It's Decision Time Next Week

Summary

• I have used the kerfuffle of the last two weeks to upgrade my portfolio.
• Since everything was taken down regardless of quality, integrity, or future earnings power, it has been a good time to do so.
• But next week will give us the opportunity to make an even more important decision.
• How much do we invest when stocks have given us a much better entry price?
• But within the context of an election year, with a very old bull market, and COVID-19 ready to possibly to slow the economy.
• I do much more than just articles at The Investor's Edge®: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Re the last bullet above: There's an old newspaper editor's maxim our hot media of TV and the Internet have taken too much to heart: "If it bleeds, it leads."

Yes, we have problems to solve, but I believe the 24-hour news cycle is more dangerous than most of the problems they regularly breathlessly report on.

For instance:

The markets are always in flux. The chart below looks like a run-of-the-mill correction, which we get at least once and usually more than once a year. In this chart, the Dow went from about 28,300 to a little more than 25,800. That's a decline of less than 9%. Standard stuff.

Chart source: BigCharts.com

However, the difference is the time frame in which it occurred:

Chart source: BigCharts.com

All of this happened in just 10 trading days. The low point was last Friday, the 28th, when the Dow closed at 24,681, more than 1100 points below where it ended this Friday.

If you are unfamiliar with BigCharts, this chart begins with last Monday, the 24th of February and covers the 10 days until Friday, March 6, 2020. The “11”, “1” and “3” across the bottom show where the DJI was at that time of the day. The “T” is Tuesday, “W” is Wednesday and so on.

Until this Friday’s closing moments, which enjoyed a nice bump up in the final hour of trading, the Dow saw a low just 550 points above that Feb. 28 scare. Is this enough to declare a double bottom and imagine we can begin seeing some upward momentum?

I'm not a technician. Fortunately. I have been in this business a long time and seen more Rolaids consumed by technicians who just “knew” that x pattern "had" to yield y result than Carter has little pills. (Which are still around, by the way, you can even buy them on Amazon now!) What I know from living it as an exec with Charles Schwab at the time is that this two weeks’ decline isn’t nearly as terrifying as Oct. 19, 1987, when the Dow fell 22.6% in one day.

This is, instead, more like a condensed version of the fourth quarter of 2018. Does anyone remember this action?

Source: Yahoo.com

The Dow opened 2018 at 24,809, went sideways to consolidate until mid-year, then had a nice run up to 26,828 until Oct. 2.

Then the bottom fell out and by Christmas Eve the Dow closed at 21,972. The final week saw the rebound that led into the super-strong market of 2019, beginning with a run to 23,327 the last week of the year.

Now – what does all this tell us about what the Dow and the other markets in the US and around the world will do come Monday?

Nothing.

It doesn’t foretell anything. It does, however, remind and teach. It reminds us that the short-term investing future is never knowable. If you ask me where the US markets will be 20 years from now, I will tell you that, as long as we enjoy a capitalist economic system and a representative republican democracy, the markets will definitely be higher then, even if that exact moment is in the midst of a bear cycle.

But Monday? Seriously? If I really could “know” what will happen on Monday, do you think I would share it with my closest million friends on Seeking Alpha?

What I can do is give you my educated guess about the coming months and share what I have told clients and Investors Edge subscribers over the past couple weeks.

On Saturday, Feb. 29, I wrote (same words, edited down a bit for brevity and because I don’t have to be politically correct on The Investors Edge):

I believe there are three reasons that came together to form this fastest-ever correction:

(1) The coronavirus panic. I'm not underestimating the medical impact of a new strain of this old, old virus. MERS was ugly. So was SARS. COVID-19 looks to be much the same. The difference is that is has a longer incubation period and therefore the likelihood of greater transmission but (so far) a lower fatality rate than previous coronavirus iterations.

(2) The panic that Bernie Sanders, after doing well in 3 states with few delegates, could become the next US president and destroy all American businesses, homeowners and workers in the process. If Bernie fades, this problem becomes old news.

