepared to accommodate this plan. Finally, in a moment of sanity and good regulatory governance, the Security and Exchange Commission ended the madness by effectively stopping the dubious transaction.

Short sellers and investigative journalists help keep stock markets honest
Short sellers are perennially looked down upon by the public since they are perceived to profit from others misfortune and stir up trouble at the expense of honest folk (which can sometimes be true). And to some extent, German regulators apparently agreed, stepping in to disrupt short sellers and prosecute investigative journalists who had flagged Wirecard - Germany’s pride and joy as their primary fintech startup success - for filing financial statements that didn't seem quite right. In the end, German regulators and Wirecard’s CEO are the ones in the hotseat as more than $2 billion in the startup’s financial accounts proved to be fictitious and the company was forced to file for the equivalent of bankruptcy protection as their debts were called in.

Speculation is NOT Investing!
The first week of June was a real head scratcher. Speculative retail investors - well, let's call them what they are: gamblers - decided to bid up all kinds of bankrupt and distressed company share prices. Hertz was catapulted up more than 1000% in the resulting frenzy! Distressed energy names saw increases of upwards of 500%. In the ensuing game of hot potato, retail investors bought up and flipped stocks at a rapid rate. The problem was that the stocks they were buying and selling were junk in every sense of the word. Such speculation often ends in tears and is usually a sign of at least a frothy near-term market top. It's worth noting that the S&P 500 did come back down to reality over the following weeks.


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* Passive investment in quality ETFs like those tracking the S&P tend to outperform most active trading strategies over the long term. Not convinced? Read about the conclusion of Warren Buffet’s $1 million bet that his passive investments would outperform hedge funds over a ten-year period from the New York Post!

Yippee Ki Yay!! Jubilant Investors Ride the S&P 500 to Optimistic Heights

The bull rides on!! And investors cling to the recent rally in the face of uncertain fundamentals that pit daunting challenges against strong tailwinds

The bulls appear to have fully wrested control of market direction with the rally expanding in breadth in recent weeks. Bears have been shoved aside and trampled as stimulus money floods the country, economies across all fifty US states begin to open and relatively positive news on the Covid-19 treatment and vaccine front seems to be a weekly occurrence. Pushed aside – at least temporarily – have been rising US-China tensions, massive increases in layoffs as evidenced by jobless claims, and uncertainty around a “second wave” of coronavirus infections.

Warning: dry details dead ahead!

The S&P 500 rose about 4.5% in May with all sectors experiencing gains. Investors who decided to wade into this market at the height of uncertainty have been handsomely rewarded, too, with some quality names doubling and tripling since March. Many biotech companies that The Ignorant Investor follows now sit near 52-week highs (even all-time highs) and some retail names of interest have seen massive 30%+ rallies just this last week as the S&P 500 battled to cross the 200-day moving average on a closing basis, a noteworthy technical level. The end of the epidemic is seemingly in sight and advancing pharmaceutical research is giving investors an idea on expected scope and timeline for effectively dealing with the coronavirus.

This is great news, but all this optimism combined with recent strong market performance makes The Ignorant Investor uneasy. As investors, we must always temper our optimism with observations of market fundamentals. In this case, what's going on with the real economy? Let’s look at two underlying facts. Firstly, the US economy is primarily driven by consumer spending, which accounts for somewhere around two-thirds of annual GDP growth. Secondly, many of these consumers are experiencing tremendous difficulty because of US economic shutdowns. Around 40 million people have filed for jobless claims since the beginning of March. Forty million- that’s about 20% of the “counted” labor force! The government will help make up the income shortfall to these folks for a few short months, but while some have found alternative employment options or have been or will be rehired, others will be left more or less on their own. Such drastic shifts in personal financing will sharply influence consumer lifestyle choices and spending going forward. We may see a partial reflection of this theme this coming week (the coronavirus shutdowns will of course take front and center stage) as many retail companies report first quarter earnings for 2020. Some companies will shine. Others may fall, fast.

