Today's word is...hopium. I ran that through Google and actually found that it is the name of a start-up making high-end hydrogen fuel cars. I am an old "car guy" - as I followed the autos industry for 11 years for global investment banks - but I was unaware of Hopium so I can't add any value on its product. My sense, though, is that H2 will decarbonize transportation only when the hydrogen is actually combusted - BMW was doing this almost 20 years ago with the H7 - and not in a fuel cell structure. Cool technology, to be sure, but when was the last time you saw a Toyota Mirai on the roads?
But hopium is everywhere in today's markets, and it just makes no sense. What happens is that valuations make no sense, and then the useful idiots (a Josef Stalin term) who populate investment research try to back-justify them with incredible estimated or "future" growth. Note that it is always "future" growth, because the future, by definition, can't be measured, only predicted.
What I try to do for my firm, Excelsior Capital Partners, is to deflate hopium and concentrate on the here and now. My HOAX portfolio is the ultimate example of that. It has 10 names, all hydrocarbon based. In the two months of its existence from December 23rd to February 23rd, it was beating its benchmark, Cathie Wood's leaky (ARKK) by 50 percentage points.
Then on February 24th, Putin invaded Ukraine, and things have gone parabolic for HOAX, which is here, since then. Obviously I didn't want to win that way. I have been just as horrified by Putin's "special operation'' as every other right-thinking person in the free world. But you always have to protect yourself from geopolitical risk, or as commodity traders not-so-lovingly refer to it, "geo." Geo manifests itself in higher crude prices, because in most cases oil is not consumed where it is produced.
HOAX, in my opinion, is the real world and ARKK is hopium. I would be happy if everyone linked arms and sang Kumbaya, but that just never happens. But, as my research director at DLJ used to say, investing is about the second derivative. What is the inflection point?
I hate to say it, but I think the next move, directionally, is down, i.e. things get much worse.
The U.S. economy is really close to recession, as the Atlanta Fed's brilliant GDPNow nowcasting tool has U.S. GDP growing at only 0.5% in the first quarter. One bad data point and that number will go negative again - it was below zero last week - and we will be on the cusp of a recession, which is classically defined as two consecutive quarters of negative growth.
How to play a recession? Well, bonds. The first U.S. bond ETFs were not listed until July 2002, so I can't go back to 1929, but we have had two nasty equity market corrections in that time period, so there is reference. Look at (IEF) .
September 12th, 2008 (Lehman Monday was September 15th:) $89.68
December 26, 2008: $99.64
Dec 27, 2019, $110.69
April 8, 2020 - the Covid bottom in equities was March 20, 2002: $120.96
That's excellent absolute performance, and obviously the relative performance for IEF vs. (SPY) was off the charts in both periods. Also, it's a measure of Powell's extraordinary incompetence that IEF's 1.1% dividend yield actually doesn't look that bad versus the S&P's yield which is currently 1.42% according to multpl.com.
Simply put, you're not losing much by switching from stocks to bonds. Do so.
This column has used some of my favorite data sources, but I have to give the last word to the alpha nerd, which is a huge compliment coming from a fellow nerd, John Butters at FactSet. According to John's most recent write-up:
...it should be noted that the first quarter also marked the largest decrease in the bottom-up EPS estimate during the first two months of a quarter since Q2 2020 (-35.9%), when there were widespread lockdowns in the U.S. due to COVID-19.
As the bottom-up EPS estimate for the index decreased during the first two months of the quarter, the value of the S&P 500 also decreased during this same period. From December 31 through February 28, the value of the index declined by 8.2% (to 4373.34 from 4766.18).
Numbers are coming down. But let me tell you, as a former sell-side analyst, those sell-side analysts are always behind the curve. Numbers down, stocks down, the market is efficient. But I am very, very, afraid now that numbers will crash down as the global economy suffers under the weight of crushing inflation.
If you own stocks, make sure they are tied to a commodity that produces cash flow. If not, take shelter in bonds, which, by definition, produce cash flow.
The motto of Excelsior Capital Partners: cash flow never lies. Hopium often does. Be careful, protect your portfolio here.