September 4, 2020
By Steve Blumenthal
“The most striking similarity between the 1920s and the 1990s
bull markets is the notion that traditional measures of stock
valuation have become obsolete.”
– Edward Chancellor, Devil Take the Hindmost (via John Hussman)
Welcome to September 2020. Hard to believe it’s here already. The good news is the year is rushing by. The good news is that there really is some GOOD news. Today, I want to share with you a bit of optimism and something for you and me to keep on our radars.
On the venture capital/private equity side of my business, we will begin researching the following. Hat tip to partner John Mauldin, who wrote last week that he sees “Light in the COVID Tunnel.” From John:
Several months ago, Dr. Mike Roizen [SB here: Dr. Roizen founded and heads the wellness center at the Cleveland Clinic] began to tell me about an innovative new technology called far-UVC being developed by a company called Healthe. He is on their scientific advisory board. Essentially, it uses a specific wavelength of ultraviolet light to kill microorganisms without hurting humans. I was skeptical because I have always been taught that exposure to ultraviolet light was bad for humans. And for good reason; the ultraviolet light that reaches the earth’s surface is dangerous. But not all ultraviolet light reaches that far. And therein lies a story of innovation and perseverance.
Dr. David Brenner, an Oxford-educated physicist at Columbia who applies quantum mechanics to radiation therapy, had a friend die from a superbug caught in the hospital. He became (my word) obsessed with preventing future superbugs from killing people. (The link to his name will bring you to an impressive list of his publications, lectures, and information.)
We have long known ultraviolet light kills viruses and bacteria. The subway trains in Manhattan are exposed to UVC light every night. Many hospital surgical rooms are also exposed to UVC light, of course while humans are not in them, making them very clean rooms for surgery.
In a 2017 TED talk, Brenner explained why a particular wavelength in the ultraviolet light spectrum would not harm humans but still kill superbugs. In 2016, 700,000 people died from exposure to bacteriological superbugs. At the current path we are on, by 2050, the death toll will be 10 million.
In this talk, he shows why “far-UVC,” ultraviolet light in the spectrum of 222 nanometers (I am told that it is technically 205-222 nanometers) won’t penetrate human skin or eyes but can still kill bacteria and viruses—both on surfaces and in the air.
As it turns out, the sun also produces these particular wavelengths, but our atmosphere’s ozone layer stops them. But that doesn’t mean we can’t produce them here.
It is a pretty convincing talk. But I’m also told that Columbia University officials didn’t want to fund his research as they did not see much practicality or viability. When he was initially talking about it, it defied common knowledge—you know, what everyone knows to be true but sometimes isn’t.
So what does a man in a modern world do to fund his obsession? He starts crowdfunding. Seriously. But as it turns out, you can’t patent a wavelength of light, so now other companies are beginning to pick up on his research. COVID-19 made the need for new approaches readily apparent.
Healthe Lighting is already manufacturing devices that look like airport metal detectors. They kill any virus or bacteria on your body as you walk through. One of the main investors is Stephen Ross, a venture capital and private equity investor, who also has an ownership in the Miami Dolphins. They have installed a form of the technology that filters the air in their indoor training facilities. This is from a Miami Herald report.
“From my perspective, and a whole bunch of people I speak with regularly, this is the best tool we have today [to fight coronavirus],” said Fred Maxik, Healthe’s founder and chief technology officer. “We can go in and clean, we can go in and scrub, but at the end of the day, the first sick person that goes into that space, that space is contaminated again. The systems that we’re deploying are systems that are cleaning in real time and cleaning constantly. We reduce that [pathogen] load that’s in that space to the minimum we can.”
Healthe’s multi-level system is designed to inactivate the virus in the air, on players’ lockers, and even on their uniforms—and it’s all completely safe, researchers say.
Here is an ABC News video of an installation at the iconic Magnolia Bakery in Manhattan (I highly recommend their cupcakes). The Air Force is beginning to test and install far-UVC equipment. Seattle’s Space Needle is using it to market their reopening plan. The company already has over $100 million in backlog orders.
