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Drive carefully, wear your seatbelt

The market can remain irrational longer than you can remain solvent

- John Maynard Keynes

​​The Portfolio Performance

The portfolio is UP +2.0%

Our benchmark, the S&P 500 is down -0.15%

Taking a bite out of Apple today I feel that Apple, below $119 is a good price, so I picked up 100 shares at $118.81 this morning for the Stay Invested portfolio. Readers investing in Apple can be patient as the stock appears to still be in a down trend. I would suggest selecting price levels that work for your portfolio and place limit orders that build your position at lower prices.

WTF is Happening? It may feel like the market is being irrational, but really its functioning pretty much as it should. These declines are never fun and require fortitude to endure. Check the Keep Me Honest list at the bottom of the page. Back on January 1st I said we would have a pull-back of 5-10%. So far the S&P 500 is off 5.20% from it's latest intra-day high, and 4.60% from its most recent closing high. Please, as you invest, drive carefully and wear your seat belt; this market decline isn't done yet.

We are likely to have a significant pull-back during the 1st quarter, about 5%-10%

Today's decline is mostly driven by Powell's dovish comments on inflation, but let's put this one day in context. The market overall is richly valued, by any metric. One good metric for a broad view is to look at the total stock market compared to U.S Gross National Product (GNP). The theory being, the stock market shouldn't be worth more than everything we produce; the two lines should be roughly inline with each other. The problem with this theory is that it doesn't take into account abnormally low interest rates or the manner in which investors look forward and pull forward earnings into their current calculations for what a stock is worth.

So let's include interest rates and see where the market should be valued. In the Shiller S&P chart below we see that the long term average, rate adjusted level for the stock market is 25.95, about 26. This chart is actually a little old, today's number isn't 35.39, its 38.44. As an investor I would like to buy stocks when the S&P 500 is below 26 offering up a bargain.

When we factor in abnormally low interest rates, there really has been no place else to put cash to work, but investors figured out another place for cash, under the mattress. Metaphorically speaking, investors have been sitting on cash, about $5 trillion of investable cash, and while that cash in hand feels safe, the reality is that as inflation rises that cash becomes less valuable. As an investor I keep looking for the cash on the sidelines to get put to work; I check for this by monitoring the inflows/outflows in equity funds and rising or declining levels of bond funds and cash accounts.

For inflation I prefer to look at commodity prices over government reports but I read both. Lumber prices have skyrocketed more than 180% since last spring. This price spike has caused the price of an average new single-family home to increase by more than $24,000 since April 17, 2020. WTI Crude Oil bottomed in April 2020 at $19.22/barrel and now sits around $61.28, a 218.8% increase driven by demand. Copper has risen nearly 17% year-to-date. Corn was trading at $302.50 last April and today is trading at $546, in fact Corn has been a better investment than the S&P 500. Maybe investors have it right, inflation is rising faster than expected and the Fed may not be able to control run away inflation. Personally, I'm on the other side. I think that inflation will be volatile and won't just rocket up in a straight line.

I've said this before, this time I'll put it in big letters. I'm not shouting, I just want this to sink in.

Interest rates are everything

As rates rise, stocks decline, until they don't. When rates rise enough bonds become an alternative to stocks. Interest rates drive home sales, auto sales, loan originations, credit card usage and default rates. Many businesses include interest rates (borrowing) in their decisions about where they will invest and how much hiring they will do. The one place where interest rates have less impact is in the decisions made by the fastest growing companies that are working on disruptive, transformational businesses.

In the mean time I would expect to see cyclical companies, especially those in areas that will benefit from reopening, infrastructure building and financials to continue to benefit from this rotation. The news media calls it a rotation from growth to value. I think we all need to be looking for growth at reasonable valuations.

Is the Party Over? No. Emphatically no. Our economy is growing fast and the only thing lagging is employment. The second half of this year will likely deliver incredible returns for investors, so I remain bullish on America and on the stock market. While the CBO is expecting 3-4% GDP growth, the best analysts have estimates in the range of 6% to 10%. That puts the U.S economy on par with the rate of growth that China was reporting over the last few years. Anything over 3% is running pretty hot, so expect inflation to finally show up.

Today's Actions

BUY AAPL 100 shares @ $118.81

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker


Keep Me Honest 2021

  1. The S&P 500 will achieve year-end earnings of $170-$175 (1-1-2021).

  2. We are likely to have a significant pull-back during the 1st quarter, about 5%-10% (1-1-2021).

  3. Stocking picking will outperform algorithmic trading again as it did in 2020 (1-1-2021).

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When good stocks you own drop 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your own homework.

RULE #10: Being early and being late is the same as being wrong...move on.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:


I am invested short in these securities mentioned in this post:

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.


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