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Dear Reader,
Potential. A word describing restricted possibility and opportunity. A limit, a stop sign, a paper certificate that says “congratulations” on it. “You are only good for this much.” “You can only achieve this level.” “You can only make x amount.” Humans make a limit in their mind of how much their potential is. But, it’s not accurate. We are too afraid or too lazy to figure what are extremes are. How far can you go? How much can you achieve? Test yourself! Live your extreme. See how long you can stay awake or see how much you can get done in one sitting or see how far and how fast you can run... test yourself. Where do you think achievement and accomplishment come from? They come from breaking barriers, going to new heights, and beating our potential. Because all potential is is a label, and I only wear non-branded shirts. The Market. The labor force participation of 25 to 54-year-old men has been falling since the 1960s. In 1969, the participation rate was 96% and in 2015, 89%. Why? Because of health conditions, disability, the rise of opioid prescriptions, and the rise of trade, automation, and outsourcing of work. All this talk of a recession might cause a recession… Some believe that companies should focus their energy on maximizing shareholder value and should not concern themselves with giving to charity. By maximizing shareholder value, those shareholders can decide whether to make donations or not. Others say companies care more than just profits; they care about the customers, the market, the government, and the environment around them. The more people multitask, the worse they are, not just at other mental abilities, but at multitasking itself. The Muni market had a record $52.9 billion of inflows through the end of July. The US budget deficit will hit $1 trillion in 2020. China imposed additional on $75 billion worth of US goods. Fed Chairman Jerome Powell said that the US economy is in a favorable place but faces significant risks. Trump orders American companies to find an alternative to China. Shareholder Yield by Meb Faber. This is a short research piece on capital allocation and investing. “Returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use in deploying capital and raising capital. Dividends and their reinvestment represent a major portion of a stock investor’s total return over time. Reinvested dividends represent over half of an investor’s annualized returns (over the period of 1871-2011). By reinvesting dividends and compounding the portfolio returns, the final value of the total return portfolio turns out to be 99.8% higher than the non-dividend portfolio. Dividends contribute virtually all of the final portfolio value versus a price only return. A study done by Elroy Dimson, Paul Marsh, and Mike Staunton showed that higher dividends yielding stocks outperformed low dividend-yielding stocks in 20 countries from 1975-2010. One of the most important qualities of a successful investment analyst is the ability to adapt to change. Companies have been lowering their dividend payout ratios for the past 70 years. One of the reasons for this is beginning in the late 1990s, share buybacks have outpaced dividend payments. The purpose of a company is the maximize long-term value.” Hunter S. Thompson on the topic of advice. To presume to point a man to the right and ultimate goal- to point with a trembling finger in the right direction is something only a fool would take upon himself. All advice can only be a product of the man who gives it. What is truth to one may be a disaster to another. We seek to understand the goal and not the man. Every man is the sum total of his reactions to experience. We strive to be ourselves. A man must choose a path which will let his abilities function at maximum efficiency toward the gratification of his desires. Decide how to want to live and then see what you can do to make a living within that way of life. Why is an inversion of a yield curve an indicator for a recession? Take the 2-year treasury bill and the 10-year treasury bill. When investors think a near-term economic downturn is becoming more likely, they prefer to hold longer-maturity bonds. Why are investors pricing in more risk for a recession? Because of the slowing in global industrial production and trade volumes. But, bank balance sheets are strong, household leverage is manageable, and the personal savings right is high concluding that the financial stability risks are still moderate today. What is the purpose of a corporation? It used to be to maximize shareholder value. Now it is: delivering value to our customers, investing in our employees, dealing fairly and ethically with our suppliers, and supporting the communities in which we work. Companies should maximize shareholder welfare not market value by Oliver Hart and Luigi Zingales. Milton Friedman states that a corporate executive is the employee of the owners of a public company and has a direct responsibility to his employer. He states the desires of the owners are to make as much money as possible while conforming to society’s rules. That there should