Boston Legal #21 - COVID or NOT

 Thursday Sept. 17 was another "mini" Boston Legal with just smokes and drinks imposed by the outside gathering constraints of COVID-19. Hosted at the Councilrock location, the days of Cincinnati gatherings may be limited as J.P. exits soon.   Zoom calls would be a weak substitute but predicting any future of 2021 is futile.  

No theme was even attempted for the evening other than to end in the frustrated feeling around our views of the threat of COVID-19.  Looking at the numbers daily, I can easily see (even in myself at that age) the college age attitudes of "get it  and get it over with".  As fall approaches our vigilance needs bolstering right at the time of weary fatigue.  

Today's news from United Kingdom predicting a fall growth in COVID-19 cases predates an October Halloween scare and created a market selloff.  Will a similar second wave occur like the 1918 Spanish Flu?  Even the hope of an early vaccine could be no different than the misguided belief that aspirin would control the Spanish Flu and may have contributed to deaths due to aspirin poisonings. The only sure thing we know is how much we don't know.

Weary not Worry is now my word for this crisis.  Lament not Laugh is the emotion.   What not Why is the thought exercise.  Hope not Helpless is the attitude.  

  

 

Emotional Volatility

I am rapidly getting weary (as many in the USA are) with shelter-in-place; gradual reopening; social distancing; masking; and virtual meetings.   While I have poked my head out of the turtle shell with meetings outside with friends; doubles tennis; and even social distancing/masking small group and worship activities;  I am tired of the constant news and conversations about COVID-19.  My time at home is now approaching the 100th day.

I continue to monitor with my own statistical model the various World, USA, State and Local data.  Even know the number of cases in my zip code (25) with hospitalizations (7) and deaths (under 3). The numbers are getting large which contributes to smaller growth rates. 

The USA stock market seems to be in the twilight zone with a V shaped recovery, sprinkled with radical emotional volatility based on news of the day.  If my attention to the market and renewed trading activity is any indication of a trend then there are lots of people speculating and creating volatility with zero commission costs of "nervous energy ".   My prior Financial Advisor (T.A.) said it best - "Nervous energy is one of the greatest destroyers of wealth".

The recent outrage of George Floyd's death with demonstrations, protests, and autonomous zone anarchy I believe escalated as a result of the rapid growth in emotional stress associated with COVID-19 and the shut down of the economy.  Oh.... stir in a dose of polarized red state and blue state political fear of the next election and you get a perfect storm of emotional pressure ready to blow up. 

What's the vaccine for emotional volatility?   Find what eliminates your nervous energy.

https://listenforjoy.com/collections/well-loved-images/products/deep-breath

Truth and Consequences

Truth will reveal itself over time.  Consequently arguments are really about time - should we wait or not in our decisions today.  Probability adds into that equation and expected values.  And so the argument continues about COVID-19 and the decisions that are being made - individually, community, nationally and globally.

Questions about the utility of life and what measures we take to save lives we constantly be argued.  Close to 75% of all deaths in the USA are the result of 10 causes (top three are 50%) -  Heart Disease, Cancer, Chronic Lower Respiratory Disease, Accidents, Stroke, Alzheimer's, Diabetes,Influenza and Pneumonia, Kidney, and Suicide.

So add three of them up - Respiratory (147K), Influenza (55K) and Suicide (43K) -  245K deaths.  Now put the cost of a life into this equation - let's assume $10 million (Value of Life) per life.  So we lose $2.45 Billion a year in lives for these three conditions.  This is likely overstated since the value of one's life varies over time and the older you are the less future earned income you can produce.  But save that thought for a different blog entry.

Let's switch to USA GDP - $21.73 Trillion and growing at 2-3%.  So here is the question -   What reduction of the GDP growth rate would you accept to save 500K lives?

If GDP growth slowed to zero in 2020 (say down 2.4% -see  Coronavirus could cost the Global Economy $2.7 Trillion. Here's How) the that would be a cost of $522 Billion.  Would you accept a $522 Billion economic opportunity loss to save 500K lives?

