While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.
Following the advice of another newsletter whose name I won’t mention, he bailed out of all his stocks during the March 2020 meltdown. He was promised that Armageddon was coming, and the Dow would collapse all the way down to 3,000.
With the Federal Reserve now flooding the markets with QE and the government about to unleash untold numbers of stimulus packages, here we are with all the major stock indexes at all-time highs, the (INDU), ($COMPQ), and the (IWM). Higher summits beckon.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped-up Honda weaved into my lane of Interstate 80, cutting me off. My Tesla Model X on autopilot suddenly broke sharply. Then I gave my friend my response, which I summarize below:
1) There is nothing else to buy. Complain all you want, but US equities are now one of the world’s highest-yielding securities, with a lofty 1.8% dividend.
A staggering 50% of S&P 500 stocks now yield more than US Treasury bonds (TLT). That compares to two-thirds of all developed world debt offering negative rates and US Treasuries at a parsimonious 1.51%.
2) Oil remains historically low, and the windfall cost savings are only just being felt around the world. $50 a barrel is a hell of a lot cheaper than $150.
3) Obscured by the GameStop (GME) fiasco was the fact that technology stocks continue to report absolutely blockbuster earnings. This will continue for another decade. Buy them before they go up ten times….again.
4) What follows a collapse in European economic growth? A European recovery. European quantitative easing is working just as well as it is here.
5) What follows a Japanese economic collapse? A recovery there too, as hyper-accelerating QE feeds into the main economy. Japanese stocks are now among the world’s cheapest.
6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&L’s for a very long time. We might see at most two 25 basis point cuts by the end of this cycle, and that probably won’t happen until the second half of 2020. In a deflationary world, there is no room for more.
This will make absolutely no difference to the large number of high growth corporates, like technology firms, that don’t borrow at all because they have enormous cash internal flows. That will be most of the stocks you own if you don’t index. Probably half of all listed stocks have no net borrowing.
7) Technology everywhere is accelerating at an immeasurable pace causing profits to do likewise. You see this in the FANG stocks, where blockbuster earnings reports are becoming as reliable as free upgrades.
Biotech has been on a tear as well.
See the new Alzheimer’s cure? It involves extracting the cells from the brains of alert 95-year old’s, cloning them, and then injecting them into early stage Alzheimer’s patients. I’ve already put myself on the waiting list.
The success rate has been 70%. That one alone could be worth $5 billion a year. I might be a user of this cure myself someday.
8) US companies are still massive buyers of their own stock, some $1 trillion worth this year. Banks are back in the game for the first time in a year, forced to conserve capital during the crash.
This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), Cisco Systems (CSCO), Microsoft (MSFT), IBM (IBM), and Intel (INTC), the top five share repurchasers.
They have nothing else to buy either. (AIG) has mandated the repurchase of an amazing 25% of its outstanding float.
They are jacking up dividend payouts at a frenetic pace as well and are expected to return more than $700 billion in payouts this year.
9) Ignore this at your peril, but China is stimulating their economy like crazy, and it is just a matter of time before that growth spills over to the US. The Coronavirus scare has prompted them to increase their quantitative easing efforts by a multiple. Biden will end the trade wars allowing a resumption of international trade the previous highs.
10) Ditto for the banks, which were dragged down by falling interest rates for most of the last decade. Reverse that trade this year, and you have another major impetus to drive stock indexes higher. Financials are looking like the top performing sector of 2021.
My friend was somewhat set back, dazzled, and non-plussed by my out of consensus comments.
With that, I told my friend I had to hang up, as another kid driving a souped-up Shelby Cobra GT 500, obviously stolen, was weaving back and forth in front of me requiring my attention.
Where is a cop when you need them? Are they ALL afraid to catch Covid-19?