April 2, 2018
I read. I study. I examine. I listen. I reflect. And then I try to form an idea into which I put as much common sense as I can.
The market volatility in 2018 is unsettling. However, no matter what anyone tells you, this time is NOT different. Barron’s recently called this a “Tina Fomo” market. We agree! Let me explain:
TINA – There Is No Alternative. After nearly a decade of central bank intervention, global interest rates have been driven into the ground. By default, many investors have turned to global equities as a source of both growth and income. Prior to the recent bump in treasury rates, several large cap blue chip stocks were yielding more than the 10-year treasury (this is unusual). After eight years of rising markets, have investors been lulled into a false sense of security?
FOMO – Fear Of Missing Out. Remember the mid-to-late 90s, when the NASDAQ was high flying? Us grey-hairs do. Its record levels were driven by cadre of technology stocks, and valuations be damned. It was full speed ahead until reality hit in March 2000. If your neighbor and hairdresser were making money, you wanted in! Fear of missing out generally overwhelms common sense and accepted valuation metrics. When you hear the phrase “this time is different,” head for the exits. Tech stocks such as Amazon, Netflix, Tesla, and Facebook have recently taken-it-on-the-chin, due to their lofty valuations. Just like the brakes were put on in March 2000, it’s not different this time.
The obituary for Tina Fomo has yet to be written, so volatile markets may continue their march upward. But just as barometric pressure foretells coming weather patterns, investors would be wise to understand which way the wind is blowing. Let’s examine some of the critical changes that we’ve made, but first, some GCM newsletter history from over a year ago.
In my January 2017 newsletter I wrote the following:
What worries me most with the upcoming regime change in Washington? Protectionism is the one issue about which I am most concerned regarding our portfolios. (Does anyone remember what caused the crash of 1929?) The big question for us is whether Trump’s pro-growth, tax-reform and fiscal stimulus policies will outweigh his protectionist views. I firmly believe that free trade is good for global growth, even though Trump has taken a stand against it. Import curbs could cripple U.S. businesses dependent on global supply chains! Hopefully, Congress will reign in his grandstanding and personal biases.
While Trump’s recommended tax cuts could stimulate the economy, we should be wary of the long-term impact – an unacceptable level of debt. When interest rates, debt levels, and inflation increase simultaneously, difficult choices will have to be made (tax increases, Social Security, Medicare cuts, etc.). I’ll go on record and state: High-levels of spending with reduced tax revenue, while increasing the debt load, is rarely a good idea unless times are dire (such as during WWII).
In my interim February 15, 2017 newsletter, I wrote the following:
Allow me to clarify: we are not getting out of the stock market. Rather, it is simply my intention to reduce our exposure to equities. This does not mean that I will stop evaluating and buying companies. There will always be what I believe to be bargains.
For decades, Trump has asserted that the U.S. was getting “ripped off” by trading partners. He will not be dissuaded on this issue. He is adamant that the U.S. has been fleeced by countries like China. What we might be witnessing is the beginning of the end of 30 years of globalization and convergence. Trump will talk tough, hoping for concessions, but he’s fully prepared to raise tariffs and pull out of trade deals. As stated in my previous letter, I truly believe that this will ultimately be harmful to the investment community.
My two major concerns from a year-ago are now closer to reality. First, with the passage of the recent tax bill, etc., our deficit will be of major concern for future generations. It may not show up in the numbers right away due to the repatriation of cash held overseas, but it will be of major concern, beginning 2019. Interest rates will continue to rise slowly and there may be a time, in the near future, when fixed income competes with stocks. Secondly, the recent announcements of tariffs with our trading partners might result in trade wars. Either this is an attempt toward a bargaining position or we end up in a downward trading spiral.
The problem with the daily chaos in the White House and the President; firing most of those (with worldlier views) who disagree with him, is that the U.S. becomes even more insular. Running our country without the smartest people in the room will only serve to leave us off the world stage, as evidenced by our global warming stance. In the daily White House soap opera, few episodes have merited as much seriousness, though, as Gary Cohn’s recent resignation as chief economic adviser. It’s a blow, I believe, from which this presidency—and the economy—may struggle to recover.
