As the year 2018 winds down, the markets keep turning more volatile (and interesting). After a decline in October, things seemed to stabilize a bit in November, but still remained sluggish. The big surprise was the change in tone from Fed chair Powell a few days ago, which hinted that they may be at the end of the cycle for raising interest rates. While it was not explicitly stated or clear in any certain way, the US market rallied ferociously as investors started panic buying. This change in direction & the amount of movement from the largest stock market in the world, based on interpretation of 2-3 words from one person (albeit the Fed chair), shows how broken the system is.
I have been banging the drums on how broken the market is over the past few months. I may have started a tad too early, but the fact remains that this market is completely skewed and warrants extra precaution from investors. To reiterate, a handful of tech companies make above 12% of the overall market – once they start faltering, look out below. This is not something new…we have seen this before.
The most disturbing charts for all tech enthusiasts from TS Lombard. If history repeats itself, there is nothing to earn with #FANG shares in the years to come. But in the digital age, clocks may tick differently today. pic.twitter.com/96Hp8cWwm1
— Holger Zschaepitz (@Schuldensuehner) November 20, 2018
The other side of this coin is the buyback phenomenon that skews the market. You can get into a chicken-and-egg discussion on the reason for this bull market and how buybacks have an effect on it. The tech companies continue to pile on long term debt and use the funds to repurchase shares (while, sometimes sneakily issuing more shares without the market catching on in some cases). Just earlier this year, Apple announced a $100B buyback – a $ number larger than entire sectors in the rest of the economy! History will not be kind to the executives when this cycle ends and eventual hindsight showing record share repurchases at market peaks. Following chart from ValueWalk paints the picture well.
Outlook for December 2018
I continue to be weary of the tech sector and it is my lightest sector in the portfolio. My focus remains at the bottom of the chart (utilities, real estate & other real assets, materials, energy etc) in the listing above — for good reason. Most of those sectors have been struggling in the last few months/quarters/years and provide better investment opportunity.
I continue to stay on the sidelines with a decent cash position to make moves when the opportunity presents itself. Meanwhile, I am still invested in fairly defensive positions (lots of gold exposure).
As of Nov-30-2018, our overall portfolio diversification is structured as shown below.
Looking for investment ideas? Check out this Top Investment Picks for 2018, where 35+ bloggers present their top pick and a reason to invest in those securities.
What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets and looking at anything interesting? Share with a comment below.
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