Author: adamweingartner

“The post-election landscape euphoria is being driven by hopes for deregulation, government spending cuts, the extension of the Trump tax cuts, and a focus on technological innovation.  This will turbocharge the US economy more powerfully than during the Reagan Revolution of the 1980s.”

Those are the words of Cathie Wood, famed (infamous?) money manager and portfolio manager of the ARK Innovation ETF, among others.  Color me skeptical.

To start, it’s possible these things may be true.  I would love nothing more than the United States to be more competitive in the global landscape, to be more energy independent in the true sense of the phrase, and to be the vision of that shining city on a hill.  I put this likelihood around 30%.  I think a lot of American consumption depends on consumer confidence.  And to that end, the consumer should, on the margin, feel like things are getting better instead of worse.  But this tends to happen every time a change in administration occurs, and one needs to look no further than the last two presidential elections to see the market optimism following the results.

The more likely scenario is that the market is on a bit of a sugar high.  We have some positive seasonality and as Callie Cox writes, November, on average, is the best month of the year (election or no election).

In our opinion, much of the potential major benefits of the policy changes are already priced into the market.  Ben Graham said it best, “today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance.  Thus what he has projected with so much study and care may actually happen and still not bring him any profit.”  The stereotypical “buy the rumor, sell the news”.  Combine that with our starting point of 23x earnings for the S&P 500, instead of 16.5x earnings in 2016, my guess is that the rally may not “stick” this time.

This is all not to say that the economy or the stock market is going to crash, but trees don’t grow to the sky.  It’s often the car you don’t see that causes the accident, and we continue to believe that caution in adding additional capital to equities (large cap equities specifically) at nosebleed valuations is warranted.

Happy Thanksgiving!

– Adam

 

Hi all,

As we approach Halloween, we find all three major U.S. equity markets at or near all-time highs.  The S&P 500 has made almost 50 new daily all-time highs this year, and the lack of traditional periods of annual volatility have left cautious investors in the dust.  But if you’re still sitting on cash or waiting for a better time to enter the markets, do not chase this market.  We believe the opportunity for a better entry will come soon.

The stock market is currently pricing in more than a few rosy assumptions and to be perfectly honest, it’s possible they all work out like everyone thinks.  In my experience, one of the dominoes tends to fall a little sideways and the market changes those assumptions very quickly.  There is nothing more dangerous than a market that changes its mind.

Let’s check out a few of these assumptions.

1. Bond spreads between investment grade and high-yield bonds are at their smallest margin since 2005.  This means people have been buying the debt of riskier companies, under the assumption of little-to-no default risk.

2. This is the strongest Year-To-Date performance of the S&P 500 this century.  While it’s true that strength begets strength, it’s rarely in this straight of a line.

3. Earnings expectations are pretty lofty.  At these price levels, the market is expecting about 20% earnings growth over the next year.  While it’s certainly possible, if companies were to fall short, the market could correct very quickly.

4. Investor Sentiment is frothy, but not yet crazy.  CNN’s Fear and Greed Index just recently reached into Extreme Greed territory, and per Bespoke, the spread between Bulls and Bears are back to 2005 levels.

Generally, in times like these, it’s always better to be reactive rather than proactive, but I am willing to say with a high likelihood, if there are distributions from accounts that need to be made over the next 6-12 months, or you’re simply looking to get more conservative and lock in gains for 2024 as your wait out the results of the election, now is the time to trim a little off the top and reload the cash pile to prepare for the next, better opportunity.

– Adam

We’re going to change it up a bit this month, but I’ve been thinking for a bit about where we’ve been and where we’re going as a firm, so here we go.

For those of you who don’t know me, my name is Adam Weingartner and I am co-owner of Second Level Capital along with my business partner, Brad Webb.  18 years ago, I graduated from Truman State University and immediately got a job at a local bank.  At the ripe old age of 22, I vividly remember sitting at my desk at 4:45 counting the seconds until the day ended, wondering why I decided to go to college to help people open Christmas Club savings accounts.

Knowing this was unsustainable, I interviewed at a small brokerage company in Clayton, which focused on tax-advantaged alternative investments in real estate and energy outside of the traditional stock and bond world.  I was only asked one question during my interview.  “Why do you want a job here, if you already have a job?”  I replied, “I’m bored.”  My future boss replied, “Well, I can promise you will never be bored here,” and in November of 2006, I started my career in the personal finance business.

