Friday, 03 July 2020 / Published in Analysis

As we closed the quarter, US markets had their best quarterly performance since 2008. Not bad considering the devastation we witnessed when COVID19 broke out. However, the bounce is not spread out evenly against all sectors or stocks.

Technology related stocks performed the best, partially because they were not affected by the pandemic, partially because they were a beneficiary of it. However, most stocks did not benefit and even more have seen losses rarely seen by most of us.

The problem with the market currently is that within the technology space, most stocks are either extremely expensive, or borderline bubble territory. In fact, most of the technology space today is simply not investable by almost any valuation method.

Then there is another very big percentage of the market that is very difficult to invest, because the COVID19 pandemic is still in play and we simply don’t know to what extent these companies will be affected (or not). Most stocks in this category are fairly valued, but we have to wait to see to what extent the pandemic has affected them. More clarity is needed for this category, and we will get this clarity after Q2 results get published.

And then there is another batch of stocks that either haven’t been affected, or have been affected very little, yet trade for scrap and no one is buying them. Yes, this is where the real value is, especially in the small cap space, but they can’t seem to get a bid.


Investors dilemma for Q3

So, the question is, do you buy in the technology game (in essence momentum trading) hoping the sky doesn’t fall under you, or do you buy stocks that have the potential to increase in value, but are out of favor?

It’s a difficult question to answer these days, because the technology trade has been successful for a while now. At the same time it’s very difficult to invest in many of these companies when one considers the balance sheet and the valuation (market cap) when you manage money for a living. Simply put, from an active manager’s perspective going with the flow and trading technology is not easy to do.


Bottom line

We think the easy money has been made during the last quarter’s bounce. There are simply too many variables and unknow factors to buy stocks blindly simply because they are in style, or because everyone else is doing the same.

So, we will keep doing what we know best, buying stocks that have value and can perform under difficult situations. Because when there is room in the balance sheet for error, eventually stocks bounce back. However, when the balance sheet is in question, and the sky falls under you, it might be a very long time before you recover.

Either way Q2 result will probably be worse than Q1 and investors have to be extra careful. And buying a good balance sheet, at a fair valuation, is always a recipe for prudence.

Friday, 03 July 2020 / Published in Analysis

For many years, many have said that the EURO is a currency destined to fail. Yet, Europe has been getting richer every year, and its citizens enjoy the highest living standards in the world. Yes, Germany’s growth is mediocre at best, however this does not mean that German citizens haven’t received above inflationary pay raises over the years. In fact, with Germany’s current account surplus of around 7% (5% for the Euro Zone), it’s difficult for the average salary to stay the same.

There are many problems in Europe, such as the banking sector, however this has nothing to do with the Euro, but with the fact that banks were never repaired to begin with post of the 2008 crisis as they were in the US. And for those who say that negative rates have not done much to fix Europe’s problem, I say negative rates have nothing to do with Europe’s problems, and are rather a consequence of Europe’s success.

The recent COVID19 crisis could be a reason for faster political union in Europe. By that I mean a Federal Army, Coast Guard, Federal Courts and prison system, banking unification and fiscal unification. Granted that these are very long-term goals in the EU, however they have been proceeding at a snail’s pace.

The 750 billion-euro joint debt plan to help Euro economies cope with the COVID19 pandemic could be a reason for unification among the bloc’s 27 member nations to roll faster.

The importance of this joint debt issue cannot be underestimated, because it is something very few thought was possible before the COVD19 crisis. Yes, European leaders who were against joint debt issues have in a way been forced to agree, however this is still a first step towards a fiscal union.

What’s next? Perhaps a European Federal Coast guard, to tackle the immigration crisis? Perhaps the long-awaited banking union, with a federal system to guarantee deposits? Perhaps a Federal Securities and Exchange Commission, that will at last replace local officials, that sometime act as cheerleaders for local companies and turning a blind eye, as the recent case of Wirecard in Germany.

The bottom line is that the COVID19 pandemic might be a reason for faster political integration in Europe. Yes, Europe still has a long way to go, but the recent joint debt issue, although being a very tiny first step, might speed things up.