Problems are created to challenge the spirit in inducing itself to find a solution. But a solution may be temporary and not a one-time-fix. As we see today, there are ever-growing problems, solutions imposed, but results have not been substantial and more “V”, “W”, or “Swoosh” like. The problems we are facing today are numerous: the value of our dollar depreciating, interest rates at zero or below zero, a virus spreading with no end at sight, investments yielding no return, a global political catastrophe, government, personal, and corporate debt defaulting and increasing, and business models being tested to their limits and failing. Even when all research and analysis is telling you that their is a fault in the system and you shouldn’t be buying the market, people will. The Central Bank is buying treasuries from institutional investors to add more liquidity to the market, institutional investors have more cash available, and they will be forced to buy the market. They’d rather go down with the herd than go down by themselves. Last resort? The Feds run out of bullets or the stock market is nationalized.
This week, the NASDAQ fell due to institutional portfolio re-allocation as well as risk-off selling. The new tension between the US and China is real, and COVID-19 is not slowing down. Precious metals are finally proving to be the haven and our currency is showing signs of weakness in accordance to the overall weakness of our nation.
We are analyzing the entire market to see businesses that will not work in the new regime. Restaurants will have to innovate, schools will have to restructure, and consumer spending will be impacted by inflation, higher savings rates, and bumps in unemployment stimulus benefits.
Which businesses will survive? Which businesses will become more valuable? Which currencies and assets will be worth more?
The ACA Foundation
One thing that I have learned is no process, no set of principles, no backstop, no hedges, and no luck can help you navigate this uncertain market. Gold has returned well this year (up 17%), but what if you believed deflation was going to occur or interest rates were going to rise? Gold would drop. Investor psychology is the most difficult to master. Staying cool and dry while a storm is hitting the market. This is what happened in March when the market dropped 30%+. So say you sold and held onto your contrarian views that the market was going to continue its deceleration. You would have been wrong with most markets returning to their former highs. Not many knew tech was going to outperform everything and nobody knew the abilities and capabilities of the Federal Reserve. So now you try to map out tomorrow's path. Virus cases are spiking again, US elections are coming soon, more small businesses are becoming bankrupt, the 10 year T-bill is decreasing, the Feds can't support the economy forever, a bubble is becoming larger in the credit and equity markets, a vaccine may be discovered soon, businesses and individuals may get more stimulus funding... As you can see, there is no right answer to what will happen. Something I have learned to do is to stick to YOUR process if you are confident enough in your understanding of current conditions and if you can take on the risk. But be careful in not being too emotional about your lack of understanding because nobody knows what will happen. There is a lot happening behind the curtain.
Things We Have Learned Recently.
Reflation.In the past, we have talked about inflation, deflation, fiscal policy, and monetary policy to better understand the cyclical economy. Now rather than look at the individual factors, we will look at the whole picture. The United States and the world are in a period of reflation. Reflation is when central banks and governments provide monetary and fiscal stimulus to spur economic activity and inflation. This often occurs in response to a recession or to deflation. From a monetary standpoint, relegation begins when the Fed lowers interest rates and takes steps to expand the money supply, which we have seen occur on a large scale. From a fiscal policy perspective, reflation occurs after the government allocated funds or lowers taxes. We have seen this occur with the SBA loans.
The steps taken to weaken the impact of a recession can lead to inflation. Inflation is much more preferable than deflation and is often a sign of strong economic demand. This means that demand sensitive stocks like consumer discretionaries, industrials, materials, and energy may outperform. Individual investors may also buy into high beta stocks and keep cash on hand to take advantage of any favorable opportunities.
My Story and Tribute
Growing up, being an outcast, being different, getting hurt, and not belonging drove me. I did not have my place, so I acted out and misbehaved. I have always been the quiet observer and I have always enjoyed spending time with myself. My confidence grew from knowing myself fairly well and from acting and learning from my experiences. I listened and looked and took in everything. Everything was a learning experience and I grew because of that. I have always known and felt that I thought and acted differently. I would think about things differently and I would think of different things, I matured quickly, I became independent at a young age, I always felt I needed to lead and take control, to not rely on anyone, I cared about the things I valued a lot, and I have known exactly what I want, but now it is being planned and executed with more detail.
I was not very social, not very talkative, I preferred to be the last to act, I used to be afraid to speak because I would make mistakes, and I still do. Insecurity took something away from me that I can never get back. Learning to not care gave me tenfold of what I lost. Now, none of it matters because I realized what is truly important and valuable.
It took time to develop into who I am now. It took curiosity, initiative, ambition, and love. It also took suffering, awkward moments, failure, and wasted time and energy; equivalently.
I learned to accept and realize who I am, and I learned to figure out who I want to become. I learned to love myself, even when I loved others before I loved myself. I never cared for recognition or acknowledgement, and sometimes I failed by seeking validation. I never had the same values and focuses as others, and I always tried, and I still try to be different than everyone else. Because someone did it, I did not want to do it anymore kind of attitude. And I never cared for what people were doing and I never cared for people knowing what I was doing.
My social connections are dismal which I am working on. I never was good at creating new, long-lasting relationships and keeping them. I am and was always too stubborn. Maybe it was my proudness or insecurity that handicapped me. The relationships I did create and that I did keep are valuable and lasting. And I take the effort in keeping up with them and making them feel valued. I never needed social connection because I learned to get everything I needed from myself. After so many times getting hurt and being disappointed, I learned this.
My values, principles, beliefs, and ways come from my observations, experiences, mistakes, and readings on Stoicism, Oscar Wilde’s philosophy, and others. I have always been strong-headed and most of the time I would be more dramatic than I needed to be. I blame the lamp that fell on my head as my younger self tried to climb to new-highs up my dresser. I have always valued my time and I have found the importance in managing it well. Sometimes more than others. Learning, achievement, getting something right, and impacting others in a positive way has and will always make me happy.
I have always told myself: you will do it and you will get it done like you always do, beat the system, stick with your system and believe in it, get off the grid, what’s yours is yours, and strive to become your best self. I have always found the last one to be particularly hard. I never understood why some people did not like me. I had the world to offer, and I would have given more. I always cared too much, and I would become irrationally foolish. I am grateful for all of those experiences because now I have a reason to give my whole self and a person to give my whole self to.
Some that know me may say I am too arrogant or proud or stubborn or I think I am too good. Some others may say I am mysterious, unknown, I am there, I do my own thing, and then disappear. Others may say I am very mature, independent, established, successful, ambitious, driven, disciplined, hardworking, and focused. And a few have said I am scatter-brained. I will always have more questions than answers, I will always be attracted to the unknown, and I will never stop bettering myself. I have come too far to care what people think.
Throughout time, I have met and learned from many people no matter the size or length of the interaction, and I have seen and done many things absent of the mundane. I remembered everything and I often recall on memories to remind myself so I may learn from it and have it be instilled. The biggest challenge I had was accepting who I am and where I came from. And that is why I may have run away or hid from my past. I definitely did not value it, but I am starting to come back to it and become reconnected.
The problem was I experienced so much pain and suffering. A different kind of suffering than that that relates to hard work and success. I became so confused by what hurt me and I became so overwhelmed by the suffering from my not knowing that I became somewhat insensitive and emotionless. That created my loss of connection.
Independence is good when dependence is not feasible, appropriate, or effective. I have always concluded my independence as not needing anyone, ever. No support, no guidance, no help… always thinking that I am right. And in itself created my desire for independence. But I forgone my main support system: my family.
I have always been motivated by the reward of excitement. I never experience boredom because I have always something productive to do. And I can be with only myself for long stretches of time without going insane. I weight opportunities and decisions based on my overall feeling and comfort, and I always try to take the rational and most efficient approach regardless of the risk.
There is not a day that goes by where I do not think about my future, where I want to be, and how I will get there. It often changes, my explanation may not be the same, my reasoning may have become more constructive and detailed, my purpose may have shifted according to my values and priorities, but I will always tell myself like I did with my eight-year-old self, “you will do it and you will get it done like you always do”.
The ACA Foundation
What's up Stock Market Price Floor?
The stock market is refusing to drop lower!! Even with record amounts of cash in money markets and on the sidelines, the stock market is either stagnant or moving higher. (Graphics 1-3). The US stock market is discounting a new expansion in its price while we only just began a major recession. The problem we are facing now is another rise in COVID-19 cases, which means tighter regulations, fear spiking, and lockdowns and hibernation beginning again. The US economy can not face another shutdown. Even though large corporations, like Apple, are shutting down some of their stores…again, small companies can not face any more economic shock. I am very certain that the rise in virus cases are due to three factors: 1) more testing, 2) the protests caused and are furthering the spread, 3) the weather is becoming hotter and while the hot weather was supposed to kill off the virus, people are staying inside with the A/C blasting and are becoming infected. The Federal Reserve pumping billions of dollars into the market is causing the market to stay-in-place; stagnant. (Graphic 4) Soon we may see what happens when the Fed stops the capital injections or slows them down. The Fed buying does not prevent defaults and it just shows how low long-term returns will be.
Chapman hosted an economic webinar Thursday, June 18th to discuss the monetary credit and fiscal responses to the pandemic. They had many panels of speakers ranging from the President of the Federal Reserve Bank of St. Louis to economic professors at MIT and Dartmouth College. The common themes between all the panelists are fear, uncertainty, this event is unprecedented, and it not being a V-Shaped recovery. Some agreed that the Feds made the right choices in their monetary and fiscal policies, but others had mixed feelings and felt that the Feds could have acted differently (bringing rates to negative). Here are the key takeaways:
Where we are now in the monetary and fiscal world is in unchartered waters and the current goals of the Feds are to mitigate a financial crisis and to mitigate depression risk. So, the Feds will do whatever it takes. Their current policy response comes in three ways:
The Cares Act essentially spent 10% of the US GDP to fund some of these policies. The prediction is the 2020 GDP will be 10% lower than 2019 GDP levels. But there will be more fiscal policy going forward because the stock market is being propped up by it, and society is relying on it. Unfortunately, this can not be maintained over a long period of time. The Feds estimate that, because a typical small business can not last 90-120 days without revenue, this is how long it will last.
One economist created illustrative scenarios to predict what may happen in three different ways.
The Feds are currently buying corporate bonds and corporate bond ETFs (regardless of their credit rating). For example, they bought an ETF fund (SPDR Bloomberg Barclays High Yield Bond ETF) composed of high yield corporate bonds… junk. Some say the Feds are going to start buying equity in the stock market. Are the Feds picking winners and losers? Will the Feds hold these corporate bonds to years to come? Will they become majority shareholders with controlling interests and voting rights? Who will they send to represent them at the shareholder meetings?
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What's up Reality Check?
Two simple words with a very impactful meaning: reality check. That is what dumb and smart investors experienced on Thursday when the indexes tanked -6%, but mostly the retail investors. (Graphic 1) Before Thursday, optimism was at all-time-highs, the market rebounded to its former highs, and the put/call ratio was at its lows (calls outnumbered puts). (Graphic 2) What caused the drop? A resurgence in new COVID-19 cases (mostly caused by states reopening too early and the recent protests)(Graphic 3), jobless claims still increasing by 1,542,000 (total of 29,505,027 for the week ending May 23), President Trump losing control of the social, political, and economical environment in the US (Graphic 4), and THE CORRECTION WAS LONG OVERDUE. The National Bureau of Economic Research determined that the peak (which marks the end of the expansion and the beginning of a recession) in monthly economic activity occurred in February 2020. (Graphic 5) What we are in is called a recession (and soon to be a depression), where volatility is high, and market-swings are frequent. What will happen is: as more economic data is released (painting a dark, ugly picture of our economy), the stock market will behave more correlated to that information. We will retest the previous lows and we may drop further. Volatility is back!!
“Weaker demand and significantly lower oil prices are holding down consumer price inflation.” - FOMC Statement
For the third day in a row, the market has shown losses across the board following the Fed’s monetary decision. Here were the key takeaways.
“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” - FOMC Statement
The Fed has many tools at its disposal but quantitative easing, yield curve control, and setting the federal funds rate are the most widely discussed and used tools today. Quantitative easing and yield curve control both involve pushing out or creating money to buy bonds. QE is when the Fed injects liquidity into the system through the massive purchase of bonds on the open market. In doing so they intentionally bid up the prices of bonds and reduce long term interest rates and borrowing costs. Yield curve control is when the Fed sets a long-term interest rate target and buys as many long term bonds as it needs to achieve that target. This is different than simply setting the federal funds rate. Proponents of the using yield curve control argue that the Fed can achieve lower interest rates with a smaller balance sheet than with QE. This would allow the Fed to not exhaust its resources and therefore be able to turn to other tools if needed. With the Fed balance sheet at $7.2 trillion yield curve control may allow the Fed to stimulate the economy while keeping a relatively low balance sheet if bringing the short term rates to zero is not enough.
