Kim Bolton, portfolio manager at Black Swan Dexteritas
Focus: Technology stocks

MARKET OUTLOOK

Your Black Swan Dexteritas (BSD) portfolio management team is very good at finding technology stocks that represent excellent value (which we sell as they approach price targets), but at this stage of the secular bull market, we also need to remain very vigilant of macro-economic developments and the price action of other asset classes, because these factors represent more than 50 per cent of the due diligence required for successful investing in the current environment.

The first half of October 2018 looked like a typical market “pullback” (a decrease of less than 10 per cent in an index from its recent high), but in the second half of October, the Dow, S&P, Nasdaq and Russell extended their losses to qualify for a market “correction” (a drop of 10 to 20 per cent in an index from its recent high). If the stock markets were to extend their losses beyond 20 per cent, this would then qualify as a textbook “bear market.” Bear markets don’t happen often and they usually happen due to fundamental macro-economic problems: an economic recession, an asset bubble, aggressive interest rate hikes, and/or a spike in commodity prices. None of these specific reasons that have historically caused a “bear market” are available in today’s macro-economic environment.

As we survey the tug-of-war between the steady factors (a strong global economic growth, benign inflation, robust earnings and buybacks, and the low probability of recession) and the unsteady undertow (geopolitical concerns), we don’t think the balance of risks is strong enough to topple the ongoing developed markets’ expansion and the continued growth of corporate earnings it supports. Market corrections don’t last a long time, typically three months on average, and we tend to see a full recovery after another four months. This market correction started about a month ago: we likely have another two months to go. If history repeats itself, in Q1/19, we should be back to where we were before this correction started.

With this expected scenario, the following are your BSD team’s strategy and tactics to handle future market volatility:

• Weather the storm with our stock portfolio of technology vendor and technology end-user leaders, while constantly adjusting our entry and price targets;
• Raise cash once those companies approach their respective price targets, and employ the proceeds into our “shopping list” of technology companies;
• Protect the stock portfolio with our proprietary hedging mode. It uses equity derivatives (various futures and options instruments) to minimize the portfolio’s drawdowns, lessen the portfolio’s volatility, and potentially generate alpha.

The bottom line: it’s still a secular bull market in stocks led by technology as the engine of growth. It will continue until it ends, and no one knows when that will be. It will end when either the economy turns down and earnings decline, or when interest rates rise to a level where bond yields provide significant competition for stocks.

UPDATE: Former top pick Red Hat was acquired by IBM on Oct. 28. We took profit on this 3.5 per cent position.

TOP PICKS

AMAZON (AMZN.O)

VISA (V.N)

ERICSSON (ERIC.O)

PAST PICKS: AUG. 29, 2018

WORKDAY (WDAY.O)

• Then: $153.78
• Now: $133.89
• Return: -13%
• Total return: -13%

ALPHABET (GOOG.O)

• Then: $1249.30
• Now: $1081.08
• Return: -13%
• Total return: -13%

FANUC CORP (6954 TYO)

• Then: ¥22,165.00
• Now: ¥19,735.00
• Return: -11%
• Total return: -9%

Total return average: -12%