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Three Ways to Buy Into this Market

Three Ways to Buy Into this Market

The COVID-19 pandemic is a great tragedy and an unprecedented event in modern history. In the midst of countless negatives–one positive is this market selloff presents a buying opportunity.

As someone who has been overweight cash over the past few years I’ve been looking a selloff like this to be able to increase my exposure to the markets.

I can’t predict when the market will bottom or I would just buy in then. So I want to go over three strategies one could use to enter this market.

COVID-19 case Plateau

It is possible that when the number of active COVID-19 cases plateau that will also be around the time the market bottoms out.

Active Cases in the US continue to climb

As of now the active cases in the US have continued to climb. At some point this will plateau, as it already has in places like South Korea.

Source: https://www.worldometers.info/coronavirus/country/us/

Active Cases in South Korea Plateaued in mid-March

Modified Dollar Cost Averaging

This method attempts to capture market exposure at given price levels.

To do this, first determine how much you’re planning on investing. Then break than into a series of price levels. For example, if you’re planning on investing $3,000 at three different price levels, you’d be investing $1,000 per price level.

Price levels could be something like the % fall from the prior peaks drop. So when the market falls 30% from peak, you invest $1,000, when it falls 40%, another $1,000 and if it falls 50% the remaining $1,000.

For example, the S&P 500 peaked at 3393 on 19 February. So $1,00 would be invested at the 30% drop level of 2375, a 40% drop would mean buying in at 2036, 50% would be 1696.

The downside to this is that the market might never fall 40% or 50%. If this happens one wouldn’t buy into the market at these levels and money would be left uninvested. It could also of course fall more, in which case one would have bought in at a higher level.

Looking at the previous bear markets of the past 2 decades, the bottom of markets is not made after just a 35% drop in 33 days.

Given that the number of COVID-19 cases in the US continues to climb I don’t believe the market has bottomed yet. The market has rallied about 14% off of the 23 March lows, but I believe the market will give up these gains and make a new low.

Of course I can’t know for sure.

Good Old Dollar Cost Averaging

This is probably the simplest and most basic method. This is buying a set dollar amount of shares on a set schedule. Such as $100 on the first of each month. When prices are lower, more shares will be purchased and when prices are higher, fewer shares will naturally be purchased.

The downside to this method is that if one has any reasonable belief that the market will fall more, then one is buying in at a higher price than is necessary.

Despite the rally over the past few days, major US indices like the S&P 500 are still down some 23% from the 19 February high.

Of course it’s impossible to know with certainty.

COVID-19 Selloff Buying Opportunity

Gold has been a decent hedge thus far. Gold is up 3% since the 19 February high compared to the S&P 500 which is currently down over 27%.

In the 2000 dot com crash markets didn’t bottom for for nearly two and half years. The 2007-2008 great recession market drop took about 500 days. We are less than 2 months into this crash.

We are certainly living in interesting times. While this has been a sharp and violent selloff, it presents a buying opportunity, if not now at some point over the next few months or years. I personally think the markets will fall lower, perhaps to the 40-50% level before beginning to climb again.

Bear Market

Bear Market

Since early 2009 US markets have been in a bull market. In less than a month that 11 year bull market has ended and we are now officially in a bear market. The big three US indices are all down more than 20%.

NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow

Interesting that the trigger to the selloff was something no one was expecting. But perhaps the fact that no one saw this specific catalyst coming shouldn’t come as a surprise.

As I mentioned before, making financial decisions out of fear or panic will rarely result in the best outcome. Cool heads will prevail.

At this point in time I have more questions than answers, but in the midst of this bear market there is great opportunity.

Is Now the Time to be “Greedy”?

“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett

It’s hard for me to respect Warren Buffett when the man does everything in his power to avoid paying taxes while at the same time publicly saying he should pay higher taxes. It is hypocritical.

Despite my misgivings about Mr. Buffett I can’t argue with the long term performance of Berkshire Hathaway.

It’s important to ignore what Warren Buffet says on his virtue signaling tours and look at what he is actually doing with his money. 

Others are fearful right now so it could be a good time to be “greedy”. Of course buying things on sale isn’t actual greed but I digress.

Who Knows when the markets will bottom out?

I’ve been underweight US stocks and will be using this bear market as an opportunity to dollar cost average into US index funds and ETFs. I do not believe it is possible to time the bottom so I’m not going to try. What I am trying to do is to buy into the market at an interval of good prices.