Bloomberg  3/6/2020  Coronavirus Could Cost the Global Economy $2.7 Trillion

Back to the equation of $10 million a life -  $5 Billion for 500K lives.  Here is where the logic breaks down - let the 500K die to save the economy.  It's 10 times the return on life.

Looking at it a different way - "At least $26 Trillion in global market capitalization has been lost since February"  (Goodbye, Dow 30,000! Hello Dow 10,000?). Obviously this drop is not entirely due to COVID-19 - but assume 50% was - $13Trillion.  What would if have been worth to prevent COVID-19 from entering the USA back in February?  What would it be worth to stop COVID-19 from spreading, get back to work, and put calm back into the Stock Market?

As you can tell - I have no answers, only questions.   Our governmental officials must wrestle with these questions but ultimately they must "bet" on time - act now or wait and see.  Different states are being allowed to make their own bets.  The Federal Government provides oversight and can "Trump" their decisions.  When is the right time for that?

Truth will be known this time next year and the historic bloggers that were right will point out their prowess.  Those that we wrong will justify their logic and decision "at that time".

Everyone will claim the Truth - yet no one knows the Truth.

Technology Comfort Food

Sequestered at home, I found a diversion that will help the social separation and tickled my technology and investment passions - Zoom Video Conferencing.  All this brings back the memories when Mom and Dad would spend time with me in the late 90's testing and experimenting with voice over internet communication - first audio and later video.

The ZM stock has Zoomed beginning in January from $68 to $165 recently due to the press and sudden need for distant communication and education.  While there are other alternatives, Zoom has benefited from its own viral explosion that started just nine days ago ($103 per share).

My first introduction to Zoom was Friday Morning Bible Study with 22 guys conferencing in the study of Deuteronomy.  Given a wide range of technology capable men, this was a great testimonial of the simplicity of the tool.

Last night, I put together an extemporaneous meeting with A.M., Ellen, Paul and myself so that I could determine whether to use it for my meetings coming up next week.  There were no real technology glitches,  and the effort to coordinate as the host was simple and intuitive. 

Tonight, I began playing with the virtual background feature.  It took Paul and a some amount of time positioning the light to get a decent picture.  I can see the challenge of lighting for portraits for photography and special effects. 

Tomorrow I'll show off at our normal monthly Vistage meeting which will now be virtual via Zoom.  However the lighting will be significantly different with sunlight streaming through the window - yet another test.

I can see why the stock is vaulting up -  I was so impressed, I immediately signed up for a year subscription $160 including tax.  And believing I needed a green screen to enhance the virtual background, I popped on to Amazon to buy that too.

Technology Gadget toys are my weakness.   But like some who are using food and other "comfort" coping mechanisms - I am not immune either.   

  

New Normal?

Saturday starts a weekend of what may be a "New Normal" for many in the USA.  Several days ago I read the Washington Post article "Coronavirus will radically alter the US".  In that article was the following graph

 

 

Referencing the 1918 Spanish flu, we can expect a second wave of this virus and should begin now to prepare for various scenarios from the best to the worst. 

How can the Investment community prepare their expectations from the best to the worst.  Yet another chart to reference.  This appeared from M.L. (R.M.'s friend) in her firm's newsletter to her clients:

US Financial Services LLC  (973) 882 3600

It's time to take a deep breath and begin planning life in a "New Normal". Some of our leaders have been criticized for calmly saying that "this too shall pass". There is a balance of avoiding panic and preventing complacency needed as we problem solve around this virus.  As my brother (D'Lane) said to me when I was nursing my Dad back from his fall in ICU - "One step at a time".

 

My homegrown spreadsheet model of the growth numbers - World, USA, Ohio still shows greater than 30% growth with a hospitalization between 12% and 25% and no peak in sight.  We are still climbing the rollercoaster with the hope of quickly getting to the top as our fear mounts.  What a relief it will be when we start down the hill!!!