Options Theta - Time Decay
Theta, or how I learned to hate time decay. Theta is a first-order effect measuring the decrease in the options price due to time. This effect is usually called time decay, as the options price decays as it gets closer to expiry. When buying options, this usually has the most detrimental effect on a stagnating stock price, as it always exhibits negative properties. While it is a burden when buying options, the reverse holds true while writing options. An options price has two main value components, its intrinsic value, and the time value. The intrinsic value is the current amount the option is in the money or above/below the strike price. The time value is the rest of the price, which is the time left for the potential option to get further in the money, or just become profitable. With this added time value, it is almost always more profitable to not exercise an option early. This however does not mean its a bad idea to lock-in the current gain by offsetting the position or selling the option in the market.
Smart Money vs. Dumb Money
In the bluntest way possible, "smart money" is exactly what you would expect it to be. It's capital injected into the market by "smart" people. What determines a "smart" person when it comes to investing? Anyone in any organization with some sort of track record or respect. The trading desk at Citibank, a mutual fund, a hedge fund, Warren Buffet, Ray Dalio, and the list goes on. People or corporations with experience, special analytical skills, and perhaps some industry information not available to most ordinary people (edge). "Dumb Money" is made up of everyone else (retail investors). You, me, my dad, my third cousin, my neighbor Jerry. We're just retail investors that do not have access to large amounts of data, nor do most of us have the time, skill, and drive to match the analysis of these large institutions. Any move made by an institutional investor is considered smart money.
But should it be?
There is little evidence that shows institutional investors, people whose investments would be deemed "smart money", are performing better than the other "dummies". Over the past 15 years, less than 10% of hedge fund managers beat the S&P 500. So, my neighbor Jerry can park most of his money in an index like the S&P, and then play around with some smaller trades on the side. Barring any extreme circumstances, Jerry's portfolio/401k is going to outperform a hedge fund any given year (except the Renaissance Fund, but that’s not fair).
It's also important to remember that smart money investors have some systematic advantages. Institutional investors represent over 70% of the market investments. Some corporations are trading with billion-dollar portfolios. The sheer volume of capital is enough to push prices in their positional direction. Moreover, they have the advantage of being viewed as "smart". Any trader from J.P. Morgan can write a piece on some stock saying how it’s a great buy. They can use some figures they pulled off a Bloomberg terminal (with a cost of tens of thousands of dollars per month), and convince some less Finance-savvy folks to listen to them. After all, they work for a giant bank and have connections with market mavens (people that are "in the know"). So we should listen to them, right? Not exactly. If they write a piece on XYZ stock, people will see it and then decide to buy it, thinking that since this analyst wrote about it, it must be good. The influx of capital from people buying the stock solely based on the article is enough to push the price of the stock up, thus making the article predictions come true. It is a self-fulfilling prophecy. Maybe XYZ stock is truly a great buy. But be wary of anyone that tells you they know for certain that this stock is the next big thing. They're trying to convince themselves just as much as they're trying to convince you. Then, there's the whole issue with banks engaging in market manipulation. Purposely releasing information to the public to drive prices up so they can unload their bad investments at a profit (looking at you, JPM). They'll stay stuff like "This stock is an automatic buy at this price" or "The sell-off has gone long enough".
On August 20th, 2019, JP Morgan upgraded Beyond Meat ($BYND) to a "BUY". This is purely hypothetical: They probably did this because they were riding the ridiculous climb of the company, one in which was easy to tell is a farce if looking at any analytical figure. Once the stock started to fall, they realized they needed to exit. So they released information to pump the price, and once it got above their average cost/desired profit point, they sold. Once they released their upgrade, the stock popped 14% on the next trading day. That pop lasted all of two weeks before plummeting further.
The takeaway here: Do your own Due Diligence. Don’t listen to advice simply because it comes from someone deemed by society to be "smart".
What's up Extreme Market Risk?
Just like hype and FOMO in luxurious retail and adventurous vacations (two examples), there is hype and FOMO in investing. It’s the newest factor to be used when evaluating market risk. The amount of retail investors joining the market has been “unprecedented”. Below is an example of the swarm.
One reason for this is consumers are using their stimulus checks and unemployment benefits to either save or invest. Below shows both scenarios.
These are due to consumer spending going down and personal “income” going up.
The issue of financial illiteracy looks like it’s being resolved (maybe) and finally the ownership of stock is not only in the top 10%’s hands, but there are many consequences and risks of this.
We have added to our list of risks. If any of these risks become extreme enough, we believe that we can see another correction in the market. We still hold the view that we are in a recession, and as history has shown, there is extreme volatility and movements in both directions. (Testing and retesting the highs and lows).
QE. Quantitate Easing is a modern monetary tool used by the federal reserve as a backstop for the economy. It was first used in the United States during the 08 financial crisis by Ben Bernanke. QE is the process of purchasing government bonds and other financial assets in order to inject capital into the economy, for the purpose of stimulating the economy and encouraging consumption. QE is usually only implemented once fed rates reach near the 0% mark as a final effort. This process usually increases inflation and can help pull the economy out of a recession. More importantly, the real affects this has on our economy has to do with increasing liquidity, increase in risky asset prices, currency depreciation, and signaling. The most important of these is the signaling effect, or as some call it the fed put. This is a psychological impact which is derived from the thought that the fed will take extraordinary steps to keep the market and economy afloat. Most market movements occur directly after the announcement of QE, with the actual QE taking place weeks/months after the announcement. This delay is due to government inefficiencies (time it takes to announce vs the time it actually takes to act).
The ACA Foundation
From the Front Lines
"Protesting is a part of your given rights as a United States citizen listed in the Bill of Rights under Amendment #1:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press, or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
You should have your cake and eat it too. You should practice what you believe in. You should protest when you feel you need to express something on a grander scale. You should voice your concerns and suggestions. Our system should be flexible and adaptable to the changing eras. But violence and destruction is never the right answer. It's not effective and it will only widen the divide."
- Camden Alchanati
Gov. Gavin Newsom declared a state of emergency in the city and county of Los Angeles shortly before midnight, Saturday, May 30th, and activated the National Guard to assist police after two days of violent demonstrations, sparked by the death of George Floyd, an unarmed black man who was pinned down by the neck by a white police officer in Minneapolis. Los Angeles had just experienced a level of chaos and unrest not seen since the LA riots of 1992.
How did we get here?
Yesterday, I met with freelance photographer Jackson Deakins to capture the events firsthand as they unfolded and see how peaceful protests turned to violent riots.
I parked several blocks from the protests in a residential area, as I turned the corner towards the Fairfax district evidence of conflict was clear. I was surprised to find that two blocks from the protests, the presence of tear gas in the air was already clear as it had no trouble getting through my N95 mask and causing my throat to burn. Pushing forward, I passed dozens of protesters who had noticeably been there all day, heading home, soaked with milk, and tears still running down their faces.
I walked onto Beverly Blvd; a street best known across the world for its luxurious shopping, but I was met with a scene of absolute chaos. A small group had led a crowd of several hundred protesters right up to the police line and marshaled chants true to the memory of George Floyd. Hundreds could be heard chanting; “Black lives matter”, “I can’t breathe”, “George Floyd”, and when police took aim with their rifles, “Hands up, Don’t shoot”.
Dumbfounded with the situation at hand, I made my way to the front where I could observe the crowd of protestors. Before I could establish my bearings, there were several loud pops from behind me, followed by the sound of rubber bullets flying by, and a sharp pain in my shin. Canisters landed in the crowd and soon the air was thick with gas illuminated by the explosions of flash grenades. My face was stinging, each breath set my throat and lungs on fire, and true to the name my eyes filled with tears. As I ran for cover, I was met with a stranger who offered an eye solution and milk to neutralized the tear gas. This is when I took notice of the true sense of community. Rather than an “every person for themselves” mentality, people rushed to the aid of complete strangers. I noticed that protesters left granola bars and packs of water in various sections of the protests. People helped each other to cover or even stood as shields to block the barrage of rubber bullets and paintballs (used to mark individuals to be arrested later).
As tensions rose some protesters took on self-assigned roles for the benefit of the crowd. People grabbed cones to cover tear gas canisters and pour water on them, others ran around with first aid kits to assist the injured, a group of seasoned protesters tried to stop others from throwing objects and escalating tensions, and on the front line older protesters without eyewear or masks did what they could to keep other protesters and police from clashing. There are very few times that I have ever experienced this large sense of unspoken camaraderie.
Unfortunately, violence was present on both sides of the protests but not to the extent that it is focused on by most news media organizations. In the local and even international news coverage that I have seen the overwhelming focus is on the looting. The area I was in was several blocks from The Grove where there were scores of looters and was a completely separate crowd from the people there to protest. In my area, it was clear that over 90% of the people there were there to protest in a manner that showed their frustration after centuries of inequality but also in a way that did not escalate tensions, but there was no professional news team insight to capture this. In fact, the majority of the officers there also did not want tensions to escalate and I often heard officers yell at others to stop firing and to be careful of the protestors, serval even conducted peaceful conversations with the protestors, but the sad truth for both sides was that it only took a few people to bring both sides clashing together.
One incident, in particular, stood out to me. Four police officers with assault rifles had set up onto a building at the corner of the intersection. One officer would tap another on the shoulder and direct him to fire upon a particular individual who was often throwing something or starting a fire. This routine continued except when a lone African American man in his late thirties stood in the center of the intersection. This man had his hands in the air and clearly had no weapon nor was he antagonizing the police. Prior to this, I had seen this man do anything but peacefully protest. Despite all of this, the officers on the roof open fire on him, sending a barrage of rubber bullets hitting the man multiple times. His only response was a simple shrug to the officers, as to simply say “why?”.
After hours of tic for tat instigations that resembled waves crashing on a beach, tensions reached a boiling point. Heavy reinforcements arrived and there were now over 100 police officers attempting to control a crowd that had grown into the thousands. Squad cars drove through the crowd to break it up and the police made one sweeping push through Beverly Blvd, sending the protesters onto the residential streets with no police presence. At this point officers in full riot gear had taken over and used excessive force to push the crowds far into the residential areas. From the side street, I watched as a police officer took aim at a young woman from 15 feet away who was on her knees holding a sign, and just before I was pushed to the side by a crowd running for cover, I saw the officer open fire.
The ACA Foundation
What's up Bubble #2?
The business cycle is very simple to understand. It goes from expansion to peak to recession to trough, and then it starts over again. Sometimes in more severe cases, it goes from expansion to peak to recession to depression to trough, and then it starts over again. In March when the stock market caught up with the health crisis but led the economic crisis, it corrected into a recession. Most people were predicting it would be a short-lived, “V-shaped” recovery. They were right. This correction allowed asset prices to adjust closer to their true valuations. Now what we are seeing is something even scarier. Irrational optimism, retail investors with their stimulus checks, and the Feds with unlimited QE have brought the stock market almost back to their initial highs. The graphics below show a couple of outstanding data sets. The first is how uncorrelated the stock market is to their 12-month estimated earnings per share (EPS). The second is how many retail investors have been active in the market recently. The third is how much the Fed’s balance sheet has grown since this has all started; over $7 trillion.
The risks I fear the most are: a wave of new confirmed virus cases, more speculation in vaccines and less successful trials, an increase in white-collar workers becoming unemployed (unemployment insurance can not cover their lifestyle expenses), and the credit market bursting due to more bankruptcies, more credit rating cuts, and negative interest rates. What will happen when the Central Bank tools run out or more importantly, what will happen when their practices and tools stop working the way they are supposed to? The year isn’t even halfway over, and most lagging economic data still needs to be released like GDP. Only time will tell, but this market is looking more like a bubble every single day.
Uncertainty brings about confusion which brings about fear which brings about stagnation which causes missed opportunity. What we are thinking about now is what asset classes will be the most valuable in a couple of years and where will value come from? We are looking at REITs and other high-dividend paying stocks. With stock-buybacks decreasing and inflation being forecasted, your return will be dismal. Where will you get the extra percentage points to create Alpha?
Hindsight bias sucks because you can not use it, but great to learn from. From learning about how asset classes reacted to the current and past market conditions, I have learned many things:
- I would have shorted volatility when it spiked.
- I would have bought into tech, e-commerce (Amazon, Shopify, MercadoLibre, Alibaba), and retailers selling essential items (Walmart, Target, Costco).
- I would have bought more Gold.
- I would have shorted restaurants and airlines.
- I would have bought the March lows with more leverage than I did.
- I would have sold out of my VIX positions at the highs in the 70s. (^VIX)
- I would have bought Bitcoin lows in the $4,000s.
- I would have bet against the biggest hit foreign economies (Brazil, Italy, China, India, Russia, and the U.K.).
