Markets & Our Outlook: What Strategies Can Help Protect Capital & Generate Returns?

Going forward, we will be introducing a risk and exposure scoring system based on a 100 point scale. This “speedometer” system monitors macro, corporate micro, consumer, and technical factors that roll up into a score that will help inform what our exposures to risk should be. This updated risk dashboard is quant/qual informed. We want the data, our qualitative opinions and the portfolios we manage around it, to all be tied at the hip. We are excited to introduce these new tools and improve them over time. Having an unemotional set of variables to assess and that drives us into the prudent portfolio allocations, should add a significant amount of value to portfolios and in our calls with clients and partners. Stay tuned!
 
Commentary:
Its been a wild 5 weeks as Trump2.0 has gotten off to a very odd & rocky start. We should expect a VIX premium tied to Trump and their approach to leading, at least for now. There were more frequent sharp drops and rebounds during Trumps first term as well. The odds of a recession have now moved from <10% to 25-35%. The markets are reacting to the odds rising. Markets had a strong January but February has been all about defense across the bond and stock markets, a welcome change as these historical "defensives" generally weren't acting defensive when inflation and rates where rising. At least we have the negative correlation of duration and traditional defensive equities now. For how long is anyone's guess. It's clear the market has been extrapolating policy changes into economic weakness as uncertainty causes businesses and consumers to pull back on the throttle short-term. Yes, the administration is playing a dangerous game, there's clearly some arrogance in the believe they can micro manage a $23 trillion economy without knock-on effects. Now that Trump has started a trade war, it could escalate. Or it could de-escalate. Either way, uncertainty has increased significantly, as evidenced by the sharp decline in stock prices. That makes this marketing tricky for both long and shorts given headlines drive daily trading direction. Short-term, markets seem ready for a bounce is my short take.

After a few interviews last week, it's become clear what the administration is focused on: 1)creating uncertainty with rapid-fire, shoot from the hip policy updates happening daily, 2)tariffing everyone, there is no country that seems safe - we need the extra revenue and we want better deals with other countries no matter what the short-term cost to our relationships or the economies in question, 3) austerity in government via DOGE - the govt spending has gotten out of control and needs to be reigned in, bloat is everywhere so they are using a shovel approach to taking out the garbage. There are sure to be negative knock-on effects here, 4) nationalism, protectionism, isolationism, aka the opposite of globalization, which is responsible for much of the economic growth around the world the last 2 decades, 5) lower rates and inflation by forcing consumers and corporations to slam on the brakes as the rules of the road are being created literally on the fly, 6) forcing a slowdown offers the Fed the air cover it needs to start cutting rates again which could begin to stabilize the economy and allow confidence to make a positive u-turn. This will take time, so for the next 2-3 months at minimum, I suspect markets and all asset classes will stay volatile and commitment on the part of long-term investors will be tested. We seem to be in  2 steps backward, 1 step forward mode for now. As far as inflation is concerned, any near-term reductions should be short-lived given most of the policies being adopted are inflationary at their core. I'm not sure we could find all the workers for all the new manufacturing plants we want to build anyway so a lot of this feels more like noise.

The Technical Take:
This week will be very telling given we kissed the 200DMA and bounced on Friday. Some follow-through early this week would be a positive development. We are starting to see some positive divergences develop that are hinting at a rally attempt but the strength of any rallies are what will be most telling. Are they narrow or are they broad? Are they happening on heavier than normal volume or lighter? Are they 1-day wonders or last multi-day? Do we get over the downtrend lines or fail around those levels, at least the first time up? More on that next week once we see what happens.

In hindsight, adding more defensives quicker would have been very valuable as we have given up our lead in the month of February. It's still early in the year so I'm not worried about it for now. Along with the risk scoring system we will be rolling out, I'm contemplating being more systematic about swapping portions of offense for defensive brands once the indexes break the 10 month moving average on a monthly closing basis (we are slightly under this level now but we need a monthly close under it) as well as de-risking on breaks of the 21DMA. When stocks or indexes break this shorter term moving average, lots of momentum money leaves quickly. More on that in upcoming posts. Make no mistake, the selling has been fierce across most of the market, particularly the names with strong momentum and beta. In 1 month the high beta style factor went from the 99th percentile of performance to the 5th percentile. Almost ALL of the relative strength has now been removed and the selling has been aggressive. It’s very rare to see equity sentiment this negative. These readings tend to provide solid forward return even if markets remain volatile for a period of time. The chart below highlights the de-risking by the hedge fund, CTA's and fast money crowd has been more severe than any time in over a decade. Put buying has been extreme. AAII bullish percent is extremely low, bearish extremely high. Fear/Greed index registering extreme fear. Is there any wonder why stocks can't catch a bid?  The good news: There will come a time when uncertainty will improve on a rate of change basis, economic growth will re-accelerate, and a pro-business focus will be more evident. The market has been sniffing out the slowdown from uncertainty and tariffs. It will also sniff-out a positive pivot at some point and all the money that left in a hurray will want back into the US markets also in a hurray. One of my key market rules will come into play: Waterfall declines get retraced. It's just one of those little rules that happens almost like clockwork. The timing is just uncertain. Savvy investors will use these bouts of weakness and uncertainty to accumulate great businesses on sale so the time to full recovery contracts from buying the dips.

