Recessions and “Vice Stock”

March 21, 2022No Comments


Hello, and welcome once again to the Smart Money Dumb Money show. And I am your host as usual, Keith Richards. I’m president and chief portfolio manager and founder of ValueTrend Wealth Management. And I’ve been doing this thing for 32 years now. So maybe I’ve learned a few things along the way and read a few books along the way. So I want to start this video off by referring you to a book that I actually mentioned in my new technical analysis online course. Now, if you’re interested in the course, you can go to our website at valuetrend.ca and you can find out more about it. It’s only a hundred dollars and it basically teaches you everything you need to know about using technical analysis in a structured format to buy and sell stocks in an appropriate and safe way. So in that course, I go into a small segment on waves within the market.

Now I refer to Elliot Wave Analysis, but Elliot Wave is just part of a bigger picture look at the market because as you know, even if you don’t want refer to Elliot Wave, you are probably aware that the market moves between growth cycles and contraction cycles. So that is effectively what Elliot was originally talking about when he started reading his books or writing his original books. And then a gentleman named Robert Proctor came along and expanded on the Elliot Wave Theory and wrote several books, including one that is one of my favorite books I have ever read in any subject. This is actually a great reading book, whether you’re investor or not. The book is called The Wave Principle and The New Science of Socioeconomics. Now the concept of this book, and it was written quite some time ago so it’s, if you grab a copy on Amazon or wherever you might go, you’ll probably find that the charts that he references in that book are at least 15 years old.

I think I read the book about 15 years ago, but it’s the concept that is important to grasp. And one of the things that stuck out in the book to me was that the economy and its waves between growth and contraction and stabilization and all those different phases within an economy reflect in consumer behavioral patterns. So Proctor pointed out that, and he charted this, that during recessions, when things are bad in the economy, people tend to smoke more, drink more. And I would say, look at COVID last year and what happened to alcohol consumption, like literally record consumption, unfortunately, they tend to turn to the vices, so to speak. The, funny enough, you gotta read the book, but watch darker subject movies. So during recessions things like you know oh subjects that are maybe a little bit more morbid, like the Texas Chainsaw Massacre and horror movies and that kind of thing come out in conjunction with the recession.

 

It just, it fits the mood of the consumer. Now, when things are good, when the economy economy is expanding and everybody has a job and everybody feels great and you don’t have too much debt, you got a house and it’s worth more than what you paid for it. And you just feel great. You bought that new car. That’s when consumers actually use less tobacco and alcohol and all those kind of things, and they tend to do more outgoing, fun things. Did you know that baseball attendance, at least when this book was written, had a tendency of acceleration in attendance when times are good and a deceleration in attendance when times were bad. So these are the kind of things that Proctor talked about in his books. Movies, rather than watching Texas Chainsaw Massacre, you would go to see Mary Poppins or the funny shows like Beverly Hills Cops back then.

 

So these were, these were trends that he actually plotted and plotted them against the movement of both the economy and the stock market. And it’s really in interesting, because of course the stock market is a bit of a leading indicator to recessions and to revivals. So a lot of people may know that. That markets start to move down or up ahead of contractions or growth periods in the economy. So this brings us to a thought, and that is that right now, we’re seeing some downside on the stock market. And this may or may not be a leading indicator that we are going into a recession. So I want to actually ask you to take a look at a friend of mine’s website. It’s, many of you will know who he is, it’s Brooke Thackeray. And he is the guy that publishes and the Thackery report.

 

And he has a website called Alphamountain.com. And he writes a monthly newsletter, just like we do at Value Trend. And I found this month’s newsletter, I think was actually not the monthly newsletter. I think it was more of his tidbits that he pulls out once in a while and writes something on. So he wrote a subject article and you can get to it on alpha mountain on whether we may be going into a recession or not. And rather than me walk you through all the conditions that he talked about in the newsletter, I recommend you go and take a look at his newsletter, because it really does spell out a case for a possibility of the North American economy, moving into a recession. And as Brooke says, near the opening part of his letter is that look, recessions are just a normal part of the cycle.

