ALERT: recession warning
16th March 2020 |
The Federal Reserve has just cut interest rates by 1%, announced $700 billion of quantitative easing, supplied $1.5 trillion to the repo market, cut reserve requirements to zero for the banking sector and opened dollar swap lines with central banks all over the world.
The central bank is panicking and that has resulted in the yield curve spread spiking higher from an inverted condition. The threat from coronavirus is epic in scale and is likely to put pressure on all manner of businesses. Those most directly affected are those that rely on person-to-person contact but the biggest threat from a technology investor’s perspective are two-fold.
The first is the reliance of big companies on revenues from small companies that are still loss making. When startups farm out their backends to the cloud it boosts the bottom line for companies like Microsoft, Google and Amazon.
However, in a recession many of those small loss-making companies will go bust. That will in turn result in a significant blow to the bottom lines of the large companies. Therefore, I am selling Microsoft and Google as a precautionary measure.
Action to take: sell Microsoft
Ticker: MSFT US
Bought at: $73.04
Sold at: $158.83
Profit: 117.46%
Action to take: sell Alphabet (Google)
Ticker: GOOGL US
Bought at: $1,093.00
Sold at: $1,214.27
Profit: 11.10%
The second is the uncertainty about share buybacks. Companies buying back their own shares have been the primary source of new demand in the stockmarket over the last decade. If companies now turn to hoarding cash in an effort to weather the virus-induced recession they are going to stop buying back their shares. That’s something that will weigh on the market for as long as they experience uncertainty about the economy.
The one thing we know is the stimulative measures introduced by central banks and governments are still expanding. Governments will continue to announce new measures until they get a handle on the problem. In my opinion that is likely to include payment holidays on debt, extending the maturity on debt and free loans.
Unemployment hasn’t turned upwards yet, but it will, and that is only going to increase the need for additional stimulus. All of that stimulus is going to result in a significant bounce for assets when the selling abates but we are not at that point yet.
Technology is likely to form a significant part of any recovery so we are in the right space but this impending recession is going to result in a reset as well as a significant rotation into new portions of the sector.
Therefore, I am selling a number of additional positions to both reflect these risks in the market and to free up cash for future investments.
Action to take: sell Autodesk
Ticker: ADSK US
Bought at: $108.83
Sold at: $158.03
Profit: 45.21%
Action to take: sell Garmin
Ticker: GRMN US
Bought at: $55.75
Sold at: $77.34
Profit: 38.73%
Action to take: sell Sherritt International Corp
Ticker: S CN
Bought at: C$1.18
Sold at: C$0.11
Loss: -90.68%
Action to take: Advanced Oncotherapy
Ticker: AVO LN
Bought at: 48.00p
Sold at: 27.50p
Loss: -42.71%
Action to take: SAIC Inc
Ticker: SAIC US
Bought at: $58.20
Sold at: $68.81
Profit: 18.23%
Action to take: Zuora
Ticker: ZUO US
Bought at: $21.39
Sold at: $7.69
Loss: -64.05%
For the remaining positions, I am placing them on hold. The worst of the selling pressure is likely to have been exhausted within the month, not least because as social distancing and quarantines become widespread, the number of new cases will peak. Once the worst of new infection cases is over, the market is likely to recover in just the same way as it did following the SARS scare back in the early 2000s.
I believe our remaining positions will be among the first to bottom, which is why I continue to hold. When I deem we have hit a bottom, I will release fresh buy-up-to levels.
All the best,
Eoin Treacy,
Investment Director, Frontier Tech Investor