I've been a bit gun-shy about defensive equities given they haven't acted defensive for the last few years, but this appears to have changed, even if yields are a bit oversold and TLT is a bit overbought short-term. Last week, most indexes tested the 200 day MA and have held for now. We are pretty oversold but not max oversold in most assets. We have extremely poor equity breadth but its not quite at full wash-out levels yet. We can have an oversold bounce at any point, but until a firm catalyst arrives, I suspect rallies will get sold and markets will stay volatile with the VIX staying in the high teens to mid 20's. If the markets continue downward, I would suspect the indexes could see another 5% down quickly which would get VIX into the mid 30's and breadth to reach fully washed out readings. Its there that a more meaningful bounce could occur. We have rebalanced the offshore dynamic brands fund and added significant "defensive brands" exposure based on some research i've been doing the last few weeks. 

I look forward to presenting a new Defensive Brands Portfolio that can be used as a side-car to other brands core portfolios or be the go-to brands model when us or clients want to stay engaged in equities but with alot more defensiveness. I'll show some great new datapoints at IC this week.
 
36% Defensive positioning now: Autozone, Berkshire Hathaway, Coca-Cola, L'Oreal, Mcdonalds, Nextera Energy, Pepsi. We will monitor the relative performance to the SPY on down days and can add even more defensiveness if we are not outperforming on down days. Ex-some large cap-gain restraints in HSUTX, we will do the same in the fund, particularly on any rallies that allow us to sell and reposition into more defensive brands on a pullback in these bond proxies. Any back-up in rates could offer solid entries into defensives at better prices as they reach overbought conditions at the same time the higher beta brands reach oversold. The International Brands portfolio is the leader YTD by a country mile, a tribute to the high quality nature of these brands and the heavy exposure to the regions of the world that are trouncing the US, at least for now. Trump seems convicted to drive flows out of the US given the uncertainty hes creating so Trump really is MAKING THE REST OF THE WORLD GREAT AGAIN. At least for now. I see no pro-business focus yet from Trump, first he needs to create the storm that he can say he saved America from.

The Good News:
If you have some duration, 2025 is shaping up to deliver wonderful buying opportunities to build bigger positions in high quality companies and brands. Buying when they are on sale is the only way solid returns happen. We advise to buy in tranches as prices come down and be willing to absorb some volatility along the way. Valuations are being re-set, that helps forward return expectations. America still has the most innovative companies and they are being put on sale as we speak. Its very hard to know where the market goes short-term, but this current bout of uncertainty is self-induced and the administration will not push this uncertainty theme forever. They have stated their goal is to cause uncertainty now so we can have more certainty and better economic growth with a better trade and deficit situation long-term. If the end is accomplished, the means that causes short-term pain and VOL will be worth it, particularly for those willing to step-in and add on these dislocations. Better prices near term, for better appreciation in assets longer term. Strap on your seat belt, the captain (Trump & Elon) is flying right into the storm in order to reach the desired destination more swiftly and on better footing. This plan is not without risks and the current environment likely warrants more defensive exposures in portfolios, which we are deploying now. Once we see a more reliable washout signal or a policy pivot, we will be happy to swap defense out for more offense at better prices so the stock recovery can be just as swift. Until that time, we intend to stay focused, stay balanced, and will upgrade the portfolio as prices get too hard to ignore. Buy fear, it’s when prices are the most attractive!