 

And that’s exactly what I was explaining when I was talking about Proctor’s book. It’s just a cycle. There was contractions and there’s expansions. So a couple of points from Brooke’s newsletter that I think a lot of us may be aware of is that the amount of debt the governments and households have right now is literally record highs. And within that, you have very, very high inflation. You know, you watch my videos, you read my blogs. You know, I have been talking about inflation for two years now. I began posturing my portfolios at ValueTrend back in the fall of 2020. And if you don’t believe me, you can go to my blogs. And if you don’t believe me, you can also look at the ValueTrend performance, because we have been making money as the market has been falling because we had been postured this way for close to two years now.

 

We believe that we were going to head into inflation and here we are. Well, inflation’s probably going to be here for a little while longer. It’s not just going to be transitory as the Red tried to teach everybody last year. It’s probably a year away before we start to see any kind of a contraction in inflation. There’s many moving parts to inflation, but there’s a real case for inflation right now, and that can lead into recession. And that’s one of the things that Brooke talks about. So without stealing Brooke’s fire, I just wanted to cover some of the stocks that should move if we actually do move into a recession. So remember I mentioned that Proctor’s book talks about the consumer habits of moving into things or buying things that are like alcohol and tobacco and seeing, you know, horror type movies and dark subjects and that kind of thing.

 

So some of these things like the alcohol and tobacco are sometimes called vice stocks or sin stocks, as they used to say a long time ago. Now the repertoire number of vice stocks and vice sectors has grown. Mankind is always looking for a new way to mess their bodies or their minds up. So it’s not just tobacco and alcohol anymore. We now have online gambling and in person gambling, we have online gaming, like video games. We have marijuana and there’s of course the traditional things like alcohol and tobacco. Junk food by the way, is another, I’m looking at my cheat notes here, but junk food is another one. You know, you tend to binge on Cheetos more when you’re not feeling so great. So these are some of the stock sectors that I want look at today just to see what they’re doing now and maybe to offer clues as to what we should be looking for to see if they start to rise if we move into a recession.

I’m just following through on Proctor’s theory. This is more of a little bit of a fun exercise today rather than an outright consultation on what we should be looking for next. This is just kind of some fun, because I really do like that book and I thought, well, let’s take a look at these stocks. So I’m going to share screen right now. And I’m going to start a off with an ETF that actually buys the vice stocks and funny enough the ticker is VICE, AdvisorShare Vice, and I’m gonna grab my cheat notes and they’re dividing their sectors into gaming and gambling as one. So things like Wynn Resorts and whatnot, tobacco alcohol, marijuana, and all its uses and junk food. So that’s their this ETF all in one big lump.

 

And as you can see, the sector has been suffering or at least the, it’s not really a sector, the group of sin stocks has been suffering really since the early part of 2021. Alright. Now, interestingly, after the COVID crash, when everybody was worried, the sin stocks went up. I guess, as we probably know, alcohol consumption went up quite a bit last year and online gambling and stay inside stuff like video gaming and whatever really took off. And I know, you know, marijuana had been legalized in Canada the previous year, but it also had been receiving some positive vibes in the United States. Now, all that kind of positive vibe towards the negative things in life are receding. As we can see marijuana stocks and whatnot have fallen quite a bit, but that’s all part of the cycle. You could say that the COVID crash was the beginning of a contraction and then we’ve had some better markets and better economy later.

 

And perhaps we’re in for another one of these contractions as inflation starts to rear its ugly head. So this is one way to look at the overall group of vices. And you can see there was an old lid on this ETF and let’s call it somewhere around 25 bucks. So there’s a good chance that the, this particular ETF could continue falling down towards the $25 because as you can see, it is in a down trend, lower highs and lower lows, pretty simple stuff, but it’s something to watch because maybe if it hits 25 and finds support there, it would be interesting to see what happens. And perhaps that might coincide with an official announcement by the Fed saying, yeah, we’re in a recession. They usually don’t like to talk about that stuff cause it makes it hard to get their guy reelected.

