Client Update from Argent Capital Management
Over my three-decade long investment career I have witnessed two huge corrections previous to this one, and both time felt like they would never end. In 2000-2001, uncertainties caused by the tech bubble bursting, compounded by the events of 9/11, led many to believe we were in a new paradigm, where business as we knew it, was permanently impacted by the threat of terror. You will recall that the world did seemingly stop for a brief time, with the closing of airports and people sealing their doors and windows with plastic sheets in the event of chemical or biological attacks. Eventually, we adapted and “normal” life returned. In what’s come to be known as the “Great Financial Crisis of 2008”, the problems struck at the core of our financial system and the total collapse of our economy was a real topic of discussion. There were massive numbers of foreclosures, banks stopped lending, and old-line brokerage firms shuttered their doors. Even money market funds had liquidity problems. The actions taken to mitigate its damage had many believing that high inflation and permanently high unemployment was the only possible outcome. Again, we eventually adapted and “normal” life returned. Since that time we have had the lowest inflation and interest rates in history, and until recently an unemployment rate below any best-case scenario.
I mention this because most of us, including me, have trouble seeing a quick solution to the coronavirus crisis. How can we shut down most of the world’s economic activity for a time and get back to normal? How can we re-employ the millions who are laid off? How can banks survive when the companies and individuals who borrowed from them have trouble repaying their loans?
Fortunately, investors do not need to accurately predict answers to these. We need to try to remember that this is the seventh huge correction in modern market history, and will almost certainly have a path that traces the previous six. Solutions will be found, albeit over a bumpy road, and corporations will figure out how to profit in the new economy, and “normal life” will return. With that in mind, this is what we are doing, as we have been working long hours trying to best position our portfolios or the rebound:
- For taxable investors we will be doing some tax loss harvesting selling some of the companies at a loss, and repurchasing them in a month. In the meantime, we will typically “park” the proceeds in an index fund so that if the market recovers your portfolio will share in the gains. The savings we can generate on future income tax returns can be enormous from this, and it is one of the advantages of having a seperate account of stocks.
- We are focusing very hard on what we call “upgrading the portfolio.” We obviously like the companies we own or else we would not have purchased and held to this point, but there are always stocks on a wish list that are priced too high to purchase. Some of those companies have seen price declines of huge percentages – we will likely buy a few of those and sell a few we own simply because on a relative basis, given the correction, we like them better.
- We are working hard to determine where something has structurally changed with existing positions. The Walt Disney Company is a current position in our Large Cap Growth Strategy. They have amusement parks that are closed for a time and also own ESPN, a station with very little current sports to show. The also are the biggest movie studio in the world and no one is going out to movies today. On the other hand, they own ABC and numerous cable channels, have the new Disney+ service (which was well-timed given everyone is at home currently) nd have a rock-solid balance sheet. Their value has been cut in half. Our belief is they are a survivor and well-positioned long-term. On the other hand, Huntsman Corporation is a chemical company we have sold. They have also had a huge decline, but it is hard to predict future commodity pricing, meaning they are somewhat dependent factors out of their control. Given other stocks we like beter are also down, we have sold to try and improve the upside as markets recover.
- The global recovery that was still underway into February has been severely delayed, if not completely derailed. Given that some inertia was beginning even before the pandemic, we are looking at the structural impact on our economy once the crisis lessens, the depth and breadth of which is unknown. We could be entering one of the few times in history that fiscal and monetary policies will be in full force. This may change the structure of the next recovery and should lead to opportunity.
We encourage you to call with questions or concerns. We don’t know any more than anyone else when the pressure of current sellers in the marketplace ebb. However, we believe we are close and are working to best take advantage of the opportunities that are inevitable presented by events such as this.
We greatly appreciate our partnership with you and wish you and your family the best in the days and weeks ahead.
John Meara, CFA
President and Chief Investment Officer
Argent Capital Management