#W.I.N.ning with KKM (Weekly Commentary)

Vaccination versus Lock-Downs.. – Akin to Milton’s “Paradise Lost” or the Pinto scene in “Animal House”, the daily swings in the market continue to flop between the devilish virus and the angelic prospects of vaccination. Even within the last several days, we have seen dramatically differing opinions of the efficacy of the vaccines, resulting in quick swings in the markets. In the same week that the first vaccines have been injected in the United States and the FDA approved an at-home Covid test (proving that all sorts of tasks and activities have been put at risk by the virus to WFH..), some of our largest cities and states have entered into and indicated the likely increase of various stages of lock-down. In the United Kingdom over 130,000 vaccines have already been injected, while London has reentered the strictest level of lockdowns.

Now, what can we say of John Milton's Paradise Lost? It's a long poem, written a long time ago, and I'm sure a lot of you have difficulty understanding exactly what Milton was trying to say. Certainly we know that he was trying to describe the struggle between good and evil, right? Okay. The most intriguing character, as we all know from our reading, was...Satan. Now was Milton trying to tell us that being bad was more fun than being good? OK, don't write this down, but I find Milton probably as boring as you find Milton. Mrs. Milton found him boring too. He's a little bit long-winded, he doesn't translate very well into our generation, and his jokes are terrible. But that doesn't relieve you of your responsibility for this material. Now I'm waiting for reports from some of you... Listen, I'm not joking. This is my job! – Professor Jennings, Animal House

Most Importantly for the markets, Fed Chair Jerome Powell and the other Global Central Banks remain committed to maintaining supportive monetary policy through low interest rates and large scale asset purchases.

The Supply Chain and the Essential Debate.. – Unlike the first government mandated lockdowns, when essential businesses and workers were chosen on a “work-in-progress” manner, we now know broadly which businesses and industries the US Government, US Economy and American Consumer deem as most essential. Furthermore, unlike the first wave of lockdowns, we are in the broad process of vaccination which creates a degree of certainty for normal life. The supply chain has been stretched as consumers are finding value and convenience of at home delivery (AMZN, FDX, IP) and, furthermore, materials have become sparser and more valuable. The demand on the Supply Chain should be a positive tailwind for these Essential companies as demand outweighs supply, therefore resulting in pricing power and increase EPS. Congruently, this pressure on the Supply Chain may result in increased strain on the consumer and the prospects for an inflationary environment. Inflation risk at the moment may seem tame, but is a real risk, which should trigger tactical shifts in asset allocations away from bonds.

Market Cap Weighting vs Equally Weighted Portfolio Management.. – The current composition of the S&P 500 is massively represented both in allocation weighting and performance attribution by five stocks (FB, AMZN, AAPL, MSFT, GOOG). Furthermore, Friday “market on the close” orders will be extremely active purchasing Tesla stock and selling broad positions to accommodate its inclusion into the index. At its current market cap, Tesla should represent approximately a 1.5% of the index as the seventh largest company. Earlier this month, the Vanguard Total Stock Market ETF, became the first ETF to surpass $1 Trillion in Assets. The downside risk of the 7 largest cap companies, could result in a massive amount wealth. Accounting for the volatility of Tesla with the regulatory risk of Big Tech (US and EU), consider de-risking away from market cap or price weighted allocations into equally weighted strategy to maintain exposure to leading market cap names, while rotating into reopening stocks.

KKM GAME-PLAN 

? Allocate into Vaccination Optimism and gain exposure to Cyclical Rotation.

? Tactically allocate between stocks and bonds as interest rate risk lingers.

? Introduce Equal Weighted Equity Strategies.