The market is crazy, and you know it and I know, but how are you reacting to it?
The Market. Traders and investors are dazed, confused, quick to cast blame… but who can condemn them, the market has been choppy. Oil is near $50 per barrel. Lower oil prices mean less pressure on inflation and less pressure on central banks to raise interest rates, and it also benefits households, businesses, and countries that import oil. Corporate bonds have fallen so hard that they’re officially in a bear market. Volatility in emerging market hedge funds spiked in recent months as regional equity market losses in both emerging and developed markets accelerated. American life expectancy falls as opioid deaths rise.
Overconfidence. It causes selection bias (selecting individuals or groups in an unrandomized way), overtrading, lack of diversification, taking on more risk… But, there is a way to mitigate it: take the outside view and do not only rely on personal experiences, think in probabilities and bets, assume you are average and record and review decisions.
Reflections. Breathe and relax. Do not overwhelm and take it slow. What’s yours is yours. Calm and composed. Don’t act on impulse. Think before you do or speak. Don’t try to validate and don’t try to prove yourself. Do not have regret. Patience and restraint. Stop being a bitch. Only weak people get upset, complain and give up. Don’t express weakness to others. No more distractions. You have to be willing to let go and accept that it’s over. I know everything in my life is there to test me and make me better and stronger. Be untouchable.
Financial stability report. The four biggest vulnerabilities the US economy is facing are elevated valuation pressures, excessive borrowing by businesses and households, excessive leverage within the financial sector and funding risks. Asset prices are high relative to economic fundamentals. There’s an increased willingness of investors to take on risk. Borrowing by households has risen roughly in line with household incomes, but there are high amounts of debt. Debt owed by businesses relative to GDP is historically high. The net increase in total household debt has been among borrowers with prime credit scores (719+). Mortgages represent 2/3 of overall household debt outstanding.
Meditations by Marcus Aurelius. Don’t be afraid of work, be sparing in your wants, attend to your own needs, mind your own business and never listen to gossip. Make decisions for yourself instead of depending on the hazards of chance, and never for a moment leave reason out of sight. Approach each action as though it were your last. Remember the doctrine that all rational beings are created for one another. Anything in any way beautiful derives its beauty from itself and asks nothing beyond itself. The man who has done one good action does not cry it aloud but passes straight on to a second. Nothing can happen to any man that nature has not fitted him to endure. Love nothing but that which comes to you woven in the pattern of your destiny.
G-20. This week kicked off the G20 or Group of Twenty summit which is an annually held summit attended by 19 countries and the European Union. Political and financial leaders from the countries plus an extended list of invitees attend the summit to promote worldwide financial growth and stability. The summit represents 85% of gross world product, 80% of world trade, and two thirds of the world population. The G20 was founded in 1999 and replaced the G8 in 2009 as the main economic forum for industrialized and wealthy nations. World leaders use the summit to meet with other heads of state and discuss economic relations. This week kicked off this year's G20 and has already seen the singing of a new trade agreement, and is expected to see progress made on a US-China trade deal. Mr. Trump, Prime Minister Trudeau, and President Enrique Peña Nieto (Mexico) signed the USMCA in spite of persistent trade disputes, which updates NAFTA, the previous free trade agreement. USMCA notably resembles NAFTA except for its updated regulations on cars, crops, and labor regulations. Even though the agreement has been signed it must still receive a majority vote in the Senate and House of Representatives, which is unlikely to happen before changes are made considering both Republicans and Democrats have voiced concerns about the agreement.
“I come to bury Bitcoin, not to praise it” - UBS. “Bitcoin trading below 4k, is it dead?”These were both headlines that displayed on CNBC and other major news stations over this last week. The question among everyone's mind, is bitcoin actually dead? Will we see a recovery? Well, to put this last crash into perspective, bitcoin has crashed more than 50% over 6 times, with crashing over 80% 2 previous times, with this last crash just reaching that 80% point this last week. What does this mean? Well, we have seen this type of crash at least twice before, and both times have surpassed previous levels. The longest correction took place from November 30th 2013 - January 13th 2015, lasting 411 days and declining about 87%. This current crash is at the 331-day mark, with a decline of around 80%. Personally, I think Crypto is on the cusp of something revolutionary and the next phase will be improving the ease of use on the consumer basis.
