Value Over Growth

I reduced our exposure in U.S. technology stocks in the first quarter. It was an unpopular move at the time. The narrative around Big Tech continues to grow more negative, as I’ve warned:

  • Thousands of Google employees walked out yesterday in protest of the company’s failure to protect women

  • Facebook’s political ads have been exposed by Vice

 U.S. technology is a falling more than the market (as anticipated). But I expect Apple, Google, and Amazon to remain long term core holdings as I don’t see a competitive threat to their market dominance. Nonetheless, proper rebalancing is necessary to make certain we’re not overexposed. 

On the contrary, BT Group (formerly British Telecom) reported a profit increase of just 1.9%. The stock was up nearly 12% yesterday, and is up 16% over the past month, while tech has been crushed. BT would kill to have a quarter like Apple’s or Amazon’s. Yes, it’s about expectations, the ‘can’t lose’ hype around Big Tech became too extreme, while value-type companies and sectors were left for dead. But I don’t believe this level of performance disparity is solely due to Wall Street expectations. As I’ve reported, there is a rotation underway from growth (US tech) to value (high dividend, telecom, utilities, staples). And we’re probably in the early stages. We’ve been adding ‘unloved’ value positions to the portfolio this year. Reducing (not eliminating) US tech exposure further may be prudent.   

source: MR Online

 Right on cue…just before the midterm elections, the president tweets that trade talks between he and the Chinese president were positive. If true this would be a genuine positive for the global economy, and the stock market. The president is a well-documented liarso take this with a grain of salt.  

 “The US can wall itself off from the world in some sort of misguided spirit of autarky, but…this will make US industry less, not more, competitive with the rest of the world. In short, tariffs are generally bad for business…”

-Ben Inker of GMO 

(Boston firm that manages $70 billion)

The Upside of the Trade Rhetoric

In my newsletter ‘A Long Way From Neutral’ (10/16/2018) I attempted to make the case that the carnage in Chinese stocks (again, trump’s trade war), may offer long term, patient investors with an opportunity. Nine days later in Barron’s: 

 source: Alibaba, Tencent, and Baidu Are Down, Not Out - Barron's (10/19/2018)

 From the article: 

“More than half of internet time in China is spent on Tencent properties. Tencent is the biggest games company in the world…”

Alibaba owns 80% of the world’s largest e-commerce market…The company isn’t only the biggest cloud producer in China, but wants to start building its own semiconductors.”

On Baidu…“It is China’s Google, and the market leader in video content with iQiyi.”

We’re still in the midst of a normal stock market correction in my opinion.  Today's jobs report confirms the U.S. labor market remains strong. Historically, if U.S. consumers are employed, they will spend. The volatility likely continues, but I’m of the belief markets stabilize sometime following the midterms. I’ll share some thoughts on the potential impact to policy, the markets, and our portfolios, based on the outcome…stay tuned.  

Please vote Tuesday.  

 

Thank you,

randy

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