The ‘bad trip’ I’m alluding to in my title was the type some substance experimenters used to get from self-administered hallucinogenic drugs like LSD (Lysergic Acid Diethylamide). This was the preferred trip-inducing substance of Harvard psychology professor Dr. Timothy Leary who thought it might have great potential in psychotherapy. “He used LSD himself and developed a philosophy of mind expansion and personal truth through LSD”. As such, he became an icon of the hippie counterculture of the 1960’s along with his catchphrase, “turn on, tune in, drop out.” Anyone ingesting LSD was said to be going on a trip. I guess for the most part these trips were pleasurable, mind-expanding voyages. But sometimes they went bad and became terrifying horrible experiences.
Last week was flashback to a bad trip (in the market) I took in the summer of 1974
Only I was not on drugs. January, 1973, the S&P 500 peaked at 119.87. Twenty-one months later (Oct., ’74) it bottomed at 62.28, down 48%. It was a slow, awful bleed. By the time we got to the summer of 1974 you could not give common stocks away, let alone sell them to people. It was even a struggle to get people to buy electric utility stocks yielding 10%, 11%, 12% because their debt laden balance sheets were so terrible. This was a major problem because, unlike today with the 10-yr US Treasury note yielding 2.9%, back then that note was yielding nearly 8% (on its way to 15% in 1982). Consumer price index inflation was 11.01% in 1974 (on its way to 13.5% in 1980).
Richard Nixon had just resigned in disgrace in the wake of the Watergate break-in and coverup. And after trading between $2.50 and $3.00 barrel for the previous 32 years the price of crude oil spiked as a result of the 1973 Arab Oil Embargo. In 1974 crude averaged $12.52 per barrel. I humbly submit things were a mess. It was THE BOTTOM, born in fear and total distrust of the market. It was the bottom, even though interest rates would almost double over the next seven years and inflation would continue to rip. Keep this in mind the next time you hear a pundit or read an article about the scourge of higher rates and inflation. Also, history would indicate, in the stock market ‘bad trips’ always turn into ‘good trips’ eventually.
What about our current ‘bad trip?’
It reminds me of that time long ago. Like the summer of ’74 we have a president under extreme duress. In the summer of ’74, sitting at our desks in the main office of K.C. based H. O. Peet & Co., Inc., colleagues across aisle and I would comment on how cheap certain stocks had gotten only to come in the next day, or the next week, as the market probed for a bottom to see those names even lower. Cheap doesn’t make any difference when emotions take over. Don’t confuse me with the facts. Nobody wanted to own stocks.This is eerily similar (to a much smaller extent) to what we are seeing in today’s market. There is no panic. It just goes down every day. The end of last week felt very similar. Even the 2%+ drop in the Dow and S&P seemed calm and orderly. Regardless, it scares people even though there is nothing in the current fundamentals remotely as frightening as those we saw in the summer of 1974.
The pain, however, is real. It has been most prevalent in small cap stocks as evidenced by a 19% drop in the Russell 2000 index since September 1st. Though the S&P 500 is down 10% since September, there are many stocks in the index down over 20%.
So, what is scaring the market? (perspective in order here)
- Growth concerns: US growth will slow. It should. A significant part of the growth in corporate earnings this year came as a one-time benefit from the tax cut. There will be NO additional tax cut in 2019
- Global Growth Concerns: China, OMG! Chinese November retail sales miss estimates by 2/10ths percent coming in at 8.6%. Chinese GDP grew at 6.5% 3Q ’18 over 3Q’17. 6.6% was the so-called consensus. Another metric, November industrial production came in below expectation at 5.4%, 1/2% below consensus. I mean, give me a break! We are dealing with the 2nd largest economy in the world ($13+ Trillion vs. the US near $20 Trillion in 2018). Despite the sackcloth and ashes (see link above) donned by the prognosticators these are not bad numbers considering the size of this economy. Oh yeah, it’s the Trade War.
- Worry about Fed policy and rates . Fed says we are almost there. According to the Wall Street Journal ... “Still, many investors say that, even with the possibility of a more gradual rate path, they remain cautious heading into 2019. The yield curve, the gap between two- and 10-year Treasury yields, has continued to flatten in the fourth quarter. Historically, that has signaled trouble ahead for the U.S. economy.” (you need a subscription to access). I would advise anyone in this quandary to reread paragraphs two and three of this post.
- Political uncertainty: Regardless of the outcome of Mueller investigation we will have a divided government, remember gridlock is good. They can’t do anything to hurt us!
- Government Shutdown. this too will pass if it happens at all.
- Falling oil prices. It is not about demand. Demand is growing. It is about supplies which look like they are being reeled in by Saudi Arabia and Russia. falling oil prices, while they last, are a good thing.
Turning a ‘bad trip’ into a good one (maybe)
I seldom make recommendations in Kort Sessions (not my mission), but sometimes I see a ‘fat pitch’ I just can’t resist. The trigger for this recommendation came from this week’s edition of Barron’s and an article covering their “Top 10 stock picks for 2019.” One of the top 10 is Energy Transfer Partners (ET).(you need a subscription to view). The Barron’s article talks about the group, which has been very much out of favor for several years: “Master limited partnerships in the U.S. have been getting their act together by setting sustainable distributions (equivalent to dividends) rather than maximizing them, and by ending investor-unfriendly structures that hurt MLP holders and made institutions reluctant to buy.” I completely concur with the premise of the article. The way I have chosen to participate is through a closed-end, leveraged fund that invests in the MLP sector, the Tortoise MLP fund fund (NTG-$12.77-NYSE). The fund sponsor/manager is Tortoise Capital Advisors. Oh yes ET is NTG’s largest holding.
Caveat Emptor. I own this fund and view it as a long-term income alternative. My most recent purchase was at $13.75. From time to time I may trade around this position, buy more or lighten up as the position moves up or down in the market. I will not be publishing on any of my buys or sells. Also, as we’ve seen over the past couple of weeks, this stock and may get cheaper. Consider your temperament and suitability for this investment … investigate before you invest.
Thank you for your readership. I hope my ‘bad trip’ will give some perspective and comfort in what has been a pretty difficult market.
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.