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THE MORNING LINE

An Advisor’s Letter to a Wealthy Client

[A friend who made his fortune in the laundry business has enjoyed enviable returns on his nest egg by staying fully invested in stocks. The following is a personal letter from his financial advisor telling him why, even after the stock market’s spectacular rally since late March, he should stay in equities. The advisor’s list of pros and cons nicely sums up the thinking of many of advisors with wealthy clients, and that’s why I am presenting it here.  RA]

Doomsayers always sound smart. I know a few of them who have been wrong for 28 of the last 30 years. I have been positioned very cautiously myself but not outright bearish (thank god, since I would have lost a fortune). Right now I like utilities (defensive, cheap-ish, unloved). I like some healthcare stocks (but worry about the election impacts). I like gold. It’s hard not to want to continue to own Amazon, too, and I do. I’m short regional banks because if there are economic issues it will be in loan markets and in real estate and small-to-medium size businesses. That will hurt the regional banks. I do not own puts on any major equity indices. Volatility is elevated and it’s just not a cheap hedge. I am short some credit but the Fed backstop makes it a bad hedge, too. But I honestly don’t think we have a big market selloff ahead for a few reasons. We should be bullish now, and here are some reasons:  1) the Fed has your back with easy monetary policy; 2) Big Government has your back with more fiscal stimulus; and 3) investors are not long. Positioning isn’t a substantial risk. For example, in March everyone was long. So there was a lot of selling by lots of different kinds of funds. Last week, the end of the quarter, there was also some selling by pensions. But in general nobody has a ton of risk on. Most institutional managers are cautious. Volatility is still relatively high. Etcetera. That means the shock to system that causes massive selling actually can’t cause massive selling; 4) other than sitting in cash, there are no alternatives to stocks for investors.

Some Big Winners

Add up all of the above and weigh them against fixed-incomes. U.S. bonds earn zero; investment-grade corporates, not much more. The dividend yield on the S&P is better. Barring a huge shock, flows will be positive into equities; 5) the S&P 500 is not a good measure of stock performance anymore. It’s dominated by the large companies that are doing very well despite COVID. You know the names: Amazon, Microsoft., Google, Facebook. The Nasdaq is up significantly while the S&P are basically flat. On the other hand, the Russell 2000 (smaller/midcap, more cyclicals) is down 13.5% on the year. Many strategists are calling for a value and mid-cap rotation. By the cheap cyclicals. Short the expensive growth stocks. I don’t like that trade personally. But if the market continues to grind higher as the economy reopens, the upside is clearly in the beaten-down stocks; 6) we are reopening, and economic activity is increasing. I do not think the U.S. has the political will (or frankly the popular support) to shut down like it did in March. That doesn’t mean virus won’t spread like crazy. And some people will die. But unless consumers go back into their shell, the actual economy will progress. And – this is even more important in my opinion – bad news will be completely disregarded if there is a vaccine. And we could have positive Phase II data this month. That means Phase III success is a decent bet by the end of year. Will there be doses avaalable? No. Will it save lives? Not yet. But will markets absolutely rip? Yes! Especially all the garbage that is still down 20-30% on the year (see 5 above).

What the Market Will Hate

Reasons to be bearish: 1) the virus spreading at a fast pace means economic recovery will have fits and starts; stalls are inevitable. Markets will hate that. This is the biggest near-term risk, but given the above positives, everyone seems to want to buy the dip. If deaths spike in AZ, FL, TX and hard lock-downs return, all bets are off. But barring that: 2) Blue wave. Biden and the Dems take DC. One sure bet: higher taxes. That’s bad for profits. Stocks go down accordingly. This should be partially factored in, given polls today. But it probably isn’t because people won’t care about polling until later in the year. This is the risk that has me most concerned; 3)  upcoming earnings will be atrocious. April was bad. May was only good in some pockets of the country. June was better. None were good in absolute terms. Counterpoint: June will be infinitely better than March/April, and if July looks better than June when companies report earnings, that will be more than enough to drive stocks higher. I’m not too concerned about this; 4) the financial state of the U.S. is a horrible mess: too much debt, weak demographics, weak productivity. High unemployment will be an overhang for years to come. If you’re asking me about returns in the stock market for the next few years, then this is a problem. If you’re asking about next six months, it’s less of a problem 5) last but not least, the world is a tinder box. U.S. riots. China taking back Hong Kong. India/China conflicts. Brexit (still). Lots of problems. I do think there is chance of global conflict. I’d bet on it for the right odds. But remember, French markets rallied as did German equities into WWI. Why? People always assume cooler heads will prevail until they don’t. Shorting market to bet on war is a bad bet.

TSLA – Tesla Motors (Last:1119.63)

I haven’t featured TSLA in a while, but the promising pattern shown in the chart was too fetching to ignore. It suggests not only that a $106 rally lies just ahead, but that a short initiated when the stock is between the two targets, respectively at 1096.89 and 1106.46 will enjoy favorable odds. I’ll provide a more detailed instruction at the appropriate time,  but the gist of it will be to buy put options priced at $1 or less with about two weeks left on them. Stay tuned to the Trading Room and this tout if you’re interested. ______ UPDATE

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DXY – NYBOT Dollar Index (Last:96.98)

I have not updated my perennially bullish outlook for the dollar for a long time, and you can see why in the chart. DXY has come of March’s 103 high with a so-far 6.3% sell-off that has done no technical damage to the long-term uptrend. Actually, a further selloff of 3.6% would come down to a trendline that is likely to evince good support. Pivoteers may also notice that a pullback to the green line would trip a strong ‘mechanical’ buy signal that is about as textbook as such trades get. ‘Mechanical’ trades work best when speculators get too far

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NQM20 – June E-Mini Nasdaq (Last:9667.00)

I sometimes joke that virtually every trading vehicle, in every time frame, whether trending up or down, reverses from p2, the secondary pivot, virtually every time. Or so it would seem. I was never really a p2 kind of guy, but my mentor, Ira Tunik, used it so often, and persuaded so many Rick’s Picks subscribers that it was important, that I eventually started to pay attention. That’s when I began to see that it actually does repel trends almost as consistently as my beloved ‘p’ midpoint Hidden Pivot. It has also become clearer recently that some of the most

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CMG – Chipotle (Last:1047.03)

Chipotle makes its first appearance here in more than a year. A subscriber had asked about shorting into the stock’s ballistic rally, but there are surely easier ways to make money. CMG’s ascent into hyperspace is right up there with Tulipmania in the annals of mass folly. Ironically, the stock’s bear market from 2015-18 was caused by two incidents where bacterial/viral agents had been detected in their food. Is business now better than ever, as the move into record territory would seem to imply? Hardly. It’s simply benefiting from investors’ desperate, heedless plunge into the shares of a relative handful

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