The Alchanati Campbell and Associates Team
The Market. Home prices in a given location are ultimately tethered to the income of the people who live there. 21% of people surveyed by Fannie Mae said it is a good time to buy real estate while 35% say it’s a good time to sell. Markets react to the plans and talks of Brexit with volatility, expecting rises in UK sovereign yields and strengthening of the pound. The tight labor market could be lifting inflation soon. Federal Reserve Chairman Jerome Powell said the US economy is strong but could face headwinds next year with raises of the interest rates. Global debt-to-GDP is at an all-time high. Oil drops most in 3 years as investors flee a market hammered by swelling supplies and a darkening outlook.
More than one strategy. Last week I briefly discussed the dividend strategy that I have been working on. This will be just one of the 3 strategies that I’ll be putting on top of each other. In my personal opinion, building a portfolio is all about stacking different strategies with different risk tolerances together to form a diversified portfolio representing different equities from each sector, varying on the aspects you are holding the equities for. Like with the previous strategy, we were looking for high yield dividend stocks, with relatively safe dividend payouts. Personally, I feel this has a medium risk tolerance and will make up around 40% of the overall portfolio. My base will have a low-risk tolerance and make-up 30%. This will most likely be based on creating criteria for finding financially stable companies. The last 30% will be a medium to high-risk tolerance, that has a higher return, and will lower the overall correlation by encompassing a non-US equity market.
U.S. Budget Deficit. For the month of October, the United States recorded a $105 billion budget deficit. This number is up from $63 billion from a year ago. You might be wondering why it’s so high. The answer has a bit of irony. Remember when the Trump Administration issued those corporate tax cuts way back? They're beginning to catch up with us. While the cuts may be great for the businesses and giving them more money to reinvest (which data from October shows that they haven't), they also reduce government revenue. The irony lays in the fact that Republicans, generally, are all about reducing taxes (which they did) and spending in general (small government). However, they've increased spending (notably in defense). Increasing expenses while decreasing revenues is not a good formula for success. This places the deficit to come in just shy of $1 Trillion with a T. Last time it was this high was during the years of the recovery from the last recession, except that time it was a Democrat in the White House with Republicans fighting to reduce spending in an effort to the reduce deficit. They've been a little quieter this time around.
The stock-bond correlation. Correlation measures the commonality in the deviation from trend for two series of returns. A positive correlation is when two things act the same and negative correlation is when two things act differently from each other. Investors should care less about how the returns deviate from their trends and more about the trends themselves. Correlation provides little information about the relative performance of stocks and bonds. Bonds provided needed diversification to equity risk in past recessions, but correlation did not matter.
Momentum investing. Betting that the stock market’s recent winners will remain winners in the near term and likewise with the recent losers remaining losers. The basic time frame for momentum investing success is three to twelve months. The strategy involves capitalizing on the continuance of an existing market trend. Momentum investors use trading signals like the 50-day and 200-day moving averages to know when to enter and exit from a position.
Lessons learned from living a full life (we haven’t lived a lot, but we read a lot). Happiness isn’t about a state of constant elation. It’s about being constant. People suck. But if you’re kind, you’ll get the best out of even the worst. Perfection only exists in the mind. It’s not real. Imagine, create, improve. The better you adjust your internal expectations, the happier you’ll be. Growth is what keeps life interesting, and it comes from doing the hard stuff. Over time, the greatest risk you can take is to take no risk at all. Who you let into your life is a vital decision. Don’t leave it up to chance. Everything is approximate. Don’t aim to be right. Aim to be less wrong.
The Alchanati Campbell and Associates Team
The Market. “Trade war is the most stupid thing in this world,” (Jack Ma). The US has a $423 billion trade surplus with the world. The Federal Reserve left interest rates unchanged, but on course to hike in December. Officials are trying to prolong the second-longest US expansion. Household spending has continued to grow strongly. Wage growth in October was 4.6% beating inflation. Bill Gates is reinventing the toilet.
7 threats to the bull market.
FIRE. At Alchanati Campbell & Associates LLC, we believe strongly in managing your personal finances and working towards financial independence. A movement known as “FIRE” or Financial Independence, Retire Early has become increasing popular as millennials become more familiar with the ideology. Advocates of “FIRE” say that in order to retire early you should save and invest 50% of your earnings and work until you’re about 35 years old, at which point you can then retire. There is nothing wrong with this idea as long as you’re okay with living your whole life on an extremely strict budget. The “FIRE” approach is an extremely conservative way to retire early and be financially independent, but there are many other ways to approach financial independence. Everyone has a unique financial situation, but a great place to start is by getting educated on the basics of budgeting and retirement plans. Check out our website for more information. Whichever path you choose to follow, always remember that the key principles to maintaining good financial health are managing a budget, saving your income, keeping a diverse portfolio and steering clear of large amounts of bad debt.
