St. Petersburg, FL

Maybe you didn’t notice, but I made it through the entire letter last month without typing the letters C-O-V-I-D. We won’t be so lucky this time.

It wasn’t because COVID wasn’t on my mind. Unfortunately, as a portfolio manager I can think of little else other than the juxtaposition between:

The great success of COVID vaccines and how everyone should just get one; and,
The extreme fear of the COVID Delta variant surging through the US population

Obviously, item one means more upside for the “in-person” stock market, as folks go back to work, play, school, movies, ball games, etc.

And also obviously, item two means only high-priced technology stocks (that don’t make any money and may never turn a profit) are the best things to buy… think Zoom Technologies (ZM not ZOOM), or Peloton Interactive (PTON). Just yesterday, Microsoft (MSFT) announced an indefinite delay for its employees returning to the office.

And so, most of every day I think about not just COVID the virus/disease, but how people are going to act, and react. I think about mandates and freedom and ultimately, impacts on capital markets.

As of this morning, domestic coronavirus vaccinations rose to more than 377.6 million administered through yesterday, with over 177.4 million Americans having been fully vaccinated.

So, more than half (54% or so) of the USA has been fully vaccinated.

And President Biden has now mandated vaccinations for not only the 2.1 million civilians who currently work for the federal government but has also mandated vaccinations for anyone who works at a company that employs more than 100 people – which covers another 58.9 million Americans. You can assume that a little more than 50% of those groups are already vaccinated.

That leaves around 30.5 million people who didn’t want to get vaccinated of their own free will, who now must decide between liberty and unemployment. The unemployment rate is very relevant to our investment process.

For employers who have over 100 people working for them, they run the risk in a very tight labor market, of losing existing employees to smaller competitors who don’t have to mandate vaccinations. I also tend to think that these sorts of mandates are pretty impossible to enforce but many employers won’t be interested in taking that chance.

Mandating vaccinations (especially for healthy folks, or those who already have recovered from COVID) makes zero (statistical) sense. There are plenty of folks in the medical profession who think so, too… For example, Dr. Aaron Kheriaty, who is a psychiatrist and bioethicist at UC Irvine is suing the university over its policy of mandating vaccinations.

You can check out adverse events related to vaccinations and download the data for yourself, here.

Mandating vaccinations does, however, make a lot of money for some companies and individuals… like the 9 new “vaccine billionaires” that were created in the past several months.

And before someone sends an angry email to me about how we “do it for those at risk,” let me stop you. Can you think of anything else that YOU do to reduce other people’s health risks?

I can only think of things that we have tried, and failed to do… like outlawing the “Big Gulp” in the state of NY. And then there is the simple fact that vaccinated folks are still spreading COVID, and that comes directly from the CDC, too… they literally put this fact as a bullet point under the section titled “What We Know.”

But when there are billions of dollars at stake… things have a way of changing.

As the news broke last night about the new mandate for small businesses to either force vaccinate their employees, or test them every week forever… I started to think about which companies would immediately benefit. The answer… COVID testing companies like Orasure Technologies (OSUR)… the stock is up 10% today.

Unfortunately, we don’t really have the capability on such short notice to take advantage of opportunities like this one in our strategies and we are mostly fully invested now, so we didn’t buy any OSUR. The stock may not hold those gains, anyway, as is often the case with trading the headlines.

We do have a separate hedge fund where we bought OSUR for a nice gain. If you meet the definition of a “Qualified Client” and you’re interested in those sorts of trades – let us know.

It doesn’t seem fair that an executive order should render so much benefit to one company while so obviously hurting so many others. But this is the world we live in and have lived in since before the most recent election. We must invest according to reality, not what should be, or what I think is virtuous and fair.

Back in September of 2020 I said in my letter to you:

“…be on the lookout for other “at all costs” mentality. And be ready for the unintended consequences that are sure to develop wherever it can be found…”

Well, it sure seems to me that our leaders are pursuing vaccinations, at all costs. There will be unintended consequences, and I endeavor to understand them, and invest accordingly.

Sometimes that means opportunities to get aggressive and play offense and other times that means a lot of uncertainty and valid reasons to be very cautious.

