Traders are at it again, states Steve Reitmeister of Reitmeister Total Return.
They are playing a game that rarely works. That is to rally on bad news in the hopes it means the Fed will change its tune and become less hawkish on raising rates. Remember that the Fed is filled with academics, not day traders. This means they are very deliberate: Read slowly.
Meaning that the logic behind the recent rally is not well-founded and likely short-lived. With that, I will spell out more of the reasons as to why I have become increasingly bearish with a hedge in place to protect us from likely future downside.
Yesterday on the Platinum Members webinar I gave a pretty thorough accounting of why my stock market outlook is tilting more and more towards the bearish mindset. Not 100% settled on that outcome. More in the 50-60% probability range. Yes, the main point of today’s commentary is that I give the current rally very little merit. That is especially true today as the famed GDP Now indicator from the Atlanta Fed slipped further from +1.3% to +0.9% for Q2 after the weaker than expected International Trade report.
By the way, it was the shocking weakness in International Trade that was the main reason behind the -1.5% contraction of the economy in Q1. That negative trend is clearly not resolved. You may be looking at that +0.9% reading and saying to yourself…hey, the economy is growing.
But let’s be clear this reading has slid all the way from +2.5% a few weeks back to +0.9% today. Directionally that is very bad news saying that the freshest economic data are indeed weaker and likely by the end of the quarterly cycle could be in negative territory again. Let’s not forget that the definition of a recession is two straight quarters of economic contraction. We already have one foot in that grave and bit by bit it looks increasingly like the second foot is not far behind.
The oddity of this negative news today is that stocks went higher and bond rates went lower. The only way to logically explain that is what I shared in the intro. That being that traders think that this spate of bad news will have the Fed immediately rethink its plans to raise rates to fight the flames of inflation.
The Fed does nothing immediately. Again, they are slow and deliberate academics working by committee. Plus they strongly desire to give the market clear indications of their intentions. And those clear intentions are to raise rates again and again and again to raise inflation while “hopefully” causing little damage to the economy. That outlook will not turn on a dime.
Sorry folks. The Fed is way behind the curve when they should have been raising rates as far back as a year ago. This is what leads a well-respected market commentator like John Mauldin to recently declare that there are no soft landings. Then you have the World Bank issuing an alarming forecast about 1970’s style stagflation with many countries likely to fall into recession.
Next up is Morgan Stanley joining the bearish chorus of other leading bank and investment firms. What you have to appreciate is that folks like Morgan Stanley, Goldman, and JP Morgan all have a natural bullish bias. Because if they scare investors too much, then they run out of stock funds with higher fees to cash with virtually no fees.
Instead, these groups usually give a “read between the lines” type of neutral outlook. Or that things are mixed. That is code for watch out below! But now they are actually saying “watch out below” which is an alarming concept that we need to appreciate increases the odds of a bear market and downside share prices.
For these reasons, and all the others recently shared in commentary, is why I have created a hedged portfolio. This is the right balancing point until we have a more definitive statement of market direction. A break below 3,855 into bear market territory will likely start a longer-term move to -34% or beyond. That’s because the average bear market decline is 34% from the previous peak.
Unfortunately this time around, the ultra-low rate environment allowed stocks to have higher than normal valuations that need to be squeezed out. That is why a 40% decline is not out of the question.
If that does unfurl, we will sell more of our long positions to become net short of the stock market making ample gains as stocks wind their way to the bottom. On the other hand, if the 40-50% chance that the bull market proves victorious, then we will do the opposite. That is to sell off the inverse ETFs from the hedge and just buy more stocks to become 100% long the market once again. Remember that I am not a perma bull or perma bear. Rather I am an investor with 40 years of experience who comes to this outlook objectively given the facts at hand. And if a recession and bear is what is in store, then it’s not time to mope or play the ostrich with our heads buried in the sand.
Instead, we will stare those facts in the face and enact strategies that put us in the best position to succeed. That is what is happening now and we will continue to adjust as the facts evolve. Do not expect perfection along this path. There truly is no such thing with investing. We just want to do more right than wrong creating outperformance. Hopefully a lot more right than wrong.
That has been the case over my career…and over the course of this year. I look forward to that being the case as we move forward.
Portfolio Update
Many of you are probably thinking to yourself that Reity got more defensive at the wrong time. That sloppy timing is not uncommon in a volatile market like this. But don’t lose sight of how the overall portfolio has really done since the hedge was enacted on 5/24:
+5.56% S&P 500 (SPX)
+5.98% RTR portfolio
Not so bad right?
This surprisingly good performance took place because the long side of our portfolio is constructed of some of the best outperforming groups like energy and shorting the bond market. That more than made up for the weakness in the inverse ETFs. No, I wouldn’t expect this strong performance to hold up if truly the bull kept running from here. We would start to fall behind.
On the other hand, if my increasing caution on the market is well-founded, and the market does start to head lower, then I would suspect that we would be closer to breakeven. That certainly is better than the severe losses endured by most. Then with a break below 3,855, we would sell off more of the long positions to become net short. In that environment, our portfolio would rise as the market sinks.
Now let’s get some updates on our notable portfolio positions:
APA Corporation (APA) and VanEck Oil Services ETF (OIH): Another good day for these shares. Heck, another good week. OIH has bounced from serious losses to a nice +8.11% gain since inception. But even more impressive is APA, which never missed a beat since coming into the portfolio rallying another +5.85% today and now up +164% since inception. Yes, it's tempting to take some profits off the table, but just no reason to do it with oil prices so steadily on the rise. That is why in the past week they have gotten upgraded targets of $60 and $68. As stated before, once oil prices head lower in a meaningful way, then we will pack up our profits and move on.
Dropbox (DBX): Shares shot up a shocking +6.2% on four-times volume Friday when the overall market was in an outright downpour. The reason is that Deal.com says the company has been approached by a takeover consulting firm representing a potential buyer. Jackpot!
If you remember that was a big reason behind our premise to buy shares. That there are very few cloud computing companies this profitable with this low of a valuation. That makes it a tremendous buyout target. Fingers crossed this comes true with likely more upside on the way.
Bloomin Brands (BLMN): Holy smokes, this thing jumped back to life quickly. From a low of $17.27 on date 5/24, it has risen 20.67%. Yes, most of that was eliminating a nasty early loss…but it is also an understanding that none of BLMN’s problems had to do with BLMN. So any ray of sunshine for the market gave these shares a beautiful tan. On top of that, there has been some recent analyst attention on shares from JP Morgan saying Buy with $26 target up to Jeffries with Buy with $36 target. I’m not greedy. I will take the middle at $31 which is more than 50% above today’s price.
Clean Harbors (CLH): Shares started rough in the portfolio, but gladly finding their stride with another+3.77% today and +10.73% since inception. Shares are pressing up near $100 which could likely provide some short-term resistance. Yet there is a good reason that the average Wall Street target is $122 with folks like five-star analyst, Patrick Brown of Raymond James, pounding the table that $135 is its rightful destination. As long as there is a glimmer of hope for the bull these shares will stay in the portfolio to reach their full potential.
Closing Comments
It is never lost on me the enormous responsibility of managing an investment newsletter like Reitmeister Total Return. It is not just about the ability to have free speech or spit out some random picks. Rather I fully understand that many of you have saved up money for decades to invest based on my advice. The outcome of which greatly affects your financial well-being…and thus your ability to take care of those that you love. It is with full appreciation of those facts that I continue to make these moves in the best interest of my family and yours.
