Michael Steinberg

Buy the Future

I note that I have not posted in the past year.  The explanation is simple.  The social and political divisiveness compounded by pandemic restrictions and government largess have made any rational predictions concerning the economic markets virtually impossible.

Government handouts sloshing through the system have driven the markets to what I believe are unsustainable levels. Nevertheless, irrational exuberance can persist longer than any short can remain solvent. Meme stocks have become the rage and I frankly cheer average investors coming together to pressure institutional markets.  Nevertheless it should be remembered that ninety percent of trading is on the long side compared to ten percent on the short side, yet fifty percent of trading profits are made on the short side of the market. 

Historically “normal” markets based on fundamentals appear to have ceased to exist.  During the past two years riding the tech and meme stocks appears to be a game of musical chairs with money chasing sector rotations on a monthly or even weekly basis. At some point the buy the dip trend will cease to function and it will probably be an ugly retracement, possibly a major bear market. As Warren Buffet has said, “A rising tide may lift all boats, but when the tide goes out, you see who is swimming naked.”  However, until there is a black swan event, the path of least resistance remains upward through the end of the year barring any fiscal lunacy from Washington.  Unfortunately there are numerous gray swans that could turn black at any moment, i.e. The Chinese credit markets if there is a complete collapse of Evergrande or Europe’s inability to bring the integrated economies back on line in light of the refugee crisis, the after effects of Brexit, or the looming energy crisis caused by the drought effect on hydroelectric production.  The most likely triggers are a Fed misstep, Congressional failure to pass infrastructure legislation with or without the 3.5 trillion social welfare bill the Progressives are pushing. Or….take your pick of any number of unforeseen happenings.

In “normal markets” a company’s health and growth prospects may be judged against its balance sheet.  It is still possible to assemble a “coffee can “portfolio by purchasing strong dividend paying stocks when they have significant pull backs. This requires patience and holding cash on the sideline at a time when the current meme is that cash is trash. 

Whereas I am a fundamentalist who uses technical indicators to buy and sell long term positions, my friend Jake Bernstein is purely a technical trader and doesn’t care anything about fundamentals, but only short term indicators. He is a day trader and rarely holds any positions overnight.  I can understand technical traders, but I am at a loss to make any rational sense out of the Robin Hood meme traders.  Certainly if there is a concerted attack on an over shorted stock it is possible to make considerable profits in a very  short period of time as short sellers force up the price to cover, but how can the average trader know when the shorts have covered and the price will drop back inflicting sharp losses.  Witness AMC and Gamestop as prime examples.

It is clear we are entering a period of enhanced volatility that will be driven by news events and Fed policy.  What is particularly frightening to me is the apparent disregard the markets have for supply chain disruptions caused by Covid and natural disasters.  The growing backlog of container ships waiting to unload on both coasts makes it appear Christmas will be delayed this year.  There is a chain reaction occurring.  Foreign ports work around the clock and are coordinated to their warehouse facilities.  In the US, union rules, single or double shifts instead of twenty four hour coordination and a simple lack of drivers is creating delays that are unlikely to be resolved before February of 2022 and possibly much later.  All of which is driving “temporary” inflation into fears of ‘70s style stagflation.  Ironically such periods tend to be very good for small, innovative growth companies.

Given the current uncertainties, I am reluctant to buy any of the major tech stocks, ETFs or mutual funds that are invested in high flyers with extended price earnings ratios.  Try to visualize that a stock with a P/E of 100 means that at the current price level it would take 100 years to recoup the price of the stock at the current earnings level.  I do not believe that the third and fourth quarter will be as good as anticipated and the slowdown may well extend into the New Year.  Building back inventories may help GDP, but only if there are end buyers.  How will the end of pandemic assistance and the end of the moratoriums on evictions and foreclosures affect the economy going forward?

Given the uncertainties the use of options makes more sense than outright stock purchases. There is greater leverage and lower capital risk.  There is a misperception about options.  They are simply tools of the market place and if used properly, can greatly enhance the opportunity for a positive trading outcome.

I have been using the current period to trade short term options and to research a sector list and individual companies that I believe will have significant growth going forward almost regardless  of the broader market action.

The classic saying on Wall Street is Buy the Future as you will spend the rest of your life there.

The following sectors are obvious growth candidates, but are not currently main stream.

Mining:  Lithium and rare earth miners.  Helium producers in particular are not often thought of, but are critical for technology production.

3-D Printing:  not only materials production, but also biological tissue printing of organs.

Genetic splicing is a fast growing area that will only be hampered if there is a moral backlash. Crispr stocks in particular will benefit.

Semi-conductors, particularly specialty chip manufacturers.  Witness the current bottleneck in production pipelines for want of sufficient chips.

Electric vehicle infrastructure.  Forget about EV manufacturers.  There will be too many and there will be an eventual shake out.  Concentrate instead on charger manufacturers who will build out the charging networks, focusing on high speed chargers that can charge any EV.

Natural gas infrastructure with particular emphasis on natural gas buses, engines and storage and handling facilities.

Drones in all categories from military to civil from package delivery to air taxicabs.

Nanotechnology for everything.

Fintech software, this is a tricky area as there is a new product available almost every day and it is impossible to know which will be successful.

Senior living facilities whether as senior communities or long term care facilities.  The growth here will be driven by the baby boomers with a large part of the expense picked up by the government.

This is hardly a complete list, just the most obvious where there are a multitude of companies that can be researched for balance sheet fundamentals.  Waiting to do research may cause you to miss a runaway to the upside, but it is also likely to prevent catastrophic losses to the downside.

Michael14Steinberg October 5th, 2021

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