Tips for surviving a correction

[vbin]

(03-03-2020, 01:23 PM)Otter Wrote: The S&P 500 sports a TTM P/E ratio of roughly 23 at the moment. The last time interest rates were slashed to zero, the market did not surge in response. TTM P/E actually dipped below 15 for a period.

Just a data point for those trying to estimate valuations in what is becoming an increasingly turbulent market, driven by uncertainty as to risk.

This is not a classic liquidity crisis. Interest rate drops are not going to restart factories/supply chains, resolve demand shocks caused by social distancing (voluntary or government-imposed), or address the many knock-on effects that flow from those issues.

Really good point. Thank you

[Otter]

I think SPY 260 is likely. I think SPY 203 is within the realm of possibility (would be a 40% drawdown from the highs, based off of Scott Minerd's Bloomberg interview last week).

Unless the known pathogenic/epidemiological characteristics of the virus and our domestic mitigation efforts in the U.S. (pitiful to date) change drastically, I think we are looking at a nationwide healthcare situation similar to Hubei Province within 30 days. The statistical outcomes predicted for such an event would dwarf any similar event in modern U.S. history. Likely more than 2 million deaths in the U.S. alone (~58,000 Americans died in Vietnam, and ~400,000 died in WWII). It is not the end of the world, but the social and economic consequences will exact a heavy toll.

My math on the 2+ million deaths is derived in part from Professor Marc Lipsitch's latest estimate of population infected. He is an epidemiologist, and Director of the Center for Communicable Disease Dynamics at Harvard's T.H. Chan School of Public Health (considered the best in the world). He recently updated his assumptions using the latest available data, and estimates a range of 20-60% of population infected (Dr. Gabriel Leung of Hong Kong University has estimated as high as 60-80%, but I'll work with the lower numbers here). WHO's latest estimate for case fatality rate (issued today) is 3.4%. Go with the lower bound of infection rate. 330,000,000 Americans x 20% x 3.4% = 2.24 million. The numbers for people requiring ICU treatment and hospitalization for pneumonia are multiples of that, and there are not enough hospital beds or healthcare workers in the U.S. to handle that burden. Healthcare workers are also at highest risk for infection, and once infected and quarantined they are removed from the pool of available treaters for several weeks, at a minimum.

Even if the U.S. switches to extreme mitigation measures like China did, I think the very nature of those mitigation measures (extreme quarantine and transport shutdowns) would create a severe shock to the economy.

This is not the apocalypse. The U.S. and world are not going to go Mad Max and fall apart, but the latest available data indicate that societal and economic consequences of an event like this are likely to be extreme.

[fenders53]

As much as I remain calm, I do expect the virus to cause near zero earnings growth this year. That should surely cause stocks to pullback 25-50% from these valuations right? Sounds logical to me. About 15 months ago we faced the very same prediction. It came true for the most part. While the GDP grew at 2%, most of my portfolio did in fact face zero or even negative growth in earnings, or at least revenues. Market ran nearly 30% in spite of it. Point being, it's great to have an opinion on market direction, I certainly do. Just don't over-react to your prediction. Don't go 100% in or out of stocks or cash ever. The market is not rational for years at a time. You'll get burned by your assessment eventually if you over-react.

[stockguru]

Just remember the last too times the FED did an emergency rate cut the S&P 500 both times was cut in half. Valuations are too high now. We need to get back to 14-15 X PE. You are going to see most companies warn on the next few quarters and estimates are going to have to be revised down. That's just common logic. And you need to keep cash on hand for declines. If your fully invested then you are going to scramble to sell to buy other stocks you want. I'm not saying I'm right, but that's just my thinking and I'm sticking to it lol

I agree with GOLD and REITS and maybe add in Consumer stocks as well. I invested in a lot of gold stocks at or near there lows a few years back and there my biggest gainers right now. Reits will also do well in this environment.

I agree there are a ton of stocks I would be willing to buy right now. But the question I keep asking myself is?? Can they get cheaper on valuation. And the answer is yes lol

If you want to own BA, IBM, MMM and stocks like that. Buy small amounts and add on bigger pullbacks. Keep some powder dry so you dont come up empty.

One name I do like here is VTR.

BTW I took some money off the table as well. I 'm about 35% cash

[fenders53]

I am surprised to learn this past week that most of this forum has a significant cash position, except for some on the youngin's.  I hope we don't discourage any of them with my our chatter.  This is a DGI forum, and the correct answer for somebody young with a $10K port is full steam ahead.  Just buy quality all your way through this.  Try to time the bottom for 40 years, and you'll miss the bus, and probably submit to the FOMO and buy high at some point.  

