January 29, 2021
By Steve Blumenthal
“Rule number 1: Don’t lose money.
Rule number 2: Don’t forget rule number one.”
– Warren Buffett
Over a very long period of time, value stocks have beaten growth stocks. Of course, there were moments when growth beat value. That’s evident in the top section of the following chart. The dotted black line tracks the S&P 500 Citigroup Value Index, and the blue line tracks the S&P 500 Citigroup Growth Index. Value won the horse race most of the time. As the two approached the December 31, 2020, finish line, it was neck and neck. Growth closed the gap. A photo finish.
Each week in Trade Signals, I share a dashboard of sorts. It includes trend-based indicators that follow price direction. The dashboard has been mostly green for much of the past 10 years. One of the indicators is growth vs. value, as there are times when shifting from one to the other is beneficial. The above model from Ned Davis Research (“NDR”) is a favorite of mine. Read the following description from NDR, and then take another look: “The top clip features the price lines of the two asset classes along with a table depicting historical performance. The middle clip features a relative strength ratio based on the two asset classes. The bottom clip features the NDR Asset Allocation model (scaled 0-100). When the model is between the two brackets, the model is considered neutral (i.e., no clear tendency for outperformance by either market). Performance is featured when the model has been above the top bracket or below the bottom bracket.”
The above model generally produces one trade every few years. The model currently favors growth.
Here is different look tracking the bear and bull cycles of growth vs. value dating back to 1932:
A new year, a new race.
Oddsmakers currently favor the growth horse, but that old mare is getting tired. I’m suggesting it is time to jump on the value horse. Here’s why:
I write frequently that today’s environment feels all too familiar. In 1999, tech stocks were raging higher and higher. Value managers like Jeremy Grantham were losing clients left and right.
The tide turned the following decade. I believe we find ourselves in a similar position today. To get a feel for what that looked like, check out the following chart from my partner and seasoned high and growing dividends expert, Kevin Malone (pay particular attention to 2000, 2001, and 2002):
When you think about risk management, there is no harm in taking profits into account. Consider a switch from growth to value. Compare 2000 to 2002 while channeling your inner Buffett: “Rule number 2: Don’t forget rule number one.” I call your attention to the value differences in 2009.
It won’t play out exactly as it did from 2000-2009, but my best guess is that we are looking at an extreme quite similar to the one we saw in 1999. No one knows when, but we can look at price-based indicators for guidance. The trend remains bullish and many stocks are participating to the upside (strong market breadth). Momentum measures, such as the Ned Davis Research CMG US Large Cap Long/Flat Index and NDR’s Big Mo remain bullish and, of course, the Fed and fiscal policy remains supportive. But euphoria abounds and it’s concerning.
I wrote a piece for Forbes this week titled, “GameStop Euphoria – What Is Happening and Why It Will End.” You’ll find the post and link below. I’m not saying this is the final straw that stops the growth horse but the retail mob mania is real and it’s the type of thing you see at major stock market peaks. As Forrest Gump might say, “Crazy is as crazy does…” Or, “Stupid is as stupid does.”
Grab a coffee and find your favorite chair. In addition to the GameStop article, take a look at the high level of margin debt in the chart I share with you in the Trade Signals section. I conclude this week’s piece talking about one of the greatest investment coaches I’ve ever had, John Ray.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- GameStop Euphoria – What’s Happening and Why It Will End
- Trade Signals – Margin Debt Insanity
- Personal Note – A Great Coach
On Monday, January 4, 2021, GameStop stock (“GME”) stood at $17.25 per share. But don’t blink, today it is trading at $319.25 per share (up another $172 per share today alone – January 27, 2021). Here’s what is going on. I’ll do my best to explain it in terms most may better understand.
To gain some simple footing, consider this: GameStop, like Blockbuster before it, sells video games. A generation of young people would crowd the store to buy new and used video games. It was an outstanding business. Since those days, the world has gone online. Click, new download. Like Blockbuster before it, high-speed internet has changed the experience. A month ago, GameStop was an approximate $1 billion company heading to zero according to a number of hedge fund managers who are/were shorting the stock. Today’s it’s worth $22 billion.
There are three main buying forces driving up the stock price higher:
- Retail investors are buying out of the money call options on GME
- Market makers are forced to buy the stock
- A gigantic short squeeze
Click here for the balance of the Forbes article, in which I explain what is happening and why it will end badly.
January 27, 2021
S&P 500 Index — 3,750 (close)
Notable this week:
Jerome Powell spoke today following two days of Fed meetings. He said we are a “long” way from full employment or about 9 million more jobs needed. He added that global forces will keep inflation at bay for some time.