DOGE - Govt Efficiencies Are Everywhere

There’s been alot of talk about Elon Musk and the government efficiencies that COULD be captured over time. We all know the government is about the most inefficient of any organization in this country. Our politicians and staffers spend like drunkin sailors and they lean on the USD being the reserve currency and our ability to print money at will. No more DC. Interest rates will not go down unless we either go into a deep economic downturn (not a compelling outcome), or get very serious about balancing the budget and cutting all the wasteful spend. Now that we have outsiders involved, those that have only 1 endgame, savings, we have a nbetter opportunity to make real headway than ever before. To be sure, it will not be easy. Bad muscle memory in the form of waste runs deep in DC but when you make these decisions and the waste very public, the abusers tend to scurry away and hide. That’s what we want. Bottom line: the market is NOT priced for proper efficiencies being accomplished. Any success on this topic will be well rewarded in the equity markets, bond markets, and rates should fall which would stimulate the housing sector which is a big employer in America. IMO, one has to have some “shelter” exposure that’s correlated to falling rates, for the good reasons. This would be home improvement brands like HD, LOW, SHW, BLDR and home builders like DHI, LEN, home furnishing brands RH, WSM, ARHS, and private equity brands BX, KKR, APO and even BLK and GS now getting more focused on their alts divisions. Blackstone has almost $300B in real estate assets so any fall of rates for the good reasons would make that stock really get some giddy-up!

The above is a great chart from Brad Gerstner’s Altimeter Capital highlighting the benefits of reducing spending while keeping the normal revenue growth trajectory we are used to. It’s absolutely doable and for the first time in my life, it’s an actual policy goal with high motivation. Bond Vigilantes beware!

Futures Tank on Trump Tariffs

Well, futures have opened and the sellers are back on the continued news of sweeping tariffs across Mexico, Canada, China, and the EU is surely coming. Trump just loves to be a bull in a china shop. Let’s hope the smart folks around him remind him sentiment is a fickle thing and so are his approval ratings. His ego needs to be stroked and he uses the stock market as his score card for success. So far, he’s starting off with a D-.

The three largest trading partners of the U.S. are: Canada, Mexico, and China. The proposed tariffs will affect trade worth about $1.3 trillion, or 43% of US imports. Again, the result of all this lunacy is likely A)high market volatility, B) slowing economic growth, C) higher persistent inflation, D) wild volatility in currency markets, E) added retaliation against the US from these countries, which simply creates a wicked negative feedback loop. Get your trading cap on and keep it close for the next 4 years, thats where the most money will be made. This is what markets will look like 4 years looking backward.

Tariff-Man Strikes Again: Canada, Mexico, China, EU; "We Comin"

Who wins most when Tariff-Man pushes every leader the US is connected to? Algo’s & Volatility. You can be VOL’s girlfriend or you can use VOL to line your pockets with cash. I know which one I prefer. Everyone knows by now what Trump’s playbook looks like. For this reason, I expect more friction between Trump and other world leaders and countries. If I was the leader of a country being tormented with Trump, I would probably torment him back and call his bluff ALOT. Trump, the man who is happy to push too hard, is playing a dangerous game. Friction, volatility and noise causes uncertainty and that causes businesses and consumers to flinch at times, which can cause economic slowdowns. Those are tied directly to stock prices so Trump, who uses the stock market as his barometer for success, is risking the positive wealth effect and markets to line the governments pockets with tariff cash so he can push tax cuts to consumers and companies. It’s like creating a ton of volatility so he can steal money from our left pocket and put it back in our right pocket. The whole thing is idiotic but consider the source!

There is sure to be plenty of tariff news this weekend and the degenerates trading futures for 5 ticks will be licking their chops come Sunday. We should all expect inflation to continue to stay elevated and volatile month to month. For now, the consumer is spending well and the industrial economy is slowing beginning to wake up. There’s alot more to be excited and positive about than you are seeing in the news. Remember, fear mongering is always an effective tactic to get you glued to the media. Once they have you captive, they can monetize your fear into more ad dollars. Don’t get sucked into the FUD (fear, uncertainty, doubt). We’ve seen this Trump movie before, we know his playbook, we know what he cares about (our admiration and stocks), and we know he wants his legacy to be viewed as positive. It will all work in the end, until then, buckle up for a wild ride.

