Kim Bolton, president and portfolio manager of Black Swan Dexteritas
Focus: Technology stocks

MARKET OUTLOOK

The month of October can be known for turnarounds and turbulent times. While this October wasn’t particularly volatile, the stock market did produce a reversal. As market participants were looking ahead into the month, not many concluded we would see new highs. The trade skirmish was still a major worry, and then we saw ISM manufacturing fall to its lowest level since 2009. Of course once any investor sees or hears “2009,” they invariably have nightmares. Meanwhile, the third-quarter earnings season seems to have met expectations with a decrease of 0.5 per cent from Q3/18, and corporate America’s outlook is still cautious for the remainder of 2019 and the first half of 2020. This less-than-bullish background begs the question: what was the catalyst for this melt-up in the stock market and the steepening of the yield curve? The answer in retrospect is the liquidity infusions from the balance sheets of the G5 central banks (the Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China and Swiss National Bank). Federal Reserve officials had been working feverishly to address issues that popped up more than a couple of months ago in the overnight bank lending market. In early October, the New York Federal Reserve undertook limited initial repo operations, which allowed Treasury cash balances to rise and the level of commercial bank reserves to recede. Not long after that, the Fed announced a new quantitative easing program to the tune of $60 billion a month starting Oct. 15, which provided even more liquidity in search of returns. With global bond yields at historic lows, this new cash fueled the global stock market rally. As with any rally to new highs, we have to keep in mind October’s gains coupled with the strong start to November have left most major stock markets at short-term overbought levels; for example, the forward four-quarter (Q4/19 to Q3/20) price-to-earnings ratio for the S&P 500 is 17.8, versus the historic P/E mean of 15.76.

Your BSD portfolio management team expects an equity market downside correction up to the late second half of November, which should wear off the recent market excesses. We believe that this systemic liquidity from the largesse of the global central banks is the ultimate high that the financial markets can have. If this is true, the first half of 2020 will deliver fantastic equity returns, but meagre returns for bonds. As we have always preached, technology is the engine of universal growth and the BSD Global Tech Hedge Fund has proven to be capable navigating those fundamental, technical and capital flow factors, while timely positioning the portfolio in the most lucrative technology sectors.

UPDATE

Universal Display Corp was sold at $207.60 after being bought at $96.70. The stock achieved our price target and we took profit.

TOP PICKS

CISCO (CSCO:UW)

ALPHABET (GOOG:UW)

PAYPAL (PYPL:UW)

PAST PICKS: DEC. 14, 2018

AMAZON (AMZN:UW)

• Then: $1,591.91
• Now: $1,766.32
• Return: 11%
• Total return: 11%

NUTANIX (NTNX:UW)

• Then: $44.12
• Now: $27.57
• Return: -38%
• Total return: -38%

UNIVERSAL DISPLAY CORP (OLED:UW)

• Then: $95.06
• Now: $199.07
• Return: 105%
• Total return: 109%

Total return average: 27%

WEBSITE: www.bsdmi.com