Me and Marko
“Finding investments is easy, waiting is hard, waiting is the hardest part”
-Clay Baker
The Portfolio Performance
The portfolio is up 5.28% YTD
Our benchmark, the S&P 500 is up +17.79% YTD
Whose Marko?
Marko, or more respectfully, Dr. Markco Kolanovic is the Global Head of Macro Quantitative and Derivatives Research at J.P. Morgan. His team is responsible for developing macro, derivatives, and quantitative equity strategies, as well as systematic cross-asset portfolios for clients. His team currently holds 5 top rankings in the Institutional Investor surveys in the US, Asia, and Europe, and Marko individually ranks #1 in the category of Americas Equity Derivatives. Major hedge funds and investment offices have implemented his trading methods worldwide. Dr. Kolanovic's work is frequently quoted in the financial press, and for his timely and accurate short-term forecasts of stock market returns, the media dubbed him ‘The Man who moves Markets’ (CNBC) and ‘Gandalf’ (Bloomberg). Marko graduated from New York University with a Ph.D. in theoretical high-energy physics. He has developed several scientific theories/models and has authored top-cited research publications.
Yesterday Marko came out with a note that clearly indicates he is not worried about inflation for many of the same reasons I've been talking about for the past year. Namely, the consumers personal balance sheet is very strong and wages are out pacing inflation. What Marko is focused on from his position at JP Morgan is how will rising rates on the US 10-Year bond and rising oil prices impact the economy overall.
Oil at $130, or even $150, won’t derail the economy, given the health of consumer balance sheets and total oil expenditures - Markco Kolanovic
I didn't go hunting for someone to agree with me, but when a man who moves markets speaks the same language, I listen and try to learn something. For perspective, on Thursday morning, crude traded below $77 per barrel, and the 10-year yield was 1.54%.
The current energy and supply chain issues do not jeopardize but reinforces my rotation thesis....Green policies have contributed to the current crisis, as it’s diverted capital from fossil fuel development, though at a certain point higher energy prices will boost traditional energy capital expenditure.- Markco Kolanovic
My own inflation thesis has always centered on wages staying ahead of costs. If wages accelerate faster than costs, then everything we buy becomes a smaller percentage of our income. Today a car, a vacation, groceries, and clothing are a smaller percentage of incomes than 20-40 or even 100 years ago.
The charts below are very instructive as we all worry about inflation. The chart at the top shows the Consumer Price Index since 1960, including fuel, food and all the other most volatile items. Notice that the chart isn't a line up and to the right, its a tight range with a few short term spikes. Keep in mind that fuel and food are the items where consumers notice price increases the most. The second chart is the CPI since 1960 with the volatile items removed so that we can see a smoothed line. This is the inflation chart that is most often quoted in the news and used by the Federal Reserve. The second chart looks dramatic until we compare the CPI to real Personal Incomes. The final chart at the bottom is RPI since 1960 compared to the CPI. I placed a label on the CPI because its so hard to see you might wonder if I forgot to include CPI in the chart.
Clearly incomes have outpaced inflation for decades which is actually a condition called deflation. The only way to account for a growing economy, declining labor participation, higher wages and low consumer price index is technology. Technology is the great equalizer that causes deflation. On this last point I'm sure Marko would agree with me.
Where Marko and I disagree is that he believes that higher prices for fossil fuels will temporarily slow down the transition to clean energy. I believe that higher fossil fuel prices will accelerate investment into alternatives and push more people to use those strong personal balance sheets to buy electric cars, solar systems for their homes and more importantly, battery systems to store solar power during the day when the house is empty so that the EV in the garage can be charged overnight with free power.
Our highest conviction ideas remain energy (equities and commodity), materials, industrials and financials, and reopening, COVID-recovery, reflation and consumer themes - Markco Kolanovic
Marko is also not looking to invest in the high growth names, like the Nasdaq 100. The sectors mentioned above will benefit from infrastructure spending and a fully reopened economy. What his thesis doesn't account for is the growth that will come from those high-multiple companies because of the labor shortage, dramatic growth in new businesses and a hyper-need to increase productivity and efficiency. Companies will increasingly adopt technology to make up for the employees they can't hire and to make the employees they have more productive.
The labor force participation rate isn't going to change very much, and since 2001 has been on a steady decline. The range for labor participation is 58% - 68% and currently sits at 61.7%. The labor force participation rate is a measure of an economy’s active workforce. The formula for the number is the sum of all workers who are employed or actively seeking employment divided by the total noninstitutionalized, civilian working-age population.
At the same time, labor force participation is declining we have a dramatic increase in New Business Applications. Where are these new businesses going to find employees? Digging further into the data behind the chart below, these businesses are mostly retail establishments that need to hire employees. According to the US Bureau of Labor Statistics, at the end of July, there were 10.9 million job openings in the US, and there are over 8 million people unemployed. That seems like a fairly large gap that will continue to exacerbate wage inflation unless we streamline immigration policies to bring in the permanent workers the country needs to fuel economic growth.
Portfolio Changes
Hedging my own thesis on growth is our position in the VanEck Vectors Oil Services ETF (OIH). The OIH has not performed as expected since I added it to the portfolio but the stock has rallied recently as higher oil prices look more likely to be a part of our future. In the last month the OIH has rallied almost 12% and over 35% year-to-date. By the time you read this I will have purchased the remaining shares to take the position to 100%.
VanEck Vectors Oil Services (OIH): I will be buying 36 shares of the OIH at approximately $208.09 per share. After the trade we will hold 192 shares and our cost basis will be reduced from $235.73 to $230.61.
SPDR Kensho Clean Power ETF (CNRG): The opposite side of the thesis above is that clean energy, particlulary solar energy, will be a growth industry over the next decade. Our position is currently down almost 6% so I'll take advantage of the situation to buy up the rest of our position. I will be buying 72 shares at approximately $95.37, increasing the position to 948 shares. Our cost basis of $101.17 will be reduced to $100.72. This buy will give us a full position in the CNRG that I expect to hold for several years.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
Stay Invested,
Clay Baker
ENTER YOUR NAME & EMAIL ADDRESS TO SUBSCRIBE
Keep Me Honest 2021
The S&P 500 will achieve year-end earnings of $170-$175 (1-1-2021).
We are likely to have a significant pull-back during the 1st quarter, about 5%-10% (1-1-2021).
Stock picking will outperform algorithmic trading again as it did in 2020 (1-1-2021).
S&P 500 will reach 5,000 by year-end.
Clay's Rules
Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't, Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your own homework.
RULE #10: Being early and being late is the same as being wrong...move on.
Rule #11: Investing is easy. Waiting is hard, waiting is the hardest part.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:
AMD, AMRN, AMZN, AAPL, ARKK, ARKG, CNRG, ENPH, FB, GNRC, GBTC, GLD, HRTX, HD, IPOD, MSFT, NVDA, PSTH, TWLO, VBIV
I am invested short in these securities mentioned in this post:
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
Comments