A Peek At My Daily Brief
Seeking Alpha Analyst Since 2013
Lawrence is the publisher of The Portfolio Architect. He has more than 25 years of experience managing portfolios for individual investors. He began his career as a Financial Consultant in 1993 with Merrill Lynch and worked in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. He graduated from the University of North Carolina at Chapel Hill with a B.A. in Political Science in 1992.
- I write a Daily Brief by 8:30 am of every morning providing a fundamental and technical view of the markets.
- It also frequently includes actionable ideas for investment portfolios across all asset classes.
- It is one of several features of The Portfolio Architect that I provide for my subscribers.
- As a thank you for being a real-time follower of mine, I will post my Daily Brief on my Blog from time to time.
Joe Biden starts his presidency with all of the major market averages at record highs. In fact, yesterday was the best performing day for the stock market during an inauguration since 1937. Technology regained its leadership position after better-than-expected results from Netflix, while tech titans like Apple, Amazon, Microsoft, and Alphabet were all higher by 3-5%. The consensus view is now that President Biden will be bullish for stocks because of his focus on fiscal stimulus. Long forgotten are concerns about higher tax rates and more regulation.
There is also growing optimism that the Biden administration will accelerate the rollout of vaccines, slow the infection rate, and bring an end to the pandemic. At the same time, investors are expecting another round of checks for consumers and additional help for small businesses. These developments would bring better days for the economy, but they may also force the Federal Reserve to unwind the easiest financial conditions on record sooner than the consensus of investors expect.
Jeremy Grantham is a legendary value investor and the co-founder of asset management firm GMO. I have a lot of respect for his investment acumen, because he accurately predicted the downturns in 2000 and 2008. He was early, but he was right. It is very difficult to maintain your conviction when you are early in what turns out to be a correct call, because you are typically going against a growing consensus. He has been pessimistic about today’s market for a very long time, claiming in a Barron’s interview published last weekend that the stock market is in a “real humdinger” of a bubble. Obviously, he is early again, assuming he is also right.
He also said that “a bubble peaks when you reach almost unbearable levels of ecstasy,” and that a bull market will not end “with some terrible burst of bad news. It ends when things are pretty darn good, but not quite as good as yesterday.” That explains why it is so difficult to time a market top. An unbearable level of ecstasy is a very subjective description of the peak, and the same thing can be said for when things are pretty darn good. Still, the historical measurements of sentiment that I have been sharing for the past few months suggest that the euphoria in today’s market cannot get much more euphoric.
While the situation for investors in the market is near perfect in terms of financial conditions, there is plenty of room for things to get better in the real economy. We can end the pandemic, reopen schools and businesses, and restore the millions of jobs that were lost. That probably won’t happen until the second half of the year, at which point investors are likely to look in the rear view mirror and realize that financial conditions are still pretty good but not as good as they were at the beginning of the year. If Grantham is right again, the bubble is likely to burst or deflate between now and then.
Leon Cooperman is another billionaire investor and hedge fund manager who makes frequent appearances on CNBC to share his wealth of knowledge and experience. Yesterday he said “whenever you bought into the market when it was selling at the present multiple of, say, 22 times or higher, you’ve never really made any serious money one year, three year, five years out. I think that’s what we’re looking at.” He followed that by saying that “the near-term outlook is probably OK.” Historical data affirms his assumptions about forward return from today’s valuations, but that would be for investors who don’t time the market, remain fully invested, and simply ride out bear markets.
These warnings from very successful and experienced investors always fall on deaf ears when things are “pretty darn good,” as Jeremy Grantham asserts, but we should be gradually incorporating them into our investment strategy as valuations rise. That is the objective of a tactical asset allocation strategy, which means gradually reducing or hedging exposure to risk assets, diversifying across asset classes, and focusing on value. It is a process and not an event.
The Technical Picture
I want to point out how influential movements in the U.S. dollar have been over the past year. Note below the peak in the dollar in a flight to safety during the bear-market decline last March.
It was followed by a 14% loss in value, as the stock market had a near perfect inverse correlation.
We can see the same inverse correlation with the price of gold (GLD)
The Fed’s near-zero-interest-rate policy combined with its asset purchases continues to put downward pressure on the dollar, which is ultimately inflationary, but the missing link has been fiscal stimulus to ignite higher prices for goods and services in the real economy. If the rate of economic growth roars later this year, leading to a further increase in inflation expectations, the dollar may strengthen and become a headwind for risk assets, including gold and other commodities. I am focused on whether the dollar can break above the downtrend line shown below, as that is likely to trigger a market reaction. I think gold can sustain its uptrend provided real rates (nominal rates minus the rate of inflation) stay negative.
Magna International (MGA) is my value play for the electric vehicle and green energy investment themes. This 60-year old company based in Canada designs, engineers, and manufactures parts and equipment for original equipment manufacturers (OEMs) of cars and light trucks in 27 countries. The list of components and systems under its umbrella covers just about everything, but it also builds entire vehicles as a contract manufacturer. Some examples are the G-Class Mercerdes Benz and the all-electric Jaguar I-Pace.
What interests me more are the joint ventures it has struck with Fisker to contract manufacture its first electric SUV for the mass market priced at $37,500, as well as BAIC Group in China to contract manufacture EVs for domestic Chinese automakers. As more electric-vehicle companies move to asset-light business models, Magma stands to be the primary beneficiary. It also recently announced a JV with LG Electronics to manufacture e-motors and e-drive systems for automakers.
At less than 10x next year’s projected earnings, even after the run up in the stock price over the past four months, this stock remains cheap relative to its peers and on an absolute basis. It has a better than 2% dividend yield that has shown consistent growth and a strong capital structure. I think in a post-pandemic world this company can earn far more than $7.48 in 2022, and it is likely to restart its share buyback program later this year. At approximately 0.5x a $40 billion sales figure, investors have a margin of safety that should limit the downside long term, but I would prefer to start my position closer to the 50-day moving average at $66. That’s my target for a new investment.
Analyst's Disclosure: I am/we are long GLD.
The Portfolio Architect is published as an information service. Lawrence Fuller, the publisher, is also the Managing Director of Fuller Asset Management, a Registered Investment Advisor, which is unaffiliated with this Marketplace service. While this service includes opinions about buying, selling and holding a wide range of securities, the publisher is not acting as an investment adviser or providing advice or recommendations to any particular subscriber. Any investment recommended should be made only after consulting with your investment advisor or completing your own due diligence. There are risks involved with investing including loss of principal. Mr. Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals or the strategies discussed by will be met.
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