Right now, we are in a very weird spot as a country, and species.

Something will have to give. With any luck, we will live to see reasonableness and liberty prevail. I am glad that vaccines are available to those who want them, and I pray for long, happy lives for everyone – both those vaccinated and those who choose not to be.

I don’t share the above with you to upset anyone or invite any debate on the matter – but rather to share with you how I think through the implications of decisions of leaders in government and business, around the world. Occasionally, the implications are striking. Most of the time it is just noise.

Maybe the government wants the unemployed to stay that way. Maybe that is why we keep hearing about Universal Basic Income or UBI… It sure doesn’t sound like what I read in the Declaration of Independence.

In the meantime, we will continue to rigorously analyze statistical data related to capital markets and the various world events that drive those markets so that we may take advantage when the odds are in our favor and protect your capital when they are not.

Performance Update

Last month was another good one for the Appreciation Strategy, where we beat the S&P 500 return on the upside. As regular readers know, we have some catching up to do in that strategy to get back to our objective of matching the upside of the S&P 500 for the year so beating the market for the month is exactly what we needed to do. We are within striking distance now!

The Income Strategy didn’t fare quite as well but still generated a positive return for the month. This year, Income is still ahead of its benchmark (50% of the S&P 500’s upside) by a fair amount. So, we are in great shape.

Outlook

I probably wrote a little too much about my thoughts on the current state of the world we live in, but I thought it was necessary to be able to write this section.

My general outlook right now, is pretty dismal.

But that doesn’t necessarily have to translate to a negative outlook for the stock market, at least for now. Other things like seasonality (which I will get to in a moment) are probably more important in the short run.

End of the day, there is no way to manage portfolios today without looking at every single potential investment through the completely opposite lenses of:

Vaccines (being mandated) and successfully saving the world from COVID and folks resuming their normal daily lives.
Leaders overreacting to COVID (or whatever comes next) and shutting down the entire global economy, again…and again, and again… forever.

Imagine making an investment without considering how the business will perform in each of these environments. Then imagine trying not to “guess” at which one you personally think is going to happen. And then imagine trying to write an entire investment commentary to the people whose money you are tasked with investing, without saying a single word about it.

As you may be able to tell, I do not support the federal government or any government mandating personal health decisions. C.S Lewis described the situation well when he said:

“Of all the tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under the omnipotent moral busybodies. The robber barons cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience.”

I sincerely apologize if I have said anything that anyone deems to be offensive, or personally directed – nothing I wrote here is meant to be either. I just think it is mandatory to tell you what I would want to know if our roles were reversed. If you were allocating my family’s capital.

My job as a portfolio manager is to set aside my personal opinions and make sound investments after weighing the current investment and economic environments and very seriously considering where those are likely leading the stock market in the next 6-8 months.

We have a great team here at Elevate that includes two other CFA Charterholders in addition to Ken’s extensive experience and countless credentials – and they hold me accountable when it comes to selecting investments for our strategies.

Aside from pandemics and mandates, September is historically the worst month of the year for the stock market. The following chart from our friends at Sentimentrader makes visualizing the tendency for poor returns this time of year as obvious as I have ever seen.

August is the second worst month of the year, so we are actually halfway through the worst two month stretch of the year, if you want to look on the bright side.

Unfortunately, the S&P 500 is already down a little over the first ten days of September. With 15 trading days left in the month, anything can happen, especially in such a headline driven market.

I will continue to look for and hold onto investments that I think will do well no matter which scenario plays out with COVID and vaccinations. We will consider other scenarios too, even though the current situation seems subject to a very binary outcome. And we will follow our stops when they hit.

Ultimately, there probably aren’t that many companies that are going to do well in both environments, so the key is to diversify and cut the losers fast. With that in mind, you may see us using tighter stops than normal to get out of bad situations quickly, as they arise.

For now, the market is still very expensive, but it is still in an uptrend. And as I pointed out last month, the combination of “expensive and uptrend” tends to see stocks keep going up, until the trend breaks down. So, we are staying long with our eye on the exit doors!

I thank God for each of you, and I thank each of you for reading this letter!

Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor

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.