Living true to yourself. "I tore myself away from the safe comfort of certainties through my love for truth - and truth rewarded me." If there is one thing I can ever promise you, it is this: you will reach the tip of Maslow’s pyramid and you will be in unconditional happiness if you stay true to yourself. There’s nothing more important in life than what you feel and think in your inner being. Ambition is our attempt to go beyond ourselves, and true ambition is beyond insecurity. . It’s not about being better than this person or that person, or accumulating this thing or that thing, but it’s about experiencing the full spectrum of what a human body can be and do. What you can be and do.
Truth that is pure is the most beautiful, and the simpler it’s expression the deeper is the impression it makes. Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. We’re self-conscious for the same reason that we’re self-confident: a healthy ego. We tacitly assume that other people think about us and judge us just as much as we think about and judge ourselves. The liberating truth, of course, is that everybody else is too worried about themselves to really care what you do. Pursuing what you must pursue for yourself, you need to realize that only you can do that. Then when you progress and experience and accomplish bits and pieces, you’re able to share it with another and create a greater whole: love; an unworldly feeling. To really love another, you need to love yourself. And to love yourself, you need to know yourself. And to know yourself, you have to stay true to yourself. Dear Reader,The Market.
Tobacco and Other Sin. Sin stocks have been the highest returning sector since the 1900s; tobacco in the US and alcohol in the UK. Philip Morris has a market cap of $137 billion, a one-year performance of 28%, and for the past 9 years, their return on investment, free cash flow per share, and operating cash flow per share have all been increasing. In 2009, their profit margin was 11% and now it is 26% which means 26% of their sales turn into profit. The prices of tobacco and smoking products have increased by 6% in 2019 and the tobacco industry has a high barrier of entry. With ESG on the rise, many funds are liquidating their holdings from sin which may result in lower stock prices, but the innovation into new products like e-cigs and vape may prove to be even more profitable for the big tobacco companies. (Note: Sin stocks usually perform better during slowdowns/downturns). Macro themes to look at going into 2020. Leaving 2019, going into 2020, we saw a wide array of global macro theories and events playing out. At the forefront was the global trade deal between China and the US, Brexit, people predicting a global slowdown, tensions arising in Venezuela between presidential incumbent Maduro and opposing party leader Guaido. Going into 2020, we are seeing some new geopolitical activity, which could result in some much-needed volatility in the global market. This activity is taking the form of a new surge in the global economy, dispelling fears of what people thought was an impending slowdown. Aside from future outlooks, we are currently seeing relatively low fed rates; demonstrating soft central bank policy, joined with relatively low inflation in the developed market, leading markets to reward those in risky assets. Although 2019 was a year of fear and reward in the double digits for the markets, I see 2020 taking a relatively calmer outlook, still bringing potential for single-digit gains in our markets. Party of Fiscal Responsibility. This week, for the first time since 2012, the federal deficit topped $1 trillion, a 17% jump from the previous year. Fortunately for Donald Trump, he was relatively successful in pressuring the Federal Reserve into cutting interest rates. The cut in interest rates lowered the cost of government borrowing, which of course lowered the deficit to a still astronomical figure. After the crisis in 2008, the deficit spiked as the government rightly injected money into the economy to spur spending and help get us out. Since then, President Obama worked with the Republican congress to lower spending. Back in 2016, candidate Donald Trump promised to reduce spending, claiming his presidency could eliminate the entire deficit in eight years. Moreover, he promised that his tax-cuts would pay for themselves in the form of economic growth they would foster. Thus far, he has been widely wrong. While Federal receipts (revenue) has grown at 2.6% average annually (less than Obama's average 3.9%), Federal spending has grown at 5.7% each year (more than double Obama's). All in all, this has led to the deficit growing 20% each year. As a result, it is clear Trump's aspirations for deficit elimination have not panned out. It also adds an interesting connotation to the economy under Trump. As we all know, basically everyone has been saying the economy has been running on fumes and has been due for a crash. We have "been in a bull market for too long", and China trade-war, the investigation into Donald Trump, BREXIT, and war with Iran would send us into the stone age. Clearly, none of that panned out. However, this data on government spending shows us that the economy may be unnaturally propped up by the increase in fiscal injection by the government as well as the Federal Reserve rate cuts. Space. It’s been half a century since humans left footprints on the moon and during that time, the focus of space exploration has shifted from human space exploration largely centered on manned low-Earth orbit missions and unmanned scientific exploration to private funding and commercial launches. The global space economy consists of non-government launch providers like the ULA and SpaceX that launch equipment for both government and non-government clients. These clients often require satellites launched in the Earth’s orbit that provide consumer TV, broadband, radio, mobile phone, and earth observation services. Morgan Stanley estimated that the global space economy in 2019 generated roughly $350 billion, but due to an unprecedented number of emerging launch providers and technological progress they estimate that the space industry will bring in over $1 trillion in revenues by 2040. Most conversations around private space exploration are centered around space tourism and while that is great, the true potential of a developed space economy is unlimited. Cheap and easy access to space would allow researchers to conduct real-time experiments in microgravity. In microgravity, researchers would be able to better study diseases; as cells and proteins act differently from how they do on earth, giving scientists more insight. What little work on the topic that has already begun on the ISS has yielded impressive results and given science hopes that they may be able to cure diseases once thought incurable. The same is true for material research, many researchers believe that microgravity is the key to developing advanced next germination materials. Even though many of these breakthroughs may be more than a decade away, there is no doubt that 2020 will be a huge year for the global space industry as Blue Origin, SpaceX, Virgin Galactic, Boeing, and Rocketlab are all expected to reach milestones this year. Coming up first is SpaceX's crew abort system test that is scheduled to take place on Saturday at 8 a.m EST, they are expected to blow up a rocket so I wouldn’t suggest missing this one. Authoritarian Government. A government type that, in contrast to democracy, concentrates sovereign and national power in a single individual. These governments have typically been the most common regime type in human history, often taking the forms of military dictatorships and monarchies. The proliferation of global democracy after World War II spawned a new kind of regime: an authoritarian democracy. Since citizens of modern nations generally demand a say in how they are governed, these governments maintain the auspices of a functional democracy, including an elected parliament and president, and a publicly accessible judicial system. However, electoral competition is largely controlled by a single party, which is headed by an extremely influential individual. These governments are inherently unstable, as their “democratic” institutions can be seen as illegitimate over time, leading to uprisings and possible revolution. Reshuffle of Russian Government. On January 15th, Russian Prime Minister Dmitry Medvedev announced he would resign his post, as soon as a new government is formed by the Russian parliament. Medvedev is largely seen as a puppet of President Vladimir Putin, who has swapped jobs with Medvedev numerous times as his term limit in the Prime Minister position expired in 2011. Mr. Medvedev’s resignation has widely been seen as a move by President Putin to consolidate power in his regime as Mr. Putin ages, as he has been in power for over 20 years. Additionally, American sanctions and endemic corruption have crippled the Russian economy, and its continued involvement in foreign wars in Syria and Ukraine has become more and more unpopular. Large protests against regime policies have taken place in the past few years, and Mr. Medvedev’s popularity had plummeted to 39%. President Putin has announced the next Prime Minister will likely be Mikhail Mishustin, a relatively unknown technocrat who has successfully implemented better tax collection practices, meaning the Russian government expects to continue to reform economically as it braces for continued sanctions from the West. The current term of President Putin’s regime expires in 2024 when he will likely appoint a successor that will keep Putin’s vision of Russia long into the future as he continues to govern from the shadows. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market.
2020 and Beyond. A few economists have started to raise the possibility of our next industrial revolution occurring in the next decade. This would mark the 4th industrial revolution we have seen as mankind. WeWork released a bold statement in early 2016 stating, “We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before”, this comment was almost instantly disregarded as marketing towards the shared economy. Four years later, in early 2020, I believe WeWork was correct, and we are standing at the brink of our next great industrial revolution, one that will disrupt almost every industry. We have the onset of quantum computing, which will change how and industry based on complex physical systems operates; biochem, Pharma, physics. We are very close to seeing industrial implementations of augmented reality and autonomous vehicles (cars, drones). We saw the rise of the sharing economy and gig economy with the introduction of WeWork, Uber, GrubHub, and this industry is only getting bigger. We are heading towards an age where 3D printers are becoming cost affordable where a mechanic can purchase a blueprint and instantaneously start printing the part. We have started to see the rise of permissioned blockchain (corporate chains), this is basically blockchain V2. We will start seeing central governments testing to see if this technology is viable to launch their next central currency on. IBM just recently revised the Buckminster Fuller knowledge doubling curve, to give a short summary of this, Buckminster, a futurist of his time in the 1900s, released the idea that knowledge doubles every 100 years. This was then changed in 1950 to doubling every 25 years, in 2015 it was updated to doubling every 12-18 months, and just recently IBM revised this to doubling every 12 hours. I believe we are heading into a new age, which will be marked with rapid growth in both human capital and technology. Gold. Gold is a precious metal, something to make rings and jewelry out of, and it’s a beautiful accessory and is a hallmark of wealth. However, it is exponentially more important as an investing asset. There a few ways to invest in gold. You can buy Exchange Traded Funds (ETFs) that track gold, you can invest in companies that mine gold, and you can also buy physical gold (rings, chains, bars). Why invest in gold? Because it’s a safe hedge against inflation and deflation, it can combat currency volatility, and it has an intrinsic value. One of the purposes of money is that it acts as a store of value. In times of inflation and deflation, regular fiat money such as dollar bills lose their value. This causes people to flock to commodity money, such as gold. In these cases, unlike dollar bills, gold can effectively hold its own value. Why? Because gold is a natural resource; it's impossible to make more of it. This means it is immune to the inflation risks that face traditional currencies. While the government can just "print" more dollars, which would increase the amount of money in circulation while also decreasing each dollar's relative value, they can't produce much gold. As such, this has led gold prices to soar when inflation rises. There is a similar effect with regard to foreign exchange rates. If the USD is losing value compared to, say, the Euro, people will buy gold as it can hold its value while the dollar falls. Why would the dollar fall? For the same reasons listed above. If the government introduces too much money into circulation, this will lead to inflation and the Foreign exchange rates of the dollar to fall. Finally, gold has an intrinsic value because humans have attached one to it. Warren Buffet has said, in paraphrased words, that idea of attaching a value to gold, something we dig out of the ground, is odd. Nevertheless, gold has value. This value leads to gold being an accepted currency everywhere. If the entire United States economy collapsed and the dollar was rendered absolutely useless, gold would be the most valuable currency. This is why Central Banks across the globe buy gold. If things go bad, gold is the place to start again. It backs the Central Bank's balance sheet and provides a measure of security to the country. While the prices fluctuate based on the economy, gold itself is not exactly a byproduct of the economy or any government body. Liquidity and QE. At the end of 2019, the U.S Federal Reserve fought to keep the repo market running smoothly by injecting half a trillion dollars. Repo or repurchase agreements make up a crucial part of our financial system and that plays a key role in the Fed’s open market operations. That is why the Fed was quick to add as much as $99 billion a day, in reaction to the amount of cash in the market dropping as demand to borrow jumped leading to a spike in interest rates. New York Fed officials have indicated that these cash infusions may continue through April, but the Fed Chairman and several heads of major banks insist that this is not another round of QE. In October, Fed Chairman Powell stated that these actions are not designed to lower longer-term interest rates or ease financial conditions as was the intent of QE, but rather to ensure there is enough cash in the market to avoid another unintended spike in interest rates and avoid turmoil in short term lending markets. The distinction on whether or not this move can be considered as QE is significant because another round of QE would single a shift in monetary policy and while it's unclear the effects this would have on the market it may lead to risky assets climbing even higher or other unintended consequences as was the case when 10-year US Treasury yields initially dropped 2 basis points following the Fed’s cash injection. This topic remains a point of debate among financial analysts as some argue that the Fed is adding to the balance sheet and reducing rates which are telltale signs of QE, while others like Jamie Dimon, CEO of JPMorgan Chase & Co argue that this is simply open market operations and far from a return to QE. The repo market is not the only major liquidity issue present in the market today. Mr. Powell has been working closely with the U.S Treasury Secretary to mitigate intraday liquidity. Intraday liquidity occurs when large banks have a gap between payments and settlements during the course of a business day and run what is known as a “daylight overdraft” to cover the gap. This practice could result in major unindented consequences for the market, or even act as a catalyst for a recession which is why the Fed and U.S Treasury and acting to address this liquidity issue. Act of War. An act of violence directed from one country to another in order to provoke a hostile response, often giving cause to initiate a war between the countries. Acts of War in the past have included Pearl Harbor in World War II, the assassination of Archduke Franz Ferdinand in World War I, and, in modern times, the 9/11 attacks. The United States Assassinates Iranian General. On January 3rd of this year, President Trump ordered a missile strike on a convoy containing Iranian Major General Qassem Sulemani, leading to his death at the hands of US military personnel. The strike was ordered in retaliation for the General’s part in the killing of an American military contractor in late December, as well as his part in organizing the violent demonstration in front of the American embassy in Baghdad, where the perimeter of the facility was breached. General Sulemani, through both his direct orders and his support for terrorist and extremist militias throughout the middle east, is directly responsible for the death of hundreds of American soldiers and has played a major part in sustaining and prolonging the terrorist group Hezbollah, as well as the regime of Bashar al-Assad in Syria, and the continuing the Yemen civil war. However, while Sulemani’s death might very well have been justified, the manner of his death breaks with traditional American foreign policy and puts immense pressure on the Iranian government to respond against the United States in a hostile manner, possibly drawing the region into another war. The Iranian government is largely unpopular among its people, with numerous public protests leading to the deaths of thousands of Iranians in the last months of 2019. Its support largely comes from religious hardliners within the country, and those hardliners will demand an aggressive response from the Iranian regime, lest the government risk losing its support and collapsing. If President Trump’s strategy was to cause the collapse of the Iranian regime, and he was willing to risk a war to do it, then this strike makes perfect sense. However, President Trump has made it clear he does not wish another Middle Eastern War, confusing many experts and allies with this action. In response to the assassination of General Sulemani, Iran has ordered a counterstrike against a joint Iraqi-American military base, though it resulted in no casualties. Many experts have concluded that this singular strike is just the first in many future hostile actions, with more strikes, including possible terrorist actions, to come. Keep Climbing, The Alchanati Campbell and Associates Team The end of a year signals the start to a new beginning. Where anything and everything is possible; where achievement awaits only the ambitious and hard working. With 2019 ending, we like to look back on our failures and mistakes. Just because we’ve lost our way doesn’t mean that we are lost forever. In the end, it’s not the failures that define us so much as how we respond to them. We grow by making our own mistakes and taking them in stride. And from mistakes come reflections.
