How to Navigate the Current Market

CEO Christina Laemmel’s Addendum to the CIO’s Commentary

We at LaIF believe, as communicated, that the markets need to experience another correction before a sustainable recovery will take hold. First of all, there are too many unresolved problems from the 2008 recession, that have continued to broil beneath the surface ever since. Secondly, there is considerable “irrational exuberance” underpinning the stock markets right now. Betting on a “V Shaped” recovery thanks to the re-opening of economies and positive news on vaccines is simply premature. Finally, uncertainty can only be sustainably eliminated after the US elections and after a successfully trialed vaccine is ready for distribution globally.

This view is not radical. Several top market investment professionals currently agree. The question is, how to navigate the markets in the meantime, or even after another correction should come? Although the exact decisions made depend strongly to which of the six “Risk vs Return Profiles” each client belongs, here are examples of what LaIF is doing right now, and what we plan to do depending on future developments.

  1. Tactical Trading: No matter where our clients have been allocated along the LaIF Risk/Return Profile Spectrum, their investment horizon has been shortened drastically. Investments must be agile: take-profit and stop-loss levels must be set and monitored, as dramatic reversals are the “order of the day” until a correction comes. Furthermore, the currently extreme lack of investment by consumers/households and business mean that stock picks must have a clear back story. They must be analyzed and chosen individually, and it is not relevant to base picks on sector or style (e.g. value vs. growth).
    • Stocks: Some examples, focusing on the U.S. market
        • Buy on dips (down 2-5%) and hold: these stocks represent megatrends that are here to stay. The only caveat is potential competition.
        • Zoom Video Communications Inc
        • Beyond Meat
        • Marvell Technology Group Ltd
    • Buy on dips but sell on rallies: these stocks represent long term trends, but individually they are too vulnerable to broader market corrections.
      • FedEx Corp
      • Clean Harbors Inc
      • Waste Management Inc
    • Buy after a 10-15% correction: these stocks represent positive trends but are currently overvalued.
      • Etsy Inc
      • Bitcoin
      • iRobot Corp

 

  1. Cash is King: Corporate and Household debt blew up over the years of low interest rates. Now, there is a “double whammy”: pending restructuring and likely defaults – especially in the financial and travel sectors – are resulting in intermittently highly illiquid bond markets and we foresee company defaults. So, it is important to examine the financial statements of any company before investing right now in detail. Cash poor, highly indebted companies are highly likely to be downgraded.
    • Cash: Keep overweight overall. In the very short term, we are slightly negative on the USD against CHF and EUR. Medium and long term we are very positive on the USD against all currencies, but with a lot of volatility. Eventually – it is very difficult to say when – the USD will lose its role as the global funding currency…for this reason, we recommend a healthy amount of currency diversification.

 

  1. US Bonds: Use any respite from volatility (like right now) and increases in trading liquidity to divest from bonds that are in the financial sector, are long term, and/or are below “Single A” investment grade. Exceptions to this are those that are benefitting from the pandemic: e.g. Netflix, which is only BB-, but trading at a high premium.
    • There are no attractively priced corporate or government bonds that are also at least “Single A” investment grade. Especially regarding bond ETFs, it is extremely important to stay away. During crises the underlying bonds become illiquid and prices can fall dramatically.
    • However, there are alternatives to Money Market Instruments that offer interesting opportunities. (Please speak with us at LaIF.)
    • We would be buyers of US government bonds upon any spike in yields (dips in prices). Global demand for US government bonds supports the USD as well: at least until a secondary crisis ensues, because the USD simply cannot sustain its role as the global funding currency forever.

 

AND, TO CONCLUDE, AFTER A SIGNIFICANT CORRECTION (20% OR MORE): Go long, go big, and don’t be afraid to use leverage (take advantage of the extremely low rate interest rate environment to borrow to invest). Shift from tactical trading to long term, BUY AND HOLD of stocks in almost all sectors except for travel and leisure. Particularly attractive:

    • Local currency emerging market bonds
    • Bitcoin
    • Equity Short put / Long call strategies: i.e. selling puts on stock options and/or buying calls on stock options either via OTC, structured products, or funds

And when the foreseen recession has truly bottomed (in what could be 3 to 4 years) we like:

    • Private equity
    • Real Estate, direct and indirect investment
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