Self-driving scenario testing, Tesla in the green, #150, GDP, junk wrapped in junk and bitcoin for hedging?
The Market. Roughly 60% of the time a 10% correction (historically) did not lead to a bear market while roughly 40% of the time it did. Returns on U.S. leveraged loans and collateralized loan obligations have outperformed other fixed-income asset classes. Investors are more concerned with risks associated with higher interest rates. Banks appear to be chasing increasingly dangerous deals and forgoing protections against borrowers going bust. Sales of new single-family houses were down 13.2% in September year-to-date. Despite a tightening labor market, companies have so far not felt compelled to increase wages to retain workers. Inflation: In order for expected changes in the general price level to not effectively alter business or household decisions, it needs to be 2%.
The Moral Machine. A game-like platform that would pull together people’s decisions on how self-driving cars should prioritize: humans over pets, passengers over pedestrians, more lives over fewer, women over men, young over old…And if the car should swerve (action) or stay on course (inaction)? Example: A little boy is crossing the street and your self-driving car is unable to stop in time; you can either let the car drive forward and kill the boy or you can turn the wheel and kill an older man on the sidewalk. Which do you choose? Results: countries with more individualistic cultures are more likely to spare the young and spare more lives.
Dunbar’s number. The bigger the brains, the larger the social groups. Animals with larger brains should be able to remember more individuals and manage more relationships. 150 is Dunbar’s number. Humans could have no more than 150 meaningful social relationships. Smaller funds usually perform better than larger funds. Companies that grow to over 150 members start having more disputes and disagreements within the group.
GDP. Gross Domestic Product grew at a 3.5% growth rate in this past quarter, just nudging the estimated growth. However, this is down from the growth rate experienced in the second quarter of 2018. PCE, or Personal Consumption Expenditures, measures price changes for goods/services and is the Fed's preferred method of monitoring inflation. The third quarter of 2018 saw PCE growth of 1.6%, far off the estimated 2.2%. This information would lead us to believe that inflation is stable for now. Consumer spending also grew 4% this quarter, which is a good sign, being that it accounts for roughly 66% of economic activity. This consumer spending growth was countered by nearly an 8% decrease in business spending. Remember way back in 2017 when those corporate tax cuts came into play? The assumption then was that businesses would have more cash at their disposal to invest in their operations and further stimulate the economy. Fixed investments, investments such as factories, actually had a negative contribution to GDP. The decreased investments and decreased business spending would suggest that C-Level executives are not too eager to spend money right now and are potentially bracing for something. Moreover, and probably more alarming, net exports took away nearly 1.8% points from GDP. In other words, the entire saga with China and NAFTA is definitely being noticed by the economy. Perhaps, as many analysts are suggesting, companies are importing excess goods now, so they don’t get hit with potential tariffs later.
Junk Yard or Gold Mine? The Debt/EBITDA ratio is a common way in which rating agencies grade corporate bonds. Companies with a high debt/EBITDA are less capable of paying their debts, and because of this, their corporate bond ratings fall. According to Moody’s, bonds of “Ba” rating and below are considered non-investment grade or are popularly referred to as “Junk” bonds. Because companies that issue junk bonds have a higher relative chance of default, the junk bonds incur a risk-premium to reward investors for taking on excess risk. Lately, junk bond yields have been outpacing other securities. In October, S&P 500 total returns (-0.70%) have fallen below Bloomberg’s High-Yield US Corporate Bond Index (1.45%). Despite growing concerns of an economic slowdown, investors seem confident that leveraged companies will be able to pay down their debts.
Portfolio construction. There has been an investing trend of dollars flowing from higher-cost products to lower-cost products (supports the trend of banks ridding their products of high expense ratios). Investors are becoming increasingly discerning when it comes to factoring cost into the investment-selection process (low costs are important to achieve investment success).
