Our outlook for 2021 is formed by the need to get away from the crowd and to expect some very stormy weather in the U.S. stock market. We are not afraid of drowning. Therefore, we will review the circumstances at the bottom of the market in 2009 with today's market to see where the crowd is and where we need to go to avoid the coming storm.
At the bottom of the stock market in early 2009, we worked off the premise that long-term bull markets get their fertilization from the ashes of the prior debacle. In other words, if you wanted bull market stew, you had to have certain ingredients. Recently, the venerable Charlie Munger (Trades, Portfolio) (of Berkshire Hathaway fame), shared that he thought the stock market is in a "frenzy." This "frenzy" has caused a huge crowd to form around the most popular stocks and the most popular ways of accessing those popular stocks. To us, this appears to be a nearly complete opposite to 2009. You can almost smell the upcoming stock market failure!
"Again Jesus began to teach by the lake. The crowd that gathered around him was so large that he got into a boat and sat in it out on the lake, while all the people were along the shore at the water's edge." (Mark 4:1)
"That day when evening came, he said to his disciples, 'Let us go over to the other side.' Leaving the crowd behind, they took him along, just as he was, in the boat. There were also other boats with him.A furious squall came up, and the waves broke over the boat, so that it was nearly swamped.Jesus was in the stern, sleeping on a cushion. The disciples woke him and said to him, 'Teacher, don't you care if we drown?'" (Mark 4:35-38)
Stocks did very poorly in the prior ten years
Source: WSJ Market Data Group. Data for the time periods 1/1/1970 β 12/31/1982 and 1/1/1997 - 3/31/2009.
Today, the look-back numbers are as positive as they ever get. This provides no margin of safety to S&P 500 Index investors and is a polar opposite of 2009.
Source: Bloomberg. Data for the time period 3/9/2009 β 11/13/2020.
This ranks among the three best stretches for the S&P 500 Index since 1924. Munger calls it a "frenzy," which, by definition, is worse than a mania or a euphoria because it is closer to rage and insanity.
Historically depressed stock prices, especially among the traditionally most admired companies
Data for the time period 1/1/1982-12/31/1982.
Source: Hedge Funds Are Finally Beating the Market in 2020. Here Are Their Top Holdings.. Data as of 9/30/2020.
Source: Buffett Indicator: Why Investors Are Walking Into A Trap. Data for the time period 1/1/1951 β 12/31/2019.
Pick any measurement of your liking and this present set of circumstances is near the top of every measuring yardstick. Price-to-earnings (P/E), price-to sales (P/S) and price-to-book value (P/B) are all at 94-year extremes.
Massive negative psychology among individual and professional investors
Source: Barron's & Bespoke Investment Group. Data as of 3/5/2009.
Think how crazy bearish investors were in 2009 near the bottom. Eighty-nine percent of them thought the market would go down and 61% of them thought it would go down a great deal at the bottom.
Source: Cypress Capital Sept 9, 2020. Data for the time period 1/1/1987 β 9/30/2020.
Today, untested initial public offerings (IPOS) and special purpose acquisition companies (SPACs) are sprouting up everywhere and being bid through the roof. Investors ignore very real antitrust threats to the biggest and most glamorous tech companies. It is like it is getting closer to midnight and these Cinderella investors don't have a clock or watch to know when the time strikes midnight. Then everything caught in the frenzy will turn to "pumpkins and mice."
Normally successful and admired money managers called out on the carpet and in some ways humiliated (preferably on the front page of The Wall Street Journal)
Source: Bloomberg. Data for the time period 1/1/2019 β 10/31/2020.
The ridicule in December 2020 is reserved for respected managers who both go long and short in stocks. They have been clobbered by short positions gone wild. Back in 1999, we remember one of the clients of the firm I worked at was short eBay and got destroyed!
Source: Bloomberg. Data for the time period 2/27/2015 β 11/30/2020.
Anyone shorting over-valued securities has been crushed in the last two years.
Source: Thomson Reuters. Data for the time period 11/1/2019 β 11/30/2020.
While the short sellers get crushed, the insiders at these firms are dumping shares like there is no tomorrow.
Buy and hold investing viewed as an idea that is no longer useful
Source: Cypress Capital October 2, 2020. Data for the time period 1/1/2000 β 9/30/2020.
Here is Jim Cramer's explanation of the current frenzied appreciation for glam tech stocks:
Jim said that, "Tesla is the stock that broke how we view stocks. It's a totally unconventional way to look at stocks, and younger people look at a company that can make a battery and they dream dreams. They don't go with the spreadsheet. They see things that we don't see." But, dreams don't survive very long without spreadsheets.
Seemingly unsolvable economic problems as part of a deep recession
"The 40 years ending in 1941 included the stock market panic of 1907, which drove down the Dow Jones Industrial Average nearly 38 percent; the World War I Era, where the period between 1910 and 1919 was one of the worst ever for stocks; AND, oh yes, the Great Depression. Finally, icing on the 40-year cake, the Japanese bombed Pearl Harbor on December 7, 1941." (O'Shaughnessy Asset Management)
Source: Cypress Capital. Data for the time period 1/1/1970 β 12/31/2019.
The nice thing about economics is its lack of biases. We think that the Federal Government throwing borrowed money at the economy and the Federal Reserve Board printing money will solve our economic problems. History would say it could cause an inflationary boom and a mad dash for inflation beneficiary stocks like real estate, housing and oil.
Accommodative Federal Reserve Monetary Policies and stimulative fiscal policies from the U.S. Government
Source: frbatlanta.org. Data for the time period 12/1/2007 β 12/31/2008.
The picture paints 1,000 words. In 2009, the table was set for tasty stew.
Source: Cypress Capital. Data for the time period 1/1/1965 β 6/30/2020.
Today the table is set for major bond market misery.
Public short selling had hit record levels
Source: Value Line. Data as of 12/26/2008.
Source: Cypress Capital Sept 9, 2020. Data for the time period 1/1/2000 β 6/30/2020.
Public call buying and small Robinhood investors have gone gaga over stocks.
Cash in Money Market Funds at record levels in relation to stock market capitalization and paying low interest rates
Source: Hays Advisory. Data for the time perios 1/1/1990 β 12/31/2009 (left); 1/1/1974 β 12/31/2010 (right).
Source: Cypress Capital. Data for the time period 1/1/1974 β 9/31/2020.
Very intelligent and credible economists and analysts explaining clearly and logically how terrible things are going to be for many years
Source: Bespoke. Data for the time period 1/1/1990 β 6/30/2020 (right).
When the leaders of the most successful tech companies dress up like homeless people to go on television, you get the sense that their arrogance is reaching the outer limits. We believe the capital destruction following this "frenzy" could be legendary and rank with the dismantling of the "Nifty Fifty" stocks of 1972 and the tech bubble stocks of 1999.
What does it look like before growth bubbles break?
Source: Cypress Capital Sept 9, 2020. Data fore the time period 1/1/1960 β 6/30/2020.
The four most expensive words in the English language are "this time it's different."
βSir John Templeton
The opportunities for investors in 2021 could be found in the economy outperforming the stock market, with investors pursuing inflation beneficiaries and companies which are semi-protected from inflation. They could find it in the necessities demanded by 90 million millennials having kids, needing houses, cars and everything that goes with them.
We expect the seeds we planted during the terrible storm in the stock market in 2020 to pay off handsomely if inflation rears its ugly head. It could be one of the few ways to prevent stock market failure. We thank you for your ongoing confidence in our stock picking discipline and believe that the rewards available from avoiding the crowd and surviving the storm could be substantial.
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