In a vote of skepticism, institutional (so-called "smart") money has been increasingly betting against the current market. After all, this rally has taken us to levels first attained in October of 2019, when the economy was running strong, US-China trade tensions appeared to be waning, and unemployment was at historic lows. While The Ignorant Investor remains very confident that in the long term the equity market will continue advancing, right now he very strongly prefers individual names to the broader market. Quality, not quantity, remains the name of the game. And, as always, if you're tempted to jump into the markets, be certain to discuss your strategy and goals with your financial advisor first!

Additional Considerations

1. US-China tensions are rising. The inflammatory rhetoric from both the United States and China around coronavirus has the potential to derail the preliminary trade pact reached in December of 2019. Then of course China’s planned security law which allows mainland security forces to operate the semi-autonomous region of Hong Kong has had President Trump openly muse about tariffs as potential retribution. The catastrophic economic cost of returning to a trade war immediately following global economic shutdowns is likely to keep both sides “playing nice” in the near term but these tensions are unlikely to subside anytime soon and should remain on investors' radar.

2. The coronavirus is managed, not beaten. While markets largely reflect a US economy that will be able to return to a new normal over the summer of 2020, everything comes down to how well the American people are able to maintain social distancing and other measures that forestall a return to sharply rising infection numbers. Treatment development will precede a vaccine and will likely only have limited availability until 2021, therefore a "second wave" of the virus still has the potential to wreak havoc on society and business.

3. Investing “against” the Fed is like swimming against the tide. The Fed has embarked on a quantitative easing program of similar levels to a war-time scenario. Huge amounts of liquidity are being rightly dumped into the economy at a time of great necessity. But as risks fall – and debt holders take a hard look at their historically low Treasury yields – then, as we observed after the Great Recession at the end of the 2000s, investors will be forced further out on the risk curve in search of yield. Don’t be surprised if equity markets continue to respond to this powerful tailwind accordingly!

Notable Stories from May

Companies behaving badly. Corporate governance matters, and investors prefer that executive compensation is tied to company performance. Whenever markets broadly fall as they have over the past several months, investors are occasionally rudely awakened by executives reaping millions of dollars in bonuses right before their underperforming companies declare bankruptcy. In a cynical piece of news, Hertz is reported to have paid out more than $16 million in retention bonuses to hundreds of executives just before declaring bankruptcy a week ago. But this is better than the $7.5 million JC Penney paid in bonuses to their four-person executive team just prior to declaring bankruptcy. Which in turn is better yet than that eyebrow-raising occurrence when Whiting Petroleum paid $14.6 million in retention bonuses to their five-person executive team a few days before also declaring bankruptcy. Usually, these bonuses are an attempt to keep the company going with a semblance of “normalcy” throughout the bankruptcy proceedings (preserving stakeholder value). Other times, investors are left scratching their heads wondering about the fairness of it all.

Work from home policies are changing. Twitter founder and CEO Jack Dorsey was the first to announce that employees would have the option to perpetually work from home if they didn’t want to return to the office. But he didn’t stop there! As co-CEO of Square, he has now told Square employees they will have the same option. Prescient? Naïve? Only time will tell, but Covid-19 work from home curfew requirements will provide some valuable data on that front. Forbes discusses the particulars of Dorsey’s announcement and some of the pros and cons of the trend here. Should work from home become a trend, this will create new business opportunities and have an outsized impact on companies currently servicing these consumers' work-from-office needs.

SEC overhauls the whistleblower program. Trust in an equal playing field forms the cornerstone of the US equity market and makes it the most powerful wealth generation tool available to the common person in the history of the world (The Ignorant Investor’s opinion). The formula is simple: invest hard-earned money over time in quality companies and reap rewards in decades to come. Enhancing the reliability of compensation for whistleblowers will enable market fairness to continue in an increasingly more complex world and incentivize potential bad players to stay on the “straight and narrow.” The Wall Street Journal has an interesting article detailing the SEC’s streamlined whistleblower program here.