Broke the break-even line. A big win for Tesla this week as the Q3 earnings report shows Tesla is profitable by a comfortable margin. Tesla reported a revenue of $6.82 billion and a profit of $2.90 a share which blows away the estimated 15-19 cent loss per share that Wall Street analysts were expecting. The end of the third quarter marks the culmination of over a years’ worth of efforts to streamline the manufacturing process and bring the world’s first sensible mass-market electric car to fruition. Over the course of the company’s history, CEO Elon Musk has made several “bet the company” moves. First when making the Tesla Roadster, then the Model S and X, and finally the Model 3. Each time Tesla over-leveraged the company and faced bankruptcy if the success was not found, and each time the bet paid off and paved the way for the next round of production and innovation. With the huge success of the Model 3, the road looks clear for Tesla’s next projects which include the Tesla Semi, Tesla Roadster, the Model Y, a new Giga factory in China, and full self-driving capabilities.
Bitcoin: digital gold? A possible hedge? Over the last week, we have seen immense volatility in the current U.S. stock market, with shifts from 1-4% each day. During this time, Bitcoin has not had more than a 1% movement each day, starting the week at $6427, and ending today around $6410. Due to this, we have seen a few comments come out from the media asking if bitcoin is the NEW digital gold, or if it’s a potential hedge to use in your portfolio. My answer to both of these? No and No. Bitcoin isn’t the new digital gold; in the current state it’s not a low-risk hold of value and has no physical backing like gold has. It’s possible that we see Bitcoin become a hedge in the future, but as of now, there has been a complete lack of correlation between the crypto markets and the stock markets. What does this mean? Well to be a hedge, the two assets need to be negatively correlated, so for Bitcoin to become a hedge, we would need to see money leave the stock market during fear, and go into the crypto market, which would mean an inverse relation to the price movement of Bitcoin and the stock market (SPX, RUT), we would also need to see the inverse hold true, with during times of greed, money will leave bitcoin and go into the stock market. If this becomes a reality, we could also see a future of bitcoin being a reliable hold of value.
The Alchanati Campbell and Associates Team
The minutes, economic data released, investing in this market, the biggest investing mistake and tax benefits with 'opportunities'.
The Market. Stocks are the cheapest they have been in nearly 7 years (according to the PEG ratio). Investors are becoming increasingly nervous about growing trade tensions, higher inflation, and rising interest rates. The average loan rate for a 30-year mortgage was 5.10 last week, the highest since the start of the decade. Student loans (totaling $1.5 trillion) have cumulatively grown 157% over the last 11 years, with auto loan debt growing 52% during the same period. Consumer Sentiment Index buying conditions for autos and homes fell as low as they were in the early 1980s. The dollar is up. The US budget deficit expanded to an estimated $782 billion, 3.9% of GDP (country’s debt load= $21.5 trillion).
The minutes. The Federal Open Market Committee released its minutes on Wednesday, and the results were not too surprising. The Fed voted to continue onward with their 2018 rate hike schedule, increasing the range by another quarter percent. Granted, this meeting occurred priorto the volatility spike within the markets this past week. The Fed has stated that 3% remains the target neutral rate in the long-run, meaning that, theoretically, it would not have a positive or negative impact on growth. While President Trump continues to oppose these rate hikes, it is likely that there will be another rate hike in December. We've talked about this mystical "rate" several times, but perhaps we have never fully explained what it exactly is. Basically, it is the interest rate in which banks can lend to other banks. The banks, who are always required to keep a certain reserve amount, can use this lending to meet the requirement. Then, they can lend that money to individuals. The higher the rate, the more expensive it is to borrow. Increasing the cost of borrowing then leads to lowering the money supply. Thus, interest rates are increased and help to slow down the economy by keeping inflation in check.
