Subject: Ross Rant Oct 13
VOTE! VOTE! VOTE!
I have been speaking to a variety of top level money managers, investors, and listening to podcasts and webinars in various fields. Here is the summary. Not even the top people in any field has any idea what the next few months will bring. I realize many of you are hoping for some direction, but the reality is there has never been anything like this time with a total shut down of the world economy for two months, continuing partial shut downs, the EU experiencing a surge of cases, no certain time most of the country will be vaccinated so life can resume normally, no clarity about the outcome of the election, a mixed picture of reopening and resurgence of the virus worldwide, Brexit negotiations coming to a conclusion by month end, a little war in Azerbaijan, and no clear picture of what will happen if Biden and the Dems get control of everything. We are in a fog. If the virus never happened, Trump would have won by landslide, but now there is a real chance he will lose. I am not so sure either way. He will work the rallies and pummel Joe on the court issue, and the economy, which Nancy refuses to help..
It is completely unclear if the R’s hold the Senate. If they do not, it will be a disaster. And now we have Biden and Harris denying they said they would end fracking, and Biden trying to claim the Dem platform he participated in drafting is not his policies, and most outrageous, he says it is not for the voters to know if he will pack the court, nor who he would nominate. Nominations to the court are the most scared things the president does, and he says we do not deserve to know because it would create headlines???? What is an election all about if not this essential type of information. What else is he not telling voters if not that. Ignore the polls and the press. There are millions of voters who lie to pollsters or, like me, never answer the phone for pollsters. State judges who are just political hacks are trying to make it possible in several states for there to be ballot stuffing and harvesting after election day. Hopefully the Federal courts will stop this. Bottom line, there are simply too many unknowns right now. My guess is Trump has time to turn it around like he did in 2016, but that is not an objective conclusion. Just make sure you go vote, and do so in person.
Retail is a very barbell situation with some sectors, like home improvement and sneakers are doing great, and department stores doing lousy. Casual apparel is doing well, and now nobody wears a tie or suit. There is no market right now for women’s luxury cocktail dresses or business suits. Costco does well, but JC penny is bankrupt. Small Main St stores are dying, or in a few cases doing well depending on what they sell. 25% or more of all restaurants will not survive. 20% of all commerce is now online, Holiday sales are expected to be up only 1%-1.5%. For the winners 35% of sales will be online. The good news is retailers have pared inventory so there should be no dumping of goods this season. There may be sold out shortages. Estimates are it could take years for some areas of retail to fully recover, and those with strong online programs will win. Prime Day is expected to draw 33% of all consumers to buy something.
Home sales will continue strong as there is a massive shortage of homes, but as prices rise, the low rates will not fully offset this. There could be a slowdown until prices reset and stabilize. The move out from big cities will continue, and from CA and NYC. As more major companies say staff can work remote permanently, at least some of the time, and in some cases all of the time, more people will leave San Fran and NYC. If Biden wins, and they institute no bail, and other insane pro criminal laws as Kamala proposes, it will just get worse for cities. CA is likely to lose a material part of its tax payer base as remote work becomes common in Silicon Valley, and workers move to Boise, Denver, Phoenix, or Austin. These are all well paid employees who pay taxes. It will not be surprising to find many startups happening in these other places instead of CA. Why live among the homeless and crime in San Fran when you can live much better for far less in these other cities which have become techie hubs. There is a major shift underway as to where well paid, well educated people live. That has major political ramifications. The home rental business should continue to do well as more people leave cities, but do not have the cash for a 20% down payment. So far the rent default rate in the single family home market is under 3.5%.
Whole industries like hotels have been devastated, and will see many properties be repurposed or sold off at deep discounts in the next year or two. Although in some places the hotel business did fine if they were a drive to resort, summer is now over, and the lockdowns are over, so it is unclear how those properties will do over the winter. At some point in 2021 hotels will have improved occupancy as people travel again, but the timing of the return of substantial travel is very unclear. Until the vast majority have had the vaccine, things will remain limited, and it may be 2023 or 2024 before occupancy returns to more normal levels, and 2022, or even 2023 before conferences begin to come back in a major way. Big boxes are likely to lose money into 2024. That is a long time for many hotel owners to try to survive. 2021 in the hotel industry is going to be very tough again. I was totally ignored and criticized in 2012-5 when I said there will be a black swan for hotels in the future, and they were not a good investment for most people compared to some other property types and the stock market. I had no idea what the swan would be, but it was clear the euphoria in the industry was not well thought through. Urban hotels in places like NYC are a disaster, and the union is making it nearly impossible to manage the problem. Until we have a new mayor and a massive shift in crime fighting policy, NYC has a many year recovery ahead. A substantial number of hotels in Manhattan will simply disappear and become residential, or maybe just close. There will be a large number of hotels nationwide that go into lenders hands and get sold at deep discounts. Probably next year will start that process. It will be nearly impossible to get financing for hotels for quite a while, so almost none will get built for several years. It is unclear what happens in Vegas while they await the vaccine to be widely administered, and major conferences to return. One day it will be back in full swing, but the financial losses will be very large. There was a reason the big brands got out of owning hotels years ago.