Dividend stocks. Dividend stocks are equities that pay a portion of their earnings back to their shareholders as an added benefit to holding the shares. When looking at dividend stocks, we first look at the dividend yield, which is calculated as the yearly dividend payout divided by current share price. I personally consider anything above 2.5% a decent and lucrative yield. Shares that offer a consistently growing dividend, over at least the past 5 years, are usually considered to be of lower risk and have less volatile price action. At first glance, one may think a higher dividend yield is always the better choice, but this couldn’t be further from the truth. There is a sweet spot for dividend yields which rely on a few different factors, mainly being its dividend payout ratio (total yearly dividend payout divided by net income), and the number of constant yearly dividend growth. Ideally, we are looking for firms that have a dividend payout ratio of less than 60%~, and a company that has been raising their dividends for around 10+ years. The payout ratio is looking at the safety of the dividend in comparison to how much they are paying out of their net income each year, with the lower the % the better. The years of constant dividend growth shows that the company prioritizes growing this dividend, which means that at the end of the day they will take drastic action to retain this growth to keep shareholders happy.
How to master your mind. Your whole experience of existence is really what’s going on in your mind. All of our emotions are created by our thoughts. Most of your interpretations are not particularly true. People distract themselves because they cannot live with their minds. The healing is only going to come once you change the perspective of the pain. Suffering is your mind not dealing with the feeling in a positive way. “I feel really lonely and that’s okay”. “It’s for the best”. Growth comes from pain and challenge. Find the meaning in the pain. Your whole life is your attitude towards life. “I’ll change my thoughts to change my emotions”. To get rid of the pain, take away the thinking. Is it true or not? Is it serving any purpose? Is it going to help me? Acknowledge it and then replace it with positivity. Write down negative thoughts that come to you and number them. You will be more aware when they come. “That’s not who I am anymore, I don’t do that”. Choose your thoughts and replace it with something good. I’m holding onto a rope that’s not attached to anything. Let go, feel the pain, except that this connection is no longer in service. Say whatever is wrong, except that it’s wrong, and then say, “and it’s okay”. “I feel really lonely and that’s okay”. “What’s your perspective and attitude towards life?” I know everything in my life is there to test me and make me better and stronger.
The Alchanati Campbell and Associates Team
With all of the chaos and hate filling the air that we breathe, we take this week to reminisce on the good, because there is good in everything, and we take a minute to remember those who passed in the Pittsburgh Synagogue massacre, flight Lion Air 737 crash, the Yemeni Civil War and all other bloodshed that keeps you up at night. We want you to sleep well tonight so let's get to it:
The Market. Student loan debt is 7.5% of US GDP. Fears of an easing in corporate earnings growth is a big factor in the stock market volatility. The top 20 financial firms now control a record 43% of assets, $40.6 trillion. The US economy remains one of the world’s most powerful employment-creation machines. Tightening labor-market conditions are helping wage growth. More jobs and higher wages are attracting more people back into the labor force. There is no negative sentiment towards bonds- even when bonds are showing signs of an end to their 30-year bull market. Manufacturing fell to a 6-month low as orders and hiring cooled.
Be inspired, the best of us are, what’s your inspiration? I tore myself away from the safe comfort of certainties through my love for truth, and truth rewarded me. The only way to get people to do great work is if they love what they do. The masks we wear – or don’t wear – shape the way we interact with the world around us, and they determine the space in front of us. Don’t work for your money, have your money work for you. When we strive to become better than we are, everything around us becomes better too. What makes a human life have meaning or significance is not the mere living of a life but reflecting on the living of a life. Your whole life is your attitude towards life. You can either sit around and watch everything from a distance or you can be the one to act and have everyone watch you.
