Biogen

Key Statistics

Enterprise Value = $48.05 billiion

Operating Income = $6.301 billion

EV/Operating Income = 7.62x

Earnings Yield = 12%

Price/Revenue = 3.49x

Debt/Equity = 53%

Free Cash Flow/EV = 13%

The Company

Biogen is a biotech firm. They sell high-margin drugs that treat a variety of different illnesses. Much of their pipeline is acquired through research & development and they also achieve growth through acquisitions.

They run a phenomenal business. Their gross margins are presently 87% and their operating margin is is 48%. Revenues & profits consistently grow every year.

Each of their blockbuster high-margin drugs has a similar lifecycle. Massive amounts of money will be spend for years attempting to develop a new drug. It’s uncertain if the drug will be successful. It’s also unknown if it will be approved. Eventually, if the drug is approved and it is successful, it will experience explosive growth. Eventually, generics will come along, and that will eat into the profit margins, and revenues will decline.

A good example of this product life cycle is evident in TYSABRI. TYSABRI is a drug that treats multiple sclerosis and Crohn’s disease.

TYSABRI’s life cycle is typical for that of many blockbuster drugs. It experiences explosive growth in the beginning. It may be approved for use in one country, then expands to others. As generics are released, revenues decline and revenues & margins start to fade away.

Therefore, a firm like Biogen must constantly invest in R&D to develop new blockbuster drugs that can serve as new sources of revenue.

Fortunately, Biogen accomplishes this. They have a rich research pipeline and are constantly developing new drugs and new sources of revenue, resulting in strong growth in revenue and earnings per share.

Due to Biogen’s rapid growth from 2010-2015 thanks to drugs like TYSABRI, the stock price and valuation experienced rapid growth in the mid-2010’s. In 2014, the company traded at an absurd multiple of 60x EV/EBIT.

Since those lofty heights, the multiple has contracted even while the company continued to grow. The stock price has mostly remained stuck in a trading range while revenues, cash flow, and earnings have grown.

My Take

Biotech stocks in the mid-2010’s went through a bubble. Thanks to their rapid growth and high margins, investors relished these stocks and bid them up to absurd valuations.

It is much like what occurred in the 2000’s to companies like Microsoft. At the peak of the internet bubble, Microsoft traded at a EV/EBIT multiple of 50. Throughout the 2000’s, Microsoft’s stock went nowhere even while the business continued to grow. The multiples continued to decline as the business grew into the valuation. By 2012, Microsoft traded at an absurdly cheap multiple of 7x EV/EBIT.

I think the same thing is happening with Biogen. Biogen was bid up into an absurd bubble. As growth began to wane for a bit, investors dumped the stock, but the business continued to execute. Now, it trades for a bargain basement multiple.

Biogen has multiple drugs at different stages of their lifecycle and they have a robust research pipeline, with multiple drugs in development. Drugs like TYSABRI are waning, but there are also drugs in earlier stages of their product lifecycle that are still growing.

Current drugs that are still growing are:

SPINRAZA (treats spinal muscular atrophy)

BENEPALI (treats arthritis), IMRALDI (treats psoriasis), and FLIXABI (anti-inflammatory, treats arthritis).

Biogen trades like it is never going to develop another blockbuster drug again. Fortunately, they have drugs that are currently in their growth phase of their development. They also have a rich research pipeline, shown below, with multiple drugs at various stages of their development.

One of the most promising drugs in development is Aducanumab, a novel treatment for Alzheimer’s disease. It has shown tremendous promise in clinical trials, which you can read about here. The FDA recently accepted Biogen’s application on August 7th and expects to reach a decision in the first quater of next year. You can read about this here.

If approved next year, Aducanumab is a potential catalyst for the valuation to rise again.

Even if that doesn’t happen, Biogen is a strong company at an absurdly cheap valuation with many different drugs in the research pipeline so that it can continue growing.

7.62x EV/EBIT seems like an absurd valuation for such a high quality company. There are retail stocks in secular decline that trade at this type of multiple. Meanwhile, the balance sheet is safe and there is a high degree of financial quality, limiting the downside risk. Debt/equity is 53% and the Altman Z-Score is 4.24, implying practically zero bankruptcy risk.

They are also aggressively returning capital to shareholders. Total share count has declined by 12% in the last year.

