This Week’s Message: Price or Conditions? — Or — Taking Only “Good” Shots

In this week’s message I’m dispensing with all charts and data (save for 1 point), you get plenty of that from me everyday. 

Recently I’ve found myself thinking more than usual about the price of stocks, or, I should say, about the price movement of stocks… well… actually, about the fact that the recent price movement of stocks — all bear market history lessons aside — in no way jibes with present general conditions.

Not that price movements don’t offer important clues, they do, but basing decisions solely on price, however, is for most folks — save perhaps for those with defined technical processes/disciplines, and the wherewithal to know when those processes are no longer effective — an ultimate recipe for disaster.

Recall the basketball analogy I’ve shared herein a few times. With it I suggest that investing decisions are like shots taken on the court:

1. There are good shots that go in.
2. There are good shots that miss.
3. There are bad shots that miss.
4. There are bad shots that go in.

1s are great. 
2s aren’t “great”, as they miss, but they should be taken over and over again.
3s are to be expected, and good/experienced players know what constitutes them, and know not to take them.
4s are ultimately disastrous, as they tend to keep the shooter shooting bad shots, and losing games for the team, over and over and over again.

As I type this morning, 20 minutes before the market open, Dow futures are pointing to a 150-point rally. It was looking a little better an hour ago, but then the ADP private payrolls number for April was released; estimating that 20 million Americans lost their jobs last month. My cell phone just lit up, Uber announced that it’s letting 14% of its workforce go. Now the Dow’s pointing to a 160-point open. Yep, that’s been the script of late…

I spoke with an unusually astute friend yesterday, someone whose money I’ve had the esteemed pleasure of managing for well over a decade, who finds himself utterly bewildered by how the market trades at current levels amid what he knows about the present state of general conditions. He totally gets that there’s record stimulus being brought to bear, but he (his career being in finance) also totally gets that piling debt on top of debt ultimately leads to, well, an ultimately disastrous debt implosion. I.e., the bailing out of the buyers of that debt doesn’t relieve its issuers of the burden of paying it back, it just transfers the buyers’ pain onto the Fed’s balance sheet. Yes, that twinge of anger you’re now feeling is justified…

Again, 20 million Americans, according to ADP lost their jobs last month; if you add up the last four weeks of unemployment claims, the number would be 50% higher. The total for the entire 18 months of the last recession (the now-former Greatest Recession Since the Great Depression) was 8.6 million. 

As of yesterday the S&P 500 was down 11% on the year. This morning it’s up 0.77% (Dow’s now up 172 points). So, if that holds, make that down ~10% year-to-date for the S&P — and that’s after ADP’s  minus 20 million jobs report. 

During the last recession — when 8.6 million (less than half the present, still growing, tally) folks lost their jobs — the S&P lost 57% of its value before it was all said and done…

So, question, are the folks (other than short-coverers and options-hedgers) who are bidding shares higher this morning presently taking good shots? Well, if they’ve been taking them since the March lows, to them it has to feel like it. I mean, if the shots keep going in how can they be bad shots? 

Yep, I totally get it. Thing is, they’re taking some really long shots, against the wind (we play outdoors), with a severely over-inflated basketball. Should one of those shots happen to come up short, as that ball takes the long bounce (remember, it’s over-inflated) off the rim and catches the wind, I’m afraid those players will find themselves chasing it a long way down that dark and scary ally that lurks behind the court. 

Well, team (clients), I understand how frustrating it can be playing defense when everyone around us is sinking shots like (and thinking they’re) Steph Curry — although few of you are complaining (as we’re still nicely ahead of the game year-to-date). But having scouted and played/coached in literally every tournament since 1984, well, let’s just say that our latest scouting reports — not to mention the threatening weather — dictate that we stick to our defensive game plan for the time being.

Thanks for reading,

P.s. With regard to the S&P 500’s mere 11% decline on the year, know that concentration among its top 5 holdings is the highest it’s ever been. By the way, historically, that’s been a harbinger of bad things to come. When we look at the market overall, however, a different picture emerges: 

The S&P 500 Equal Weight Index (all members measured the same) is down 19.49% on the year. Breaking it down further, 20% of the S&P 500’s members are off 40% year-to-date, while more than half are down 25%… As bad as that may sound, it nevertheless fails to discount on-the-ground reality, in my humble estimation


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