July Was Great, This Week? Not So Much, Yet I’m A Buyer

I have been saying this for too long. Growth is where you want to be.

As long as this economy will allow technological innovation to gestate and be birthed then growth is where you should be for the most part. If they have any kind of dividend then certainly salt some away for long-term investing. Many commentators and money managers were thrilled when tech and other growth areas lost their sheen. I will grant that there are still plenty of fast-growing names that are on the mat; TKO’d is a very apt way to put it. The stocks that have a bright story but are really not able to generate meaningful cash flow may just run out of money and have to vastly dilute their shares by selling more shares at reduced prices. More than a few will eventually end in bankruptcy like Electric Last Mile (OTC:ELMSQ). In fact, I still am short of EV names that are third-tier, even second-tier like Fisker (FSR), perhaps not go bankrupt but lose the initiative as other E-SUVs are debuted. They claim to be asset-light and have outsourced their manufacturing to Magna. The plan was to be manufacturing 50,000 trucks by 2020 at a price of 37,500. Perhaps that is with government subsidies but still, that is not anywhere near where it will likely be today. Am I being unfair? Tesla (TSLA) kept putting out a lot more cars than expected throughout 2020. Still to the question of fairness, it is more than halfway through 2022, where are these trucks? One can pick any number of EV companies and know that they are in danger of running out of money. There are going to be plenty of such companies, many not even in tech as broadly defined. With the money supply being tightened there is just not enough available for the riskiest of stocks. I have digressed, many of the value-oriented money managers that spent decades in the wilderness were crowing that finally, value stocks will win out over growth, huzzah! Alas, their time in the sun might have been glorious but will likely be cut short.

So if I am so bullish on tech, why am I throwing shade?

It’s all about time scales, last week’s rush into shares was way over-blown. A lot of cautionary statements about inflation were overlooked and a Panglossian sheen was sprinkled on the equity market. Perhaps market participants already discounted Powell’s hawkish remarks, and as the market soared commentators interpreted the statement as a dovish reaction. There was certainly a rush of money coming in but I think it was as I said “window dressing” and repositioning. Before you ask, “window dressing” is the notion that hedge funds and money managers have to show how smart they are. At the end of the month, a portfolio is “marked to market” and they need to show they have the best performing names. It sounds dumb it is what it is. Whoever is concerned about losses can see if the stock was bought but I guess if your overall fund is doing ok, they aren’t about to drill down. July was the best month since November 2020, the S&P 500 was up 9.1%, and the Nasdaq Composite was up roughly +12%. You can bet there was some “window dressing”. Repositioning is merely a recognition by professionals that there’s a sector rotation and they need to move their allocation where the action is. They are similar actions but the latter can happen at any time. The fact that they came together I think was the gasoline on the fire. Why can’t I accept that Powell has turned Dove, and be happy with that? Because it would be a dumb move on his part. He reiterated that inflation is way too high and that recent inflation numbers are still going higher. He needs to project hawkishness without creating financial panic which is a difficult “needle to thread”.

Here are some June Numbers:

Meat +8%

Eggs +33%

Fish +11%

Milk +16%

Veggies +8%

Coffee +16%

Gasoline +60%

Airfare +34%

Used Cars +7%

Cereal +13%

Market participants glommed on to him being data dependent, and even though he said 3.8% as the terminal FFR and that would be at the zero real interest rate. Everyone just heard that the real rate was at zero. That means that the FFR equals the inflation rate. Under normal liquidity, these are not words to celebrate. He also said that he won’t be satisfied until we are at 2% inflation. Let’s not forget that the terminal rate means the rate at which the Fed stops hiking is 3.8%. Look, I am not saying that we are doomed. I am just saying we should see some retrenchment in the first half of the week.

I have been watching the Fed since Greenspan’s “Briefcase” indicator which purported to predict whether the Fed will raise rates by the thickness of his briefcase. In those days whether the Fed would or would not raise was a mystery. It was felt that the less prepared the market the more effective either the rise or drop would have effect on the economy. Now the Fed has evolved its openness to such an extent, that today perhaps the Fed has realized that oversharing may have contributed to the economy overheating. I think Greenspan was very skillful in making a statement that was so inscrutable that it was awarded the appellation of “Fed Speak”. The art of interpreting the meaning of Fed policy was nearly as arcane as “Kremlin Watch” where photos of parade attendance and who sat closest to Stalin were a hint to the future strategy of the hermetic Kremlin. More interesting were older photos of the same seating order with some people removed completely from attendance and what that ominous indicator meant. Perhaps Powell took a page out of chairman Greenspan’s playbook and carefully put together a statement that meant different things to different participants. Where I focused on the terminal rate of 3.8% noted by Powell, others have glommed onto being “data dependent”.

I thought the market would ignore the .75% rise but be spooked by Powell

So maybe I’m having sour grapes. It certainly had me rocked for a day or two trying to understand what pushed the market up. Perhaps I expected a sharp retrench to be unrequited. Then I will just have to let my positions fly. My medium-term outlook is a very sharp shot higher. That is if there is any news of deflation, and less of inflation. The truth is we ought to dust off “transitory” because some of this is. We will be pumping more oil. The Baker Hughes Rig Count was 767, and Canada’s was 200. July 2021 for the US was 488. The biggest issue is not crude, it is refining capacity which also can be fixed very easily. There’s a huge refinery in the US Virgin Islands that has a 600,000 per day capacity that is sitting idle. It is behind on its pollution standards, they could give them 6 to 10 months of operation to get us over the hump. That doesn’t mean anti-pollution retrofit can’t go on at the same time. There are other examples, this is about policy, not true inflation. Inflation is a monetary phenomenon, if you create too much money you create inflation.