Like any new innovation, there are problems and solutions. Let’s deal with the problems first. Right now, installations are relatively expensive, and production is backlogged. But there is a solution which doesn’t require more research. Within a few months, the company says it will be able to produce simple LEDs that emit the proper wavelength. They will likely be expensive at first, but like anything involving technology and chips, costs will fall quickly, enabling wider use. (Today it would take $20,000 to equip a 2,000 square foot bar. The LEDs will drop that price dramatically.)
COVID-19 is devastating restaurants and bars because people are in such close proximity. But these LEDs will be easy to put on the walls and ceiling, or even in regular light-emitting lamps on each table. When somebody coughs or shouts and unknowingly spreads a virus, the far-UVC light will kill it. Will it be perfect? No, if you are kissing someone with COVID-19 or another virus, you may still catch the bug. The light doesn’t go past your skin or eyes.
Can you attach a small strip on every seat in a stadium? Of course. Plus lighting in airports, trains, planes, hotels, in fact, just about everywhere people congregate.
Yes, if you gather at a big outdoor event with no far-UVC lighting, there would be no protection. But (and this is a big but) infection potential should be lower after enough of the virus has been killed.
And we are not talking just about COVID-19. We are talking about all viruses, including new ones. David Brenner’s vision of killing superbugs in hospitals (which caused 49,000 people to die last year last year in just the US) is in reach.
This is simply amazing. It will usher in a new area of health, saving lives, and significantly improving economic productivity. I know other companies are exploring the same prospect. That’s great; nothing like competition to spur innovation. It’s wonderful news for mankind.
I could write a book (and in fact I am) on all the amazing technological developments that will arrive on our doorsteps in the next 20 years. You can’t believe what agriculture will look like by the end of this decade. Super plants, taught to evolve rather than being GMO, will be a reality. Food will be far more nutritious, and farmers will have more productivity per acre, with less pesticide and fungicide and all the other nasty things we don’t want. Solar energy is getting cheaper every day. AI is growing by leaps and bounds. Life extension is closer than you think.
I could go on and on, but you get the idea. I have reasons to be optimistic. Wildly optimistic, in fact. Yes, I recognize the problems all around us and especially in government. I have long maintained that I want my investment strategies, not to mention my life, to be long humanity and short government.
Here are some links to additional far-UVC research.
All of this sounds encouraging. It lifted my spirits and hope it lifts yours as well. Ever forward… we will win this fight.
Grab that coffee and find your favorite chair. When you click on the orange On My Radar button below, you’ll find a quick look at median P/E ratio, price-to-sales ratio, and a few charts on what valuations tell us about coming returns (including Warren Buffett’s favorite). And check out Wednesday’s Trade Signals post titled, “Insanity.” You’ll find a few fun screen shots I pulled from Twitter too.
If you are reading this early Saturday morning, welcome to a relaxing long weekend. Wishing you a backyard barbeque with your family and some downtime with a book. I’ll be exploring the Admired Leadership program, which I’ve been meaning to dive into. My good friend, Michael Gale, sends me a text reminder every other day. It’s time.
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:
Buffett Indicator – Market Cap-to-GDP
Market Cap-to-GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001, he remarked in a Fortune magazine interview that “it is probably the best single measure of where valuations stand at any given moment.” (Source: Jill Mislinski, Advisor Perspectives)
The conclusion is clear. As of 8-31-2020, the market sits at the most overvalued level in history. We’d be better off at 80% market cap-to-GDP vs. the current 152.2%. Note the levels in 2000, 2002, 2007, and 2008/09. Keep you stop-loss triggers in place. This is insanity.
In Trade Signals this week, I shared a chart of the price-to-sales ratio for Amazon. You’ll find that below. Put your quant geek hat on and have fun with this chart.
Here’s how to read the chart:
- Focus on the bottom section. The red line plots the price-to-sales ratio back to 1964. Note that the most recent data is through 6-30-2020. That 2.28 number in the upper right-hand corner of the lower section is likely much higher at August 2020 month end.