- I would’ve sold TVIX at a higher price above 700. I waited too long and got greedy, which I should not have done. I then would’ve bought back into the blue chip stocks, knowing that eventually the market would recover as it did
- I would not have watched the market everyday, because the past few months have all been give and take. Trump says something positive and the market goes up, new data says something negative and goes it back down. Rinse and repeat.
- I would have put more time into researching companies with strong financials to last or even thrive during a pandemic.
- Sold out of more of my less risky assets and allocated more funds to speculative stocks.
- Followed more pharmaceutical companies to capitalize on news of vaccines or new treatments.
We have learned much more and moving forward we will use what we learned to make smarter, more profitable decisions.
The ACA Foundation
China vs. USA
War of the Worlds
Tensions between the United States and China are higher now than at any other point during the last three decades. As a result, the world’s two largest economics continue to clash politically and economically, increasing uncertainly in an already chaotic world. Despite being as economically intertwined as two nations can be, the U.S. and China have vastly different political ideologies and are often on opposite sides of geopolitical issues.
Starting with the trade war, the two nations began decoupling their economies, an action that had economic implications for nations across the world. As the trade war dragged on, Chinese firms found other markets to sell their products and U.S. companies found other nations to manufacture their goods in. China fell from the United States’ top trading partner to 3rd place behind Canada and Mexico and is not expected to regain its place anytime soon. Just as it seemed a lasting agreement had been made the world was blindsided by the novel coronavirus and U.S.-China tensions skyrocketed once more. Sticking to his nationalism sentiment, President Trump shifted blame from his administration's handling of the pandemic to the initial cover-up by Chinese officials. This created a nationalistic fervor in both nations with officials on either side accusing the other of false claims. As a result, increased tensions can be seen in the South China Sea (North Natuna Sea). The U.S. and China have both sailed naval vessels through the area as a show of strength. Conflict in this part of the world is recognized as one of a few flashpoints that could spark a massive international war. While displays of strength are common, both nations have also demonstrated more commitment to the area. This week the U.S. announced a sale of $180 million worth of torpedoes to Taiwan. This sale comes as both nations are drastically upgrading their militaries. The U.S. is midway through an ambitious plan to shift its fighting force to focus on near-peer enemies that includes upgrading almost every weapon in the U.S.'s expansive arsenal, while at the same time the Marine Core is disbanding most of its armor battalions to shift its fighting force to become more agile and able to quickly assault and take small islands in the South China Sea. China for the first time is preparing to outfit its troops with body armor and improve its training platform, both of which have long been considered major setbacks for the PLA. At the recent semi-annual meeting of party members, Chinese officials discussed plans to take a long-term approach to retake Taiwan through political means as opposed to military action, and a new security law for Hong Kong that may jeopardize the “one country, two systems” framework. These are just some of the events that the global markets are looking to for insight on relations between the two counties that make up approximately 40% of world GDP. Another important indicator is the weakening of the Chinese yuan which has reached the level it was at during the height of the trade war. In the near future we can expect more events like the U.S barring American companies from supplying Huawei as China retaliated for the striking blow to the telecommunications giant. These events will only accelerate the pace at which these economies decouple.
The ACA Foundation
What's up Broken Market?
In normal times, the stock market and economy are not correlated, but have more of a causal relationship. When employment is in full strength and GDP growth is increasing, we can expect companies to have stellar earning reports and distribute a gracious return to shareholders. Today, there is a huge disconnect between the stock market and economy where the economy looks more like a depression, but the stock market looks like it just started its next expansion. In this day, politics has more of a deciding factor on our stock market than corporate finance and economics. I say its too soon for this ambition rebound. The world is changing and will forever be changed. Globalization will look more like a risk than an opportunity. The equality gap will widen. Our health care systems will have to restructure. Our fiat currency system will be tested. Ultimately, there will be no market place (normal buying and selling) for a while.
The Fight Continues. As the United States presses forward with its battle against the novel Coronavirus, some Americans have grown weary of the economic consequences of the massive economic slowdown. Right now, more than 97% of Americans have at least some confinement guidelines set by their local governments while tens of millions are under stay at home orders. These measures have not only drastically affected the economy but also tested the patience of many Americans. This last week we have seen an increase in protests against safety measures even as the death toll climbs past 51,000. This begs the question, should the U.S reopen to minimize the economic impact at the cost of human lives?
Today, The US Congressional Budget Office announced that they expect the federal budget deficit to hit $3.7 trillion by the end of fiscal year 2020, making it the largest budget deficit since World War 2. They also estimate that the federal debt to GDP ratio will hit 101%. At the same time as government spending is heavily increasing, they predict the economy will contract by 5.6%, and unemployment will still be as high as 16% in the third quarter and average 11.4% for the year. By comparison during the Great Recession, unemployment peaked at 10% and the largest annual contraction in GDP was by 2.5%. Many other countries are also facing a grim economic outlook as the world has seen a severe decline in services, manufacturing, and global trade (shown in the figures below). As discouraging as the data is these circumstances have not been encountered in modern times and the possibility of a V-shaped recovery can not be entirely dismissed. So, should states allow businesses to reopen and people to get back to work? We will let you decide since it comes down to how much value you place on a human life.
Trump facing a hard path to victory as pandemic rages. With the upcoming presidential election looming large in November, President Donald Trump had seemingly laid out strategy similar to the one that brought him victory in 2016 against Hillary Clinton, full of delegitimizing attacks on reputation and catchy nicknames. This election calculus has been thrown into disarray with the onset of the COVID-19 worldwide pandemic. The present crisis has forced the president to act in a manner not often associated with his character, including working with Democrats to pass legislation, continually hosting experts who have publicly disagreed with his past statements, and attempting to make eloquent, scripted remarks to the entire American people, calling himself a “Wartime President.” While crises do have the potential to substantially increase a president’s approval ratings, they have just as much potential to dissuade previously enthusiastic voters of a president’s competence in the job. For his part, President Trump has mobilized national resources to respond to the pandemic and has overseen the deployment of military and emergency resources at a record pace. However, his initial response to the pandemic was unenthusiastic, with the president publicly blaming both the media and the Democrats for blowing the story out of proportion, before finally declaring a state of emergency upon him personally almost being exposed to the virus. His present demeanor has won him some support, as his approval rating has finally edged above 50%. However, he is still projected to lose to his Democratic counterpart, former Vice President Joe Biden, including in Fox News polling that shows Biden winning in Michigan, Pennsylvania, and Florida. The crisis has not helped Trump narrow this lead, though the election is still 6 months away, and much could change as election season heats up. While polls are not necessarily indicative of future election results, Americans have a tendency to rally around leaders during national crises, and Trump not receiving more of a boost during this time should trouble him, and his campaign greatly as 2020 drags on.
Not Taking a Position. With the equity market trading between a range of 35-50 VIX, the bond market volatility between 60-100 (signified by the MOVE index), and oil volatility near 175, it's a traders dream. The issue is we aren’t all traders, and can’t take full advantage, if any, of the constant price movements. A high volatility environment means that price changes are occurring much faster than usual, and trading time has been sped up. If you don’t have experience trading these markets, it's more likely than not, that you will be whipsawed back and forth and ultimately end up on the bad end of the trade. Personally, I don’t have time to sit and trade these markets the entire time, so I’m taking a position most people don’t realize exists, not taking a position. With unemployment nearing 20 million, businesses starting to go under, lockdown being extended to may, fed decreasing rates to 0% w/ nothing but cash left in the arsenal, and increasing the federal balance sheet to an unprecedented 6.6 Trillion, the market seems to still be pricing in a near best-case scenario being just 20% off 2019. “Markets can stay irrational longer than you can stay solvent.”
Opening the Economy. As people across the country begin to become more and more agitated with a government-imposed "quarantine" (protests, a general relaxation of strictness), it's very plausible to consider the pros and cons of opening the economy back up and resuming operations in a somewhat normal capacity. The pros of doing so are fairly simple and obvious. Opening the economy back up would, essentially, be as if nothing has changed. Of course, there would still be the massive layoffs that we have already seen, as well as a change in consumer habits. Nonetheless, if businesses reopened their doors, individuals would go back to work and continue getting a paycheck if they have not been receiving one during the quarantine. This means more money to spend on goods and more grease on the cogs of the economy.
What if it doesn’t go so well? What if there is a second, equally intense wave of infections in the fall (as global health organizations/professionals are predicting? What if we open the economy back up to early, and that second wave is even more intense, resulting in more infections/deaths? Surely, the impact on the economy could be even greater than if it were to just remain closed now. A few financial newsletter writers can't predict how a global pandemic is going to spread. But we can look at some of the logic surrounding the economy. If people stop working, stop getting a paycheck, and remain home, what will happen? Well, we're already seeing this now, but on a more long-term basis, it could lead to more deaths as people won't have the money to buy necessities and otherwise survive. That is, they won't have the means to survive without assistance, most of which will have to come from the government. Having already given out over a trillion dollars, many people are looking at the government to do more. How much more can the government handle given the current record debt and deficit levels? It would take a restructuring of the budget, we fathom.
In additional long term impacts, many small companies are closing their doors right now, never to re-open again. Filling that void of small businesses will be the giant conglomerates, leading to greater market share for those companies, and generally a greater capacity to manipulate the market and harm consumers.
The ACA Foundation
We ended this week lower, but this was expected. We were in a mirage from tech earning reports (the NASDAQ is only down -4% YTD) and continuous promises of stimulus from the Feds. Within the US, there is no value for the USD. Consumption and demand is decreasing, paying off debt and saving is happening more than spending and investing, and the government is LITERALLY giving away money. It is one thing for the government to give when someone needs and applies for it, and it’s another thing when they just give it without the recipient asking for it. Even with the funding, corporations and businesses will solve their short-term liquidity problems, but they will not solve their long-term solvency problems. States are beginning to open up their marketplaces, but at the risk of new cases. There is risk of retesting March lows and entering into a depression. With the disconnect between the economy and stock market, we can see the stock market starting to correct based on our current economic environment.
The Fed Minutes. The Federal Reserve echoed its previous statements this week. Jerome Powell reassured the global economy that the Fed would do whatever necessary to keep the market afloat and get us on the track to total recovery. If you were afraid that the Fed would be more limited and will only be able to offer a limited amount of help from a monetary quantity basis, fear not. Powell said that the Fed would absolutely not run out of money. Robert Kaplan, President of the Dallas Central Bank, reiterated this with a gloomier tone. He stated that the U.S. could be seeing a 30% decline in GDP during the second quarter, and that unemployment could rise to 20%. This is cause for another type of stimulus package from the government. Furthermore, Kaplan warned against disinflation, in which the rise in prices is slower than normal. This is looking likely for the next 1-2 years in the U.S.
A Nation in Limbo. The lack of informed and cohesive guidelines on how and when to reopen the country from the federal level has left cities, counties, and states arguing amongst themselves as more Americans grow inpatient. Unfortunately, reopening a country with over a million people infected with a virus that has killed 65,000 people is not as easy as picking a day and there is no right answer. Until significant progress is made towards a vaccine or treatment, the decision to reopen will be a trade-off between human life and economic well-being. Gilead Sciences Inc. is the top story of the week. Gilead is an American biopharmaceutical company that specializes in antiviral drugs used to treat HIV, hepatitis B and C, and influenza. As of this writing, their stock is priced at $79.95, they have a market capitalization of $100 billion, and they are up 22% this year.
Earlier today, The Food and Drug Administration on Friday granted an emergency use authorization to Gilead Sciences Inc.’s Remdesivir. Remdesivir is an experimental drug that was first used to treat Ebola. This means that the drug can be used outside of clinical trials to treat patients with COVID-19. Remdesivir has been used to treat other coronaviruses namely SARS and MERS and was used in China back in January to test its effectiveness towards COVID-19. Since January, the drug has been used in several trials across multiple counties and the federal research agency found that on average, Remdesivir shortened the recovery time of patients with COVID-19 from 15 days to 11 days. While this new treatment is promising, it should be noted that its effectiveness is limited, and is by no means the treatment that the world is desperately waiting for. Despite its limited effectiveness, it has the potential to save lives, and demand is extremely high. Gilead announced that they could spend $1 billion dollars developing the drug and already plan to donate 1.5 million vials. As you read this, 50,000 courses of the drug are being distributed across the country, and results are expected as early as next week.
Bitcoin Halvening. Bitcoin prides itself on being a depreciating asset, which means that over timeless of it is being created. This is done through a halving cycle, which occurs every 4 years. The next halving is in approximately 10 days. This means that the block reward, the amount is given out ever nth minute, will be cut in half. The current reward per 10 minutes is 12.5 bitcoin, which will fall to 6.25 in 10 days. Bitcoin is statistically interesting as at any minute you know exactly how many bitcoin currently exist, how many will be mined that day, how many will be mined that year, and the total amount that will ever exist. This in conjunction with the halving creates a predictable scarcity. The potential price impact from a block reward halving isn’t completely known, as this will be the first since BTC has gained such popularity. I will personally be watching the halving, which I’m sure will be interesting. It is taking place exactly on May 12th at 4:40 pm PST, on block #630,000.