A New Hope for Markets Caught in the Coronavirus War

The darkness of chaos and uncertainty remains, but the light is beginning to shine bright once again

Contagion. Try saying that word four or five times. There is a weightiness to it- perhaps somewhat diminished after the 2011 movie of the same name, but still, weighty. Following the spread of the coronavirus to all corners of the globe since the turn of the decade a few short months ago, everyone seems familiar with the name. The spread of a virus from person-to-person through human contact or proximity. There is talk of airborne viruses. Methods for sanitation. Guidelines for cross-contamination avoidance. If there is a silver lining to all this, the world’s population has quickly learned about the seriousness of disease; how to limit risks for catching a disease (wash your hands! Remain socially responsible and physically distant if feeling ill!); and finally, the importance of drug discovery and development for our collective future. 

We’ll talk about that importance shortly, but first, let us quickly discuss April. The common theme here is best introduced (or reintroduced, if you’ve read The Ignorant Investor’s March post) by an event that occurred on the afternoon of April 20th, when WTI (oil, NYMEX) made history for all the wrong reasons as prices fell more than -300% on the day, albeit in very thin trade, to close at a -$37 per barrel. This is merely a symptom of a bigger problem: real (negative) economic effects are being magnified, spreading throughout markets- crushing commodities (broad-based, not just energy, mind you!), and moving through equity, credit, and currency markets. In summary, economic contagion is propagating and expanding as quickly as the instigating viral contagion.

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A New Hope for Markets on the Coronavirus Front

Global markets – equity, debt, commodity, and currency alike – currently crave certainty and stability above all else. No need to look further than the VIX to understand this more clearly! The big unknown right here is the effectiveness of global containment – not eradication – of Covid-19. What clearly helped calm markets in the middle of this month were reports that a Chicago hospital saw patients with serious cases of the coronavirus mostly make fast and full recoveries after taking Gilead’s remdesivir (and yes, this is the company and drug The Ignorant Investor personally referred to in January’s post, found under the section “Coronavirus' true effect on the global economy is unclear”). While we all await official clinical trial results, market and investor sentiment was decidedly positive on this initial information. Meanwhile, markets have made incredibly strong gains - demonstrating an incredible amount of resilience - over this last month.

In response to possible economic outcomes, consensus on winners and losers are clearly emerging in terms of both sectors and individual companies in the United States. For example, some biotechnology indexes are now within 10% of all-time highs established in 2015. Quality energy names have gapped higher even as oil prices collapse after careful examination by analysts appear to show that they will be survivors of the current energy crisis. Retail companies with a strong online presence have made strong gains relative to the broader sector as the US economy looks to gradually reopen. And these themes hold true across the entire market with respect to the winners (the strong outperforming and pulling ahead of the weak).

Now, with such solid gains across the board over the past month, some investors are sounding the alarm that the rally has come too far, too fast, shifting the risk/reward again to the downside. The Ignorant Investor tends to generally agree with this assessment - that is, across the entire market - but continues to see compelling stories in specific sectors and names. However, as always (hopefully this is doctrine at this point!) be sure to consult with your investment professionals before making any moves into this volatile market.

A Wild Ride on the WTI Express

As discussed in The Ignorant Investor’s March post, oil markets continue to face the unprecedented challenge of massive demand destruction amid worldwide government shutdown measures to contain COVID-19. Prior to the virus, demand and supply for worldwide crude was just about balanced. Thus, the US, OPEC, and Russia have been compelled to come to a common understanding to help stabilize the situation, with OPEC+ agreeing to cut about 10 million barrels per day of production. However, the IEA and other entities believe that actual demand destruction could be in the realm of 20 – 30 million barrels per day, creating a supply overhang that will remain frighteningly unbalanced if current coronavirus containment measures remain in place.

