(Please enjoy the latest investment insights from the Reitmeister Total Return newsletter).
On Friday afternoon (5/8) we shifted to a net-short portfolio. In just 3 short session things have been certainly fallen our way with a portfolio return of +4.36% return vs. -3.79% loss for the S&P.
We all know why stocks SHOULD continue to head lower from here. We just don’t know if they WILL. That and other topics are on the menu today.
I have spent the better part of 2 months pounding the table on this size of this economic problem and why down makes a heck of a lot more sense than up for stock prices. And for 80% of that time stocks continued to climb to obscene levels making this an extremely overvalued market. Here are a couple articles that concur with that value notion.
Stock market has richest valuation in 18 years even as profit outlook worsens
David Tepper says this is the second-most overvalued stock market he’s ever seen behind only ’99
On Friday I couldn’t take it anymore and saw it as an opportunity to make 7 trades that pushed us to 32.5% short the market. As shared up top that strategy has worked wonderfully as we have gained +4.36% while the S&P fell by -3.79%.
You may be wondering how that kind of outsized return is possible if we are only 32.5% short the market. And that is because our inverse ETFs have vastly outperformed the inverse of the S&P…which is exactly why we sold SH to be in the 3 other ETFs that have more risen between 6.56% to 7.69% in the past three sessions. On top of that our stocks have all outperformed. And gold rising in face of market concerns is just a cherry on top.
Back to the main point. My focus the last 2 months is pointing out the enormous size of the economic problem and that it will not blow over quickly and thus WAY TOO EARLY for stocks to be rallying.
Perhaps the action the past few days is a growing acknowledgement by other investors that they finally got the memo. Or maybe this is just another pullback before testing 3,000 once again….and then finally heading lower in earnest. We can patiently wait for either outcome.
For now, I will just continue to color your understanding of what is going on out there and why our short portfolio posture is still the most sound strategy. Here is this week’s list of new insights to drive home my point:
Stocks got decidedly more negative Tuesday afternoon as Dr. Fauci gave some pretty sobering warnings to Congress about the risks of opening the economy too early. That it may lead to more “suffering and death”. And yes, that would be coupled with setbacks on economic recovery.
Sorry for saying this. But this is as obvious as night following day. And another reminder of how the rise to recent levels never made any sense when the economic outlook from here is so riddled with question marks. Truly the move towards 3,000 was pumped up with 110% optimism of the best possible outcome. So even if things only come out 80% as good as expected, then stocks are too high at this level.
The above couples well with this article…
States that have re-opened economy first are seeing an increase in Covid-19 cases which shows the difficulty in re-opening the economy and why Mohamed El Erian believes that we are looking at a W recovery with many false starts with subsequent tumbles. And yes, I would say right now we are still too close to the top of the W.
Goldman warns of an 18% stock-market drop as coronavirus cases steadily rise. Here are some specifics from that piece:
Meanwhile, Kostin is placing a three-month target on the index of 2,400, or an 18% decline from current levels.
“A single catalyst may not spark a pullback, but concerns exist that we believe, and our client discussions confirm, investors are dismissing, including $103 billion in expected bank loan losses in the next four quarters, lack of buybacks, dividend cuts, and domestic and global political uncertainty,” he wrote.
Investor Stanley Druckenmiller says he doesn’t like the way the market is set up from CNBC.com. And here are insights from that piece:
“Hedge fund manager Stanley Druckenmiller told the Economic Club of New York on Tuesday that, “the risk-reward for equity is maybe as bad as I’ve seen it in my career,” Druckemiller said, according to the organization’s Twitter account.
The hedge fund manager also said he thought the market was overreacting to news of progress on antiviral drugs, such as Gilead’s remdesivir.
“I don’t see why anybody would change their behavior because there’s a viral drug out there,” he said, according the club.”
Jobless Claims on 5/7 showed another 3.17 million lost. This brings the total over 33.5 million. And this was followed up by both ADP and Government Employment reports showing over 20 million jobs lost in the past month. The Government now shows a 14.7% unemployment rate. That is already worse than the Great Recession and will likely test the Great Depression record of 25% unemployment when all is said and done.
Now let’s add on top an interesting note from a recent Fed Survey that shows a 40% loss of jobs for households making less than $40,000 a year. Yes, 40% of those living paycheck to paycheck no longer have a paycheck. Which explains why congress is contemplating a new wave of $3 trillion in stimulus. The sum total of this package and the previous = $5 trillion which is more than 5X the stimulus from the Great Recession.
Or to put it another way, the government believes this problem is 5X bigger than the Great Recession. And if they are that worried…perhaps we investors should be that worried too.
Aviation industry warning
“Air traffic levels will not be back to 100% by September. They won’t even be back to 25%. Maybe by the end of the year we approach 50%,” Boeing CEO Dave Calhoun said in an interview with NBC to be aired today. “So there will definitely be adjustments that have to be made on the part of the airlines.” Asked by Today show host Savannah Guthrie if a major airline might have to fold, Calhoun replied, “Yes, most likely.”
NFIB Small Business Optimism for April came in at the lowest level in the 46 years of the survey. That’s because the sales expectation reading dropped 30 points to -42. That is more than 2X worse the previous record low of -24% back in April 1980. Some will point to the increase in participants saying that they expect the economy to improve. But that is such a false positive. Yes, business will improve over having your business closed for 2 months. Anything is better than zero. But will reopening business = growth = expanding their work force and spending more? Probably not and that is the heart of the economic problem.
As you imagine there are many more articles I could share with you to paint the picture of the hot mess that is the US and World economy. Yet I believe this is an adequate enough grouping to explain why there is too much optimism baked into the current market level which makes downside more sensible than upside…which is why we are 32.5% short the market.
Speaking of which, I realize that math is not intuitive to everyone so let me spell it out.
56.5% allocation to 3 inverse ETFs = 56.5% short
24% allocation to 3 long stocks
32.5% net short the stock market.
On top of that we have an 8% allocation to gold and 11.5% in cash. Speaking of the portfolio…
This section highlighting the specific 7 holdings in the portfolio is reserved for Reitmeister Total Return members. To learn more about the service and see these 7 picks, then click the link below:
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SPY shares fell $2.40 (-0.85%) in premarket trading Thursday. Year-to-date, SPY has declined -12.75%, versus a -12.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More…
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