Instant Experts and the Middle Ground

We live in an age of instant experts.

Last year social media was full of constitutional experts who were the definitive source for impeachment related information and the proper definition of high crimes and misdemeanors. In 2020 the number of experts on viral diseases and how to best manage a global pandemic. The murder hornet experts are currently on deck.

I have dealt with all of this for decades in the markets. Everybody is an expert and knows exactly what will happen in the financial markets over the next days, year, or decade. They can very confidently tell you where the stock market will bottom and where it will peak with a shocking degree of confidence. They are almost always wrong, but that’s your problem if you followed their advice. They have moved on to the next story and the next victim.

The coronavirus experts are killing me with their alleged knowledge right now (unfortunately, in some cases, that could literally mean killing me).  The experts- the real experts who have studied viral pandemics for decades- are telling us that they have no idea how this plays out. This virus is different than the last, which was different from the one before that. They have told us that social distancing and not touching your face help prevent the spread. Washing your hands often is a game-changer as well.

That’s not enough for the new experts. They want to tell you exactly what the virus will do, how it will and will not infect or kill. They know what you should do. They know if masks do or do not help prevent the spread (they do). None of them have spent a minute in a medical school or lab, but they can lecture you on herd immunity at length.

One section of the newly minted experts thinks we should stay in lockdown until there is a vaccine. Most of these people have a stack of cash in the bank and are in an excellent position to ride this thing out. Many of them have nice safe government jobs. A full lockdown would cost them nothing, keep them safe while ruining the lives of so-called non-essential workers and business owners.

The other side wants everything opened with no restrictions right now. For some reason, there is a subset that thinks the way to express their demands is to parade around with loaded weapons and yell a lot. The path chosen by these experts is going to mean more infections, more deaths, and there is a strong possibility of overwhelmed health care systems. Apparently, they don’t care as long as they can go to the beaches and bars.

There is a middle ground. I will freely admit I know little to nothing about infectious viral diseases and how they attack us. I do have a really good Rolodex (that’s contacts list for the younger among us). I put it to use calling people who do have an understanding of these things and how to prevent a wider spread. I talked with emergency room personnel, EMT’s. Infectious disease doctors and research physicians over the past several weeks. I have read a few dozen studies on preventive measures.

If we all practiced social distancing and wore masks, we could reopen most of the economy right now. Infection rates would plummet, giving scientists time to perfect vaccines and treatments. We could be almost normal, except for the masks and the painful chore of standing six feet away from everybody else.

Look, I get it. The masks are a pain in the ass. I don’t like it either. I won’t pretend I am wearing my mask for you.  I am wearing my mask for ME. I am 59 and smoked for 40 years. I do not want to spend any time gasping for air in a hospital bed because I didn’t want to be mildly uncomfortable when I venture out and about.

For the masks don’t work crowd, you should know all the evidence suggests that they work and work very well. Look at Japan, Korea, Taiwan, and Vietnam for the results of the experiment that proves the hypothesis.

We can have the best of both worlds. Open economy and increased safety.

We have lots of stock mark experts out and about these days as well. Some say we are going to the moon. Some say we will fall into the abyss. Both are possible, and I have no idea which one is right.

I do know that any forecasts made based on earnings projection or current stated values of assets are probably wrong.

 I know that Warren Buffett and Sam Zell, two of the best-known bear market buyers in history, are doing nothing yet.

 I know all of the private equity executives on a recent conference call said that while they were putting some money to work in special situations, none of them expect a quick ending to this and have lots more cash they hope to put to work at lower prices.

I didn’t sell off my portfolio when this started. I didn’t buy on the way down either because this is not a financial crisis. It is an economic and health crisis, and the eventual impact is unknown. If we see a rise in cases as we try to reopen and the economy slams shut again, these prices will seem like a pipe dream.

I am building cash and looking at industrial REITs and infrastructure REITs that won cell towers and data centers. I am building a list of high quality, conservatively financed companies that I hope to buy at bargain prices. I am tracking infrastructure companies that will play a huge role in the eventual economic recovery. I am talking to bankers and closely watching call reports to determine asset quality, so when the time comes, I will be ready to buy more small banks.