be a clear separation between the goals of companies and the goals of individuals and government. But most of these “owners” care more than making money. They care about ethical, moral, social, environmental, and governance issues. Why would they not want the public companies they invest in to have the same sentiment and care? Pension Funds. A Pension Funds is a very desirable employment benefit. Essentially, after you retire, you continue to receive an annual payment equal to a certain percentage of your salary. This percentage is usually based on your position as well as your years of experience with the company. Generally speaking, this fund invests money for the employees. The manager of the fund has to get enough of a return on investments to actually make the obligated payments. If they don’t hit that level of return, the employer is going to have to pay the difference. This represents a defined benefit plan. There is also a defined contribution plan, which a 401k is. Essentially, every year, employees pay certain amounts into their 401k. These amounts are invested into the market and grow with the market. The difference here is that the employer is not responsible for ensuring a specified payment amount. The risk is transferred to the employee, along with the potential for exponentially greater returns. Nowadays, very few private entities offer defined benefit plans and opt for defined contribution plans instead. Government entities, however, still pay defined benefit plans. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
Stability, secureness, and independence. Every human strives for freedom. Freedom from debt, freedom from sick addictions, freedom from inequality, freedom from poor treatment, freedom from non-democratic countries, freedom to run and explore in the wild... And most are born into freedom; born with natural rights granted to them by nature or God that cannot be restricted or denied by any government or individual. But is anyone ever truly free? We are all governed by externalities. We commit ourselves to paths: professions, partners, schools, lifestyles; losing out on the opportunities that our third-dimensional selves are enjoying in other worlds. We will never be free, but for most, we’ll never be caged like animals or restricted to a preordained life. Who is free? People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom. Only the disciplined ones in life are free. If you are undisciplined, you are a slave to your moods and your passions. Free people can speak freely, but if you fear to speak, you aren’t free. What truly has the potential to shape us is our freewill, who we decide we want to be. And the only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion. The Market. Argentina’s stock market dropped by 49%. The Consumer Price Index rose 3.4% in July. The US delays China’s tariffs. Germany’s economy is near a recession. When companies invest outside of their domestic markets, the most immediate risk that they are exposed to is exchange rate risk (cash flow and revenues are affected by the exchange rate). The Bank of Israel found that mutual funds that added “!” to their names had a significant decline in their net flows. WeWork filed for IPO. The two-year and 10-year yields inverted, causing mass selling and increased market volatility. This inversion was a signal for many people that a recession is in the near future. Over-Tourism. The number of international tourist arrivals totaled 1.4 billion in 2018. Why the increase? People are traveling more. Disposable incomes have grown around the world, people are living longer, people are having fewer children, the world is becoming more peaceful and accessible, technology has advanced, booking vacations have become easier, transportation has become cheaper, safer, and more available, and tourism is a big portion of revenue for many countries. The tourism industry has reached $8.8 trillion in 2018 and supports 10% of all jobs on the planet. Stockholders versus non-stockholders. The consumption of stockholders is more volatile and highly correlated with the excess return on the stock market. In the 1990s, ¾ of US families held no stock. The fraction of households owning stock increases with average labor income. Also, more educated households tend to own stock. According to a study done by N. Gregory Mankiw, stockholding families spend approximately 25% more capita on food than non-stockholding families. Negative interest rates. Around $15 trillion of outstanding bonds worldwide now trade at negative yields. Rising life expectancy increases desired saving while new technologies are capital-saving and are becoming cheaper. This savings glut tends to push the natural rate of interest lower. A savings glut is when savings exceed investments. This depresses the natural real rate of interest. People value future consumption during their retirement more than today’s consumption. Meaning, they are willing to accept a negative interest rate and bring it about through their saving behavior. A slowing manufacturing sector increased trading tensions through added tariffs, and the tightening of the monetary policy are