Status Quo is no more

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Last quarterly newsletter headline was: “Sell your extended-share-price stocks with falling growth. Otos will help to isolate the best sell opportunities now. We are very likely to see lower and potentially much lower share prices as the cyclical decline in growth sets it. More important, Otos will see clearly the timing of when to buy back, so sell now and rely on Otos.” The recent steep decline in stock prices will alter the status quo in ways that cannot be known. That is why it is so important to make the shift to active management now.

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Q4 2019 hedge fund letters, conferences and more



No V Shaped Recovery This Time

The single purpose of the massive money response from central banks during the financial crisis (2008) was to preserve the status quo. When the crisis reached its peak in early 2009, US companies where achieving broadly higher profit margins and company cash was accelerating. The market recovery was sharp and v-shaped.

The recovery from the current decline will not be v-shaped. Money policy is already exhausted and this time, it is people who need a bailout rather than companies. Meanwhile company growth has been falling at a more rapid rate in recent quarters and the average gross profit margin fell in the third quarter for the first time since 2015 and from the highest level in history.

Company cash flow is falling and now likely to fall at a more rapid rate, at a time when debt levels are very high and interest costs cannot go lower. The massive cash infusion from the U.S. treasury announced this week is mostly a corporate bailout, reduces risks in the short-term, providing an opportunity to sell all bonds.

We have already seen the unprecedented jump in unemployment as companies seek to conserve cash as revenue drops. Next will be widespread dividend eliminations and then loan defaults.

Families dealing with cash concerns will respond the same way (only with no dividends to cut it is loan default right away). Widespread defaults on mortgage payments, rent, taxes, and student loans will place stresses on the financial system that the financial crisis did not. It is unlikely that a check from the Feds is going to the pay the mortgage, much less the taxes.

The effect of the response to the financial crisis in 2008 was very low-cost money and plenty of money available to lend. Add a tax subsidy (MLPs) and federal loan guarantees (coddle the banks) and it is little surprise that energy companies expanded their capital expenditures and added huge volumes of debt to expand fraking. Then, beginning in 2014, the result was a global oversupply and a persistent downward pressure on oil prices to the current all-time low. Widespread bankruptcy in the energy space that will now get much worse. (Fed subsidies for energy were in the recent mega-bill).

Shift To Active Management? Now Consider Real Estate

The effect of the response to the financial crisis was very low-cost money and plenty of money available to lend. The 2008 crisis had a minimal impact on the cash flow of families so after a few foreclosures (mostly financed by hedge funds that, after getting a huge cash infusion from the Feds set about buying foreclosed properties, switching them to high cost rentals and putting people on the street. All with the help and support of the Feds (they guaranteed the mortgage) and the Sheriff who enforced the foreclosure order.)

The result was a huge boom in real estate and in real estate investment vehicles (REITs) all deeply in debt. This is now the same oversupply that destroyed the energy industry and from the same set of incentives set up by the policy response to the financial crises. People are now discovering that they occupy twice as much real estate as they want or need.

With widespread default on mortgage payments to appear in the next few weeks, there will be cuts in dividends (REITS can only pay out what they earn). Because debt levels are very high and profit margins are very thin, REITs, will begin defaulting on their own loans this summer.

This time mortgage and rent defaults by families will be so widespread that foreclosure orders will be stayed (not enough Sheriffs), and loans will be written off. This is a much larger risk to the banks than the financial crisis was.

The current mega-bill does little to ease the cash flow stresses on families that will almost ensure that they will default on the mortgage. Our experience in the energy industry in the past 5 years will be repeated in real estate in the next five.

Sell Sell Sell While You Can?

(Not investment advice)

Talk about the opportunity of a lifetime. Sell all but your best quality REITs (Otos will help you find them) all banks, all bonds except treasure bonds (their day will come but not yet). Last week’s flush of liquidity and fanfare about the bailout, results in what could be the last liquid market for fixed income securities for years.

This will alter the status quo in ways that cannot be known. That is why it is so important to make the shift to active management now. Empower yourself with data and analytics that has identified every market peak and trough in the past 50 years. Register at Please remember Otos in your money and investment conversations.

I will very much appreciate your referrals and participation now. It is likely that whatever shape the recovery from this system re-boot takes, Machine learning and AI will be an important component of it. Otos leads the way. Please talk to your people about the opportunity that is Otos.

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