(3) The market was simply overpriced and tired. Anything would have caused a correction. In my opinion, it was the trifecta of all three of these factors that created the fastest decline in history. Some day you will tell your grandchildren their panic decline is nothing compared to this.

What am I doing to prepare for the coming months?

In light of the fact that the market is still somewhat overpriced, though not as much as it was two weeks ago, and we still have the uncertainty of an election in eight months, and the direction COVID-19 takes is yet unknown, I'm positioning for uncertainty.

I'm taking advantage of the fact that “everything” has fallen, regardless of reputation, quality, sterling balance sheet, dependable sector, or anything else. For example: I owned a number of pipeline ETFs and CEFs. Some I had trailing stops under. For those that did not, I'm down 15%. On the other hand, Exxon Mobil (XOM), Chevron (CVX), Total (TOT), Occidental (OXY) and Texas Pacific Land (TPL) have all fallen even more! So I have moved from lesser-quality to the Survivors.

It's the same in the healthcare sector as it is in energy. I could take my losses, some very small thanks to trailing stops, in some bet-the-farm biotech stocks and ETFs, and place those funds in AbbVie (ABBV), Bristol-Myers (BMY) and more Pfizer (PFE).

In addition to taking this opportunity to move up the quality scale, I'm also placing more funds in some of the great income-producing mutual funds and ETFs.

Treasuries may yield less than 1% but, for instance, the AlphaCentric Income Opportunities Fund (IOFAX/IOFIX) still pays me a steady 5%-plus. I first recommended this fund for SA readers, due diligence beginning in February 2018 here, The Perfect Mutual Fund For Volatile Times, and many times since.

Source: Seeking Alpha as of 6 March

This fund is uncorrelated to the US stock or bond markets. That doesn't mean it's bulletproof, but as you can see from the chart above it has since inception been a "no worries, mate!" investment. Their specialty is in a niche in mortgage-backed securities – they specialize in pre-Great Recession mortgage loans, their logic being that if those supposedly poor-quality mortgages kept getting paid during and since those long-ago days, they may be “rated” poorly, but their history of payment is great.

This is just one example. There are many other investment alternatives in the not-so-fixed income arena that have a low, zero, or negative Beta to the stock or bond markets.

Finally, I will be building a slightly larger cash cushion next week. Cash is always nice to have if the markets decide to dish up better prices for me. My first responsibility has to be to my clients and subscribers, but I'm determined to occasionally write more on my SA blog for those who wish to keep these conversations going!

Good investing,

JS

Analyst’s Disclosure: I am/we are long PFE, ABBV, BMY, TOT, XOM, CVX, TPL, OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Unless you are a client of Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence and not as advice to buy or sell specific securities.

Comments

[sgm8g]

Long TPL

[Rsmt]

In my comment, I referred to liquidations, but meant redemptions. The resulting liquidations by several participants lowered bond valuations in the non-agency sector.

[Joseph L. Shaefer]

Agree. In my end-of-the-bear call March 3, 2009 I specifically suggested for every reader's due diligence busted pfds. My specific example was a UBS $25 par selling for $10. Never missed a payment, later called at $25. Stick with quality and the deals will be there.

[Rsmt]

Yep, unfortunate timing on IOFAX call. But, the problem has been less about fundamentals and more about liquidity. They were forced by liquidations to sell into a very illiquid market. The carnage from this situation is visible in the MReit sector and several CEFs, such as PCI, PDI, and DMO. With mark to market valuations on non-agency Mbs at levels not seen in several years, the prospects are attractive to me. The legacy bonds have a lot of credit protection given the discounts to par. And the remaking lives are short - meaning significant principal pay down which come in at par. When we get through the current distress, potentially heightened paydowns will produce additional upside.