He was right.  The ensuing years during the Great Financial Crisis was a baptism-by-fire education in which I learned more each week than I did during my four years of college. Regardless of what anyone says, every advisor is a by-product of the market in which they grew up.  Gen X advisors today will be wary of another tech bubble.  Older advisors will see the ghost of 1987 around every corner.  The pain of clients during this period has been burned into my brain and has directly led to doing all we can to avoid those situations again.  It is still the primary objective of our business today.  Risk first.

At first, I loved the idea of doing something different.  I couldn’t acquire knowledge fast enough.  It was intellectually stimulating for me and seductive for clients who wanted to be involved in the ground floor of new and exciting ventures filled with profitable possibilities.  For the first six years of my career, I read hundreds of books, went to dozens of conferences, spoke on panels next to billion dollar institutional money managers and reviewed more investment projects than I can remember.  It felt like I was playing in the right sandbox, rubbing elbows with TV personalities and colleagues I respected immensely.

In 2012, as the stock market was approaching the all-time highs last seen in 2007, it was clear to me that the traditional stock and bond world would survive, the financial system wasn’t going to completely collapse, and the US was entering a longer period of sustained growth.  As the original intent of the brokerage company for which I worked was to be a complement to high-net worth investors traditional portfolios, I hatched an idea to develop a new division of the company that focused on our deepening our existing relationships by offering traditional investment advice along with our suite of alternative options.

The most surprising aspect of those first years running a traditional money management business was how much pride I took in knowing as much as I could about each family we served.  Learning communication styles. Knowing when to ask for advice, but also which parts of the plan were non-negotiable.  It’s still my favorite part of the business, and it’s why we’ve deliberately turned down business to stay small and nimble.  Sometimes it makes me think of the mission statement from the movie Jerry Maguire. Fewer Clients, Less Money.

For most of the next six years, I ran this division of the company on my own.  My bet that the stock market would be a great place turned out to be prescient.  From the start of 2012 until we left the firm in 2018, the S&P 500 returned 120% (not including dividends), while the publicly-traded real estate index returned 40% over that same time frame.  Couple this with the decreasing costs of owning stocks (commissions went to zero), and the stagnant nature of commissions on the brokerage side (around 10%, up-front), it felt like the old model was already under so much regulatory and price pressure that even if it survived, it would be a shell of what it once was.  Real estate firms were already redesigning products for fee-based accounts, and in the middle of 2018 it just felt like it was the right time to make the jump with both feet.  

While we were certainly having second thoughts after having taken significant pay cuts to spin-off our own venture and seeing the stock market fall 20% in the fourth quarter of 2018, it’s the best decision we’ve ever made.  Every choice we make today is designed to grow our business intelligently, optimize our time for those of you who have entrusted us with your financial livelihood and design portfolios that will work for you both financially and behaviorally.

If you’re someone who’s been procrastinating getting started, you’re someone who’s financial advisor only calls to remind you to contribute more money once a year, or you’re an existing client who knows someone who could use some help, we’d love it if you gave us an opportunity to see if we might be a fit.

Thank You,

Adam

“There are two kinds of forecasters; those who don’t know, and those who don’t know they don’t know” – John Kenneth Galbraith

Hi everybody,

With valuations in large cap tech companies reaching nosebleed levels over the summer, and the fervor over Nvidia and the Magnificent 7, in mid-July something happened that has never happened in the history of the stock market.  At the first sight of a tech pullback, the largest and quickest rotation of money moved out of those names into the value-heavy Russell 2000, pushing it more than 4 standard deviations above it’s 50-day moving average (see chart below from Bespoke).

Whenever something happens for the FIRST time in markets, it catches my attention.  Combined with stock allocations at an all-time high as a percentage of financial assets, I think we can be comfortable saying that most investors were “all-in”.  (see below)

Well, you can guess what happened next.  Whenever extreme greed enters the picture, the market has an uncanny ability to humble.  From July 17th to August 5th, the Russell 2000 fell 13.2% from peak to trough, punishing late comers to a market rotation that started in October of 2023, but stalled during the first half of 2024.

Those who got smacked on the nose, quickly reversed course during the recent decline, but the market popped back quickly and has already recovered more than 50% of the decline.  So the psychology of investors is now a little more skittish than it was when everyone thought they were a genius.  As a gentle reminder…

August and September are generally weaker months (the first half of October as well).  We are viewing the recent selloff as a precursor to another sell-off in the next few weeks, and during that period of time, we are looking to rebalance away from short-term money markets and large cap technology into more of the “value” type sectors.

