March 5, 2020
Eagle, Colorado
Crypto, bonds, stocks
Fed rate cuts
Benzinga Interview
Coronavirus/COVID-19
Performance
New one-pagers
What a wild ride!
The S&P 500 finished the month of February down 8.41%. This was after posting a loss in January. So, 2020 is not off to a great start – even though there have been more than a couple of new highs posted along the way.
In fact, this recent correction – defined as a 10% pull back from highs – was the fastest in history from an all-time-high. This fact has gotten quite a bit of attention in the media. But not as much as the corona virus, or COVID-19… I have personally received more emails related to this than any other topic in my career. Easily.
It is tragic that people are losing their lives to this virus. Loss of life is always hard. Ray Dalio laid it out rather well in his recent article. He says there are 3 separate aspects of this situation that we must deal with and they are: 1) the virus, 2) the economic impact and 3) the market impact. Of course, there are other ways to frame the situation and this is only one. The article is short, and I think it is worth a read (Ray Dalio manages over $160B in the largest hedge fund on earth).
Ultimately, I don’t have much of an opinion on COVID-19. I am not a doctor or an epidemiologist. I have a good understanding of statistics and Fibonacci sequences. That training isn’t extremely helpful in treating anyone who is sick, but it does seem to help with portfolio management, which is what I know and will stick to. I saw a great clip yesterday of Jurgen Kloop, manager of the Liverpool football team responding to reporters and one asked about the corona virus. Its only a minute long – check it out.
A few people (friends and family) have asked me about our stress level around the office for the past week or so and wished me good luck. Some others have asked how we are addressing the news and the selloff in equity markets. I think most people are very disappointed to hear that it is pretty much business as usual at Elevate.
Let me explain.
We prepare for these events at the time we invest or take a position in a stock (or ETF, whatever the case may be). We define our exit strategy at the time we open the position. While many advisors are scrambling trying to figure out what is going on, and what to do about it, we know that our risk has been defined and our trailing stops will actually tell us when something meaningful is changing in the market – not the other way around.
I think it is because of our strict rules-based approach to portfolio construction and management that all our strategies are up for the year. Plus, a little luck of course. Meanwhile the S&P 500 index (SPX) is down 3.12% and the MSCI All-World (excluding USA) is down 8.49%. As I mentioned above, SPX was down 8.41% for the month of February. Our Appreciation and Income Strategies were down much less which is partly why we still have gains for the year.
The only thing that is remotely exciting around our offices is that we have stopped out of and sold some of our favorite positions (for gains), like Disney (DIS). On the bright side, this event has given us the chance to get back into some other stocks we had stopped out of (for gains) a while back.
Along the way we have sold plenty of covered calls against our long-term holdings. This technique which we deploy in both the Income and Appreciation Strategies has contributed to our success and we will continue to sell calls whenever we think one of our long-term positions is “taking a breather” within its long-term uptrend.
We are still carrying some cash in case the selloff should worsen and we always have our trailing stops in place. We also still hold the majority of our long-term positions and we have added 5 new stocks across both strategies recently. They are as follows. In the appreciation strategy we added MercadoLibre (MELI), Ubiquiti Networks (UI) and Okta (OKTA). In the Income Strategy we added Essential Utilities (WTRG) and Parker Hannifin (PH). Click the links for one-page descriptions that contain our thesis and exit strategy.
Meanwhile the bond market is absolutely ripping. As I have said more than once, bonds are probably a bigger “bubble” than stocks these days. But if interest rates are headed negative, then any yield at all is going to be in high demand. The Aggregate Bond Index is up 4.36% YTD.
By the way, bitcoin is up 26% for the year so far, crushing both stock and bond index returns. That is on top of a 94% return in 2019. If you don’t own some bitcoin you might want to consider buying a small amount. The most you can lose is what you put in, but the upside is unlimited. $1,000 of bitcoin bought at $1 each in 2011 would be worth $9,000,000 today.
The last thing I will mention is the Fed. The United States Federal Reserve bank, in a “surprise” (to no one) action, cut overnight bank-to-bank interest rates by 0.50% a couple days ago. They did so in an “emergency” fashion to limit the damage to the domestic economy from COVID-19. The last time they did this was 2008.
The stock market was mostly down the remainder of the day of the announcement but has rallied a bit since. The swings have been extremely volatile, to be sure.
Again, with the caveat that my expertise is in portfolio management and not medicine, I think the COVID-19 situation will be with us for several months and has already put a serious dent in global productivity for the full year 2020. The event would have to resolve fairly quickly with supply and demand both returning to better-than-normal levels rapidly to have any hopes of meeting global GDP numbers. Anything is possible, but this outcome is increasingly unlikely.
It doesn’t mean that there won’t be opportunities to invest along the way. And it doesn’t mean we are out of the woods yet just because the market dropped 12% or 13% and bounced a bit.
The good news is that we have our exit strategies in place (they have worked well so far), and we have much more reasonable valuations at which to invest our cash than we did just a few weeks ago. Meanwhile, with volatility much higher we can earn even more premium for selling covered calls on our long-term holdings.
Sorry, one more last thing, if you are interested in watching (or just listening) to me talk about trading and some of our strategies and investments (both personally and professionally), I recently did a 1-hour interview with market data firm Benzinga, which you can find here.
As always, thank you very much for reading!
Until next time,
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.