 

How appropriate we want to flatten the virus curve as it heads to the peak.  The faster we flatten it the quicker that same curve (flipped in reverse) will let the stock market bottom. 

 

. 

 

 

 



TGIF

For Wall Street Investors the adage "Thank God It's Friday" may be an understatement.  As I write this blog at 3:06 EST the DJIA has dropped 16% for the week, 33% for the month.  The market drop is better defined now as contagion - the combination of emotional fear from the economic impact of lockdowns with the Saudi/Russia Oil fight, and a sprinkle of political uncertainty. 

In this environment - cash is king, physical supplies is queen.  This is my second day locked down at the house.  Taking a walk in the neighborhood, it felt like grand central station - cars, people walking, children playing outside, even an Indian Hill Ranger patrolling and stopping to say hello.  Of course it helps that it was a sunny day with temperatures in the 50's.

Ellen cooked some brownies, Jenna was outside playing fetch with her dog Wally, Paul was working making client phone calls, and Susan attempting to collect receivables for her clients.  I sat transfixed on the red and green ups and downs of individual stocks while listening to the gloom and doom of CNBC.

Will the pressure cooker of this week's activity continue to build over the weekend?  With little routine outlets available for weekend decompression, everyone will be trying to find new activities and ways to fill their time.  What a great opportunity to re-evaluate how we spend our time together and what we can do to be emotionally supportive of each other. Like the feeling of being snowed in during a winter storm, we can practice ways to create calm and peace.  Here are some ideas:

(1) Turn off the media
(2) Read a book
(3) How about a puzzle; or art; or a family game
(4) Take a walk outside in the neighborhood
(5) Do one of those home organization projects you have put off indefinitely

Take the time to appreciate your home and feeling safe at home.

PANIC or NAP

The stock market seems to be in free-fall and the word PANIC seems appropriate.  The fourth circuit breaker (7% down) in two weeks and the S&P graph appears to mirror the wall chart that I face in my office for the 2008 recession (1.6 years and a drop of 57%).  My personal capitulation day back then was Dec. 3, 2008 just before the market bottom of March 9, 2009.  I have great memory of this because of my personal financial logs that recorded my feelings and trades.

For the past four days, I have watched the market continuously aided by the recommendation to physically distance from others.  I suspect that has exacerbated the panic and created more nervous energy of people liquidating accounts.

The fluid nature, next to zero transaction costs, and real time ability to move large sums of money has contributed to the volatility and steep intraday movements.  Even the ability to watch global markets - CNBC Asia allows a person to remain glued on minute by minute futures market.

Temptation and regret slips in when the market vaults up as the "market timers" try to optimize the bottom.  I also get tempted to play in this game but have avoided making any trades or timing decisions.

How do you control PANIC -  I C NAP :)

Down and Up

The market goes up...  the market goes down.  Today the stock market's volatility looks like the week of Aug. 1, 2011 to August 5, 2011 when there was a debt downgrade of the U.S. Government.  So the talking heads will attempt to explain the human fear that occurred this week - China, Oil, Turmoil.

On paper this week makes those invested in the market 6% poorer.  Yet looking over a 15-20 year view the market continues to increase for those who invest in the long term.

So this is another example of letting the short term impact of weekly events change a patient behavior of "keeping your hands off the dials".  Yet money (even paper money and digits on a screen) perceptions are powerful forces in our mystic.

My advice -  Go home this Friday, enjoy your family and forget about the market. 

And my prediction for the market for 2016.......  The market will go down and up.

The New Normal

For the umpteenth time, I've heard the expression - "It's the new normal".  The recent NBC TV  comedy series with that title became a fatality of that expression on May 11, 2013 when the series was cancelled (I guess it didn't become a new normal  comedy series).

Usually expressed about the stock market or socioeconomic factors,  the expression becomes a lazy justification for why a trend has defied some expected (or traditional) long term principle.  The expression is also used as a club to hammer the laggards who preach that this change will revert back to the natural norm.