The AI Bubble is Leaking

If you’re an Eagles and Chiefs fan, it was a great weekend. I am in fact an Eagles fan, they always keep us on the edge of our seats but wow did they look good Sunday! Over the weekend we started hearing more and more information about the Deep Seek Chinese AI models that where supposedly cheap to build ($6m), and just as effective as the best American models. Color me skeptical about the cost and how many Nvidia chips were required but with such a massive crowded trade across the chip, power, datacenter, and memory universe, I was expecting a rough day for tech today and largely that’s what happened. What was most interesting to me today: NVDA was -17%, Vistra (energy) -28%, XLK -4.9% and yet 2/3 of the market was green on the day. Massive and positive moves happened outside the blast zone as money rotated out of the most crowed names and moved into other tech via AI beneficiaries as well as companies that would benefit from cheaper costs to deploy AI tools. The brands portfolio held up like a champ today because we are massively underweight tech because of our view it was too crowded. Remember, there’s about $2.8 TRILLION in tech sector ETF’s, about $13 trillion that’s benchmarked to the S&P 500 with tech being the top weighting at 35%, and trillions more across the active fund complex and growth style boxes. As I’ve written many times over the last 12 months, when crowded trades unwind, even a little, they can be disruptive and unsettling for a period of time. Imagine the positive benefits to high quality company shares if they get just a fraction of the flows from the world’s largest and most crowded trade. That’s a large wave coming to a very small shore where the “rest of the market” is concerned. I sincerely hope this is a warning sign investors will heed as a reminder to make sure they have proper diversification. The momentum factor is a good one but it crashes on occasion, particularly when it gets wildly crowded like tech and semiconductors are today. There will surely be opportunities in many of these names in the coming days but for now, I want to watch how the most popular stocks trade and what kind of volume they show. For now, the group is a trading vehicle for us.

Did Stargate, Sam Altman and Masa from Softbank ring the bell with the idiotic $500B+ AI spend announcement? It sure feels like a headline that marks at least a short-term top. Masa being aggressive in anything continues to be a wonderful contrarian signal.

Here’s how the Brands portfolio looked at the close today. I’m anxious to add to the Alts basket and COIN along with more American Express, and some pure retail.

Trump is Back!

My job is to make money for clients. Full stop. In order to accomplish my goals, I have to navigate through economic data, macro data, and corporate micro data, aka company earnings and trends. Ultimately, its earnings and growth that drive equity prices but prices of all assets can fluctuate wildly during short periods of time. As we start 2025, we must all remind ourselves that algo’s and other systematic investors drive the day to day volume on exchanges. This reality is just as important to consider as the other factors I stated above. When I got into this business 30 years ago, investors drove markets. Today, trading and very short-term thinking drives markets. We live in an A.D.D. world where a new get rich quick theme seems to develop daily. These are distraction folks, do not lose sight of the real price: having a solid nest-egg for retirement. My daily mantra is: “we trade the market we have, not the one we want”, this will forever be true. A few days before the inauguration, the reality of Trump became completely clear; their camp intends to be in the news daily and fully intends to monetize their power like no other politician has in history. Welcome to the meme coin mania folks, the daily dose of Trump is akin to our daily vitamins, we don’t want them but we are going to get them! In crypto, the Trump & Melanie meme coins are backed by air, fart coins air is particularly foul, and more meme coins for every one of Trumps family are incoming. Will the Barron coin smile? I mean the kid needs to smile once in a while. He’s got the world by the short-hairs!

This week, we had the AI revolution get a big boost by, you guessed it, a Trump announcement. It’s these kinds of announcements that get the algo’s moving aggressively, I enjoyed jumping on the ORCL train and selling the stock the next morning at the open +13%. That’s how we make money in an ago-driven world! Sam Altman of OpenAI could be this generations biggest cheerleader of a new era in tech. We shall see how it all ends but the dude knows how to tell a story and get massive amounts of funding. AI will cure disease, solve every problem, do everything humans do today, never takes a vacation, and never asks for a raise. AI will change the world and everything in it…Now how much money would you like to pledge to invest in the new revolution designed to put us all out of work? Here’s the details on Project Stargate: The Stargate Project is a new company which intends to invest $500 billion over the next four years building new AI infrastructure for OpenAI in the United States. We will begin deploying $100 billion immediately. This infrastructure will secure American leadership in AI, create hundreds of thousands of American jobs, and generate massive economic benefit for the entire world. This project will not only support the re-industrialization of the United States but also provide a strategic capability to protect the national security of America and its allies.

The initial equity funders in Stargate are SoftBank, OpenAI, Oracle, and MGX. SoftBank and OpenAI are the lead partners for Stargate, with SoftBank having financial responsibility and OpenAI having operational responsibility. Masayoshi Son will be the chairman.

Arm, Microsoft, NVIDIA, Oracle, and OpenAI are the key initial technology partners. The buildout is currently underway, starting in Texas, and we are evaluating potential sites across the country for more campuses as we finalize definitive agreements. Color me skeptical on the ability to raise $500B but crazier things have happened. I’m the consumer brands guy so thankfully, I can generally watch from the sidelines while focusing on brands that will have massive productivity gains by implementing AI and tools to drive sustainably higher margins and better profitability. All of this allows a stock to have solid multiple expansion. So maybe stocks in general aren’t as expensive as they appear today?