If you’re sitting on cash on the sidelines, patience will be paramount, but we DO believe there will be an opportunity in the coming weeks to put that cash to work at better prices.  We don’t feel this pullback will derail the bull market, but unfortunately like Walter Deemer says, “when the time comes to buy, you won’t want to.”

Kids are finally back in school.  There is a God.

– Adam

“I beseech you, in the bowels of Christ, think it possible that you may be mistaken.” – Oliver Cromwell

Hi all,

There has certainly been a change in tone in the stock market over the last three weeks and for the first time in quite awhile, some things that didn’t matter, now do.

1. Top Heavy Concentration of the S&P 500.

2. With everything nearing all-time highs, why do the negative vibes persist? Adjusted for inflation, households haven’t seen much change in their overall net worth.

3. Valuations are stretched.

4. Sentiment has gotten frothy and investors gone “all-in”.

5. Housing is finally starting to come back to earth (in some places).

Long time readers will know that we’ve been expecting the market to “come to its senses” since October of last year.  We saw a rotation into small cap companies during Q4 of 2023, and have maintained our small cap bias, but the small caps have lagged substantially against the flavors of the month (semiconductors, large cap technology companies, AI darlings).  I can’t tell you how many times someone has called the office wanting to ditch diversification because momentum stocks were the only game in town.

Well, in July alone, the Russell 2000 is up 11%, while the tech heavy Nasdaq 100 is down 3.5%, with still a week to go.  If you want to try and sell all your tech stocks and move into unloved names (real estate, utilities, energy, GASP!), be my guest.  But you might end up chasing your tail.  We feel the most prudent course of action is to simply view this pullback as serious, but one that needs to occur in order for rationality (and fear) to come back into the stock market. August is generally a weaker month, so we could be in for a few more surprises along the way, but regardless of where this pullback stops, we will likely view it as a buyable dip as long as the bias of the federal reserve remains toward cutting interest rates this year.

Buckle up, and please keep your hands and feet inside the ride at all times.  Try to remember that the S&P 500 is up 56% over the past 20 months.  What we’re going through now is normal, the speed and magnitude of the gains over the last several years wasn’t.

– Adam

Hi all,

This month’s post is simply an excerpt from a memo that was written in March of 2000.  I urge every one of you to read Walter Deemer’s report in its entirety (link is below).  Swapping out ‘Cisco’ for a name like ‘NVIDIA’ could provide a little perspective about today’s market and should serve as a great reminder to always stay prepared for what might happen next.

– Adam

Walter Deemer’s Special Report — March 3, 2000

ARROGANCE 

As I said at the outset, what prompted this piece is the arrogance on the part of all too many New Economy (growth) managers who sneeringly tell everyone who is not invested in the same Cisco’s and Qualcomm’s as they are that “this is the way it is and this is the way it’s going to be from now on. The Old Economy stocks are relics of the past and if you don’t own the Cisco’s and Qualcomm’s of the world, no matter what the price, you’re living and investing in the past, not the future.” Again: we are not about to quarrel with the idea that Cisco is a better company than, say, Sears; it is. But investors are not buying Cisco, the company — investors are buying Cisco, the stock, and what seems to be lost on the part of many money managers is the fact that just because Cisco is a better company than Sears does not automatically make Cisco a better stock, too.

To put it even more bluntly: The question that must be asked here is at what price Sears is a better buy than Cisco — and “Never!” is NOT an acceptable answer. The money managers who are in the “My Cisco, right or wrong!” camp and who will not consider alternative investments no matter how low those alternative investments get nor how high Cisco goes — are doomed to eventual disappointment, just as the Nifty Fifty managers, the managers who bought and owned the finest companies in the world at the time, were doomed to eventual disappointment twenty-seven years ago. The question is “when?” — not “whether?”

None of the foregoing is meant to knock growth stock investing per se; clearly, growth investing IS currently working — and working unbelievably well. In addition, given our comments in our regular reports regarding small growth stocks (and the fact that our own money is invested in a small-cap growth-stock fund), we suspect that growth investing will continue to generate superior performance for some unknowable time to come. My quarrel is with the money managers who 1) think that investing in growth stocks, no matter what their price, is the ONLY way to go, now and forevermore, and 2) refuse to consider alternative investments under any circumstances. For all I know, Cisco may be a better stock to own than Sears for a long, long time to come. But there IS a limit somewhere, and investors must thus keep on comparing Sears to Cisco even if the answer keeps coming up “Cisco is still the better stock to own.”