What is normal?  Start first with the opposite - not normal, or the unexpected.  So it is the frequency of how many times the unexpected occur that determine a "new normality".  Here is where the statistician kicks in.  When normal is described, I visualize the normal curve - that bell shaped thing we learned about in school. 

But remember there are two axes (see April 13, 2013):

A.  The vertical  y axis - best visualized as the mountain top.  Is the curve a steep mountain of a flat rolling hill?

B.   The horizontal x axis - the data points of what you are measuring.  Has the curve shifted right or left of the expected middle?

Does a perceived change in the curve mean a new curve or that the sample of observations that just happens to be outside the confidence interval (now it's getting very statistically deep)?

Unfortunately, those that opine about "the new normal" are never consulting the statisticians.  But then again most statisticians are "A B normal" :)

                                                  Source:  http://jerz.setonhill.edu/EL150/2008/ABNormal.png

More Market Media Mania

The Dow hit a record high yesterday - 14,282.30 and naturally the press went wild and today it continues.  It's like the high school days of hearing about that wild party occurring (unsupervised) at the kid's house where the parents are gone.  The Fed's unbridled $85 Billion per month purchase of bonds is the equivalent of the older brother buying unlimited booze for the party.

I have the luxury of keeping financial journals of my investment patterns since October 7th 2004 (now on my 22nd 100 page volume).

Before the last crash, I began to get nervous about the market in October 2006.  I was convinced I should exit the market based on a chart showing the NAHB Housing Market Index superimposed on the S&P500 lagged for 12 months (a 79% correlation). If that correlation was correct the market was going to crash.  Yet it took another year ( the DJIA increased 2,307 points or 19.4% up)  of the "party" before the "police" (Fed/Treasury) showed up and the "hang overs" set in ( the great recession).

So how long will this "party" continue?  Another year and 19.4% like 2006?  That would be another 2,771 points  up to a DJIA of 17,053 sometime in March 2014.

Literally off My, My, My, My, office wall chart!

Apple Slider

Susan's iphone arrived a couple of days ago.  This tells me that the Apple market share is saturated and is an early indicator that Apple's shine is over. You might want to consider selling the stock.

I am the last holdout and hope for Microsoft in the family. The cool factor of my Window's phone has worn off and I've still not installed Windows 8 on my laptop.  And the hype over the Surface has died down and economic reality sets in - do I really need a tablet/new laptop to replace what I have?

There is just no real technology gadget (or software app) on the horizon that is exciting the marketplace. 

It's hard to pick a side - when both are sliding.


Postscript - AAPL - $500 on 1/18/2013    and   $456.83 on 1/30/2013  -  that's a slide!

Pretty Poor Predictions

The results of the Telecombil/Wisner annual prediction lunch are tabulated- and I was re soundly defeated - 8 to 1 (with one category we will rollover to 2013).

Here were my pretty poor 2012 predictions: 

S&P 500  1157   (actual 1370.92 - lost to 1300)
SVP Partners  20  (actual partner units 24 - lost to 22)
Asset under Management for B.S.  $16M (actual $17M - lost to $17M)
Xtown Shootout - Bearcats (60-45 Bearcats win)
Bengals -  9-7 (actual 10-6 ---  B.S. picked this exactly)
Long Stock Pick GLD (lost to LNG)
Short Stock Pick CRM (lost to DTUL)
Unemployment 7% (lost to 7.5%)
Election  Romney (Obama won)
Superbowl XLVII #47 (NFC -  we rolled this over to 2013)

B.S. has appeased me in playing the predictions game each year since 2000 (for 2011 see 12/23/10 and 2/20/12 for results).  While most years have been close (and required a tie breaker), B.S. has trounced me in 2003 and 2012. 

Next years picks vs B.S. (dare I do this again?):

S&P High  1512 vs 1650
S&P Low   1157 vs 1250
Long Stock Pick  NOK vs QIHU
Short Stock Pick AAPL vs DTUL
Xtown Shootout 2013/2014 Season - Bearcats
Bengals   8-8  vs 9-7
Superbowl XLVII #47 NFC  (Kept the 2012 prediction)
Asset under Mgt  $17.25M vs $18.25
SVP Partners 26 vs 28
Unemployment 6.3% vs 7.5%
Senate Confirms Hagel  Yes
BS moves office out of home  No

Here's hoping for 2013 Fabulous Firstplace Forecasts

Postlog -  Just discovered Real Money Doug Kass Predictions for 2013.  It make my contest look like a kindergarden attempt at predicting.

