Gaming the Game…
What goes up, always comes down, that’s gravity. Same theories can be applied to the Global Equity markets. After the fourth quarter meltdown, markets have catapulted back to new highs. Dizzy yet? After 19 years on Wall Street, I have had the fortune/misfortune of seeing 3 Bull markets and 2 Bear Markets. In fact, I started my career in June of 2000 working for a hedge fund in New York. Watson Asset Management a $500 million-dollar hedge fund focusing on micro-cap securities. Companies under $300 million in valuations, which has given me an incredible opportunity to work with C Suite executives building businesses, observing secular trends and focusing on capital structure turnarounds. Having viewed thousands of companies and working with many exceptional leaders I have learned to look beyond the noise, filter emotions during times of uncertainty and focus on hard facts.
Hard facts are relevant data points that have proven accurate over the long term. Does that mean its right all the time, no. But it prevents you from the day to day noise. Why am I mentioning this today? Simple, as a firm, Alpha Street took a more defensive approach to our portfolio allocation as the Hard Facts continued to deteriorate. Fortunately, our defensive posture was offset by strong out performances in our equity portfolios. After 5 cycles, you learn to identify what works and doesn’t work in certain points in the cycle. Late cycle, which is what we believe we are in, companies with high ROIC (Return on Invested Capital), FCF and later cycle businesses do well. To date, that is exactly what has been happening. As the year progresses, value will begin to out perform growth stocks. Investors heavy in growth will begin to see higher portfolio volatility as investors reallocate into value names. Companies with cyclicality and high debt will likely under perform the markets. Investors should prepare their portfolios for the new environment.
Our internal models suggest the US Economy is slowing faster than current models suggest as leading indicators, Citi Surprise index and Purchasing managers index continue to decline in a rising stock market. Don’t take our word for it, direct quote from the April ISM release.
“The April PMI® registered 52.8 percent, a decrease of 2.5 percentage points from the March reading of 55.3 percent. The New Orders Index registered 51.7 percent, a decrease of 5.7 percentage points from the March reading of 57.4 percent. The Production Index registered 52.3 percent, a 3.5-percentage point decrease compared to the March reading of 55.8 percent. The Employment Index registered 52.4 percent, a decrease of 5.1 percentage points from the March reading of 57.5 percent. The Supplier Deliveries Index registered 54.6 percent, a 0.4-percentage point increase from the March reading of 54.2 percent. The Inventories Index registered 52.9 percent, an increase of 1.1 percentage points from the March reading of 51.8 percent. The Prices Index registered 50 percent, a 4.3-percentage point decrease from the March reading of 54.3 percent.” ~ ISM April 2019 Report
Caution is prudent in this environment, but with the recent Tweet heard around the World, China Deal is dead is all noise and posturing. We have seen this game before, just before a deal was announced with Canada & Mexico, Trump threatened increased tariffs and no deal. Does this sound familiar to you? Does that mean a deal is done with China? Impossible to say and irresponsible to play. But lets try and map out the scenarios, Lets Game the Game.
- They announce a “deal” acceptable to the markets and we rally 500 points
- They kick the can down the road suggesting a partial deal, need more time and we go ahead with tariffs. (Current Market expectations, likely priced in)
- They announce NO DEAL and things completely fall apart (low probability) – Down will drop 500 to 1000 points.
Option 3 is the least likely as it would be an embarrassment to both countries and likely hurts Trumps re-election plans. Maybe that’s China’s plans to out live Trumps presidency with hopes of a friendlier incoming administration. But that game will hurtle us into a Global Recession. Not a likely scenario but can be planned for with out gambling on today’s meeting outcomes.
In the past few days, I have had countless discussions with business owners, executives and individuals about adding protection to the markets, Alpha Street clients were protected before the “Shocking news broke” so as a firm we have done nothing, except picking up quality companies at better prices.
Markets are a longer-term vehicle and trading in today’s markets is a dangerous game, many individual investors are SHORTING the market here, gambling the deal will fall apart. Which tells me a relief rally may be ahead, again as a firm we have no intention of gambling with client’s money, we just own quality companies that will stand the test of time.
If anyone has any questions, we are available to speak 866-257-4278.