Open-mindedness is one of the signs of a great investor. Arrogance is not.

Full report can be found here

“We have nothing to fear but the lack of fear itself.” – Walter Deemer

What a milestone.  40 years ago, this month, the Dow Jones Industrial Average was 1,082.  25 years ago, it crossed 10,000 for the first time.  It’s a great time to reflect back on an amazing fact. The stock market empowers ordinary people to build extraordinary wealth.

But big round numbers are always a psychological yellow light for stock market participants.  Whenever we cross a major barrier, it brings out anxiety-inducing thoughts like “How high can this market really go?”.  Our natural inclination is to get a little more defensive and protect our gains, even though during the last 100 years, there have been more days making new all-time highs than days spent in a bear market. (thanks to Callie Cox for this nugget)

While it’s always important to avoid complacency, it’s also important to remember why we’re here.  Ben Carlson from Ritholtz Wealth Management recently laid it out pretty nicely.

These aren’t feelings.  They aren’t thoughts and prayers.  These are facts.  And although financial lives are empirically better than any time over the last five years, why doesn’t it feel that way?  Because everyone of a certain age knows “this too shall pass”.  Chuck Palahniuk has a great quote.  He says, “It’s so hard to forget pain, but it’s even harder to remember sweetness.  We have no scar to show for happiness.  We learn so little from peace.”

The trade-off for investing remains the same at 39,999 as it does at 40,001.  In Howard Marks’ recent memo entitled, “The Indispensability of Risk”, he writes, “you shouldn’t expect to make money without bearing risk, but you shouldn’t expect to make money just for taking risk.  You have to sacrifice certainty, but it has to be done skillfully and intelligently, and with emotion under control.”

Strength begets strength.  The bull market is still young relative to previous cycles.  The stock market has never been negative in a year where a president is running for re-election (10 out 10 since 1950).  Corporate earnings are at all-time highs.  You get the idea.  It’s foolish to think it will always be this way, but try to enjoy it while it lasts.

If you’re someone (myself included) who tends to see the glass half empty from time to time and focuses on the “unprecedented” geopolitical risks, inflationary pressures, or the unsustainable national debt, I’ll leave you with this:

This is from Harper’s Magazine.  In 1847. (c/o Brent Beshore)

Talk soon,

Adam

Hi all,

In our previous post, we mentioned remaining cautious in the short-term even though the market showed no real signs of slowing down.  As it happens, the final trading day of March marked the intraday all-time high in the S&P 500 (5264), and as of last week, the S&P was almost 6% lower.  The technology-heavy Nasdaq 100 found itself 7.5% lower and the representation of small business in America, the Russell 2000, was 9.5% lower.

It is likely we are nearing some sort of short-term bounce, but the $10,000 question remains: Will this be a buying opportunity on our way back to all-time highs, or do we still have more work to do on the downside before stocks find their footing?

“The work of a pullback in a bull market is to unwind over-aggressive positioning, drain excess optimism, reset expectations and take prices down to meet fundamental buyers’ conviction.” – Michael Santoli

This is precisely what has happened.  Less than a month ago, 82% of stocks were above their 20-day moving averages.  Last week, that number sat below 8% (got as low as 6% in October of 2022, which happened to be a fantastic buying opportunity).

We are believers that history remains a guide.  Over the last 100 years, when the S&P 500 had been up more than 10% by the end of March, it had closed the following nine months of the year green 12 out of 13 times.

Assuming this still holds true for 2024, that would portend a gain of at least 5-6% from current levels.  But with short-term interest rates holding very steady, a 9-month treasury bill can earn roughly 4% over the balance of 2024 with zero risk.  Herein lies the dilemma.  When will market participants decide to start moving out of very attractive risk-adjusted returns, and back into the stock market?

Our guess is that this happens sooner rather than later, but we believe that in order to justify moving out of high-yield savings accounts and short-term treasury bills, investors will start to go bargain hunting rather than choosing the darlings of the past year.  We’re looking for stocks and sectors that are well-off recent highs, still providing quality business models which have stood the test of time, and potentially pay an attractive dividend yield (as a nice transition from treasuries).  For a decent portion of our client base, we have been waiting for a better market entry point and been quite content to sit and collect interest.  We believe that time is coming to an end, and for those of you with the appropriate risk tolerance and time horizon, we put additional capital to work last week.