This week’s economic data. The end of the year is coming up fast, as October reports come in we get to see a clearer picture of the health of the economy and its performance over the year. Dozens of major monthly indicators were reported this week ranging from Retail Sales to the EIA Natural Gas Report. These will be the last major indicators to come in before midterms next month so what these reports entail will be very important in the political future of America. Retail Sales are closely watched by economists, investors, and traders as it is a very timely report, but this month sales were less than expected in 3/4 of the categories (prior= 0.1%, forecast= 0.6%, reported= 0.1%). Next up is the Business Inventories report which tracks the dollar amount of inventories companies kept for the month of the report. This report met the forecast which was down from the prior month, but that is understandable as companies get ready to fill their inventories for the holidays (prior= 0.6%, forecast= 0.5%, reported= 0.5%). Monday was the beginning of the fiscal year for the Federal Government making the treasury budget report an extremely timely indicator as people look to see how well the current administration is performing. The Treasury reported a whopping $119.1B, $41.6B more than was forecast (prior= $214.1B). Lastly, we will look at the Energy Information Agency’s Petroleum Status Report that is filed every Wednesday. This week they reported 0.5 million more crude oil and 2.0 million more gasoline barrels in reserve than were expected by analysts, possibly showing an attempt to keep domestic gas prices from rising.
Investing advice for the current market weather, but we are NOT advising.
The single greatest mistake investors make. Recency bias. Trend following. Momentum investing. The illusion in which a thing that has recently come to one’s attention suddenly seems to appear with improbable frequency shortly afterward. Not using technical indicators and fundamentals which creates blind spots. A psychological dynamic that operates according to well-defined psychological principles based on the belief that past growth in market prices is strong evidence for more growth in the future.
Opportunity Zones. Putting money into funds that are committed to serving “opportunity zones” to avoid the immediate capital gains tax until 2026. Those who commit their money will receive a reduction in the capital gains tax they pay if they hold the money in the fund for 5 years (and more if they hold it longer). The Opportunity Zone fund then uses the money in different ways to serve specific low-income areas. If these funds do make money, the investors will not have to pay any tax on the second capital gain.
Small habits create big changes. The moments when you’ve habituated yourself to a pattern of behavior for long enough that it becomes instinctive. We don’t change our lives in flashed of brilliance, but through a slow process in which assumptions unravel and require new explanations. What you do every single day accounts for the quality of your life and the degree of your success. The outcomes of life are not governed by passion, they are governed by principle. If you want to change your life, you need to make tiny decisions every hour of every day until those choices become habits.
Tether - the USD of the crypto world - so we thought. Tether, a cryptocurrency which is pegged to the USD, should have an innate value of $1. The backing to the USD, is possible by the creators of the coin, Bifinex, holding 1 USD for every tether that is in the market. There has been controversy whether this is true or not, and last week was another case of doubt. Tether is used as a way for crypto traders to stay out of the crypto market, while still staying in the stable currency. Early last week, there was another scare concerning Tether, and we saw traders trying to get out of it which shot the price of BTC up to around $6800, from $6200. This decreased the value of tether from 1 USD, to around $0.93. A week later, it’s still sitting at a 3% discount, at around $0.97. The effect of this? We saw a large rise in traders using other stable coins, such as the Gemini Dollar, created by the Winklevoss’s, and Trueusd.
The Alchanati Campbell and Associates Team
The Market. From Wednesday to Thursday, about $8.5 trillion in market cap was wiped off of US markets. The downtick spike suggests either outright panic or a series of automated program trades were the cause. Today’s rally was due to trade data from China easing concerns and the tension, finding out China isn’t manipulating the Yuan and relief on bank earnings. Economists believe a rate inversion will be likely to happen in 2019. Over this last week, we saw gains that occurred over the last 3 months get wiped out. There is a lot of speculation to what caused this drop, if this drop is going to persist, and why bonds and stocks both went down on Thursday. Personally, I feel it’s a two-part answer to what caused this drop: it’s a mix of increased fear in retail investors, and trading algorithms selling when the market dropped past the Moving Averages (specifically the 200-day moving average). CNN’s fear and greed index, which 1 month ago was rated at 59 equaling to greed, is now currently ranked at a 5 equaling to extreme fear.
Housing market slowdown. Several economic factors have led to discouraged and hesitated homebuyers in 2018. These factors include:
What determines how successful a portfolio is in terms of net inflation-adjusted returns.