Worldwide storage capacity will expand as companies continue to find ways to squirrel away more oil for higher prices at a later time (most recently, attempting to store crude in idled pipelines), but soon – and very soon – worldwide storage capacity will be breached, forcing producers to stop wells (an expensive process that cannot always be reversed) and bringing some production to a crashing halt. Energy company stock prices have largely baked in this scenario. Indiscriminate selling of energy companies ended the week of March 23rd (as observed by The Ignorant Investor) with quality companies across the spectrum experiencing strong buying interest since that time. The same may be slightly less true with the accompanying service industry.

On April 20th, US crude oil prices briefly fell more than -300% to -$40 per barrel. That’s right! For the first time in history, people were paying others money to take oil off their hands. This was a unique situation demonstrating the dire nature of the coming oil crisis, with markets showing us exactly what happens when physical traders no longer want to accept physical oil: financial traders become desperate to escape their contracts (these contracts are typically transferred to physical traders at the end of contract periods, but on this occasion, demand disappeared as physical storage capacity reached limits). Now, don’t read too much into this since the number of barrels that actually traded at negative prices were relatively few. Consider it rather a harbinger of things to come (Bloomberg has an excellent narrative around the April 20th oil price plunge). And then by Friday, April 24th, prices had temporarily recovered to some extent with US crude oil prices rising more than 50% from intraweek lows, sparking massive short squeeze rallies in specific energy names, before again resuming declines this week. This demonstrates what strange times we now find ourselves in as energy markets face a massive upcoming demand supply imbalance.

Energy markets are incredibly complex
As US oil prices collapsed, many retail investors began trying to get additional exposure to oil price upside. Some invested in a fund that attempted to track oil price movements through futures contracts. Sudden price movements of these underlying contracts once oil moved into negative territory sparked the partial collapse of the USO oil fund, demonstrating how important it is that retail investors steer clear of investment instruments they do not understand (even more so instruments that professionals can game to create steady income streams for themselves). Read comprehensive coverage about the USO drama at MarketWatch.

The drug development race to combat Covid-19

An existing drug may well prove to be as effective a counter to the coronavirus as a new one

Expanding on our previous discussions, we concluded that economic uncertainty will be greatly reduced once a treatment is in place for the coronavirus. Then, further down the road, a vaccine will see a path to pre-Covid-19 normalcy. Therefore, the current objective of finding a treatment is a prerequisite for avoiding a second wave of coronavirus infections, leading to healthy economic activity and improving business conditions.

Drug development has never been easy, as The Ignorant Investor has discussed in depth before, and is a costly process with no guarantee of success. However, enormous resources are being put into drug development at a scale not seen before. There may be more than 150 treatment and vaccination candidates in or entering clinical development, with a few frontrunners that come from reapplication of existing drugs or drugs that have been in development for similar infections for some time. Politico highlights a number of possible candidates with an elevated potential for leading to effective treatments or vaccinations. Several of the frontrunners have demonstrated high efficacy in testing, with initial clinical results expected by the end of the summer. The Ignorant Investor will simply note high personal interest and belief in several candidates that happen to make this list.

Bipolar markets: investors and the manic journey from manic highs to manic lows in just one month

Coronavirus is the name of the devastating cyclone currently tearing through the streets. The accompanying storm pelting us with heavy rain, lightning and strong winds is the war for market share in the energy markets

History was made on February 19, 2020 when the S&P 500 hit the historic closing high of 3,386.15 points. Thirty-three calendar days later, the S&P 500 hit a recent closing low of 2,237.40. Ouch! That’s nearly a 34% decline in just about a month! Since then, of course, the S&P 500 has partially recovered and is now down a mere 24% from recent highs.

