Bullish or Bearish?

by Matt Commins Posted on May 10, 2020

I’m not a professional investor. I’m an above average-to-good fantasy baseball player. I’m just a fanboy who reads, listens and watches real investors (and pretends to be a real investor). I currently have 40% cash and for the past two weeks I have been wrestling with to do with my cash.

To try to make a better decision I thought it best to write out my best ideas for both the bull and bear case. Charlie Munger said in order to fully understand something you have to know both sides.

I originally wasn’t going to make this public, but when I was scouting the Cal League in 2012 a professional scout, when asked whether to go after a goal, said to me, “sometimes you got to put your dick on the table.” Ever since I heard that I’ve never forgot it.

This is me putting my dick on the table. This is not financial advice. In fact, if you derive any investment ideas from this then you deserve to lose your money because I don’t know anything. Lastly, this is not meant to be a comprehensive list.

Bear Case: Why Not to Buy Stocks

Older People.  They make up a big part of the economy. (Source: Numbers from here) People >45 represent 59.7% of consumption. >55 is 41.4%. Will people over the age of 55 really go out and start spending right away?

< 25 9.18%
25-34 13.33%
35-44 17.77%
45-54 18.30%
55-64 16.90%
65-74 14.13%
>75 10.39%

Consumer spending. Heading into 2020 people had a lot of debt. “Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation.” (source: WSJ) Before the crisis hit about 53% of people didn’t have a rainy day fund heading into the crisis. I have to believe the credit cycle has to take shape and since there is so much debt people will not spend as if nothing happened.

Sweden has stayed open and consumption was still down. “All of that is contributing to what Sweden’s government estimates will be a 6% contraction in domestic consumption this year.” (source: WSJ.com)

Jobs/Employment. Blue collar AND white collar jobs have been lost. “An economy cannot consume its way out of a slump–it needs to produce. Capital spending for the sake of spending will not help.” (Source: Bull) If jobs are lost that means we won’t produce as much which will limit growth in GDP.

When the reopening happens businesses can’t be at full capacity. Even if all businesses returned to 90% of their 2019 revenue levels then those companies and governments will be hurt. Restaurants make their profit when they’re about 85% capacity. If they can only be at 60% capacity they’re not going to be profitable.

Price of the Market. Market is pretty expensive right now. The SP 500 is expected to earn $128 per share in 2020, down from $152 at start of the year. The index’s PE ratio is almost 23 times, among the highest ever. The Market is expecting a V-shaped recovery in 2021. The Market is higher now than December 2018. I sincerely doubt the forward looking prospects of the economy is higher now than at the end of 2018.

Macro. There is a high chance the corporate tax rate will increase. Companies were the most profitable as they’ve ever been in 2018 because of the corporate tax cuts. With all this debt we’ll have to start paying it back. Therefore, corporate taxes will have to increase especially if Biden wins.

GDP didn’t drop as much as now compared to previous sessions. In 2009 it dropped 2.5%, 2001 up 1%, 1991 down 0.1%, 1982 down 1.8%.  GDP dropped about 4.3% in Q1 2020 and is projected to drop 30% in Q2. Therefore, we have a long way up.

Economy was slowing entering 2020 and revenues/sales were slowing.

The amount of debt is massive. In the last 10-11 years for every $1 of growth we had to finance that with $3.5 of debt. Those numbers exclude the trillions of debt we spent in 2020. It’s difficult to grow economically with a big debt load.

Trade war/rhetoric against China will intensify and could result in tariffs. In 2018-19 the Market would gyrate up and down based on news on tariffs. Even if Biden wins, relations with China will continue to worsen.

Fraud. The fraud cycle follows the economic cycle. Companies are juicing their numbers. For example, a lot of tech companies pays their workers via company stock but they don’t put that expense in the Balance Sheet.

Other countries. Other countries will be affected more harshly than the USA. Emerging markets like Argentina and Brazil could get crushed by the virus because they do not have the economic infrastructure to provide fiscal stimulus.

Bull Case: Why to Buy Stocks

The Fed. The Federal Reserve has unlimited money. “As of Wednesday, the central bank’s balance sheet had increased by more than $2.4 trillion, or 56%, to $6.68 trillion, in eight weeks.” (Source: Barrons) The Market is forward looking so the economic pain the economy is experiencing doesn’t dramatically impact the future cash flows in the next 5-20 years. If the Fed is going to keep the markets going then why fight the Fed?