Compared to the highs stocks are on sale at a 25% discount. They might go on sale for 40% off or even 50% off but in either case it is a significant discount from the mid-February highs.

How is Gold Working Out?

Gold has been a decent hedge so far. However during a panic the yellow metal will probably fall as people sell everything. And indeed gold is down from the $1,700 high made earlier this month.

For the first five years after the last financial shock (2008-2009) US stocks were the place to be and gold, which had a tremendous run-up, went into a bear market. Of course past performance is no guarantee of future performance, but it can provide a guide for how markets could possibly perform.

Gold in Yellow and S&P 500 in Blue

Over the past five years, as a result the current crash, gold has outperformed the S&P 500. Gold is up 32.71% compared to the S&P 500 being up 24.06%.

Gold in Yellow and S&P 500 in Blue

However, even after this large drop. Since the 2008-2009 financial crisis, stocks have been the place to be. The S&P 500 is still up 248% since February of 2009, while gold is up relatively modest 68.9%.

Gold in Yellow and S&P 500 in Blue

And despite this large drop, for the past 10 years, stocks have done very well.

NASDAQ in blue, S&P 500 in Grey, Dow Jones Industrial Average in Purple and Gold in Yellow

The Fed Tries to “Help”

Not one to stand by and allow the free market to operate–the US Federal Reserve announced more quantitative easing (QE4) on Thursday. Of course if you count the not-QE QE, this would be QE5, for those keeping score at home. It is also anticipated that rates will be cut again. 

Source: https://www.marketwatch.com/story/stock-market-attempts-to-claw-back-from-thursday-depths-after-fed-announces-big-bazooka-to-help-ease-treasury-market-problems-2020-03-12?mod=home-page

Rates are already at an absurdly low 1-1.5%.

Rates were over 6.5% prior to the 2000 dot com crash. They were hiked back up to about 5.25% prior to the 2008-2009 financial crisis. But after the 11 year bull run rates only made it as high as 2.4%.

In short the rates have never been this low going into what could be a recession.

The Fed is entering this bear market (and potential recession) with interest rates already so low they have little ammunition to “help”.

The Fed is already doing more Quantitative Easing.It seems inevitable that rates will go negative.

Source: https://fred.stlouisfed.org/series/FEDFUNDS

Keep Calm Amidst the Coronavirus Correction

Keep Calm Amidst the Coronavirus Correction

The Coronavirus (COVID-19) outbreak has tanked stocks. The S&P 500 is down 13.6% into correction territory, falling from the high of 3,397.5 down to 2,931 as of writing this article. Other major indices have fared similarly.

What we Know about the Coronavirus

“As of March 6, 98,134 people have been confirmed to have COVID-19 (also known as the Wuhan coronavirus)…There have been 3,388 fatalities. “

There are 14 confirmed COVID-19 deaths in the US.

Source: https://heavy.com/news/2020/02/coronavirus-covid-19-cases-deaths-updates/

As is often the case, the COVID-19 virus seems to impact the elderly more severely. As of 11 Feb, in mainland China, no deaths occurred in those age 9 or younger. The fatality rate was estimated to be higher among those age 70 and older.

Source: https://www.marketwatch.com/story/coronavirus-fatality-rates-vary-wildly-depending-on-age-gender-and-medical-history-some-patients-fare-much-worse-than-others-2020-02-26

What we Might Know about Coronavirus

The virus itself has an estimated case fatality rate between 1-3%. Meaning an estimated 1-3% of people who have the virus die from it.

Source: https://en.wikipedia.org/wiki/Coronavirus_disease_2019

By comparison, in the 1918 “Spanish Flu” epidemic the case fatality rate was estimated to be 2-3%.

I think it is valuable to keep this in perspective by comparing it the the standard influenza virus or “flu”. So far in the 2019-2020 flu season in the United States, there have been between 32 to 45 million flu illnesses and 18,000-46,000 flu deaths. By my calculation this would be a case fatality rate between 0.04%-0.14%.

Source: https://www.cdc.gov/flu/about/burden/preliminary-in-season-estimates.htm

The case-fatality rate is the number of confirmed cases divided by the number of confirmed deaths.

Of course there will likely be many more people who have or had COVID-19 that were never confirmed cases. A healthy person with flu-like symptoms might never go to the doctor and get tested and recover on their own. It is also possible there are people who have had COVID-19 that never showed symptoms and they would not count towards the number of people who have been infected.