That said, some cash seems prudent.  This seems to be a market looking for a reason to be volatile.  The virus could very well be legit.  The political excuses I hear from the talking heads are laughable.  The market is scared because Bernie had momentum, the market is happy because he won't be Trump.   Today it may run because Biden has momentum.  If he gets too much momentum they'll get scared Trump won't beat him.  The political winds aren't investable, and maybe not even tradeable other than providing an excuse for volatility.  It's just a casino right now.  

I'm not saying growth stocks won't remain popular, but the market will get back around to higher dividend stocks IMO.  Maybe not so much oil, tobacco and other high headwinds stocks like some of the REITs.  There are now lots of quality boring stocks paying 3-4% after the 20% pullback many of them have seen, and quite a few of them are aristocrats.  We should be able to come out of the back end with higher yielding ports.  I don't think we will see 15 PEs for most of them though.  That would require a 50% correction in SP if their earnings pullback.  In effect, you are predicting a harsher than average recession.  Of course it could happen, but it's not my prediction with all this liquidity, and a President who will no doubt cut taxes if he gets concerned at all about the polls.  I think a correction like that is off in the future, but that's what makes a market.  2020 is going to be a ride.  That seems like the easiest prediction ever.  

Now I need to hear some more sky is falling price targets from Divemenow the stock Swami. 

[divmenow]

(03-04-2020, 05:49 AM)fenders53 Wrote: I am surprised to learn this past week that most of this forum has a significant cash position, except for some on the youngin's.  I hope we don't discourage any of them with my our chatter.  This is a DGI forum, and the correct answer for somebody young with a $10K port is full steam ahead.  Just buy quality all your way through this.  Try to time the bottom for 40 years, and you'll miss the bus, and probably submit to the FOMO and buy high at some point.  

That said, some cash seems prudent.  This seems to be a market looking for a reason to be volatile.  The virus could very well be legit.  The political excuses I hear from the talking heads are laughable.  The market is scared because Bernie had momentum, the market is happy because he won't be Trump.   Today it may run because Biden has momentum.  If he gets too much momentum they'll get scared Trump won't beat him.  The political winds aren't investable, and maybe not even tradeable other than providing an excuse for volatility.  It's just a casino right now.  

I'm not saying growth stocks won't remain popular, but the market will get back around to higher dividend stocks IMO.  Maybe not so much oil, tobacco and other high headwinds stocks like some of the REITs.  There are now lots of quality boring stocks paying 3-4% after the 20% pullback many of them have seen, and quite a few of them are aristocrats.  We should be able to come out of the back end with higher yielding ports.  I don't think we will see 15 PEs for most of them though.  That would require a 50% correction in SP if their earnings pullback.  In effect, you are predicting a harsher than average recession.  Of course it could happen, but it's not my prediction with all this liquidity, and a President who will no doubt cut taxes if he gets concerned at all about the polls.  I think a correction like that is off in the future, but that's what makes a market.  2020 is going to be a ride.  That seems like the easiest prediction ever.  

Now I need to hear some more sky is falling price targets from Divemenow the stock Swami. 

Here's your chance to sell at the open while were up 700 points... sell,sell,sell, 

In all seriousness if you a young investor you have nothing to worry about. Don't think 1, 10, 0r 12 weeks out. Think 5, 10, 15, 20 years out. If you have a long term outlook this is not a bad time to buy some quality companies. Some great stocks are 20-25% off there highs. Get a list ready and buy the ones you think will be a around for many years to come and have a strong balance sheet.

[Otter]

(03-04-2020, 05:49 AM)fenders53 Wrote: I am surprised to learn this past week that most of this forum has a significant cash position, except for some on the youngin's.  I hope we don't discourage any of them with my our chatter.  This is a DGI forum, and the correct answer for somebody young with a $10K port is full steam ahead.  Just buy quality all your way through this.  Try to time the bottom for 40 years, and you'll miss the bus, and probably submit to the FOMO and buy high at some point.  

That said, some cash seems prudent.  This seems to be a market looking for a reason to be volatile.  The virus could very well be legit.  The political excuses I hear from the talking heads are laughable.  The market is scared because Bernie had momentum, the market is happy because he won't be Trump.   Today it may run because Biden has momentum.  If he gets too much momentum they'll get scared Trump won't beat him.  The political winds aren't investable, and maybe not even tradeable other than providing an excuse for volatility.  It's just a casino right now.  