Value Stocks. According to the latest paper from Cliff Asness value stocks are the cheapest they’ve ever been. So, even if the Market as a whole is expensive it doesn’t mean investors shouldn’t be buying. Should I take my full position on $CSV? $IWN? $IWS?

Also, over a long time horizon it’s better to be in the Market than out of it.

Investor psychology. Howard Marks has said investor psychology is a pendulum that swings from euphoric to pessimistic; it hardly stays in one spot for long; it very rarely stays in the middle. With low interest rates it’s very possible FOMO and/or handcuff volunteers will have to buy equities. “And given Treasury yields under 1% for all but longer bonds, the 2.07% dividend yield on the S&P 500 looks absolutely lush.” (Source: Barrons)

Consumer Psychology. People will be so “crazy” from being self-incarcerated for so long that they will try to return to normal despite the risks of catching the disease. Americans have shown the willingness to exercise their independence and freedoms.

90% of Live Nation customers didn’t take refunds for concerts that were postponed. The company offered a 50% credit (if you have a $100 ticket the company will deposit an additional $50 into the person’s account). If people were really strapped for cash then why not take the refund? Maybe people want the credit? Maybe people are extremely bullish and they’re going to go back to concerts at the end of 2020 and early 2021? Or maybe customers are unaware of the refund? It’s probably a combination of all these but I think the largest percentage of people are expecting to go concerts.

Jobs. Globalization recedes and nationalism gets more entrenched in America and the Western world. More jobs come back to America from China. This won’t happen immediately but in about 3 years more companies will bring jobs back.

Inflation. It’s possible in the next 3, 4, 5-plus years we’ll see high inflation. If we are near the bottom investors are better off having your money in anything besides cash because cash’s value will decrease in a high inflation environment.

Coronavirus Data is Inaccurate. Maybe the death rate is lower (or higher) than we think?This is anecdotal but a friend of mine is an ER doctor in the Boston area and they’re classifying people who died for non-coronavirus reasons as coronavirus deaths. In his/her words:

Grey Area

Vaccine. The image below are the phases a drug goes through before a drug reaches the public. (Source: The Five Rules for Successful Stock Investing).

  • Phase 1: trial has less than 100 people. Only 20% get past this phase. Phase takes 1-2 years.
  • Phase 2: 300-500 people. 50% fail this phase. Takes 2-3 years.
  • Phase 3: 5,000-plus people.  60% approval rate. Takes 3-4 years.

A vaccine on average takes 10 years to create. Since the entire world is working on a vaccine there is a high probability we get a vaccine quicker. However, I think it’s extremely bullish to think we get a vaccine in the next 12-18 months. Also, even if we get a vaccine in 12 months that doesn’t necessarily mean consumer behavior will instantly bounce back.

Second Wave. A second wave is going to occur. I don’t know when, but there will be another wave. When the second wave hits, how big will it be? Even if the second wave is larger than the first will the government shut down the economy? Will we as a society not shut down again despite the numbers of deaths? Will the participants in the economy have to (metaphorically) walk past dead bodies?

South Korea tried to open up bars and nightclubs but had to close them for at least 30 days. One man, who showed no symptoms, visited five different spots and gave the virus to 13 people and additional 1,500 people were exposed. (Source: NewsWeek.com) South Korea has extremely good testing and this is the amount of damage one person did. I have a hard time believing America, which doesn’t have enough tests, is going to be able to contain another outbreak.

The fact the Market has ripped despite the unemployment rate increasing to all-time highs may mean Americans A) want companies to pay more in taxes, B) want more anti-Market (anti-capitalistic) legislation and C) will more favorably engage in populism/socialism.

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2020 $250 12-Team Mixed NFBC Draft Recap

by Matt Commins Posted on March 24, 2020

About three weeks ago MLB decided to delay the 2020 and currently, no one knows when the season will begin. I signed up for two NFBC leagues and I kind of forgot about baseball (focusing too much on reading and investing). I stopped listening to baseball podcasts and stopped reading content.

On Sunday afternoon, I was surprised to receive an email saying one of my leagues filled up and the draft would happen in four hours. Normally before drafts I spend a couple of days creating decision trees for each of my draft picks–trying to assemble the most optimal team possible.