all adding to the uncertainty and to negative interest rates. Rules of Thumb by N. Gregory Mankiw. Learn from the right mentors. Mentors determine your professional outlook in much the way that parents determine your personal outlook. Mentors give you your values. They teach you what kind of behavior to respect and what to avoid. Work with good co-workers. Have broad interests. Allocate time and crew. The cost of saying yes can become intolerable. Have fun. Find out what you like to do, and then find someone who will pay you to do it. The new finance. There are assets whose average returns can not be explained by their beta. Returns are predictable over the business cycle and longer horizons. The dividend-price ratio and the term premium can predict substantial amounts of stock returns. Bond returns are predictable; a steeply upward sloping yield curve means that expected returns on long-term bonds are higher than on short-term bonds or the next year. Past winning funds seem to do better than average in the future, and past losing funds seem to do worse than average in the future. Times of past volatility indicate future volatility and volatility is higher after large price drops. Why dividends are important. Over the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities. Portfolios consisting of higher dividend-yielding securities produce returns that are attractive relative to lower-yielding portfolios and to overall stock market returns over long measurement periods. Stocks with high and apparent sustainable dividend yields that are competitive with high-quality bond yields may be more resistant to a decline in price than lower-yielding securities because the stock is in effect “yield supported”. The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings. The payment of dividends has been declining and the repurchase of shares have been increasing. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
If time was all I had. If you aren’t careful, your life can be determined by time. Hourly pay, age, work ethic, sex... Life will be turned into a Formula 1 race where you’re ranked by lap time or the countdown to your last breath. Bring me someone who places any value on their time, who reckons the worth of each day, who understands that they are dying daily, and I’ll give you whatever you desire. But you wouldn’t be able to; that special someone wouldn’t have time for you. Ask yourself: would you rather sacrifice time to have more money or money to have more time? What is more important to you? I believe in time-saving expenses (car washes, house cleaners, gardeners, drivers). Outsourcing work to free-up time for yourself. It helps determine how much you’re worth. Time is your friend; impulse, urges, and procrastination are your enemies. Putting things off is the biggest waste of life: it snatches away each day as it comes and denies us the present by promising the future. Lost money can be found, but lost time is lost forever. Everybody wants to know the secret: how do you do more with less of your time? You need to have a fighting mentality. You need to know what makes Sammy run. Time passes when you’re not looking. And lastly, NEVER say that you’re too busy. If you actually cared, you would make the time. The Market. Cultural norms and culturally shaped emotions have a substantial impact on the domain of morality and the process of judgment. Hedge fund managers perform better under pressure especially when there is a high management fee at risk. Empress Trees mature several times faster than your average Oak or Pine and absorb about 103 tons of carbon a year per acre. If people were just to work hard, avoid drugs, alcohol and violence, and stop having children out of wedlock, poverty would be rare. The Feds expect one more rate cut in 2019 and two more in 2020. By devaluing a currency, the exchange rate is pushed down and borrowing costs are cut down. This is what China did. US assets are overvalued, hitting around 275% of nominal GDP. Cyclical stocks are decreasing while defensive stocks are increasing. The 10-year Treasury and 3-month Treasury rate spread is negative. (3-month: 2.05, while 10-year: 1.75). Russia wants to “d-dollarize” the Russian economy. Key risks to the global economy today include weakening of production growth and expansion of lower-quality debt. The Japanese government plans on people driving flying cars by the 2030s. The 12-month average of wage growth is 3.7%. The present cyclical economy. The International Monetary Fund and Organization for Economic Cooperation and Development have lowered their global growth estimates. Global growth and momentum has weakened, and growth is set to continue to decline. With the current trade war between China and the US, consumers and businesses are exposed to disruptions in trade and business investments. Most of Europe’s economy is experiencing negative rates (25% of the global market trade at negative rates). Corporate debt of the lowest quality has been rising, totaling $1.3 trillion today. But, consumer confidence is still high and investors are still enthusiastic, shown in the surge of recent IPOs. Wage growth. Hourly