Defense Production Act. In times of crisis, many governments have measures in place that allow the national government to take control of industries deemed necessary to address the crisis at hand, whether that be a war, natural disaster, or pandemic. In the United States, this measure specifically is called the Defense Production Act of 1950. Enacted during the Cold War, this law allows the federal government to force businesses to produce materials necessary for war, as well as allows the federal government to take over “vital industries,” specifically allowing the President to seize control of necessary companies and factories. Additionally, this act was used to mobilize resources to industrialize the country in industries deemed lacking, yet necessary, providing low-interest loans that kickstarted the domestic aluminum and titanium industries and channeling research funds toward the development of new defense technologies. Famously, the act was invoked to nationalize the United States’ steel industry during the Korean War, as steel unions had decided to go on strike during the conflict, threatening the war effort.
Meat Plants told to stay open to ensure food supply. In the wake of the COVID-19 pandemic, many meat processing plants had suspended or reduced operations following numerous outbreaks at plants across the country. This has led to a potential shortage of meat in the United States, and as a result, President Trump has used the Defense Production Act of 1950 to force them to stay open, as they have now been designated as “critical infrastructure” during this national crisis. This has been just one of the numerous times that President Trump has activated the Defense Production Act during the outbreak, as it was used previously to order General Motors to use their industrial capacity to produce ventilators for critical patients. The use of this act underlines how serious the impact of COVID-19 has been across the United States, with the federal government instituting wartime measures and record spending bills to address the burdens created by the pandemic.
The ACA Foundation
What's up Pandemic Rebound?
Disclosure: The ACA Foundation’s Newsletters are looking to expand more into investing and finance-related topics with its new partnership with Panther Capital. This will include coverage of equity analyses, industry analyses, positioning and allocation, and an overall content focus on the stock market and global macroeconomic events. We will be sending out “What’s up?” Daily Alerts consisting of short bullet-points and graphics of what we see and hear in the market and around the world on a daily basis.
There are two distinct ways you can view the market now. The first is you see the economy opening back up relatively soon. You see employment surging again, consumer spending and consumer confidence becoming positive, and overall business investment/spending normalizing. So, you decide to buy into the hardest-hit industries: industrials, manufacturing, oil, airlines, cruises, precious metals, store-front retail, luxury brands, shipping, and REITS. The second is you see the economy getting worse than it is now and staying shut for a couple more months even when the government and Feds will do “whatever it takes” ignoring moral hazard. Unemployment could get much worse, there could be more underlying liquidity and solvency problems, and the stock market can revisit its early March lows. In this, you would be more defensive but smart. Even though there would be an overall sell-off in all asset classes (like we experienced in March), some asset classes would fare better than others. You would position in tech, e-commerce, biotech, and healthcare. The Nasdaq, which is a composite of some of the biggest tech stocks, retraced from its lows of 30% from its February 2020 highs to around 12%. Tech has been performing well during this time with Amazon and Netflix (two of the FAANG) hitting new highs.
Retail and Manufacturing. Predictable and perhaps unavoidable, retail sales underwent a record plunge in March, dropping 8.7%. Amongst the spread of Coronavirus, businesses were forced to temporarily close their doors. Spending in areas such as Food/Beverage and Healthcare Products saw a spike in sales, but that spike is nowhere near large enough to make up for the drops in other key areas, such as Clothing and Accessories and Food Services. Analysts were forecasting an 8% drop. The news led to a tumble on Wall Street.
The Retail numbers provide a window into the effect on the American economy as a whole. Retail is a huge part of Consumer Spending, which in turn is responsible for over 66% of the American economy. With the grim retail numbers, economists believe the Consumer Spending drop will be the greatest since the number has been tracked.
In the spirit of pure speculation, we have thought about some of the longer-term impacts that Coronavirus could have on consumer spending and our economy. Something that, for the economists in the room, will shift the demand curve to the left. A change in consumer habits. With no definitive end to the shutdown in sight, it is rational to think that consumer's short term adaptations could eventually turn into lifestyle changes. They can realize they don't need to shop at certain stores, or eat out as much, or go to movie theaters. The list goes on. Just something to think about.
Let's talk about China. For the last three months, China has dominated international headlines due to the novel coronavirus. Since the virus began in China, it is easy to look to the country to estimate how the COVID-19 might impact different areas. At first, early data from China was looked at to examine how the virus might spread, but now that China is well underway with reopening their economy, many economists are looking to China to estimate how fast the rest of the world can recover, or how badly the global economy will suffer. While the majority of the headlines are unbiased, fact-checked, and data-based, there is one issue we at The ACA Foundation need to address: misinformation. The global pandemic has led to a large sense of fear and mistrust, some of which have been placed on China and has led Chinese officials to place blame on The United States. This exchange of misinformation, especially between the President and his officials and Senior Chinese Officials is dangerous and jeopardizes the ability of countries to fight the pandemic together. In this age of hyper information, it is important to think about the information you read and check its sources before you go on to support what could be misinformation.
Now back to the facts. Chinese officials claimed on March 12th that China had reached its peak of new coronavirus cases. Over a month later this seems to be the case, but it is important to note that the international community questions China’s claim of no new domestic cases and its overall transparency. Especially after China released an updated death total for Wuhan that showed an increase of deaths caused by COVID-19 by almost exactly 50%. The worst of the pandemic seems to be over for China as much of its workforce has returned to work and the rest of the world is looking to China for an idea of the economic impact. Chinese officials on Friday said that the world’s second-largest economy shrank 6.8 percent in the first quarter which is the first time China’s GDP has contracted in nearly five decades. The IMF expects the global economy to contract by 3% this year, but China is expected to grow by 1.2% in 2020 and 9.2% next year. Compared to the rest of the major economies of the world, China is set to recover from the pandemic better than ever and significantly shorten the gap between the U.S and China. China’s political outlook does not look as promising. The pandemic has starkly increased the decoupling of the U.S and Chinese economies that began with the trade war, and this is also true for some European nations like France and The U.K. The virus has even caused a divide among China and the African Union after reports of African’s living in China who were mistreated were released. For the first time in decades, African leaders expressed their displeasure with China openly instead of behind closed doors. Problems contained as China is refusing to match G-20 members in their calls to forgive loan payments or cancel debt all together for African nations. China is reluctant to do so as they are the world's largest lender to African nations, lending more than $150 billion and funding massive infrastructure works as a way to sucre access to the continent's natural resources and farmland. These issues are unlikely to persist though, as China will continue to support African nations significantly more than the rest of the world. Looking back on the latest information it seems that relative to the rest of the world China is set for a speedy and prosperous recovery as long as the coronavirus does not strike again.
Intergovernmental Organization. An IGO, often called an international organization, is an organization created by a group of international states, usually by treaty, that seeks to carry out an internationally recognized function or address an international problem that such states have not been able to do at a reasonable cost. IGO’s have proliferated especially after World War II, with prominent examples including the United Nations, the International Monetary Fund, and the World Health Organization. Each of these institutions features a broad roster of member nations, from democracies and developed nations, to autocracies and developing nations. Even amongst such a diverse group of peoples, it has been largely recognized that humanity faces certain problems that go beyond the purview and power of individual states, and thus requires international cooperation to effectively come to an effective solution. This does not mean that these organizations operate free from state interference, however. Due to the increasingly interconnected nature of the 21st-century world, more and more issues are seen as global, rather than national, causes, and therefore threatens the sovereignty of even the most powerful states.
WHO threatened with potential defunding. On April 14, 2020, President Trump announced plans to eliminate future funding for the World Health Organization, due to the laggard response by the WHO in declaring COVID-19 as a worldwide pandemic. Currently, the US is the largest contributor nation to the WHO, providing 17% of its budget. This gives it more influence than other nations in how the WHO responds to crises while forcing the WHO to operate in accordance with international legal and transparency standards. Unfortunately for the WHO, the political considerations of other nations, especially powerful ones such as China, make its response to the current pandemic difficult to carry out. The Chinese government has been notoriously difficult to work with in the past and refused to acquiesce to international health transparency standards until COVID-19 infection rates had skyrocketed and cases had been reported in other nations. China acts in this manner to ensure that discontent against the government and the Communist party does not form, as potential missteps by the party leadership in response to a public health emergency could seriously threaten the stability of the government. Unfortunately for the WHO, China has a history of making life difficult for organizations that offend its government, forcing it to hold off on criticizing the Chinese response, and even declare that unsanitary practices that are officially blamed for the beginning of the pandemic (such as exotic animal wet markets) could resume. The WHO will likely continue to be funded by the United States, as defunding them would result in further Chinese influence over the powerful organization, though President Trump’s announcement does bring awareness to the continued fallibility of IGO’s in the face of pressure from authoritarian governments (like Russia and China) who seek to challenge international democratic norms, such as transparency and openness.
The ACA Foundation
The job of physically printing currency belongs to the Treasury Department’s Bureau of Engraving and Printing. After the currency is printed it is distributed to 28 cash offices that individually distribute the money to over 8,400 banks and other financial institutions where the currency can enter the money supply. For the 2020 final year, the Fed’s Board of Governors voted to have the BEP print 5.2 billion Federal Reserve notes, valued at $146.4 billion. This process seemingly creates money out of thin air but is actually built on the foundation of international commerce. Before 1971, most currencies were backed by gold and silver therefore the central banks of the world were limited in how they could print currency and increase the money supply. Now governments like the U.S can print money as needed and the value of their currency is decided by demand for the currency, tied to debt, and backed by the credit of the issuing nation.
When people refer to “printing money” they are usually referring to the processes the Fed undergoes to increase the money supply. The U.S Federal Reserve has several tools to control the supply of money, but two methods, in particular, are being used to carry the economy through the nationwide economic standstill. Quantitative Easing is a policy that was pioneered and widely used during the Great Recession and it involves the Fed purchasing massive amounts of financial securities, mostly U.S. government bonds, from financial institutions, with the goal of pumping more money into the economy. The other method is referred to as “helicopter money” and used much less. Helicopter money involves the Treasury Department, which under the direction of the Fed sends money directly to individuals. Most recently, the Feds have used this method and started distributing $1,200 to individuals who are eligible. You can see if you are eligible by going to IRS.gov and filling out the form. When the Fed institutes a “helicopter money” policy, like the stimulus checks being sent out this month, it is to help get rescue the economy from what is known as a liquidity trap. A liquidity trap in a simple sense is when interest rates are near zero, but the economy remains in a recession.
As of this week, the Fed’s balance sheet due to its aggressive round of quantitative easing has inflated to a record of $6.13 trillion; $5 trillion in bond holdings alone. While these measures are seen as necessary, they will likely have long term consequences. Critics of QE argue that it will lead to hyperinflation, that it allows corporations and investors to act irresponsibly, and that it could make the U.S dollar less favorable to other nations and jeopardize its status as the global reserve currency. Long term, the status of the US dollar as a global reserve currency is in trouble but short term, we are seeing a large use of the Fed’s central bank liquidity swap lines, which allow foreign central banks to exchange their local currency for dollars, rise to $358.1 billion. Economists currently believe that the U.S can avoid hyperinflation and even deflation by using a combination of its many other economic management policies like cutting tax rates, lowering bank reserve limits, and potentially using negative interest rates. While the long term consequences of these policies remain uncertain, it is very likely that they will remain prominent for more than a decade.
Now that we have some background, we can look at how printing and spending money affects the U.S Government. It is no secret that the federal debt had been increasing at an alarming rate and in many years the government operates with a large deficit, but now COVID-19 and the unsteady direction of President Trump has the U.S operating like never before. Ceteris paribus, the U.S federal budget deficit is on track to exceed $3.8 trillion this year, making it nearly 4 times the deficit from the prior fiscal year. By October 1st, the Committee for a Responsible Federal Budget estimated that the federal debt to GDP ratio will be larger than the record set after World War 2 at 121.7%. Years of economic expansion, combined with the novel coronavirus have set the world stage for the worst economic conditions of our lifetime, here at the ACA Foundation we will keep you updated with the latest news and straightforward analysis to help you navigate these troubling times. Stay safe.
The ACA Foundation
What's up Bear Market Rally?
There’s no such thing as fundamental analysis in this market. It’s either: stay out of the market, cost-average at predetermined times, or stare at your phone for every second when the market is open (with stop losses and the flexibility to play the ups and downs). The market is being pumped up by printed money inflating the Fed’s Balance Sheet and open Fed operations in the MUNIs, high yield debt (junk) markets, and high yield debt (junk) ETFs. The market is unpredictable, but this week we saw stocks rise (positive news from the flattening of the virus death rates + more promised stimulus), Gold and other precious metals rise, high yield bonds rise (due to Fed stimulus), and the USD drop in value.