In my opinion the number of confirmed deaths of Coronavirus is likely to be more accurate than the number of people infected. If someone dies of flu-like symptoms they were probably hospitalized before they died and were tested.

The point is there are a lot of unknowns. The stock market doesn’t like unknowns. At this point we don’t know if COVID-19 will become an epidemic or not.

What this Means for Your Wealth

I confirm from personal experience that making financial (or any other decisions) from a position of fear, panic or anxiety will almost never result in a good outcome.

While it can be easy to invest heavily in stocks or other higher risk assets when times are good, a 13% correction is a good reminder of the importance of diversification into a variety of non-correlated asset classes.

Even though gold has under performed stocks since the 2008-2009 financial crisis, the yellow metal has done well in the face of the Coronavirus panic.

Psychologically I think it is easier to keep calm and not panic when some assets are going up, as opposed to when all your holdings are dropping in value.

I have actually been underweight US stocks, missing out on some gains over the past 10 years, and will attempt to use this selloff to carefully and slowly build more equity exposure, cognoscente that stocks could always fall lower, particularly as the US enters election season and the uncertainly and volatility that could produce.

While I think that gold probably will go higher, with it trading at a six plus year high, it could be a good time for some profit taking for those over-allocated.

Trump and Powell Meeting

Trump and Powell Meeting

Stock valutations in the United States are no longer driven by profits, future earnings, productivity or any other free market measure of value. Instead they are controlled, in practice by President Donald Trump trade war tweets and Fed Chair Jerome Powell’s comments about future interest rate levels.

These two economic central planners met on Monday the 18th to talk about “Everything”.

Trump

Trump has already made clear he wants negative rates and more quantitative easing. He mentioned discussing negative interest rates with Powell.

“Trump called the meeting ‘very good & cordial,’ adding that ‘everything was discussed,’ including interest rates, negative interest, low inflation, easing, dollar strength, and its effect on manufacturing, trade with China, the EU ‘& others, etc.'” (Emphasis added)

Source: https://seekingalpha.com/news/3520154-trump-powell-meet-talk-everything

Powell

Powell sounded like a 3 year old parroting some rehearsed line, stating monetary policy will be set to support maximum employment and “stable prices”.

The Fed’s target for price inflation is 2%. Which means that the value of a dollar will be cut in half in about 36 years. This is hardly what I would consider to be price stability.

On the topic of “maximum employment”. The unemployment rate is at a half-century low of 3.6%. To have a lower unemployment rate you have to go back 50 years to 1969.

Unemployment Rate
Source: bls.gov

Do interest rates need to be below the level of inflation in order to support maximum employment?

A Health Person on Life Support

Interest rates are at 1.75% and central bank balance sheet growth has resumed. These are the kind of extraordinary life support measures seen during economic crashes and recessions.

If the economy is healthy, vibrant, growing and strong you don’t need to pump it up with stimulants and preventative measures. Yet these extraordinary measures have been going on for a decade.

Say you have a patient in a hospital. The doctor says they are fine and doing great. However, we’re going to pump them full of antibiotics, keep a morphine drip and IV going, and hook them up to an iron lung, “just in case”.

You would rightfully be suspicious of that doctor. If the patient is fine then why do they need all of those extraordinary life preserving measures?

It seems clear to me the Fed is keeping interest rates low for some reason other than price stability or supporting maximum employment.

Online Sales Taxes on eBay and Etsy

Online Sales Taxes on eBay and Etsy

Within the past month or so online marketplace sites like eBay and Etsy started collecting sales taxes. This phenomena was a result of a flurry of states passing legislation targeting these types of sites. More states will inevitably follow.

Source: https://www.etsy.com/seller-handbook/article/marketplace-sales-tax-where-etsy/321914904041

I started noticing back in 2017 that more and more of my Amazon.com purchases have required the payment of sales taxes as well.

Source: https://en.wikipedia.org/wiki/Amazon_tax

But this recent scourge of legislation is tied to a 21 June 2018 supreme court case: South Dakota v. Wayfair, Inc. in which the court changed their mind about state’s ability to collect sales taxes on purchases from other states.