Wages are back. It's November, which puts the October equity beatdown officially behind us. It also means it is time to stop shaving for a month, and apparently, the U.S. jobs report got the memo. For the month of October, nonfarm payroll employment grew by 250,000 jobs, easily beating estimates. Moreover, the unemployment rate remained astronomically low at 3.7%, the lowest in nearly 5 decades. Given that jobs are increasing, and unemployment is decreasing, it’s easy to see that there may be a lack of workers. Thus, it’s a good sign that wages increased by 3.1% over the past year, the largest year-over-year gain in nearly a decade. Also, wages are growing ahead of inflation which hovers around 2%.
In a world of increasing chaos, it is easy to get overwhelmed and lost in it all. It's important to remember to always P.A.C.E. yourself. Positive attitude changes everything. – Alex Martino (Part of The Alchanati Campbell and Associates Team)
The sunk cost fallacy. You are reading a bad book. For the past few days, you have endured through 100 pages. You are considering abandoning the book; however, you are compelled to continue because you’ve already read so much. What should you do? If you truly dislike the book, the 100 pages that you have read are a sunk cost and should have no effect on your decision making going forward. This phenomenon is something economists call the “Sunk Cost Fallacy”. In basing a decision on previously invested capital (in this case, time) one ignores the costs of engaging in a particular behavior. For an investment firm, this could be holding a bad stock because the firm is a legacy shareholder; for the reader, this could be reading a terrible book because they’ve already read 100 pages. By acknowledging sunk costs, firms and readers alike can more clearly see the costs and benefits of their decisions.
Peter Thiel's “competition is for losers” is something I live by. Living every day as an improvement upon yesterday is a better way to live. – Daniel Covelli (Part of The Alchanati Campbell and Associates Team)
The grass could always be greener. For the last 15 years, Brazil has had a leftist government. That all changed on Sunday when Brazil elected Jair Bolsonaro as president. When president-elect Bolsonaro takes office on January 1st, he is expected to begin enacting his far-right political plan, one that is very similar to US President Trump’s plan when he first took office in 2016. In fact, Bolsonaro openly admires Trump so much so, that many political analysts and colleagues describe him and Trump to be extremely likeminded. Bolsonaro’s plan covers many of the same issues that include: pulling Brazil, the country with the largest section of the Amazon rainforest, out of the Paris climate accord, restructuring and pulling out of free trade agreements both with neighboring countries and China and moving Brazil’s embassy in Israel to Jerusalem. Many of these issues are expected to cost Brazil billions of dollars, and political analysts are uncertain if the president-elect will follow through.
I believe in learning and sharing accurate knowledge so I and the people around me can make informed decisions about the world around them. – Matthew Campbell (Part of The Alchanati Campbell and Associates Team)
A trade deal with China? Yesterday, November 1st, our president announced on Twitter that he “had a long and very good conversation with President Xi Jinping of China” “with a heavy emphasis on Trade”. What does this mean? Well, many analysts think this is Trump trying to raise investor confidence and boost the stock market in anticipation of the midterm elections. Trump told reporters yesterday, as he was leaving the White House, that “I think we’ll make a deal with China”. Currently, the US has imposed tariffs of $250 billion on Chinese goods and stated another potential $17 billion to be added soon. In nearly every case, barriers to trade are a net negative on each country’s economy, and weigh on economic growth, according to David Ricardo's comparative advantage theory. Why is the trade war weighing so heavily on China? Well, China’s historically has exported around twice as much as they import, making them an export-heavy country. To put this in relation to the US, they import around 2.4t worth of goods, and export around 1.6t, which means they are an import-heavy country.
The 2 main components of what I am inspired by are: 1. To be part of tomorrows change, and 2. To leave a positive mark on the world. I believe that nothing is more powerful than a group of people, working towards the same goal, and what they will be able to achieve. – Brent Gordon (Part of The Alchanati Campbell and Associates Team)
How to make friends and influence others. If you want to gather honey, don’t kick over the beehive. Talk about your own mistakes before criticizing others. Don’t criticize them; they are just what we would be under similar circumstances. A great man shows his greatness by the way he treats little men. The only way I can get you to do anything is by giving you what you want. The deepest urge in human nature is the desire to be important. If you tell me how you get your feeling of importance, I’ll tell you what you are. Give honest and sincere appreciation. Arouse in the other an eager want. The ability to get the other person’s point of view and see the things from that person’s angle as well as from your own.
Everything I am and hope to be is due to my ambition to be my best self, the love that surrounds me daily and the appreciation I have towards the experiences and memories I carry and the life I was given. – Camden Alchanati
The Alchanati Campbell and Associates Team
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.