May 22, 2020
By Steve Blumenthal
“The problem I have is that it’s pure fantasy to think that normalized earnings are not
going to be seriously dented by the likely permanent loss of some 10 million workers
in the future from what the baseline was prior to the crisis, which means lost labor income of roughly $1 trillion.
Since it is an economy where 70% of GDP is derived from consumer spending, I just have a really
tough time wrapping my head around the concept that the long-term trend line for
corporate profits is miraculously going to be left unscathed.”
– David Rosenberg, Rosenberg Research
(Mauldin Economics Virtual Strategic Investment Conference, 2020)
A big hat tip to the Mauldin Economics team for pulling off an outstanding Virtual SIC 2020 conference. It became clear about two months ago that they would have to cancel the annual event, which was set to been held in Scottsdale, Arizona, this year. Instead, the tech teams raced in to bring the conference online. Honestly, while I missed the networking and one-on-one discussions, I preferred the format.
There were a few WiFi glitches from time to time, but nothing too distracting. The new format even provided a bit of comic relief: In a very funny moment, one of the presenter’s family members crawled hands-and-knees across the room to reach the door. She thought she was out of view—as did the presenter, who had no idea his camera picked up that much of the background. We all smiled and the show didn’t skip a beat.
There were viewers from 70 countries, and presenters came to us from their homes and offices in many parts of the world. Europe, Asia, and the U.S. And it worked.
Five packed days full of outstanding brainpower and content over the course of two weeks. The Mauldin SIC 2020 concluded yesterday (May 21). David Rosenberg, Dr. Lacy Hunt, Jim Bianco, and Felix Zulauf are cyclically bearish on equities. Felix Zulauf argued debt is too high, earnings will be affected, and corporations will begin to shore up their balance sheets. That likely means a number of jobs will be lost for good.
We touched on Rosenberg’s presentation in last week’s On My Radar here. Dr. Lacy Hunt believes we may initially see an impressive-looking recovery, just because the economy will improve from such low levels. He doesn’t expect it to last long, nor reverse the lost output and employment. The debt overhang he’s been describing has grown worse and will affect growth for years to come. He is concerned about serious deflation.
The title of Jim Bianco’s presentation was “The 90% Recovery.” John Mauldin summarized Jim’s views well in last week’s Thoughts from the Frontline here.
[Jim] emphasized we have to think in relative terms. Even if most businesses reopen and some semblance of normalcy returns, it’s still going to be significantly less than before. Even 90% recovery, which he thinks optimistic, will be a disaster relative to the recent past and even compared to the last recession.
Meanwhile, Jim said the Fed is effectively dictating bond yields and well on its way to full-scale ‘yield curve control’ similar to Japan. That would mean we don’t really have a bond market anymore. With prices fixed, there’s no need to trade.
Let that sink in for a moment. The probability of this happening is, unfortunately, high.
Felix Zulauf anticipates a decline in the stock market, perhaps retesting the March lows. Overall, he sees an environment that favors market timing—a strategy that has been out of favor for more than ten years. Think of it in terms of selling the big rallies and buying the big dips. He believes many will see equities as the preferred asset class in many people’s minds because bonds are losing their appeal. Though current high valuations limit coming 10-year return potential. Ahead is an environment that favors traders versus index buy-and-hold investing. Zulauf said, “The depth and duration of an economic downturn depends on the degree of the previous credit excess. As the downturn was triggered by the extensive government lockdowns around the globe, the world economy was thus pushed into its Minsky Moment. Economic subjects (a/k/a corporations and private businesses) outside the public sector must repair their extended balance sheets and cut costs over the next few years.” He noted that the previous credit excesses were very high.
