09/08/2020
The Feinberg Stein Group
Portfolio Update as of 9/3/2020
We are in a defensive allocation position across all investments and employ a Risk vs Return Investment strategy to construct models that guide us through market volatility. The current factors we consider while implementing and adjusting our allocation are outlined below.
Proactive Analysis and Plan for the Second Half of the Year 2020
In many ways, the COVID-19 Recession is incomparable to other economic downturns in U.S. history. The immediate shutdown of the U.S. economy caused a rapid stream of job losses—more than 20 million in April 2020 alone. Since then, we experienced three straight months of job gains since the US saw record payroll losses in April: 10.2% for July after 11.1% in June. These numbers are positive indicators, though the underlying market forces are more complex.
Wall Street’s primary comparisons for the depth of the COVID-19 pandemic’s economic impact are the Great Depression from 1929-1933, the 1946 post-WWII drop in production, and the 2008-09 Financial Collapse/Recession. We see these as sales points for Wall Street brokers.
Wall Street’s “experts” are hopeful that the length of the COVID-19 recession will be shorter than these prior downturns. They point to the health of our economy heading into the 2020 COVID-19 pandemic shut down, which was better than that of the economy leading into other economic declines in U.S. history. They believe the strength of the pre-recession economy could lead to a quicker recovery. They assume economic activity will improve by year-end, reduce unemployment, and lead to consistent GDP growth in 2021. Even so, we value these insights only so far as they are forecasts, or best-guesses, as to what may happen.
Feinberg Stein’s Investment View and Plan:
Transparency Integrity Wisdom
Feinberg Stein Wealth Management relies neither on hope nor assumption when selecting investments; we do not sell Wall Street Models* that are proven only in perpetuity because we know that our clients may needs funds in in a more moderate timeframe. Our focus is on managing portfolio risk and our goal is to protect your assets, grow them responsibly, and not be subject to the volatility of the markets. “Accumulate, Protect and Transfer Wealth”
With our proprietary research and process, we identified the sudden, accelerated increase in market risk in January and early February of this year. We proactively began to dollar cost average out of risk assets prior to the collapse we projected in March. We reduced other Corporate and Municipal obligations, investing 100% of proceeds into US Treasuries or Treasury-backed, FDIC-insured cash and cash equivalents.
In April, our liquidity model told us growth assets were again worth the risk vs the return for investment. At that time, we started dollar cost averaging our cash and cash equivalents back in to stocks until we reached 70% of our normal stock allocation. We collected very respectable returns.
It is now September 2020 and we are in a challenging climate full of uncertainty, fear, greed, and anger. We are currently holding 30%-35% of growth in our stock allocation and our plan is to dollar cost average out of equities reaching to a 0%-10% allocation prior to the November election. We are approaching what Feinberg Stein calls DEFCON 1* – our indicators show we are likely heading into major market downside risk scenario due to a Global Liquidity and Leverage crisis. We are using what we do know about the following to determine our Risk vs Return allocations:
Presidential Election & Potential Repercussions We could write pages on how elections impact markets and how to measure Risk vs Return during such times. Instead, we will focus on two points: First, the stock markets and investors are averse to the kind of uncertainty that comes during presidential elections. Second, in taxable accounts, depending on the outcome of the election, the tax rates on realized gains will be 15%-20% federal and state (national average 27% keeping $73.00 per every $100.00 gain), or 39.6% federal plus state. For example, in California, the average capital gains tax for high earners is ~50%. For every $100.00 you gain, you pay $50.00 in taxes, keeping 50% for taking 100% of the risk). We do not believe investors will continue to pour money into the stock market to assume all of the risk for only half the profits.
Feinberg Stein’s Largest Concerns Include, The Big Banks:
Shadow Banking System (Hidden Risk) Big Banks currently have dangerously high levels of involvement in Lending, Hedging, Derivatives, Options, Credit Default Swaps etc. According to the Office of the Controller of the Currency* July 2020 was the third largest contract volume on record. The two months with the highest activity were January and February of this year and we know what followed in March. Regulated banking institutions still escape regulation in these derivatives and we feel the current situation is much more dangerous situation than the 2009 financial collapse. https://www.occ.treas.gov/publications-and-resources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/files/q1-2020-derivatives-quarterly.html
Executive Summary Quarterly Report O.C.C. US Government Top Holding Companies
March 31, 2020 Notional Derivatives total $267,629,991,000,000.