- Next look at the data box in the upper left. The yellow highlight shows the % Gain per Annum when the price-to-sales ratio is 1.26 or higher. NDR shows it as the “Market Expensive” zone.
- 2.58% annualized returns. The market has been in the “Market Expensive” zone 33.82% of the time since 1954.
Median Price-to-Earnings Ratio
Let’s next take a look at median P/E ratio. Median means the one in the middle. If there are 500 stocks in the S&P 500 Index, median is 250. I like this process because, in my opinion, some companies play financial accounting games with earnings, so to me it’s is a fair way to remove a lot of that.
Here’s how to read the chart:
- You can see that the red “We are here” arrow shows that prices relative to earnings (based on median P/E) is at the second highest level since 1964.
- Simply, the price of the market relative to earnings is very high.
- The bottom section shows how far the market is away from Median Fair Value. A 40.2% decline takes us to S&P 500 Index level 2,093.19. That would be an excellent level to again overweight to equities. Approximate 10-year returns from that starting point would be in the 10% range, if history is any guide.
- My two cents: with the Fed creating Special Purpose Vehicles to buy assets, other than mortgages and government bonds, a -21.80% sell-off to 2,737.24 may prove to be good support. Of course, I could be wrong.
Stock Market Capitalization-to-Gross Domestic Income Ratio
The next chart takes a different look at valuation. It compares the value of the overall stock market to gross domestic income.
- The middle section plots a long-term trend line (dotted blue) and plots Stock Market Cap to Gross Domestic Income relative to that dotted blue line.
- The bottom red “We are here” arrow shows you where we are relative to 2000, 2002, 2008/09, and today. And since 1925…
- Take a look at the data box in the upper left. It shows 5 and 10-year total returns (not annualized) when the market is in the Top Quintile. Today we not only sit in the top quintile, we are at the second most overvalued level since the mid-1930’s.
I found today’s intro quote while reading John Hussman’s September 1, 2020 missive titled, “Yikes.” From John,
The most important observation about market valuations here is that while a decade of zero interest rate policy has encouraged yield-seeking speculation in stocks, the resulting extreme in stock market valuations has also driven likely 10-12 year S&P 500 nominal total returns below zero. The same outcome accompanied the decade following the 2000 market peak.
The chart below shows our estimate of average annual nominal total returns for a conventional passive portfolio mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills. As of August 28 that estimated 12-year total return has declined to -0.95% easily the lowest level in history, including the extreme low associated with the 1929 market peak. The red line shows actual realized total returns on this portfolio mix over the same 12-year periods.
Here is the link to Yikes. As usual, it is very well done. Thank you, Dr. Hussman.
I have several other 3-, 5-, 7- and 10-year forward return processes. We’ve looked at enough for today. If you’d like more information, email me at email@example.com. Bottom line: expect flat returns over the coming 10 years. That means we may go up a lot and then down a low, then up and down again on our way to little progress. I continue to favor a select portfolio of high and growing dividend stocks (approximate yield of 4.5%), systematic trading strategies and select private investment opportunities. I was on a due diligence call today for a private fund, backed by pharmaceutical royalties, yielding more than 7%. That’s not a recommendation to buy or sell any security. Talk to your advisor. Point is, there are opportunities if you have a deep network and know where to look.
August 26, 2020
S&P 500 Index — 3,580
Notable this week:
“The market is trading at dangerously high valuations should anything
— financial, economic, political — not go according to plan.”
– David Rosenberg, Rosenberg Research
The most notable Trade Signal this week is the Zweig Bond Model moved to a Sell. The equity signals remain risk on. Bullish optimism is extreme. I’ve screen captured a few tweets this week I thought I’d share with you. We have reached insanity… and it may continue. Here’s a look:
Apple’s Price-to-Sales – This is INSANITY!
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.
“What we know is there was never a time when stock prices did not reconnect to reality,
and the stock market indices today are telling us this time is different.
What we know from history is there has never been a time
when this time was different.”