What’s going on

Themes are being woven during these tumultuous times that have very serious long-term implications. Since The Ignorant Investor’s last post, markets have experienced historic, breathtaking declines with the market swinging wildly between positive and negative territory on a day-to-day basis, for several weeks often with percentage moves in the S&P 500 that exceed 4%. Spreads broke wide open and trading slowed to a trickle even among typically active names. Counterparties were disappearing, hailing back to regulatory changes imposed on institutions by the Volcker rule. Treasury market behavior was becoming unusual and unpredictable. Liquidity was drying up. Cracks were beginning to form across the financial markets as the reality of the crisis facing the United States became clear as large portions of the economy started to shut down. Something needed to be done in order shore up investor confidence and backstop the US financial system or the house of cards would come tumbling down.

An oversimplified view of mostly supportive March events
March 11. Fed provides 175 billion USD in overnight lending
March 12. Fed provides 1.5 trillion USD in liquidity through repo market
March 13. NCAA cancels March Madness [not relevant, but it caught my attention!]
March 14. Fed plans to buy Treasuries to support market, up to $80 billion

March 16. Over the weekend, Fed cuts rates to 0%, announces a 700 billion USD return to quantitative easing (ie plans on buying Treasurys and MBS) and helps banks out by loosening reserve requirements
March 17. Fed provides another 500 billion USD for repo operations
March 18. Bill Ackman personally tanks the equity markets with doomsday predictions on TV. Later people are angry because, hey, guess what? He shorted the market last month!
March 20. Fed backstops additional asset classes to ensure liquidity

March 23. Fed announces unlimited quantitative easing program in orderly to fully support markets
March 27. After a week of added pork and political positioning, Congress comes together on an unprecedented 2 TRILLION USD relief bill to help blunt the coronavirus effects on the economy.

War-time level support has been enough to calm market panic

That’s plenty of support, and it was very much needed. The US economy – the real economy, mind you, not some ethereal representation like the stock market – was in peril, with demand shocks permeating a variety of industries. The historic stock market, along with energy woes (more on that below) were also significant enough to jump into the real world and impact the real economy. And liquidity was evaporating.

Okay, fine. This is all very scary, but what does this all mean? Has the market bottomed? The stock market collapsed and made history for all the wrong reasons because the fundamental case for the equity market became obscured in the unknowability around the coronavirus COVID-19 and the US government’s response to it. China demonstrated that containment can work and Italy equally demonstrated that a lack of serious response to the virus will result in death, suffering, and economic stoppage.

In the United States, once liquidity was restored and credit markets backstopped, the monetary side of things started to look okay. Once Congress and the US President were able to come to terms around a stimulus package and implement measures to slow the virus’s spread, government response looked satisfactory. The last piece of this jigsaw puzzle (again from an over simplified view), is how well the US can contain the COVID-19 outbreak and how quickly treatments and vaccines can be developed by biotech and pharmaceutical companies. Yes, that industry the public loves to hate on will soon be the one saving us all.

Prevailing logic says that indiscriminate selling should be a good time for long-term to investors to take a hard look at the fundamentals and examine which companies may have been way oversold. As always, and especially during this time, be sure to talk with your investment advisor before making any decisions!

Requiem for the dream of American energy independence

The death, and then structural transformation, of America’s shale oil production industry may be imminent in a world awash in cheap crude

Oh, there is one important item missing from the above timeline. March 8th, a Sunday. After the collapse of OPEC+ discussions on March 6th, Saudi Arabia announced plans to flood global markets with oil in the midst of a massive, global demand shock due to coronavirus. Production is rising significantly at a time when demand may have fallen by 20 million bpd according to the IEA head (read about these comments at Bloomberg), while US shale companies call foul.

Analysts have been examining global unused global storage capacity, and estimate there to be roughly a billion barrels of excess capacity remaining during the week ending on March 20th. When compared against the 140M weekly demand/supply imbalance talked about by the IEA, this sets up an oil crisis of unparalleled historic proportions. Oil prices at $40 is somewhat beneficial to the US economy. Oil prices at or below $20 will destroy the US shale oil industry and the dream of US energy independence (the US was never truly energy independent, remaining a net importer of crude even as shale oil production kept increasing). Unless world producers can come to an understanding in coming weeks and months, there is a tidal wave of bankruptcies coming to the USA. Tread very careful in US oil and gas markets; there is a reason some energy producer stock prices have fallen 90% in just a month.