Power of Belief

It was the first call to R.M. of the new year.  A chance for us to plan the traditional visit during the Superbowl and tee up the early discussions about sports, politics, stock market predictions, philosophy, and history.  The call ended with a preliminary discussion about the Military and Power.

R.M. had the last word about power with the following riddle (taken from the HBO season 2 of "The Game of Thrones").

"Three great men, a king, a priest, and a rich man. Between them stands a common sellsword. Each great man bids the sellsword kill the other two. Who lives, who dies? Power resides where men believe it resides. It’s a trick, a shadow on the wall and a very small man can cast a very large shadow."


Something to ponder.

Living Risk

I said "If you don't take a risk in life, are you really living?" in a recent discussion with a friend. 

In fact, every day when you walk out the front door you are taking a risk - a very calculated one and with low probabilities of dire consequences - but still risk.  The real issue is that we all differ in the type of risks we take, the amount of risk we take, and when we take risk. 

Risk is the currency of return.  No risk and no reward. Which is why I believe life becomes boring without some risk.  However more risk (with possible more or less return) is not always better.  But the fear of risk can freeze an individual from deciding or implementing an action. 

This came up in discussion today about the stock market.  Loss aversion (preference to avoiding loss vs acquiring gains) sets in at times and limits our desire to take risk. With the market (S&P500) continuing to advance toward the October 2007 high (1,562), emotions about risk begin to take hold.

The talking heads on CNBC refer to this as "risk on" and "risk off" - making sudden and complete moves in either direction of taking large amounts of risk or alternatively reducing risk to zero. However the prudent person doesn't use this approach to life (on or off).

Your "Return on Life" is dependant on how you live with risk.

Fall Countryside

I just finished 23 hours of driving (1600 miles) across the Midwest countryside - to and from Wichita Kansas.  I took the southern route (through Louisville) for the trip out and the northern route (through Indianapolis) on the way back.  Amazingly the weather was hot (Kansas had the hottest day on record Tuesday) at almost 90 degrees but with the "2-80" airconditioning (two windows down at 80 miles per hour), I got to experience the smells of fall - the Combines clearing the fields and the smell of burning leaves. 

This is the most visually appealing time of the year to drive the relatively flat terrain of Indiana, Illinois and Missouri.  Luckily San Franscico won the National League Championship (so tonights game is in San Fransicso) so the traffic through St. Louis was minimal. 

It's good to visit Mom, Dad, Vana and Dayton but also great to be back home.  This weekend will be a fun excursion to Keenland with the family.  I hope my luck in horse picking will be better than this year's stock picks.

Bifurcate Nuance

Seems to me words come into vogue.   I getting sick of hearing people say nuance and bifurcate. 

Whenever someone say's "nuance" I think of the company I invested in called Nuance Communications.  On my wall is a framed picture of a worthless stock certificate from Lernout Hauspie Speech Products (LHSP) which also reminds me of Nuance (Nuance acquired most of the intellectual capital of this LHSP; which had been acquired from the bankrupt Kurxweil - KURZ).  My investment in voice recognition software started after a presentation by Kurzweil at an Accenture Technology Conference at St. Charles Illinois (3/8/1994).  So there were many bifurcations KURZ  - LHSP - SSFT - NUAN.
I was convinced that voice recognition would eliminate the keyboard within 10 years - how wrong that assumption was!  If you have experimented with Siri on your iphone, you can attest that voice recognition technology will take a very very long time to become mainstream.  I sold my Nuance position May 18, 2012 because of the Siri glitches.


For me, if you bifurcate Nuance, you get a bad investment.