Quickly, a decision tree is identifying what players are expected to be available at each draft pick. I pull the latest ADP numbers from NFBC and use the ADP data to see whose likely to be available at pick 25, 45, 65 and so on.

For this draft I had the fifth pick. I didn’t have the time to create an advanced decision trees. Instead I created two. One if I drafted Cody Bellinger and Gerrit Cole. After doing the decision trees the best overall team statistics were, surprisingly, with Cole.

My initial premise going into the draft was I want the best player per at-bat/start/relief appearance. I think the best case scenario is MLB plays 120 games this year with 100 games being the most likely scenario. Therefore, my theory was I wanted the most talented player available.

Below is the team I drafted along with analysis of each player. The analysis is speaking as if we are having a 162 game season:

Gerrit Cole: I was prepared to take Jacob deGrom if Cole was taken. On a per start basis (on a 5×5 scale) Cole is the best pitcher available. If Aaron Judge and Giancarlo Stanton are healthy Cole has the highest likelihood of winning 20 games.

Bryce Harper: I wanted to draft the best hitter who provided at least 10 stolen bases. I believe Harper is underrated; he’s still young, plays in a great home ballpark, a very good lineup and should steal 10-15 bases with a lot of power and account stats.

Ozzie Albies: I wrote about him here.

Aaron Judge: If he plays a full season, he’s a steal at this pick.

Marcus Semien: He’s improved for four straight seasons. He will hit atop the lineup and is so good defensively he should play at least 150-plus games. The advanced offensive statistics suggest last season wasn’t a fluke.

Shohei Ohtani: I wrote about Ohtani here.

Liam Hendricks & Taylor Rogers: I think Hendricks keeps the job all year. He’s easily the best pitcher in the bullpen and Bob Melvin is very loyal to his closers. Rogers may lose some saves because he’s left handed but his base rate statistics suggest he’s extremely good. If Rogers was “the guy” for every save chance he would be a top five closer.

Tommy Edman: I wrote about Edman here.

Byron Buxton: Would you be surprised if he leads the league in steals? I know he’s been hurt the past few years, but in a shortened season the odds he plays the full year increases. I project 16 home runs and 29 stolen bases with enough runs to be relevant. His biggest problem has been health and not skill set. When drafting in the middle rounds I will gladly take a chance on the player with a super star skill set.

Mitch Garver: He was extremely lucky last year and he will only play about 50% of the time. He’s not hitting 31 home runs but I am only projecting 19, which seems reasonable. Also, I picked Garver because I needed home runs and I wanted to get a catcher who could provide power.

Paul DeJong: very underrated player. He’s going to hit fourth in a good lineup and should hit 30 home runs with a decent average. He’s good enough defensively that he should play 150-plus games.

Yuli Gurriel: At this point in the draft he was the best first baseman available and the drop off after him was pretty steep. Like Garver, the power last year is not going to be repeated but I think he should hit 21ish home runs and that’s all I am asking for.

Omar Narverz: He’s going to get 65% of the plate appearances; his home ballpark is a big upgrade compared to Seattle and he probably hits fifth or sixth in the lineup.

Justin Upton: I love the lineup and before the injury riddled 2019 season he was very consistent. He’s 32 and is heading towards the right-side of the aging curve but at this price he’s worth the pick. Also, when Ohtani doesn’t play Upton probably bats fourth.

Christian Walker: a lot of fantasy experts are not optimistic about Walker and I see it. However, the Diamondbacks are going to try to win in 2020 and Walker performed well enough last year that he should be safe for 2-months before there are whispers for someone else to take his job.

Brian Anderson: if he played on a better team and in any other ballpark (besides the Giants) he would be picked 100 picks earlier. His hard-hit rate is more than Nolan Areando for example. The Marlins, at the top of the order is very competent which means Anderson should get enough accounting statistics. Also, he has OF and 3B eligibility. In a shortened season position eligibility is so useful.

Dylan Carlson: if he played a full year he’s a 20/20 candidate. I drafted him to protect my Tommy Edman pick.

Josh James: Eno Sarris loves James so I took a shot.