The Bottom Line

This is a difficult time for folks. Many people around the world are experiencing social isolation to help combat the spread of the virus and jobs are being lost across many different industries. Last week, initial jobless claims exploded above 3 million... yet this is expected to be simply the tip of the iceberg. Most of us aren't directly working to help those affected by the virus, but if we've managed to navigate recent market downturns fairly well, let's remember to check up on our family, friends, and neighbors. Perhaps if we've been blessed through smarts or dumb luck to mostly benefit from recent declines, we can help share those blessings with those less fortunate than ourselves.

Look out below! That market correction is finally here!

Investors watching the markets this last week may well have felt as if they were base jumping off a mountain.

This last week of February was spectacular for all the wrong reasons, as months of relentless forward momentum ground to a halt and moved in full reverse, with markets closing Friday near levels first seen in September of 2018 and then again in the late spring of 2019. Equities basically gave up a year and some gains in a matter of a week, destruction to the tune of more than $3 trillion in market value according to estimates. Let’s look at those numbers in detail. In the past five days, the S&P 500 fell more than 8.3%; the Dow closed down 10.1%; and the Nasdaq declined 6.3%. Oh, and as an expected accompaniment to such declines, the so-called VIX “fear” index exploded a record 112.9% (to close above 40) over the same period.

Ouch! The culprit behind this massive decline is, of course, the coronavirus strain now termed COVID-19 (SARS was a different strain of the coronavirus family). The virus has apparently broken out of China and has begun to spread, organically, in such faraway places as South Korea, Japan, Iran, and Italy. Although highly contagious, it must be noted that the World Health Organization and the US Center for Disease Control recommend that simply washing hands and not touching the face will typically be sufficient preventive actions for COVID-19. Hopefully continued practice of these measures will also help when the common flu season comes around again this year. But we digress!

True investors slept well this week. Yes, that’s right. Diverse asset allocations and careful company and sector selections enable a good investor to weather even the scariest downturn without fear. Investors also, understandably, hate uncertainty. But just so that we’re clear, this last week in the equity markets the baby was thrown out with the bathwater as the old saying goes; oh, and the bathtub was seemingly tossed as well for good measure. In the limited panic selling of last week, stocks – good, quality stocks – sold off ridiculously along with companies that can reasonably be expected to suffer material losses from the side effects of coronavirus. Some quality companies started to see significant buying pressure as early as Thursday and again on Friday (based on personal observations of companies The Ignorant Investor follows that have compelling stories). In the January post, The Ignorant Investor listed stocks being richly valued as a potential headwind to equity. Perhaps it’s time long-term investors re-evaluate that statement and begin to sift through the ruins of last week’s selloff in search of “diamonds in the rough”.

*Please note, the threats some companies face as a result of COVID-19 are MATERIAL. The possibility of coronavirus indirectly affecting the economies of various countries is REAL. A sustained global battle with coronavirus will have implications that spill over into the commodity markets, debt markets, and currency markets. Be cautious and always consult an investment professional before taking significant positions in individual companies or the broader market.*

Notable Stories from February

Inflation indexes may be missing the bigger picture. Rent prices have risen relentlessly in the United States for years now, partially supported by a limited housing supply that has seen buying prices steadily rising over the same period (New York City is just an exaggerated example of the theme that has played out in many regions). Barron’s has an excellent article on why inflation may not be missing from the US economy.

