Morning Comment: Follow the (smart) money

The stock market got rocked pretty hard on Friday after several key companies reported earnings and tensions between the U.S. and China began to rise again. The 2.8% decline in the S&P 500 came on horrible breadth (17 to 1 negative). The volume, however, was quite low. The composite volume was less than 4bn shares for the first time since late February. However, a good part of that low reading had to do with the fact that the vast majority of the global markets were closed on Friday. Of the major markets, only Japan and London were open…so it’s not a surprise that the volume here in the U.S. dropped significantly. Still, the fact that the decline came on very low volume is something that can give the bulls some solace.

The futures are trading lower again this morning…as the tensions between the U.S. and China have only grown due to threats of tariffs from the Trump Administration and/or threats of a reconsideration of “Phase One” of the trade deal…….However, the comments from Warren Buffet (and his actions…AND his inactions…of the past few months) has got to be having an impact as well. Yes, he did say that he believes that nothing can stop America…and that “America will prevail again”. He also said that the fact that his cash position is not even higher is something that should be seen as constructive. However, he also said that investors should avoid investing money in stocks that they’ll need soon.

More importantly, Mr. Buffett did not invest money during the more than 30% decline in the stock market in Q1. His cash position actually grew to $137bn dollars and he spent just $3.5bn buying shares of his company and other companies in Q1. He spend $1.8bn buying the shares of Berkshire (which was less than he spent in Q4 of 2019) and just $1.7bn of shares of other companies. He also said that he completely sold out of his shares of U.S. airline stocks in April.

Think about that. Mr. Buffett has become a billionaire many times over by buying shares of companies when everybody else was dumping them…and after they had fallen by a substantial amount. He has spent a career investing in companies whose shares have fallen so much that they have become incredibly cheap. In many cases, the shares of those companies have fallen well below their fundamental values…when the “baby had been thrown out with the bathwater” due to fear and/or “forced selling.” However, in the case of the airline stocks this time around, instead of buying more shares, he completely dumped them…even though they had declined a whopping 65% in less than 2 months (as measured by the XAL airline index). Given the importance of the air travel to our economy, what do you think Mr. Buffett’s actions mean about his opinion on the intermediate-term potential for the U.S. economy?

We completely agree with Mr. Buffett that American will prevail again over the long-term. However, his actions (in terms of he airline stocks) and the inactions (an unwillingness to invest in Q1 when there was at least some blood in the streets)…is a clear indication that he does not believe that the intermediate-term potential in the stock market is very good at all. It also indicates that he believes that the stock market is going to have to fall further…probably to levels below where they stood at the March lows…before it will be worth investing his large hoard of cash (in the way he did during the financial crisis).

When one of the most successful investors in the history of our country…along with other billionaire investors like Singer, Ichan, Gundlach, etc….all believe that the stock market is at a level which should be avoided (despite the massive levels of stimulus that is being added to fight the situation), one has to step back and wonder if FOMO is the right strategy to follow right now.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on May 04, 2020 — 8:05 AM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
  • {[]} — Marketfy Staff — Maven — Member
Want to add a comment? Take me to the new comment box!