Passed Pawn Advisors April 2020
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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 outbreak appears to have gone through its peak of new cases and deaths in most US metropolitan areas as well as throughout the developed world, and the economies are starting to slowly reopen.

  • The headline economic numbers are disastrous with no precedent, starting with US unemployment topping 30 million in just six weeks.

  • Consumer Spending, Manufacturing Index and virtually all economic reports signal the worst economic downturn in recorded economic history.

  • In response, the Congress has approved a second tranche of small business loans and more is being discussed, while the Fed has expanded its liquidity program to buying fixed-income ETFs.

  • The shock of supply and demand created huge imbalances, and it’s nowhere more apparent than in oil markets where the futures briefly traded in the unprecedented negative territory.

Market Highlights

  • US Equities had one of the best months ever, with S&P 500 Index closing higher by 12.8% on the heels of the government Coronavirus response.

  • Foreign equities also rallied, with Developed Markets up by 6.5%, and Emerging Markets jumped 9.2%.

  • US high-grade bonds added 1.8%, and high yield rebounded 3.6%, while foreign high yield led fixed income with a 5.7% gain.

  • US and foreign REITs also saw major rebounds, up 8.2% and 6.3%, respectively.

  • Commodities were the only major asset that dropped in April, down -7.6%, feeling the effects of demand shocks, with oil down another -5.0%, while gold jumped 7.0%.

Observations and Expectations

May You Live in Interesting Times. Often misrepresented as Confucius-style ancient Chinese blessing, this phrase is in fact modern, Western in origin and was meant as a curse. Regardless, the underlying meaning of it is that change can be scary, but it can also create opportunities if you know where to look.

Following the announcement of the enormous, “kitchen sink”-style economic stimulus package, the stock market and most other assets have staged a huge rally off the lows, horrible headlines notwithstanding. The dire predictions of a catastrophe, both medical and economic, seemed to have not materialized. The market bottom seems to be in place. In fact, the sheer strength and speed of the rebound surprised even the most optimistic market participants, let alone the cautiously optimistic ones like yours truly. So, what’s next? Are we out of the woods? Should we be getting back to normal soon?

There’s no shortage of predictions again. Most are falling into one of three camps now: V, U or W. These refer to the shape of the market chart. The V recovery camp believes that we’re essentially going right back to where we left off once the economy reopens. The recent market strength has given this camp a lot of ammunition since last month. The U camp that was dominating a month ago suggested that we will languish lower for a while before fully coming back. The W camp has been gaining popularity lately and now counts this author among them.

The basic premise stems from the fact that the stock market is a leading indicator of the economy. It usually changes the trend six months or so before the economic indicators do. This cycle may have shortened, given the nature of the current crisis, but the market is still trying to predict what’s next for the economy, rather than just react to the current headlines. Yet the V recovery is too optimistic in assuming most risks have been mitigated. There are three major risk groups to consider.

  1. Medical, with four major parts:

    • risk of recurrence or the second wave of the virus after economies reopen

    • availability of reliable diagnostic tools and therapeutics

    • availability of effective vaccine

    • risk of significant virus mutation

  2. Economic Relief:

    • risk that gap funding won’t be enough for many individuals and businesses until the economy is back to some normalcy

    • risk of any of the medical risks above forcing another lockdown and no financial relief to help

  3. Economic Recovery:

    • risk that parts of the economy will be very slow to recover or may never fully return

    • risk that unemployment lingers on keeping the demand low

    • risk that supply chains will undergo major changes, hurting global trade further and increasing consumer prices

It doesn’t take an expert to see that the risks are significant. And unfortunately, very few people can offer an expert opinion on the first or second group of risks. However, the economic recovery portion is where the real risks and opportunities of this market lie. While the current economic headlines and most corporate earning numbers are being written off as a one-time bloodbath, the results for the next quarter will establish more of a trend and won’t be taken so lightly. Some eye-pooping corporate losses (e.g., $50B quarterly loss for Berkshire Hathaway) and mounting bankruptcies in energy, retail and hospitality industries will catch up with the market sooner rather than later. Coupled with general economic sluggishness after reopening and many pockets of distress, we believe this, will bring major averages down quite a bit from the current levels before the eventual recovery. Hence, the W shape.