I hope I am not confusing you. The selling of the market is just for the next few days because in my humble opinion last week, we had a hugely overbought condition.

This leads me to mention the Cash Management Discipline (CMD). As the market soared, I was following it and trimming one to three percent every day of every position. I am sitting with a nice hunk of cash, since the “D” in CMD, is the word discipline. To me, discipline should be automatic, reflexive even. That way you don’t have to be a prophet to know when to sell in order to prepare for a sell-off. Before I developed this style, I would get caught in the excitement of trading in an upmarket I would forget. Or I would agonize over it, and delay until again it was too late. Selling is much harder than buying, it generates the most angst because you almost never top tick a sale. Nothing gives buyers remorse more than watching a stock you just sold fly up seemingly through the roof. By automatically trimming small amounts gradually, and buying in by scaling into a position almost as gradually. Part of the community of Dual Mind Research is to instill this discipline. It has also morphed into a way to take advantage of market-moving occasions, which we call it a trading plan. Right now, the market is on a hair trigger because it is as opaque as any I have seen in memory. So I have about 12% cash and the market finally behaves as it should. I will come to scoop shares on sale. If I don’t get my way, I will sit with that cash unless an individual named I have my eye on falls for a temporary reason which takes me to…

My Trades…

This time I do have a number of new names to talk about. First, I trimmed my tech titan names, I may live to regret it. For Amazon (AMZN) I was influenced by the charts. To my eye, AMZN has a ton of overhead resistance at like $137.50. My heart was in my mouth when it went over $138. I am taking a chance because I worked my cost basis down to $103 per share. At this point, I am looking for AMZN to fall back into the low one teens. I will start buying a bit above that, and if I get lucky I will keep buying as low as it goes. I also sold quite a bit of Alphabet (GOOGL) as well. The price action encouraged me to aggressively trim it. It just wasn’t following along with the market let alone leading it. I had trimmed quite a bit of Meta Platforms (META) going into earnings. Earnings reports are a binary event, to me, that is just gambling so I almost always sell half of my position going in. So as it retreated I started scaling back into it. I bet on the Zuck, not because I believe in the Metaverse, I don’t. I just believe this project will be like the 1st effort to go to the moon. Everyone lamented that so much money was wasted on something so frivolous. Yet if it clearly examined all the technology that grew around making effort possible has paid off untold trillions in technological advances, in software development, computing, electronics, communications, and medical technology. I think that attempting to enable the Metaverse will push the development of new technology that could be used in other ways. Also, META will continue spinning profits out of Instagram, and Facebook. So now I am buying back and hoping it falls even more. Ok on to the new stuff. I am adding a lot of smaller names that I think will display a lot of beta if I am correct about August continuing where July left off.

Bill.com (BILL) I actually use BILL in my consulting business and I found it very useful. The stock went sky high, then it slammed down. I admit I started a bit high but if it does fall I will continue scaling in. Similarly, I started positions in HashiCorp (HCP), Pinterest (PINS), Procter & Gamble (PG), and Haleon (HLN). The last two might surprise, PG, they just missed their earnings report. The CEO was interviewed live on cable and I watched his body language. There was a lot of confidence there, also there was a lot to like in that report as well. PG is already down close to 30 points, and if the move to tech continues as I think, PG will continue to be sold as a source of funds. I want to be on the other side of that trade. As far as Haleon it was just spun out by GlaxoSmithKline (GSK). HLN is the world’s largest consumer health manufacturer, from Sensodyne to Advil, and beyond. It’s selling for 19 times, almost a market multiple. For comparison, Colgate (CL) sells at 33 times. I expect that gap will close, so I am buying.

Finally, there is this little company. I am talking about Boxed (BOXD), I actually was in the SPAC that BOXD was merging into. This was before all SPACs became radioactive, I sold out all of my SPACs pronto and lost track of it. Now, something really interesting is happening, BOXD’s original business is eCommerce for bulk selling of staples. What is going on is classic entrepreneurialism, they are pivoting. Apparently, eCommerce for bulk selling seems to be a niche that can be sold into. Or perhaps this is also a “Land and Expand” tactic. First, start with bulk eCommerce, and perhaps widen it to other targets once they establish themselves as a SaaS provider. They already announced two sales, one is international selling the technology to an entity in Vietnam, which will mimic the BOXD business. Then just recently they announced a brand for this new business Spresso, it is a fully productized version of the tech that currently drives Boxed bulk eCommerce operation. They simultaneously announced a sale to Jeffers Pet, one of the largest, privately held animal health companies in the U.S. of Spresso.

Needless to say, it is one thing for a tiny company to announce an ambitious product roadmap. It is quite another thing to have sales in rapid succession with the announcement of this new initiative. BOXD is less than 2 bucks a share. I have bought options at a much higher price than $2. Consider this as if it’s an option with no expiration date. I bought all of 50 shares. If they continue to announce more sales for this product, yeah, maybe I’ll make it 100 shares. This is a tiny market-cap company and it is entering a very competitive space. Maybe it goes nowhere, it could happen. I am not in any way betting the farm, you shouldn’t either.

Ok, that’s it, good luck this week!