Dear Reader, I read these reflections frequently; sometimes on a daily basis. They remind me of my past mistakes, weaknesses, and things I need to improve on so I can try to never commit them again and ultimately grow from them. These are the rules I try to live by, but I always keep adding and my beliefs are continuously changing.
Observers trying to decide what a man is like look closely at his actions. But you all have the pleasure in looking at his thoughts too. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market:
Questions we have going into 2020:
Commodities: The drivers of the global economy. Commodities are basic goods that are used in commerce, often as inputs that are turned into a good or service. For most of human history, commodities have fueled trade, war, and progress. Many commodities are extremely valuable and can command a high price on the market, especially since production can be impacted by countless factors. Vanilla is not necessarily what comes to mind when you think of costly commodities, you may think of gold, silver, or oil, but none the less, in the 1990s, Madagascar was responsible for approximately 30% of the world's supply of vanilla and in 2000 when a cyclone hit, vanilla production fell and prices rose to $600 for a kilo! After the industry regained its capacity, vanilla prices fell back to $20 a kilo, but since then, Madagascar vanilla production has grown to 80% of the global supply, which means that global vanilla prices are extremely susceptible to the condition of the vanilla industry in Madagascar. Over the last few years, there have been disputes between the vanilla industry in Madagascar and some of the largest firms that purchase vanilla, leading the price to jump back to $600 a kilo in 2018. As you can see, the price of a commodity can be extremely volatile, more so when the majority of production takes place in a single country, but this is just vanilla, and vanilla has no significance outside of the kitchen. What happens with commodities that are so strategically significant that they can decide the technological superiority of an entire nation? China alone is responsible for 85% of the world’s capacity to process rare earth materials and supplied 80% of the rare earth materials imported to the U.S from 2014-2017. These rare earth materials are critical for the production of everything from DVD players and wind turbines to electric cars, jet engines, and missile defense systems. The United States only has one operating rare earth facility and even that is not capable of processing the materials and instead sends them to China to be processed where they face a 25% tariff as a result of the current trade war. Due to the technological and strategic importance of these materials, they are extremely valuable gaining them a high price and political importance. As a result, China is able to use its stores of these commodities as leverage at the negotiating table and in response, nations like the U.S and South Korea are attempting to stockpile billions of dollars’ worth to avoid a potential cutoff by China. While the nuances of vanilla production in Madagascar and the tensions between the U.S and China remain uncertain, it is clear that commodities will continue to play a vital role in the global economy. Permissioned blockchain + hyper ledger. Although the cryptocurrency craze seems to be nearly over, and most of the tech never left the small industry, one new sub-sect is quickly emerging. Permissioned blockchain, brought on by Hyperledger, a multi-project open source collaborative effort being brought on by the likes of the Linux Foundation, IBM, Intel, and SAP, seems to be quickly dominating the institutional space. This technology allows for a governance aspect on current blockchain systems, without the use of a coin, making it suitable for large corporations. This technology should be able to support inter-country transactions, supply chain improvements, and other non-fungible aspects. Although the technology as a whole would require too much information to efficiently explain in one section of this newsletter, it’s worth looking further into, be-it if only for the fact that billion-dollar companies, such as Cisco, IBM, Intel, BNY Mellon, JPM, Wells Fargo, and many more have already started to integrate this technology into their current ecosystems. In short, the technology allows for a completely governed and permissioned decentralized database, which admin users can effectively manage and track changes too. Dark Money. A source of political funding that is typically anonymized and unlimited, allowing groups to influence elections without the transparency requirements of typical political fundraising and advertising. In the United States, Dark Money has been particularly influential in the funding of “Super PAC’s” or large Political Action Committees that independently fund advertising and voter mobilization efforts; effectively becoming a political campaign without a specific political figure at its head. These Super PACs have become increasingly frequent in modern American politics, with specifically targeted ads issuing calls to action over abortion, illegal immigration, and other hot-button political issues. Dark Money allows corporations, large net worth individuals, and other groups to fund initiatives anonymously, therefore not tainting their individual name while also not delegitimizing causes they support by being funded by specific corporations or billionaires. Democratic Dark Money. The Republican party dominated the “dark money” market for much of the past decade, outspending liberal dark money funded organizations 4 to 1 in the 2016 presidential election. This is due to the organizational complexity and hardline supporters that conservative causes often engender, and absolutely played a key role in mobilizing supporters for Donald Trump among people who may not have agreed with him personally but saw him as a defender of their views on specific issues. However, for the first time, the 2018 midterm elections saw liberal dark money organizations outspend conservative ones by almost 2 to 1, leading to speculation that the conservative dominance of such donations and organizations is coming to an end. Additionally, several prominent conservative organizations, such as Koch Industries, have been alienated by President Trump’s divisive policies. As a result, many have signaled that they are either spending less or even considering funding of Democratic candidates in 2020. While many Democratic candidates have sworn off corporate donations to their campaigns, dark money-funded Super PAC’s will continue to operate on their behalf regardless of candidate support, drawing a sharp contrast between candidates’ rhetoric and the source of liberal campaign funding. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market.
US Employment. In the past the Fed has predicted that the natural rate of unemployment is around 4.5-5%. This natural rate of unemployment is a combination of frictional and structure unemployment which is present in an efficient economy, which is in expansion, created by labor and resource meeting an equilibrium point. The last unemployment numbers came in today, beating previously conceived notions and analyst forecasts, posting unemployment of 3.5%. More importantly, we saw leisure and hospitality post an increase in 45,000 jobs this last month, which instills confidence that consumers have started to spend more. It seems that the generally perceived climate of the economy, being that we are nearing a recession, is quickly turning suit. The numbers don’t lie, and they seem to show that this trade war is affecting the global economy, much more than it is our domestic economy. although PMI is posting under 50, with a steep decline in business confidence over the last year, we are seeing a booming service industry, with newly instilled confidence in consumers. November posted 266,000 jobs, beating analyst forecasts of 180,000 jobs, by over 47%. Financial Obligations Ratio. In recent years consumer debt has been increasing at an alarming rate. As of 2018, total consumer debt reached $13.3 trillion which is mostly comprised of $291 billion in personal loan debt, $834 billion in credit card debt, $ 1.27 trillion in auto loan debt, $1.37 trillion in student loan debt, topped off with $9.4 trillion in mortgage debt. These new extreme debt levels are worrisome when you consider that U.S median household income has barely grown over the last ten years. So, how does all of this look for the average consumer? Each quarter the Federal Reserve publishes the Financial Obligations Ratio (FOR). This ratio tracks how much disposable income a family has compared to the amount of debt they owe. The Fed accounts for what percentage of household income is being spent on repaying debts, for example; rent, auto loan payments, property tax, mortgage payments, credit card payments, and personal loan payments. The FOR can be used by the Fed and by firms to gauge how financially secure the average consumer is as well as the stability of the overall economy. Unfortunately, there are several issues with the FOR. The Fed publishes the FOR irregularly, sometimes months after the end of the quarter, revises the data without notice or any clear criteria, and doesn’t publish regional or demographic data so the ratio is extremely broad. While researching the Financial Obligations Ratio we also found that it is not entirely reflective of the average American family and that the data may be skewed by the ultra-rich. As of Q2 2019 the FOR stood at 15.03%, which shows that many consumers are in a fairly strong financial position, but unfortunately, we know that is not that case for many Americans. Experian found that the average consumer debt per adult is $61,554 and that 74% of consumers die before they can pay off their debt. This is reflective of a society that is heavily burdened with debt, but there are measures you can take to help manage this. The debt to income ratio is a tool you can use to assess your financial security. Simply add up all of your monthly debt like mortgage/rent, car payment, student loans, credit card minimum payments and divide the total by your gross income, you can find you approximate annual income on you most recent w-2 or by looking at your gross YTD earnings found a paystub from December. You should aim to have a debt to income ratio below 30% to be in a strong position financially. If you are above this figure, then you should consider increasing your monthly payment amounts to pay off debts sooner or consolidating your debt. CFA. You've probably heard the term CFA. It stands for Chartered Financial Analyst. It's widely known as arguably the most prestigious and most respected qualification/designation in the world of finance. Not just anyone can hold the title. At the completion, you must have a bachelor's degree, four years of work experience, or some combination of education and work experience that equals four years. It’s a three-exam qualification, and the CFA Institute recommends 250 hours of study time for each exam. Candidates report a figure closer to 300 hours, however. Due to the way it works, you sign up for the exam in December and take it in Jun (or vice versa), and only have six months to study. In addition to this, its widely known as being incredibly difficult to pass. Below are the pass rates from the June 2018 exams. Level 1: 43% Level 2: 45% Level 3: 56% These are sequential, meaning that 43% of people go on to take #2, and of those people only 45% pass. Out of that 45% that go onto level 3, only 56% finish. Of all the people that enroll to take the exam, less than 12% finish. This is exactly why people decide to do this. Because it is so hard, it carries a lot of weight, and signifies to anyone that sees your resume that you work hard, you're disciplined, you understand a multitude of financial topics, and you would be a valuable asset. It will help immensely in job searches, and puts you over the other candidates. Topics include money management, financial ethics, asset classes, investment tools, portfolio management, economics, corporate finance, and more. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market.