To avoid this danger for investors is to use effective hedges for riskier parts of the portfolio, while also adjusting out of the losing themes and into the winning ones of the brave new world. Again, this is the time to leave index investing to robo-advisors and take advantage of the active portfolio management and especially thematic investing, which – luckily – is what we specialize in. Over the past two months, we have highlighted extensively some of the themes that will be winners in the post-Coronavirus world, and our clients have benefited in April because we jumped on these trends early.

Looking forward to May, we expect the upward momentum to continue as the optimism grows that the economy is reopening. We also expect most good news to run out when most jobs are not back, and many taxpayers and companies start facing the ever-uncertain future. Sell in May and go away, may just prove to be the best market advice this year. We still expect a number of themes to significantly outperform the market, especially in the long run, and we still stay away from many portions of the beaten down Travel and Leisure industry. Gold, consumer staples and technology continue to provide the best hedges in this environment and should be a part of all portfolios for the foreseeable future.

Sector Update

Energy sector. What a mess. It’s in the eye of a perfect storm created by the epic loss of demand from the lockdowns, the price wars and the secular shift to the alternatives. If a number of bankruptcies in the shale and offshore drilling won’t give you a pause, perhaps Exxon Mobil’s first quarterly loss in 30+ years should. The rebound may be coming but will probably be short-lived. Avoid like a virus.

Technology sector has created one of the biggest paradoxes of the new normal in the economy and the markets. It remains one of the most promising growth themes, while simultaneously becoming one of the most defensive areas. The world with less contact means both the need and the future growth. It’s not just for the day trading, it should be a healthy portion of every long-term portfolio.

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.


How can any asset, and oil in particular, trade below zero?


Oil has made big headlines recently in the month full of awful headlines. The price of oil went negative for the first time in history and all the way down to -$38.45 per barrel at the low point. What in the world was happening?

First, consider what the “price of oil” really means. Typically, in the US it refers to the front-month oil futures contract that is traded in NYMEX under the ticker CL. This contract is an obligation to deliver (for a seller) or receive (for a buyer) a pre-specified amount of light sweet crude oil (1,000 barrels) to a pre-specified location (Western Texas port of Galveston, hence the term WTI – Western Texas Intermediate) at a pre-specified time (after the contract expires) for the traded price of the contract. This contract settles physically, which means the actual oil has to be delivered. The failure to deliver or receive carries very significant penalties that market participants dare not allow for the fear of being shut out of the market. This is in contrast to Brent contract on ICE, which settles in cash. There, a potential speculator can lose money at the contract expiration but doesn’t risk having a tanker dump oil on his backyard.

The reason for this contract to exist is so to make the market function efficiently. The sellers – oil producers - can assure the delivery plans for contracts sold. The buyers – refiners, airlines, and other major oil consumers – hedge their risks by buying contracts and allow for better planning of their finances and operations.

What happened in April was a direct result of the epic drop in oil demand. First, airlines and other typical oil buyers needed no more oil. At any price. When a buyer finds themselves in this situation, they have two choices: sell the contract to someone else or receive the oil and store it. Unfortunately, the storing option was largely used in the previous month already, which meant that the storage facilities were running out of space. The rate for tankers went way up just because they were being used for storage now rather for oil transportation. Yet the glut was too big. Selling was the only option available to many contract holders, but there were no takers. In the end, on April 20th, the date of the contract expiration, those left with the contracts and with no options left were willing pay handsomely for anyone to take it off their hands.

The negative price was purely a financial result of the derivative. It does not represent the economic value of oil. It is, however, a sobering reminder of the changed world and the depth of the economic crisis we’re in.

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 Small Business Services
Risk Profile Moderately Aggressive
Time Horizon Mid/Long-Term

Small businesses are the engine of the US economy. This motif combines public companies focusing on small businesses as their core customers - benefiting the economy in the process.

Motif Gig Economy
Risk Profile Moderately Aggressive
Time Horizon Short/Mid-Term

Gig economy is a free market system where independent workers are contracted for short-term assignments. As it grows, so are the companies providing the opportunities and catering to the ecosystem.

Motif The Gold Retrievers
Risk Profile Conservative
Time Horizon Short/Mid-Term

This motif focuses on major pure-play gold miners listed in US. The stocks were screened for only positive projected EPS growth next year.

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

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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.
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