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100% CASH (15/08/2019)

  • We have gone to 100% cash in the Marcus Today SMA (Separately Managed Account).
  • We are still holding some stocks with dividends coming up in the Marcus Today Income SMA and will be looking to buy stocks that have OK results and pay dividends if they look like bucking the market trend.

BETTER IN CASH WONDERING WHEN TO BUY THAN RIDING THE STORM HOPING IT ENDS

Managing money is about stock selection and timing. But just sometimes you have to look up from the stocks and respect what the “Wood” (the market) is doing not the “trees” (the individual stocks). We had an investment committee meeting at 7:30am this morning and have decided that this is one of those times. The risks outweigh the rewards at the moment.

The immediate risks include:

  • A developing recession theme. An inverted yield curve and record low interest rates mean central banks have run out of tools and will have to resort to QE. If they now flinch they admit the risks of recession are real and the market is not priced for that.
  • No prospect of a trade deal. There is no tweet Trump can concoct to reverse the trade deal failure. He is dropping the balls.
  • A potentially explosive situation in Hong Kong.
  • The market trending down.

Other reasons to stand away:

Price – The S&P 500 represents $25.62 trillion dollars worth of companies trading at a PE of 20.26x, a price that would not exist in the ‘real world’. Offer any business owner 20.26x last year’s net earnings and they would knock you over in the rush to sell you their company.

Corrections start fast – This looks like the beginning of a US profit take, it’s overdue especially in the very large tech stocks that are all revenue and no earnings. We will not escape a US sell off.

Losing the benefit of the doubt – We have been giving the market, Trump and a lot of growth stocks, the benefit of the doubt. We have been happy to run with it while the market mood was “comfortable”. As of now, it has become uncomfortable. We have been watching the recent short-term falls and cashing up. Before going to 100% cash in the Marcus Today SMA today (15/08/2019) we had 60% cash Wednesday. A second 700-800 point fall on Wall Street in two weeks says one thing, do something.

The need to be decisive – One of the major failings of individual investors is an inability to sell but if you wait for the fear to become mainstream and you will be selling far too late. So we are being decisive on behalf of members. Selling is over dramatised, you can always, with commission rates where they are these days, buy everything back the next day if that’s what the market tells you. So we are putting ourselves in position. We are taking an option on the market falling, and the cost is the brokerage which is minimal in our structure. It’s almost a free option.

We can always buy back in – We reserve the right to be buying everything back in a day or two or maybe a month, who knows, but we are not going to sit here fully invested with our thumbs up our @#$% as many many fund managers will making excuses for why the market sell-off doesn’t matter. We’d prefer to be waking up happy that the market is falling and calculating when to buy back in.

Because we can – One of the big attractions of the Marcus Today SMA’s (Separately Managed Accounts) is that we can go to 100% cash if we want to. In other words, we can protect investors in a way large managed funds simply can’t. Our Members expect us to do it, to be decisive at difficult times, on their behalf, so we are reacting to the market sell-off rather than prevaricating about it. With only $45 million invested we can be nimble.

We need cash to take advantage of the market fall – We need to raise cash so we have some ammunition to buy back in – we are always busting with great ideas, quality stocks we want to buy. A great opportunity may be on the way to buy them on lows not highs. If we don’t sell we can’t take advantage of it.

Fear breeds fear – Kerr Neilson (the retired multi-billionaire fund manager of Platinum Asset Management) said last year: “We as fund managers are institutionally bound to play the game until the last second” – when’s that? We don’t know, but we have taken the view that now is as good a time to find out. A slap in the face like a 3% fall on Wall St on fear of a recession can change the mood and turn the herd. All the glass half full commentary can quickly turn into an “it was obvious” in hindsight analysis that exposes the market for what it is – too comfortable despite the risks.

No big panic – It is just the herd, that’s all. You will see a lot of talking heads floundering around in the next 24 hours/week, knowingly explaining exactly why the market has fallen over, but they are ignoring the most important factor, the herd. Sometimes the herd, when it has been moving swiftly higher as it has been since December 24, can change direction even more swiftly. You don’t need an excuse, and in a world where over 50% of our trades are done by computers, and there are trillions of dollars in exchange-traded funds which are robotic, we have never really experienced how savage this new electronic herd can be. All the more reason to stand back while nobody knows.

Australia will do better than the US in a correction because we don’t have a developed technology sector. The FAANG stocks on the other hand account for 25% of the S&P 500. There is a lot of revenue without earnings which makes the top end of the US market vulnerable.

WHERE TO AFTER CASHING UP

  • Once we are in cash (well, mostly cash) the storm disappears, we can be unemotional and objective, and the only decision is when to buy – it is a glorious alternative to sitting there taking losses in denial of the market sell-off which is what 80% of the industry will do.
  • Trend changes start fast and then trend in the same direction. We are expecting this correction to continue, not miraculously turn on a sixpence. But we are open-minded enough to believe that it could all end tomorrow and we will take the appropriate decisions if it does.
  • We will wake up every morning and make decisions based on the facts. Investment is not about making unmakeable predictions. That is the stuff of publicity seeking financial commentators who don’t know they don’t know, or do, but throw their predictions out anyway in an attempt to attract attention. Our job now is simply to time buying back into the market, and we do that by assessing what has happened not by guessing what will happen.
  • There is no rush to buy. The market goes up slow and down fast. The bubble has burst (we think), now it will take three times as long to build confidence as it took to lose it. We will have time. All we have so far is the arrival of a storm….this is not the time to push the boat out. Wait for the Sun to come out, but we prefer to avoid the risk of being sunk for now.

CONCLUSION

  • Going to 100% cash.
  • Being open-minded about whether this is the start of a “recession correction” or a short term sell-off – we don’t know – we’ll re-assess constantly.
  • Sleeping like a baby and waking up every day deciding whether to buy back in.
  • Making a list of stocks we will buy with the cash we have raised. Truth is it will be the same list of stocks that we have sold over the last three weeks (with maybe one or two changes).

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