Valuentum Exclusive Analysis for the Discerning Investor

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Mar 23, 2020

Fed and Treasury Efforts Might Not Be Enough to Avoid Another Great Depression
Image: The Energy Select Sector SPDR and Financial Select Sector SPDR, two securities removed from both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in August 2019 have been ravaged during this market selloff. We maintain our view that the energy and banking sectors are worth avoiding during this market meltdown. The U.S. is stuck between a rock and a hard place, and we might get the next Great Depression regardless of what the Fed or Treasury does. The timeline for when these markets attempt to bounce back meaningfully from this disruption may not be based on whether COVID-19 cases roll over, but rather when consumers start coming out to spend in droves again, and that may not happen until we have a vaccine broadly available. We're maintaining our fair value range on the S&P 500 of 2,350-2,750, with expectations of panic/forced selling down to 2,000 on the broad market index (it closed at 2,304.92 on Friday, March 20). We believe that savvy investors have been nibbling at this market during the past couple weeks and may have achieved up to 50%-75% of their equity allocation in a well-diversified portfolio via dollar-cost averaging strategies, with expectations of further market declines. Our best ideas remain in the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio and Exclusive publication. Expect more gut-wrenching volatility.

Mar 22, 2020

Coronavirus disease (COVID-19) -- Sky News
"The crisis gripping the town at the centre of the global COVID-19 crisis in Italy has been witnessed by Sky News' Chief Correspondent Stuart Ramsay." -- Sky News

Mar 19, 2020

Extreme Volatility and Crisis Economics
Image: The Dow Jones has now registered 8 consecutive trading days with a 4% move in either direction, from March 9 through March 18. This is the most volatile time in history, a streak that is longer than the 5 consecutive days registered in November 1929 (Great Depression), 4 consecutive days in 1987 (Crash of 1987), and 4 consecutive days in 2008 (Great Financial Crisis). The worst of the declines may still be ahead of us. The S&P 500 still is trading within our fair value estimate range of 2,350-2,750, and we wouldn’t be surprised to see panic/forced selling all the way down to 2,000 on the S&P. Expect more volatility, and please stay safe out there as the world declares all out war on COVID-19. Our best ideas remain in the Best Ideas Newsletter portfolio, Dividend Growth Newsletter portfolio, High Yield Dividend Newsletter portfolio, and Exclusive publication.

Mar 18, 2020

US Considering $1 Trillion (Or More) Fiscal Stimulus Program
Image Source: Frank Boston. A lot has changed in a short period of time since we published our first note covering the potential for a major US fiscal stimulus program back on March 10. Due to the sheer amount of pummeling the stock and credit markets have taken over the past few weeks, along with consumer, business, and investor confidence at-large (we’ll get a better read on that over time), it seems that both Democrats and Republicans are now more open to a major fiscal stimulus program than before. The ‘Survey of Consumers’ conducted by the University of Michigan notes the ‘Index of Consumer Sentiment’ fell from 101.0 in February 2020 down to 95.9 in March 2020, and there’s room for that index to fall a lot further. Please note the next data release date is March 27. In all likelihood, this is all due to the negative impacts posed by the ongoing novel coronavirus (‘COVID-19’) pandemic to both the health of individuals (particularly the older demographics and those with preexisting conditions) and the health of the overall economy (due to the “cocooning” of households and consumers). We sincerely hope everyone, their loved ones, and their families stay safe out there as we get through this pandemic as a nation and as a global community.

Mar 17, 2020

Buybacks and Wealth Destruction
From Value Trap: "According to S&P Dow Jones Indices, S&P 500 stock buybacks alone totaled $519.4 billion in 2017, $536.4 billion in 2016, and $572.2 billion in 2015. In 2018, announced buybacks hit $1.1 trillion. Given all the global wealth that has been accumulated through the 21st century, it may seem hard to believe that another Great Depression is even possible. However, in the event of a structural shock to the marketplace where aggregate enterprise values for companies are fundamentally reset lower, the vast amount of cash spent on buybacks would only make matters worse. The money that had been spent on buybacks could have been distributed to shareholders in the form of a dividend or even held on the books as a sanctuary of value within the enterprise during hardship. Buybacks, unlike dividends, can result in wealth destruction in a market economy, much like they can with companies. This is an important downside scenario that is often overlooked." -- Value Trap, published 2018