Random

I’ve been listening to a lot of Ladytron.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

The Weird Portfolio

I wrote a book describing my passive approach to investing, the Weird Portfolio.

I was originally going to publish this on Amazon, but decided to give it away for free. I really want to get the message and ideas out there to a mass audience, so I thought this was the optimal approach.

I put the whole thing up on Medium for free. It’s a short book. It’s designed to be read in a couple hours on a Saturday afternoon. It’s an easy, breezy, read. It’s free so hopefully that’s a consolation for the typos that are probably in there.

You can read it here. I hope you enjoy it.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Is it crazy to own gold?

I hope you had a great July 4th!

Gold is a controversial asset.

Feelings about gold tend to be separated into two camps:

  1. Stock people who hate the asset. They don’t understand why anyone would invest in an asset that generates no income with no future prospects for growth. Stocks pay dividends and generate earnings. Bonds at least pay interest. For gold, there is no intrinsic value other than what other people are willing to pay for it. I was in this camp for a long time.
  2. Perma-bears who love the asset. The Fed is destroying the monetary system and blowing up bubbles. So, the only safe haven from a dollar that is being slowly decimated by the Fed is a hard asset, like gold.

My asset allocation has a 20% allocation to gold. I don’t go all-in the asset, but I think it serves an effective role in a portfolio. It tends to cushion drawdowns, although not as well as treasuries.

Long term treasuries remain the champion of performance during massive stock drawdowns:

With that said, I’m not comfortable putting 40% of my portfolio in treasuries. I don’t believe treasuries are truly “risk free.”

The greatest risk to treasuries is inflation. Inflation would prompt the Fed to increase interest rates, which would crush treasury prices. Inflation would also make the interest and principal payments more and more worthless.

I previously had TIPS in my asset allocation as my inflation protection, but this is flawed because TIPS rely on official government statistics on inflation.

If the US government wanted to hurt TIPS investors, it could simply manipulate the inflation statistics and change the inflation yardstick. I’m not going full “shadow stats” and don’t think the government is currently doing this, but I don’t think it it outside of the realm of possibility in the future.

Meanwhile, gold is a defensive asset. Like treasuries, gold can cushion drawdowns. Unlike treasuries, it has a track record of performing well during periods of dollar weakness and high inflation.

I don’t advocate a massive allocation to gold and I don’t think that the global economic system is about to unravel because of the Fed’s insanity, but I have 20% of my portfolio in gold because inflation (and a weaker dollar) is a real danger and gold is also an effective way to contain this risk.

I think a good way to demonstrate the usefulness of gold in a portfolio is to look at it through the perspective of a truly crazy portfolio: 50% US market cap weighted US stocks, 50% gold.

This portfolio is indeed crazy. I don’t actually advocate putting 50% of a portfolio in gold, but I think that this crazy portfolio helps demonstrate why gold is a useful asset in a portfolio.

Before I looked at the data, I assumed that a massive allocation to gold would weigh down on returns. Shockingly, it does not. In fact, the 50/50 portfolio slightly outperforms the returns of 100% stocks with less severe draw-downs and less volatility.

On its own, gold is an absolutely terrible investment. Massive volatility, an extremely long drawdown & recovery (gold entered a drawdown in 1980 and didn’t fully recover until 2007), and it has little promise to ever outperform US stocks.

But – in a portfolio – gold can do extraordinary things. It helps reduce drawdowns and it tends to do well in decades when stocks are not doing well.

Gold demonstrated extraordinary performance during the 1970’s, but it also did well during times like the early 1930’s. Gold prices tend to rise during periods of growing fear, as investors flock to “hard assets.” The flock to hard assets is what occurred during the Great Depression. As people gathered gold, the price rose, rising from $20.63 in 1929 to $26.33 in 1933, a 27% increase during a period when stocks were down nearly 80%.

When rebalanced with stocks, it helps deliver a great result: less volatility and cushioned drawdowns.

The interaction between stocks and gold in the 50/50 portfolio is something I’ve noticed with a lot of asset allocations: an investor gets a result that is greater than the sum of the parts.

One would assume – for instance – that the return would simply be an average of the return for the two asset classes. Gold has a CAGR of 7.8% since 1972. Stocks have a CAGR of 10.25%. Averaged together – it is 9.025%.

However, in a portfolio, the actual result is 10.29%. It’s greater than the expected average of 9.025%. It’s greater than the return of either asset. The result is greater than the sum of the parts.