Technical Analysis. The best technical analysis consists of looking at the trends coming from monthly indicator charts. Is technical analysis a great way to base your investment decisions on? The graph below shows a similarity between Caterpillar and the Nikkei Index for a span of 5 years. Does it mean anything? You should base your investments on multiple analyses: technical, fundamental, comparative, and macro. The Bulls are Charging. Investor sentiment is at an extreme high, with all market indexes hitting new highs. Investors are heavily invested in equity while holding the lowest cash reserves. With low levels of cash reserves and extreme investor confidence, how much longer can the markets sustain new highs? Key indicators to look at are manufacturing, consumer confidence, consumer spending, GDP growth, household-debt-to-GDP ratio, new home sales and the number of new homes being built. If we see a slowdown in any of these, it’s a bearish sign. Besides these economic indicators, the 2020 elections, the Feds hiking/cutting/holding interest rates, the slowing of the Chinese and US economy, and the US-China trade war are the events that will be dictating the direction of markets. Based on banking sentiments, cyclical stocks, emerging markets, and economically-sensitive sectors like financials, industrials, and materials will be good plays if the market continues to go up. If not, look for hedges in assets like TIPS, REITS, Treasury bills, VIX, and defensive stocks like consumer staples and utilities. The Superiority of Investment Companies and Asset Classes. The comparison of the Vanguard Growth Index Fund ETF (VUG) and the Fidelity Growth Company mutual fund (FDGRX) is done to show how the difference in asset type, asset allocation, investment company reputation, and expense ratio influence fund performance. VUG is a Vanguard large-cap growth ETF with $95 billion net assets, the inception date of 2004, Beta of 1.04, an expense ratio of 0.04%, and a 1-year return of ~21%. This ETF is made up of large market cap US growth companies, with its top holdings being Microsoft (8.52%), Apple (7.87%), Amazon (5.81%), Facebook (3.59%), and Alphabet (2.93%). FDGRX is a Fidelity large-cap growth mutual fund with $41 billion net assets, the inception date of 1983, Beta of 1.20, an expense ratio of 0.85%, and a 1-year return of ~16%. This mutual fund is made up of large market cap US growth companies, with its top holdings being Amazon (6.44%), Apple (5.41%), NVIDIA (4.95%), Microsoft (4.37%), and Alphabet (3.93%). Now from a basic analysis, we can make the hypothesis of: because the Vanguard fund is more well known, has a lower expense ratio, has a lower Beta (lower riskiness), is an ETF (not a mutual fund), and has allocated their fund by buying more heavily into Microsoft, Apple, and Amazon (higher returning equities), they outperformed Fidelity’s mutual fund. China's Slowdown. China just posted its third straight month of declines in its industrial profits, being down 9.9% in October, over last October. This marks the steepest declines in industrial profits since 2011, most of which can be accounted for by severe overcapacity, with a lack of demand in the international economy, brought on by a harsh trade war. China, being the second-largest economy, has been in a trade war with the US, the largest economy, over the past year. Industrial profits have been falling severely for the last 6 months, with their equity market following suit, with fears of a looming global slowdown. With declines in industrial profits, China has been able to slightly offset this decline through growths in the mining sector, as-well-as utilities. This offset has not been enough to increase GDP growth past their historical growth, sitting currently at 6% over the last year. This overcapacity has led to decreases in raw materials, and final product prices, shown by a decrease in PPI (Producer Price Index). Political Talks. Valuation at its Finest. You may have heard about how certain companies are overvalued, undervalued, “a great buy right now”, “stay away at this price level”, etc. Analysts from Goldman Sachs, J.P. Morgan, Morgan Stanley, Credit Suisse and the like make a living telling investors what to do. This is all great, except by the time you hear about the investment opportunity from them, it’s already too late. In a way, it’s almost a self-fulfilling prophecy. An analyst puts out an article saying how this stock is a great buy, expected to increase by 20% in the next year, etc. Everyday retail investors see this and then race to buy the stock before they miss out. All of these people buying the stock causes the price to increase (pumping or dumping), which then fulfills the prediction originally set out in the article. As you can see, the stock price is often shot up without a true dive into financials. This leaves us a higher price, with less evidence to back it up and renders it more prone to a drop. (Example: when LVMH Moet Hennessy made an offer to acquire Tiffany & Co., TIF jumped ~50%. Example #2: recently, Morgan Stanley downgraded Dollar Tree, Inc. When a big bank downgrades a company, it can cause a selloff of that equity.)The key to investing is to know when a drop is coming, and when a stock is about to soar. How do you do this? You have to use at least one valuation method. The most popular being Discounted Cash Flow; this involves projecting the Free Cash Flow (the money after all cash expenses to be distributed) into the future. Once you reach a certain point, it makes sense to stop projecting the annual cash flows and come to a terminal value (the value of a firm in that year for all the years going forward). After all of this is done, you must discount all cash flows and the terminal value back to the present day. This is the #1 rule of finance. Money today is worth more than money tomorrow. You must always account for it. The basic formula for Free Cash Flow is “Operating Cash Flow – Capital Expenditures – the annual net change in working capital. Discounting all the cashback to the present day will give you Enterprise Value. Enterprise value is the true amount you would have to pay to acquire the firm. For instance, if I were to buy a company outright, I would not only be acquiring all the operations, but I would be acquiring all the debt that the company owed which I would now have to pay off. Similarly, I would also be acquiring all the cash the company has. This leaves us with the formula: Enterprise Value + Debt – Cash = Market Capitalization. Take the market capitalization and divide by shares outstanding to get a true value for a single share of stock. You may be wondering, “If it’s all based on the numbers, why do people come to different values?” The answer is that the numbers require reasonable assumptions to be made. Things like sales growth, research costs, etc. The skill of an equity analyst lays in their ability to make assumptions. That is what separates a fine analyst from a fantastic analyst. Keep Climbing, The Alchanati Campbell and Associates Team International Diplomacy: Diplomacy is defined in the oxford dictionary as the profession, activity, or skill of managing international relations, typically by a country’s representatives abroad. International Diplomacy takes many shapes around the world, depending on the country practicing and receiving such communications. All internationally recognized countries have a specific foreign ministry which oversees the diplomatic activities and exchanges that must happen in order to function in an international world. In the United States, this ministry is called the State Department, and is overseen by the Secretary of State. However, the Secretary himself reports to the President, therefore giving the President of the United States unusually direct power over the international relations of the United States. Resumption of Taliban negotiations: President Trump made a surprise trip to Bagram Air Force Base in Afghanistan this week, during which he announced the resumption of armistice talks with the Taliban, who is currently fighting both the Afghan government and NATO armed forces in an armed insurrection. An armistice would allow for the United States to disengage from the conflict while ensuring the stability of the war-torn country, as the Afghan conflict is now the longest military operation in US history. Talks were frozen several months ago when Taliban officials would not agree to President Trump’s demand that any signing ceremony happen at Camp David in the United States, and a subsequent suicide bombing in Afghanistan killed a US soldier. Engagement with the Taliban has been a hallmark achievement for the Trump administration, as previous administrations sought to avoid negotiations in order to maintain the legitimacy of the current Afghan government. The Taliban does not recognize this government and claims instead that it is a puppet organization of the United States. A successful armistice would allow President Trump to keep one of his most important campaign promises, and would continue with the current trend of disengaging the United States from many areas it had previously considered highly important to national security.
Dear Reader,
The Market.
Financial Fallacies. Like in literature, we have fallacies in finance as-well. A fallacy is a belief/observed occurrence which seems logical, but in reality, it is unfounded and unproven by statistics. Common fallacies present in finance/investing are the sunk cost fallacy, gamblers fallacy, loss aversion bias, confirmation bias, and the self-fulfilling prophecy. Although these all play a large part in day-to-day investment decisions, most people aren’t aware they exist. The sunk cost fallacy is continuing to include previously spent, irrevocable costs into your current investment decisions. An example of this would be investing in an equity, solely because you spent time researching it. Personally, I believe the fallacy which plays the largest part in the overall market would be the self-fulfilling prophecy. This fallacy states that because one believes something will happen, that will play a part in it actually happening. An example of this could be because a large portion of investors believe we will see a massive sell-off in this last q4 of 2019, as we saw in 2018, it will occur in large part to these investors selling in preparation. A World in Protest. Over the past year, we have covered the rise of authoritarian leaders and “strongmen” across the world, who rose to power in the wake of people's frustration with their standard of living. It appears this trend may be coming to an end. In the U.S over the last two waves of state elections, the citizens of the U.S have stood up to the current administration and elected a significant number of Democratic candidates. Over the past few weeks, mass protests have broken out in Bolivia, Chile, Spain, Ecuador, Lebanon, Hong Kong, Iraq, and Iran. While these protests are separated by thousands of miles and have different causes, the same themes still arise. Except for Hong Kong, all of these protests can be tied to income inequality. Income inequality is a disparity of income distribution which the majority of income going to a small percent of the population. Economists have found that countries with high-income inequality have high rates of health and social problems. The graph below will give you an idea of where some major countries measure income inequality. In Bolivia after a brief period of recovery where their president cut extreme poverty in half in just a few years, the people now face increasing rates of extreme poverty. Chile has one of the highest income inequality rates in the world. In Ecuador and Iran, government actions lead to an increase in the price of fuel that acted as a catalyst pushing thousands of people to protest the increase in fuel prices combined with a low standard of living. While the government of Ecuador has met the demands of the protesters, the government in Iran had reacted to protestors by shutting down the nation’s internet and shooting at protestors. There is no doubt that the core issue in these countries is income inequality. While most of these countries are rich in natural resources much of that wealth goes to a very small percent of the people, creating a very low standard of living leading to social and health problems and frustrating the people of these countries. With any luck, these protesters will continue their momentum and lead to at least some improvements in their countries, because a more equal economy is more productive and able to grow at a steady rate. Are you sure your investments are appropriate for you? High valuations or low valuations, overweight or underweight, bullish or bearish, growth or value, income or total returns, etc. are very important to consider when investing, but are not nearly as important as how the investments jibe with you personally. Here are some important factors to consider to help you judge the appropriateness of your investments:
Recommendations on How to Sustain Economic Growth. Output growth is strong, the tax reform has boosted business dynamism, inflation is moving up, unemployment is low, but regulations continue to hinder the business environment, infrastructure is under-supplied, participation remains low, and housing prices are high. What are the solutions to these problems? Incentivize corporations and consumers to spend more, raise interest rates at a gradual pace as long as inflation remains close to the Fed’s target, ease restrictions and regulations, remove exemptions from anti-trust law, reform housing finance and support the provision of affordable housing for low-income families. By solving these problems, we can help the economic expansion continue. Impeachment. While following this process, a group of elected officials seeks to accuse another public official of criminal wrongdoing. In the United States, impeachment does not actually result in the removal of said official, but rather a successful impeachment becomes a formalized accusation that is put forward from the US House of Representatives to the Senate, where the House acts as a “prosecutor” of sorts, seeking to prove to the Senate the guilt of the accused party. The Senate acts as a “jury,” and the proceedings are presided by the Chief Justice of the US Supreme court. Importantly, impeachment is not a criminal process and is largely political in nature. Impeachment Hearings to Date. On September 24, 2019, House Speaker Nancy Pelosi put forward a motion to initiate an impeachment inquiry into President Donald Trump as a result of testimony from a “whistleblower” from within the Trump administration. The whistleblower was responding to a phone call between the Ukrainian President, Volodymyr Zelensky, and President Donald Trump, alleging that the US President had withheld $400 million of American military aid from the Ukrainian government in order to pressure them to investigate former US Vice President, and possible presidential rival, Joe Biden. The impeachment inquiry began with a closed-door fact-finding session in the US intelligence committee, where both Democrats and Republicans interviewed potential witnesses for the upcoming impeachment proceedings. The next phase involves public hearings by witnesses that are called by both Democrats and Republicans, where both sides are permitted to ask questions. The first witnesses included members of the bureaucratic class of Washington, including Lt. Colonel Alexander Vindman, whose careers are meant to encompass multiple administrations and are therefore seen as generally impartial to partisan bias within their areas of expertise. The next witnesses called include officials specifically appointed by Donald Trump and would, therefore, be seen as potentially more loyal to the Trump administration. One of these witnesses, Ambassador to the EU Gordon Sondland, testified that he was instructed by his superiors to withhold aid from the Ukrainians in pursuit of the investigation of Vice President Biden. Mr. Sondland, a former hotel-magnate from the Pacific Northwest, was appointed by the President, and personally donated more than $1 million to the Trump campaign in 2016. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market:
Public Equity Picks. Our team does NOT offer investment advice. We are in the business of educating and sharing knowledge; knowledge that will be more useful and valuable than the day-to-day headlines we all see in the newspapers and media. But our team is full of like-minded individuals and we all share a growing passion for finance and investing. We have many insights, but here are three of our insights regarding public investments:
CPI and Inflation. This week, the October consumer price index or CPI was released, showing a 0.4% increase over last month which was the largest gain since March. This is significant because the Federal Reserve uses the CPI along with the PCE and PPI to track inflation. The CPI is a measure that looks at the weighted average price of a basket of consumer goods and services that is calculated by the Bureau of Labor Statistics. By looking at the cost of household goods and services such as; food, transportation, medical care, and energy needs, the CPI can track the change in price and determine the buying power of the dollar. The reason the Fed uses other indices as well is that the CPI can be easily skewed by outliers in the data, which was exactly the case in October because energy prices rose 2.7% and are responsible for the majority of the 0.4% increase. The Fed targets 2% inflation measured by the PCE index as a guideline for underlying economic strength. October’s CPI brings the year on year basis to 1.7% showing that consumer inflation will likely be on target by the end of the year supporting Fed Chairman Jerome Powell’s resolution to hold rate hikes through the end of the year. Shiller PE Ratio. The Shiller PE ratio is a measure of the market valuation. Also known as Cyclically Adjusted PE Ratio (CAPE), it is aptly named after Professor Robert Shiller of Yale University; it is thought to be a more effective method of measurement than the commonly-used P/E ratio. This is due to the fact that the P/E ratio can vary widely depending on macroeconomic swings. Remember, in finance, measurements are all about consistency and stability. The goal of any measurement is to eliminate the fluke fluctuations and find the true number.Shiller PE uses earnings on an annual basis of the companies within an index, like the S&P, and adjusts for inflation (always, always adjust for inflation). Then, you simply average the earnings for the past ten years and the equation becomes the simple Price/Earnings that we all know and love. Right now, the Shiller PE is 30, far above the mean of 17. How do we utilize this information? Well, generally speaking, the lower the P/E the better, but it depends on the industry. Given that the Shiller P/E right now is much higher than the average, the assumption would be that now is not a good time to buy. That doesn't mean that if the market is soaring, you should never buy. Rather, it might be wise to be more strategic with your investment choices (companies). If the Shiller P/E was lower, now might be a good time to buy. As great as the Shiller P/E is, like any statistic, it is not an all-encompassing statistic. You need to look at other macro and microeconomic measures, as well as look into the past periods of economic expansion to see how the Shiller P/E behaved. Using past history and behavior, along with a plethora of current measures, you can be most assured of your beliefs. The Shiller P/E has been reliable in foreseeing the Great Depression, Black Monday, and the dot com bust when the ratio was over 40. In all those cases, the ratio showed that earnings can be going off the charts and the resulting impact on equity is not always so hot. While the ratio has its doubters, who believe that the high ratio should be mostly ignored due to the fact that by nature it only looks backward in time, it has continuously demonstrated its ability to at least sniff out the beginnings of a crash. Current Market Valuation. The S&P 500 is currently up over 23% YTD and the DOWJ is up about 20%. In the past, the S&P 500 has sat around a median 15 price/earnings, while currently its sitting north of 23. Although the price/earnings ratio has long been used to determine if an equity is under/overvalued in comparison to its counter-parties in its industry, some use it to determine how the overall market is valued. I personally believe the latter is changing quite fast. With the rise of globalization over the last 10 years and the ever-increasing importance of international trade, I believe the P/E ratio for stating the value of the overall market is becoming obsolete. I think we are heading towards a state where our market performs in comparison to how our economy is doing relative to other world economies. Although our economy is doing just OK in comparison to past years, relative to other global economies we are doing quite good. I believe this relative approach is what has given us this 23% gain over the last year and will continue to display gains into 2020 for the US capital markets. Political Bar Talk Freedom of Speech: Often referred to in the United States as one of the basic 1st Amendment guarantees, Freedom of Speech is a broad concept. Generally, it is known to encompass the freedom of individual and press organizations to express their opinions publicly without government censorship or retaliation. The most contentious form of speech in this context is usually political speech. The regulation, or lack thereof, or political speech can often be used as a barometer for how open or closed a society is. For instance, in the United States, statements in support or criticism of any sort of political cause or organization, so long as that statement does not cause or incite violence, is fully protected by the government. However, in countries such as the Russian Federation and the Peoples' Republic of China, statements, and protests made in criticism of the ruling party are often prosecuted with lengthy prison sentences and violent state action. Protests in Hong Kong: On Sunday, March 31, 2019, monumental protests began in the Chinese territory of Hong Kong to protest a proposed law that would allow the extradition of Hong Kong residents to mainland China who had been convicted of crimes that the Chinese government considered especially dangerous. While Hong Kong is technically part of China, it maintains a largely separate judicial system, allowing it to maintain transparent legal processes vital to sustaining international business. This bill would have significantly eroded the independence of Hong Kong and was seen as a breach of the “One Country, Two Systems” agreement China agreed to in 1997, which guaranteed an autonomous Hong Kong, including its citizens' democratic rights, until 2047. Protests to this bill have exploded in popularity within the territory, with over a quarter of local residents rumored to have participated in at least one protest. While organizers largely maintained peaceful demonstrations, frustration with a lack of progress on grievances, as well as aggression by police, has pushed certain elements of protestors towards extremism and violence. While the Chinese government has generally allowed local police to contain the protests, civil action of this scale has been crushed by the Chinese military in the past. The future of Hong Kong’s relative independence hangs in a precarious balance, and a Chinese state intervention would likely mean the end of the only semi-democratic enclave in China. Keep Climbing, The Alchanati Campbell and Associates Team Hello Readers,