[RandyFloyd]

yikes!!! unfortunately poor timing for IOFAX. i never trusted this fund, nothing goes up so smoothly like that without some kind of hidden weakness. nonetheless, i still appreciate all your articles

[Joseph L. Shaefer]

Thank you, Randy. Yes, the credit meltdown hit all income holdings as much or more than the equity side of the markets, ugly as that has been. The great "income-producing mutual funds and ETFs" I referred to had to sell holdings at any bid they could get in order to meet redemptions (mutual funds) or panic selling (ETFs.) Fortunately I told my subscribers to sell in tranches so we got out at 13, then 10, then 8 -- it was intense but at least we avoided the worst of it. When the Fed belatedly intervened as the buyer and guarantor all these ETFs, funds and preferreds began to claw back. In anticipation of more weakness not in actual credit but in investor mindset, I have some buys in at lower prices on a number of those preferreds... You?

[dj94080]

I rarely see anybody write articles towards people with company sponsored retirement plans, i.e. Fidelity, etc. where your choices are limited. The safe have is usually a money mkt fund.

[Joseph L. Shaefer]

Take it!

[smi70]

Oils have been in decline for several years now. Even with their dividends, profits are elusive. The growing negativity toward fossil fuels provide a formidable headwind for investors. Couple that with possible dividend cuts in the future,I’m thinking that looking elsewhere may be safer.
P.S. What ever happened to fuel cells that were promised, years ago, to be the answer for environmentally safe, efficient and cost effective means for electricity generation?

[Igor Luksic]

You are aware that people hating on oil doesnt impact cashflows? Usual SD for oil is around 9$ a barel, good companies. FCF is massive for all of them.

Best oportunities are found in sectors that are hated, not beloved. Trust me. Just mind balance sheets to see if company can endure 6-10 mths of lower cahflows

[smi70]

I am aware that oil companies have massive amounts of debt that will come due in the next few years. Dividends may come under pressure and for my thinking, I’ll pass.

[smi70]

Bernie is a communist, whether he admits it or not...enough said.
He will lose and probably it’s game over for him, but beware “Bernie clones” in 2024.

[Bilhelm]

@smi70 Hoping you are right about Sanders losing the nomination battle, but you are wrong about his being a communist. Like many Americans, you may be confused about the distinction between 'Communist' and 'Socialist,' (Both Communist and dictatorial regimes have appropriated 'Socialist' when they realize they are in bad odor and want to blow smoke.) A 'Democratic Socialist' is different from both: think Scandinavian countries. I don't like ideologues, no matter what they call themselves, and IMO Sanders is one.

[smi70]

“A rose by any other name is still a rose.”
Agree that there is a difference between communism, socialism, and democratic socialism. But there is overlap and similarities. It has often been said that socialism is just the road to communism, “the road to perdition” , as one could say. Democratic socialism is no more than a whitewash. The DSA will not lead us to utopia, that’s something for Bob Hope and Bing Crosby!
No revolution needed please. USA society will evolve as it has, with our constitution as a framework and guide.
Since this is an investment forum, I’ll close by saying,”Bernie be gone”; you are making promises that u you in can’t keep!🇺🇸

[auto44]

@Joseph L. Shaefer
Who knows what evil lurks in the hearts of men? The Shadow knows.
"Nobody knows'. Howard Marks
"Nobody knows nothing". John Bogle
"I don't know nothing either so I tread carefully". Auto 44
Good article. Thanks

[Money 29]

Have dry powder ready, the time to buy is when the markets are in free fall.

"If you have trouble imagining a 20%, loss in the stock market, you shouldn't be in stocks"

- Jack Bogle

[dynx]

Sitting on cash still. Keep maxing out my retirement accounts on same schedule, no selling.
Taxable accounts DRIPing the dividends so I’ll get a decent bump if there’s a rally.
Some things are looking interesting but I think the market is still over valued. We knock about another 10% off the top and I’m pretty confident I’ll be able to find some buys. But right now nothing seems like a screaming deal. I think/hope we have further to fall.