Trump and the Feds will be doing everything possible to keep the market from falling. When countries finance their way around a problem, they open the door to inflation. The increase in currency circulating means there is a much larger supply. When the supply of something goes up, unless it’s met with an equal demand, it’s value goes down. In this case, the demand for what we purchase with cash is not expected to rise. This could lead to a devaluing of currencies, which buys fewer goods and services. Any day now we can expect a treatment or a cure for the virus which will bump up the market. But Wall Street sees something we don’t see. Economic indicators like consumer confidence and initial claims have been worst than worse; with numbers looking more like The Great Depression. The last three weeks of jobless claims totaled 16.5 million unemployed. With the total US workforce being around 157 million, this comes out to an unemployment rate of ~10%. With this, we see a disconnect of the economy and the stock market; with the economy pointing towards a recession and the stock market indicating a new expansion. But there will be consequences in education, society, and debt bubbles. And even if the economy reopens, how long will it take for everything to be back to normal?
Dollar Illiquidity, or a dollar-denominated shortage, comes from a mismatch between supply and demand, with the later overpowering the former. When we are mentioning the USD, we are talking about all dollar-denominated safe assets, which are considered like-money. This idea of dollar liquidity can get very complicated, relatively fast, so we will leave it at this definition.
A dollar illiquidity crisis, in its simplest sense, means a dry-up of liquidity. This results in a general decrease in loans across the board. The second derivative consequence leads to a rapid appreciation of the USD, leading to strain on international trade and net imports outside of the US. We recently saw a sign of this dollar illiquidity through our repo market, whose rate blew up to over 10% in late 2019.
Now that we have what it means down, we can get into how this has come about. The major underlying cause of this stems from directly after world war 2 when the USD replaced the British Pound as the new global reserve currency. The global reserve currency is a central currency that is held by a majority of central banks and other monetary authorities for the means of international trade, cross-country investments, and most aspects of the global economy. The global reserve currency cements that nation as the most fundamental aspect of the global system. This creates a large demand for our US greenback, increasing our dollar prices. Realistically, this in part, leads to the US being viewed as a safe haven during times of global doubt. This is net positive for the US, while being negative for the rest of the world. Hypothetically, this should allow the US to not only weight out a global recession but should lead to increased risk-free and risky asset prices and further dollar appreciation.
The Alchanati Campbell and Associates Team
Share Buybacks. Share buybacks and dividends have historically been used to distribute earnings back to its shareholders when the board of the company believes they don’t have a better use for the excess cash. To decide between distributing dividends or conducting share buybacks, the company decides whether they believe their shares are undervalued or overvalued, if the former, they conduct buybacks. As of the last 5 years, this has not been the case. Companies have been conducting rampant share buybacks, distributing a majority of retained earnings, further exhausting any potential cash reserves to be used during times of distress. Boards of these companies have been looking out for their own interest, conducting share buybacks, then selling into these now higher share prices with their share options. Since 2013, Boeing decided to buy back over $42b dollars’ worth of equity, while board members and insiders sold over $1.2b. If Boeing had not bought back shares, but instead amassed a cash reserve for times like this, they would not be fearing a bankruptcy and more importantly not asking the government for a bailout. The question to be asked is, why is it the US taxpayers responsibility to bail out these companies when they have never had our interest in mind? Let capitalism run its course, companies will start managing their risk better, without the safety net of knowing the government will bail them out.
Unemployment. In the month of March, non-farm payrolls fell by 700,000. It was the first time since the Financial Crisis that payrolls declined month to month. Unemployment is now up to 4.4%, the highest it's been since 2017.
We've mentioned before that the unemployment rate doesn’t capture a perfect picture of the job market. It doesn't take into account discouraged workers -- people that have simply given up looking for jobs. Also, unemployment numbers underestimate the overall impact because they don’t include people who are self-employed and ineligible for unemployment benefits. When businesses such as retail shut down, other business such as advertising become affected. And, as unemployed individuals cut back on spending, all industries are affected. Furthermore, the data collection period is based on information available the week of March 12th, before the totality of the economic shutdown began to sink in. Combining the lack of new data with the systematic flaws of the unemployment rate and it seems that the situation will only begin to appear direr as the weeks go on. Analysts of the big banks estimate that job losses will hover around 10 million when new information is released in April.
Deflation. One of the big risks that we feel is not getting enough attention is the very real threat of deflation. The opposite of inflation, deflation is the general fall of prices. It generally occurs when people are not spending money (having more goods produced than there is a demand for). I'd wager that bad deflation is more significant than inflation. Think about it. If I knew that the price of something was going to be lower tomorrow, wouldn't I wait until tomorrow to buy it? Or maybe even the next day? The stimulus package should alleviate some of the concern, but truth be told, it will depend on how long the shutdown lasts for. The government can't fund our consumption indefinitely. Well, maybe they could, but it would take some intervention never before seen in our lifetimes.
Brent Oil Index. Generally used as the benchmark for world oil prices, the price of Brent crude oil has maintained its relevance in the world oil market for over three decades. In the international oil trade, a blend of crude oil extracted from the North Sea, between the Nordic countries and Great Britain, has been used to set the price for over 60% of all oil traded on the global market. This specific oil blend was chosen because of its relatively “light” qualities, meaning it contained little sulfur and therefore could be easily refined into high-demand oil products, such as gasoline. Additionally, its source being on the ocean, its production could be increased or decreased with demand, cushioning the price from supply issues and therefore making its price more reflective of global oil demand. A rival claimant to world oil pricing, West Texas Intermediate, or WTI, is priced in Cushing, Oklahoma, and is largely based on American oil production. Unfortunately for WTI, its usefulness as a benchmark is diminished by the fact that Oklahoma is landlocked, meaning it must use pipeline networks to make it to the world market, and therefore can be overwhelmed when demand outstrips those networks.
Oil markets rocked by an international price war. For the past several years, OPEC, or the Organization of Petroleum Exporting Countries, has maintained an economic alliance with the Russian government, where both organizations agreed to decrease production to maximize the global oil price, so as to maintain the profitability of Russian oil projects while stabilizing oil demand to a more sustainable level. However, the COVID-19 outbreak had seriously reduced global oil demand, requiring further production cuts to keep the price stable. On March 8, 2020, the Kingdom of Saudi Arabia launched a price war with the Russian Federation due to a breakdown in negotiations between OPEC and Russia over whether or not to initiate further production cuts in the face of the COVID-19 pandemic, with Russia resisting any more production cuts. By selling their oil at a massive discount to the world price (the Saudis priced their oil at 10$ a barrel), the Saudi government put massive pressure on the Russian government to agree to further production cuts, or risk upending their vitally important oil and gas industry. These actions, in combination with pandemic containment measures that have drastically reduced economic activity, have put the world oil price in freefall, with Brent Crude falling from $54 a barrel on March 4th to $34 on March 9th, and $26 on March 18th. While the pricing feud has played out between the Russian and Saudi governments, the international oil production chain has been thrown into disarray, with massive oil rig closures throughout the world, and billions being wiped from the value of oil giants such as Occidental and Haliburton. The economic pain has been especially present in the Permian Shale basin of West Texas, where a number of heavily indebted oil producers have barely hung on for years, as their methods of extraction are only economical at higher oil prices. The Permian basin has been hugely influential on the international oil markets, helping to make the United States the world’s largest oil-producing country since late 2018. A wave of bankruptcies by oil producers in the region could force many fields offline, substantially reducing world supply, and devastating the economies of oil-producing regions across North America, from West Texas, to Oklahoma, and all the way to North Dakota and Western Canada. Many have speculated that this price war is an indirect way for Russia to wipe out American competition in the oil industry, as the country is especially dependent on oil exports to finance its national budget, and could, in the long run, strengthen the Russian government’s influence over global energy markets, if American producers are allowed to go offline. President Trump has recently announced that he believes that Saudi Arabia and Russia are close to reaching a deal over production cuts, indicating that the US government has intervened in the talks between the oil giants, though an agreement is far from certain between the feuding powers.
Just for a second imagine you are a small business owner. You have fought and worked tirelessly to keep your business alive, on average you worked 20 hours more per week than the average American worker. After 10 long years, your work has paid off and you are part of just 30% of small businesses that make it past 10 years. Something that you have created is part of the other 30 million small businesses that together make up the backbone of the American Economy. But after years of economic growth things have taken a sharp and sudden turn. Not only is the economy heading for a massive recession, but now your business is effectively shut down. In the best-case scenario you are providing some essential product or service and are allowed to stay open at the cost of you and your employees' health, but worst case your business is completely shut down.
To help small business owners face these unprecedented circumstances the Federal Government has approved $376 billion to be used in the “relief for American workers and small businesses”. The Federal Government, in working with the U.S Small Business Administration, has concluded that small businesses will face issues in securing capital, maintaining a workforce/inventory, facility remediation, insurance coverage, market demand, and in general adjustment to the circumstances. To combat these issues the SBA is facilitating the use of the $376 billion through a variety of loans to small business owners, many of which are forgivable. Unfortunately, much like the approved stimulus check, these loans are running into problems. As of today, the Federal loan program for small businesses was supposed to be up and running, but the SBA and the U.S Treasury were still finalizing details that left banks unprepared to handle the flood of applications. The hope is that in the coming weeks the process will be streamlined, and small businesses will get the money they desperately need. Some banks are already approving applicants and as of this afternoon Bank of America alone had granted over 58,000 client loans and received over 22.2 billion in applications.
The Alchanati Campbell and Associates Team
What has happened over the past 3 weeks is something that none of us have ever experienced in our entire lives. As a result, the S&P 500 has had a 34% drawdown, 3.3 million unemployed, and some of our leading industries and companies will never recover from the economic paralysis we face. This situation is going to get worse, and we will soon enter a recession. Regardless of where you stand, I am going to lay out some important factors to consider going forward and how they will likely impact you.
First, let’s take a step back from the pandemic and look at our economy from a big-picture perspective. The downturn was inevitable, regardless of COVID. After 12 years of expansion, our consumer debt service payments to income ratio is growing and they are close to 2008 levels. All it takes is to start a downturn is for debt service to outpace income growth, and everyone stops spending. This causes our economy to contract. In a sudden and unpredictable black swan event, it was the virus that stopped our spending. And not just our spending – entire industries have been paralyzed and key businesses are not allowed to generate revenue for a whole quarter. This alone will hurt all of us for at least a year.
All of this is happening while the Fed has lowered the federal funds rate to zero. This is now a trend across the globe, as we have $10 trillion+ in outstanding debt with negative interest rates. This means two things for the United States: the Fed can’t stimulate the economy using rates, and QE will barely raise asset prices. Demand for near-zero interest rate bonds can only go so high. Now the Fed has to turn to riskier means of stimulating. The Fed has turned to “helicopter money” – essentially handing money to institutions and individuals. The $2 trillion in fiscal stimulus that was recently passed is the biggest in history. The risk that this has is causing inflation while incomes decrease, and devaluing the dollar. The dollar is currently at risk for losing its viability as the worlds’ reserve currency, both because of inflation and less foreign demand for US financial assets. While some inflation as a result of this is a risk, it is likely we will see deflation throughout the duration of the recession due to spending on consumer goods and services drastically decreasing.
In these uncertain and difficult times, it may seem that gold would be the best hedge against systematic risk. While gold historically performs well in times of economic hardship, it also has a strong positive correlation to inflation and a negative correlation to deflation. We could see considerable inflation as a result of the Fed's stimulus in the short term. However, we also have a significant amount of outstanding consumer debt service relative to income. Given the considerable drop in incomes - households, consumers, and businesses will likely use this money to pay off their debt and not spend it. This will cause deflation. Not to mention the further economic weakness we are likely to endure that will exacerbate that lack of spending and the decline in prices of financial assets. A bigger risk for the price of Gold is the continuation of the leverage unwind and the liquidity squeeze. Keep this in mind when considering gold as a hedge, or other “safe-haven” assets that are correlated to inflation.
Another major factor affecting the market is volatility. Volatility has likely peaked at the inception of our downturn, but we are sure to see more as it persists. We’re currently in a liquidity crunch, which has adversely impacted highly leveraged assets such as derivatives. Many leveraged ETFs such as $JNUG have reduced their exposure, and over 30 have closed over the past three weeks. This particularly affects leveraged ETFs because, in contrast to common knowledge, many do not amplify the returns of their underlying asset on a total-return basis – they do it on a daily basis. Meaning, daily gains or losses get compounded. If you look at the total max return of many leveraged ETFs, you’ll notice they’ve lost nearly all their value because of this. This effect is magnified by volatility, so keep this mind moving forward if you plan on considering leveraged ETFs as safety assets.