So next chart I want look at is Wynn Resorts, which would be a leading example within the gambling arena. And you can see it’s down near a support level. And I think you’ll find that with a lot of them like LVS and a few others, they’re all sort of down and out and approaching support levels, but not yet showing true support. So that’s, again, this is telling us ahead of time that right now the market is not necessarily rewarding this type of stock. People actually can’t go or have not been able to go outside and go to the casinos such as Wynn would support. But this kind of thing may turn around and it may become more popular if we do actually go into a recession. People gamble to try to make more money sometimes, which is ironic, because it’s a loser’s game, but anyway, that’s another subject.

So let’s look at the next stock. Oops. I double-clicked there. This is the tobacco industry index. So we would have British tobacco and Imperial and a whole bunch of other Philip Morris would be in here. And you can see again, it kind of reached a, it went up during 2020, reached a bit of a peak and has been in a bit of a downtrend. But it’s going to be a point again where perhaps somewhere around this 15, sorry, 16.50 or so area that you will see some sort of support come in, maybe. So again, we’ll have to see what happens, but there is definitely a clear movement as we saw in the last couple of charts from a positive momentum when things were tight to a bit of negative momentum that may reverse.

And I guess that’s the thesis of my talk today is that it hasn’t happened yet, but these are interesting things to keep an eye on. So here’s another one. This is the Horizons Medical Marijuana ETF note. It incorporates more than just medical use marijuana companies because most of these companies offer both pleasure and medical uses through their products. And you can see after Horizons broke its old neckline breakout point here, it went into free fall, but now it’s coming back down to the lows that it saw in the crash of 2020, the COVID crash. So again, at the risk of repeating myself over and over again, this is not a sector or an ETF you want to buy right now. But certainly as these areas and sectors and stocks come into a level of support and if they can find support, it might be interesting to see what happens.

 

So again, according to Proctor, they would start to move up if people get feeling sorry for themselves and we move into a recession. Tough times breed bad habits, I guess. So final one I want to talk about in the industry is actually, I think I’ve got tobacco to do next, but is junk food and McDonald’s. Now I’ll disclose that ValueTrend, we own McDonald’s. Interestingly enough, we had bought it around here, watched it go up and then along came the Russian invasion of Ukraine, McDonald closed their stores in the Ukraine and that caused the store, the stock to sell off. It’s broken below its 200 day. We are actually on the verge of possibly selling it, but we’re going to give it a bit of time to see what happens over the next week or so, but certainly this would be the king of junk food providers.

 

We have a very small position. I think it’s 1.7% of our portfolio. So we don’t, we’re not overly exposed to it, but it might be interesting to see if it does rebound. And again, people like their McDonald’s and that’s their treat. It’s a cheap treat, I guess, during tough times. You don’t necessarily go out and buy a bottle of Dom Pérignon, but you maybe do buy a Big Mac. So that’s the, in the junk food pile and finally tobacco. Now, tobacco of all the charts we’re looking at here, this is the, sorry, this is alcohol, my apologies. Of all the charts we’re looking at here though, see the great thing about being a technical analyst, I don’t even have to know what the company is. I just look at the price formations. But of all the charts we’re looking at here, this is probably the most positive. It’s forming a bit of a base and possibly a neckline here at around $70 for Molson’s.

 

So if Molson’s does break out then past 70 or so, it could be very bullish. So keep an eye on that one and we’re back to vice. So as far as the industries go within the sins, none of them look that attractive, perhaps the Molson’s chart does. The one we just looked at, but generally speaking, they’re not sectors or stocks that I would buy right now, but they’re certainly something that we should probably keep an eye on because if we do move into tough times recession, then you’ll probably find, funny enough, a renewed interest in the products and services that these type of companies offer. It’s just the way people are. They turn to the vices or their comforts. And those type of stocks tend to benefit from that. So this is more of a food for thought video. It’s not a video where I’m saying run out and buy some tobacco stocks or whatever. I’m saying, keep an eye because if we actually do move into a recession, this would be something that we probably want to pay attention to. Thanks for watching as usual. And I’ll be back next week.

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