As David Swensen points out, asset allocation is the only free lunch in investing.

This is because gold and stocks are truly uncorrelated. They are almost inversely correlated.

By regularly rebalancing, an investor is able to sell gold when it is up and then buy stocks when they are down. This regular process of rebalancing enhances returns by buying each asset class after poor performance and selling each asset class after strong performance. Meanwhile, thanks to the interaction of the asset classes with each other, drawdowns and volatility are reduced.

Just to reiterate: a 50% allocation is too much for my tastes, but I think this is a useful experiment to show how an allocation to gold isn’t completely crazy and it can serve as an effective defensive asset in a larger portfolio.

For my portfolio, my defensive allocation is split between long term treasuries and gold. Long term treasuries perform better during large drawdowns. However, long term treasuries will be decimated in a period of rising inflation and interest rates. For that reason, I split the “defensive” slice of my portfolio between both gold and long-term treasuries. You can read about my passive allocation here.

Random

U2 at Live Aid in 1985.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Q2 2020 Update

Performance

Year to date, I am down 17.77% and the S&P 500 is down 3.9%.

This is actually pretty good in context of my deep value strategy. VBR, the Vanguard Small Value ETF, is currently down 22% YTD. QVAL, the deep value Alpha Architect ETF, is currently down 26% YTD.

The deep value universe of stocks with an EV/EBIT multiple under 5 is currently down 30% YTD.

17% isn’t all that bad in this context.

Due to my large cash position going into the crash, I was only down 26% at the lows, while most of this universe was in a nearly 50% drawdown.

With that said, I missed my chance to gobble up bargains at the lows because I thought the worst wasn’t over.

A Mixed Bag: Good Decisions & Bad Decisions

In the last year, I made some key decisions. Some of them turned out to be good moves and some look like mistakes.

I started accumulating cash last year when the yield curve first inverted. I thought we were going to have a run-of-the-mill recession and I thought due to the overvaluation of the market that this would be enough to cause at least a 50% crash.

I went into the March crash nearly 50% cash. This was a good decision. When I saw that the recession wasn’t going to be a run-of-the-mill affair and was turning into the worst recession since the Great Depression, I started selling my cyclical positions aggressively. By the bottom, I was nearly 80% cash.

I was also convinced that the selling wasn’t over. I saw an index at internet bubble valuations hitting the worst economic event since the Great Depression and assumed that the crash would continue. Value stocks aren’t a place to hide during a crash, so to stay market neutral, I bought a position in an S&P 500 inverse ETF to stay market neutral. This was not a good decision.

What I didn’t anticipate was the extent to which fiscal and monetary policy were going to go full-throttle in an all out effort to boost the stock market and the economy. As a result, the S&P 500 rocketed upward and my short position was beat up.

As a result, I lost about 15% on the short position. I finally got out of it when the S&P 500 went above the 200 day moving average. Fortunately, it wasn’t enough to hurt my overall YTD results.

At the lows, net-net’s started to re-appear and the number of stocks below an EV/EBIT multiple of 5 increased. I didn’t buy any of them, thinking that the economic downturn was going to continue melting down the market with no regard to valuation. I didn’t buy enough at the lows. This was not a good decision. There were many stocks I should have bought and I didn’t.

One position I bought near the lows has worked out marvelously – AOBC, which has turned into SWBI. This is a gun manufacturer. You can read my write up here. I noticed that AOBC was trading at a low multiple to book value while simultaneously background checks were surging due to COVID. Gun sales continue to be strong, and this continues to skyrocket due to the unrest currently gripping the country.

I’m currently up 189% on this position. Obviously, buying SWBI was a good decision. I sold a piece of this position when it grew to 10% of my account from 5%. I plan on doing the same thing once this happens again.

I recently purchased a net-net, Friedman Industries. You can read my write up here. It is yet to be seen if this was a good decision, but I think that the risk-reward makes sense.

Looking Ahead

Currently, the market continues to be strong and seems invincible.

I’m not short after getting my butt kicked in my short position, but I’m still not bullish. I’m currently 80% cash and still only have a handful of positions.

It’s still yet to be seen how COVID is going to shake out.

I am finding it hard to figure it out. On one hand, the lockdowns worked, we flattened the curve. On the other, now that the economy is being re-opened, cases are surging. Skeptics say that this is simply because of more testing. Those who sounded the alarm on the virus say this is concerning.