My name is Alex Zabit, and I will be putting together the new politics section of your newsletter. As a recent graduate in Political Science from UCSB, I will do my best to translate the chaos of today’s ridiculous times into easily understood concepts that, through the course of my articles, will help you all have the tools to put events into context, parse through facts and fiction, and overall better understand and predict past, present, and future events. I truly hope you enjoy what I have put together for you. Cheers, Alex Z Political Bar Talk. It will be broken down into two sections. The first, I will be choosing an abstract political concept that many of you may feel like you understand the jist of, yet may find a hard time explaining to another person. If you may find yourself in a political argument in a bar, hopefully this will help. The second, I will be discussing a current event of particular importance to international security, economic health, or stability. This event will elaborate on a real world example of how the above concept is used, or misused, to the benefit or detriment of the individuals, communities, and government affected. The Market:
Why Our System is Broken According to Ray Dalio. Lenders are lending out tons of money because interest rates (the cost of borrowing) are very low, Central Banks continue to buy financial assets adding money to investor pockets, investors are choosing to invest the money instead of spending it and they are choosing to take losses on their investments (accepting very low or negative interest rates when lending their money), and money is being thrown at start-ups at alarming rates (even when these not profitable tech start-ups already have too much investor money). Money is “free” for those who have money and creditworthiness, but it is becoming expensive to borrow for those who do not have the required creditworthiness (consumers being charged 50-200% interest on their borrowed money). The government deficit will continue to grow which will require the government to increase their debt, interest rates will remain low even though raising rates would help the government control their debt levels, and the world has been overly leveraged for a long time. Pension and healthcare liability payments are at risk. Pension fund managers are finding it increasingly difficult to find substantial returns that can meet their pension fund obligations. The US healthcare system is unstable and becoming more expensive for consumers. The three options to be able to fund pension and healthcare obligations would be to cut their promised benefits, increase the money supply or by raising taxes. Signaling Theory. Signaling Theory is the idea that the actions of high-level executives and the companies they manage give signs as to how the company is performing and expecting to perform beyond the simple earnings report. It is most prevalent in dividends. When a company increases their dividend yield (the relative percentage of the stock price paid out to investors), it displays to the marketplace that the company is ok with retaining less of their earnings (the more dividends they pay, the less they keep). If a company is ok with retaining less of their earnings, it is likely because they know, or expect based on private information, that the company is performing well. That could mean more sales in a crucial area, a potential acquisition, a new product set to debut, and so much more. As a result, investors will buy more of the stock, because based on all the signs, the company is going to perform well in the earnings season. On the flip side, if a company decreases its dividend, it tells investors that the company can no longer afford to pay that much dividend, as it will eat into their decreased profits too much. In this case, investors will sell off the stock because, in their minds, not even the executives of the company have faith in their upcoming performance. In fact, signaling theory is so important that companies will actually take on new debt in order to keep paying out the same or higher dividend even if their revenue (and bottom line cash flow) is decreasing. The Economy and Equity Market. The economy, which has exhibited 1.9% GDP growth over the last 4 quarters, leads investors to believe the equity market, which has displayed over 22% growth since January 1st, will start a decline to follow suit. Although the economy and equity market usually follow each other, with the former acting as a quasi-leading indicator for the market, this is not always true. A professor from Chapman, Mark Skousen, put this best in one of his classes, and paraphrased from his book, “A Viennese Waltz Down Wall Street”, the market and economy can grow apart, like in the Viennese waltz, but will always come together at the end. In the current global atmosphere, we see a slowing global economy, with political fears present in China and the UK, leading capital to flow from these troubled countries to a relatively stable safe domain, the US. Although the US economy is showing just OK economic data, we are relatively doing better than most other countries. This relative point is what is leading the US markets to display what seems like irrational exuberance, in what looks like a faltering economy. As fears of a global slowdown grow, and sovereign debt continues to lead further into negative interest rates, we will continue this Viennese waltz, with the equity market making new heights, and the economy falling behind. Why it's Better to Put Bonds in Retirement Accounts. When it comes to investing, it’s not how much you make that matters- it’s how much you keep after taxes. As a general rule, investments that tend to lose less of their return to taxes are good candidates for taxable accounts. The best investments to hold in IRAs and 401ks are taxable bonds and taxable bond funds. Outside of a retirement account, they’d be taxed much higher than your stock funds. There are many different types of bonds: US Treasuries, corporate bonds, high-yield bonds, and municipal bonds. Investors may be able to realize significant tax benefits by including bonds in their portfolios. There are also many different types of retirement accounts, but the most well known are the IRAs and 401ks. The Roth IRA is funded with after-tax dollars and grows tax-exempt. Bonds are generally taxed at a higher rate than stocks. If bonds are not held in an IRA, income from them is taxed as ordinary income (the federal tax rate for ordinary income can be as high as 37%). IRAs are especially attractive for holding Treasury Inflation-Protected Securities. Since the income produced by bond funds is taxable, it is better to put them in a tax-exempt account. But it is important to avoid holding municipal bonds in an IRA. $2 Trillion. In the early 1930s, a relatively small oil company known as Standard Oil of California was seeking new sources of oil from abroad when it stuck oil on the Arabian mainland and received drilling rights from the government. Several years later, Texaco bought a 50% state in the arrangement and helped find vast amounts of oil. In 1944 the company name was changed to the Arabian American Oil Company or Aramco. Aramco would go on to become the world’s largest oil supplier and support U.S oil needs as U.S policies and wars limited oil sources. In the 1970s the Saudi Arabian government began to increase its interests in Aramco and eventually took over full control of Aramco through the Saudi Arabian Oil Company. Today, Aramco is believed to be the world’s most valuable company, worth somewhere between $1.2 and $2 trillion dollars and most likely holds the title of most profitable company with a reported $111.1 billion in net income for 2018. Aramco also has the second-largest proven oil reserves and second-largest daily oil production. With stats like this, their December IPO should be a breeze as investors fight over shares, but that does not seem to be the case. Aramco’s IPO comes at a time when many investors are beginning to turn away from oil. American investors remain skeptical towards the IPO largely due to its valuation. The Saudi government originally estimated Aramco to be worth $2 trillion dollars but then dropped their valuation to $1.7, but many analysts think that geopolitical factors need to be accounted for an estimate a valuation closer to $1.2 trillion. Aramco remains at the center of several multinational disputes and is often the target of attacks aimed towards the Saudi government or western influence. The recent September attack, for example, cut Aramco’s oil production in half, such an attack on a large public company would be devastating for shareholders. Investors have also made the point that the Saudi government may only sell 2% of Aramco which would give virtually no say to minority shareholders. As if these issues weren’t enough there are reports that Aramco’s finances are heavily entwined with the government’s, stating that its profits have been used to boost government budgets and even pay for government officials' luxurious accommodations, which is something many shareholders will not stand for. These issues have to lead the Saudi government to pressure rich Arabian families to commit to investing millions in order to ensure a successful IPO. The Saudi government has also turned to China, the world’s largest oil importer to commit to the IPO. China is expected to commit around $10 billion in an effort to hedge against rising oil prices and support its Belt and Road program. There are likely going to be many more updates on this as the company prepares for their IPO and the December OPEC meeting so we will be sure to keep our readers updated. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
Happiness. The world is so angry, it’s getting harder to enjoy the little pleasures in life. Satisfaction is a rarity because we always want more. Happiness is like privacy: hard to have. What makes you happy? Life begins and ends with happiness, but with the happiness of two kinds. The first joyful and excitable, and the second calm and resigned. We are always in a rush and most strive for perfection. Little disturbances, troubles, delays, occurrences, change our mood to a negative one. When we don’t get what we want, when we compare ourselves to others, when we have high expectations... it all puts pressure on our happiness. Our subjective well-being depends not on our absolute material well-being, not even where we stand relative to others, but on where we think we stand. One secret to happiness is to ignore comparisons with people who are more successful than you are: always compare downwards, not upwards. Happy people don’t put other people down. People are happier when they do generous things and live among generous people. Expect less and appreciate more. I give everything except for what I can lose forever. Enjoy every day as it comes. Who is rich? One who is satisfied with what they have. If you can concentrate always on the present, you’ll be a happy person. Know that no one is ever satisfied with where they are. The Market:
Why are companies paying fewer dividends or no dividends? A dividend is a distribution of a portion of a company’s earnings to holders of its stock. Dividends = meaningful portion of stock returns. When a company makes money, they have the option of distributing their retained earnings in the form of a dividend, retaining the earnings and using it to pay off debt or pay for R&D, or use it to buy back their stock. When a company pays dividends, its board of directors decides what percentage of its earnings to distribute to shareholders. Investors love dividends; over the last 100 years, half of the total stock returns came from dividends. Companies pay dividends to make their shareholders happy (making the company more appealing) and sometimes companies retain so much net profit that they’re able to pay dividends and still have money left over. But why do companies not pay dividends? Some companies use their retained earnings to fuel its growth, they choose to use the money and put that money to better use (Research and Development, Acquisitions, etc.), shareholders are taxed on the dividends they receive and some investors don’t want to pay extra taxes so companies choose not to distribute dividends, and companies that start to pay dividends, it can be difficult to stop so they are stuck paying dividend (investors see a drop in dividend payout yield as financial instability). Berkshire Hathaway, the company founded by Warren Buffett, is a well-known company that does not pay a dividend. The company prefers to reinvest profits in things that allow the company to improve its efficiency, expand its reach, create new products and services, and further separate themselves from the competition. Shareholder Yield by Meb Faber. This is a short research piece on capital allocation and investing. “Returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use in deploying capital and raising capital. Dividends and their reinvestment represent a major portion of a stock investor’s total return over time. Reinvested dividends represent over half of an investor’s annualized returns (over the period of 1871-2011). By reinvesting dividends and compounding the portfolio returns, the final value of the total return portfolio turns out to be 99.8% higher than the non-dividend portfolio. Dividends contribute virtually all of the final portfolio value versus a price only return. A study done by Elroy Dimson, Paul Marsh, and Mike Staunton showed that higher dividends yielding stocks outperformed low dividend-yielding stocks in 20 countries from 1975-2010. One of the most important qualities of a successful investment analyst is the ability to adapt to change. Companies have been lowering their dividend payout ratios for the past 70 years. One of the reasons for this is beginning in the late 1990s, share buybacks have outpaced dividend payments. The purpose of a company is the maximize long-term value.” Why dividends are important. Over the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities. Portfolios consisting of higher dividend-yielding securities produce returns that are attractive relative to lower-yielding portfolios and to overall stock market returns over long measurement periods. Stocks with high and apparent sustainable dividend yields that are competitive with high-quality bond yields may be more resistant to a decline in price than lower-yielding securities because the stock is in effect “yield supported”. The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings. The payment of dividends has been declining and the repurchase of shares has been increasing. The US Healthcare System. The United States spent $3.65 trillion on healthcare in 2018, more than any other country and more than the entire GDP of Brazil, the U.K, Spain, or Canada. At current rates, healthcare spending will increase to 20% of US GDP by 2027. This spending equals an average of $11,212 per person. Despite having some of the most advanced healthcare technologies in the world and spending these vast amounts of money, the U.S healthcare system is ranked 27th in the world. In the U.S, people are/were (healthcare and tax law has changed sporadically under the current administration) required to have health insurance to help offset the high costs of healthcare. Health insurance can be provided by the federal government, state government, or by private providers. Private providers generally offer either a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). HMO plans have lower monthly premiums, low or no annual deductible, require a primary care physician referral before seeing a specialist, and provide a list of network providers, but if you chose a provider outside of their network you will have to pay 100% of the cost. PPO plans offer more flexibility, allow you to see more out of network doctors, and are usually offered by employers to their employees. The federal and some state governments also offer health insurance to provide for lower-income individuals and families. Despite these options, healthcare costs are still devastating for the average family which is why in a recent poll 87% of voters in a recent poll say it is very important for a candidate to discuss healthcare. This overwhelming voter interest in the topic has led many of the presidential candidates to release healthcare plans. These plans all aim to lower the cost of healthcare and ensure all Americans are covered, but use different tactics, some candidates want to simply improve our capitalistic model, some want to socialize the entire healthcare system, and others think a mix between the two may offer the best solution. Whichever the strategy might be, these healthcare plans are going to cost a lot. This week Elizabeth Warren released her strategy to pay for the massive $20.5 trillion needed to pay for her proposed since-payer health care plan. This plan does not increase the cost of healthcare on the average taxpayer and will likely save the average family tens of thousands of dollars in the long run, but it boldly targets wealthy individuals and corporations to pay for the cost. Some argue that this tax burden will stunt economic growth, while others believe that in the long run strategies like this will improve the efficiency of the healthcare system allowing the economy to grow due to the potentially billions of dollars that consumers would save on healthcare and could use to increase their spending or investments. Whatever the outcome may be healthcare will continue to be a heavily debated topic of the upcoming election year. Americans’ Levels of Concern about Personal Finance. 1. Not having enough money for retirement. 2. Not being able to pay medical costs in the event of a serious illness or accident. 3. Not being able to pay medical costs for normal healthcare. 4. Not being able to maintain the standard of living you enjoy. 5. Not having enough money to pay for children’s college. 6. Not having enough to pay for normal monthly bills. 7. Not being able to pay your rent, mortgage or other housing costs. 8. Not being able to make the minimum payments on your credit cards. Online Installment Loans. Online installment loans are personal loans that borrowers can apply for online. The average borrower balance is $16,259, the interest rates are often extremely high starting in the double digits but can range from 34% to 200% and have much larger maturities. In recent years online installment loans have grown as subprime lenders shift from payday loans to offering online installment loans (lenders are targeting the middle working class). The volume of the number of installment loans approved has grown 8x since 2014. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market:
Bank CEO and Director Sentiment on Negative Rates.
