We ask when it is down enough. We worry about a recession. We debate retests and bottoms.
And on another monumentally bad day we come up empty-handed. The market isn't interested in sales, or earnings or franchises. It cares about infections and deaths and denominators and social distancing.
But one day it will be interested in them. One day they will be paramount. The answer we have to find is not, Can we still sell? It's more of, It's so far down, when can we buy?
I don't arrive at that too-late-to-sell call easily. Nevertheless, this weekend and this morning, I derived a degree of comfort from the actions and statements of the Fed chief and the Treasury secretary to think that there are, at last, opportunities, but you can't get them in the indexes. That's not where they are. The S&P 500, for example, that much exalted, alleged passive index that is actively managed in what is in and taken out is the preferred "vehicle," like it's a car, for people to invest.
Sixty percent of stocks are owned by some sort of indexing investors. They have been told that they are brain-dead and profligate and dumb as a bag of hammers, so they better not buy shares in Apple (AAPL) or Alphabet (GOOGL) or Tesla (TSLA) . But this is a unique moment where there are yays and nays, the days of Bread and Circus where some gladiators triumph and others are put to death or are on death's door never to fight again.
That's' where the opportunity comes in.
Before I get to the opportunities, let me tell you why I actually am more constructive down here and then I will demonstrate how to find winners even in this time of Covid-19.
First, the Fed Chief made some historic moves Sunday night that accomplished the one thing: Your bank opened for business. There were no runs. I heard all day that the Fed rate cuts and all the liquidity Jay Powell put into the banks wasn't enough or wasn't thoughtful or was too late. Blah. Blah. Blah. What he did was perfect. If it had been done in 2007, we wouldn't have had the worst downturn since the Great Depression. He took bold action and he should be praised.
Fed Chair Jerome Powell took bold action and he should be praised.
I had been worried about two things going into the trading session: Someone in my family getting sick and then, secondarily, a run on the bank. Boy, people have short memories. Back in 2008 there were bank runs after bank runs. You had to be worried if your bank was solvent. I spread cash around a bunch of banks, because I feared a bank would close and I would lose my deposit. Powell took that off the table. If he only does that, it would be enough. But he also made it clear that he would make the treasury market and the mortgage-banked market more liquid. The latter could lower mortgage rates, because they are stubbornly high.
Again, these are the kinds of things that the policy makers back in 2007 didn't even think about They were so paralyzed and mistrustful and vindictive that they couldn't think straight. Their punitive, moral hazard nonsense threw millions of hard working people out of work. All they had to do was prosecute the top guys, but they failed. Disgraceful.
Then this morning I talked to Treasury Secretary Steven Mnuchin about his plans to stabilize not the markets, but the small business base of the country. He liked what Powell did and he made the point that labeling something a recession doesn't really advance the ball. I ventured that what we have is a hiatus in business and we both agreed that the amount of stimulus is so strong that you have to be able to look through the valley at a certain point and look for companies with great balance sheets that sell products that will be bought when things get better.
Which brings me back to the indexing phenomenon.
I think there are many industries that are truly on the ropes and may remain on the ropes for some time, unless they hit the canvas and take a 10 count. I don't want to own any airline stocks, because this feels a lot like 9/11 where the companies were crippled. Sure, they ultimately came back, but that's because the 9/11 incident was singular. We are on, call it, day three of this horrendous moment, and I don't want to be a hero.
I think oil is another total problem area and, as economic activity dries up and the Saudis and Russians keep trying to crush our shale oil companies to regain hegemony, many of our oil companies will be severely disabled. I don't want to own them, either.
I got the word from the city I have to close our restaurant and our bar. Too many people gathering: I wish! But restaurants and entertainment places are, for now, uninvestible. Social distancing killed them. I don't want to own them. Penn National Gaming (PENN) is the paradigm. They did this great hook-up with Barstool for gambling. They owned it. They killed it. But now there's nothing to bet on. Thirty-nine last month. Eight and change today.
Retailers can't respond to lower rates, because no one really feels like doing anything except ordering from Amazon (AMZN) . That will change. I think that there will soon be so much inventory at stores that bargain houses will be able to offer cash. It could be a glorious time for the off-price retailers but, that said, I don't want anything from this group, either. Consider that the stock of Macy's (M) has now fallen 59% and yields 21%. Kohls (KSS) : Down 59% with a 13% yield. Nordstrom (JWN) , off 56%, 8% yield. What the heck are those stocks saying?
I know the banks are cheap. But until others accept my view that the banks will come out whole, they will be so-so investments. I want to recommend them but we discovered this weekend that if they want to borrow from the Fed to stay solvent, they can't buy back their own stock with it. You have to wait until it sinks in that they won't have to recapitalize even as the new Wells Fargo (WFC) CEO just bought 5.6 million worth of stock That's a total step-up and I think that could be a real game changer for me. But not yet...
Autos? No one's buying. Auto part makers? Ugh? Suppliers? Ouch. I could go on and own -- as you will hear when we interview Jim Fitterling, the CEO of Dow (DOW) , the chemical company.
Tech? Too hard, too soon... for now.... Let's see what settles in.
OK, so what's the deal then? If the data is just going to get worse, if we are going to come in day after day and get bad news, what is the point? The answer? If you go to your supermarket do you know that the makers of literally everything, I mean it, everything in there, dropped in unison with the rest of the index and then proceeded to rally, and rally furiously even as the indexes didn't? That's because of index infatuation.
So what do we do?
I think we are going to get some coronovirus numbers soon now that we are beginning testing in earnest. We are going to get lockdowns like in San Francisco where you may not even be able to shop, although I think grocery stores will always be open. We are going to hear horrendous reports from every part of the country.
But we are also going to see the stocks of companies that actually make products we can't live without. Check your medicine chest. Check your refrigerator. Look at your pantry. Yes, stocks were down 8%-10% on average. We should 't buy average. We should by quality that we can't live without. Because as far as I can tell, that's the only thing that's worth investing in. But it's better than where we were last week when the banking system seemed in peril.