"The Longer The Need For Repair"

JC Parets
April 19, 2020

Most of what you'll hear me talk about are things I've learned from other people. In some cases, they were predecessors of mine and in other cases they're buddies and colleagues. It's funny because I try to do a good job of giving credit when I can, where I remember specifically who I learned something from. You guys who have been following me for a long time know that about me. But the truth is that sometimes I simply forget where I learned it. It's just part of my arsenal and I always assumed it was there.

The best part about this is that sometimes, when I'm lucky, I come to realize down the road where I learned certain things. For example, I was in Chicago last year or maybe the year before that, I forget, and had lunch with Jim Bianco. Of course we can't help ourselves but talk markets so we dive into a heavy bond market conversation (I know you must be shocked if you know Jim that he's arguing about rates lol). Anyway, he proceeds to rip through 20-30 charts in what felt like a matter of seconds. It hit me! THAT is why I rip through so many charts when I give my presentations. I got that from watching him give a talk at Bloomberg over a decade ago!

Another time, John Roque was nice enough to invite me to lunch. He's a member of the New York Athletic Club but I got booted out for wearing jeans (Amateur move on my part). But we went around the corner to this great Greek joint, so it was all good. Plus then I got to drink my favorite Assyrtiko from Santorini that I love so much with a branzino. The volcanic soil really brings out that acidity, but I digress. John is a big sports nut. So he makes so many references to sports in his analysis that it hit me. That's why I do that! I was so excited. Because I've stolen a ton of stuff from John over so many years - he's one of the best in the business. I got, "We're not in a reversion to the mean business, we're in a reversion beyond the mean business" from him. I learned from him to analyze the market caps of sectors as a % of total market cap. He was one of the early influences on me to use gold as a denominator when I was in my early 20s. I'm probably missing a bunch, but he's been a tremendous inspiration to me.

The reason I'm telling you all these stories is because sometimes, I truly truly remember where I learned certain lessons, including what we're going to talk about today: "The Bigger the Drop, The Longer The Need For Repair". This is one of the many great lessons I've learned from my friend Louise Yamada. She is one I'm glad I listened to when I was much younger! When I emailed her about this quote wondering if she got this from the great Alan Shaw, she said yes, that she learned it from him and Ralph (Acampora).

When I look at this chart of Carnival Cruise Lines, I can't help but think about this quote. It's almost like it was written for this stock:

Click on Charts to Zoom In

Doesn't it remind you of Citigroup after the financial crisis?

Or Tech after the bubble?

Or Japan, for that matter? In the late 80s, this one park in Tokyo was worth more than all the real estate in the entire state of California combined. I've been to that park. Eh. Skip the park and head straight to the Tsukiji market instead. But needless to say, the Nikkei has been "repairing" for over 3 decades.

The Financials relative chart tells a similar story here as Citigroup, but you get the idea:

My point is that I think this is something to remember when asking, or get asked in my case, about buying these stocks that have gotten crushed. What is it about humans that makes us want to buy the biggest piece of crap we can find, because we think we're smart enough to "know" it's cheap. It's nonsense. It's being sold like this for a reason. No one wants it.

For us, it's really been about buying the strongest stocks in this market. You guys who have been following along know this. We even created a Coronavirus Index on March 10th, with a list of the strongest names. This was 2 days before the stock market bottomed. From there, many stocks continued even lower, the weaker stuff no one wanted. The strongest stocks had already shown their true colors and kept ripping higher from there.

Some of you might ask, Well JC, the stock market didn't bottom until March 23rd. What do you mean? 

What I mean is the S&P500 didn't bottom until March 23rd. The list of new 52-week lows on the NYSE peaked on March 12th. The "Market of Stocks", if you will, bottomed on March 12th and a lot of stocks have done very well from there. If you're anchoring performance numbers for stocks and sectors, I would encourage using that date as one of your data points. That's where relative strength really started to shine.

It's no different than talking about the top in the S&P500 on February 19th. The list of new 52-week highs peaked on January 17th. Most sectors peaked way ahead of February 19th. Regional Banks, for example, peaked in December. So the "top" of this market was well before February 19th, just like the lows last month came before the indexes put in their lows.

So will we see new lows in the indexes? I don't know. But I do think there are stocks that will keep doing well. Those are still the ones we like.

The only way to make sure you own the strongest stocks is to buy the strongest stocks.

JC

 

 

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