– Kevin Malone, Greenrock Research
At CMG, we work with hundreds of advisors. We see the A-team players—the superstars—and we see B- and C-team players. Don’t work with the C-team advisors. They have little conviction; chase returns; and lack a mature, steady hand.
In the past few weeks, I’ve seen more of them show up. They set plan in place, and when approximately ten stocks are distorting returns, they tear up their game plan and move money to those stocks via ETFs and mutual funds. Euphoria sucks them in.
Some C-players know exactly who they are. But many think they should be on the “A Team.” The say the coach didn’t pick them because she has her favorites. Sure, sometimes that’s the case, but mostly it’s not true. In golf, you get instant feedback. I know I’m a C-team golfer and, if you were to bet on me, I’d tell you not to waste your money. Put it on Dustin Johnson or Tiger Woods. In soccer, or other team sports, it may be harder to tell the A players from the Cs. We are lifted or lowered by those around us. But a good coach can see it instantly.
Speaking of A-team players, Kevin Malone from Greenrock Research wrote about the disconnect between the economic collapse that saw Q2 GDP down negative 32%, dropping from negative 5% in Q1, and the stock market hitting new highs—something that likely has you scratching your head too. From Kevin:
We see the S&P 500 getting back into positive territory, and we have been asking ourselves why this disconnect exists. If GDP is down as much as it is, why have stock market indices rebounded? Are they telling us everything will be fine? Are they telling us that all those people who have lost their jobs will get them back?
Our answer to these questions comes from a review of history. What we know is there was never a time when stock prices did not reconnect to reality, and the stock market indices today are telling us this time is different.
What we know from history is there has never been a time when this time was different.
So, let us look at the S&P 500 and see what is really going on. Table 1 shows the top five names of the index plus Netflix, their percent weighting in the index, their return for the year and their contribution to the total return of the index.
It turns out the market is not up, just the index and a handful of stocks. This analysis shows us that the top five stocks in the index plus Netflix are up 16.09% year to date as weighted from the index, and the total index is up only 9.74%. Said differently, these six stocks are up 16.09% while the S&P 494 is down 6.35%, and the value part of the investing equation is worse.
So, I know we have all seen this and read about the concentration of stocks that have brought the market up with them, but conventional wisdom is telling us these companies are thought to be disruptive technology companies and they can continue to rise. Our view is not so fast. The first part is true, they are disruptive technology companies, but we do not think they can continue to rise. They have all reached some level of maturity and are trading at absurd prices.”
You can find the full piece here—well worth the read.
We’ve recently added Catherine Wood’s ARK Invest top ten highest-conviction stock portfolio to our platform and made it available to our advisor clients. They can walk into their TAMP kitchen, pull it off the shelf, and plug it into their clients’ accounts. That portfolio is up a crazy high amount this year. Is it wise to put all of your money in just ten stocks, no matter how well researched? I don’t think so. Some exposure as part of your overall game plan? Sure.
My point is that except for a few stocks, returns are flat to negative. You know you have a C-team advisor if his or her answer to your return complaint is to switch you into the NASDAQ and S&P 500 cap-weighted indices: investments that, by rule, have you overexposed to just a few names.
The C-team player is afraid to lose your business. You wag his tail, his head nods yes. Some advice from an old dog who’s seen this movie before: It’s about discipline and sticking to your game plan. Defend your wealth first. Carefully grow your core. Explore with a smaller portion of your money. Maybe you can do this on your own. If not, find an A-team advisor. We work with many, and I can recommend a few.
This is euphoria. Wait for pessimism. Be greedy when others are fearful, not when others are greedy. Yes, it’s very hard to do.
Sorry for the rant. Had to get that off my chest.
The weekend weather looks amazing. I’m trying something new. A group at my golf club has a Saturday morning match. They all put a little money in the kitty and the players are randomly divided into teams of four. Twenty players means five teams. Each team competes against the others. It’s fun to have a little competition to look forward to, as well as the opportunity to make new friends. Hoping to win a little IPA beer money too.
Thanks for reading. Wishing you a relaxing and fun 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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