Persitent Patient Parnoia

The recent trading software glitches has created a buzz about testing computer systems ( e.g. Knight loses $440 million).  I was fortunate to be trained at Accenture in proper system testing.  It was always a battle of cost benefit trying to convince clients on the proper way to assure a smooth conversion of a new computer system.  The potential business disruption, impact on employee confidence and acceptance, and even revenue loss factored into the risk of less testing.  There were unit tests, string tests, integration tests, user tests, volume tests, stress tests, and complete system tests to perform.

Obviously testing every logic path in a system is impossible (and not practical).  But only testing the most probable paths is equally not practical.  Many clients just wanted to use historical data to test the new system.  Typically this was the worst test methodology as it tested millions of transactions within one logic path instead of fabricating unique test data that would test thousands of logic paths once.

Susan has always commented on my intense skeptism and lack of confidence in so many things.  I think this comes from a career of testing and discovering system bugs. 

It takes patience, persistence, and partial paronoia.

You Inc.

Moshe A. Milevsky in his book, "Are you a Stock or a Bond" has a great chapter titled "You Inc.".  Addressing the idea of Human Capital, he recommends a person should estimate the present value of their earnings stream and add this to their personal net worth statement. Based on this new balance sheet, financial planning takes on different decisions - asset allocation, insurance, and debt. 

After all, You Inc. is a "small, tightly controlled, privately held company with productive assets invested in non traded units of your future salary and wages".  Started by Parents Inc. as a speculative venture that lost money in the early years, it was always planned to be spun off into a separate entity.  An eventual merger of equals (marriage) may occur at You Inc. and will be rightfully renamed Family Inc. anticipating the decision of creating one or more Child Inc.  Various stakeholders in this Family Inc. will now include spouse, children, and in-laws (maybe even Parent Inc. again).

So is You Inc. a stock?  Higher returns, leveraged, risky cash flow, and volitile?

Or is You Inc. a bond?  Conservative, steady reliable interest payments, with a long maturity?

Runaway May

"Sell in May and Walk away" should be changed to "run away".  If tomorrow's stock market follows the Asian markets tonight, it will be a final  Mayday of stock market pain.  May is down over 6% and has given up half of the 12% year to date gain that everyone was cheering about at the end of March.

Managing your emotions in investing is the single most important factor in investment success.  Knowing yourself and your internal chemical reactions to risk and returns can provide a discipline to act methodically and rationally.   For example, yesterday the market was up 1.1% and today it was down 1.4% - yet there was no major change in news (political, international, financial, etc.). 

Even though I know intellectually that you can't time the market, emotionally I have attempted market timing many times (including this latest movement to cash).  But I have always said "the stock market continuously reminds you of your suboptimal performance". 

The best strategy is to establish an asset allocation that corresponds to your risk profile.  Your risk profile is correct when you can ignore the market news and on any large unrealized loss you can sleep properly.  Re balance every year or so back to your original asset allocation and continue to forget about the short term.   This "passive" investment style will give you overall a great long term performance and beat over half of the money managers.

So what's the most worrisome month to invest?

"October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February." -- Mark Twain

Minimize the Downside

From William Bernstein’s book – “The Investor’s ManIfesto  …  Preparing for Prosperity, Armagedddon, and Everything In Between”  - he says:  “Finally, never, ever forget Pascal’s Wager as it applies to investing:  The name of the game is not to get rich, but rather to avoid dying poor.”

P.S. Pascal was a famous French philosopher  and mathematician who defended his belief in GOD with this logic:

 (1) Suppose GOD does not exist ----  The atheist “wins” and the believer “loses”.

or

(2) If GOD does EXIST ---  The believer “wins” and the atheist “loses”

The consequences of being wrong with each belief is starkly different!!!!   [statisticians say - expected value :)  ]

 (1) If GOD does not exist – then all the devout believers lost the opportunity to fornicate, imbibe, and skip a lot of boring church services.

But

(2  If GOD does exist – then the atheist roasts eternally in HELL. 

Therefore:

The rational person thus chooses to believe in GOD.