Most notable to me this week is the size of “Margin Debt to GDP.” Simply, this gives us a sense for just how much leverage there is in the system. Retail investors gone mad… indeed. Margin debt is good on the way up. Think of it as capital to fuel stock purchases. But leverage is dangerous and can unwind, by force, quickly. This chart looks at margin debt as a percentage of GDP. It is higher than the last two bubble peaks in 2000 and 2007.
With this said, the frenzy is real and the party is raging on. Markets do best when margin debt is expanding (above its 15-month smoothed moving average) and less well when below. It is currently in the risk on zone. Keep risk management in place with a foot towards the exit door and remember there is no harm in taking profits.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
“Great coaches teach you what to do within the talents you possess.
Stay disciplined and do what you were taught to do.”
– John Ray, Retired Professional Investor, Husband, Father, Friend, and Mentor
To be successful, teams need different players with different skills. Walter Bahr was my college soccer coach. Young and dumb at the time, I had no idea of the enormity of Coach Bahr’s impact and legacy.
Late in my freshman year, one of my teammates told me Coach was on the 1948 Olympic team and played on the US World Cup team that beat England 1-0 in 1950. I was shocked. How did I not know that?
In his later years, Coach Bahr was the Ambassador for US Soccer. But to us, he was Coach, and Coach was a humble man. He always believed that no one person—including himself—was more important than the team as a whole.
In college, I was a forward. That’s the position that best suited my skills. If you put me on defense or in the goal, I would inevitably hurt our team. Coach always reminded me to stick to what I did best.
Equally humble is John Ray, one of my great investment coaches. John Ray was my very first client. More important, he became my mentor and friend. John was a portfolio manager for many years at Delaware Funds, and made the introduction at Merrill Lynch that led to my first job. I was 22.
Just days after I started, he called me to his Philadelphia office. I walked the few blocks north on Market Street and he handed me a book titled, Reminiscences of a Stock Operator by Edwin Lefèvre. “This is the best book you will ever read,” he said. With a stern look, he added, “I want it back.” I loved the book and looking back, he was right.
John called me this morning. He manages his wealth and had just tried to place some trades in his Fidelity account, and the system crashed on him. We talked about GameStop. Firms are restricting trades. It’s a mess. But according to John, GME is one of the greatest shorts of all time. If you can get the borrow… short it he told me.
“Steve, do you remember October 19th, 1987, when I raced to your Merrill Lynch office to deposit a check to avoid a margin call? Actually, I don’t think you were there. What is going on today is going to end badly,” he said.
And I wasn’t in Philadelphia. Amazing how such events crystalize your memory. I was on a Merrill Lynch trip in Hawaii with 150 other brokers from around the country. “Get home,” my manager ordered. Flights were booked. No way. Over the next few days, I dialed every client from that hotel room. At least I was in paradise, I thought.
One call I made was to Dr. Ginsberg. No stocks, just a large portfolio of long-term muni bonds yielding something like 7.5% tax-free. Bonds were rallying as stocks were crashing, yet Doc was inconsolable. He was worried Merrill would fail.
John’s message to me this morning? Remember what Coach Bahr taught you: Stick to your discipline, to what you do best. Don’t get pulled into the frenzy.
Investing isn’t a game of “perfect.” Rather, it’s about having a plan and sticking to it. That’s especially important when everyone around you is losing their minds. “Run, Forrest, Run!” Maybe not just yet.
My game plan is CORE and EXPLORE: When it comes to your CORE wealth, play great defense, not offense. It’s Buffett’s, “Never forget rule number one.” For the EXPLORE portion, find asymmetric reward-to-risk opportunities. They exist.
Visually, it looks like this:
One more thought: One of the great joys in my life is my wife, Susan, and, of course, our children. Last night, I listened to Susan speak with one of her players. “Coach Barr” is what they call her. Every time I hear it, I smile, remembering my great soccer coach and the impact he had on me. Every time I hear it, I smile knowing the positive impact she has on her players’ lives. Someday they’ll know.
Indulge me for two photo shares: The first is a text photo and note to me from son Kyle this week. His timing was perfect, as I needed the lift. Had to be from 2009. Time is going by way too fast.
Made me smile too…
And here is a shot of CMG’s new Chief Comfort Officer, Cora (PJ and Ania’s new puppy). They surprised with a visit to our empty office (just me here) this morning along with several others on our team:
Best to you, your family, and the coaches in your life. Stay safe and stay healthy!
Wishing you a great week.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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