Ender Inciarte: he was good for four years before he had a bad injury plagued season last year. The Braves don’t really have an every day CF and he’s really good defensively. Also, before last season he was a sure bet for 20 stolen bases. Lastly. if Buxton gets hurt Inciarte is my hedge for stolen bases.

Anthony DeSclafani: I draft him every seasons it seems like. For some reason I keep thinking he’s going to be break out eventually but if he doesn’t he’s one of the best fifth starters in baseball.

AJ Puk: he benefits from a shortened season because an innings cap doesn’t negatively effect his fantasy value now.

Dylan Cease: he’s a home run pitcher; he’s either really good and takes a step forward or I drop him after three weeks.

Tommy LaStella: was his 2019 legitimate? The numbers say yes, but the sample size is small. At this ADP I will take chance on him. He’s projected to leadoff in front of Mike Trout, Anthony Rendon, Ohtani and Upton. If he’s not hitting I’ll drop him.

Austin Voth: he is currently in the bullpen but I don’t believe Joe Ross will not be in the rotation for more than two weeks.

Randal Grichuk: he’s safe for playing time and over a full season he hits .240 with 30-plus home runs with room for 5 stolen bases.

Zach Eflin: I believed in him last season and he disappointed. At this price I want to see if he can return to the K% in 2018. If not, I will drop him.

Steven Matz: he averaged a strikeout per inning last season and since he plays in the NL East he’s going to have some good matchups. Maybe he stays healthy and maybe he takes a step forward. If not, I will drop him.

Carter Kieboom: he is probably the Nationals starting third baseman all year. He has SS eligibility and should hit 20-25 home runs with maybe 10 stolen bases. Honestly, if I need starting pitcher in week one I probably drop him.

Forrest Whitley: total shot in the dark. He struggled in the first half of the season but looked great towards the end. The Astros rotation is mediocre so if he’s pitching well I can’t see the Astros leaving him in the minors.

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What to do with Shohei Ohtani?

by Matt Commins Posted on February 23, 2020

If we knew Shohei Ohtani was the every day DH he would be a borderline top 10 hitter. That’s how good his tools and offensive production are. For my projections I’m only valuing him as a hitter. If I draft him I’m never going to use him as a pitcher. The simple reason is in NFBC leagues pitchers a locked in for a full week while hitters can be benched and started twice a week.

His hitting is far more valuable than his pitching in 2020. I have no idea how many innings he will throw per game and I have no idea how good the stuff or the command will be. It’s very possible he only throws 70 innings and averages 3-4 innings per start. The reason why I’m not fretting about the pitching is because his offensive production is elite.

Below are my projections if he plays 120 games as a DH-only. My projection assumes he gets days off against lefties, for rehab starts and to still justify the Albert Pujols contract.

Based on those numbers he’s my 21st rated hitter. Looking at the last two weeks of ADP data at NFBC, Ohtani’s average ADP is 116.6. That seems awfully late for the amount of talent he has. I think the Market is pricing in not a lot of playing time, his DH-only position, and the hassle/frustration it’s going to be every week from a roster management perspective.

I can definitely understand the latter. It’s going to be really frustrating to only have him play 3 out of 4 games during the Monday-Thursday period and only playing 1 game during the Friday-Sunday period.

However, let’s look at the numbers if we averaged out his numbers with another player. I choose Adam Eaton. He provides similar offensive production and has an average ADP of 208 so he’s easily available.

Below is my full year projection of Eaton:

Now let’s see what happens if we combine Eaton and Ohtani’s numbers. One projection assumes 400 at-bats (ABs) from Ohtani and 120 from Eaton. Another projection assumes 350 ABs from Ohtani and 170 from Eaton.

I personally think these numbers are reasonable. If you don’t feel that way create your own combined projection.

What happens when I put these numbers into my cheat sheet? This combined player becomes 27th and 34th ranked hitters. I admit it’s very possible I won’t get 520 at-bats if I combined the output of both players because there will still be days where Ohtani is in my starting lineup and he’s not playing.

However, the reason I did this exercise is I wanted to get an idea how much of a discount should I apply to the uncertainty the Market is pricing in. I believe the Market is too pessimistic on Ohtani. At his current ADP the Market is only assuming he gets 300 ABs. Maybe that happens but I doubt it. The Market is not pricing in enough of the upside he provides. If Ohtani gets 450 ABs or more he’s going to be a lot of winning NFBC leagues.

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