Clients and friends of our firm:
The Wolf is at the Door
Our February 27th note carried a warning that it was not a question of if but when Covid-19 would spread in the United States. That time is now immediately upon us. The next several months are likely to be unprecedented in modern day America. This is real. It’s here and it’s ugly. We have been preaching the validity of this threat since late January, but for the average American it has taken the news regarding Tom Hanks (he and his wife are infected with Covid-19) and the numerous event cancellations to finally make the pandemic hit home; shattering previous illusions that the virus was a hoax, a product of the media, China’s problem, or a political ploy. Here’s where we stand at the time of this note:
- Investors are gripped with fear. The stock market is plummeting.
- As I type, today is the stock market’s worst day since 1987.
- The World Health Organization (WHO) has finally done what we thought was inevitable and declared Covid-19 a pandemic.
- Worldwide, approximately 4,600 people have died due to Covid-19 (we suspect the true number is much higher if an accurate accounting of Chinese deaths were given). Barring a miracle, we expect that number will escalate rapidly over the next several weeks / months.
- The United States has banned all travel from Europe (excludes the U.K.).
- The NBA has postponed the rest of its season after Utah players tests positive for Covid-19. Other sports leagues and tournaments will follow soon.
- More than 100 universities have cancelled classes. More will follow.
- The Pope is not going to Mass.
- Prime Minister of Canada Trudeau’s wife tests positive. Trudeau self-isolates.
- The world’s economy is in immediate jeopardy.
Are you panicking? Perhaps a better question is are you tired of being told not to panic? Our view is that telling people not to panic is hollow advice if it is not backed up with a solid plan and specific reasons for not panicking. That’s our goal with this note. We can’t solve the pandemic problem, but we did anticipate the potential for a crisis of this magnitude. Thus we entered the market selloff with the largest cash levels in our history and a good plan for the future. Make no mistake; it’s still painful. But we’re weathering this far better than most. Your team at Blackwell Boyd remains clear-headed and steadfast in what we believe is the best path forward. Fear is ugly. But fear creates unprecedented opportunity for those that can keep a cool head and have the cash to take advantage. Allow me to return to a quote from Warren Buffett that we gave in our last blog:
“I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.”
We’re now seeing the fear. Before it is over this crisis will provide opportunities we have not seen for years. We are positioned to take advantage. We see no need to rush in, but we know specifically what we want and what we’re willing to pay for it.
How long Will the Crisis Last?
Ready for some comforting words? We are now seeing relatively good news out of the Far East. It appears that the Covid-19 Crisis has peaked in both China and South Korea. We are still somewhat distrustful of the data published by the Chinese government, but reliable data from Apple and Starbucks now supports the government’s claim that the crisis is abating. Both Apple and Starbucks have reopened almost all their stores in China. In South Korea, the daily count of new cases of Covid-19 is starting to decline. Further, the drastic measures recently taken in the U.S. in restricting travel and cancelling events should mitigate the spread of the virus here. Make no mistake, barring news of a vaccine (not likely for another year or so), this gets much worse before we see relief. But based on the precedent of how the virus has behaved in countries that had a significant head start on the U.S., we anticipate seeing light at the end of the tunnel by early to mid-Summer
Investment Plan: A World Starved for Income Yield
When we do emerge from this crisis, investor confidence will be shaken. We do not expect a quick or V-shaped recovery in the markets. It may be a slog for quite some time. But with global interest rates at historical lows, we see with clarity a post-crisis world that will be starved for yield. People will need a safe place to earn some positive return on their money. Investors will still need to save and invest for retirement, college for their kids, etc. Savings accounts will pay next to nothing. Money market accounts and CDs won’t either. Even ultra-safe U.S. Treasury bonds and other traditional safe havens will simply not provide much income yield. Thus we believe safe, dividend-paying stocks with solid businesses and great balance sheets will be in much demand when we come out of this. That’s already the bulk of our holdings, and it remains our focus as we selectively begin to use our cash buying into this panic.
Panic Becomes Our Ally
Let me briefly cover some specifics of how we trade. Almost exclusively, we use limit orders. Perhaps an analogy which will help visualize our trading process is to compare our trading process to buying a home. If you have bought a home, you likely chose a house you thought would be a great fit for you and your family, and would make a good investment. But you most likely did not agree to pay the seller’s asking price. You made a bid that was lower than the asking price. That’s essentially what we do. Each day we make a bid for our target securities. But here’s where the comparison differs. When you bought your home, you needed a place to live and some amount of emotional attachment may have influenced you to raise your bid. Meanwhile, we can wait with no pressure to get our price. That allows us to be cool, calculating, and emotion-free. We don’t have to have a ”house”. We’re entering buy prices that we feel are nearly ridiculous, and in many cases they are being filled by panic-driven selling.
To be clear, we feel no compulsion to rush your cash back into the market. We did our selling in advance when the market was healthy and people had great confidence. But now that the market’s confidence is clearly shattered, we have the luxury of being able to pick through the rubble. From this perspective, panic is our ally.
A Last Word on the Value of Cash Flow
Your monthly statements this Spring are going to be ugly. Better than most, but still ugly. But keep in mind that as we have built our current portfolio on high quality dividend payers, you will continue to see consistent cash flow paid into your account even through the crisis. For our two major strategies, the current average yields we expect to see for the next twelve months are as follows:
Palmetto, Growth and Income: Approximately 2.9%.
Live Oak, Income: Approximately 5.7%.
Thus a $300k balance in Palmetto is expected to produce cash over the next 12 months of approximately $8.7k, regardless of market fluctuations. A Live Oak account of similar size is expected to produce cash flow of approximately $17.1k. Your accounts remain liquid and cash-flow producing, even through the depth of the stock sell-off.
So this is why you should not panic. There are tough days ahead for our country. But cool heads and good plans will ultimately win out. We will remain in contact and may err on the side of over-communicating for the near term. There will be a day when a vaccine is announced or that we are past the peak of the crisis. But until then we’re working long hours and will remain available to our clients. My direct line is below. Todd’s is (843) 290-9172. Michael can be found at michael@blackwellboyd.com for any administrative needs.
Take care. God bless… and wash your hands!
Jonathan Boyd
Direct: (843) 540-1149