Finally, equities have clearly taken a big hit, though we have seen some rallying as a result of the mass liquidation and Fed response in the past week. The rallying will likely continue, though I wouldn’t recommend you don’t try to time it. The industries most heavily impacted are airlines, hospitality, and staffing. While many of the companies and industries that have been impacted have experienced real drawdowns in their financial performance, and some will go bankrupt, most leading companies will recover and prevail over the long run. Some profitable companies with high earnings potential relative to their prices and healthy balance sheets have lost over 80% of their stock value in the last month. This means there are currently big mispricings in the market. Five years from now, the drawdowns caused by the coronavirus will have no effect on financial performance. This is the best way to think about equities as a retail investor.
In summary, we’re currently in a downturn that is headed towards a recession. It will likely fit the classic “U-shaped” recession (even though we have experienced the biggest fall in the shortest amount of time, looking more like it could be a “V-shaped” recession), in that we have a prolonged recovery period as a result of the unique cause and limited means of stimulation we have. It depends on how and how soon policymakers continue to react. Financial assets will continue to decline, people will continue to lose their jobs, and incomes will fall. In the end, we may have other social, policy, and global financial implications we haven’t seen before. At this point, no one can predict the direction we’re heading in with any certainty. The only thing we can be sure of is that we will get through it. In fact, we will thrive in the long run, as we have at the end of all previous crises. Many of our biggest achievements and innovations in history have resulted from adversity. As G. Michael Hopf said – “Strong men create hard times. Good times create weak men. Weak men create hard times. Hard times create strong men”. While the context doesn’t apply perfectly, that pattern tends to be the cycle in our economy. And it always trends upward in the long run.
The Alchanati Campbell and Associates Team
The Senate and the House both voted to pass the $2 trillion stimulus bill. In the short-term, this stimulus will help the corporations, small businesses and individuals who are in need of money. It may help alleviate the lost revenue and damaged balance sheets in the short-term, but there will be huge ripple effects do to the unknown consequences. What happens when $2 trillion+ is printed and added to the US deficit? What will happen to inflation? What will happen when people realize they get paid more for not working? What will happen when the Feds have their printing machines constantly on?
Consumer confidence is down meaning they will stop buying goods and services. Consumers will stop spending money due to: a) the inability to buy due to the nationwide quarantine, b) the inability to buy due to being unemployed, and c) the shift from spending and investing to saving. Once they get free money (helicopter money) from the government, it won’t be used for investments and other spending. It will be used for the essentials of survival. And for the landlords’ sake, hopefully rent.
Earlier this month we experienced a liquidity shortage, tons of volatility, and forced selling due to a leverage unwind. Today, we see all asset classes fluctuating in confusion (USD, gold, silver, Bitcoin, public equity, treasuries).
You can trade the Market short-term by having open positions capitalizing on the highs and lows by shorting and buying short-term option calls/puts, but the store of value now are in Gold, Gold miners, and cash.
There is a tug-a-war between the Feds providing trillions of dollars in stimulus and asset purchasing and the virus spreading faster and more people dying/staying out of work and being unemployed.
In the short-term, massive amounts of outflows will continue and we will see short-term rallies and declines. Once the trillion dollar stimulus begins to distribute to its specified parties, we can see some more upside.
In the medium-term, we will enter a recession and we will see more downside. The virus is spreading faster and damaging more than people’s expectations. Fear will spike and chaos will erupt.
In the long-term, we will see ripples of the virus for years to come.
The Alchanati Campbell and Associates Team
This is not a regular “What’s up Friday?” Newsletter. This piece will discuss the current events occurring around the world and the current market reactions and price movements in the stock market. In short, people are panicking and grocery stores, Purell manufacturers, and virtual communication companies are thriving. Most economies around the world are easing their policies to allow their companies and societies to have some relief. Central banks around the world are offering more liquidity and more easement in rates. Governments are lending money interest free to businesses who have been negatively impacted by loss of business and soon we may see consumers getting handouts. Businesses are closing, losing revenue, and some businesses are going bankrupt. Oil is in a recession and assets like Gold, Silver, and Bitcoin are being sold off for liquidity reasons. Countries are announcing national emergencies and are restricting travel to try to stop the spreading. Schools are closing, public spaces are closing, public events are being postponed, and people are working virtually from home. I am currently split: I believe that there could be more selling, but I also believe we can see the market moving higher (as you could see from the buying spree today with a 9% increase). The selling has been caused for two reasons: irrationality and poor emotions (fear, anxiety, panic) and companies being downgraded due to future earning losses and/or being directly affected by the virus (cruises, airlines, retailers, restaurants, entertainment parks, travel agencies, manufacturers, etc.). My tips: be cognizant of your expenses, DO NOT SELL, buy back slowly at these lows and hoard cash to prepare to buy some more, do not try to time or play the market, plan for the next expansion, and if you have debt, focus on either paying it off or restructuring it.
“At the beginning of the last recession, the first selloff was in the summer of 2007 and totaled about 15%. The Fed cut rates aggressively and the market rallied to a new high in October right before the start of the recession in December. The second drop was from that October high to a March bottom 19.5% lower. Stocks recovered nearly 2/3 of that loss before hitting the skids again. Stocks managed a 15% gain after the onset of recession on (misplaced) optimism about the Bear Stearns deal. By that time our recession indicators were clear with the yield curve, credit spreads and the CFNAI all in agreement.” – Joseph Y. Calhoun III
“Buy, sell, or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached- whenever that is- and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows.” – Howard Marks
“Oil is like a wild animal. Whoever captures it, has it” - J. Paul Getty. More than 50 years later, Mr. Getty could not be more right. In addition to all the turmoil these last two weeks have brought to the global economy, Russia and Saudi Arabia are in an all-out oil war. For the past three years, Russia has worked with OPEC to set oil prices via production levels, but last week Russia decided to blow up the relationship and undercut OPEC’s price target. In response, Saudi Arabia has gone all out. Saudi Aramco plans to pump 12.3 million barrels of oil per day in April. That is 27% above their recent levels and 300,000 barrels above their maximum capacity! Oil was already struggling due to COVID-19, so why did Russia decide now was a good time to start a price war and lead the oil market into a free fall? US crude plummeted 26% which was its worst day since 1991. The answer is very simple. Russia saw a chance to deal a major blow to America’s fragile oil industry and they went for it. Back in 2018, the US overtook Russia as the world’s largest oil producer, and this was only made possible by shale oil companies. Shale is a high-quality oil and is produced by fracking. Since 2014, shale oil companies are responsible for the boom in domestic US oil production, but this growth is built on a massive amount of debt as most shale oil companies are over-leveraged or heavily in debt and rely on high oil prices just to survive. The much needed high prices could be easily undercut by other oil-producing nations, especially Russia which can easily balance its budget at under half the price needed by US shale companies. In recent years, Saudi Arabia with OPEC has helped support these higher prices and allowed the domestic US oil industry to grow to this level at the expense of Russian market dominance, but Russia has had enough. Now it is one big game of chicken that neither Russia, Saudi Arabia, nor the US will win. Short-term and long-term projections do not look good for the oil industry. In the long run, oil is set to be replaced by cheaper and cleaner energy sources, but in the short term, the worst is yet to come. It is unlikely that OPEC or Russia will back down so the oil market will continue to experience turmoil, but demand is not likely to recover in the coming months as global travel is restricted. In the meantime, some US shale oil companies may not be able to make it through the storm and some are even expected to file for bankruptcy by the end of the month, adding to the 208 shale oil production companies that have filed since 2015 and the 21 oilfield service companies that filed in 2019 alone.
The Alchanati Campbell and Associates Team
How crazy a month can do to markets let alone a week. We officially have entered a correction, but the question now is if we will enter a global recession. All 11 S&P sectors are falling, and the only shelter seems locked up in your house (for health reasons) and stored up in Gold (“flight to safety”). The market will continue to fall as long as the virus continues to spread, more people die, supply is restricted, travel is prohibited, and productivity is limited.
To Lever or Not to Lever. You've probably all heard the term "leverage" before. What does it mean? It simply means to take on debt to finance a project. The more debt you take on, the more levered you are. A logical reaction to this is, "Hey, why would someone/a company purposefully take on debt when they don't have to? Isn't debt the harbinger of doom?" This is where we believe societal connotations have failed society, at the very least in a financial literacy aspect. We have all been brought up thinking that debt is some horrible thing that should be avoided at all costs. While it certainly can be a problem if it gets too high beyond a corporation's reasonable ability to pay it off, it should be looked at in a neutral light. Debt is more important to the economy than equity/stocks. Debt is how corporations finance most of their projects. Debt is what allows tens of millions of Americans to own a house. Why take on debt? For a homeowner, it's easy to see. Most people don't have hundreds of thousands of dollars laying around to buy a house in cash. They take on a mortgage (aka debt) and they slowly pay it off. For a corporation with billions of dollars in cash/cash equivalents, why take on debt? To increase the rate of return. Say there is a new project for a company that has a cost of $1 million for a new facility. Say that, at the end of 5 years, the present value of the 5 annual cash flows equals $1.1 million. The project has returned ~10%. However, what if we used leverage and only put 70% of our own money down and took out a loan for the rest? We spend 700,000 and take a 300,000 loan. Now we have only spent 700,000 but we still generated cash flows of $1.1 million. Of course, we still have to pay the interest. Let's assume interest is $25,000 (in the real world the interest will be an annual/monthly rate that compounds, but this is a newsletter so let's keep it simple). So we have spent 725,000 to generate 1,100,000, which gives a return of 52%! That is the power of debt.
Dollar iliquidity Theory - theorized and popularized by Luke Gromen. Dollar Illiquidity, or a dollar denominated shortage, comes from a mismatch between supply and demand, with the later overpowering the former. When we are mentioning the USD, we are talking about all dollar-denominated safe assets, which are considered like-money. This idea of dollar liquidity can get very complicated, relatively fast, so we will leave it at this definition.
A dollar illiquidity crisis, in its simplest sense, means a dry up of liquidity. This results in a general decrease in loans across the board. The second derivative consequence leads to a rapid appreciation of the USD, leading to strain on international trade and net imports outside of the US. We recently saw a sign of this dollar illiquidity through our repo market, whose rate blew up to over 10% in late 2019.
Now that we have what it means down, we can get into how this has come about. The major underlying cause of this stems from directly after world war 2, when the USD replaced the British Pound as the new global reserve currency. The global reserve currency is a central currency which is held by a majority of central banks and other monetary authorities for the means of international trade, cross-country investments, and most aspects of the global economy. The global reserve currency cements that nation as the most fundamental aspect of the global system. This creates a large demand for our US greenback, increasing our dollar prices. Realistically, this in part, leads to the US being viewed as a safe haven during times of global doubt. This is net positive for the US, while being negative for the rest of the world. Hypothetically, this should allow the US to not only weight out a global recession, but should lead to increased risk-free and risky asset prices and further dollar appreciation.
The Death of Titan: “Neutron Jack”. Jack Welch who was the CEO and Chairman of General Electric from 1981-2001 passed away on March 1st, 2020. Mr. Welch was for many people the embodiment of what it signified to be a CEO. During his tenure as CEO, GE’s revenue increased nearly fivefold, skyrocketing the company to become the most valuable in the world. His success in leading GE allowed him to become one of the most well-known business leaders of all time, including making the cover of more newspapers and magazines than any other CEO. At the time of his death, Mr. Welch was worth nearly $750 million, but that was not for nothing. Over two decades for better or for worse Jack Welch lead GE to stardom during some of the most turbulent times in the American industry and helped shape what it means to be a “CEO”. Thanks to some innovative management and organizational strategies, GE’s value increased by $400 billion over 20 years. Mr. Welch pioneered the idea of “a boundaryless company” during a time when corporations put little effort into the corporate culture. In 1990, Mr. Welch introduced GE to his idea stating, “Our dream for the 1990s is a boundaryless company, a company where we knock down the walls that separate us from each other on the inside and from our key constituencies on the outside.” As a result, GE reduced the bureaucracy and instead focused on its employees. This led to a golden age of innovation at GE as it became a company that attracted talented employees who gave their all. Noticing the success this had, Mr. Welch doubled down on his idea and pushed for increased self-confidence among his employees. He gave many of his employees the word “manager” in their title, which lead them to take ownership of their work and see their projects through until completion. To work out the issues that would arise from having lots of passionate people work together GE held “town meetings”. Finally, in what was most likely his single greatest decision he "de-layered" GE. Like every large company at the time GE had grown to be inefficient and was weighted down by its hierarchical organizational levels. By reducing these layers, Mr. Welch reduced costs, minimized delays, and allowed GE to operate as efficiently as a small company while competing on a global scale. This strategy would go on to influence business leaders around the world, especially in Silicon Valley which gave way to a new generation of CEOs.