Mar 11, 2020

Seeds of Financial Crisis May Have Been Sown, Volatility Soars
Image Shown: The broader market indices continue to reveal tremendous levels of volatility. The Dow Jones Industrial Average dropped 5.86%, or 1,465 points, to 23,553 during the trading session March 11. From Value Trap: It seems like the markets experience a new financial crisis every decade or so. During the past few decades alone, there have been three significant banking crises: the savings and loan crisis of the late 1980s/early 1990s; the fall of Long-Term Capital Management and the Russian/Asian financial crisis of the late 1990s; and the Great Recession of the last decade that not only toppled Lehman Brothers, Bear Stearns, Washington Mutual, and Wachovia but also caused the seizure of Indy Mac, Fannie Mae and Freddie Mac...It's likely we will have another financial crisis at some point in the future, the magnitude and duration of which are the only questions. My primary reason for this view is not to be a doomsayer, but rests on the human emotions of greed and fear... -- Value Trap, published 2018

Mar 10, 2020

S&P 500 Hits Target Range, Nibbling at Ideas?
As we have outlined extensively in Value Trap: Theory of Universal Valuation, the combination of indexing and quantitative algorithmic trading is creating a situation of tremendous volatility. When indexers sell, they're not selling overpriced equities, they're selling everything in the index, indiscriminately. This has profound implications on the levels of broad market volatility, as we've been witnessing, exacerbated by the quants that pay little attention to fundamental analysis.

Mar 10, 2020

Fiscal Stimulus Coming to the US?
US equity markets started up strongly initially on Tuesday, March 10, likely due to reports coming out that the Trump Administration was considering recommending payroll tax cuts, paid leave, and special loans to small businesses to offset the negative impacts of the novel coronavirus (‘COVID-19’) epidemic. There are over 560 reported cases of COVID-19 in the US as of this writing, and unfortunately, that includes roughly two dozen fatalities. This remains a serious epidemic.

Mar 9, 2020

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?
From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as downside probabilities such as a liquidity event are baked into the market price and at a higher probability. Because debtholders are higher up on the capital structure than equity holders, shareholders can sometimes get nothing in the event of a bankruptcy filing. Entities that are extremely capital-market dependent, or those that require ongoing access to new capital to fund operations, often face the greatest risk of the worst equity price declines during deteriorating credit market conditions.” Value Trap: Theory of Universal Valuation, published 2018

Mar 8, 2020

Coronavirus Crisis Deepens, Italy on Lockdown
Image: WHO. The epidemic curve of confirmed COVID-19 cases that have been reported outside of China is steepening. Italy remains a hotspot. The situation with COVID-19 remains dire. A vaccine may not be available for another 12-18 months, which is simply too long before what could be an overwhelming of healthcare systems around the globe. The WHO has already revised the expected mortality rate of COVID-19 higher, now 3.4%, and its catastrophic impact on the large economies of China and Italy is already being felt. The US equity markets have largely lulled investors to complacency the past decade or so, and many have been conditioned to largely ignore major events as a result, employing the buy-the-dip-at-any-price mentality and championing “stocks always go up” doctrine. However, the situation with COVID-19 could be setting the stage for an all-out financial crisis, as we outline in this piece here. With the S&P 500 at 2,972, the market continues to largely ignore the long-term risks that may come from changed behavior as a result of COVID-19. We’re reiterating our near-term 2,350-2,750 target on the S&P 500, and we encourage long-term investors to evaluate long-term charts to assess how far we have come since the March 2009 panic bottom, and how even a modest 10-20% sell-off from here (supported by reasonable forward multiples and earnings) would be largely a blip over the long term. This blip, however, may cause an outright panic, made worse by price-agnostic trading. The Fed, for example, made an emergency 50 basis-point rate cut with the market just a few percentage points off all-time highs. Emotions are running high, and investors are simply not ready for COVID-19. All else equal, panic selling is not selling with the S&P 500 at 2,972, today's levels. Just because stock prices have fallen doesn't make them cheaper. Panic selling, for example, might be selling with the S&P 500 at 2,000 (if it ever reaches those levels), and that's if reasonable valuation expectations don't warrant those levels at that time. Today, we're still at relatively overpriced valuation levels on broader market indices, and the sell-off to this point has been more reasonable than overdone, in our view. Please stay safe out there!