I don’t know how this shakes out. What I do know is that the the present state of the economy is not good. Unemployment looks poised to reach its highest levels since the Depression in the 1930’s. Many businesses have been completely destroyed, and the number of businesses that are being destroyed continue to mount.

On the other hand, unprecedented levels of fiscal & monetary stimulus might create a new economic boom as the economy re-opens.

I don’t know how the economy shakes out, either. My instincts tell me that the economy is screwed, but my instincts can be wrong. We went into this with unprecedented levels of leverage and the only way that a lot of businesses are surviving is by taking on even more debt, making them even more fragile. On the other hand, the fiscal & monetary stimulus might work.

I don’t know how the virus shakes out and I don’t know what’s going to happen to the economy. The way I see it, the current situation is replete with massive uncertainty.

Uncertainty is something that an investor should get paid for with a cheap valuation.

Investors aren’t getting paid for that uncertainty.

What I know for certain is that the market is not cheap by any stretch of the imagination. From a market cap to GDP perspective, the market trades at 147% of GDP. At the peak of the internet bubble, we were at 140%. That’s right – we are beyond the valuation of the most extreme bubble in American history and we’re in the midst of the worst economic calamity since the Great Depression.

If the market were to return to 100% of GDP – the S&P would crash to near 2,000. If we were to return to the lows of the last two nasty bear markets, we would fall to nearly 1,500 on the S&P.

The CAPE ratio is at 29 – higher than the peak of the real estate bubble although not as high as it was during the internet bubble.

Looking at the value universe I operate in, it is currently only an average opportunity set. There were many stocks in the EV/EBIT < 5 universe at the lows, which was a pretty decent opportunity but not as big as 2009. There are now 75, which is a pretty average opportunity set.

An average opportunity set and a market trading at internet bubble valuations is not compelling. It’s definitely not an opportunity when we face the wide range of possible outcomes that we face today.

As a result, I’ll continue to be cautious and hold a lot of cash. If I find more stocks like SWBI or FRD that look like big opportunities, I’ll buy. What I won’t do is fill up my portfolio with subpar opportunities.

The large cash balance definitely weighs on my mind. Cash is a terrible investment long term, but I want to have the dry powder if the market crashes again.

I’ve considered deploying it into my passive asset allocation that you can read about here, but haven’t made up my mind on that yet.

My goal when I started this blog was to focus on Ben Graham’s low P/E, low debt/equity strategy during the good times. When the bad times arrived, I was going to buy net-net’s. The net-net’s started appearing in March and I didn’t buy enough of them. I barely had time to research any of them before they disappeared.

My instincts tell me this isn’t over and I’ll get another chance to buy them. We’ll see.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Friedman Industries (FRD)

deer

Key Statistics

Market Capitalization = $37.02 million

Current Assets = $69.29 million

Cash & Equivalents = $22.33 million

Total Liabilities = 12.68 million

Net Current Asset Value = $56.61 million

Operating Cash Flow = $3.47 million

Price/Tangible Book = 53%

Altman Z-Score = 4.66

Summary

Friedman is a steel company that has been around since 1965.

Their business is split up into two segments: coil products and tubular steel. Coil products account for 67% of revenue and tubular steel accounts for 33% of revenue.

Coiled steel is basically a form of sheet metal used in a wide variety of different industries. It can be used in the manufacture of automobiles, refrigerators, or roof gutters.

Tubular steel is used for a wide variety of applications. It can be used in the medical industry for stethoscopes or wheelchairs. Engines require tubular steel, which can be used in aircraft or automobiles. Steel tubing is also used in the manufacturing industry, to transport liquids throughout the process. It is also used heavily in the construction industry, for things like structural support or railings.

Friedman is a smaller player in an industry dominated by giants, but it has managed over the decades to continue to survive in a tough industry. Its plants are located throughout the Southern United States. The plants operate in Texas, Arkansas, and Alabama.

My Take

Friedman’s stock has been beaten up. It started to decline last year as a recession and reduced steel demand became more apparent. It hit a low of $3.72 during the depths of the COVID decline. I bought it yesterday at $4.9899. It has gone up significantly since the lows, but I still think it is relatively cheap. A return to the 52-week high would take the stock up to $7.01.

The stock trades below net current asset value, so I don’t expect it to be an outstanding business that is growing fast with high returns on invested capital.