The Alchanati Campbell and Associates Team
The virus has caused the US market to crash around 12%, wiping out trillions of dollars. The 10-year dropped to its lowest, Gold had a steady climb but dropped back down today, so what is one supposed to do? I am going to state it very simple and blunt: Wash your hands and take care of your health; it’s the most important thing. If you have cash on the sidelines, cost average your positions and buy into favorable stocks at these lows. If you are a new investor, congratulations and buy into this “more affordable” market. If you have debt obligations, liquidate and have some cash for those expenses because who knows where the market is heading. Lastly, don’t panic but be cautious and smart. This is a historical learning experience, and this will build character and show your true colors.
Expansion or not, CEOs are sprinting for the exit. Over 1,500 CEOs have stepped down from their positions over the last year. Last month alone set a record for the most CEO departures in one month with 219 leaving their positions. The U.S hasn’t seen this many departures since the beginning of the great recession in 2008, so why are so many CEOs stepping down during a period that is often referred to as an unprecedented period of economic growth? It is very difficult to say since many CEOs have stated varying reasons. Here are some notable CEOs who have recently stepped down; Bob Iger of Disney, Keith Block of Salesforce, Tidjane Thiam of Credit Suisse, Les Wexner the longest-tenured CEO of a Fortune 500 company (L Brands), Dennis Muilenburg of Boeing, Matthew Levatich of Harley Davidson, and Ginni Rometty of IBM announced she will step down in April. Several business consulting companies, and corporate governance groups have been following this trend and have some ideas. First off, many of the CEOs have been involved in recent corporate problems and were forced to step down as was the case for the former CEO of Boeing and former CEO of Credit Suisse. The #MeToo movement has also played a large and has lead to the resignations from the former CEOs of CBS, and McDonald's. Both of these circumstances show an increase in corporate accountability, in large part due to new social pressures placed on corporate boards. Another theory is the growing concerns of an impending recession which may cause some officers to step down with their corporate legacies intact, basically, they want to quit while they are ahead. Whatever the cause there is an undeniable outcome. Over 2,000 large corporations have CEOs that have only just filled their position within the last 2 years. This does not mean they are inexperienced business leaders, but they will need time to adjust to their new positions which will likely be more difficult than usual thanks to factors like increased international tensions, political turbulence, and COVID-19. On the bright side, this mass exodus of CEOs is allowing some space for a new generation of corporate leaders and increase equality since the number of women filling the open positions has more than doubled from just a year ago.
Treasury Yields. US 10-year treasury yields hit an all-time low of 1.127%, as of closing on February 28th 2020. We are seeing an unprecedented amount of capital flowing into US government debt, only growing with the corona virus fears. This capital is seemingly coming from domestic smart money - pensions, hedge funds, and asset managers. Investors are seemingly fine with earning such a low yield rate, with the top 100 pensions having upwards of 50% allocation in fixed income, up from 25% in 05. With this recent market sell off, it seems retail investors are also moving into these risk free instruments, seemingly once again late to the party. Although this yield seems low, a good portion of the developed world is currently in negative interest rate territory, where you are seemingly paying the government for safe harbor. With this recent fear, and the recent statements by Jerome Powell and Donald Trump, regarding further fed rate cuts and possibly going into negative territory, many fund managers believe we will see this 10 year treasury rate declining closer to 0. Personally, I’m betting that this corona virus pandemic doesn’t last past Q2, and the equity market will make a swift recovery.
Navigating a Recession. To be clear, we're not calling the current situation in the U.S. Equity Markets a recession. Nevertheless, it’s impossible to ignore the facts. This week has been the worst since 2008. The S&P 500 encountered a correction within a single week. All the gains from 2019 have been wiped out. The question is, how do you optimize your allocation of capital during a time like this. If you ask Warren Buffet, he'll give you the ol' "Time in the market beats timing the market". He's also the most famous investor of all time. Generally, people want to move from riskier assets like large-cap equities to safer assets. These safe assets typically include Gold, Bonds, and certain currencies. However, things are a little different this time around. As we know, the Fed has been cutting interest rates over the past year or so. Whether you agree with their decisions or not, it’s hard to argue against the fact that their actions have led to some wacky yields on bonds. As of now, short term T-Bills (bonds with a maturity of 1 year or less) are inverted with the yield for the 10-year treasury bond. Without getting too deep on the recession indicator implications of this, it implies that people generally have lower faith in economy in the near future. So, maybe the safe assets such as long-term Treasury Bonds are not a good place to move right now. That leaves us with Gold. Usually, the price of gold goes up during red weeks as it’s a "safe haven" to move cash into. This week however, gold has plunged. Why? Without knowing for sure, it seems panic is truly setting it. Something similar occurred during 2008 in which investors sold anything they could just to have cash, the safest of assets. Obviously, this massive sell off will lead the price of gold down. Hindsight is 20/20, and it’s impossible to be certain of the best decisions to make when the world seems to be falling down. All we will say is there is a reason that Warren Buffet is regarded as the world's smartest investor.
Democratic Socialism. A political concept of economic organization requiring relatively heavy involvement of the government in the economic affairs of a nation. While more free-market oriented than socialist regimes, democratic socialists tend to require that large industries are at least partially government or union controlled, while levying large corporate and consumption taxes to finance generous safety nets for citizenry. Importantly, democratic socialists are committed to democracy and the ideals surrounding it, meaning that these regimes generally do not tend toward authoritarianism. However, heavy state involvement in economic activities does allow the government to play a more direct role in citizens lives, often leading to increased regulation, higher tax rates, and the potential for even more far-reaching economic measures, such as direct state ownership of key industries.
The rise of Bernie Sanders in the Democratic party. The most prominent socialist in the United States, Bernie Sanders, has recently been portrayed by many news organizations as the most likely nominee of the democratic party in the upcoming presidential election. A member of the Democratic Socialists of America, Senator Sanders is the longest serving independent in the United States congress, serving the state of Vermont since the 1980’s. Until recently, Senator Sanders has been considered on the fringe of American politics, with traditional socialist policies failing to win wide appeal. However, the 2008 financial crisis prompted a radical shift in the politics of younger Americans, giving the senator a large enough power base to launch a national campaign, coming in second to Hillary Clinton in the 2016 Democratic primary. Sanders has promised new regulations on the financial industry, as well as universal healthcare, free college education, and the erasure of student debt as his signature policies. Unfortunately, these new government programs would require large new taxes on all Americans, including the middle class, and would still likely require deficit spending in the federal budget, even as the federal debt of the United States reaches record levels. In a recent poll, only 28% of Americans said they had a favorable view of the term “socialist,” and a Sanders candidacy in the general election would likely prove nearly as divisive as the Trump campaign, as his policies sharply divide the nation. The senator has used polarizing terms when campaigning, framing his potential election as a “revolution” of the political class, alienating many Americans. Regardless of his potential weakness in a general election, Sanders has won the most primaries of any Democratic candidate up until this point, as his base of support has shown active in voting in primary elections.
The Alchanati Campbell and Associates Team
Following the Crowd. There has been this concept that has gained attention recently that stems from a subreddit on Reddit. The subreddit, “Wall Street Bets”, is a platform where investors and such are able to comment and speak to each other about options trading, their portfolios, and the market as a whole. The concept I am referring to is “pumping” or some people may call it “trend following”. In the US Equity market, the two hottest stocks recently have been Tesla and Virgin Galactic. Tesla has gained 150% in the last 3-months and Virgin Galactic 296% in the same period. Pumping is when investors/traders all agree to buy stock or calls in the same company, pushing the stock higher. With Tesla’s cult and the profiteers who are looking to make an easy buck, they all jump on the bandwagon and this has proven to generate crazy returns. Some could say that this is illegal, and that the SEC could get involved soon, but so far this unethical style of investing has made people very wealthy.
How to Maximize Return During Market Panics. Bull markets are all different. In the 2000s, companies with exposure to emerging markets and commodities were the biggest winners. In the 2010s, the FANG stocks and other tech and software stocks drove the expansion. And in the future, renewable energy, cybersecurity, and tech can be the drivers of the next expansion, nobody knows. Crises are more predictive and are more alike. The smallest, cheapest, and the most conservative capital deployment of stocks perform much better during crises. Companies that are profitable and cash generative also tend to do well during recessions. Private equity or distressed debt funds perform horribly, and if you want to invest in debt, dedicated public debt is an optimal way.
Sales-to-Price Ratio. There has been a lot of chatter of how overvalued the market is and how its too expensive to enter in now. The ideology is, knowing that the market should contract soon, why should I invest into these higher prices? Valuation can never help us with market timing. An overpriced market can always become more overpriced. Based on the sales-to-price ratio, the nominal total annual return for US stocks over the next decade is about 4.5%.
Market Volatility. For the past few weeks, the market has been jumping to new highs despite global worries surrounding Coronavirus. Production factories have been shut down, with some companies stating that they are moving production out of China. Despite this, the market has hardly reacted as one would expect. In the past few days, the markets have been sliding as investors are moving to hold safer assets such as gold and cash, the former being at all-time highs. Just to add more confusion to the investing world, the 30-Year Treasury Bond is at an all-time low, further inverting the yield curve. Widely believed to be a signal of recession, this has been taken mostly in stride. Why? Some possible reasons lay in the governmental intervention. The Fed has shown that it will go against traditional indicators to stabilize the market. The Trump administration has repeatedly shown it will do whatever is necessary to ensure industries keep growing through the use of tax cuts and subsidiaries, the deficit be damned.
Factor Rotation. Heard of sector rotation? How about its new friend Factor Rotation. Over popularized at the turn of the century, sector rotation is an investment strategy that tries to predict the business cycle and overweight industries which expect to outperform in that scenario. In a general sense, when someone believes the market is overheating and due for a cool down, they would start moving their portfolio into Healthcare, Consumer Staples, and Utilities. When they believe we are on our way out of this cool down, they would start investing in Financials, Technology, Consumer Discretionary, and Materials. At the onset of the expansion, they would start moving towards industrials and energy. This strategy, which seems simple, usually underperforms the SPX, as its relatively hard to constantly predict the business cycle. Now another strategy, which has been around for a while, but is just now becoming mainstream is factor rotation. Factor rotation instead invests in companies that share common characteristics, for example, strong financials, constant dividend growth, and relatively low debt, which would make up a defensive strategy. Although this will allow investors to increase their general active specific factor, it keeps the factor tilt relatively the same as would be for sector rotation, which means it still requires a general reliance on detecting the business cycle.
The Millionaire in the Capitol. There are currently three billionaires running for president. Donald Trump with an estimated net worth of $2.48 billion, Tom Steyer with an estimated net worth of $1.6 billion, and Michael Bloomberg the 8th richest person in the world with an estimated net worth of $65.2 billion. The United States has a long history of wealthy presidents dating back to the very first. George Washington had an estimated net worth of $587 million (in 2016 dollars), and over half of all U.S presidents had a net worth over $2 million placing them within the wealthiest 10% of the population. Despite its long history of wealthy leaders, the U.S has never had three billionaire presidential candidates. While these candidates are running for various reasons, they are a reflection of current social sentiment. Voters across America feel that there is a correlation between the ability to lead and be successful and earning a large amount of money or the “smart businessman” argument, but many others also feel that large amounts of wealth lead to corruption, inequality, and the ability to buy the election. Traditionally, U.S presidential campaigns have been funded by donations from average Americans, political fundraisers for the wealthy, and more recently corporate donations to Super Pacs, but this year we have seen another option. Bloomberg has taken no donations and yet has spent $450 million of his own money to fund his campaign and join the democratic race. For some background, here are some of the wealthiest leaders in the world. Keep in mind that as we go down this list the estimates are less accurate and, in most cases, the large net worth is due to the corruption of world leaders and their ability to funnel public assets or national resources to their personal wealth. French President Emmanuel Macron $31.5 million, President of Chad Idriss Deby $50 million, Turkish President Recep Tayyip Erdoğan $50 million, Prime Minister of Singapore $51 million with an annual salary of $1.6 million, President of Rwanda Paul Kagame $500 million, President of Kenya Uhuru Kenyatta $500 million, President of Azerbaijan Ilham Aliyev $500 million, President of South Africa Cyril Ramaphosa $550 million, President Teodoro Obiang Nguema Mbasogo of Equatorial Guinea $600 million, President of Gabon Ali Bongo Ondimba $1 billion, Bashar al-Assad leader of Syria $1.2 billion, President of China Xi Jinping $1.5 billion, Sebastian Pinera President of Chile $2.8 billion, leader of the Czech Republic Andrej Babiš $3.7 billion, leader of North Korea Kim Jong-un $5 billion, and President of Malaysia Mahathir Mohamad $45 billion.
A few other notable cases are Sheikh Khalifa Bin Zayed Al Nahyan who is the leader of the United Arab Emirates and has an estimated personal net worth of around $18 billion. King Salman of Saudi Arabia with an estimated personal net worth of $17 billion, while the royal family has a net worth that may be as high as $2 trillion. Ali Khamenei, supreme leader of Iran had a claimed and estimated net worth as high as $95 billion. Lastly, Vladimir Putin with a very rough estimated net worth of $200 billion.
