After a blistering start in January, February has sent chills to stock markets worldwide. Volatility is back with a vengeance and the DOW has seen its biggest one-day decline on record. Kim Parlee speaks with David Prince, Founder of Harbinger Capital Markets Research, about whether the longest U.S. market winning streak is over and what is next for the markets.
And what a week it has been. Let's just show what's happened in the last week of trading. And it's been record setting for all sorts of reasons. Let's run through the Dow, the S&P 500, the NASDAQ, the TSX, and take a look at everything. The sell-off was global and brought with it massive volatility.
So what was the trigger? Is the volatility over? Is this ultra long bull market finally coming to an end? Who better to talk about this than one of our favorite guests, market veteran David Prince, founder of Harbinger Capital Markets Research and editor of The Harbinger Notebook. Thank you so much for being here on this show after last week. I know you've got some charts you want to show us, but just your first take, just in terms of when you saw that 1600-point dip on the Dow happen last week, what did you think?
Well, I think the number one thing is I immediately went and I was trying to get my buy button going as fast as I could.
That's the difference between the retail investor and the market veteran right there.
I think that the biggest point to make out of this is we've gone through this extended period whereby the S&P has gone straight up and everybody got quite used to it never goes down because somebody comes along and prevents it from falling much more than 2%. We really lulled ourselves into this ridiculous sense that volatility was never going to rise again.
And what happened last week wasn't just that because some crazy mechanical device went off. That's the easy excuse that the news likes to look at. But what I've always said is every one of these crazy events are often triggered, and pretty well always, but not quite always, but often triggered by something disruptive in the currency market that is overlooked.
And what has been driving me crazy in this last year is the fact that people really haven't paid attention to how much the US dollar has fallen versus all the major currencies. And to me that was a big headline from the standpoint of one of the things that I love doing is looking at history, and the biggest trigger that happened in 1987 wasn't just because of portfolio insurance, which was the thing at that time. It was, in fact, the great decline in the US dollar and the subsequent rise in rates.
So the combination of the two came to an abrupt halt with that crazy day that we had in October of '87. And people really were shaken. We did not go into a recession. And that's what I want to show you with this first chart. I've got it here with that crazy nonsense, as you can see. That peak was the Plaza Accord. And that's when they decided that they'd better go and take a look at the US dollar because it's too strong against everybody.
So what happened was it started to weaken, that's for sure, but no one wanted it to weaken as far as it did. And obviously, when we got to the actual crash itself, you can see it took another leg down because people wanted out of US assets. Well, subsequent to that, we started seeing the stabilization. And that's what I expect you're going to see this year.
So the surprise call-- and I know this is hard for a lot of people to swallow-- I think that what you're going to see is the US dollar start to rise for the rest of the year. And that will change the course of the volatility that we've been experiencing over this last week.
Change from the standpoint that it's going to be a higher level of volatility. I think that's really, really key. And to me-- and as you know, Kim, I mean, I love this. This is absolute heaven. But what's really important for the viewers, and certainly people that are retail investors, is the worst thing that happens is you panic with what the direction is at the moment.
I will give you an experience. On Monday morning I was fully aware that things were going to get bad. It reminded me very much of the setup that we had on Friday. It was the same as the Friday prior to the Monday crash in '87. What I did was I outlined a bunch of names that I wanted to buy because I wanted to own them longer term, and I felt comfortable with the companies. So I put in bids. I also put in a whole bunch of offerings.
And what really works in craziness like that, you have to be very committed to the companies that you're in. But what happens is you get hit in both cases. I'll give you a perfect example. Simple little thing, long term I like Shopify. Great. I was flat Shopify coming in. I put in an order to buy it. I got lucky. I got it on the opening near the low. And as I got the report-- and that's a better way to put it-- the stock had already rallied over $4.00 a share.
Well, the good news was I had a sell on at that price and I got taken out. So I thought, that's a pretty good day. I think I'll go home.
That's a good 30 seconds.
Absolutely. It was about a minute and a half. So that type of thing is not for the faint of heart. It is for people like myself from the standpoint that I love volatility. But you have to have a game plan. And if you don't, and if you're just trying to play the index, you're going to get killed because you'll be too late.
So the better way to play high volatility, individual names. And I think we're going to see a lot more of that over the next six weeks. This has been a very passive environment. People just own the index, made lots of money, boy, isn't that great. But that's about to change. And we saw a lot of that differentiation in the Canadian market because the Canadian market-- and I'll give you a lovely stat that will shock you. We're 100 points up from where the peak was in 2008. Boy, isn't that a nice long termer?
So my response to people about what you do in this environment is you definitely stick to what you know. Don't get caught up in the whipsaw and take advantage. And make sure that you understand what it is that you are buying or selling, especially when it comes to derivatives.
We're going to come back with David in just a moment. But before we go, very quickly I want to just get in a chart here. You know, you talked about what's happening with the US dollar. I just want to bring up a chart, talk about raising rates, just quickly, if I could, explain to everyone-- this is a good news is bad news environment, right? People get scared when the good economic news comes out, rates will go up more quickly than is anticipated. Tell me what you're seeing on this chart.
OK. So the whole process has been a bottoming out process. Whoops, I forgot I got the different one here. Whoops. OK. All along there we can see that bottoming out period. I thought this was the line one, sorry. But the main point is that what you're seeing is that dramatic increase in rates that has occurred from the middle of last year.
