The “Restart” theme continues

  • The “Restart” theme continues. Bondi Beach is about to open, various States in the US are planning their re-openings and its fair to assume that the dominant theme for the stock market amidst the horrific/predictable/discounted economic headlines is getting the local and global economies back on the move. Generally happy to be in the market. Good stock selection for this event will address recovery plays rather than long term safe quality plays.
  • Volatility still falling - The VIX Volatility index or "Fear" index is still falling - this is an essential ingredient of a market recovery, uncertainty needs to dissipate and confidence build. This clearly shows you that process has started and continues:

  • Switch from survivors to victims or Technology to Value - Wall St pauses overnight held back by Technology stocks. Interesting - as the market focuses on economic restart the stocks that has served it so well in the disaster, start to get sold off. Facebook -2.5%, Alphabet -3%, Amazon -2.6%, Netflix -4.2%. Nasdaq fell 1.4%. Although there is no big Technology sell-off to worry about (and Alphabet jumped 3% after hours on late results) it is an interesting theme that the stock market is turning from the stocks that are ‘pandemic resistant’ to those that are pandemic affected; to the stocks that have the most to gain from it going away. We have been playing the same game here, buying a list of stocks on recovery sentiment. For instance, fundamentally you wouldn’t buy Qantas, Sydney Airports, Webjet, Flight Centre (and many others) but for a recovery bounce you would.
  • Aussie dollar strong – 64.97c – Rising - It is the barometer of economic optimism, a lead indicator that the economic recovery theme is now washing through the markets.

  • Stock specific risk - Myer shorted and talk of Administration (see the press) – highlights the risk in specific stocks and the need to have some quality filter on recovery stocks. Some have taken mortal blows.
  • The biggest risk – is the “Second Wave”. Whilst we take the bet that the stock market is going to respond to the ‘economic restart’ theme, we do have to be mindful of the risks, and the main one is the ‘next wave’. If economies come out of COVID-19 lockdowns and have to go back in again the market is going to tank as the economic damage is extended and uncertainty takes over again. We have to watch it. Everything we do now depends on case numbers not rising again. China seems to have survived without relapse, so we should. But lets keep looking over our shoulders.
  • Financials – The Financials sector is leading the market in Europe – they are a sector set to benefit from an improvement in virus sentiment. Selling the banks now is probably selling at the bottom. Especially if they are a sector that will see a sentiment improvement if the virus goes away.
  • Small and Mid-Cap Companies – Have started to pick up. Most smaller stocks are driven as much by sentiment as earnings. If the first stocks you sell when a market tops out are the high PE, growth stocks (most smaller stocks) they are probably the stocks to buy when betting on the opposite. Time to revisit your favourite growth stocks, the stocks you sold buy first..
  • Doing nothing at all – I was rather amused at one very smart high-profile value-based fund manager in the press this morning saying that “Sometimes its better to do nothing at all” with the predictable reference to Buffett and Munger. You can be too smart for the stock market sometimes, because sometimes the stock market ain’t that smart, but you still have to deal with it. This is not a high brow game steeped in accounting accuracy. It’s the stock market. By the time you’ve calculated the ever moving uncalculable return on equity the share price could have doubled or halved.
  • Too long term and too cautious – I am fielding a lot of comments on my articles about “But what if…” and “Global GDP is going to fall 5%...” and “There are surely too many anchors preventing a recovery any time soon” and this one “I just can't believe commentators like you believe that its just all going to be OK, and we have passed the worst???" - I hear you and I'm sure you're right with your long term negativity BUT it's an important general point that the stock market is not about being right in the long term. For instance - in the long term the Tech Boom turned into a bust - I had a colleague at Bells in the Tech Boom who knew it was a spoof and he sat, sagely finger-wagging throughout, persuading his clients not to get involved. The one-man with the maturity and vision to call it for what it was, a spoof, a moment of headless misplaced optimism. 'This is going to end in tears'. was his catch-cry. And he was right. Meanwhile we made a fortune while he and his clients missed that golden, once in a decade, opportunity to make money. Long term caution is only valuable if your audience only ever buys stocks for the long term (and what investor would faithfully do that these days?). Whilst being cautious about the long term impact of COVID-19 is doubtless right, there is an opportunity to make money now out of a recovery from these sentimental lows, and that's our current focus. By the time the long term comes right, I and many other investors will have taken twenty different opportunities and forgotten what was said a year ago. The stock market is not about being right in the long term or in the end, its about making money whenever you can on any timeframe that allows.
  • FOMC on Thursday morning – Very likely to be good for the market – they will reiterate rates at zero to 25bp for a considerable period of time and mention their willingness to employ other measures (QE) if required. They will try and support rather than deliver a dose of fear.
  • US GDP tonight for Q1 – Expecting minus 4% - who cares - history is of no interest to the markets.
  • ECB on Thursday night – Will tell us they will do ”Whatever it takes” as usual, even if that means turning Europe into Zimbabwe on printed money.
  • CPI today – Irrelevant. Food up, petrol and travel down. No-one is interested in history and its not as if the RBA are using inflation as a driver of interest rate policy. Bigger fish to fry.


  • We continue to try and exploit a sentiment recovery on the “Economic Restart” theme.
  • Still no flood of buy signals on stocks or markets. At odds with our 'feelings'.
  • We are interested in the rotation from safer stocks that survived the virus to more risky recovery stocks that fell victim.
  • There is no doubt there is value to be had and its not in Netflix and Amazon. Quality will underperform if we get a recovery rally.
  • Macquarie have done a bit of research on the capital raisings we have seen. We are trawling those for de-risked stocks that have raised capital already and damaged their share prices with dilutive rights issues. Henry is writing about them.
  • We reduced our cash from 40% to around 20% yesterday buying a few stocks for recovery – we picked them out on sentiment rather than numbers. We are playing recovery for the moment, not buying quality stocks for a long term portfolio.
  • Happy with our position – a bit of cash and rotating to recovery plays from quality plays.
  • Banks – frustrating but not selling at the bottom.

Members Only - Login to read full article

Remember Me

Error logging you in.
Please check your details and try again.