The Alchanati Campbell and Associates Team
What's up Trumponomics?
From 2016 until now, investors have learned a valuable lesson: Don't bet against the house AKA Don't bet against Trump. With his administrations' tax reform, numerous trade deals, deregulation, tariffs on the EU, control over the Feds, etc.; his words and his actions have kept the market screaming higher. With his first term due to end soon and with his campaign for reelection, a market correction would be terrible for his chances. With this in mind, expect the stock market to continue to make new highs even if there is a terrible epidemic or other crises.
The Reason For No Recession. A yield inversion happens when a long-term interest rate crosses with a short-term interest rate. Example: 10-year Treasury with 90-day Treasury. The inversion of the short and long term yields have always been an indicator of a recession 6-9 months later. When the long-rate is dropping, businesses pull back on investments and reduce spending on CapEx. They stop borrowing and banks have less demand for lending, so they lower the interest rates to make the rates more attractive. Businesses indicate that the economy is slowing, and this may lead to a recession. BUT, in this global economy, foreign 10-year T-bonds are 0% or negative. All of these global investors want to be liquid, safe and returning positive returns. So they all buy US bonds, increasing the prices of bonds, and lowering the interest rates of these bonds. This is why the yield inversion may not indicate a recession.
Correlation Between Major Assets. Finding patterns in data has always been something that humans have tried to do to game the market. Usually, traders will throw up the two normalized data sets on a graph, and try to eye if they see correlation or not. This will usually end up with an erroneous outcome. Take Gold/Oil for example, although it seems these assets usually move in the same direction, and the graph shows a semi-consistent correlation, its R^2 (which is the % of the dependent variable explained by the independent variable) is 7.2%, with its R (correlation when using only 1 independent variable) is .268, which shows a weak correlation. When adding the USD into the equation, we see the r^2 and correlation jump up. This is explained by an error with multicollinearity, or the addition of the USD, which strongly influences both gold and oil, due to both assets being dollar-denominated. This means that when the dollar goes up, oil and gold will both follow inversely.
Checks and Balances. A set of organizations that split sovereign power among them in order to prevent dominance by a single individual or group of individuals. This can be as simple as having an independent board of review for a public company but generally refers to the distribution of power in a government. Checks and balances have existed as long as independent states have, but their widespread use only came with the advent of modern republican democracy, where the people, through their representatives, sought to prevent the reestablishment of autocracy within their lands. Generally, governments are split between an executive, legislative, and judicial body, each with separate priorities, and, importantly, largely independent. In the United States, this split is extremely formalized, with contradicting powers given to the different branches, including Congress’ power over the budget, the President’s power over actually spending government money, and the Supreme Court’s power of judicial review over the whole process.
Presidential interference in Stone Sentencing. Roger Stone, a long time confidant, and advisor of President Trump was found guilty of witness tampering and lying to congress in November 2019. His crimes had been discovered in the course of the Mueller investigation, as it had been found that he had cooperated with Julian Assange in the course of the WikiLeaks hacks of the Democratic National Party during the 2016 election. As a result of these crimes, an assistant US attorney followed the guidelines of the Department of Justice and recommended to the judge that he be sentenced to seven to nine years in federal jail. However, President Trump tweeted earlier this week that this sentence was inappropriately long, and, following this, the Department of Justice intervened in the case and recommended a far more lenient sentence. The four prosecutors involved in the case resigned, and the DoJ has received widespread condemnation for what has been termed “political interference in the judicial process.” Technically, what President Trump did is not technically illegal. However, it does greatly delegitimize the Department of Justice, as one could now view the department that is supposed to enforce and prosecute federal crimes as a political tool of the presidency, rendering investigations it pursues vulnerable to allegations of political bias.
The Alchanati Campbell and Associates Team
Helicopter Money. Helicopter money is an extreme, unconventional, and unorthodox practice of stimulating growth within the economy. It is comparable to Quantitative Easing, which involves increasing the money supply by purchasing debt from the market. Unlike, quantitative easing, helicopter money involves the central bank distributing printed money directly to the public. It is also referred to as a helicopter drop, as if the money were scattered from a helicopter. Consumers could do whatever they want with this money, but in theory, sustained helicopter "drops" would encourage spending and create demand, sparking growth. It is a permanent impact on society; once the money is out there, it cannot be taken back. Distributing money to the public comes with its own problems, such as inflation and currency weakening. Obviously, Jerome Powell is not going to charter a helicopter and toss money out of it (that seems like an Elon Musk type of thing). Rather, there are more tamed actions they can take to go about this. The Central Bank's spending on tax cuts and purchasing government bonds with the condition to distribute the interest directly to consumers rather than government spending are two possible ways of dropping money into the economy.
The Feds. This week the Federal Open Market Committee held the first meeting of 2020. The Fed’s position has not changed much since they met in January, stating that the “labor market remains strong and that economic activity has been rising at a moderate rate”. The Fed did note that household spending has been constantly rising and business fixed investment and gross exports remain weak. In response to current economic conditions, the Fed Funds Rate was held steady at 1.75 percent, which is within their target of 1.50-1.75 percent. The rate is down from a year ago when the rate was 2.25%. Since mid-October, the Fed has been buying $60 billion a month of T-bills, and reserve levels have risen by more than $270 billion since then to roughly $1.67 trillion. At the meeting, Chairman Powell expressed his intention to reduce the market's reliance on the Fed. He outlined loose plans to reduce cash injections into the market by the second quarter. Some analysts have liked these cash injections to a new round of QE, but the debate on that continues. Powell intends to lower the Fed’s reserves from $1.67 trillion to around $1.55 trillion which is the level the reserves were at when the market first ran into liquidity problems. With the trillions in annualized balance sheet expansions from Central Banks around the world, stocks will have a difficult time selling off much and any correction may be limited. In other Fed news, Trump has formally nominated Judy Shelton and Christopher Waller to fill the remaining seats on the Fed’s board of governors. Shelton is known for criticizing the Fed, advocating for a return to the gold standard, and questioning the independence of the Fed itself. No doubt if she is confirmed we will see future changes in the Fed’s policies.
Consumer Confidence. Consumer confidence measured through the Consumer Confidence Index (CCI) has recently reached a normalized high of 101.4 (meaning long term average is 100). This high hasn’t been seen since March of 2018. Although CCI has been reaching highs, business confidence (BCI) has been steadily decreasing, currently at 96.3 (normalized at long term average of 100). This rise in consumer confidence, not accounting for the Wuhan outbreak, is being brought on by an increasing job market, which is increasing optimism for consumers' futures wealth, fueling current consumption. This disconnect between CCI and BCI can be bridged by looking at the CEO confidence survey, which is at a level of 7 out of 10, which backs up the CCI report. This also brings into question what you believe powers GDP more, consumption or investment. With CCI backing up consumption, and BCI backing up investment. But what drives the market: consumers or businesses? Keynes’ Law says, “Demand creates Supply” and Say’s Law says, “Supply creates Demand”. I say businesses drive the economy; aggregate supply drives the economy while aggregate demand responds passively. Purchasing power grows out of production. The great producing countries are the great consuming countries. Consumer confidence is important, but the real factors to look at are business investment and business spending indicators. Once business slows down, consumer confidence and spending will slow.
VIX. Volatility is the statistical measure of the dispersion of returns for a given security. The higher the volatility, the riskier the security is. The price of the security can move more dramatically in a short period of time. BETA is how you measure volatility. A beta approximates the overall volatility of a security’s returns against the returns of a relevant benchmark like the S&P 500. The beta of 1.1 has historically moved 110% for every 100% move in the benchmark. A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. Low volatility means small fluctuations and high volatility means large fluctuations. Generally speaking, when investing the more risk you take with your money the higher the return can be, so investments that often see low volatility are lower in risk and therefore offer less of a return. The two most common ways to measure volatility are the VIX and Average True Range (ATR for short). VIX is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options. It uses the prices of options on the S&P 500 and then estimates how volatile those options will be between the current date and the option’s expiration date. The Volatility Index (VIX) is an index created by the Chicago Board Options Exchange. It shows the market’s expectation of 30-day volatility, constructed using the implied volatilities on S&P 500 index options; calculated from calls and puts. It uses the price of options on the S&P 500 and then estimates how volatile those options will be between the current date and the option’s expiration date. One of the biggest risks to an equity portfolio is a broad market decline. The VIX Index has had a historically strong inverse relationship with the S&P 500 Index. VIX below 12 is considered low, above 20 is considered high and in between, normal.
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The Alchanati Campbell and Associates Team
The market was in a panic today. The coronavirus is becoming a bigger concern with cities in Asia going on lockdown, travel is restricted, and the virus spreading to other countries. The market is becoming too expensive and calls for a good defense. Earnings season commenced this week and 70% of the companies that reported beat expectations, but there is still fear in a slowdown in corporate earnings. Phase 1 deal with China was a success, the USMCA deal is in the works to be passed, and the Central Bank is using all of their resources to keep the market afloat at an all-time high. In the short-term, the market is obsessed with the Fed’s monetary interventions. The market is at full-bullish. The put/call ratio is hitting historic lows and with new-highs at every market close, investors are getting a sense of FOMO where they feel they need to catch the ride up. Investors are starting to question the current economic expansion and are starting to ask the question of when it is going to end.
Capitalism. The age-old debate of economic structure, the battle between socialism and capitalism, has become more prevalent than ever. These two structures, in their simplest form, can be differentiated between capitalism representing less government intervention, more company choice, with socialism being the counter. Although capitalism has its downfalls, such as corporations taking advantage of the populous, it has worked for us for the past few hundred years. Capitalism is definitely not the end all be all, our financial system is so young, that we don’t know exactly what completely works yet. What we do know, however, is what has led countries to turmoil through incentive issues, lack of property rights, and generally poor quality of life, and that seems to be pure communism. Although socialism weighs on the left, such as communism, it is far closer to the middle, being much closer to capitalism than many think. What lies in store for the future, in regards to how powerful the government will become, or possibly the counter with corporations, time will only tell.
Boeing. It seems like Boeing just can't keep out of the news nowadays and is once again making the rounds as a result of negative news. Boeing released news on the return of the notorious 737 Max, which has been the spark of all the negativity regarding Boeing, stating that the plane most likely will not return to flying until Fall 2020 at the earliest. This is not great news for the company, but at the end of the day, it will help to ensure safety for people across the globe, which is most important. Boeing, which has halted the production of this troubled aircraft, does not get paid until they deliver the planes, which can't be done until they get recertified by the FAA. Recertification is likely to happen sometime in mid-2020. This has increased the expected costs for Boeing, which are now at around by $10 billion. Some analysts expect costs to reach $20 billion by the time planes get recertified in mid-2020. The halt of production has ramifications up and down the supply chain, as well as costing customers like Southwest in lost profits. Boeing is seeking a $10 billion loan at a similar price point of its previous loans. The full details of their costs, expectations, and loan will likely be revealed during their earnings call at the end of January. Analysts are expecting low revenue, low earnings, and increased liabilities. This has led to the stock being down right around the 52 week low recently. The Dow, which is a price-weighted index, has been dragged down by Boeing's $300+ share price. Many people see the rock-bottom price of Boeing stock and think it could be a good deal, however it is very plausible that the stock is still overvalued.
Public Health Emergency of International Concern. Defined by the World Health Organization as “an extraordinary event which is determined to constitute a public health risk to other States through the international spread of disease; and to potentially require a coordinated international response”. This definition implies a situation that: is serious, unusual or unexpected; carries implications for public health beyond the affected State’s national border, and may require immediate international action.” Initiating a PHEIC is not something the WHO does lightly, as it signals the broader need for international cooperation and access to emergency funding and protocols. The last major PHEIC was the Ebola outbreak in West Africa that lasted from 2014-2016.
Coronavirus outbreak in Wuhan, China. A new treatment-resistant virus has infected over 800 people and has spread to eight major cities in the country, as well as seven other countries, including Thailand, Japan, South Korea, Taiwan, Vietnam, Singapore, and the United States. New cases have exploded since the outbreak was first noticed last week. A coronavirus is a particularly volatile form of viral infection, in that it has the potential to mutate easily and jump from other mammalian species to human hosts. Chinese officials hypothesized that this is what happened in this particular case, as there is a large market near the Wuhan train station, where the disease is thought to have originated. While this virus is not nearly as deadly as past coronaviruses, such as SARS and MERS, the transmission of this virus has shown itself to be particularly active, worrying officials and markets. The Chinese public is especially vulnerable due to the widespread Lunar New Year’s celebrations that are taking place this week, leading to the migration of millions across the country for festivities and family visitation. The government has mobilized the military and quarantined infected cities while shutting down previously planned celebrations, but its lack of transparency with the international medical community has significantly hampered the ability of the WHO to assist with the outbreak, and as of now still has not declared a PHEIC due to the lack of information.
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.