Good riddance you horrid quarter. Thanks for proving once again that equities can cut your heart out and leave it in a box filled with Covid-19. Forget the history books, the Dow's having its worst-ever quarterly decline.
And you know what's the craziest thing? It could have been much worse. There were many, many stocks since the bottom one week ago that have roared here, and we are leaving the quarter with more hope than despair.
How is that possible?
As I always say, once we get a vicious move down, investors regroup. They find out what they can make peace with and the find out what must be avoided. The stocks that fell into favor are stocks that have stabilized and are moving right up and bounce down and then back up on bad Covid news.
The stocks that are shunned, put on a little short-covering rally Tuesday, something that happens when you have the second to worst quarter in the S&P's in history. It's no different than when the bulls have a huge quarter and the profit-takers come in to ring the register.
It's important, though, to put things in perspective about where we are and whether the stocks that were coming back during last week's 19.9% rally are the ones to buy, the major chords as I always call them, or whether we have to switch into the minor chords because of events.
First, understand that we are in the midst of a great biological war and if we don't win it, then all bets are off and we are silly to be talking about anything, but the finest utility stocks that have no earnings' risks. Treasuries are offering very little yield, so if you want yield without reaching for it then buy a utility stock fund or buy Dominion (D) , Southern (SO) , Con Edison (ED) . Those are all fine.
I think we win the war. We win by testing everyone and confining those who fail, while allowing those who have had it to go on with their lives. Meanwhile, those who haven't had it have to be careful, use good hygiene and, we hope, have far few people out there to get it from. Think of it as starving the beast.
There have been many fits and starts to the fight against Covid-19. The fact is we weren't ready. It's not the first time our nation wasn't ready for the outbreak of a war. We were woeful going into World War 2, with the 17th largest standing army.
But we caught up and after a bloody and arduous slog, with plenty of help from Russia, we beat the Axis.
I think we will do the same.
I know a lot of people are going to die, though because we didn't take it seriously at first. We have to pay that price. That's what is happening now.
But the market doesn't think like that. It doesn't assess the blown opportunities. The market doesn't think about what a shame it is, the market's heart doesn't go out to anyone, any family, because the market is heartless.
It's heartless, but it is rational.
And what does it see?
A total mess.
We are a service-based economy. Who do we serve? We serve Americans who buy things, big and small, cars and homes, and iPhones and tables and chairs and meals, and plane, cruise and concert tickets. And they buy televisions, computers and washers, dryers and the like.
There's only one problem: We aren't buying much of anything beyond canned food at the supermarket and staples from Amazon (AMZN) or Costco (COST) . Covid has robbed the American consumer of her consumption. Worse, many people buy things and rent things with borrowed money.
They can't pay.
So the service economy is pretty much stopped in its tracks.
In a total oddity, it's the manufacturing economy that's doing well, that is if you, as I do, consider technology as manufacturing.
So what does these mean for stock picking in the second quarter?
It's a bit of a barbell. On one end of the barbell is a list of companies that do well if the economy does indeed drop more than 30%, which is what many research houses say could happen. In that end of the barbell? The staples, like ConAgra (CAG) , which is on "Mad Money" tonight, or PepsiCo (PEP) or Mondelez (MDLZ) . The drugs like Johnson & Johnson (JNJ) or Bristol-Myers (BMY) . And the new industrials, stocks like Zoom (ZM) , Ring Central (RNG) , Citrix (CTXS) and Cloudflare (NET) , AMD (AMD) and Nvidia (NVDA) .
On the other end, are the companies that will come out on top in post Covid world, and there I am thinking of stocks like Disney (DIS) , Boeing (BA) , Costco (COST) , Amazon, Walmart (WMT) and Honeywell (HON) . The barbell is curiously imbalanced, because there are so few companies away from the staples that are going to be investible if the economy takes such a huge header. You can't own the banks, they are way too on the hook for the mortgages, and they need to offer forbearance they can't afford. You can't own the retailers away from the big box winners. You can't own travel and transport, because it is going to be a very long time before people trust the process of going away, although it is tempting to buy a United (UAL) as a hedged bet.
Most importantly, you cannot buy oil stocks where the posted price for oil in the Permian, our main production area, is about ten dollars, not twenty as the West Texas Intermediate seems to go for. It's a level that no one can afford, not even the biggest and the best and if you think that we aren't going to return to having real driving demand anytime soon, oil could easily come down to the price that oil producers are getting at the Permian.
Now, it gets even trickier. My model actually presumes that we are going to beat Covid-19 in the next 30 days from a combination of testing and physical distancing. The problem is "beating" means not returning to the old world, but adjusting to a new one where fear is still in the air and we stay at home much, more than we used to.
Hence the overabundance of staples and the lack of anything that is cyclical or auto or housing, because I do not see those areas of the economy coming back. I like Costco and Walmart because they are going to destroy pretty much every retailer because they have the balance sheet to do so.
I do believe in the third quarter we will see a resurgence of consumer tech, namely Apple (AAPL) , Alphabet's (GOOGL) Google and Facebook (FB) -- all of which have service components that are loved. But no need to rush into any of these, because a 30% decline in the real economy is not going to yield a more than 30% gain to go back to even.
Remember, I said that this quarter could have been a lot worse? With the portfolio picks I have, and the ones I am recommending to club members of Action Alerts PLUS, I have developed a core of stocks that, once again, are to be invested in, because I think it could be a lot worse, but won't be in the second quarter, too.