Copy
Passed Pawn Advisors March 2020
Passed Pawn Advisors logo

Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

Economic Highlights

  • The COVID-19 Coronavirus outbreak has effectively shut down large parts of global economy, while the governments around the globe race to prevent further spread, find the cure and vaccine, and limit economic consequences

  • US Congress has approved a multi-stage $2.2 trillion relief bill dubbed CARES designed to provide help to individuals, small and large businesses, and additional help to medical community.  Most major economies are rolling out their own stimulus packages.

  • The Fed is using essentially all tools at their disposal, cutting interest rate to 0% and announcing quantitative easing by providing liquidity in the wider range of markets than even in 2008

  • As a result of sudden closures and forced layoffs and furloughs, there were a staggering number of new unemployment insurance claims filed (more than 16.5 million in just 3 weeks)

  • OPEC+ and G20 reach an historic deal to cut global oil production by about 10% to end price war and bring some stability back to the energy market

Market Highlights

  • US Equities had one of the most volatile months ever, with S&P 500 Index closing lower by -12.4%, capping the worst quarter for equities since 1987

  • Most major foreign equities dropped moderately, but Developed Markets cratered by -15.4%

  • US high-grade bonds only lost -0.6%, providing a relative safe heaven led by Treasuries. High yield sold off hard, down -10.3%, and foreign investment grade lost -7.4%

  • US REITs crashed -21.6%

  • Commodities tumbled another -12.8%, led by oil’s worst ever monthly loss of -55.6%, while gold finished marginally down -0.7

Observations and Expectations

Unprecedented.  This single ominous word describes anything and explains everything that’s been happening around the globe in the past six weeks or so.  The sheer spread of the deadly disease as measured by the numbers of infected, numbers of deaths and the geography of spread is unprecedented.  The social distancing and “shelter-in-place” orders that brought large parts of the global and local economy to a self-induced coma – unprecedented.  The level of hardship and the speed at which it has affected billions of people – unprecedented.  The level of government aid programs to deal with the medical situation and economic fallout – unprecedented.  The speed of the market selloff – unprecedented.  And the level of remaining uncertainty, medically and economically – you guessed it.  Unprecedented.

During the new March Madness, the market’s fall often looked apocalyptic.  As we mentioned before, the government bailout bill was the game changer, providing a much-needed bridge for the economy to weather several months of extremely low economic activity.  The markets have bounced back from the lows, retracting some of the losses. So, what’s next?

There’s no shortage of predictions.  Some envision an economy coming right back on surging pent-up demand later this year.  Others foretell doom and gloom, at least in the near future.  The reality is probably somewhere in-between and depends largely on many key hard-to-predict factors:

  • How soon and how effectively can the spread of the infection be stopped – in US and globally?

  • How soon can an effective diagnostic, treatment and vaccine be developed and made widely available?

  • Will the government aid be enough to bridge the gap until the economy can be effectively reopen?

  • How bad could the economy get until then?

  • When the economy reopens, how soon can it get to the new normal and what would that look like?

Most economic forecasts from the leading investment banks expect a single-digit loss in US GDP in Q1.  The Q2 numbers are anywhere between 25% and 40% loss.  The spread itself is a testament to a major uncertainty, and either number would be catastrophic by historical standards.  The only saving grace is the temporary label. To that end, the actual numbers are almost irrelevant.  The only thing that matters is how much of it will we get back and how soon.

Looking forward to April, all eyes will be on “flattening the curve” – the curve of new Coronavirus cases, that is.  The sooner we can reach the peak – at the largest metropolitan outbreaks, nationally and globally – the sooner we can start the road to recovery.  The other major data point will be the collective US Q1 earnings reports.  The numbers will be ugly and the future guidance largely meaningless in the few cases where the companies haven’t suspended it altogether.  Some market observers suggested that adjectives will be more important this time around than numbers.  In fact, the markets have been trading on sentiment lately rather than on fundamentals.  More on that in our Question of the Month.

In light of this dynamic, the key questions above should hold the key to the investor’s portfolio and risk hedging strategy.  Some industries are clearly affected but have roared back after the stimulus was announced.  They may hold opportunities but could remain risky.  The travel industry as a whole, and airlines and cruise lines specifically, may be facing significant industry-altering changes similar to the post-9/11 world.  We think that large numbers of remote thermometers and other health symptom-reading devices are coming to the airports, ports, resorts, amusement parks and sports arenas near you.  Disney execs are already planning it, apparently.  Some hedges have emerged as successful but may now be overbought.  Other areas may benefit from the new “stay at home” economy.  This is the time to take advantage of the active portfolio management and especially thematic investing, which – luckily – is what we specialize in.  We have seen no withdrawals during this period, which hopefully means that our clients trust us to guide them through this crisis as well as through a bull market. We don’t take it for granted and truly appreciate it.

