Watching the market over the last few weeks, you can see the frustration build in real time. A lot of investors feel trapped. They want out.
Let them go. While I can appreciate that recent developments suggest the opposite of a “Goldilocks” environment, we’re a long way from absolute disaster.
As old hands on Wall Street say, people who predict disaster have a zero batting average. They’ve never been right in all of history.
That’s true now. We aren’t looking at catastrophe.
But what we’re looking at is a lot of broken dreams and bad money getting washed out of the market. For a lot of traders, environments like this are a call to change the way they operate.
They need discipline and a measured approach to risk. They need to weigh the odds, do the math and hedge their bets against the likelihood that several of them will fail to pay off.
Of course that’s a lot more work than simply assuming that all stocks go up from week to week. From our point of view, there’s no learning experience required.
My team and I already know that some stocks are better than others and, more importantly, that everything is more relative than absolute. It’s not a matter of buying stocks that thrill us and skipping the ones that are boring.
We need to buy boring and thrilling stocks alike at the right price. Sizzle will always cost more. Boredom is cheap.
Boring stocks did well this week. I’m pleasantly surprised to see Apple leading the way.
What’s Going On
Easy market narratives broke down this week. The Fed, as it turns out, is nobody’s friend. The economy won’t boom forever.
Shocks have consequences. The job market froze last month on a combination of natural seasonal factors and the growing weight of COVID disruptions.
As a result, the economy looks less effusive today than it did a week ago. But don’t be fooled. Seasonal factors resolve with the seasons.
Hiring budgets that are frozen now will thaw. And viral variants can be vaccinated against in a matter of months now.
Meanwhile, the economy naturally regulates itself. We are all rational economic actors and favor our own interests . . . as best as we can understand what they are.
Employers who can’t find workers at a reasonable price have paused hiring. Coincidentally, 600,000 people came back to the labor force in November, increasing competition for each open position.
More applicants mean fewer desperation offers from employers who need to fill holes on their team. As a result, wage pressure cools down a bit.
And while this is going on, oil prices have cratered. I think it’s overdone, but the relief on that side helps keep commodity inflation in check as well.
Any break on inflation will give the Fed more freedom to be measured when it comes to raising interest rates. There’s no shock here. We always knew the Fed would resist the urge to choke the recovery in order to protect the dollar.
Month to month, they might err a bit either in the direction of kindness or severity. Powell has been talking tough lately but if COVID truly gets bad, he’ll flex like he always does.
His biggest fear is a deep and prolonged relapse into recession. We know for a fact that he’ll tolerate inflation in order to keep the economy moving . . . and that means interest rates will take a back seat to corporate earnings.
Meanwhile, the gyrations provide buying opportunities. We’ve been buying aggressively in several of my portfolios. We’ll keep doing it.
Let other traders blink and flinch. Stay liquid, stay disciplined and you’ll be able to buy the dips . . . world without end.
Cannabis Corner: No Shelter In This Foxhole
This week has been brutal for just about every company with an even remotely speculative reputation. Investors are crowding into defense. Everything else is collateral damage.
You only need to look to the cannabis stocks for a demonstration of how fast the mood has swung from cautiously optimistic to complete negativity. It’s exaggerated, obviously.
We know this because all the big stocks are trading the same. There’s very little daylight between the way Tilray and Canopy and Aurora have moved in the past week . . . much less their smaller and more peripheral counterparts.
With very few exceptions, they’re all down about 14-15%. That tells me this isn’t about the companies or the headlines.
Despite what you may hear elsewhere, nobody woke up on Monday and decided that legalization isn’t progressing fast enough. The map is neither a problem nor an opportunity at this point.
The problem is that shareholders are looking at the big picture and want to get liquid. They’re willing to take a 14-15% haircut across the board in order to do it.
Meanwhile, the opportunistic short sellers are back. Big names like Canopy and Aurora are once again 14-15% “owned” by people who are betting on them to go down.
And as a result, the stocks are now statistically oversold. When (not “if”) they recover, the shorts will need to cover fast or risk being stuck for days while the bulls run.
I think many of the smarter shorts have already covered. They’ve bought the shares they needed from those shareholders who are just looking for an exit.
Already, buyers are stepping in at these levels. But I have to say, you really need conviction in the theme in order to buy this dip.
What’s the charm of owning Aurora or Canopy at this stage? I get anecdotal reports of people in dispensaries being urged to buy in bulk, which tells me there’s too much plant product in the system.
Don’t buy suppliers in a glut. Wait until they have the upper hand . . . and if that looks unlikely, buy the players who can actually achieve something.
There’s a lot to be said for Innovative Industrial Properties (IIPR) in this environment. It owns real estate where cannabis is produced and processed, not plant product.
And it pays a dividend like other real estate stocks. IIPR is “only” down 6% this week. Buy the dip and lock in about 2.4% a year . . . the same yield as blue-chip companies like Johnson & Johnson.
GreenTech Opportunities: Drowning In Oil
If you’ve been listening to my new weekly radio segments with Kevin McCullough, you know we love electric vehicles . . . which depend on high fossil fuel prices to attract car buyers’ attention.
And with oil on the run, it’s no wonder big EV stocks like Tesla are on the defensive. Today alone, Elon Musk is 6% poorer, roughly tracking crude prices over the past week.
This is extremely overdone. Numbers I’ve seen suggest that in order for the petroleum market to justify its recent collapse, demand for jet fuel will need to drop to zero between now and February.
That’s essentially another global lockdown. And if that happens because of the omicron variant, I will be shocked.
Lockdowns aren’t coming. This isn’t that kind of variant and we are in a much better place in terms of vaccinations.
If I were buying stocks for instant gratification, I’d perversely look to the oil patch. I know it sounds absurd, but that’s the best bet here.
And if you prefer to stay as green as possible, everything in the group is profoundly oversold right now. Sooner or later, a diversified program of buying this dip will be rewarded.
In that respect, I’d start with the utilities. NextEra Energy (NEE), for example, is actually in positive territory this week, outperforming its defensive sector. It pays a yield, it’s green and has big horizons ahead of it.
From there, you can get more speculative. You know I love Rivian (RIVN). But you also know the rebound there will take time. If you’re patient, you’ll wait.