With that said, in the universe of net-net’s (a world of reverse mergers and biotech science experiments), Friedman strikes me as a high quality net-net. In the last year, it has posted positive operating cash flow, so it is a viable business. The Altman Z-Score of 4.66 also shows a high degree of financial quality and limited bankruptcy risk. I’m confident based on the operating history and high level of financial quality that Friedman isn’t going to annihilate its current asset value, which can’t be said for many net-net’s.

The situation currently appears bleak for the steel industry. The customers for steel products are hitting hard times as a result of the recession. Construction and manufacturing activity are likely to slow down.

I think the hard times are already reflected in the stock price. At 53% of tangible book, this is near the lowest level that it has traded in the last 20 years. In the last five years, the stock usually trades in a range of 80%-100% of tangible book. When the steel industry was hot in the mid-2000s, Friedman traded at double tangible book value. I think it’s a reasonable assumption that this can return to 80%-100% range of tangible book, at which point I will sell.

If the economy returns to some semblance of normal, then construction and manufacturing activity will get back to normal. Coiled and tubular steel are essential for a number of uses that aren’t going away.

Meanwhile, steel plants are being shut down and steel production is down for the industry. This means that if demand returns back to normal, Friedman will be well positioned to take advantage of it.

If that doesn’t happen, then Friedman has the balance sheet and discipline to survive. It already trades at a price which indicates that there won’t be a recovery in the steel industry.

For those reasons, I think the risk/reward makes sense, so I purchased a position.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Trades

I sold 125 shares of Smith & Wesson (SWBI) @ $16.8803. I still own 145 shares. I was up 122% on the position and it had grown to 10% of my account. I took it back down to 5%. I still don’t think that the run for this stock is over, as gun sales are likely to be strong.

I bought 350 shares of Friedman Industries (FRD) @ $4.9899, which is below net current asset value and 50% of tangible book.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Portfolio Position in Troubling Times

fork

Goodbye, shorts

I dumped my short position yesterday. It looks like I screwed up with this bet. Fortunately, it wasn’t a fatal bet.

I lost 15% on the position and I’m up slightly over the last few months overall, thanks to the performance of the stocks that I still own. I owned it mainly to stay market neutral and didn’t make a big bet on it, so it’s an outcome that isn’t the end of the world.

I’m still happy that I have been cautious this year. I’m down only 22% YTD, which is a lot better than the deep value universe that I operate in. The universe of stocks with an EV/EBIT multiple under 5 is down 40% YTD. It was previously down nearly 50% and I avoided nearly the entirety of this drawdown. I also outperformed this universe last year, when I was up 32%.

I still badly lag the S&P 500 since I started this blog in December 2016 – which is very disheartening – but I’ll take the good news where I can.

My passive approach (small value, long term treasuries, gold, international small caps, and real estate) has handled the crisis excellently, down only 5% YTD after being down only 20% in the worst of the crisis. I’m often tempted to put this brokerage account into that passive approach, but I still enjoy the hunt of picking stocks and trying to figure out the macro picture.

Positioning

I bought only a couple stocks during the depths of the crisis – VLGEA (super markets) and AOBC (guns – now SWBI). VLGEA is flat, but AOBC has been an outstanding performer. I am up 80% on the position. It looks like my thesis – that COVID would drive higher gun sales – is proving to be correct. I couldn’t have anticipated nationwide riots, but that appears to be helping out the position, as well.

While I am no longer short, I still hold a lot of cash. 78% of my portfolio is still cash. Needless to say, I am still quite bearish on the market, even though I don’t want to be short it.

The Market

If I’m bearish, why aren’t I holding onto the short position?

I know that a trend following element is absolutely essential to shorting.

I walked into the short with an eye on the market’s 200-day moving average. Recently, the S&P 500 crept above the 200 day moving average.

200dma

As a value investor, I have always talked a lot of smack about trend following, but I have been changing my mind after examining the evidence.

A great resource on trend following is Meb Faber’s paper – A Quantitative Approach to Tactical Asset Allocation. The approach advocates owning asset classes only when they are above their 200 day moving average. The approach reduces drawdowns while still delivering the market’s rate of return.

A trend following strategy like that gets out of the market when it falls below the moving average and stays invested when it is above.

