Active investing has become a dirty word over the past ten years.
Survey after survey shows that actively managed funds have consistently underperformed their benchmarks, especially when it comes to equities.
2021 was no different. 90% of actively managed equity funds that were benchmarked underperformed the index. This is why the migration of money from actively managed funds to passive vehicles like ETFs shows no signs of slowing down.
If it has become impossible to beat the market, why bother to listen to me or any so-called professional experts on how to invest your money?
A good question.
Perhaps because, when it comes to the markets, I was more often right than wrong.
You can google the big phone calls I've made in my 20-year career on Wall Street, but if I were you, I wouldn't waste my time on that. A strategist is only as good as he says these days. Past performance is no guarantee of future performance. In the market every day is a new day.
Should be more important how good my calls have been lately.
Four months ago I started writing for this site and at the same time I am posting my calls on my personal site.
On October 21, I recommended buying Pfizer (NYSE:).
On November 12, I recommended buying the iPath® Series B S&P 500® VIX Short-Term Futures™ ETN (NYSE:) and shorting the iShares TIPS Bond ETF (NYSE:) and also predicted that financials outperform technology.
On December 10, I recommended buying Exxon Mobil (NYSE:).
You can easily check that these trades did well, and in some cases very well. And from my perspective, perhaps more importantly, they did well for the reasons I thought they would. my advantage, you may ask?
This brings us back to the question of why alpha is disappearing from active investing, especially in stocks.
In my opinion it is a mismatch in skills. While most professional equity fund managers focus their efforts on analyzing the individual companies in their investment universe, the stock price performance of these companies is increasingly driven by macro considerations that have little to do with what these companies do alone.
My advantage is that I am a macroeconomist strategist. My focus is on forecasting the macro themes that drive markets. In case you're wondering, because I don't look too closely at companies, I tend to pick stocks only from companies with solid foundations and easy-to-understand business models to express my macro views.
Now that you know a little more about my process, let's talk about my favorite investment right now, Carnival Corporation (NYSE:), the global cruise line operator.
I started recommending these stocks two weeks ago. The stock has since risen by 13%. It closed on Friday at $22.95, but I feel there is still a lot of upside potential in this trade. I think it's heading towards $30 per share, which would represent a return of 30% from here.
My optimistic view of CCL stems from the fact that since the early days of Omicron I have seen the new variant as possibly the light at the end of the tunnel for the pandemic. Since this variant of COVID is a combination of highly contagious and generally mild, I thought the new variant would allow the world to achieve herd immunity faster and safer.
Indeed, the arrival of Omicron on the scene was the reason why I quickly closed all my PFE positions, as it could even reduce the need for boosters.
With experts predicting that Omicron could hit a high by the end of this month, the market is getting closer in my view. This means more people want to put money into businesses that would benefit from reopening. This is why CCL is going up.
In my opinion, CCL stands out compared to other reopening transactions:
1. Compared to the hotel industry, cruise lines seem cheap. Even with its recent rally, CCL is still trading at just 50% of its pre-COVID level.
2. CCL's debt has risen, but given its recent refinancing, it has cut its future annual interest expense by more than $250 million a year.
3. Cruise lines are sensitive to fuel price increases, but less so than airlines, another popular reopening trade.
4. Because Americans make up the majority of global cruise passengers, CCL is well positioned to take advantage of a post-COVID splash by Americans who have saved the equivalent of an annual income during the pandemic.
Before COVID emerged, the cruise industry was booming due to the aging of the world population and the fact that air travel has become unnecessarily stressful. Recent studies suggest that younger people who have never been on a cruise are open to trying one.
In that regard, CCL is not just a normalization trade, but one with a positive long-term story. The market loves a good story and I suspect few industries will have a story as good as the cruise industry in 2022.
The risks to trading? Three come to my mind: new variants of COVID that are less mild than Omicron; an unexpected slowdown in the US economy reducing discretionary spending; and heightened geopolitical risks pushing prices towards $100. I worry less about the first two risks than about the third.
That is also the reason why I stay XOM for a long time.