Zulauf believes the economic recovery after the initial slump will disappoint and sees multiple U-shaped recoveries and slumps that may last two years. The trend in globalization is reversing. World trade will remain weak and may remain weak for years. One of his biggest concerns is the level of debt we had going into the pandemic crisis. He said the bigger the credit excesses and the financial leverage in the previous expansion, the deeper and longer the ensuing corrective process will be. We entered the current crisis with twice as much debt than we had at the peak of the last business cycle (2007-08). As such, he sees no V-shaped recovery.
I speak regularly with individual investors and our advisor clients. The single argument supporting higher stock prices is based on the Fed’s actions. And there is some truth in this. But I believe Fed support comes in waves. Crack in the dam, more Fed support. New crack, new round of support. In between, the Fed steps back in an attempt to let the markets find their footing. I like how Jim Bianco put it: “The markets are a junkie and the Fed is a pusher.” Indeed. Put me firmly in Zulauf’s camp. The period ahead favors individual stock selection and trading strategies.
A few more quick notes on the conference. It was awesome to listen to Leon Cooperman. His discussion on capitalism and story about his letter from Warren Buffett was inspiring. He sees the market as fairly priced at around 2,800 in the S&P 500. That’s about 500 points higher than median P/E.
Mark Yusko was his perennial outstanding self. Mark is bearish on the general equity market and bullish on gold and cryptocurrencies/technology. More on Mark in a later letter.
Hedge fund great Doug Kass sees a number of bullish opportunities and, like Cooperman, gets to a similar fair valuation target on the S&P.
I thoroughly enjoyed Bain and Company’s Karen Harris’s presentation and was absolutely blown away with Camp Kotok fishing friend Barry Ritholtz’s discussion with Catherine Wood. So much so that after their discussion, I called Mauldin and told him we need Catherine on our CMG Mauldin Portfolios’ platform. Catherine founded ARK INVEST, an ETF company that has an active stock-selection process with a focus on autonomous technology and robotics, next-generation internet, the genomic revolution, and 3-D printing. I would love a portfolio of her 10-20 best ideas. I’ll see if I can’t get a replay of the discussion to share with you. You can search ARK ETFs and take a look at her firm’s line-up of ETFs, if you are interested. Please know this is not a recommendation to buy or sell any security.
If you are not familiar with Barry, he is a Bloomberg Opinion columnist and hosts an outstanding podcast called Masters in Business. Put your sneakers on, plug in, and take a walk. Next is a link to Barry’s recent podcast conversation with Jim Bianco.
There is more to share. George Friedman and Ian Bremmer on geopolitics. Neil Howe on “The Fourth Turning.” John Mauldin was the perfect host, questioner, motivator, and speaker. He’s not afraid to push a few buttons and does so in a way that helps us viewers assess a presenter’s conviction. Ed D’Agostino, if you are reading OMR this week, you were a star emcee; I see TV in your future. Who knew?
If you responded to last week’s invitation for a copy of my conference notes, please know it is in the works. My goal is to pull it all together and share with you my high-level takeaways in bullet-point format. Selfishly, this exercise is of real benefit to me, as it helps me to take in the collective data/viewpoints and stress-test my own perspectives and biases. As I re-watch the presentations, my head clicks, doesn’t matter, doesn’t matter, MATTERS! My goal is to try my best to better understand the odds and make sure those odds are in our favor.
If you haven’t yet signed up to receive a copy of my notes, you can do so by clicking here. Give me a few weeks to finish the work—my target date is June 4.
Grab that coffee and find your favorite chair. This week’s post is a quick one. You’ll find a great chart showing the growth vs. value extreme in the Trade Signals link below. Brings back memories of #1999. Also, do put your walking shoes on and listen to Ritholtz and Bianco. Thanks for reading.
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:
May 20, 2020
S&P 500 Index — 2,865 (open)
Notable this week:
Relative Overvaluation Growth vs. Value
I find Twitter useful in the sense that it enables me to follow specific individuals whose analysis or perspective I respect (whether I agree or disagree with a particular view). I clipped this chart recently because it instantly hit me. It takes a look at the relative valuation between growth stocks vs. value stocks. Further below, I share a trend chart that indicates which of these two factors an investor may want to currently favor. Growth continues to be the place to be. However, we should stay on our toes as today feels eerily similar to the great tech bubble peak in 1999. In the following chart, you see that the valuation premium of Growth vs. Value Exceeds the March 2000 High – (Recall the 10-year outperformance “Value” run from 2000-2010).