The fallout could prove extensive. Most immediate is that the protectionist Wilbur Ross (a former steel executive and now Secretary of Commerce) and the nativist Peter Navarro (Director of the WH National Trade Council) have driven out their biggest free-market opponent (Cohn), increasing their ability to wreak harm on the economy. The voices of those who understand economic policy are greatly diminished, as witnessed recently by the administration’s endless loop of fact-free and near fantastical claims about the effects of the tariffs.
As the Great 20th Century American Philosopher, George Costanza once counseled, “It’s not a lie if you believe it.”
The 21st century’s economic winners will the countries that deepen international commercial relationships. By increasing tariff protection, threatening to withdraw from the North American Free Trade Agreement and dropping out of the Trans-Pacific Partnership last year, Mr. Trump is pulling the U.S. back from global engagement. (Or he’s a genius with one of the best head fakes in recent history.)
So, where does this leave us?
In the past year, we have moved money into fixed income (Vanguard short & intermediate-term bond funds), invested in non-cyclical companies (beverage companies such as New Age Beverage, Barfresh), made our first solar investment with Enphase (ENPH makes microinverters which convert DC power to AC power), bought farmland (Gladstone), invested in data security firms (Widepoint, Intellicheck) and maintained our investments in large pharma. WE ARE NOT GETTING OUT OF STOCKS, but we have been extremely conservative allocating available monies in your account.
Regarding Enphase (ENPH), our timing thus far has been rewarding. Their management team has been enhanced, balance sheet fixed and technology is now considered world class. Why should Enphase remain a long-term hold? Currently, solar panels do not work when the (electric) grid goes down. ENPH has emerging technology that will resolve this and related storage issues. Why this is important is the impact that this will have on solar usage for countries/continents with unreliable/nonexistent grids. Additionally, Enphase is a domestic company (although they do import) that tariffs might help.
During the market swoon in February when the Dow had a couple of thousand-point drops, I was asked to convert most of an account from stocks to cash and asked to decide on a good time to get back in. This IS NOT what I do. I have stated this on several occasions – I am not smart enough to time the markets. In early 2012, I also received requests for converting accounts to cash after a difficult 2011. Please do me a favor and note the bottom right side of your account statement to review your yearly account growth since 2012. If we had thrown the towel in at that time, your finances would simply not be what they are today. I urge you not to let these past two volatile months sway you from our course.
I am focusing all my attention on investing in companies for the long-haul; companies that will be financially rewarding, regardless of the what the multitude of stock indices are doing. However, I am aware of client uneasiness regarding account volatility. Going forward, you can continue to count on volatility, for as long as we’re trying to outpace inflation.
I still believe in making money the old-fashioned way. I regularly speak with company executives, scrutinize balance sheets and search for out-of-favor companies trading at inexpensive levels. I’m confident the fundamental approach will see a revival. The key is not to reach for yields or performance but stay disciplined to your risk and long-term goals. We have come a long way since 1/1/2012, but we’re doing it now with less risk market risk. The goal is to outperform in difficult markets as we last did in 2015.
The market has not been kind to technology and, particularly, semiconductor stocks during the first quarter of 2018. Tower Semiconductor (TSEM) shares are currently floating at around -50% less than its true value of approximately $53. In addition, TSEM’s PE ratio is currently around 9x against its semiconductor peer level of, 25x implying that relative to its peers, you can buy TSEM’s shares much cheaper. TSEM is also strong in terms of its revenue, balance sheet (assets-liabilities) and generation of positive cash flow. Even though TSEM has gone down during the recent market swoon, I have not wavered on its long-term prospects. Putting this another way, if a prospective client came to me today, I would not hesitate to buy TSEM at roughly 3X the price that we originally paid in 2014. TSEM is a gem, with a great management team and without the lofty valuations of many stocks in the tech sector. I’m very excited about their prospects the next couple of years.
The first quarter is a wrap. Hang in there for we own some very good companies. Keep an eye on Barfresh during the second quarter! They just had their military press release (approved for all U.S. military bases) with more major announcements forthcoming. I’m betting that the four-year-wait will be well worth it! Our military personnel will be drinking free smoothies, courtesy of us 😊
Cheers and all my best,
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.