Discount Buying

Discount buying.  Stocks rebounded sharply yesterday as inflation fears receded, even after an early morning inflation number came in hotter than expected. First time unemployment claims were less than expected and the CDC eased its mask restriction guidance, clearing the way for investors to buy the dip.

N O T E W O R T H Y

One man’s words.  It happened again.  Last night, I was safely gathered in a small group of vaccinated individuals (in line with CDC and state guidelines), and someone told me that he put his entire portfolio in cash many months ago because he was afraid that the market had run too far, too fast.  Before I could enquire any further, he admitted that he wished he hadn’t done it… you know left about 15% on the table.  I will give him an A for honesty… most people only tell you about their winning exploits but avoid bragging about their misadventures.  So far so good. But now having missed out on the recent rally, his FOMO instinct began to cloud his thoughts. FOMO is an acronym for Fear Of Missing Out.  His fear of late 2020 is now turning into greed, and he wants to make up for lost opportunity.  He told me that he needed to find some supercharged winners.  That is the point in the conversation where I started to become uncomfortable.  I asked him what he planned to use his hard-earned money for and more-importantly, WHEN he was planning on using it.  He told me that he was considering retiring… soon… as soon as possible.  At that point, the alarm bells started ringing.  It wasn’t just me.  One of the other folks in the discussion was an experienced financial advisor from a bulge bracket investment bank.  I could see the advisor tense up as well. Investors with a shorter term horizon are advised to seek less risky, or volatile investments to avoid having to take out their money when volatile investments may be in a temporary down cycle.  Longer term investors can tolerate more volatility, giving their investments the ability to recover from pullbacks.  No, this gentleman was a shorter term investor and he was eager to make a killing.  And then it happened.  He said it.  “I am thinking of Bitcoin.”  I couldn’t help myself at that point and I asked him why he wanted to put a sizable amount of his investment dollars in Bitcoin.  He told me that he had read that it was supposed to go to $100,000.  He also reminded me that it had gone up +370% in roughly the past two years (I knew that).  I asked him why he expected the currency to more than double.  He told me that Bitcoin bulls believe that it will take over a portion of all dollar transactions and replace gold as an inflation hedge.  I decided to unpack his first assertion.  I told him to imagine if he got a bonus check for $1,000 dollars and decided that he would buy a new television set for his man cave.  I asked him what he would think if he deposited the check a few days later only to realize that check was worth -16% less!  That also means anything he would buy with his money would now cost him +16% more.  He clearly didn’t think that would be a good scenario.  Well, that is exactly what happened in the Bitcoin market in the few days leading up to last night’s gathering.  Now, to be clear, all currencies fluctuate, but those fluctuations typically occur for economic reasons. Central banks work together to ensure that those natural fluctuations occur smoothly in order to avoid the TV scenario up above.  Bitcoin suffered its most recent setback after Elon Musk appeared on Saturday Night Live and referred to another cryptocurrency as a “hustle”.  He was joking, of course, but the crypto markets didn’t take kindly to his comments.  Later in the week, Musk announced that Tesla would no longer accept Bitcoin for purchases of cars.  His reversal in policy was due to the fact that mining Bitcoin is bad for the environment, as he put it.  I can’t get into all the reasons why in this note, but vast amounts of electricity are required to power the servers which solve the complex equations in order to mine a Bitcoin.  All of that electricity in the current climate would produce a significant amount of carbon emissions.  See where I am going with that? Anyway, Musk, perhaps in an attempt to make Tesla appear to be environmentally sensitive sent the Bitcoin market… and most other cryptocurrencies into a tailspin.  One man’s words eroded the -16% of the value of your would-be money.  Not to worry though, because last night WHILE YOU SLEPT, Musk tweeted that he is working with the creators of his favorite Dogecoin (another cryptocurrency) to improve it. Wouldn’t you know it, the entire crypto market rallied overnight in response.   All of that aside, cryptocurrencies and blockchain technology are exciting developments which will certainly play a big role in the future of technology, banking, and all other industries.  We are still, however in the early stages of development which can lead to lots of volatility. While volatility can yield really great returns on the upside, they can also wreak havoc on the downside.  That simply means that investors need to treat crypto investment like any other investment.  One must be diligent and do lots of research before making an investment.  When making that investment, buyers must look at the portfolio risk that will be attributed to that position. In this case, size matters.  Too much of a volatile stock, bond, fund… or currency will make an overall portfolio more volatile. Imagine your entire portfolio sinking in value because of one man’s words uttered on a late night live comedy show… that was probably way past your bedtime. Taking risk is necessary to make returns, but investors must make sure that the risk they take is in line with their objectives.

THE MARKETS

Stocks rallied yesterday as investors rushed in to buy the dip on solid employment figures and new, more relaxed CDC guidelines.  The S&P500 rose by +1.22%, the Dow Jones Industrial Average climbed by +1.29%, the Russell 2000 index rallied by +1.68%, and the Nasdaq Composite Index added +0.72%. Bonds also rose and 10-year treasury yields fell by -4 basis points to 1.65%.

NXT UP

– Retail Sales (April) was expected to come in at +1.0% but missed by breaking even after growing by a revised +9.7% last month.

– Industrial Production (April) is expected tohave grown by +0.90%, down from May’s +1.4% growth.

– University of Michigan Sentiment (May) may have risen to 90.0 from 88.3.

– Next week we will get some regional Fed reports, housing numbers, FMOC meeting minutes, and flash PMIs.  Check back on Monday for calendars and details.