earnings have stagnated since 1979. Why is there a dilemma in wage growth? Globalization, the decline in union membership, computerization, and low inflation are some of the causes of the wage decline. With cheap labor abroad, Americans are losing jobs to outsourcing and streamlined production processes. In 2016, only 6.4% of the workforce was unionized. The Phillips Curve states that when unemployment is low, inflation is high because if employers cannot find workers, they will need to offer higher wages (high demand for workers equals nigger increases in pay). Macroeconomic shocks increase wage inequality in countries where wages are flexible and unemployment in countries where wages are constrained by institutions. Higher minimum wages reduce wage inequality. So does stricter employment protection legislation, more generous benefit replacement ratios, longer benefit duration, and higher union density. Different firms also pay different wages according to sectors and occupations. Day Reconstruction Method. How people spend their time and how they experience the various activities and settings of their lives. How do people use their time? How do people enjoy their time? What affects people’s enjoyment? Time pressure is an important determinant of enjoyment at work. If people feel stressed for time, they will not enjoy their work. Sleep quality has an effect on your enjoyment at home. People who have slept 7 hours or more are less tired throughout a full day than those who slept for 6 hours or less. Importance of religion and household income have an effect on household activities. For your well-being, it is important to know what influences your enjoyment. Micro V Macro influences in business. Microeconomics boils down to household decisions and choices which individuals make in their day-to-day lives. These decisions have a direct effect on goods and resources through supply and demand. Macroeconomics involves larger-scale decisions, and economic factors such as interest rates, unemployment rate, phases of the business cycle, inflation, etc. In a business setting, microeconomics relates to everything which has a direct effect on the business. This includes customers, suppliers, resellers, the general public, competitors, and other interested parties. All of these factors influence the supply which a business may provide, the demand their product will garner, the price which they will offer the product for, the # of employees they need to hire, and other day-to-day operations. These could be considered unsystematic, or firm-specific factors. Macroeconomics is broader and encompasses components of the country's economy, and influences which affect entire industries/countries. The easiest example of this would be trade deals with China. These macroeconomic influences affect how most businesses in an industry operate and form strategies. These factors include economic, demographic, technological, natural/physical, political/legal, and cultural. These factors are considered systematic, or relating to the entire market. It's important to have a fundamental understanding of both of these influences when conducting a top-down analysis, running a business, or even just looking at the market. Moral luck. Our lives are substantially shaped by circumstances that lie beyond our control. And the way we blame ourselves, the way we blame others, and the sentiments we have play a crucial role in expressing our humanity. The moral judgments we actually make conflict with the judgments that we think we ought to make. And our commonsense either thinks luck exists or doesn’t exist. Agricultural emissions. The majority of agricultural emissions come from raising livestock (more than 70 billion raised annually). The biggest single source is from manure and cow burps.The countries that cause the most agricultural emissions, which account for 11% of global greenhouse gases, are China, India, Brazil, and the US. What are countries doing to reduce agricultural emissions? By reducing food loss and waste, shift to healthier and more sustainable diets, achieve replacement-level fertility rates, and increase livestock and pasture productivity. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,Love. The feeling you can never get enough of. Or for some, a feeling they have never learned to accept. A feeling of mixed emotion. A subject of individualism and an outcome of hard-work or of fantasy or of pure luck. A diamond that you wish you had when you don’t have it, but a pebble that you have when you don’t have a fear of losing it. It’s simple: the knowing that a pair would dedicate their whole selves to the mutual fulfillment and obligation of making each other happy, important, and safe. A word thrown around, beaten up, varying in its strength of meaning. But what is love? Love has a picturesque image of roses and hearts. It’s a symbol of nurture and of commitment. It’s a feeling one can uncontrollably describe. It’s a secret one can whisper into the ear of another... “tell me what love is. That sweet hers and his. How does it feel? Is it for real? Tell me what your heart says. I’d really like to know what love is.”