When today's bulls are puking, and Warren and Sam are buying, I will become a huge buyer. If I am wrong and stocks do continue to move higher, then the stocks I currently own will also go higher.

It’s the middle ground.

I'm Back!

Welcome to the new blog!

Now that I am rolling out here on my own with no new venture in place yet (and yes, I am working on that), I still feel the need to be able to write about what I see in the markets and the world. As a bonus, there is no need to filter one damn word for a sensitive audience. If I see stupidity, I will point it out. If I see something ridiculous, I will point it out if I feel like writing about baseball and books some days, that is just what I will do. If I don’t feel like doing anything on a given day, then that’s what I will do.

As everyone knows, my time at Money Morning has come to an end. I loved working with some of the brightest and talented people in the financial publishing industry abut they have chosen a new path forward that does. While I may not agree with that path, it is theirs to take, and I wish them well.

By the way, be sure and follow our posts at DailyAlts.Com. Both Garret Baldwin and I are writing there about the fascinating world of alternative investing. I have found over the years that following what is going on in private equity, private credit, and real estate, as well as venture capital, can help spot trends and pockets of undervaluation in the markets. Be sure to sign up for Garretts Daily Alts letter and my Active Alpha publication. That’s currently delivered free, and we are discussing whether to keep it monthly or go weekly or bi-weekly with that.

The markets have defied logic and have come screaming back off the March lows. As this has gone on, I keep hearing Marty Zweig telling Louis Rukeyser never to fight the Fed. The Fed has flooded the economy with cash, and Congress has done its part by making unemployment and attractive alternative for the tens of millions of people thrown out of work.

I have my doubts that the market can withstand the wave of bad news still to come. A lot of the jobs lost are never coming back. There will be high yield bond defaults. GDP will drop. Second-quarter earnings are going to resemble Kings Landing after the dragon was done his little performance. There is a lot of horrific news still coming, and it is going to be interesting, to say the least.

That’s what is happening if all the states opening back up don’t see second wave infections. If that happens, it could get really ugly really fast.

I could be wrong. I am the self-admitted worse market timer in history. If we do see a V-shaped recovery, I still have enough companies in my portfolio to see a meaningful recovery. I have all my little bank, and they will come roaring back. I do not think it plays out that way. I will be happy to be wrong about this, but I have a hard time see a fast recovery when we have collapsed the economy very quickly, and some segments of it will never come all the way back.

Whenever this end either by just burning, but like some viral pandemics have done on past years or the development of treatments and vaccines, you will want to an aggressive buyer of small banks. There will be a massive M&A wave sweep the community banking sector. You will also see consumers rewarding the small banks who got them their PPP loans in record time. I spoke with one banker the other day who told me he was getting loans done for small businesses in his community in just a few hours.

I will sound the all-clear when I think it is time to jump back into the little banks. We need to see second-quarter credit performance before the all-clear can be safely sounded. The timing of in and out of the bank sector has worked for me because I keep my opinion out of it entirely. The numbers will tell us.

The output from all the screens contains information about the markets. There are usually somewhere around 70 companies that are cheap based on enterprise multiples across all market cap sizes and have excellent fundamentals and a low risk of financial distress. In 2003 there about 200. In 2009 there were also about 200. In the first week of March, just 35 US companies passed those filters. Today there are still only 40 passing companies. You can call it what you want, but you cannot call this market cheap.

Some pundit was talking the other day about the market trading at just 17 times forward earnings, which was historically only a little high, and that adjusted for low rates stocks could be undervalued. That was the best laugh I have had in some time. No one has a clue what forward earnings will be. The virus will call that tune. So far, coronavirus has not had friendly inclinations, so it is probably not sharing that information.

It is a confusing time, to say the least. On top of everything else, the lockdown is starting to cause cabin fever for many people. I am lucky in that staying home with my family with a glass of bourbon, and a good book is my idea of a good night. I do miss the hell out of baseball, but like a junkie hanging around the methadone clinic, I have been able to hold off the worst of withdrawal playing MLB TSB 20 on my phone quiets the jitters. The liquor store kindly delivers here in Florida, so it is hard to bitch about being with the people I care about in a house full of good bourbon and good books.

Besides, there are plenty of other things to bitch about right now. We will start on those tomorrow.