Online Sales Taxes are Bad for Consumers

These online sales taxes are just in time for the busy Christmas shopping season. Among the many benefits of online shopping was that it was normally sales-tax free. Tax savings are partially offset by having to pay for shipping. But in many cases, depending on the price, size and weight of the item being purchased, this was less than the taxes would have been.

online sales taxes
Online sales taxes means unhappy consumers

There are fewer and fewer ways to shop online without paying sales taxes.

Online sales taxes are a regressive tax hike on the lower and middle classes who spend a higher percentage of their income on goods and services.

Sales Taxes Saps the Motivation of Producers

Never mind that the company making the sale pays taxes on their profits. Forget the buyer paying for the item is doing so with money on which they paid income taxes. These taxes aren’t enough for states that want to charge sales taxes as well.

There really is no limit to how big a slice of cake the government thinks they should get.

Online sales taxes are a regressive tax hike on the lower and middle classes who spend a higher percentage of their income on goods and services.

A person buying ingredients and spending time baking a cake ought to get the most benefit from that labor. At its most extreme, not being able to benefit from the fruits of one’s labor is slavery.

Most people enjoy having goods and services so it makes sense to live in a society that motivates and incentives people who produce to goods and services.

Societies that punish producers of goods and services tend not to have a lot of goods or services.

At a certain point people start to feel that the government is getting too much of the cake. A baker might decide they aren’t benefiting enough from their labor and they stop making cakes.

Bad for Small Business

One of the biggest burdens besides the consumer is the small seller. Companies like Amazon.com have entire legal and accounting teams that can navigate the myriad of state, federal, and local taxes.

Big conglomerates can afford systems that track how much is due based on the location of buyer and seller. Smaller players are less able to manage the complexity the number of tax jurisdictions an online seller would need to be responsible for.

All in all online sales taxes benefit the government and to some extent large businesses. Online sales taxes hurt smaller competitors who are less able to deal with managing tax collection on behalf of the government. It’s bad for consumers and small businesses.

Just One More Problem in the Economy

There were already numerous economic headwinds facing the United States and this is one more. While many States are essentially insolvent, Illinois being one of the worst offenders, it makes sense that they are desperate to increase money flowing into their coffers to offset the unsustainable promises they are obligated to pay out.

However, until there is real reform of government spending, increasing taxes will ultimately hurt the lower and middle class and shrink the economic pie being divided up, resulting in everyone being poorer.

Dueling Central Planners

Dueling Central Planners

Central planners President Donald J. Trump and Fed Chair Jerome Powell both spoke regarding the US Economy this week. Trump was Tuesday; Powell Wednesday.

One interesting quote from Chair Powell’s prepared remarks were the following: “Nonetheless, the current low interest rate environment may limit the ability of monetary policy to support the economy.”

In other words if the economy goes south, the Fed won’t be able to do much to prop it back up.

This assumes rates don’t go negative (like Trump is already calling for) or Quantitative Easing (QE) isn’t further expanded (which Trump has also called for). With those in mind, the Fed still has tools at it’s disposal to wreck the dollar and re-inflate asset bubbles.

Powell also read, “In a downturn, it would also be important for fiscal policy to support the economy. However, as noted in the Congressional Budget Office’s recent long-term budget outlook, the federal budget is on an unsustainable path, with high and rising debt: Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”

As he states the obvious, Powell is of course correct about the unsustainable federal budget.

Seeing as how the Fed is empowering the Treasury to go deeper and deeper into debt it is ironic that the Chair of the Fed is concerned about the debt.

Powell also mentioned his “In no sense, is this QE,” Quantitative Easing program: “To achieve this level of reserves, we announced in mid-October that we would purchase Treasury bills at least into the second quarter of next year and would continue temporary open market operations at least through January. “

Source: https://www.federalreserve.gov/newsevents/testimony/powell20191113a.htm

Trump’s Tuesday Speech

Trump, no surprise, was more bombastic.

In his Tuesday speech President Trump called for negative interest rates. He is further complaining the Fed isn’t working with him and that interest rates were cut too slowly.

While touting the stock market at all time highs (which he once called a big, fat, ugly bubble), Trump purports the stock market would be 25% higher if not for the Fed.

Trump is the Bubble-Blower in Chief. He basically wants the kind of sweetheart deal Obama got.

He also mentioned a desire for more tax cuts. Tax cuts are fantastic and important, but without cutting spending they will only increase the unrepayable and unsustainable deficits.

All of this should be good news for gold. While the yellow metal has not dropped through the $1450 resistance line, it is hovering just about it.