Is it Over Yet?

November 21, 2018

Markets since the election have reversed course sharply.  This post will be short and not review my view of the key reasons, but it is worth noting that the world’s ills have not been corrected by the US elections, by the Brexit agreement, nor any of the myriad other issues that have been progressing since my last review.

Below is a chart of the S&P500.   That spike up on the right was the day after the election when all seemed like it might be okay, but the problems begin with US politics, but they don’t necessarily end there and the market downturn is suggesting there is still a lot of risk.

20181121 - SPX

Today a couple of reports continue with the whipsawing of your opinion.  You really should ignore the news if you are an investor . . .

First was that durable goods orders sank 4.4% in October.  That’s a big number but it is just one month so while it fits with my thesis that things will slow in the US economy, it needs confirmation of a trend.   Secondly, the news is that the economy will begin to slow materially soon.  Consumer sentiment is also declining (happens every time the market drops precipitously).  There are so many ways to examine the world and recognize that 2018 may have been about as good as it gets.

So the path forward is to perhaps buy deeply discounted assets, but more importantly recognize that if the current trend continues, asset prices will be lower in the future, thereby offering a better return.   Today you can reduce your risk by holding more cash than you would normally (perhaps 40-80% depending on your situation), and being patient while valuation metrics become clear.

Without going into detail, GE is a good example of what can happen to equities.   I am an owner of GE and have recently added to my position, but the company is in serious trouble, (and that is why the stock is down 60% on the year and about 75% from it’s recent high in 2016).   But more importantly companies like this are proverbial canaries in the coal mine.  The company has two significant issues, both of which reflect bad management.   The first is that they have massive amounts of debt and are having difficulty generating cash flow to cover the payments.   The second is that they have used massive amounts of capital in trying to hide their slowing growth through acquisitions of businesses (which some are now being sold back at a loss) and buying back their own shares at a significant premium to the current price.

Both of these suggest that past management has failed at even the most basic economic lessons.   It is certain that they are not alone.

Tread carefully!  The issues facing the market are coming into focus but the resolution for the concerns will still need time to reach clarity.   If you don’t need to make money today (trading), then be patient and wait for some clarity.

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