The beginning of the end for a failed business model? In 2008, Groupon launched the first collectively bargained online coupon website. Several years later, Groupon turned down an informal $3 billion offer from Yahoo; then a $5 billion offer from Google. Now, in 2020, the company is fighting for survival and relevancy, having lost more than 50% of market value in the last month following a very disappointing earnings report and a failed pivot into the ecommerce space. The New York Post has a good summary of Groupon’s disappointing quarter.


And then there were none. TD Ameritrade, E-trade, and Scottrade were independent brokers considered very beginner-friendly. First, Scottrade was acquired by TD Ameritrade in September 2017. Then TD Ameritrade was snapped up in November of 2019 by Charles Schwab. Finally, E-Trade was acquired by Morgan Stanley in this last month.

Why all this recent consolidation? In October of 2019, Charles Schwab made the unprecedented announcement that it would cut trading fees to zero for online stock and ETFs (bringing trading costs in-line with fintech startup Robinhood). TD Ameritrade was forced to do likewise to remain competitive and made a similar announcement the next day. The remaining independent brokerages have mostly followed. TD Ameritrade’s stock plunged after cutting trading fees to zero as analysts and investors examined the company’s business model. Then, Charles Schwab announced in November that it would acquire the now-cheaper TD Ameritrade for $26 billion. A brilliant strategic move that one might almost mistake as being part of the plan!

Farewell, 2019! And welcome back, volatility?!?

Markets have less baggage entering 2020 now that US-China trade tensions are clearing up

Goodbye 2019, welcome 2020! January has been a crazy start for the year, with plenty of global newsworthy events passing on by with seemingly limited effect on the US stock market. After all, even after Friday’s steep slide, the S&P 500 is roughly flat for January.

The beginning of the monthly news cycle began with widespread coverage (some sensationalist) about US-Iran tensions and concern over massive bushfires engulfing Australia. Towards the middle of the month, we transitioned to fears over the spread of the new coronavirus out of Wuhan, China. Then, Kobe Bryant and his daughter perished in helicopter crash last weekend just days before the increasingly acrimonious relationship between England and the EU ended with Brexit.

On the final day of the month, stocks tanked as news stories decried the economic impact of a disease that is “certain” to slow down the world economy by shutting town Chinese tourism and shuttering Chinese industrial plants (please note there is a degree of exaggeration and sarcasm in this statement). Wow, all these events are enough to make anyone pause and do a double take.

What is the informed investor to do? How do geopolitical events, “global health emergencies”, or other uncertainty affect stock market investment decisions? Well, The Ignorant Investor – rationally ignorant, mind you, not blissfully or woefully uninformed – always recommends when stormy situations arise to take refuge in fundamentals. Once we’re certain of how things are going, and after taking into consideration the wisdom of Keynes*, we can better quantify the risk we’re facing and take calculated actions that result in solid wins even while navigating the swirling clouds of uncertainty. Today, let’s hit the pause button and break down what risks have the power to derail the stock market’s forward momentum.

A few January themes for February and beyond

1) The US stock market is richly valued. Following the S&P 500’s staggering 29% gain in 2019, the index is now valued highly relative to historical averages (ie this sometimes means that stock prices are higher on average than fundamentals warrant). With the market valued near perfection, any grey or black swan event can result in magnified stock market declines. In other words, the long-term risk reward ratio has changed so that there is higher risk relative to reward for the broader US stock market over an extended term than there was at the beginning of last year.

2) Global trade risks remain elevated. Over the last several years, the US has embarked on a policy of equalizing trade relationships with peer nations (while all agree this is necessary, what exactly that means and how to go about it is a matter of some dispute). While the US and China have embarked on a path towards normalizing ties, the Phase I trade deal remains tentative for the time being with considerable friction remaining about what enforcement mechanisms will be put in place in a final trade agreement to ensure that neither side will cheat in the future. Besides this, the US and EU have outstanding issues, some involving trade, others involving European taxation of US companies, that could result in tariffs is some amicable solution isn’t found in the near term.