[Whosman]

Having come into $ last June I have been waiting for right opportunity in Vanguard only funds; 10% initial equity buy in last July, goal 25% if market is down 20% from high (ultimately goal is 70% Equity/30 fixed Income), my current nibble is 2850 on s& P (~14% discount from high) and with expected earnings to be reduced from current $174 to around $165, the forward PE would be around 17.95x versus historical of around 17.2x. Bottom line strategy; I will buy in slowly..25% in first downdraft, another 25% if it gets to a 30% from high and so on. In the mean time my muni investments have been on a roll so I sit and wait patiently for right opportunities. Impossible to time market so I am patient with a 10+ year horizon.

[User 1033050]

I fear we have more downside to go and prefer buying when things when they're moving up after they bounce around on the bottom for a spell. Picking bottoms is a fool's errand for most of us. Oil is what appears to be nearest the bottom to me. I like RDS/B and waiting for the precipitous drop to stabilize before adding stocks. On the other hand, my financial guru son is in Three Month Treasuries and GLD and stocking food because of the coronavirus and his perception that the stock market has been overvalued and is overdue to correct much farther.

[Glen Easton]

Excellent article. Thank you. I look forward to more in the future.

[James 62]

We now live in a hysterical world that lives their lives from headline to headline. If you make people believe they will die if they take a plane trip or go shopping it will make global commerce come to a stop. Also sad to say a lot of people would like to see this happen for political reasons. Twenty five to 60 thousand people in the US die of the flu every year. We now have a couple of dozen dead and the Fed has lowered interest rates 50 basis points, sports events cancelled, South by Southwest cancelled and sports leagues are talking about playing games without fans. The death rate of this virus is not much different than the regular flu if you reside in a country with good medical care. This is not the country I grew up in and I think the evolution of hysterical cable news is the cause.

[daverkb]

I regard Virus Hysteria as symptomatic of an elite run system that seeks to deliberately dumb populations down, to continually sow divide and conquer dissension, to incessantly terrorize the people with fear ... and of all of this so as to drive and control an agenda inimical to the true welfare of the people.

Virus Hysteria may drive as a means to a end, at least in part, but it is not a chief objective in and of itself of the War Lords who have long controlled the Western World. Virus Hysteria is another dysfunction set piece in an increasingly to be seen failed system. Since there is no objective reportage on anything, It is hard to say 'who, what, why, where and when' as in the once great journalistic standard now no longer observed. And as you say, "this is not the country I grew up in ..." And I add, it is because the ruling elites have had another agenda many decades in play -- and they conveniently forgot to tell the rest of us what it was.

[Bilhelm]

Actually, I've not detected this 'hysteria;' only mostly well-researched and well-received (by me) information on CV-19 that keeps it all in perspective. The distortions and misinformation I've seen mostly comes from media and politicians with an agenda. As a poster child for a vulnerable population, I am totally on board for cancelling events that promise to be cheek-by-jowl attended. I'm also on board for buying solid, dividend-paying stocks when I think (hope) the time is right. Good luck to us all!

[kpatel2018]

I know this is off-topic. However, I would consider adding ESG funds to portfolios in this market decline. When your biggest fund manager, BlackRock, and others are starting to play big, I would focus attention before the rest follow. The overall market still fears a growing trend. MSFT is one of a few companies that is listed in most U.S. ESG funds. Europe is also starting to focus on ESG funds. I see Norway's sovereign wealth fund has had this overall focus for years.

[HKondor]

1.75 expense ratio.

[BeaBaggage]

$CVX will be 75 by 3/14; $XOM, 35
w RU and KSA going to oil war, KSA announcing huge disc to Asia and USA for their oil and RU upset over USA forcing CN to buy o/ng in trade deal.. sick of sanctions including on Rosneft
seekingalpha.com/...
RU tired of losing mkt share and ready to put it to OPEC and shale.. KSA same, they have their bank from IPO and wont care, shale bankruptcies will be rapid along w their bankers.. $CMA to 35.. demand down already.. desperate Iran will bomb KSA w RU blessing.. it will be ugly. It alraedy is starting.. seekingalpha.com/... add to that the "treason" of KSA princes.. firming up leader's power.. WuFlu gives all the cover they need to do all the damage they want.. dividend growth investors will see their capital crushed.. etf disgorgement.. S&P to 2400 at least... www.msn.com/...