The more important aspect is this is two-year yields. This hits everybody. What is key to this whole thing is the fact that we've been forced in Canada to see our rates rise as well. We can't absorb it the same way as the Americans. So what's doing that? A sharply rising rate environment is somewhat scary for a lot of people. But if it's coming because the economy has improved so much, then it's good.
Unfortunately it's very disruptive when people get fearful of how far that is going to go and how quickly. I suspect that we've probably seen a good reason to see it sort of level off. Unfortunately, it definitely means that we're seeing higher, but we're going to be in a situation where the rates are going to have an impact on our Canadian economy.
Looks as though the pendulum swung, and now it looks as though it's starting to at least moderate a little bit in the middle. But who knows if that's going to continue? It did today. I'll say that.
Well, not in the last 15 minutes. I mean, that was pretty dramatic again. There's no question that a lot of it is being professionally driven. The average retail client is not capable of making moves that quickly.
So what's interesting for-- again, for the retail investor who's watching-- going, OK. Or maybe you are. But for those who aren't professional traders, what's interesting in this environment?
Who have a day job.
Earning the money to do this, yes.
Well, the main message is to make sure that when you are looking at your portfolio, that you know where you want to own the stock and whether it's still good to continue to own. Big changes have occurred here in the last six months. For example, people that owned all those utilities and real estate stocks have been hammered in terms of the price. So what I'm now looking for, in fact, is a place to start buying some of these because a lot of them are yielding in excess of 5%, and some and as high as six and change percent. So why can't I go and take a look at that for some of my cash equivalent?
So that's when I'm digging away at right now in terms of looking at that sector, as well as even looking at some of the telcoms. But the main point, though, is the two big groups that I keep on wanting to be in, infotech and, of course, consumer discretionary.
And that was the call even before the sell-off, I assume, yes?
Absolutely. And the main point about it is that we're not at the end of the cycle. We will get there. But the immediate rejection of this thing has been that it's over. We've peaked. We may have peaked, but that doesn't mean that you can't have a whole bunch of companies that still rise in price.
So what I'm getting at here is let's go and concentrate on things that I've always liked in the infotech. So there's no doubt that when I look at cybersecurity, that's always been an area that I think is only now getting recognized. So FortuNet and things like that come really into play at this type of stage in the cycle.
The other one that I keep on emphasizing, gamers are not going away. These game stocks are continuing to go and get great revenue growth.
So these are like the EAs of the world, Electronic Arts.
EAs, yeah. Take Two Interactive, all of the different gamers. And there is an index that you can go, but we don't need to go into that.
That's a different discussion.
But the main point here is that I feel comfortable with it, much like the Shopify here in Canada simply because it is changing. And that disruption, and those disruptors, are going to continue to be performing well even though the market has changed from an interest rate standpoint and certainly from an overview of what's going to happen with this crazy market.
And consumer discretionaries you still like? You think the Americans still have a lot of money to spend?
Well, the best example is Netflix. We're still disruptor. And they're still winning. And it still went up in spite of all what what's happened in the last couple of days. So another classic example in that consumer discretionary is Amazon. OK, well, Amazon came down, but guess what? It went right back up, and it's been a leader coming out of this.
So you are seeing what the market wants in terms of long-term leadership. You are seeing lots of people being influenced because these are big weights, and so you're getting that volatility in their price action. So pick spots. Don't chase. Get yourself a game plan and then stick to it. That's going to be the tough part.
Do you expect to see another-- I know no one knows the answer to this-- but do you expect to see another wild sell-off like we saw before?
Oh, for sure.
For sure. The reason I'm saying that is because the interest rate environment has solidified itself and has gone back up. Today was a terrible day for US Treasuries because the 10-year auction-- this is something we haven't heard for years-- 10-year auction did not go well. So that's kind of interesting to me because the response in the overall market was whoa, we haven't heard that before. What do we do? But the main thing is that we've seen it react, and therefore the interest rates were moving higher in the afternoon, which also prompted a little bit more fear.
The message is pretty clear. We're seeing some pretty major asset mix changes. The biggest one, and I'm very firmly convinced of this, is we're seeing a lot of foreign selling in US bonds. That's been ongoing. I'm primarily attributing a great chunk of it to the Chinese. And that's why the Chinese Yuan has been so strong in the last three weeks.
So I think that's a big change in what we've seen in the environment over the last five years.
I do want to touch on this briefly if we can. But one of the things also that's it's been happening-- and I know I've been talking about this for a long time and probably because you've been talking about it for a long time-- is exchange traded funds and notes and those types of things. I mean, it was a very easy way for people to participate in the upside for the past 10 years. How did they do on the other side of things?
Well, this is the problem. As you know, I was very much involved in the whole formation of this crazy thing called exchange traded products. But what I want to emphasize to people is these things that have been created in the last couple of years are utter nonsense and should not have been allowed because people didn't understand the risk. So we stress test the banks. We didn't stress test the products underneath the banks.
So be very careful. I don't recommend them. I think it's crazy. It's nothing more than traders just trying to make a daily decision on the market. Be very cautious. Retail does not work. If you're talking about using ETFs for your asset allocation, make sure they're direct replication and they own the underlying.
And make sure there's some volume behind them, too. That's the other thing as well. Sage advice. David, always a pleasure. Thank you so much.
Thank you very much.
David Prince is founder of Harbinger Capital Markets Research and editor, of course, of The Harbinger newsletter which goes out.