3) Coronavirus' true effect on the global economy is unclear. China has moved quickly and efficiently following the discovery of the coronavirus to self-quarantine and take control of the contagion of the virus. Some effects of the virus on the global economy are very apparent. Countries have shut their borders to Chinese citizens. Airlines have refused to fly to China. Industrial plants and manufacturers have been forced to temporarily suspend operations within China.

The situation must be carefully monitored, but The Ignorant Investor suspects that the overall fear surrounding the virus is overblown, primarily because the fatality rate, hovering around 2%, remains relatively low. This makes the coronavirus quite serious, but hardly warranting the degree of fear and dread that was associated with the 2014 Ebola scare (70% fatality rate, WHO), or even the 2003 SARS epidemic (10%, WHO). For reference, in terms of total worldwide fatalities, the common flu will likely remain a much more formidable opponent. The Ignorant Investor will also note, based on patent filings, that one big biotech company that he has followed for many years may have even begun testing a drug that has the potential to treat illnesses associated with the coronavirus family as far back as 2016.

4) Political risks rise. President Trump is largely expected to be acquitted of impeachment charges by the Senate, but the race for the presidential election is now in full swing, with a number of potential candidates that desire to change the status quo of doing business in America for a variety of industries (yes, this is not a near-term risk but something to keep in mind for later in 2020). Political commentary may have an outsized effect on specific industries (*cough* healthcare *cough*) as the presidential race heats up.

Other stories of note

2019 is a tough act to follow. The S&P 500 rose an astounding 28% to historic levels from year end 2018 to year end 2019 (this ignores dividend reinvestment and other adjustments) while the Nasdaq rose more than 33% for the same period. Performance was remarkably strong across all sectors, with outperformance concentrated in technology, communications, and financials. The year’s challenges included soaring global trade tensions, yield curve inversions, and unexpected geopolitical events (Hong Kong protests). Rising to overcome these challenges were solid US fundamentals, a more accommodative Fed, and the semblance to a start of what may well become a US-China trade deal. The New York Times summarized earlier this month some arguments for why 2020’s stock market performance may be more subdued.

The ultra-exclusive Trillion Dollar club has arrived! In 2018, Apple became the first publicly traded company (in the United States) to pass the $1 trillion valuation mark. Since that time, markets have continued to increase, and multiples have expanded. Now, global publicly traded members include Saudi Aramco, Apple, Microsoft, and - sometimes - Google. As far back as 2018, pundits were discussing whether Apple’s trillion-dollar valuation was symbolic of a market top. What might this mean for 2020?

Elon Musk actually did it. While The Ignorant Investor is not necessarily a big fan of Elon Musk (primarily issues related to corporate governance, follow-through on corporate promises), he is readily willing to admit that the CEO managed to hit some impressive numbers and pull off a short squeeze that surely deserves a golf clap (this might be a good place to reference Keynes sage advice* for a second time in one post). Hey, in terms of sheer number of shares bet against the company relative to company size, Tesla has consistently ranked near the top in recent months. Tesla as a company has been an important pioneer for the electric vehicle world, but Elon Musk IS Tesla, and a bet on Tesla is a bet on Musk himself. This is why The Ignorant Investor bets neither for nor against the company.

From Wall Street to the White House? Bloomberg. Whenever The Ignorant Investor hears that name, he thinks of Bloomberg Terminal, the access point for many investment professionals to the data streams permeating the public equity markets and beyond. But in this case, we’re talking about the man behind the product. The Ignorant Investor is following Mike Bloomberg’s unprecidented approach to the Democratic nomination with a great deal of interest and curiosity. Will flooding all forms of media that Americans consume with pro-Bloomberg messages clinch the man the Democractic presidential nomination? Mike is undoubtedly smart, ruthlessly calculating, and truly rich. He may have entered the race late, but nobody is laughing now that the DNC unexpectedly changed the debate rules just so that Bloomberg can participate.



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* “Markets can stay irrational longer than you can stay solvent” – John Maynard Keynes