Some of the winning themes have already been identified earlier: medical diagnostics, infectious disease biotech, online communication, online learning, digital entertainment and gaming, e-commerce and home delivery.  We recently took it one step further to get some ideas on the second wave of themes to likely grow in the post-Coronavirus world.  Here’s a short list of candidates with brief investing thesis that we’re using for growth-oriented portfolios. The top three are also featured as Motifs of the Month.

  • Smart City.  Smart City is the modern-day city-state, fully self-contained with renewable energy, technology-driven and interconnected transportation, infrastructure, communications, and public services.  This has been our biggest umbrella of themes over the past few years and its growth has been now accelerated by the pandemic.

  • Game of Drones.  Whether it's for military or commercial use, drones or unmanned aerial vehicles (UAV) are becoming more commonplace.  As they get safer, cheaper and more sophisticated, the sky is the limit for this technology, and the Coronavirus is the new tailwind.

  • Ray of LED Light.  The LED technology has taken consumer electronics by storm, from literally a light bulb to PC, TV, and mobile screens.  This motif follows companies that lead the space and stand to benefit the most from the change of the guard, and the increased usage of home devices is accelerating this trend.

  • Emergency Services.  Companies supplying emergency equipment and doing emergency work.

  • Gig Economy.  A free market system where independent workers are contracted for short-term assignments.

  • Broadband.  With the connected world hungry for data, the push is on to bring broadband to the masses.  The coming G5 will help.

  • RNA & DNA.  One of the most promising recent developments in biotech has been the ability to affect DNA and RNA directly.  Many new techniques have made possible a whole new class of drugs that could yield cures to multiple diseases.

  • Consumer e-Services.  Unlike the traditional e-commerce companies that sell products directly to consumers, e-Services sell services and are based entirely online.

  • Data Center REITs.  Data centers are in the heart of today's technological advance.  High growth is built in, and it's now in the tax-efficient REIT form.

  • Smart Home.  The stay-at-home trend is a huge tailwind.

  • Internet Infrastructure.  The companies that make up this motif are not all Internet companies; in fact, most of them are not.  However, they're all "systemically important" to the way the Internet works and their failure could undermine its foundation.  The remote networking is spiking the demand.

  • Pay It Forward.  As the world of commerce becomes increasingly digital, the companies offering digital payment services are poised for profit and growth.  The pandemic accelerates this trend.

  • I, Robot.  Many technological advances in Robotics & Automation in recent years provided a series of reliable applications and hold promise to revolutionize several industries.

  • Internet of Things.  Technologies that allow both wireless and wired systems to communicate with other devices hold the promise of “Internet 2.0” and see increased demand due to the quarantine.

  • Healthcare Information.  With proliferation of computer systems, vast improvements in data protection, and regulatory changes, the healthcare information services are now a separate and rapidly growing segment.  No future pandemic preparedness will be complete without it.

In conclusion, the situation is still evolving.  The rebound off March 23 lows had to happen, but it should not provide a false sense of security.  Plenty of volatility and more possible downside are still ahead.  We may face a brutal recession, albeit a relatively short one.  Yet one can take comfort in the fact that every downturn since WW2 provided a patient, long-term investor with a buying opportunity.  Know your risk and make sure you’re comfortable with it.
 

Sector Update

Real Estate sector has been in the perpetual expansion mode since the last crisis of 2007-09.  In particular, it’s been in a sweet spot in the past few years benefiting from both growth and generous income in the low-yield world, while providing diversification from tech-heavy portfolios.  Suddenly, it finds itself in big trouble.  The shift in paradigm to remote working, learning and shopping puts in doubt the future of commercial, campus housing and retail real estate, respectively.  The latter has been already largely “Amazon-ized” and could be witnessing the final nail in the coffin.  Naturally, hospitality REITs are also struggling in this environment.  Even the healthcare REITs are under pressure, given that the future of senior housing is in jeopardy following the Coronavirus spread through these facilities.  Mortgage and Residential REITs are also bracing for a wave of missed payments in the coming months.  With some notable exceptions in the industrial space, this sector is not a “buy” at this time.