Bonds vs. Stocks since 2018
Bonds have more fun – I think what has gone largely unnoticed is the significant outperformance of Treasury bonds vs. stocks over the last two years. SPX down 1%, while TLT gained 35%. Chart courtesy of Mark Yusko (from his Mauldin Economics 2020 Virtual SIC presentation).
In viewing the Dashboard of Trade Signals indicators, you’ll see that signals continue to favor government bonds and gold. I believe it is important to diversify to several different trading strategies and then let the processes work for you. No single indicator is perfect. When combined in a portfolio, they generally work well together. It has the effect of systematically scaling down market risk exposure and then scaling back in as the weight of trend evidence improves. The Ned Davis Research CMG U.S. Large Cap Long/Flat Index remains in a buy signal, as does the NASDAQ Index 200-day MA rule. Volume Supply vs. Demand, the S&P 500 Index 200-day MA rule and the S&P 500 50-day vs. 200-day MA cross is in a sell. Investor sentiment remains bearish, which is a short-term positive for equities.
The Zweig Bond Model remains in a buy signal, suggesting long exposure to high quality bonds (lower yields), the CMG Managed High Yield Bond Program remains in a sell signal and the intermediate-term trend in gold remains bullish.
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.
I’m about a quarter of the way through reviewing the SIC 2020 presentations and organizing my notes in what I hope you find to be an easy-to-follow format. There is so much good content and I’ll conclude the wrap-up with my thoughts.
Again, if you haven’t yet signed up to receive a copy of my notes, you can do so by clicking here. I’m hoping to have it done by June 4.
The week has flown by. The highlight was stepson Kieran’s high school graduation. A drive around the campus loop with the teachers, administrators, support staff, and coaches lined up to celebrate the seniors. Kieran stood tall in the back of the decorated pickup, complete with soccer balls attached to rope dragging from the back of the truck bed. Appropriate for a soccer family.
As is the case with so much in life, the celebration went by far too quickly. And if you’ve been reading On My Radar for some time (you too, Art Cashin) note that Penn State polo shirt. Just saying! If you are new to OMR, you’ll soon learn that I’m a bit over the top about Penn State.
Just one more thing to share from a very proud husband. Some of the most underpaid among us are our teachers and coaches. Yet, they truly rank among the richest people I know. The abundance they have comes from the inside. A dividend earned one child at a time.
To Kieran’s initial chagrin, Susan took the Malvern Prep head-coaching job last summer. His comment was, “I don’t like it, but I don’t not like it either.” It’s one thing to have mom nagging you to get your homework done; it’s another to have her on you about your level of play—and maybe worse: pulling your best friends from the game to provide a pointer to two. They eventually reached an understanding, and I’m sure they’ll both look back on that time together with great affection.
Malvern Prep is an all-boys school. The school reached out to Susan to see if she’d be interested in interviewing for the position. Soccer is largely a male-dominated sport. At the youth club level, even on the girls’ side, the majority of the coaches are men. When a reporter later asked her if she knew she was one of just a handful of females in the country coaching a boy’s high school team, she brushed it off. Not an issue. She was more than qualified.
I’m sharing the following video interview Susan sent me this morning. She was interviewed by Ian Barker, the director of coaching education for United Soccer Coaches. Ian is at the top of youth coaching education in this country.
Success is tied to hard work, a willingness to take risks, face fears, fall down, get back up, and advance again. That’s true in sports and in anything else worth creating in life.
Here is a toast to the great teachers, coaches, and the strong women in our lives!
Wishing you a wonderful holiday weekend.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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