Update on Delta Fears and Podcast with Tim Travis and Tobias Carlisle

We are beginning to see a bit of increasing volatility in equity markets arise, as concerns around Covid-19 and the Delta variant have caused increases in positive test results and restrictions, albeit on a far smaller basis than what occurred last year.  We’ve been writing about the market getting a bit ahead of itself for a while now so I don’t view a bit of a correction as being much of a surprise.  Bond yields have been plummeting lower over the last few weeks, as the market is showing fear that economic growth won’t be as robust as expected. These negatives are somewhat offsetting very strong earnings reports, especially from many of the banks and technology companies that have reported thus far. 


With nearly 60% of the United States vaccinated and tens of millions, if not hundreds of millions having been previously infected, the likelihood of C-19 creating anything close to the hellishness of 2020 seems unlikely.  Many people naturally have almost a PTSD of what that experience was like, which is why hearing any talk of additional restrictions at this point seems quite jarring.  Many of the cases are asymptomatic and reflect seasonal trends, along with disparities upon vaccination/preexisting immunity rates.  Any restrictions that pop up locally or perhaps nationally, would likely be far less damaging economically, targeting specific industries such as travel and entertainment. To be clear, I hope and pray this doesn’t happen, but I just want to speak honestly about possibilities and how markets and the economy might react.  We have avoided having positions in industries such as cruise ships, or having anything more than small positions in airlines because we had worries about their balance sheets and how rapidly sustainable normalcy would resume.


It has been quite some time since we have had a 5% correction and it is not uncommon to see volatility ramp up in the summer.  At TTCM, we’ve harvested substantial gains since the start of the year and have been resetting into relatively conservative and income-generating positions built to weather a bit of volatility.  The volatility index has risen quite dramatically, including by about 25% yesterday, which ramps up all options pricing.  Over the short-term, this causes a mark to market loss on our options, but over time, volatility and time value go to zero at expiration, which is when the full level of protection comes through for our accounts.  If all our securities stayed exactly where they are currently when our options expire, our accounts would be far higher, so always keep that in mind.  It also means that we are setting new positions at extremely attractive risk-adjusted returns, taking advantage of the heightened fear in the market, reflected by that volatility index.


I would best characterize our current investments as deeply undervalued stocks, that could should continue to trade higher as earnings and stock buybacks come through at discounted prices.  This basket has the potential for earnings multiples to be re-rated dramatically higher if we see interest rates perk up, but we’ve been living in a low rate world for a decade, so we feel prepared either way. 


The second basket is income-focused securities with smaller upside potential.  These positions offer very high yields and should be expected to hold up far better than the overall market in times of upheaval. These securities are defined by high dividend stocks, loan funds, etc. Yields might vary between 5-11% on these securities, which is obviously reflective of individual security selection, as you aren’t going to get anything close to that in most fixed income funds.


The third basket is growth at a reasonable price stocks.  This would consist of some of our Technology investments both domestic and international.  These stocks should continue to see strong earnings growth and still trade at reasonable prices relative to that growth rates.


The fourth basket is our options strategies, which are designed to generate income and/or get us into stocks at cheaper levels than what are available currently.  This strategy has us buying on the dips, or earnings attractive returns with our options expiring worthless. As mentioned earlier, the full benefit of this strategy shows through when the options expire.   


All of these strategies seem more attractive to me than buying the market at current levels, or owning something like Treasury bonds at a 1.15% yield on the 10-year.  Lastly, I recently did a podcast with Tobias Carlisle, which I’d like to share with you if you have the time.  Here is the link: Podcast with Tim Travis and Tobias Carlisle