Banks report earnings. JPM (-0.98%), FRC (+2.51%), PNC(-5.59%), CITI (+2.14%), WFC(+1.34%) were of the first publicly traded banks to release their earnings, earlier today. JPM, CITI, WFC, and PNC all were slightly above estimated EPS. With FRC being directly below estimated, by less than a cent. JPM stated that “they had attracted a record amount of fresh money” - CEO Jamie Dimon, as well as decreases in credit losses by over 35%. The general sense that we are seeing from these earnings calls are rises in deposits, increases to interest income, and increased lending activity. All of the banks are signaling for a positive outlook on future economic growth, and this should help to squash a bit of the fear currently in the market. The only bank struggling in the current market is PNC, as they are dealing with raises of around 1% in non-interest expenses and weak loan growth.
To infinity and beyond…. Almost. Over the past few years, we have seen private companies kick off a second space race with the goal of sending a paying customer into space and eventually to the surface of Mars. This week there have been several exciting developments. SpaceX has finally landed a booster on the west coast and created a magnificent spectacle over the Californian horizon in doing so. Amazon founder Jeff Bezos gets his rocket company, Blue Origin, ready for their first suborbital flight which they estimate will take place in the first half of 2019. Richard Branson, yet another billionaire with a rocket company claims that Virgin Galactic will be in space “in weeks, not months” taking a direct jab at all the other companies reaching for the stars. Not all news is good, yesterday a Russian Soyuz rocket carrying an American astronaut on his way to the ISS failed causing an abort and reminding us that space travel is still extremely dangerous and far from routine. Both the American astronaut and the Russian cosmonaut are unharmed, but this innocent means that there is no way to re-crew the ISS. If Russia isn’t ready to fly by January, and SpaceX and Boeing don’t expedite their crewed test flights then the ISS may need to go un-crewed for the foreseeable future.
Life advice. Be true to yourself- live the life you want to live. Focus on what is true to yourself. Take a break, meditate, or take time off. Don’t forget to show love- be selfless. It’s not about the hours in the day, it’s how you use them. Right is might, and when you do your work and figure it all out, all the other noise will disappear. Don’t give up. You need to know your limitations- you shouldn’t do what you don’t understand. You always live to fight another day. Do something you love. Everything you do really means two things. Find the smartest people you can, surround yourself with them, and shut up and listen.
Regret. Senior citizens flashback to their youth and give advice on what they would change about their financial planning. Here are some of the mistakes they made:
The Volatility Index. Here is something you should know because it might be useful with upcoming market volatility...
The Alchanati Campbell and Associates Team
How to be smart, how to be less risky, how to have less regret + some more.
The Market. Two-thirds of economists expect a recession to begin by the end of 2020; the biggest fear: trade tensions. The US government payed $523 billion in interest payments, more than the total economic output from Belgium’s latest fiscal year. The confusion about tax law changes are cleared up: companies can deduct 50% of meals while entertaining clients and customers. Volatility in the market is back up. The unemployment rate fell to a 48-year low to 3.7%.
Property prices continue slow rise. For the most part, commercial property appreciation has been modest over the past few years- something like 2% per year on average. Industrial property has increased 11% and Manufactured Home park real estate has increased 16% in the past year; while Malls have declined 9% and Strip Retail property has decreased 4% in the past year.
Americans are retiring later. People are retiring and taking their benefits later. 57% claiming their benefits under social security at age 62 in 1997 versus 34% at age 62 in 2017. Increased life expectancy and improved health are some reasons for this. Another reason is private pensions have transitioned from defined-benefit plans to defined-contribution ones creating less incentive to retire earlier.
Risk management for regret. Project yourself to age 90: looking back on your life, you want to minimize the number of regrets you have. A few regrets are universal: a decision that can not be easily reversed and a decision with downside so severe that it prevents eventual recovery. Risk management comes down to avoiding decisions that can not be easily reversed, whose downsides are unrecoverable. Taking good risks requires knowing both the odds of failure and how that failure will affect you afterwards. “Risk is what’s left over when you think you’ve thought of everything,” (Carl Richards).
