Week of 3/13/2020 - Market Melt Down. A New Era?

3/12/2020

The S&P index dropped 9.5%. The market was almost 30% off its peak.

The decade long bull market is officially over.

Throughout 2019 I consciously high graded my portfolio, away from the speculative micro/nanocaps into large caps. At the same time I capped my equity exposure to 80% through most of 2019.

I came into mid-Feb with equity exposure about 65-70% of my portfolio. Then the market hit. Now I'm roughly 60% equities - I sold very marginally, the reduction is mostly because stocks went down so much that they became a smaller percentage of the mix.

What now? I've sold most of what I wanted to sell. I still have some high growth, high multiple names that are liable to take a 70% drawdown, but I've cut them down to small size and readied myself to ride out the pain. (TTD, SQ, UBER).

I even added - very marginally - to companies that I think will not only survive a recession, but will come out stronger by consolidating weaker competitors.  Examples are GOOGL, ILMN, DIS.

So, What now?

It certainly looks like a recession is unavoidable. Indeed the U.S. faces a tough trade-off  - shutting down everything to protect public health means taking economic hits.

So why have I not cut exposure to 0 or even go short?

Some of this is almost Pavlovian - every time I cut in the past 10 years stock roar back higher. It got even more absurd in the Trump era - as soon as stock goes down 10% there's a Fed cut coming.

Shorts have lost every single time because of policy responses.

So what's the normalized valuation going forward? Any low growth company that's not totally cyclical can probably fetch 20x PE. As policy response grows stronger, I wouldn't be surprised if that number goes to 25x (and with fake earning add backs too as in stock based comp).

So I'm holding, under the assumption that the economy may enter a recession, but comes back in 3-5 years - with even more system leverage.

Why The Economy Might Not Come Back

What could go wrong is if the economy just don't come back. Maybe at some point we just can't borrow our way out of a recession anymore?

The trigger could be this reflexive intersection between markets and politics - as markets go down, the chance of Trump losing re-election increases. Imagine Biden wins in November and Democrats take congress, they will likely roll back the Trump tax cuts. Immediate hit to corporate earnings!

Government is already cracking down on big tech. You layer on more regulation and taxes...

Then we can look forward to a decade of stocks going nowhere.

For now though I'm still holding to my 60% equity exposure. I may regret it one day.


3/13/2020

Stock was going nowhere until the last 30 minutes of trading. Trump spoke in a press conference, and talked about telehealth (TDOC stock went flying as he speaks). Then he brought up Google (GOOGL goes up), then Thermo Fisher, then a steady stream of CEOs.

Then he talked about waiving student loan interest, and buying oil for SPR.

Stock went on a rampage toward the close. It was hilarious! A master class by the best stock pumping president ever!

It's as if Thursday never happend.

This is why I'm afraid of shorting stuff.