Friday, June 5, 2020

This week's interesting finds

Stats on re-opening
Only a handful of states have reopened bars and restaurants, and of those, most were in the past week. Montana was one of the earliest to reopen. The stay at home order in Montana was lifted on April 27th and bars and dine in restaurants reopened on May 4th at half capacity with social distancing measures. They move to 75% capacity tomorrow. Gyms reopened May 15th.

Buffett and Charlie Brown are due some relief
A resurgence of value implies an optimistic outlook for the economy. If growth returns, then cheap value stocks won’t look so risky (because even their boats have been raised). Value tends to do well at the beginning of recovery — although note that the last great period of value outperformance, in the early ’00s, came amid the onset of a recession and a bear market. As value stocks still include a lot of banks, a strong period for value also implies a steepening yield curve. This could be a dangerous bet to make when the Federal Reserve is discussing deliberately controlling the yield curve. And a second viral wave could change everything.

For now, the recovery of value would help to confirm that investor confidence, justified or otherwise, is really back.

There are many reasons to doubt that optimistic scenario. But the mere fact that advocating for value makes me feel like I might turn into Charlie Brown is perhaps the strongest reason for believing there is an opportunity here. One behavioral investor once told me that he adopted a “sharp intake of breath” test for potential investments. If a name provoked that reaction, the chances were that sentiment had moved too far and it was now too cheap. It is at this point that value investors can make a killing. Put differently, to quote Oaktree Capital Group’s Howard Marks from an interview with me earlier this month, “every great investment begins in discomfort.”

The week in charts 
Bubble behavior during a depression
The dot-com bubble made the stock market too tempting to pass up for aspiring day traders. This type of behavior makes sense during a mania. But what about during a depression?

This is one of the strangest economic crises in history. Stocks continue to surge higher in the face of the worst economic data of our lifetime. Housing demand has already surpassed pre-crisis levels. And even though the first quarter was the most volatile period since the Great Depression, people opened new brokerage accounts at a record pace. Major brokerages — Robinhood, Charles Schwab, TD Ameritrade, and Etrade — saw new accounts grow as much as 170% during the first quarter.