As I wrote last week, August Came Early This Year. Now it’s in full force. The August effect put the pedal to the metal in just one week. So, what has transpired and what does it all mean?
The market had already been correcting, and that’s a healthy thing. However, last Thursday night, we got some mixed messages from Techland. The news from Apple (AAPL) was positive, and after some wild gyrations on Friday, the stock inched up a little by the close. Intel (INTC) on the other hand got smoked. It got a piledriver like on the World Wrestling circuit with the stock down nearly 26% after reporting disappointing results and eliminating its dividend. This was after the federal government lined its pockets with $8.5 billion, with a “B” from the Chips Act. Where did that money go?
Then on Friday, we got the confirmation that many suspected was coming from the Bureau of Labor Statistics (BLS). The economy in July produced a paltry 114,000 jobs with downward revisions for the prior two months. Average hourly wages increased by 3.6% (likely to combat inflation) and average hourly hours worked ticked down by 0.1 to 34.2 hours. If you have some time in the bathroom, you can read it all here. To add insult to injury, the unemployment rate increased from 4.1% in June to 4.3% in July. An increase of 0.2% is a big jump for a month. Recall that I wrote just a month ago that signs of recession are on the horizon.
What really ticked off the market and made it move lower was that the Federal Reserve could have cut interest rates on July 31 but chose not to. The FOMC had advance copies of the BLS report and had all the ammunition it needed to cut rates. Now, the worst Fed Chairman ever, Jerome Powell has painted himself into a corner. Does the FOMC make an intermeeting rate cut or watch while the financial markets (which contribute to economic activity) spiral further out of control and wait until its September 17-18 meeting? That is the last meeting before the election and the FOMC never wants to appear to influence an election. Well, now it's forced to take action and will appear to be political and have to support failing “Bidenomics” (which by the way, has been removed from the political lexicon, in case you did not notice).
Just like a late-night “As Seen on TV” infomercial…but wait there is more. Sunday overnight in the US, and Monday in Japan, the Nikkei 225 stock market index plunged 12.4% in yen terms, the worst such drop since the 1987 stock market crash which was the day after Black Monday (October 19, 1987) in the west (trust me, I lived in Tokyo and worked for Morgan Stanley (MS) at the time).
Now, here is where I will get a bit wonky and technical. What caused the precipitous plunge in Japan was the unwinding of the carry trade. The carry trade is where hedge funds and banks borrow money in one currency and lend it in another. So, for example, you borrow money in Japan at 1% and re-lend it in the United States at 4%. It sounds like a printing press. That is all fine and dandy as long as the exchange rate between the Japanese Yen and the US Dollars remains stable. However, it did not, and the carry trade had to be unwound. As a result, the carnage in the carry trade and currency market spilled over to the stock markets; first in Japan and then Europe and then the United States on Monday.
As I always say, there is never a stock market problem. It’s just a credit or currency market problem that infects the stock market. Well, yesterday, the US stock markets got hammered at the opening of trading. As it turns out, the opening was the worst level of the day and stocks recouped just over half their early losses by the close.
So, here is more wonkiness (I promise that’s all). There is a gauge called the CBOE Volatility Index (VIX), commonly referred to as the Fear Index. A historical chart dating back to 2007 is below. All the way on the right (It’s very hard to see and faint but trust me it’s there) the VIX spiked to 65.73. That is the highest level recorded since the pandemic in 2020 and before that the financial crisis in 2008-09. Volatility spikes are notorious for being points of time of maximum panic. If you bought volatility spikes in the past you could buy good stocks at cheap prices. Look, if you walked by a store one day and saw a shirt selling for $50 that you liked and the next day that same shirt was $60. Would you buy it? No, but some people in the stock market chase higher prices. If you came back and saw that shirt selling for $40 a few days later, would you buy it? Yes, assuming affordability. However, when stocks are down 20% or more, you should be buying them, assuming that they are quality. 
This brings me to my last point, as I know this is getting a bit lengthy. Over the past few weeks, I have been cutting back on exposure to the market (beta) and then raising cash. Whenever we have periods of time such as when we are now in, I call around to my trusted group of graybeards in the business; people who I have known for at least twenty years and have been through many market ups and downs, especially 1987.
One such gentleman, whose initials are BR, for anonymity, and I spoke at great length yesterday. He sees the stock market through the eyes of a credit analyst, and I see it through the eyes of a stock analyst. We spoke of the volatility spike as we both recognized it. Then I mentioned that I raised cash and was going to redeploy that cash into high-quality stocks. BR mentioned that there are companies with strong balance sheets that should soon begin to buy back their own stock at depressed prices. I said that I learned how to identify such stocks from a tool I learned from my old professor at NYU when I was getting my MBA, Edward Altman. BR said, “oh yes I use that also, it’s the Z-Score.” Mr. Altman’s book is on my bookshelf right next to Jeremy Siegel’s “Stocks for the Long Run.
Anyway, we agreed that if you want to buy INTC now, go ahead, that stock was so 1980s and 1990s. It’s Z-Score is dangerously low, even after the Chip Act bailout. If you want to go back to the 1980s and 1990s, BR and I will sell you all the Boeing (BA) and General Motors (GM) that you want. Both have nauseatingly low Z-Scores. BA will need a government bailout and GM has had a few.
We agreed that Nvidia (NVDA) is so cheap and has the best Z-Score that we ever saw that it cannot be avoided. I might even buy back some of the NVDA I sold at higher prices. NVDA reports results at the end of August.
Finally, I mentioned that Palantir (PLTR) has the third highest Z-Score on my screen and that the stock was set to report last night. I added to our positions in PLTR before reporting earnings. The stock is another AI play and rose about 15% after reporting results. The pullback in stocks was not an indication that the AI trade was over, it was just an indication that the weak holders or as we call them “renters” were panicking.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC were long AAPL, NVDA & PLTR although positions may change at any time. The mention of a stock is not a recommendation and may not be a suitable investment for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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