The Market. Some research says that when short-term rates are higher than long-term rates for a full quarter, a recession will occur in 12-18 months. To get ready for one, clean out your portfolio (rebalance, reallocate, take profits), pay down debt, be ready to buy when stock prices plunge, and check and clean up your credit score. Q2 GDP was estimated at 2.1%. Many economists say the Fed is acting prudently to prolong the economic expansion. Their two main goals are to keep the job market strong and maintain inflation around 2%. People are taking out personal loans (APR 10.6%) to pay off credit cards (APR 17.1%). Following ESG criteria doesn’t destroy value but rather creates value. The labor market remains strong and job gains have been solid. The Fed cut rates because they see economic weakening and they want to ward it off. Interest rates and inflation have an inverse relationship: lower rates equal higher inflation. The Fed cuts. Fed Chair, Jerome Powell, cut the fed funds rate earlier this week by 25 bps, decreasing it to a range of 2%- 2.25% The board attributed this cut to weak global growth, trade politics, and muted inflation. Although economic numbers came in as expected, or better than expected, the board decided a mid-cycle rate cut would be best to contribute to being proactive. Powell made it evident that we were entering a new regime where we would look towards trade talks, and other global indicators, as they were influencing economic numbers, to decide what the next steps will be. Our current core inflation, which is inflation minus food and energy prices, has been steady at 1.6%, expected to increase to their target of 2% in 2020. We have seen domestic inflation pressures muted, while the global world is experiencing disinflation. Wages are rising slightly, but not enough to materially affect upwards pressure on inflation. Markets stayed flat for the day until Powell mentioned the possibility that this could be followed by future interest rate hikes, which led to the market closing down 1%. On that point, Powell mentioned this was a mid-cycle rate cut, which has historically been followed by rate hikes, and that the economy could continue into an expansion. The benefits of low interest rates. Low interest rates encourage spending, reduce the cost of borrowing, lower the cost of monthly mortgage payments, encourage investing, and reduce the cost of capital. With more spending, it increases employment and increases wages. Low interest rates reduce the discount rate used in calculating the intrinsic value of companies, which raises the valuation of companies. Low interest rates incentivize investors to take on more risky investments which means a possibility of higher returns. Mortgages. For the vast majority of Americans, a house is likely to be their biggest investment. Mortgages are low interest, long-term secured loans. The typical mortgage works like this: you are looking to buy a house, so you secure a $100,000 mortgage and pay a down payment of 20% which brings the total cost of the home to $120,000. This loan will likely last for 30 years at the current interest rate of 3.92%. With this loan, you will pay $473 a month which adds up to $170,213 after 30 years, but since a mortgage is secured by your house, if at any time you become delinquent and the bank forecloses, they have the right to kick you out and sell your house. Mortgage rates are highly influenced by the market and have averaged 6.25% over the last 30 years. The Fed has worked to keep these rates low in order to allow the economy to keep its momentum, with the current rates around 3.75%. This is well below the average and should be leading to a rise in home sales and home refinances, but due to rising home costs, sales are down 2% from last year, home investments have declined for the last six straight quarters, and new home sales continue to decline. Just like any market, the housing market is cyclical. The case of a strong dollar. With a strong USD, U.S. consumers pay less for imports and foreign consumers pay for more U.S. exports (hurting U.S. production and employment). A strong USD also makes the US a less affordable travel destination but benefits US citizens traveling abroad. The reason the USD is so strong is that we are considered to have a “healthy” economy compared to the rest of the world. Factors that impact currency: the strength of the economy, geopolitics, trade, inflation, and interest rates. For US consumers, it is relatively good. For US manufacturers and producers selling abroad, relatively bad. Store-front focused retail companies. Department stores have been suffering in a self-explanatory way. In a way that you, as an American consumer, can figure out. When was the last time you spent more than an hour at the mall? When was the last time you shopped in a store-front department store? The issue at-hand for department stores in e-commerce. If department stores don’t have a competitive advantage in this new market, they are doomed to fail. And this basic thesis explains my position of betting against department stores (ex: Macy’s and Nordstrom). Both Macy’s and Nordstrom state that a major risk they face is from the competition in the digital space. In the short-term, tariffs and political affairs abroad have been hurting these companies. Nordstrom’s biggest challenges are being competitive in the e-commerce market (current digital sales are 30% of total sales), consistently growing their return on assets (2015 ROA: 8.1%, 2019 ROA: 7.07%), lowering their debt-to-equity levels, and improving their liquidity. Nordstrom has been outperforming their comparables due to “Nordstrom Racks”, their discounted retailer. This allows them to sell to a diversified demographic, gain more sales, and increase their inventory turnover. Macy’s has seen three years of consecutive declines in sales, decreases in the amounts of stores they own, a decrease in inventory turnover, and a decrease in cash flow per share. Conclusion: e-commerce is dominating the retail industry and department stores must innovate or be crushed. Keep Climbing, The Alchanati Campbell and Associates Team |
AuthorWHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now. Archives
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