[BeaBaggage]

CVX 80.. XOM 41 .. CMA 36...oops..and it's only Monday!

[Zig Zag Cowboy]

I wanna buy stocks that Jerome Powell will be buying with my tax dollars in the near future...

[daverkb]

I know what you mean. But they are not really our tax dollars. It's all just an 'imaginary unit of account' scam. And besides, we regular folks don't have enough 'scam money' to pay for this one. And where it all goes, only The Shadow knows. And he ain't saying!

But seriously, I really think that we are at a Wiemar Republic moment. And if this is correct, equities will inflate. If this be the given, then one had better have a good solid asset exit strategy for come the time when Pop Goes the Wiesel.

[LongTermInvestor123]

Hi JS, Noted you are long for quite a few names for energy. Would you be concerned of long term prospect of fossil energy? The impact of Covid-19, global push for green energy, EVs etc etc? Could share your view?

[Joseph L. Shaefer]

Certainly. EVs are powered by electricity -- which is mostly generated by coal or natural gas power plants.

We are all pushing for green energy. Some of us realize it isn't as simple right now to generate, store, and distribute as fossil fuels. That will change over time but it will take many, many years and a number of breakthroughs to get there.

COVID-19, the latest iteration of SARS, is not going to stop the world from needing food distribution, clothing manufacturing, water distribution, etc. It will impact discretionary travel the most,but I am a student of history and that makes me optimistic about what the best medical minds with the right funding can do. Influenza 1918, MERS, Ebola, SARS, AIDS, etc.

Also, all the big energy firms also have wind, solar, and other subsidiaries. They are energy firms, not oil firms, and if they can make a bigger profit in wind, that's where their dollars will go. We will still need petroleum for chemicals, plastics, pharmaceuticals, etc. but I look forward to the day when these firms are what we would today consider green.

[daverkb]

The Ideological Green Mask super-charge in 'Author's reply' is really beyond the pale. Take away all the Sustainable Development Socialist subsidies, eliminate the internationalist Agenda 21/30 public policy terrorizing the planet and instead return to real markets, real price discovery, capital allocation by real supply and demand factors plus a sane world free of government propagandizing and control over all aspects of human action, and then see what world look like.

[LikeaRock]

"The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse."

James Madison

[chinthake1]

Compared to flu, covid 10x more resistant, 10x more contagious, and 20x more lethal. Do the math.

[HKondor]

I think everyone is being too optimistic about the virus. But perhaps too pesimistic about the government response. No clear way forward to me, I'm 50/50 cash and equities.

[User 51352630]

I agree with "too optimistic". Fear is setting us up for something that we have not seen since the 2008 Financial crisis. What can save us is not our Government but for warm weather to kill off the Coronavirus like it kills off the regular Flu. What concerns me is no one has told us really what this stuff is and how is it transmitted. Why ? Because they do not know. Fear. Just check out your local Walmart. Stores look like they are in hurricane relief. Sections for anti virus totally out. Our manager said the warehouse is out. Massive warehouses in Bentonville Arkansas out. Really ! So what if it does not die off come April when in many parts of the US warm weather comes. For older people like me and maybe even you young people these new policies of zero charge on trades really helps. At least we can play with the big boys for a while of getting out on Friday and back in at our choice. Got to admit I need this Seeking Alpha website more now than ever to communicate with those that have much more knowledge than myself. Good Luck All.

[M.truth]

Smoking killed about one hundred times more people in the same time as the covid 19 virus and still does kill at least 22000 people worldwide EVERY DAY (that is more then 6 times the total death count from the covid-virus IN sinds the disease started). So why is smoking still allowed??? all this hysteria about covid is totally crazy if the smoking disease is still allowed and kills so many more people (more 8 million people a year at least in the whole world)