Co/Report
Relief or Bear Market Rally?
Investor Education
The cash ratio is a good way for investors to measure a company’s current liquidity. The ratio tells investors the ability of a company to cover all of its short-term obligations with cash held on the balance sheet. The measurement for this ratio takes the company’s current cash and marketable securities and divides them by the current liabilities. Investors would want this ratio to be greater than one, showing that the company can cover all its current liabilities with cash. If the ratio is less than one, it could show investors and creditors that there is a risk that the company may not be able to fulfill all of its current debt obligations.
Read our overview on Cash Ratio Here!
Relief or Bear Market Rally?
The stock market ended last week in rally mode and had its best month of 2022, with the S&P 500 jumping 9.1% in July and the Nasdaq climbing 12.4%. The S&P 500 has cut its year-to-date loss to a little over 13%, and the Nasdaq to a little over 20%. Is this a sign of more relief to come, or is this just a bear market rally?
If you’ve been reading this newsletter long enough, you’ll know that our answer is: We don’t know, and don’t think anyone does, at least not with enough certainty to bet heavily on such an opinion. But we observe history, and the wise and experienced, to help us understand the environment and the risks at hand.
Let’s look at the bear market rallies in the last two major bear markets. In the 2000-2003 downturn, the top five bear market rallies were 21%, 21%, 21%, 19%, and 15%. In 2007-2009, there were rallies of 24%, 19%, 12%, 12%, and 11%. So, history says that rallies like we saw in July are normal within bear markets, and that it wouldn’t be surprising for it to go further. What do the wise and experienced have to say?
Veteran investor and bubble-watcher Jeremy Grantham made another podcast appearance this past week. In that conversation, he made the following comments:
The first half of this year is about as fast as stock markets ever declined. I remember seeing that the first four months was the fastest decline in the S&P since 1939, when I was one year old and they were preparing for World War [II]—so that’s a pretty good excuse to go down and this was the fastest decline.
This is the about as fast as markets go down and they always have good rallies. There’s nothing as quick and spectacular as a bear market rally. They had one in late 1929 to early 1930, an absolute doozy of 45% and of course, with historical hindsight, they signified very little. But at the time they frightened the pants off bears and they give hope that all is over, all is forgotten, and it’s back to the races. I suspect we may very well have a pretty decent bear market rally as we sit. I wouldn’t be surprised if this went on for at least another month.
In terms of the entire bear market, it would be unusual for it to bottom out anywhere near this high. I would expect that by the low that the S&P would’ve declined by 50% from the peak in real terms, so you do have to adjust the stock market for inflation and also the trend.
The trend in the market is a little over 4% a year and as time passes, you should put that into the fair value. A year from now, when the bear market might end, the trend line value would be almost 3000 on the S&P. Of course, there’s no rule that says you stop at fair value. Typically, in previous big bubbles breaking, they go down below that.
Grantham’s suspicion about a bear market rally proved timely, given the acceleration of the rally that occurred at the end of the week, after the podcast had already been recorded. He’s often early with his calls, and occasionally too cautious, but Grantham has been prescient when calling the major bubbles of the past. And he’s been worth listening to during the last 19 months, beginning with his January 2021 piece “Waiting for the Last Dance,” as well as his January 2022 piece “Let The Wild Rumpus Begin.”
If Grantham’s hypothesis is approximately correct about seeing at least a 50% decline in real terms from the peak, then from where we are today, there is still at least 27% downside in the S&P 500 before we are finished.
We wouldn’t bet on that coming to fruition. But we wouldn’t rule it out either. It’s worth asking how your portfolio, and your psyche, could handle either a big drawdown or a continued bear market rally (if we are, in fact, still in a continuing bear market).
You want to Know Thyself and you want to know what you own—and why you own it. Knowledge about your holdings is one of the best hedges you can have when dealing with an uncertain future. As we wrote in Cash and Knowledge:
Knowledge about your holdings gives you the confidence to hold or add to your investments when they are down—if you know they are good—or to sell and invest in better things that you also know well. You are hedged because you know the difference between price and value and won’t let a declining share price affect your ability to act intelligently.
“You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is.” —Charlie Munger
Co/nversations Podcast
Hosts Sam DiFiore and Aaron Staley have a conversation with Aaron Edelheit. Aaron shares his fascinating career journey looking for solutions and opportunities that other people don't see.
Aaron's passion for the investment industry and dedication to research shine through as he speaks about his experiences in:
Investing in small-cap and value stocksBuying and renting over 2500 foreclosed homes
Writing a book about the business case for taking a day off
Establishing the Mindset Value Fund and newsletter
Launching a cannabis investment fund
Creating a non-profit as a scalable solution to transition people out of homelessness
"Investing in cannabis is like investing in a 3rd world country". Aaron reveals the story of why cannabis is illegal, explains the conflicts between state and federal government, and shares his knowledge about the cannabis market and how legalization effects the surrounding areas.
California housing shortage and homelessness - Aaron joined a group of business people and formed a non-profit called DignityMoves. DignityMoves works to end unsheltered street homelessness in our communities by building Interim Supportive Housing with rapid, cost-effective, scalable solutions. Learn more about DignityMoves here!
Tweet of the Week
In Case You Missed It…
Howard Marks Memo: I Beg to Differ
Massif Capital’s Second Quarter 2022 Letter to Investors
Farnam Street Investments’ July 2022 Letter to Investors
A Conversation between Drew Dickson and Morgan Housel
The Intellectual Investor Podcast: Position Sizing: How to Construct Portfolios That Protect You
The Knowledge Project with Shane Parrish Podcast: #143 Andrew Wilkinson: Entrepreneurial Insights
Watch List and Earnings Under $250M
The Co/Investor Club is launching a watch list for premium members. These companies have been profiled by investors we follow, The Co/Investor Club team internally, or by our premium members. We may or may not own the names on our watch list. We heavily encourage all members to do their own due diligence as this is not investment advice. If you would like to discuss any of the names or share a name you believe needs more attention, please feel free to reach out to sam@avenelfinancial.com.
We understand how much our premium members enjoy staying up-to-date on the small and microcap markets. Given that most investors know when the companies in their portfolio and larger companies are reporting earnings, we have decided to keep our members up-to-date on companies reporting earnings that have a market cap of under $250 million. You can log into the premium member portal each week to see which companies that have a market cap of $250 million and under are reporting in the upcoming week.
To have access both of these, please sign up for the Co/Investor Club Premium Membership.
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