We have never had such a small group of companies like the FANG stocks have so much influence on the stock market. We had the nifty fifty decades ago, but in the end they did not even survive in many cases, and if you had bought those stocks, and held, you would not have done well. By comparison, many of those stocks were selling at multiples of 60-90 x. By comparison FANG stocks are far lower PE in the 30-40x range in many cases. That does not mean you should think FANG is not fully priced. We just do not know. Maybe some will be forced to spin out some subs. Not likely, but maybe. Stocks no longer sell on relation to book value. Now we have zero rates which badly distorts stock values. Since that will go on for a few more years, maybe it suggests these stock prices will be artificially supported for quite a while. There is no way to really value Facebook, Apple, or Google or Twitter. What metric is the right one in the face of possible regulatory changes. What do we use as a measure of the impact on stocks and the economy of the massive fiscal stimulus and high taxes, shut down of major parts of the fracking industry, and $15 minimum wage nationally, and the end of right to work laws, Biden will implement. The huge spending will hype the economy in the short term, but high taxes on investors will stifle the stock market. Interest rates will rise over a couple of years after 2023. Costs of production of all sorts will rise materially, and earnings will shrink. Wall St seems to think full Dem control leading to the huge fiscal spend is great for stocks, but those of us who are older realize this will end very badly. They have very short term thinking, and no sense of what happens next. Classic Wall St. We just do not know if things go really bad in one year, or three years, but massive spending is always bad. What happens to the economy if they pack the court and eliminate the filibuster, and we get a stream of laws that are far left. It will be a major mess for investors. It is clear that is exactly what they intend to do. Biden and the Dems have stated it is time for “shareholder capitalism” to end, and for profits to be better distributed to workers and the community. Translation-higher taxes and regulation, lower stock prices. Wall St seems not to be listening, or they believe it could not possibly be so bad as it sounds. Yes it can. If you think Trump is a problem, you have not been paying attention to what the Dems plan to do to destroy democracy and wealth creation. A Yale study in 2006 written by a Noble winner for the National Bureau of Economic Research showed that only 4% of the “social surplus” and “societal wealth” from innovation is captured by the innovators, and society and consumers capture the remainder through better products and a higher standard of living. Profits are good and without them the economy and society suffer. The more taxes are levied the less benefit to society, as that money is redirected to non-productive and non-innovative political uses. The Soviet Union as the best example.
I was going to start selling yesterday, but when I saw the futures in the early morning my gut was to sit tight, at least for one more day. That paid off big for me. I am monitoring it closely each day now, but momentum seems to be to the upside. I remain in the wait and see mode today. My finger remains hovering over the sell button. I am up 31% YTD so if I get out soon I had a very good year.
There is also a left wing push for a shorter work week at the same pay. That has been tried in the EU in places and in some companies here. The result is always the same. It does not work. Projects do not get done on time. Staff are not always available when needed, and productivity does not increase to the extent it is projected to do. It has been abandoned by almost everyone who has tired it. So of course the left here is all for trying it. Similar to guaranteed income programs which have failed where tried around the world. Capitalism and the profit motive is what has driven new business start-ups and new product innovations. If you do not meet demands from customers you go out of business. If you are not sensitive to community demands it can be costly. If you do not maximize profits you cannot compete, you cannot invest in new products to meet customer demands, nor in upgrading your equipment to improve productivity and quality, and you cannot pay higher wages. Milton Friedman said this very clearly, and that has not changed. Capitalism, and the chase for profits, has lifted billions of people around the world out of poverty. Giving people free money never works, it only corrupts and disincentivizes .
