Stillwater Capital, LLC

Let the stimulus debate begin!!!   


Stimulating                                    

This week started with a bang, as Senate Republicans rolled out a plan to throw another $1 trillion of liquidity on the Coronavirus bonfire, which sounds like big money until you compare it with the $3.5 trillion that Democrats are offering up. While there are a myriad of details to be sorted through and agreed upon, the one that is taking up most of the headlines is the $1,200 check individuals are going to see in their mailboxes come August. The new proposal also has $500 headed out for each dependent child, even extending above the 17-year-old threshold.

Dollar Bills, Headed Your Way

Full Disclosure: This week, we are very market and economic chart forward. That said, there is plenty to stick around for as we provide a deeper dive on the new face of education,  what $2 million buys you in the white-hot mountain west housing markets, and what $3,000 gets you from Aaron Franklin in Austin. Here is a hint…

Smokin’ Deal


Longtime economist, and frequent pundit on CNCB, Diane Swonk, offered up her concerns, which happen to be our concerns as well, when she said, ‘Congress is chasing a moving target’. She would go on to explain her view that Covid is going to cast a long shadow over the economy and how the business failures and bankruptcies headed the economies way are going to produce a smaller base to rebuild from. That said, look at how top heavy we are in sectors that were already in trouble and probably could use a flushing out anyway. The only problem there is that the Fed is sitting ready to buy bond ETFs of zombie sectors to keep them alive.

Let Em’ Die

 

Earlier this year, Harvard Business School did a deep dive on the subject and with the important sub-text that a BK is not a liquidation, and those are spiking as well. The chart below helps tell the story of why mega-cap technology companies are powering the rally as they aren’t seeing the downside effects.

It’s Good to Be Big

 

The Economy                     

One reason we are seeing the increased need to get cash into the hands of those who need it most, is the newly emerged trend in unemployment. While ever so slight, the fact that claims are no longer on a second derivative trend of ‘getting less worse’, is going to start acting as a bigger headwind to the economy. July’s employment situation report won’t be released for another two weeks.

Trend Bottoming

A very silver lining to the Covid recession of 2020 is the record low interest rates home buyers, and those looking to re-finance, are seeing these days. This, along with the massive wave of liquidity and Fed balance sheet expansion has done wonders to support asset prices. Which, as we have said many times is great, assuming you own assets that can use the reflation. But cheap money is cheap money, and the world desperately needs that around right now.

Lower Still?

 

Markets                                 

As is very much the case these days, and this can’t be emphasized enough, equities and indexes are not the economy. They may loosely reflect what’s going on with Main Street, but make no mistake, trading and daily price discovery are a quant driven and day trading speculators paradise. Two years ago, J.P. Morgan estimated that nearly 80% of daily stock trading was machine based. This chart from the Economist paints the directional picture right, but underestimates the magnitude of machines because it doesn’t include trading of the high frequency kind.

Fundamentals in the Back Seat

 

Further emphasizing the point that institutions aren’t in charge, over the weekend the Wall Street Journal published a piece with the headline, “Everyone is a day trader now”. This can be seen by the hockey stick move higher in the number of positions held among Robinhood account holders.

Stealing from the Rich

 

Performance of the names most heavily trafficked by the retail investor set tend to show much higher volatility and a skew to upside capture. But in this environment, downside protection is far from being in vogue right now.

Who’s Dumb Now?

If that wasn’t enough to prove that the unwashed masses are partly in charge now, here is the chart showing the explosion in new account openings among the major discount brokerages.

Power Move

Last but not least, here is a look from Goldman Sachs on how short-term the nature of S&P 500 options trading has become during the Corona-Trading-Palooza fest of 2020. 

Derivatives in Charge 

 

So why are we flogging this pony so hard? In part because we don’t run strategies that particularly benefit when the doors to price discovery open to anyone who wants to day trade a stock with a four-letter NASDAQ symbol. More to the point, we have seen some dismal upside capture since mid-May. While it won’t last forever, being on the conservative sidelines right now as the great Covid 2020 party rages has been challenging. But here is where the cautionary disclosure comes in, all is well and good until somebody starts taking losses, at which point prices have a tendency to collapse onto themselves. During the original dot.com bust that equated to an 80% loss.

The Internet Bubble v1.0

 

One last piece of evidence that we might be jumping the shark here, is that my son and his friends, who are all of the 18 to 20-year-old age bracket, all have discount brokerage accounts now and compare holdings and returns on a daily, if not hourly basis. While they aren’t wrong for doing it, just know that ratings for Happy Days crashed after the Fonz got one over the Landlord.

Jumping Sharks 

 

What’s Working                

Enough about why it’s working, let’s focus now on what it is that’s working. First off, is the ‘stay at home’ basket of an original list of which was produced by MKM Partners back in February. The challenge for these, and all the other thematic ideas, is what happens when we get closer to a Corona-19 cure. Will offices and malls be dead forever? The latter is for sure. 

The Popular Kids 

 

Another area that has been white hot as of late, are the shares of cloud-based technology companies, and the ETFs built to take advantage of the trend. For the Wall Street wonk/junkie in all of us, here is a link to a deeper dive piece published on ETF.com that not only reviews the products taking in real money, namely First Trust’s cloud computing SKYY, with over $2 billion in AUM.

