Chips Off the Table?

Join Chris Perras for the 1/29/2021 edition of Stock Talk!

Chris Perras: Hey. Happy Friday. My name is Chris Perras. I’m the chief investment officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our January 29th weekly Stock Talk podcast: Keeping You Connected to Your Money. This week’s podcast is titled February Downshifting, Taking Some Chips off the Table. Now admittingly, I started writing this podcast on Tuesday earlier in the week, but the market’s near all-time highs and 99% of the markets calm and uneventful.

Since then, what we’ve seen is some wild swings since Wednesday through today for reasons we will discuss later. We previewed this time period now for almost six months. What am I talking about? I’m talking about the time period in mid-first quarter 2021 post earnings reports since the pre-presidential election last year and the beginning of the fourth-quarter rally that started on October 28th, 30th.

The team at Oak Harvest has been discussing a normally turbulent period that would most likely start sometime in between very late January and February 3rd, next week, and lasting through most of February, possibly into mid to late March during the first quarter dead zone. A number of reasons we’ve seen that this is most likely time for some decent seesawing and increased volatility, let me name a few. The calendar is flipped to a new year and had you been lucky or skilled enough to buy the COVID-19 bottom in mid-March, late last year, you are now approaching a one-year holding period, which is an incentive by way of long-term capital gains rates to finally start taking some profits if you’re an investor rather than a short-term trader.

Number two, fundamentally, I see evidence of double ordering throughout many supply chains as many customers are loath to miss a sale. What do they do? They place multiple orders throughout their supply chain, hoping that each order is partially filled. This is particularly likely going on and of note throughout the semiconductor supply chain. As you recall, President Trump’s administration had imposed numerous constraints on both the timing and quantity that many semiconductor companies here in America could sell to a very few large Chinese technology companies that are considered to have military ties.

It’s safe to say that many of these Chinese companies then just either double or triple ordered in advance of those deadlines or went onto other foreign suppliers and booked up all their excess capacity for the second half of 2020 and the first half of 2021, leading most other buyers scrambling for supply as a Christmas electronics build happen and strong forecast for 2021 were being built.

This kind of supply chain issue does not just affect one industry. It causes ripples through entire industries that usually last a few months if not a quarter or two. How do you build a car or a truck if you can’t get certain semiconductor sensors that are required by law? How do you build a personal computer if the leading technology chips from Taiwan semiconductor are already spoken for or back-ordered? How do you build as many houses as you projected if the price of lumber has doubled or tripled as it has the last nine months and its supplies being limited by ongoing trade disputes?

This is what you do. What you do is you go to Intel, whose technology is two to three years behind schedule, and say, “Hey, give me whatever you got.” You have what works and you build a PC that has less power or slower speeds, and you ship it and you sell it to, say, Costco or Best Buy because consumers are satisfied short-term buying a PC that they can find on the shelf. You have your contractor, go to Home Depot and he or she buys grade B pickets with knots in them to build your new fence, because you tore down the old one and there is no fence between you and your neighbors, and all the top grade materials aren’t available.

What do we do? We recently took some action after what we thought was an excessively fast rally the last two weeks of January to trim back a few of the longer-term semiconductor and semi-equipment names because of valuation and double ordering concerns. Now, listeners, we love these companies long-term. Don’t get me wrong. Semiconductors are this generation’s plastics, and the fundamentals have obviously been great for the past year. However, when confronted with the question of “Where do you want to invest your next dollar?” well, we are trawling other areas now for the second quarter of 2021 through year-end.

The third area of short-term concern is J&J, Johnson & Johnson, is supposed to be out with their detailed vaccine news this weekend. In the last two weekends that we had positive vaccine news, well, the next Monday and Tuesday, they were up big in the markets, but they also ended up being short-term tops in the market. The final area of my concern short term is I expect a lot of bickering out of Washington, DC during February and March over the ultimate size of the next fiscal stimulus package. There could be a lot of people out there who are short-term disappointed and so they shorten their time horizon and they sell some stocks, or they just stepped back and don’t buy anymore.

We will take any weakness during this time period to become more aggressive once again. What’s our investment team seeing? Like most every other investor watching the markets daily, and by the way, you shouldn’t be watching the markets daily, we have been seeing a massive ramp and exponential moves in many highly shorted stocks such as GameStop, AMC, Blackberry, and more common names to many Houstonians, Dillard’s department store, it isn’t unprecedented to those who watched the cycle the last 12 years or who’ve lived through the 1990s. The names have changed.

Have you forgotten the I, Omegans in the 1990s, or the pets.com crowd in the late 1990s? I haven’t. All that has changed is that the technology these short-term traders are using is different. It isn’t Yahoo! Finance, it isn’t The Motley Fool or the street.com like it was when the internet first was a vehicle for investing in the 1990s. Come on, listeners, you have to remember the 1990s in the financial markets. Go google, and I quote, go google this. “TD Ameritrade, YouTube, let’s light this candle commercial.” Go back and reminisce of the early internet days when baby boomers were driving both the economy and the stock markets.

Nowadays, at least since around 2015 or ’16, it’s millennials and Gen Z driving both the stock markets in the economy and their communities of choice are now the Reddit’s Wall Street bets in Twitter instead of CNBC interviews or a hedge fund invite-only dinner. The only difference between what they are doing, what many of us were doing back in the 1990s trading-wise, is technology and cost. When Charles Schwab introduced fixed fee commissions, it was groundbreaking, and it drove a generation of new investors since it only cost $9 to $10 per trade.

In this decade, well, in 2013, it was Robinhood introducing commission-free trading a few years ago. What did they do? They forced. In 2019, they forced the likes of Schwab, and E*TRADE and Fidelity to follow suit and give away trading for free. Our indicator, it continues to say, be increasingly cautious and go slower in initiating new capital into higher risk, more volatile stocks right into the month-end of January and the first days of February. That’s where we are. Listeners, we haven’t changed our outlook and our strategy for months. Why? Because contrary to the headlines, we have yet to see anything really abnormal in this cycle.

These air pockets that almost always come at least once a year even in bull markets are the real opportunities that we get excited about. Those are the periods when we see volatility that has spiked over multiple weeks as people who are late selling are really panicking. That’s when volatility is peaking. The data hasn’t changed. All the data continues to line up with our team messaging since we wrote our second half 2020 outlook, which was published mid-last year, as well as our recently published first half 2021 outlook.

That message was the fourth quarter of 2020 through early 2021 would show accelerating stock returns with the market making and sustaining material new all-time highs in January, showing what could be an exponential move up to a short-term peak near month-end or early February. Fast forward four weeks from there, and we should be looking at more attractive valuations. Fast forward another four weeks, and we should be looking at the clouds clearing for the rest of the year and volatility plummeting to levels fewer predicting. In a nutshell, that’s our plan. We’re in a bull market, one that has many stocks going too far, too fast.

We released our first half 2021 outlook a few weeks ago by way of a podcast. It’s posted on our website. Go to oakharvestfg.com, check it out. Next week, I’ll preview some of the areas we’re looking for opportunities post-first quarter recovery. We’re looking for companies that are good long-term secular growers but have been hit by an air pocket caused by COVID, and in the meantime, they’re having increased pent-up demand that should come back to the market in the second quarter of 2021 through 2022. At Oak Harvest, we’re comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. Give us a call at 281-822-1350. We are here to help you on your financial journey in retirement through customized retirement planning. Many blessings, stay safe. May God bless you and your families, and God bless America. We are stronger together than we are divided.

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