Total assets 16,958,447,000,000 Trillion in assets. 17-1 ratio
March 31, 2008 Notional Derivatives total $185,933,647,000,000
Just prior to the dislocation in credit markets and the financial collapse.
Total Assets $11,448,430,000,000 in assets. assets. 17-1 ratio
Warren Buffett derivatives are "financial weapons of mass destruction".
Robert T. Kiyosaki is best known as the author of Rich Dad Poor Dad: the #1 personal finance book of all time. “The subprime disaster was a result of financial bombs-derivatives-exploding in financial institutions such as AIG and Lehman Brothers, as well as banks and financial institutions throughout the world.”
Feinberg Stein saw increasing Risk in 2008. We sold off investment risk prior to the financial collapse of 2008-2009 and followed a similar model during February of this year.
The United States historically recovers faster than Europe after a financial crisis. Many people on Wall Street claim it will be different this time and that Europe has an edge. We feel this statement is inaccurate as the US has more tools to aid in a recovery and Europe will drag on this economic recovery. We are staying away from international investment until we see more transparency. US large companies have business exposure in Europe & Asia; we see no reason to consider International investing on the horizon.
ISSUES AND EXPLANATIONS
● Geopolitical Risk is the potential for political, socioeconomic and cultural factors (events, trends, developments) to affect businesses’ vitality (stability, health/well-being).
● Headline Risk The risk that a company may decline in share price because of negative news coverage or a lack of reliable information from Wall Street and the media.
● Lack of reliable statistics, data, earnings per share, return on equity, projected earnings safety and health risk. Two of the main Wall St analysis methods are Technical Analysis and Fundamental Analysis. Technical Analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume (charts). Fundamental analysis is a method of measuring a security's intrinsic value by examining related economic and financial factors. A fundamental analyst will study what affects the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management. In today’s Global Recession, we lack sufficient data to perform fundamental analysis.
● Behavioral Economics a method of economic analysis that applies psychological (mental and emotional state of investors) insights into human behavior to explain economic decision-making.
● Illiquidity In financial economics, a liquidity crisis refers to an acute shortage (or "drying up") of liquidity. Liquidity may refer to market liquidity (the ease with which an asset can be converted into a liquid medium, e.g. cash), funding liquidity (the ease with which borrowers can obtain external funding), or accounting liquidity (the health of an institution's balance sheet measured in terms of its cash-like assets).
• Office of the Comptroller of the Currency is the world's largest equity derivatives clearing organization. Founded in 1973, OCC operates under the jurisdiction of both the U.S. Securities and Exchange Commission (SEC) as a registered clearing agency and the U.S. Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization. Named 2020 Best Clearing House – Equities by Markets Media for the third consecutive year, OCC now provides central counterparty (CCP) clearing and settlement services to 20 exchanges and trading platforms for options, financial futures, security futures, and securities lending transactions.
• Modern Portfolio Theory Developed by Nobel Laureate Harry Markowitz in 1952 Markowitz theorized that investors could reduce risk by diversifying their assets and asset allocation of their investments using investment classes like the Efficient Frontier strategy. Markowitz was awarded the Nobel Memorial Prize in Economic Sciences in 1990.
• Feinberg Stein’s Levels of Risk vs Return Management Definition of Defcon Levels range from alert status 1 to alert status 5. Defcon level 1 is the highest US military alert status and our most defensive position and Defcon level 5 is the systems lowest threat condition and our most aggressive growth allocation.
• *Feinberg Stein Investment Models use select research, advanced technology, and proprietary informational sources to develop our asset allocation and equity investment models. Our proprietary methods have been developed, tested, and improved since 1974.
* Benchmarks are indexes created to include multiple securities representing some aspect of the total market performance.
Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice.
HighTower Advisors, LLC is a SEC registered investment advisor. Securities are offered through HighTower Securities, LLC, member FINRA and SIPC. ©2020 HighTower. All Rights Reserved. Feinberg Stein Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, and SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates.
The Feinberg Stein Group
16501 Ventura Boulevard, 4th Floor, Encino, CA 91436 main (844) 209-8714 fax (888) 979-6540
200 W. Madison St., Suite 2500, Chicago, IL 60606 feinbergstein.hightoweradvisors.com
Each quarter, based on information from the Reports of Condition and Income (call reports) filed by all insured U.S. commercial banks and trust companies as well as other published financial data, the Office of the Comptroller of the Currency prepares a report.