Lots of kinds of smart. Smart is the ability to solve problems. Accepting that your field of work is more important or influential to other people’s decisions than dozens of other fields, pushing to spend your time connecting the dots between your expertise and other disciplines. Willing to make bold moves but always within the context of making survival the top priority. Humility not in the idea of the world you’ve experienced you are likely wrong, especially in knowing how other people think and make decisions.
Insufficient sleep = risky teen behavior. Teens who sleep for less than 6 hours per night are at greater risk of mental health issues, substance abuse, accidents and other risk-taking behavior. Teens require 8-10 hours of sleep at night for optimal health, but 70% of high school students get less than that. The odds of unsafe behavior by high school students increased significantly with fewer hours of sleep. Those who slept less than 6 hours were more than three times as likely to consider or attempt suicide.
Rate hikes and investment advice that we are NOT advising you on. After the almost unprecedented job report, we can expect yet another interest rate increase come December. In fact, if nothing dramatically changes, many economists from banks including PNC Financial and J.P. Morgan Chase expect at least 2 more rate hikes in 2019. 10-year Treasury notes hit a seven year high (3.229%) following the job report, but the Fed believes the economy is still strong. In previous interest rate hikes, shares of J.P. Morgan have increased 5.2% in a month-to-month period, Goldman has seen a similar 3.9% gain, companies like Visa and Exxon Mobil have also done well. Historically, Walmart and Coca-Cola have struggled.
Is it Musky in here? Last week, Elon Musk, eccentric CEO of Tesla, was being sued by the SEC. Now, Musk has a somewhat decorated history of using social media to speak about Tesla (which often leads to sharp increases in Tesla's share price). However, he went too far this time.
In August, Musk tweeted that he was thinking of taking Tesla private at $420 dollars per share (another juicy story behind that number), and that he had already secured the funding necessary to buy back all the shares. Tesla jumped 11% on that day. However, upon further investigation by the SEC and Tesla shareholders, it's been revealed that he may have been stretching the truth just a bit.
Musk got sued by the SEC for Securities Fraud, issuing "false and misleading" statements to manipulate the stock price in a favorable manner.
Musk has settled his lawsuit with the SEC, agreeing to pay $20 million to the SEC with Tesla, Inc. also paying $20 million. Furthermore, Musk agreed to resign as Chairman of the Board but remain Tesla's CEO.
The drama seemed to be over, but that’s never the case. On Thursday, Musk further taunted the SEC. He tweeted out that the SEC is doing fabulous work but referred to them as the “Shortseller Enrichment Commission”. Given Musk's history of opposing investors shorting Tesla (betting that the stock will go down), this is clearly a jab. Investors responded by sending shares down 7% today, which wipes out the slight recuperations made from the settlement.
Remember folks, secure funding before manipulating securities!
Government spending. Government spending currently accounts for 36% of US GDP, with 57% attributable to federal spending, 26% to state spending and, 27% to local spending. Government spending is split up into 3 subsections: mandatory spending, discretionary spending, and the interest on our debt. In the last few years, the government has started to reduce the amount they are budgeting to discretionary spending, decreasing from 13.1% of GDP in 1968, to 6.3% currently. Although discretionary spending is decreasing, total government spending is increasing drastically due to mandatory spending and the earned-benefits programs under it. Specifically, when looking at the mandatory budget, you will notice Social Security and Medicare dominating a large % of the budget. This is due to one of our largest generations reaching retirement age, the Baby Boomers. It is projected that there are currently 10,000 new retirees every day, with that number projected to increase in the next few years. Currently, social security is completely funded by payroll taxes and the interest earned on previous payroll taxes that were invested. The trust fund is currently running at a surplus, but the board predicts that by 2036, the surplus will be depleted and social security revenue from payroll taxes and the interest earned on them, will only be able to cover 77% of the benefits promised to retirees.
The Alchanati Campbell and Associates Team
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WHAT'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.