2022 Mid Year Update

Strategies for H2- 2022

As of Jul 22nd 2022

As quoted by John Maynard Keynes - "Its better to be roughly right than perfectly wrong" . In the same vain , GTI had predicted back in Nov-2021 that positive returns in 2022 are not to be expected given the statistical odds of having a 4th consecutive year of double digit returns are very rare and low especially when Federal Reserve is embarking on Quantitative tightening ( when attempted in 2018 caused a peak to trough loss of over 25%)

Bubbles are very common in the market and when they burst , opportunity is created for investors.

My top strategies for investment and trading are

1) Don't buy companies with Price to Sales > 10 . In rare cases , I violate this rule but suggest keeping stop losses if your compelled by momentum , quality and growth story. For example : ISRG, LULU , NVIDIA , TSLA, NOW are some examples where high multiples can be justified

2) If you own single stocks, most of trading happens pre-market and post-market and you can loose over 15% overnight before market opens. Hence, watch for earning dates and trade out based on your research if you feel a negative surprise is more likely based on peer group performance

3) Analyze the companies debt structure leverage and free cash flow generation ability over next 18 months. In bear markets ,these metrics will matter the most against drawdown. Companies which I avoided based on excess debt are NETFLIX, Sales Force, Nike, Ford, GM although I may buy GM ( below $ 32).

4) Trade the bottom by averaging good quality stocks ( Small caps provide plenty opportunity's )

5) Learn to sell and take profits from time to time and learn to admit that a mistake has been made an exit a position at a loss. ( High Volatility Stocks like Chipmakers- AMD , Hydrogen Play - Plug Power are good candidates for trading)

6) Learn to watch credit spreads in High Yield (HYG) and Interest Rates sensitivity for the companies you own associated . Severe widening of spreads is usually a precursor to defaults and stocks of those companies will go to Zero.

Outlook for H2- 2022

Growth is driven by a complex interaction of demographics and population growth, technological innovation, immigration, productivity increases and hence creation of money supply and debt. There is a natural run rate for GDP growth which functionally one can argue should drive stock market and real estate returns over longer term.

In 2020, the shock of money supply was immense ( 4 Trillion new money was created), which caused an unprecedented shock to asset prices. If we plot the last decade trend line for SPY , we can see that joining 4 tops gets us to level of 400 ( in S&P ~ 4000). That's one of the reasons , smart money started pulling out in late 2021 when S&P was 25% over the trend line. Where do we go from here ?

I suspect that regaining a market top back to 4600 is not going to happen unless macro economic data starts to bottom out , energy prices with Russia war stabilize , inflation turns more into deflation, dollar grinds lower against other currencies, earnings dip more and Federal reserve starts hinting to reverse course in QT. All of which is going to take another 6 to 12 months as indicated by Interest Rate Futures ( 2023, 2024 forward rates) and 2s10s curve spreads inverting.

My macro suggestion is to buy SPY at levels below 385 and buy more below 350 if it were to get there . Sell the rally's over 420.

OK , so what's getting absolutely crushed ?

Small Caps have relatively never been this cheap. Relative to S&P, there has been a roughly 20% excess drawdown. However, general level of rates and credit spreads are also expected to get wider and hence there is vulnerability. So where to we invest ? Look for small and mid caps which have lower debt ( debt to equity < 30%, service a large diverse set of corporate or retail clients and can whether the economic shock with strong balance sheet and leadership. The risk reward tradeoffs might be better than usual large and mega cap.

GXO logistics at $ 42 seems reasonable buy.

Page updated

Google Sites

Report abuse