I offer no good projection any more. There are so many games being played now by Pelosi, the teachers unions, and others, that nothing makes any sense to those of us who learned our history and assumed there really was a checks and balance system. If they do pack the court, there are no checks and balance left, especially since the press is now no longer objective, and is in the pocket of the Dems. Now that we know the entire Russia investigation was fake, and was dreamed up by Hilary, and moved forward by Brennan and others, and covered up by Comey. We cannot count on the rule of law anymore. Now it appears they have uncovered what the Clinton Foundation was really doing with the money from foreign donors. Durham should have issued indictments by now, or they may get away with it if Trump loses. If Trump wins top Dems are going to jail.
With no Durham report, no announcement of a vaccine, no second debate, no fiscal stimulus, continued refusal of the teachers unions to fully return to schools, and apparently a reduction in the rioting and looting, Trump has lost the things that were his edge in the election. The press has refused to clearly explain what happens if the Dems get complete control. Things seem to have turned strongly against Trump after he totally blew the debate, but reality is hard to know with polls so unreliable, and the press so determined to defeat him. For those reasons I now believe Trump could lose. What is worrisome is the massive anti-Trump effort, which in my view, is a power play of the far left which has been going on the entire four years. It is clear from the Russia collusion false scenario, that they will go to any extent to gain power, and the press is their willing dupe. What may matter more on Nov 3 is the poll that shows that 56% of voters say they are better off today, even with the virus shutdown, than they were 4 years ago. Only 32% say they are worse off, and in light of the massive unemployment, that is quite a strong approval of the economy.
Under the circumstances, any prediction of anything right now is nothing more than a wild guess. The shorts got killed lately, but may earn a lot as things evolve. Investors holding long positions on tech stocks and a few other stocks did very well lately, but that could all end badly as the chance for another stimulus package dwindles to be not good in the very short run, and announcement of a vaccine is now deferred until after the election. The market seems to assume that a massive stimulus package will get passed at some point, and they view that as a major hype for stocks. That is what is driving stocks higher right now. It is probable that right after the election the vaccines will be approved and released for use, and a fiscal package will get approved in some form. I doubt, no matter the election outcome, that the Senate before late January will approve several of the Pelosi ideas, like $600 unemployment, cash for bankrupt cities, money for illegals, or several other items. If Republicans lose the Senate, they have no incentive to go along with any of Pelosi’s left wing demands. However, if the Republicans do lose, the Dems will pass all of those things by February 15. There is no long term rationale for the market to rise unless the Republicans win, and that is unclear now. However, the market is irrational, so it could be that as earnings come out over the next three weeks, and beat materially, and when Q3 GDP is announced at the end of October at 30%+, the market will go up in the next couple of weeks. That may be a good time to get out. At this time the market is ignoring the massive tax increases, $15 minimum wage, packing the court with left wing black judges, and new costly regulation that will be put in place if Biden and the Dems win. Even Moody’s says the stock market will underperform over the next ten years if the Dems win, and they support the Biden Dem economic plan. One can argue either side with good basis for the short run. What to do with your money if the Dems get full control is an unanswerable question right now. It might be best to have cash in some high yield (2.5%) CD or AAA and AA corporate bonds with short maturities. I don’t think anyone has a god answer right now. One thing is certain, if the Dems get control, your taxes are going up a lot, and inflation and interest rates will be higher in a few years, and in time the stock market will be lower as interest rates rise and inflation picks up.
There are now additional reports, and research papers, including a new one from the WHO, saying that the damage from the lockdown was far worse than if it had been done on a selective basis. WHO now says do not do anymore full lockdowns. Biden is talking about a new lockdown. A lot of mental health clinics closed during that time, and a lot of patients had bad problems, and suicide or serious drug abuse. A lot of cancer and other tests were not done, and now for many it is too late to take action to prevent early death from cancer and heart disease. Several non-partisan academics now say the cure of a full lockdown really was worse than a limited lockdown would have been. And that leaves out the economic disaster that has happened to many small businesses and their employees. Trump should have listened to his own instincts and not Fauci. Fauci may have caused more death and destruction than anyone by only considering things from a pure medical, attack the virus view. The Dems demand for more lockdowns is exactly the wrong things to do. The results are already clear that red states that have reopened are doing much better than blue states still in partial lockdown like CA and NY.
If you still like to hear real news of the rest of the world, I suggest tune into the BBC and Euro News broadcasts that are on many cable outlets daily. They are far more objective and informative.