I guess I shouldn’t be amazed by now at how many people refuse to accept the cyclicality of business. This is problem number one. What goes up eventually goes down. IT’S ALWAYS A SINE CURVE. Problem number two is the human ego. Making money in the stock market is the art of execution, not the science of analysis. When you have to execute, there are 4 or 5 main behavioral issues that come into play. Problem number three is that Wall Street has many conflicts of interest and you are not priority number one, two, three or four. For the next two months, I will lay all of this out so that you can have the tools to be better.

First go back and re-read what I wrote in January, February, and March of this year. Second, stop reading and believing in Wall Street research. This is nothing more than sales literature designed to keep you in the casino at all times. Price targets are bull shit. It’s “hopium.” Get off it. Last, learn to trend follow. Price is the only thing that matters. You can’t pay your mortgage with, “well at least (insert company name here) won’t go out of business ha, ha, ha.” Your job as an investor is to buy something at a low price and sell it later at a higher price (and repeat this process as often as possible). Nothing more. Do not get confused about this.

Referencing the picture above, begin to think about an investment program that starts with what will happen if a financial hurricane hits? A pie chart portfolio will not save you. It only dilutes your upside. WE ARE NOT ALL IN THE SAME BOAT TOGETHER. We are certainly in the same storm, but you do not have to choose to be in the same boat as everyone else. Although, that is another behavioral issue that we’ll need to address.

I’ll close this missive with this comment (and really what ticked me off to write this post). Humongous Bank and Brokerage firm “research” is putting out garbage about the strength of the consumer and strength of corporate earnings. This is a lie and let’s just stop the B.S. When you read, “the consumer is in great shape,” that is a level and a rearview mirror moment in time. And the consumer is 100% of the time in “great shape” at the peak of the cycle. So this is irrelevant to point this out. Right now, as I write this today, the best spin I can give is that the U.S. consumer is in SLOWING SHAPE. The level or narrative around the consumer doesn’t mean squat. So, if you want to talk about the consumer you must look through the lens of employment (which is a “the horses have already left the barn” data point), savings, and credit. The savings rate peaked in December of last year and is meaningfully slowing. Disposable income peaked in Q1 of 2021 and real income growth is negative. If you look at the credit card data, defaults are increasing. The sub-prime rated consumer is really struggling.

Let’s look at the health of corporate earnings. In February of this year, I posted a chart graphing high-yield OAS index, which is a risk barometer for corporate credit, is now hockey-sticking up. So when the media wants you to get all ginned up when the market rallies 500 points, take a look at what high-yield spreads are doing on the same day. They are most likely not moving much at all or continuing to move higher. The is a real-time look at corporate financial conditions that are tightening (worsening) not improving or in “great shape.” Stocks will not make a sustained move higher until this index peaks and begins to decline.

This is my situational awareness. The following is the dialog that I have in my mind. The other team has the ball. You are on defense. Your defensive team (whatever that looks like for you) should be on the field. Your job is to defend your portfolio - now! What you paid for some stock or fund is irrelevant and the market doesn’t care. What your statement balance looked like four or five months ago is irrelevant and the market doesn’t care. Believing that somehow a paper-loss is not a loss until you sell is ridiculous. It’s a loss. Dollar cost averaging into a down-trend is fools way of (mis)managing capital. Shore-up your funds to be deployed later when the probability of business conditions are more favorable to risk assets.

Sincerely,

P. Franklin, Jr., CEO

Franklin Tend Investment Management, LLC