Looking at the S&P 500 over the last decade, an investor would have only been out of the market a few times. They mostly turned out to be false alarms that didn’t see the market make a massive move lower. This includes the 2011 debt ceiling showdown, the oil market chaos in 2015-16, and the December 2018 meltdown.

Where a trend following strategy helps is during the big, nasty draw-downs. An investor following a trend system would have sold in February, avoiding all of the mayhem that occured in March. It would have also kept an investor out of the market during most of the 2000-03 50% drawdown. It would have also kept an investor out of the market from 2007-09 during that 50% debacle. Trend following buys in late in the game – but who cares? They avoid the cops showing up to the party, and then arrive a little late to the next one.

When a market is solidly above the 200 day moving average, it usually continues rallying higher, even when the fundamentals don’t support it.

Paul Tudor Jones is probably the most vocal advocate of using the 200 day moving average as a trend indicator. He had this to say about the approach:

My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.

Historically, it is a very bad idea to be short the market when it is above this level.

While it is often maddening to value investors like me, the fact of the matter is that there is nothing to prevent something absurd from getting a lot more absurd. This is a lesson that value investors who have been short stocks like Tesla have learned the hard way.

It’s something that people who were short the Nasdaq in the ’90s also learned the hard way. An investor could have looked at the market in early 1999 and concluded that it was absurdly overvalued. They would have been correct. Even though they would have been correct, it wouldn’t have stopped the market from wiping them out by doubling before melting down from 2000-03.

Unrelated: “The Hard Way” was a pretty funny early ’90s flick.

 

There is nothing to keep an absurd market from getting more absurd.

As a value investor, I have a visceral hatred of following the herd, but I think it’s important to keep tabs on the movements of the herd to prevent me from getting trampled by it.

Absurdity

Make no mistake: I think what’s going on is completely absurd, but I’m not going to fight it.

The real economy has been eviscerated. We have Depression level unemployment – approaching 20%. America’s corporations are surviving by leveraging up, making them even more fragile than they were before the crisis. Even the tech giants that have enjoyed the biggest gains of the rebound have seen their earnings dissipate.

The Fed is providing liquidity, but that’s all that the Fed can do. Jerome Powell isn’t a sorcerer who can create a 1999 economy out of 1930s unemployment. The Fed is preventing the system from collapsing, but that’s not the same thing as fixing the damage that has been done to the actual economy. The Federal government is providing fiscal stimulus, but that isn’t enough to replace a job or re-create the actual productive economic activity that has been eliminated.

Wall Street doesn’t care. It has doubled down on its commitment to the Fed put – the idea that the Fed will have the power to prevent any further meltdown in the market. The actual earnings capacity of the market has been decimated, but the markets are completely ignoring this.

The bear thesis of the last decade – that the markets are fraudulent and being manipulated by the Fed – has now turned into the bull thesis. Buy stocks because the Fed will make it go higher. Earnings and the economy don’t matter. This is dangerous and absurd thinking.

One take is that the market believes we will swiftly return back to normal with the economy re-opening. Maybe, but I think this is a dubious bet. I’m sure activity will resume and life will go back to normal, but it’s not going to be 100% of where we were before. There will be a number of businesses (like bars & restaurants) that will not re-open, because they couldn’t survive a 100% drop in revenues. Meanwhile, furloughed employees won’t be immediately re-hired, as businesses take a wait-and-see approach to bringing them back on board.

Nor will everyone in the economy immediately leap back to normal. Everyone isn’t going to re-book their vacations, even if 70% of them do. Businesses aren’t going to resume all of their business trips and conferences. Older people will likely wait until it’s clear that the virus has either been overblown or that we have a vaccine. They also command most of the disposable income, so that’s a major hit to the economy.

There also isn’t a guarantee that there won’t be a resurgence of the virus once the lockdowns end. We flattened the curve, but who is to say this won’t start spreading all over again? This virus started with a handful of people in China and spread all over the world. Once we resume normal activities, won’t it start spreading all over again?

Most of the damage from the Spanish Flu occurred during the second wave of the virus. Will we have a second wave of this virus? Will that trigger another round of economically destructive lockdowns? I don’t know, but the probability of that happening is not zero.

Call me a pessimist, but I don’t see a lot to be optimistic about these days. The market is partying like it is 1999 while the economy is in 1932.

I’m still holding a lot of cash even though I am no longer short, simply because I think that the risks are massive and the market is behaving like they don’t exist.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.