Time To Raise Some Cash?

I’m going to let Colin to take the majority of today’s newsletter talking about some moves & actions we did @ LFG.

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Colin Symons, CIO Lloyd Financial Group

Last week was certainly an interesting one. Political football continued with the Iran war and software had a 5% flash crash following a 20% rally, just to name two of the many dizzying events. As always, if we want to invest well, we need to focus on the future. What does the crystal ball say?

First, though, you do need to consider positioning. For our part, we raised some cash last week, selling the rest of Takeda (TAK) and all of Berkshire Hathaway (BRK.B.) With markets up again, was that a mistake? Well, it’s been a noisy market, dominated by semiconductors, so plenty of stuff has been underperforming. Both of those sales have dropped since then. Broadly, while SPX was up last week, the equal-weight version, RSP, was not.

That leaves us with about a 7% cash position to play with. What, if anything, do we want to do with it? Markets usually involve difficult, perhaps agonizing, decisions. We don’t know the future, but we can examine the markets for clues. For instance, we raised that cash when aggressive market hedging disappeared and the performance chase began, which is what we’d been expecting and planned for. That opened the door to make a cash position make more sense.

What now, genius? As usual, I don’t know. I thought we’d have seen more of a drop than we did. Instead, the market was surprisingly resilient, betting on a quick resolution to the Iran war. Personally, that seems a little optimistic to me, but I’m not willing to argue with the market, casually. I do think there will be a resolution eventually, and ideally, we’d get aggressively invested the day before a solid agreement. That’s the bogey.

Of course, we don’t know when, or if, an agreement happens. The market seems confident something good happens, though. That kind of puts the pressure on. My hope and expectation are that the market builds up some worry to give us better prices to buy into. If so, we’ll be fairly aggressive about buying the dips, as many participants seem to be doing the same thing. Dips are likely to get bought.

If we don’t dip and market internals like rates and liquidity stay strong, we have to put our cash position on a timer. If the market seems dead set on going up, we need to be better positioned than in cash. With all that, what’s the gameplan?

The gameplan is very dependent on what the market does. Assuming nothing changes (and it will,) we’d probably have to put some money to work by Thursday. That’s the end of the month, and while relative performance would create a reallocation from stocks to bonds, I view that as just one factor of many. Again, at some point in a strong market setup, you have to get invested.

Of course, it we see market stress, we’ll try to invest around when it peaks. I, personally, don’t mind being fairly aggressive with investing now, as you can get great prices by being aggressive and this market still looks positioned for likely upside. There’s also nothing saying you have to sling it all in at once. You can put some cash to work and reset your timer for the rest.

What do you buy? That’s a question of risk tolerance and current positioning. I continue to believe this is a great environment for potential upside, so I think it’s a better time to be aggressive than most believe. We’re already fairly aggressively positioned, but I wouldn’t mind going even further down that path. We’ve bought a lot of software stocks, and I continue to think that’s likely the best broad place to be, right now, even after the bounce.

Ultimately, we’re looking at an environment where growth is staying quite strong and liquidity is trending up, as is positioning. That’s one where you want to get invested. Yes, that can go wrong, particularly in the short-term. Some war headline or something else can scare markets and lead to a repositioning of risk. As we’ve talked about before, those sorts of tensions are how you make excess returns. Until we see issues in growth or credit, we want to stay invested, absorbing the bumps.

The DOJ dropped their prosecution of Fed Chair Powell, which should pave the way for Warsh to get nominated.

Futures got happy overnight on a new Iran proposal to open the Strait, with nuclear talks held later. That bid has since disappeared and futures are back to modest downside. Honestly, it sounds to me like the sides are getting close but that’s just my opinion.

Oil is up and stocks are down a bit as peace talks broke down over the weekend. World stocks are broadly up a bit, though.

Japan’s Nikkei closed at a new ATH on strong earnings.

On Friday, semiconductors (SMH) became the most overbought in history after rising for 18 straight days and being up 27% over the last month. They’re up another 1% this morning.

Dallas Fed Manufacturing today.

Bottom line: The Warsh news helps bring clarity but Iran tension remains.

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