Financials have been the second worst-performing sector of the 11 S&P sectors so far this year, behind only the abysmal performance of Energy.  Yet the selloff is largely overdone.  The fear was that in addition to losses in trading, asset management and wealth management units at the banks, many mortgages, business and personal loans may become delinquent, triggering another financial crisis.  The fact is that banks are much better capitalized today than in 2008, with most leverage out of the system.  The aforementioned CARES Act by the Congress restores confidence that a run on banks isn’t likely in the cards.  This should provide a buying opportunity in the sector that could soon be another market leader after earnings reports.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

Why is the market so unpredictable lately?

Answer

This question has many forms.  Why should market go up and down nearly 10% on consecutive days?  Why is market going up when terrible news keeps piling up?  The market can always surprise, but these days even the institutional investors are often just as confused as the individual ones.

First, let’s set a few rules about basic market behavior:

  1. The future is unknowable.  All forecasts, models, strategies and algorithms aside, the market trades on best available information, but no one knows exactly what the future holds.

  2. Market decisions have a basis.  Market participants make investing or trading decisions based on a variety of factors: experience, data analysis, observations and intuition, as well as models, strategies and algorithms built on that.

  3. Asset prices are relative.  There are many ways to price an asset, but the Modern Portfolio Theory suggests that the latest price reflects all available information.  That information includes certain expectations of various factors that may affect the price of an asset.  Therefore, its price changes when those expectations change.  In particular, equity price should be based on the net present value of the company’s expected future cash flows.  Any perceived change to that expectation should affect the stock price accordingly.

These rules guide an ordinary market and can be easily traced.  Unfortunately, the March Madness featured a new type of threat, a black swan with an unprecedented uncertainty, as we discussed.  The basis for decisions in Rule 2 has all but disappeared.  The panic that the crisis has caused changed the behavior of market participants driving sometimes irrational decisions.  With lack of clarity or data, sentiment has taken over as the primary force behind the price movements.  That held on both the downside and on the upside.  As some of the worst fears receded, the expectations swung the other way causing significant rebound, even in the face of grim health and economic news.  This new trend is more likely to continue, in our view, unless a setback will change those expectations once again.

ETF Education

We have recently added a new section to our website designed to provide educational, reference, and news resources to investors in the growing world of ETFs. Product knowledge, understanding cost and tax structure and how ETF trade works can help investors of all stripes find better opportunities for their portfolios and improve its risk management. Knowing the mechanics of volatility ETFs, for example, could have helped $XIV ETF holders avoid huge losses last week.

Featured Motifs

Motif Investing is an innovative broker that allows you to treat a portfolio of equities as a single unit.  We utilize their platform to offer our clients affordable solutions in thematic investing.

Each month we highlight 3 of our motifs that play on current market themes.


Motif Smart City
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Smart City is the modern day city-state, fully self-contained with renewable energy, technology-driven and interconnected transportation, infrastructure, communications, and public services.  This motif has it all.

This was already one of the top themes in the last few years, and Coronavirus has just helped accelerate it.


Motif Game of Drones
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Whether it's for military or commercial use, drones or unmanned aerial vehicles (UAV) are becoming more commonplace.  As they get safer, cheaper and more sophisticated, the sky is the limit for this technology and the companies who get in the game of making them.  This motif tracks the early entrants.

With the growing need to get to places people would like to avoid, this is another hot theme that the Coronavirus helps accelerate.


Motif Ray of (LED) Light
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

The LED technology is taking consumer electronics by storm, from literally a light bulb to PC, TV, and mobile screens.  This motif follows companies that lead the space and stand to benefit the most from the change of the guard.

Coronavirus created more demand for all kinds of electronic devices to stay and work from home, as well as advanced lighting products, accelerating this trend.

Investing Hot Reads

Model Portfolio

See how our proprietary algorithm creates a customized portfolio just for you

Our Papers


These thematic investing papers provide insights into specific investment topics.  If you follow the subject, you can easily subscribe to them and receive a daily email update.  It's absolutely FREE.

In The News

  EquityMag: Case Study
Twitter
Facebook
LinkedIn
Pinterest
Email
The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
Copyright © 2020 Eureka Wealth Solutions, All rights reserved.

You've received this email because you subscribed to the Eureka Wealth Solutions newsletter, registered on our site, through Meetup or other affiliate, or are a client.

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list
 
Email Marketing Powered by Mailchimp