We have some supportive price levels a few percentage points lower than here, but the entire market is looking at these.  For instance, the Jan 2022 high for the S&P 500 is around 4800.  This would be the first test of the breakout from the levels in late January, but all tests are not passed.  The problem with focusing only on levels is that it disregards the most important indicator of all: price.  Are the majority of stocks going up? No.  Has there been a change in market sentiment? Yes, but not enough to consider it a major buy signal, in our opinion.

For those of you with additional cash on the sidelines, you will likely hear from us in the coming weeks in order to prepare to get those dollars to work in the short-term.  We have no idea whether or not the pullback extends to 4800 or 4500 or 4200.  Picking a number, while disregarding the current market environment is a terrible way to manage allocations, but we need to be prepared for all eventualities, including positive ones (gasp).

The Federal Reserve is meeting today and tomorrow, and tomorrow’s press conference should provide a little more clarity into the market’s patience level as it grips with the possibility of a “higher for longer” interest rate environment.

– Adam

Hi Everyone,

This month will be brief as we are moving offices (more to come on this next month).

Last week, the market extended its winning streak on the S&P 500 to five months, and looking back in history, the future looks pretty promising.

When the S&P 500 is positive for December, January, and February (the DJF Barometer), one year later the index is higher 25 out of 25 times.  According to Wayne Whaley, the signal is the only 25+ case study in his domain that is perfect back to 1930.  If you want to bet on something that’s never happened before, that’s fine.  It’s just not something that we do around here.

While we tend to agree that stocks will be higher one year from now, for those clients who have fresh capital right now (or those clients sitting in 5% yielding T-Bills) we remain cautious in the short-term.  Valuations remain elevated, speculative investments have started to come back into vogue (crypto, SPACs, etc.), the interest rate outlook remains muddled, and the first real signs of a stressed consumer have started to pop up as well.  Nike, Lululemon, and Walmart have all guided for a weaker first quarter than what they were seeing just several months ago.  This leads us to believe that the market is due for a traditional pullback (5-10%).  At that point we would feel much more comfortable allocating additional capital, although when the times comes to buy, you probably won’t want to.  Until then, sitting in a 5% money market doesn’t feel too terrible.

I’ll leave you with a passage from Berkshire Hathaway’s annual report, published early in 1987.  Keeping this information in the back of our minds has proven itself quite useful over our last two decades in the business.

– Adam

“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

– Warren Buffett

“Some people are so poor, all they have is money” – Bob Marley

Hi all,

I read a short piece from Morgan Housel earlier this month and wanted to pass along a few points from his latest post, A Few Thoughts on Spending Money.

• There are two ways to use money. One is as a tool to live a better life.  The other is as yardstick of status to measure yourself against others.  Many aspire for the the former but get caught up chasing the latter.
• Everyone can spend money in a way that will make them happier, but there is no universal formula on how to do it.  The nice stuff that makes me happy might seem crazy to you, and vice versa.  Like many things in finance, debates over what kind of lifestyle you should live are often just people with different personalities talking over each other.
• Unspent money buys something intangible but valuable: freedom, independence, autonomy, and control over your time.  Every dollar of savings buys a claim check on the future.
• Some wealthy people struggle to spend money on things that would make them happy because “I’m a saver” becomes such an ingrained part of their identity. What you intended to be a strategy to achieve a better life turns into an ideology you are beholden to.
• The more money you have, the harder it becomes to know how to spend it in a way that will make you happy.  And that confusion sets in at fairly low levels of income. Luke Burgis writes: “After meeting our basic needs as creatures, we enter into the human universe of desire.  And knowing what to want is much harder than knowing what to need.”

Like everyone else, there’s always a push and pull from life’s expenses on what we want vs. what we need.  This was most apparent on my most recent hockey-related adventure to Madison, WI.  Buying souvenirs and eating out more often than you normally would is part of the fun on these “mini-vacations”.  I’m usually the one who is more conscious of the spending (curse of the job), but in more recent years I’ve softened my stance a bit.  Maybe it’s seeing the kids getting a little older and realizing it’s all moving too fast.  Maybe it’s becoming more financially comfortable as we start to earn more later in life.  But to be honest, the real catalyst for this post was the recent passing of a neighbor and parent at my son’s school.  46 years old and leaves behind a wife and two young boys.  He’d known about the terminal nature of his diagnosis for sometime and was lucky enough to be able to quit work and focus on his bucket list, which was not filled with regret about his mortgage rate being .5% too high, or his 401k’s relative performance with the S&P 500.

Just a reminder to hug everyone a little tighter this month and remember to try and create future nostalgia when we all hopefully look back at a life well lived.

– Adam