Don't panic! That has been the message of financial prognosticators throughout this market selloff, and if you have been reading my RM columns you'll know that I disagree. It is time to panic, but in a smart way.
Panic was shown in Treasury Secretary Mnuchin's statement last night that he had spoken with CEOs of six of the major bulge bracket banks and they assured him their institutions "have ample liquidity available for lending to consumer, business markets, and all other market operations." Why on Earth issue such a statement? And on a Sunday night?
The folks in DC are panicking. Mnuchin is better known for his Hollywood days producing such box office classics as Get Hard and Fist Fight than being an actual rainmaker on Wall Street, but his decision to hit the panic button was chilling.
Why did he do it? Because liquidity is the lifeblood of the markets, and he knows that liquidity dries up around the holidays. As someone who worked at major investment banks in London for five years, I can confirm this; nothing gets done during the festive season. And Continental Europe is even slower between Christmas and New Year's.
So, if there's going to be a liquidity crisis, the week of Christmas would be a great time for it. A look at the Fed's money supply data shows no current pressure whatsoever on U.S systemic liquidity, but that is not a forward-looking measure. Again, though, Mnuchin was trying to reassure markets that there is no problem when the credit markets are showing no problems. Why? That's panic.
So, the smart way to panic is to remove any trace of financial systemic risk from your portfolio. How?
- Sell bank stocks. I only buy stocks of banks when they begin to trade below book value, but please do not make the mistake of confusing entities such as Goldman Sachs (GS) (now trading well below 9/30/2018 tangible book value of $191.71) and Morgan Stanley (MS) as "banks." They are not. Their stocks have limitless downside here, and that counterparty risk will pressure other money center banks ( (JPM) , (BAC) , (C) , (WFC) , etc.) as well
- Sell bad balance sheets. I keep harping on this, but among the mega-cap tech names, Tesla (TSLA) and Netflix (NFLX) have the most problematic, debt-laden balance sheets.
- A continued stay for TSLA shares below will $359.87 will cost Tesla $920 million on March 1, 2019 to settle convertible notes. Elon Musk needs that cash to support product line growth and the disastrous legacy of SolarCity.
- Netflix's $2 billion debt offering on October 22 just added more fuel to the debt fire at the Los Gatos, Calif., streamer. Servicing that debt becomes an issue in 2019 for NFLX.
- I'm not just picking on the Bay Area here, either; (GE) and KraftHeinz (KHC) have debt-laden balances sheets and should be avoided, as well.
- Frequent readers of my RM columns will know that I spend a lot of time with energy companies, but, as energy bonds are getting slammed in this environment, all but the major integrated stocks-- (XOM) , (BP) , (RDS.A) --now have to be questioned from a debt-to-cash flow standpoint.
- Buy strong balance sheets. I mentioned in my RM column Friday a strategy of buying bonds of well-capitalized major tech names (Apple (AAPL) , Microsoft (MSFT) , Intel (INTC) , Cisco (CSCO) ) to lock in income and avoid further capital losses. Other names that meet that criteria are the major oil integrateds--hedging and downstream operations will shield them from oil's decline--and the mega-cap money center banks, whose balance sheets remain strong even as their stocks have turned radioactive.
- Exxon's 3/2045 3.567% notes are one example of a very solid credit play here.
- JPMorgan's 1/2023 3.2% notes are now trading at discount and also meet my other criteria for purchase.
So, that's the definition of panic. Companies with fortress balance sheets such as Apple and JPMorgan could withstand any economic shock, but stocks of Apple and JPMorgan have no support here. Both AAPL and JPM are still more than 50% above their levels of March 2016, and please do not think the erosion of the Trump Jump can't continue. It may not on every given trading day--don't be fooled by the inevitable "bear market bounce"--but this great re-rating of the U.S. stock market will continue.