The Cloud v. S&P 500

The article also lays out the criteria used by one of the best performing products, the one shown above, the Global X Cloud Computing – CLOU.

CLOU holds companies that generate 50% or more of their revenues from one of five business models, including those that:

  • License and deliver software through online subscriptions, known as software as a service (SaaS)
  • Provide a platform for creating online software apps, known as platform as a service (PaaS)
  • Provide online, virtual computing infrastructure, known as infrastructure as a service (IaaS)
  • Own and manage data and server storage facilities, including data center REITs
  • Manufacture or distribute infrastructure and hardware components used in cloud and edge computing

To be clear, Wall Street is a product producing and selling machine. The criteria laid out above would take about two people with some portfolio management background and decent access to screen quantitatively about 48-hours to come up with. Slap that on a powerhouse distribution platform like First Trust, and suddenly the sponsor firm is drinking from the firehose, or as a colleague of mine once said, swimming in a river of ETF nickels.

The Buffalo Nickel

 

The Education State       

As we enter the late stages of summer, and are theoretically only a month of away from back to school, emotions are running high as schools and governments try to formulate plans to get students back into the classrooms. For those with the mental wherewithal, here is a link to the current CDC guidelines for back to school planning. 

The Future?

 

In terms of what major colleges are planning, Business Insider does the heavy work of compiling what 25 top institutions are looking at this fall and provides a running update as things change. This is hugely important, as the bailout, or deferral rate, appears to be rising rapidly from parents and students who are having trouble reconciling tuition to what looks to be amounting to coursework provided only online. And if that isn’t enough to get you thinking about a not so pleasant future, CNBC reports that 56% of students say they can no longer afford tuition.

Inflation in the Wrong Place

 

There is little doubt that getting students back in their seats safely is paramount, but the issue is far from one dimensional. On top of the educational component, there is a huge risk of negative emotional and psychological impact from distancing and a lack of social interaction. Taking it a step further, primary education provides the best babysitting money can buy, which in most cases is free money. Think about the impact of not being able to send Johnny and Susie to six hours to eight hours of monitored supervision is going to have on a middle-income family? Enter the ‘learning pod’. 

The New Classroom

 

Hedge Funds                    

Following an unpleasant trend for the industry, the world’s largest hedge fund, Bridgewater Associates, is cutting headcount on both the operational and investment level. This is on the back of an otherwise challenging year for the firm, which is seeing losses north of 10% after a 20% first quarter drawdown. Assets under management are also on a downward trend, though some longtime investors are coming back in for the reversion to mean trade. All of which dovetails into what Bloomberg wrote on Monday, that the headwinds of lower management and performance fees continue unabated. That said, most active long only managers would take something north of 1% and run to the bank with it.

Feefalling

 

Real Estate Reality             

Having just completed a run through Wyoming, Idaho, Utah, and Montana, we can report with real boots on the ground knowledge that the Mountain West skit town real estate markets are on fire. Both Jackson Hole and Sun Valley had zoo like market conditions that even the locals said was well beyond normal. Properties in Montana are going sight unseen, as there is a scramble to get out of the metropolitan areas. With that, we give you what $2 million will buy you in a desirable area of each state.

Sun Valley, Idaho

 

Three days on the market, and this 2,400 square foot, 3 bedroom, 3 bath, streamside property is now under contract for somewhere around the $2.2 million asking price. Backup offers always welcome.

Jackson Hole, Wyoming

 

A similarly situated home in Jackson will run you slightly more, but that is to be expected as the state offers an appealing zero percent income tax. For this home listed at $2.5 million you get 500 extra feet with the same three bedroom, three bath configuration. 

Park City, Utah

 

If you are looking to seriously stretch your mountain town dollar, head to Park City where for the same money as Jackson and Sun Valley you can square yourself away with twice the square footage and bedrooms. Case in point is this 7,000 square foot 5 bedroom, 5 bathroom home set against the Wasatch Range.

Bozeman, Montana

 

And now for something completely different. For $2.1 million you can be the owner of this 1897 classic Queen Ann Victorian named after brew master Julius Lehrkind. While the style of architecture is an acquired taste, you get 6,000 feet of living space in a downtown location.

 The Barbecue Guide       

The writing staff at the Wall Street Journal once again did the work for us when they published their BBQ: Ultimate Guide, barbecue A - Z over the weekend. Subscription required, but it’s well worth it.

WSJ’s Ode to Q

 

For us, the highlight was the Aaron Franklin crafted offset smoker with the brisket masters signature cut from the metal. The list price for this piece of New Braunfels art is $3,000, a full 10x premium to that which you would find at your local Home Depot for a similar, yet vastly lesser quality, version.

The Master’s Smoking Vessel  

 

In case you have missed it on the Instagram, Facebook, or pop-up ads on your most visited website, purveyors and distributors of online meats are hitting their bull market stride right now. Business Insider reviews the top sites, and how they differentiate themselves in a seemingly saturated market.

The SRF Tomahawk Chop 


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