I'm not saying growth stocks won't remain popular, but the market will get back around to higher dividend stocks IMO.  Maybe not so much oil, tobacco and other high headwinds stocks like some of the REITs.  There are now lots of quality boring stocks paying 3-4% after the 20% pullback many of them have seen, and quite a few of them are aristocrats.  We should be able to come out of the back end with higher yielding ports.  I don't think we will see 15 PEs for most of them though.  That would require a 50% correction in SP if their earnings pullback.  In effect, you are predicting a harsher than average recession.  Of course it could happen, but it's not my prediction with all this liquidity, and a President who will no doubt cut taxes if he gets concerned at all about the polls.  I think a correction like that is off in the future, but that's what makes a market.  2020 is going to be a ride.  That seems like the easiest prediction ever.  

Now I need to hear some more sky is falling price targets from Divemenow the stock Swami. 

Agreed. If you are young, have a small portfolio, and are at the beginning of the compounding curve, even a 2008/9 drawdown is a non-event for your portfolio. If you are 40 and planning for early retirement, the calculus is a bit different, and using put options to multiply your market downturn cash pile you had been building so you can buy more yield at the bottom isn't a bad idea. That said, the time to be buying puts was early February, when the markets were at all time highs. They cost a lot more now, as the market has a different assessment of risk.

[vbin]

This is going to get ugly.

Foxcon cut revenue projections by 15%. Fedex EPS q3 guidance lowered to $1.22 from $1.72 by suisse. GE cuts cashflow guidance by $500M.
Amazon employee in seattle and broadcom in san jose tested positive.

[fenders53]

I'm pretty sure I'll hedge a little more in the future.  It's as tricky as any part of investing though.  You can spend a lot of money for insurance over time waiting to be right.  The whole thesis for my covered put selling income strategy is taking premiums from those buying "insurance".  I agree that the risk was most obvious last month Otter.  I used my cash position as a hedge of sorts this time, since I've felt equities have been overpriced for most of the past few years.  If I could have used the typical 60/40 model, I would do that and call it a day.  That just doesn't seem prudent with these bond yields.  I don't see the opportunity to buy many longer term bonds for years to come, but things change so who knows?  I think the house of cards will have to tumble before anything will change.        

Some of my recent investments will probably be early in hindsight.  I usually am.  I'll have to treat those with patience.  That is why I am trying to be disciplined and only buy quality now.  Patience is MUCH easier for me, if I believe in what you own.  I'm finally not forced to buy distressed stocks like MO, oil and very few others just because they are the only thing that looks reasonably priced.  I look at a stock like F and think, "well this surely looks like the end you dummy".    I know better than to go crazy doubling and tripling down.  Some of them end up being a sucker bet and you nullify the ones you got right.

[NilesMike]

(03-04-2020, 10:37 AM)fenders53 Wrote: I'm pretty sure I'll hedge a little more in the future.  It's as tricky as any part of investing though.  You can spend a lot of money for insurance over time waiting to be right.  The whole thesis for my covered put selling income strategy is taking premiums from those buying "insurance".  I agree that the risk was most obvious last month Otter. 

We have mostly been at all time highs since May 2013.
The risk was no greater in february 2020 than it was when SPX was at 2100, 2400, 2700, 2900 or 3,000. I do not fight the tape.

[fenders53]

(03-04-2020, 04:54 PM)NilesMike Wrote:

(03-04-2020, 10:37 AM)fenders53 Wrote: I'm pretty sure I'll hedge a little more in the future.  It's as tricky as any part of investing though.  You can spend a lot of money for insurance over time waiting to be right.  The whole thesis for my covered put selling income strategy is taking premiums from those buying "insurance".  I agree that the risk was most obvious last month Otter. 

We have mostly been at all time highs since May 2013.
The risk was no greater in february 2020 than it was when SPX was at 2100, 2400, 2700, 2900 or 3,000. I do not fight the tape.

ATHs don't alarm me so much.  The market is generally up and to the right over time.  Continuous ATHs + no earnings growth does cause me to be more conservative.  Some multiple multiple expansion is OK.  To my knowledge we have never seen rates this low with a generally strong economy.   There is some limit to how much expansion I am comfortable with.  At some point we revert to the historical mean, or at least head in that direction.  I was pretty sure we were due for some correction soon enough, in spite of the tape.  

I do intend to hedge some when the time seems right.  l will never go all in on that idea though because you are fighting the tape.  Buying options is always gambling and you are not the house.  I'll get it wrong more often than I will get it right after premium decay is factored in.

[vbin]

Market never goes down in straight line. I feel there will be ralllys like this but if the crona spread continues for another month or so, we will see large impacts on economy.

I am not sure how much rate cuts will help, fed can go on to cut rates further and then what? They are pumping in money to keep the markets up.