Anthony Speciale Stock Market Analyst

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Don’t Fight the Fed

Hi everyone. I’m Tim Melvin. Welcome back to A Better Way to Wealth. Now, back when I first started in the financial business and we’re going back, you know, kind of to the dark ages here, there was a guy who was probably one of the original star fund managers and, you know, financial TV was brand new, kind of in its infancy, but this guy would be on those shows pretty much wherever he could. And he was a very regular guest on what probably no one remembers anymore, but me and other folks, my age was Wall Street Week with Louis Rukeyser. Came on every Friday night. And Louis would interview fund managers and different personalities from Wall Street. And talk about what was going on in the world. It was on PBS and it was a very well, it was a wall street show on PBS and it fit that vein.

It was very kind of intellectual discussion about stocks and bonds. And if you had anything to do with investing back then, you watched Wall Street Week every Friday, or you taped it on your VCR so that’s how important that show was back then. Now the gentleman I’m talking about is a guy named Marty Zweig. Marty is a really interesting character. He passed away at the age of 70 several years ago, but he was a technician who loved growth stocks that had some value characteristics and anybody that ever said, oh, I never met a rich market technician, never met Marty Zweig. Cause Marty lived over the top. At one point, he lived in the most expensive piece of real estate and apartment on the top of the Pierre hotel in New York City, which back in 1983, I think was worth like $21 million a bit more than that today for the same apartment.

So Zweig made a lot of money for himself and for his investors and he was best known back then because the week before the crash of 87, he went on Wall Street Week and flatly told Rukeyser the market is going to crash. And he was one of the very few ones that saw that debacle coming. Zweig eventually wrote a book called Winning On Wall Street, became a best seller. I still have a copy around here somewhere. It’s a great book. You can still get it on Amazon. And in there he disclosed a lot of his rules for investment success. One of the most important rules that Marty Zweig followed was a simple admonishment to never fight the Fed, do not fight the Fed. If the Fed is lowering interest rates and keeping interest rates low, like they have for, well over a decade now, you want to own stocks.

If the Fed is raising interest rates, you probably don’t want to own stocks. So you really want to pay a lot of attention to what the Fed is doing. Now, what should we do if the Fed is selling stocks, and that’s exactly what happened last week. Two heads of the regional Feds, the president of the Dallas Fed and of the Boston Fed sold all their stocks. Now I’m appalled by this on two levels. First off, how are Fed presidents with the amount of influence they have over the US economy allowed to be investing in individual stocks and even real estate investment trusts that are direct beneficiaries of their policies and they have advanced knowledge of that. Everybody else uses a blind trust when they go into government, I think maybe Fed officials should have to do the same. More importantly, they sold guys.

These are the guys that know everything there is to know about the US economy, and they sold stocks and put the money in cash. That’s a massive statement. And it goes along with a growing chorus of people that are talking about what they’re seeing in the market. And I’m gonna just check here, Deutsche Bank and Goldman Sachs also made very bearish noises last week. Goldman says that peak optimism is behind us. This is exactly the scenario that I’ve talked about. Where we get into a case of is this as good as it gets, right? We had all the massive stimulus, the kind of reopening of the economy, the vaccine, all this great stuff happened. And now we’re looking around going, wait a minute. There’s variants of this bug running around, still making things difficult. The stimulus is going to be withdrawn.

And this is what we got, what comes next? We had this spectacular explosion in earnings, but that’s not going to happen again because that was just a recovery of the dramatic decline that earnings suffered in 2020. So what are the drivers going forward? Well, Goldman doesn’t see them. I don’t either, to be honest with you. Bank of America made a really bold statement. They said, and I don’t know where they got the 36 year. I may have to call them before the day’s over. They compared the stock market to a 36 year zero coupon bond with the same sensitivity to any changes in rates, any change in interest rates, any change in high yield spreads. And that’s the one I watch like a Hawk. If high yield spreads start to kick up, that’s going to raise the cross cost of capital across much of the US market.

And that’s going to be a disaster for the stock market. Same with interest rates. You know, as we get into the taper talk, everybody thinks, oh, it’s going to be okay when the Fed rolls it off, or, you know, with the variant running around, they’re going to take even longer to quit buying bonds. But someday folks they’re going to quit buying bonds. There is not much more capacity to put stimulus into the US economy or continue to send, you know, $800 and $900 checks every week to folks that aren’t working. We’re losing the ability to do that. We’ve got an inflation problem. We’ve got a supply chain problem. There’s a lot that can go wrong in the stock market. Now, one thing that I found very interesting Bank of America has a quantitative model, and I love quantitative models, as you know, that looks at the 10 year forward return to the stock market.

And it’s pretty accurate if they say stocks are going to do well, stocks usually have done well. Only one other time since they started running this model, has the model suggested that the 10-year returns from today forward would be below zero. That was 1999. Oh, there’s a second time. Last week, the model finally tipped negative for the first time since 1999. If you remember what happened after ’99, you know that that’s a reason for concern. So what do we do? Do we panic run, get into cash, sell short a bunch of stuff. Probably not. I mean, the last big gasp of a bull market can provide spectacular returns. And you sure don’t want to be caught short the last breath of a bull market. Cause you could get crushed very, very quickly. Now, here’s what you do want to do. You want to go through your portfolio and ask yourself, why do I own this stock or this fund or this investment?

Do I still love it? Do I think it’s going to give me a great return over the next several years? Or is this just something that’s trading at about 90% of what I think it’s worth? And I’m just kind of hanging around. Cause I don’t see anything else to do with the money. If you don’t love it, sell it, having a little cash available as a tool when there’s not enough opportunity in the market. You’ve got cash as a tool when the market does pull back, you can get it to work on much better terms than exist today. So no don’t panic. Don’t sell short at this point in time, do make sure you love everything in your portfolio. Now you can do something else that I do a lot of. People focus on special situations, merger arbitrage, some other things going on, we’ve talked about some of this stuff, that just aren’t that market dependent on returns.

The market is going to do. What’s going to do, but there’s special situations at work here that should keep these things fairly elevated in price and give us a decent return no matter what the market does. So yes, let’s do that, favor some some special situation type investments that have a little shorter timeframe. It could work out and and give us profits without having committed us to the stock market. And then there’s my favorite. And I talk about it all the time. Using one of my high return strategies, many of which I’ve talked to you about on these A Better Way to Wealth videos. Use those strategies, stay the course and use a black swan hedging strategy. Right now, it looks to me like you can buy puts, deep out of the money puts, long-term, about a year or more, on the Russell 2000 index, for much less than you can on the S&P 500 or certainly the NASDAQ.

They buy them way out of the money. If the market collapses, the volatility explosion of even a small position should make us plenty of money to help offset the losses of the stocks that we do own. So, nope, don’t fight the Fed, be concerned, get a hedge in place. Make sure you love everything that you own. If Fed officials are selling stocks and all the leading brokerage firms, who by the way, massive reputational risk to say that they think that market conditions are not going to be outstanding going forward. I’ll keep watching credit spreads and interest rates. If I see anything really troubling, I’ll let you know, but it is time guys to start playing just a little bit of defense in your portfolio. So anyway, I’m Tim Melvin, that’s A Better Way to Wealth, and I’ll talk to you tomorrow.