Does being smart make you rich? 80% of wealth is owned by 20% of the people. Intelligence is measured by IQ, where the average is 100, but nobody has an IQ of 1,000. Or, hard work is measured by the hours you work where some people work more hours than average, but nobody works a million times more hours than the average. But when being rewarded (earning), some people get millions or billions more than the average ($$$$). The wealthiest people are not the smartest or most talented or most hard working, they are the luckiest according to a study. Debt and Equity. What is the cheapest financing option, a company selling debt or a company selling equity? The answer is debt financing. Reasons: you get an income tax benefit on the interest component that is paid to the lender. If the firm goes bankrupt, equity investors lose everything, but the debt holder has the first claim on company assets. You do not give away ownership or a stake in the company. The cost of equity is more expensive due to its riskiness (cost of debt is lower than the cost of equity). Generally, companies in stable industries with consistent cash flows use debt financing (taking out a loan or selling bonds) more than equity financing (selling shares of the company). The UC Endowment Fund. Strategy, keeping with set fundamentals and standards, and being able to adapt and innovate quickly can easily differentiate the best-performing funds with the worst-performing funds. The UC fund thanks its “agility” for their investment success. Agility means the ability to move quickly and easily, and their agility allows them to find investment opportunities and prosper. “We move quickly and hold what we believe to be lucrative assets for the long term,” (2018-2019 Annual Report). With the current economic environment plus the instability and uncertainty in geopolitical events and climate change, agility is a strength. As of the beginning of 2019, the fund’s assets under management totaled $126.1 billion with a 1-year return of 8.2% for their endowment portfolio and a 1-year return of 6% for their pension portfolio. The UC Endowment Fund believes in: less is more, risk rules, creativity pays, concentrate and build knowledge. Interestingly, they recently adopted a sustainable strategy and are starting to sell out of their fossil fuel assets and starting to buy into ESG investments. The fund has been performing well, cutting costs, leveraging, building and cultivating better relationships, and this has been partially due to the leadership. The CIO and Treasurer of the fund, Jagdeep Bachher, has said, “Leaders are measured by how they lead when things turn bad.” The biggest determinant of returns is asset allocation. They are changing their investment strategy to a concentrated set of assets that they understand deeply, they are reducing their number of investments, and their main focus is risk management and growth. In order to perform well as an endowment fund or an investment fund, this is a great model to follow. Business Ethics. We all know that the bottom line for a business is the cash they bring in. At the end of the day, a typical business exists only to generate profit. That is how a capitalist society operates. Accordingly, there exist some extreme lengths that people will go to in order to make money. Often times, these measures are taken as a result of a conflict of interest between an individual and a company. Ethical considerations have to be made, and it is important to not fall victim to moral myopia (where you let your own unethical behavior slide due to some false rationalization) or ethical fading (where you are so focused on one aspect of a situation, such as the potential revenue, that you lose sight of ethical considerations). Recently, there was a revelation about a giant company that is the epitome of all ethical issues fusing into one perfect storm. Boeing, who is now infamous for several fatal crashes that took the lives of hundreds, is the perpetrator here. The crashes happened last year, but it was revealed last week that the malfunction in the design was known about as early as 2016. A message conversation between two Boeing executives/pilots showed that they knew the plane was malfunctioning. We are no aviation experts here, but the MCAS was erroneously engaging itself frequently, and causing planes to nosedive. Even though they were aware of this, either they or other upper management would not bring it to light in front of the FAA. They were too concerned about competing with Airbus and making money. As a result, hundreds of people are now dead, and the willingness to accept unethical behavior is to blame. Quantum Supremacy. In November 1939, John Vincent Atanasoff flipped the switch on the world’s first electronic digital computer and fostered in the digital age, an age of untold potential that connected people and spread information across the world allowing for a period of unprecedented technological development and economic growth. As of this week, Google had claimed “quantum supremacy”, marking the beginning of the end of the digital age as the world prepares for the quantum age. Quantum supremacy is a term used to mark the point at which quantum computers have passed the capabilities of the current computer architecture and is something physicists have been after for decades. The latest test of Google’s Sycamore quantum computer proved that it could complete a complex calculation in 200 seconds. The reason this is such a big deal is that it would currently take the world’s best supercomputer roughly 10,000 years to complete that same problem. That makes Google’s Sycamore computer an unbelievable 1.5 trillion times faster. The reason is traditional computers use bits to process data where the data can exist as a one or a zero, quantum computers process data in quits which can exist as a one, a zero, or a zero and one simultaneously. This small processing difference allows the processing power of a quantum computer to scale exponentially. Physicists even believe that quantum computers will double Moore’s law, meaning the power of these computers could quadruple every couple of years. Google’s achievement has allowed the U.S to surpass China as the world’s leader in quantum computing, but this lead won’t last long. Quantum computers have the potential to make an entire country un-hackable or hack into the communications of any other country, so the first country to truly reach and apply this technology will instantly have the most secure military possible. The U.S may not remain in 1st place for long, as China is already years ahead of the U.S in Quantum communication technologies, has launched the first quantum satellite, and is investing billions of dollars more than the U.S into quantum computing. Tesla's Profitability. Big news for Tesla this week as they achieved their first profitable quarter since last year, earning $143 million. Tesla short-sellers, on the other hand, lost $1.5 billion. Despite being a company that is valued at over $50 billion, Tesla is still largely running like a “Silicon Valley start-up”, focused on growth rather than profits, taking on large amounts of debt, and making “bet the company” business discussions. Shareholders have been (somewhat) patiently waiting for Tesla to transition to a company that is focused on earning regular profits and achieving steady and sustainable growth. Tesla may finally be at a place to allow this to happen. Tesla has $5.3 billion in cash, is earning an automotive gross margin of 22.8%, while their energy business is growing, and their new Shanghai Gigafactory has started production for the Chinese market. With the lessons learned from producing the Model 3, Tesla’s management believes that they will be able to easily and efficiently scale production for their new crossover utility vehicle, the Model Y. In other news, Tesla owners will get some significant updates in the comings weeks. Tesla’s engineers have found another way to increase the efficiency and power of their vehicles and will send a free update giving Model 3s 5% more power, while the standard range plus will receive a mileage boost to around 250 miles per charge; other Tesla models will also receive a power increase around 3%. Tesla recently released “smart summon”, which allows owners with the full self-driving package to summon their car from within a parking lot to come pick them up. While this update was impressive, many drivers reported minor flaws, with some reporting major flaws in the software. Thanks to Tesla’s large fleet of cars and their neural net commuter, Tesla has compiled data from over 1 million smart summon uses and will send an update next month to improve its “smart summon” software. Our Rights. With the rise of authoritarian leaders across the world, it is important to remember that as citizens of the United States of America we are endowed with certain rights. As long as you do not infringe on the rights of others you are allowed the freedom to express yourself, speak freely and worship as you wish. You have the right to vote in elations once you are 18 years old and run for office once you are of proper age. The right to vote comes with the responsibility to participate in the democratic process, which means if you don’t agree with the course of action your government is taking you should educate yourself on the process and on potential candidates who intend to change this process and then vote for them. In criminal or civil circumstances; you have the right to sue anyone, you have the right to a fair trial in front of a jury of your peers, you have the right to not be subject to unreasonable search and seizure of you or your property, if arrested or accused you have the right to remain silent, and you have the right to a speedy trial, legal counsel and to face your accusers. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
Identity. What makes you, you. The masks we wear — or don’t wear — shape the way that we interact with the world around us, and they determine the space in front of us. That inner person (your inner voice) is who you are. What you tell yourself and what you express to others is what you are. And your reflections on life and your reactions to life will determine where you are. Your identity is only as valuable as its ability to help you create a sense of order in your mind about what is going on in the world. Live what you preach and accept your reality as best as you can. In a world dominated by distractions, we are increasingly getting out of touch with our ability to direct ourselves to where it matters most. We don’t become who we are by staying as we are now. There’s a constant fight between who I want to be versus who I should be. Should I always be nice and genuine? Positive and soft-spoken? Or can I benefit from being ruthless and emotionless? With a thick face and a black heart. The Market:
Characteristics of a Fund Manager. When people compete, their success is often predicted by their techniques and their track record. Mutual fund managers rely on a variety of techniques when trying to beat their benchmarks. We can tell whether a manager is skilled by comparing his investment decisions with the decisions of other skilled managers. These managers have strong leadership, are open to experimentation and risk, are willing to challenge the status quo, and focused on the customer. Managers who make similar investment decisions have similar skills. Earnings Season. Q3 financial earnings season started off with a boom earlier this week. Out of the major financial companies, we saw only Wells Fargo miss earnings by a large margin, with Goldman hitting expectations, and Charles Schwab, JPM, BNY Mellow, PNC, BOA, and Morgan Stanley significantly beat earnings. In the current economic environment, this financial earnings season was very important, as the underlying reasons for beating/missing earnings for financial companies are usually indicators for how the economy is forecasted to perform. Jamie Dimon (CEO of Morgan Stanley) attributed, “the consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels,” with the opposing being, “this is being offset by weakening business sentiment and capital expenditures are mostly driven by increasingly complex geopolitical risks, including tensions in global trade.” This is the current sediment from most financial institutions as they are releasing earnings. Wells Fargo earnings miss seems to be attributed to previous controversies they were facing earlier this year with the fraud. We are Melting. According to a report from the National Oceanic and Atmospheric Administration, the Arctic has lost 95% of its oldest ice, and 78% of its ice volume or roughly 10 trillion tons of ice since 1979. Rather than working to find solutions to combat this massive geological crisis and emplace restrictions to protect what’s left of the Arctic, the World’s leading nations are scrambling to gain territorial and political ground to capitalize on the resources opened up by the melting ice. Large amounts of oil and natural gas have been discovered in the Arctic, shipping routes are staying open for more months of the year, and soon enough ice will melt to allow for a Northwest Passage where ships could sail north from the U.S to China in 20 days fewer than it currently takes. Last weekend world leaders, politicians, scientists, and environmentalists met at the Arctic Circle Assembly to discuss climate change, security and the exploitation of new oil and gas discoveries. Representatives from the U.S, China, and Russia expressed their interest in Arctic exploration and asserted their right to do so. Russia laid out its plans for new liquified natural gas fields, which they plan to continue their skyrocketing industry that has already quadrupled since 2016. Russia is currently sailing a nuclear powered, ice-breaking ship through the Arctic to emplace infrastructure along with small villages in preparation for the coming Arctic boom. China has proclaimed itself a “near-Arctic” power which the U.S and its allies have condemned. China has planned several multi-billion dollar initiatives to reduce its trade logistics costs in the Arctic as part of China’s Belt and Road initiative. The melting ice is forcing nations to redraw their maps and disputes are already breaking out overfishing, mining, and land rights. To protect resources and shipping routes potentially worth 100’s of billions of dollars, Arctic powers are expanding their military’s presence in the arctic and tensions are rising quickly. The U.S, Russia, China, Canada, and Norway are all slowing increasing their Arctic military might with new military bases, increased troops, and large scale drills. Over the next decade, we may see the Arctic turn into the next geopolitical flashpoint similar to the South China Sea today. Behavioral Finance. “The human mind is fundamentally not a logic engine, but an analogy engine, a learning engine, a guessing engine…” The study of behavioral economics allows us to understand the decisions we make. Behavioral finance aims to influence and improve our financial decisions. We are more sensitive to losses than gains and overly influenced by short-term considerations. We seek to conform to group behavior and prevailing norms. We overweight the importance of recent events. We are poor at assessing risks and gauging probabilities. We over-estimate our own abilities. We focus on outcomes. We are often persuaded by captivating stories. Have a long-term investment plan. Automate your savings. Rebalance your portfolio. Don’t check your portfolio too frequently. Don’t make emotional decisions. Don’t trade, invest. Save more tomorrow. Individuals should build reserves that can provide an acceptable standard for living in retirement. To achieve this, they should start saving early. What’s hurting us is our tendency to think that the present is more important than the future, and limits to our self-control. Ask yourself these questions: What is the problem or issue? What is the rational or optimal decision? How do you actually behave? What is causing this difference between what you should do and what you actually do? How can we alter behavior to deliver better outcomes? Reasoning Logic Down to its Roots. What drives us? What formulates our thoughts? What makes us do what we do? It starts with nurture. How our parents raised us, taught us, punished us, rewarded us, loved us… Then nature. How community-based your family is, how close your family is, where you live, who you hang out with, where you went to school, religious beliefs, economic-political standing… Then when you leave the nest and go out into the world, it ends with individual growth and understanding, and your contribution to the world when you no longer exist. Who you make yourself out to be, the core rules and principles that you live by, the experiences and mistakes that you learn from, the relationship you have with yourself and with others, the restrictions and disciplines you impose on yourself… We now live in a world where we’ve connected to everything except ourselves. We read up on others, obsess over the latest gossip and keep up with the hourly following. We lost our courage and increased our insecurity. The secret? You will become way less concerned with what other people think if you when you realize how seldom they do. Everybody else is too worried about themselves to really care what you do. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market:
Fed Minutes and Market Sentiment. Inflation and inflation expectations are quite low. There is much support in lowering interest rates, where cuts could help the US economy ‘power through’ recent signs of economic weakness. But lowering interest rates more may take away ammo that the Feds might need later. If there were a really big shock, we could expect interest rates to go down to zero. The goal is to use this unconventional monetary policy, cut rates, bypass the recession, and then raise the policy rate back up. We may be seeing a flatter yield curve as a norm with long treasuries becoming a favorite hedge. We will most likely see another rate cut before the end of the year, meaning, interest rates will lower again, the cost of borrowing will decrease, and everything pegged to interest rates like bank account savings rates, credit card APR, and mortgage rates will decrease as well. We should be cognizant of the upcoming earnings season, with lower expectations of positive earnings growth. Housing has been a drag on GDP for 6 straight quarters but it appears it will be positive this quarter. New home sales, housing starts, and permits are all up double digits year over year. Lastly, we should realize that if a recession does occur, it will be the most anticipated recession of all time. Poker and Hedge Funds. There is a correlation between skill in poker and skill in hedge fund management. Hedge fund managers who have won at least one poker tournament significantly outperform managers who have no wins. Skilled poker players are better at hedge fund management and fund managers experience an economically significant increase in net inflows after winning in a poker tournament. Poker is a game of luck and strategy. “The Perfect Bet” by Adam Kucharski is a great book to learn about probability and the ‘smart way’ to gamble in blackjack, poker, other card games, trading, and horse racing. One tip out of the many tips given is: [In poker] bet if your cards show very low or very high numbers and check otherwise. Bluff only with your worst hands. Bluffing won’t persuade someone with a decent hand to fold, and it’s not worth betting on the off chance that your mediocre hand will come out on top. The best option is to check and hope for the best! The Art of Thinking. There is no real structure that you are forced to operate within unless your life depends on it. You can create your own rules if you build the right supporting systems. Our environment controls far more of our behavior than we realize. Creating better habits and opportunities begins with deliberately shaping your surroundings. The real purpose of life is to create a story in which you can constantly define what it means to be better tomorrow than you are today. That’s what we are programmed for. Happiness, productivity, presence, and fulfillment all find their roots in your ability to proactively control where you direct your mental energy. Take control of your attention. You don’t have to be an expert scientist, artist or psychologist, but you should know the fundamentals in all of the major disciplines if you want to optimize your thinking. Over a long enough timeline, if you seek to reduce uncertainty, you can optimize your exposure to luck. Success is often random, but that doesn’t mean it can't be designed. How the Trade War could End Up. The trade war will end with both the Chinese and American people less prosperous than they would otherwise have been. President Trump’s objectives are to raise economic growth and create jobs by boosting investments. China’s long-run goal is to become a modernized and prosperous economy’ by the mid-twenty-first century. The trade war started when the US imposed tariffs on steel and aluminum imports in March 2018. So far, the US has imposed duties on more than half of its imports of Chinese goods and China has retaliated with tariffs on more than 70% of its imports if US goods. A trade war is costly for both parties. While the US will impose a larger cost on China in the initial years, it will suffer an impact on growth. We are currently seeing positive trade talks from this week and positive sentiment for the talks to come in the upcoming weeks, where we may see a resolution to this almost two-year global disruptor. Largest Offshore Banking Country. When you think of offshore banking, most people consider the Caymans, Luxembourg, and Switzerland as the main sites. Well, all three of these countries fail in comparison to the largest of the offshore banking countries. Offshore banking refers to a location off-coast from one's domestic country, which offers tax advantages, and other favorable attributes one couldn’t get in their own country. As of 2014, the United States is considered to be the largest offshore banking country, to those not actively living here, due to the refusal to sign the common reporting standard, which means our government does not actively report foreign holdings. This has effectively made the United States the largest tax haven in the world, for foreign capital. US Stats. By total area, the United States is the third-largest country in the world behind Russia and Canada and has the third-largest population at 328 million people, after China (1.39 Billion) and India (1.37 Billion). Despite not having the largest landmass or population, the U.S has the largest GDP at $20.5 trillion, followed by China with $13.6 trillion. This gap is expected to close as over the next four years with estimates that U.S GDP will be worth around $24 trillion in 2024 and China at $21 trillion. Even with the largest GDP, the U.S ranks 9th in GDP per capita at $59,895 with Luxembourg at 1st with $105,712 per capita. International trade has consumed the news over the last two years due to a trade deficit with China. The U.S ranks second place in annual exports worth $1.54 trillion in 2017, with China exporting $2.26 trillion. The same year China led the world in imports at $2.34 trillion with the U.S at second with $1.35 trillion. It should be noted that despite an ongoing trade war with China the United States’ trade deficit has increased to a post-recession high of $621 billion. Japan leads the world in public debt with a debt to GDP ratio of 234.9% while the U.S ranks 13th with a ratio of 106.2%. This debt is in large part due to military spending where the U.S has a massive lead. In 2018, the U.S spent $649 billion on its military, with China in second spending $250 billion, the following 6 countries only spent a fraction of that, spending between $50 and $65 billion. Outside of these dollar amounts, several other rankings offer some insight into the overall country compared to the world stage. The KOF index looks at social, political and economic indicators to gauge how globalized a country is. Switzerland was ranked the most globalized country scoring 91.17 points out of 100, the U.S ranked 23rd and scored 82 points. The U.S ranked 9th in infrastructure, with Singapore in first. The Economic Freedom Index examines indicators like government spending, property rights laws, judicial effectiveness, tax burden, business freedom, and other similar aspects to rank how "Economically Free" a nation is. The U.S ranked 12th place with Hong Kong coming in first (current circumstances notwithstanding). In 1990 the U.S was ranked 1st in both education and healthcare but now ranks 27th, although its university system is ranked 1st in the world. Compared to the rest of the world’s leading countries, the United States has a low tax burden that averages 25.5% compared with several European nations whose tax burdens are around 45%. Finally, an important but often overlooked indicator is corruption, the U.S had constantly ranked 16th place but recently dropped to 22nd in corruption. Denmark ranks as the least corrupt country. These statistics should offer some context and background as we continue to discuss future economic news. It should be noted that these numbers are the latest reported for all parties and most come from 2018 or 2017. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market: Charles Schwab cut their trading fees/commissions on equities and options trading to zero. This caused brokerage stocks like Ameritrade (TDA) and E*Trade (EFTC) to decline significantly, with the result of all major brokerage companies cutting their trading fees to 0. We have tariffed our way into a US and global manufacturing recession. US service industries are slowing down. Gen Xers are saving little, are the most debt-burdened of all the generational groups (balances averaging $134,000) and will be expected to have larger sums for retirement. 42% of Gen Xers are focused more on paying off debt than on saving for retirement. Rumors of tariffs placed on $7.5 billion EU, manufacturing data weakening, the labor market tightening, hiring slowing, and consumer demand decreasing… some of the reasons why stocks are falling. Expect more hedging with Gold and Bonds. Corporate insiders are selling stock at an impressive pace and corporate stock buybacks have been slowing. We might see additional rate cuts this month. US yields are relatively higher than other developed regions such as Europe and Japan, so the US has more room to compress. The European Central Bank is signaling that interest rates in the eurozone will remain negative for a long time, pushing investors further into risk to seek some return. Secret of getting people on the right track for retirement: Have a mandatory savings system in place! A robust labor market, rising wages, and low interest rates continue to support consumption and housing. Are Markets Efficient? This theory states that market prices reflect all available information, so there is no mispricings and no such thing as “value” investing. Risk aversion shifts throughout time and readily available information changes and grows with time. But it is almost impossible to test this theory. You can ask yourself: Can you beat the market? And, are prices, right? Prices fluctuate too much to be able to be explained by a rational process, and returns do have different variations according to asset class and investment instruments. If markets were efficient, there would be no such thing as “bubbles”. Bubbles represent misinformation and “overvalued” securities. Bubbles are when prices exceed a rational valuation of the securities being traded. Is there a difference between value and pricing? In value investing, you invest on the basis of the company’s fundamentals being misrepresented and on the positive future free cash flow growth. Based on the terminal growth rate, your expected return from the weighted average cost of capital, and the intrinsic value of the company, you buy or short the company based on the difference between its intrinsic price and current price. So if markets are not efficient, where are the inefficiencies and how inefficient are they? This question shows the favor between value stocks versus growth stocks. The best bars in the world. Slowing of Global Manufacturing. Recent manufacturing data leads us to the worst period for manufacturing since the last major recession (2007-2009). This is shown through the ISM index (Institute for Supply Management), which has been in a steady downfall since the majority of tariffs were imposed on China starting in June 2018. This was only made worse this last week, with ISM falling from 49.1% to 47.8%. Although a small fall, the ISM has a key point of 50%, with numbers above indicating an increasing business environment, and below the contrary. The main reason for this sharp downward movement has to do with the trade war and tariffs the US and China have been imposing. Although the cause is pretty clear, the effects can get pretty complicated. People tend to believe this is an indicator of an impending economic slowdown, with manufacturers forecasting lower demand, and a potential recession. Personally, I disagree with both of the former arguments. I believe this is solely the effect of a decrease in the supply of raw materials from China, and manufacturing becoming more expensive in the US. Realistically, manufacturing only accounts for about 11% of the US’s total GDP, while it accounts for 27% of China’s GDP. The single greatest mistake investors make. Recency bias. Trend following. Momentum investing. The illusion in which a thing that has recently come to one’s attention suddenly seems to appear with improbable frequency shortly afterward. Not using technical indicators and fundamentals which creates blind spots. A psychological dynamic that operates according to well-defined psychological principles based on the belief that past growth in market prices is strong evidence for more growth in the future. Most recently, this has been shown in 2019’s IPOs. IPOs are the hottest, new companies that go public; where investors like you and I can publicly trade them and buy ownership in them. Since inception returns: Beyond Meats +120%, Peloton -11%, Uber -29%, Lyft -50%, Pinterest +12%, Zoom +25%, Levi Strauss -12%, Fiverr -50%, Slack -36%, Chewy -30%, and CrowdStrike Holdings +10%. This shows that trend following and buying into “hype” is not a smart investing plan, and its very risky and most of the time not profitable. Productivity and Motivation. Productivity is the name we give our attempts to figure out the best uses of our energy, intellect and time as we try to seize the most meaningful rewards with the least wasted effort. It isn’t about working more or sweating harder, it is about making certain choices in certain ways. Productivity rises when people do the same kind of tasks over and over. Repetition makes us faster and more efficient because we don’t have to learn fresh skills with each new assignment. To motivate ourselves, we must feel like we are in control. When people believe they are in control, they tend to work harder and push themselves more. When we start a new task or confront an unpleasant chore, we should take a moment to ask ourselves “why”. If you can link something hard to a choice you care about, it makes the task easier. The best productivity strategies: assign a fixed period of time to a task, schedule it and stick to it. Prioritize. Politely decline (say no!) so that you can focus on the most important work. Moving around does a lot for you. Clear your desk of distracting devices and see how much more you get done with fewer distractions. Take short breaks. Eat well. Choose when to check your email. Organize your workspace. Wake up early. China’s Debt. We've all heard about how China's economy is seeing slower growth, and how many analysts believe this will lead to a global economic pull-back. One interesting aspect of China's economy is their debt level. In the first quarter of 2019, China's debt was over 300% of its GDP, up from a year ago. To put it into perspective, the United States', which has an infamous debt, debt-to-GDP ratio was just over 106, meaning total debt was 106% of GDP. China has nearly triple that. What led to all this debt? The Chinese government pumping out credit in order to spur economic growth. Now that growth is slowing down, this debt issue is becoming more serious. One interesting venture that this debt was used on is Ghost Cities. Essentially, China has constructed about 50 cities, each designed to house hundreds of thousands of people, and most are completely empty. On the one hand, individuals believe that this has allowed China to boost its infrastructure and investment in property. Furthermore, each city has the potential to create jobs. However, I have a more critical view. I see the construction of these ghost cities has a faux method of mimicking economic growth. Obviously, China's economy has seen immense legitimate growth. Yet, these Ghost Cities are not authentic infrastructure enhancement. It’s a way of creating fake, unsustainable jobs that there is no demand for. In doing so, they are disrupting the natural supply and demand market. Furthermore, there is no plausible way to continue this process. They can't just keep building cities that nobody will live in. I believe that this "project" headlines the debt issue, and this debt issue is one that will lead the already in progress depression of the Chinese economy. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market. President Trump could be impeached. Even though Beijing withdrew its extradition bill, the bill that caused chaos in Hong Kong, protests are still occurring. The next step would be to declare a national emergency and send troops… which investors speculate could trigger a global stock market selloff. Value stocks are starting to underperform, lagging in return compared to fundamentally weaker stocks, is value dead? Where are the rich putting their money? (See the picture below) Index funds make the market more efficient. Quarter 4 estimates (corporate earnings and economic data) are not looking positive. The Consumer Confidence Index decreased in September (Current: 125.1, Last: 134.2). The global economy works best when goods, services, people and ideas flow freely across administrative boundaries. A bubble is viewed as the asset or market that is expensive relative to its potential growth and income and the marginal buyer in the asset class or market appears to have little interest in valuation. News and increasing uncertainty about trade tariffs decrease investment and activity. Advances in AI and robotics will continue to disrupt the labor market and the amount of skilled and unskilled jobs available. Four output and living standards to rise over time, either people need to work more hours or people need to be more productive while working. The future of work. Automation technologies promise to deliver major productivity benefits that are too substantial to ignore. Automation is expected to displace: office support, food service, transportation and logistics, and customer service roles. But the economy will create jobs in: healthcare, science, technology, engineering, math (STEM), and jobs that require personal connection and interaction. Those with a high school degree or less are four times more likely to hold automatable roles than those with bachelor’s degrees. High-growth hubs and megacities are where you’ll see the most employment. In the US, 60% of job growth by 2030 could be concentrated in 25 cities. Young workers, workers over 50, and Hispanics and African Americans are the workforces that are most likely to be displaced. 40% of Americans are in occupational categories that could shrink by 2030. With the jobs displaced and phased out, new jobs will be created, more than making up for those lost. Energy Outlook 2019. Key takeaways from this study (the study’s estimates are for 2018-2050): The Organization for Economic Cooperation and Development (OECD) is an economic organization that has 34 members (all developed countries), founded to boost world trade and economic progress. GDP estimates for 2018-2050 for the OECD countries is 1.5% compared to 3.8% for non-OECD countries. The [estimated] fastest-growing countries (non-OECD) for the period of 2018-2050 will be: India, Africa, China, and the Middle East). Japan and Russia are the slowest-growing economies (both have declining populations and aging workforces). China is estimated to not grow as fast (grew 10% annually from 2000-2010). Energy consumption will grow by nearly 70% for non-OECD countries. The industrial sector (refining, mining, manufacturing, agriculture, and construction) will account for the largest share of energy consumption. Liquid fuels will continue to be the predominant transportation fuel and an important industrial feedstock. Renewable energy will become the leading source of primary energy consumption by 2050 (although renewable energy is the world’s fastest-growing form of energy, fossil fuels will continue to help meet energy demand). Global natural gas consumption will increase by more than 40%. Where will the next crisis come from? Crises tend to have a large element of unpredictability. Periods with a higher number of crises/shocks coincide with higher levels of debt and with it higher deficits. Leaving the precious metal-pegged currency systems has encouraged budget deficits, rising debts, huge credit creation, loose monetary policy, and financial deregulation (In a gold standard world, mining new gold was the only stable way of increasing the money supply). Extremely high global asset valuation and low economic growth relative to the past could cause an asset price correction. The central banks have made yields very low causing other asset prices to rise. Investing in the future. What is the future going to look like? What will be popular and profitable? What will consumers be buying and using? What will be essential and what will be disrupted? Where are the trends leading to? What are the future trends, consumer preferences, and behavior? Here are our thoughts: companies that contribute to a more sustainable economy like electric vehicles (the world is going green and not by choice, by necessity), biotechnology companies working in the agriculture space (agriculture will be disrupted by irregular weather patterns. What can solve that?), solar companies and other renewable power companies (the new sources powering the world), waste management and water purification companies, ESG ETFs, data storage and data center companies, telecommunication companies, US opportunity zones (for tax purposes), investing in developing and emerging markets like India, Nigeria, Vietnam, Mexico, Russia, Brazil, etc., cybersecurity companies, AI companies, liquified natural gas, and cannabis. These investment types are based on intuition and experience/knowledge of the world we live in and how the world will be in the future. Introduction to Bakkt, Bitcoins' new futures market. Bakkt is bitcoins first US compliant futures market, offering an investment vehicle for institutions and US investors to safely purchase and hold bitcoin. This exchange is run by ICE (Intercontinental Exchange), who also operates the NYSE. This exchange opened to the public earlier this week, Monday, September 23rd, with first days volume being disappointing, around 200k USD. Although volume was substantially higher later in the week, reaching around 700k USD, this still fails in comparison to even a lesser traded futures market, such as the lean hogs commodity, with volume around 2m$. This market does bolster a few different attributes to the current capital markets, being that it is open 7 days a week, and is only closed for 2 hours every day to finalize closings. In my opinion, a 24/7 market has quite a lot of drawdowns’ and isn’t nearly as good of an idea as it sounds. Operating constantly leads to a lack of active trading hours, and increased potential for manipulation. Shortly after opening, bitcoin's price fell sharply by around 19%, from 10500$ to 8500$. It seems that the hype that has been circulating for the past year, regarding Bakkt’s launch and constant delays, is all but over. Global population changes and predictions. By the year 2030, the world’s population will grow by 1.2 billion people, with 97% of that growth occurring in developing countries. Over the same time, cities will expand to hold a record 60% of the world’s population. This data has large implications for the economies of the world as population growth or decline directly impacts many aspects of the economy including per capita output, per capita income, and the standard of living. For example, Russia is currently facing an annualized population decline rate of 6% and is expected to lose over 9 million people by 2030. This decline is one of the contributing factors to Russia’s ongoing finical crisis. On the other hand developed countries with steady population growth like The United States are expected to see correlated economic growth. The bulk of population growth will occur in China and India which are expected to grow by 67.7 million and 224.3 million people, respectively. This growth will continue to fuel the recent economic growth as long as the countries can successfully allocate resources quickly enough to provide for food, housing, and jobs to account for this unprecedented population growth. By 2030 the median age will increase to 33.2 years which is generally good news because the ideal median population should be around 35 years, so the bulk of the working population is working in productive, high paying jobs that contribute to growth and provide for the retirement of the previous generation. Japan has one of the worst future outlooks with an expected 5% population decrease and a median age of 51.6 years. After decades of improving life expectancy and falling birth rates, Japan now had a rapidly aging and shrinking population. In 2016, 86% of employers struggled to fill open jobs while most filled positions are worked by people who are over 50 years old. Without young people entering the workforce, the government and companies are struggling to continue to provide pensions and retirement care to retirees. This has contributed to Japan’s shrinking economy as fewer people means fewer goods and services are produced and in turn, fewer goods and services are purchased. One of the paths Japan is taking to combat this issue is a focus on the robotics industry, which the current Prime Minister hopes to quadruple. Japan is working to use robots to help with everything from increasing productivity, to taking care of the elderly, to robot wolves that chase away wolves as they approach city limits. So, if you make it to Japan in the next few years don’t be shocked to see a country with people and robots working hand in hand to usher in a new era of Japanese economic growth. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market. Fed cut another 25 basis points. The newest projections estimate that Social Security will be insolvent in 2034 and Medicare in 2026. 20% of Americans are illiterate. Lacking knowledge on a topic makes it difficult to read and learn about. Coal and nuclear energy are being displaced by natural gas, wind, hydropower, and solar energy (shown in the graph below). Chronic absence has a huge impact on a student’s education and the four school conditions for learning include physical and emotional health and safety, sense of belonging and support, academic challenge and engagement, and social and emotional competence. Most people have 100 10 minute blocks of living time each day. You have to think about everything you spend your time doing in the context of its worth in blocks. A human isn’t simply a perfect survival creature—it’s also just the right element of a perfect survival tribe. More than half (53%) of U.S. CFOs believe that the U.S. will be in recession by the third quarter of 2020 and 67% believe that a recession will have begun by the end of 2020. The value of financial advice. Does professional advice contribute to investor value? Vanguard did a study to test advisor value in their Personal Advisor Service to see if professional advice increased a customer’s portfolio value, financial value, and emotional value. Portfolio value comes from building a well-diversified portfolio that generates better after-tax risk-adjusted returns net of all fees, that matches with the client’s goals and risk tolerance. Financial value comes from the achievement of the client’s benchmarks or goals like education funding, retirement funding, and growth of wealth. Emotional value comes from the advisor-client relationship and the trust and confidence involved. From their study, after clients were advised, three distinct changes happened: risk-levels were adjusted, high cash reserves were invested in fixed income securities, and home bias was eliminated. Professional financial advice helped clients make more and have a higher probability of meeting their retirement goals. "The Art of Worldly Wisdom" by Baltasar Gracian. It is the fool's misfortune to fail in obtaining the position, the employment, the neighborhood, and the circle of friends that suit him. Silence is the holy of holies of worldly wisdom. Knowledge and courage are the elements of greatness. The wise man would rather see men needing him than thanking him. More is to be got from dependence than from courtesy. Keep the imagination under control. He cannot make himself understood who does not himself easily understand. All fools come to grief from want of thought. To be occupied in what does not concern you is worse than doing nothing. Insolvency. Insolvency is the state of being unable to pay the money owed. Cash flow insolvency involves a lack of liquidity to pay debts as they fall due and balance sheet insolvency involves having more liabilities than assets. Insolvency is a concern for sovereign entities. When governments become insolvent, they are in default. Their debt becomes refinanced by further borrowing or by issuing more currency which results in higher inflation. Most people think that governments cannot become insolvent simply because they can issue(print) more of their own currency and continue to pay the interest on their debts. When currency is printed, it has no value until it enters the economy. When it enters the economy, it adds to the sovereign debt. A country becomes insolvent when more than 25% of tax receipts are required to service existing debt. The US has a fiscal gap (the present value of all its spending including servicing its official debt less all its future taxes) of $202 trillion. Great market commentary: https://www.peakprosperity.com/america-the-insolvent/ The repo rate. A repurchase agreement (similar to a collateralized loan like corporate bonds) is a form of short-term borrowing (inexpensive financing for security holders), mainly in government securities. It is the sale of securities for cash with a commitment to repurchase them at a specified price at a future date. The repo market is a key US borrowing market that recently saw a massive surge. The US has three overnight Treasury repo rates: Secured Overnight Financing Rate (a broad measure of the cost of borrowing cash overnight by Treasury securities), Broad General Collateral Rate (a measure of overnight Treasury general collateral repos), and Tri-Party General Collateral Rate (a measure of rates on overnight, specific-counterparty tri-party general collateral repos secured by Treasury securities). All of these rates rose around 79% on Monday. These rates serve as benchmarks for market participants to use in financial contracts. With higher repo rates, cash leaving the funding space and more cash being added to the repo market, Treasury’s cash balance will increase and the number of bank reserves in the system will deplete. The fear in the surge of the repo rate and the reason why the Fed had to add billions into that market is because of the threat of borrowing costs rising for consumers and corporations. Free trade. Trade used to be a zero-sum game. Mercantilism was a 16th-century belief where a country’s best interest was to maintain a trade surplus. But when trade is free, it allows nations to prosper and grow without restrictions or barriers. Free trade refers to a situation where a government does not attempt to influence trade through quotas or duties that its citizens can buy from another country or what they can produce and sell to another country. International trade allows a country to specialize in the manufacturing of products that they can produce most efficiently and then export and allows a country to import products that can be produced more efficiently in other countries. The world market can only support a limited number of firms in some industries. Countries that are open to trade have higher growth rates than countries that close their economies to trade. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries. Free trade, on paper, should be a positive-sum game. But you need to factor in politics, the fight for power, currency manipulation, the constant changes in trade policy, the increase in transportation costs, global warming and irregular weather patterns, corruption and civil war in emerging markets, and labor laws and regulations. Oil. Oil has been a hot topic over this last week. With it, we have gotten a lot of events, massive volatility, and a few exaggerations. From the media, it seems that there was a massive drone attack on Saudi Arabian oil fields, specifically Aramco, perpetrated by Iran. This attack was reported by Saudi Arabia to have wiped out 50% of the facilities processing power, which is the largest producer and distributor of crude oil in the world. It was then reported that Trump could go on the offensive and declare war with Iran in retaliation. This sent crude prices skyrocketing upwards of 15% on Monday. In reality, it seems that although there was a drone attack carried out against Aramco, and 50% of production was cut off, in less than a day 50% was back up and running, and there was no definitive proof regarding who carried out the attack. This leaves a deficit of 25% of total production capacity, which Saudi Arabia states will be back online by the end of September. More so, the infrastructure which was in place was outdated, and the new infrastructure which will be implemented should increase processing capacity overall. Oil prices have since fallen, but still holding above the previous levels. To the other point, among common misconceptions, Trump is firmly against declaring war, which played a role in why Bolton was removed from the Whitehouse. How the Fed is feeling. The labor market remains strong, economic activity has been rising at a moderate rate, job gains have been strong, unemployment has remained low, household spending is strong, but, business fixed investment and exports have weakened. Below are the economic projects from the Federal Reserve board members. The Feds cut rates again this week by 25 basis points. In order for rate cuts to stimulate the economy and avoid a downturn, they need to work through one of two channels: spurring credit growth or easing financial conditions. Here is a report done by Meb Faber on how to prepare and protect yourself for the next downturn (Note that this paper was written in 2017). Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market. More than a billion tons of essential and nutritious food goes to waste each year. In today’s economy, it can be cheaper for farmers to leave perfectly good food in the fields than to sell it. The number of people with no health insurance has been increasing. Oil companies are starting to invest in clean energy due to shareholder pressure, new technology, and the up-and-coming consumer preference from the new generations. Health authorities are urging people to stop vaping and using e-cigs until they can investigate the 5 deaths caused by a mysterious lung illness. In 2018, only about 70% of the high school students enrolled college, but less than half will graduate with a BA. What is the most effective way to increase the graduation rate? By lowering the costs of colleges or by giving schools more money to fund their students. The four tools of discipline: delaying gratification, accepting responsibility, dedication to reality, and balancing everything in your life. 800,000 people die by suicide every year, meaning one person dies every 40 seconds. Coal is being phased out of the US. Natural gas consumption is rising. Trump wants the US’s interest rates down to “ZERO OR LESS”. Natural gas production is increasing even when natural gas prices are declining (the new alternative to coal). Sustainable finance. Sustainable investing is the practice of investing in companies or funds that aim to achieve market-rate financial returns while pursuing positive social, environmental, and governance impact. 85% of investors are interested in sustainable investing (mostly millennials). Investors want products that match their interests and they want more product choices. They care about plastic reduction, climate change, community development, multicultural diversity, and gender diversity. Worries in finance. Equity is way too expensive, earnings are declining and becoming weaker, multiples are 16x their 12-month earnings, and US margin trading is near its peak level. Consumers are still buying and the top-line (revenue) is still growing, but profit margins are dwindling because operation expenses such as labor is becoming more expensive. Nobody knows what is going to happen. We can either go into a recession because key economic indicators say so or because the talks of recession start increasing and the overall fear of investors brings down the market… OR the US can sidestep the recession through strategic quantitative easing, monetary policy, and continued market manipulation. BREXIT event study. Did the BREXIT announcement have a significant effect on the stock markets around the world? An event study is an empirical analysis performed on securities or markets that examines the effect of a significant event on that security or market. On June 24, 2016, the UK voted in favor of leaving the EU. According to the MCSI Global Market Index, global markets dropped -4.762% on that Friday, decreased another -2.19% on the following Monday the 27th, and rebounded 1.72% on Tuesday the 28th. But some countries were more affected than others. Below is an event study analyzing France’s stock market to the global market on the Friday, Monday, and Tuesday. You take the regression of the previous 100 days of stock market returns of the MCSI Global Market Index and France’s CAC 40 and see if there is a significance (A t-Stat greater than 2) on the Friday, Monday, and Tuesday. According to the table, a 1% increase or decrease in the global stock index will lead to a 1.29% increase or decrease in the France stock market. On Friday, there was a significant return of -4.06% on France’s stock market. We can now say that the announcement of BREXIT significantly impacted France’s market- and it could have been due to France’s close trade relationship with the UK and how BREXIT could hurt that relationship. The shadow economy. Known as the underground economy or the black market, shadow economies are the economic transactions that are deemed illegal like untaxed labor, untaxed sale of goods, and the smuggling of goods into other countries without paying duties at the border. In 2013, the American underground economy represented approximately $2 trillion. The mean value of the shadow economy across all nations was 31.9% of GDP in 2018. The nations with the largest shadow economies are Zimbabwe (60.6% of GDP), Bolivia (62.3% of GDP), and Georgia (64.9% of GDP). Countries with relatively low tax rates, fewer laws and regulations, and a well-established rule of law tend to have smaller shadow economies.Black markets are considered unethical, illegal, and considerably dangerous, but there are also some pros: resources not being used in the official economy can be used in the shadow economy to increase overall supply, and governments try to encourage firms to move out of the shadow economy by improving public institutions and funding public services. Organized crime, corruption, and illegal employment can be fought through stricter controls and enforcement. “I always pass on good advice. It is the only thing to do with it. It is never any use to oneself,” (Oscar Wilde). Go deep on things, become an expert. Find what things you enjoy doing. Aim to read a lot. Don’t make the mistake of judging your success based on your current peer group. Learn to think for yourself. Don’t fear fear. Be playful. Speak your mind. Do not limit yourself. If she/he’s interested in you, they will go after you. Be careful with who you disclose your feelings to. Don’t lie to yourself. Smile your way through life. Back to $1 trillion dollars. Following Apple’s annual September product reveal, the company’s market cap jumped back up to $1.01 trillion. This year Apple doubled down on its plan to branch out to several new multi-billion dollar markets by leveraging its massive base of dedicated product users. Over the few years, Apple has acquired some of the biggest actors, directors, and producers in Hollywood to launch Apple TV+ and now the subscription is set to launch on November 1st. To break into a massive market dominated by Netflix, Amazon Video, and HULU, Apple has set the subscription price at an extremely competitive $5 a month and has included the service free for a year for anyone who buys a new Apple hardware. Apple is using a strategy known as “penetration pricing”, which is when a firm enters a market by offering a product or service well below the market price with the goal of attracting a new customer base and later raising prices to a competitive level. Apple has also entered the mobile gaming market with Apple Arcade and announced 100 new games will be released this year. Several new products were introduced starting with the new iPad Pro which starts at $329 and was touted as “two times faster than the bestselling PC”. The new Apple Watch Series 5 features a new screen and power management system that allows it to stay on all of the time. Lastly, Apple revealed three new iPhones that followed its previous product lineup. The iPhone 11 ($699), 11 Pro ($999), and 11 Pro Max ($1099) are all set to release this month. The main improvements are increased battery life and an improved neural engine camera system. The iPhone 11 has a wide camera and an ultra-wide camera on the back, and the pro models have an additional telephoto camera on the back. These additional cameras combined with the new neural engine creates one of the most powerful cameras of any smartphone, with each picture you take, the camera actually takes 8 images and selects the best pixels from each image to create a single beautiful image. The new iPhones feature the fastest CPU and GPU in any smartphone and a new neural engine with machine learning accelerators that allow for over 1 trillion operations a second. Overall, Apple released new products and services that are likely to sell well and for the first time in years, lowered the cost of many of their new products. The only thing missing was the highly anticipated Apple glasses which are rumored to realize next year. Great read on sunscreen. https://www.health.harvard.edu/staying-healthy/the-science-of-sunscreen Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
The Market. Australia’s economy has slowed sharply as households struggling with record debt and weak wage growth cut back on spending. The US initiated tariffs on $110 billion in Chinese imports on Sunday. A decision is a matter of judgment. Professionals often make decisions that deviate significantly from those of their peers, from their own prior decisions, and from rules that they themselves claim to follow. Negative yielding debt is now at an estimated $17 trillion. Extreme heat is the deadliest consequence of our excess consumption of fossil fuels. The World Health Organization predicts heat stress linked to the climate crisis will cause 38,000 extra deaths a year worldwide between 2030 and 2050. The cost of manufacturing solar systems have been decreasing for the past 7 years and the cost of manufacturing wind turbines and natural gas generators increased slightly. The Arctic is warming twice as fast as the rest of the world. Hong Kong’s troubles have significantly reduced by the city’s chief executive withdrawing the extradition bill. Bond market data is pricing in a 47% chance of a recession in the next 12-months and Ray Dalio stated a 25% in 2020. Lifetime finance advice. The central problem of life-cycle finance is the spreading of income from the economically productive part of an individual's life over the person's whole life. No investment is riskless if the "run" is long enough and no one knows how long they will live. A person’s life has three financial stages: 1) growing up and getting educated, 2) working, 3) retirement. We all start off with tons of potential and we begin accumulating our human capital (the present value of future labor income). The amount of education one receives is highly correlated with the present value of earning power. Our total wealth is made up of two parts: our human capital and our financial capital. The risks to our retirement are as follows. The risk of living too long is called longevity risk. To insure against longevity risk, one can purchase annuity products that pay yearly income as long as one lives. People today are living longer and could face much higher health-care costs. One way to reduce wage earnings risk, the risk of losing one’s income, is to save more. The Social Security system and many Defined-Benefit plans are at risk so investors must increasingly rely on their own savings for retirement spending. Investors need to make asset allocation decisions and life insurance decisions jointly. The optimal asset allocation depends on the risk-return characteristics of their labor income and the flexibility of their labor income. Younger investors may invest more of their financial assets in risky assets than older investors because the young have more flexibility in their working lives. Conservative investors should invest relatively more in risk-free assets and buy more life insurance. In the event of death, life insurance can be a perfect hedge for human capital. The number one reason for individual investors to save and invest is to fund spending in retirement. A typical investor has two goals in retirement- ensure a comfortable lifestyle and leave some money behind. Individuals risk a stable and healthy retirement due to financial market risk, longevity risk, and the risk of not saving enough. The first step of a well-balanced retirement plan is to locate a suitable global mix of risky and risk-free assets. Dorian. With Hurricane Dorian making landfall on the Eastern coast of the United States this week, the impact of Hurricane Dorian is incalculable at this moment. 2017 was the costliest year for the U.S. economy in terms of natural disasters, with 16 extreme events costing over $300 billion. The St. Louis Fed put out an informative article detailing the costs. There are direct costs, expensive losses -- things like houses, cars, jewelry, and barbeques. These are easy to calculate the cost of. There are also direct costs like the loss of historical monuments, which are impossible to quantify. Indirect costs are more of the lingering effects of a disaster. Local businesses are destroyed, and depending on the specifics, may never return to that area. That puts people out of jobs and wrecks the unemployment and income of the area. Luckily, most people are insured against disasters like hurricanes, tornadoes, and wildfires, so much of the cost falls on insurance companies. However, in 2018, only half of the $160 million losses in 2018 was insured, so these disasters are even more devastating for the uninsured. The less affluent people are the ones not insured and are the ones that need the insurance the most. They signify no hope of being able to rebuild their home by their own, and quite possibly represent the most tragic of disaster repercussions. Something interesting to keep in mind is that, according to most scientists studying climate/weather, global warming is increasing the frequency of disasters. In turn, global warming is advanced by businesses that are disregarding the environmental impact of their operations in exchange for lower costs and a higher profit margin. Then, when disaster strikes, these companies undoubtedly feel the impact, whether that be through damaged buildings, taxes for national emergency relief, and loss of revenue. While the two sums (cost of lowering environmental impact and disaster relief costs) are not equal, it's interesting to note that they may be paying either way. USD strength. Amidst global slowdown fears, a potential impending recession, and political instability, the dollar is still holding near its 2-year local high. The DXY, which is considered the US dollar strength index matches the USD against a basket of foreign currencies, to obtain a trade-weighted average value. Dollar strength means a few things: decreased exports, increased imports, increased US capital flows, and decreased tourism. We have decreased exports, as US products are more expensive in foreign currencies, while foreign products are cheaper in regards to the USD. Usually, a strong USD is directly related to the current belief in the future of the economy being strong. To me, there is something awry, as there is quite a bit of fear currently in the US economy. Maybe people can’t find another instrument to move into to cover an impending recession and are willing to bet the USD will drop the least, in regard to other currencies. Social Security. A study conducted by the Transamerica Center for Retirement Studies stated that 80% of millennials are worried about social security and don’t think they will be able to count on the system that they will have paid into for their entire working life. Yet, studies on the longevity of the system vary. The Center for Economic and Policy Research found that when millennials retire they will actually be able to receive 10% more benefits than current recipients. This report is in stark contrast to what the Social Security Administration reported just this year when it found that the Social Security Trust Fund (that has $2.8 trillion in reserves) will run out of reserves by 2035. This discrepancy is due to the fact that the first report accounts for the fund’s reserves growing faster than inflation. So why is everyone so worried about Social Security? Well, the Center for Retirement Research found that the amount of income that social security will replace is going to drop by 4% which means that beneficiaries will either have to cut back on expenses or find another way to replace that income. In addition, the AARP expects Social Security to only cover roughly half of the basic living expenses. So be sure to start saving your money now! You may not have another choice. Management practices. In the past, we have learned that managers cannot be trusted to do their jobs of maximizing shareholder value, but the manager’s values must still align with the shareholders. And, that there should be strict monitoring and supervision to restrict opportunistic behavior. But these practices are outdated and ineffective. Bad management theories are destroying good management practices. Business schools and academics are creating management theory into a science of sorts. They are teaching students how to be a good manager based off of a scientific model. Ethics and morals have been diminished due to the strict objectives and goals placed on managers and executives. Goals such as: making shareholders happy and wealthy, profitability, and constant growth and improvement. Sometimes these goals cause managers to be unethical to achieve the goals. If we wish to reinstitute ethical or moral concerns in the practice of management, we have to first reinstitute them in our mainstream theory; the theory taught in schools. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
Potential. A word describing restricted possibility and opportunity. A limit, a stop sign, a paper certificate that says “congratulations” on it. “You are only good for this much.” “You can only achieve this level.” “You can only make x amount.” Humans make a limit in their mind of how much their potential is. But, it’s not accurate. We are too afraid or too lazy to figure what are extremes are. How far can you go? How much can you achieve? Test yourself! Live your extreme. See how long you can stay awake or see how much you can get done in one sitting or see how far and how fast you can run... test yourself. Where do you think achievement and accomplishment come from? They come from breaking barriers, going to new heights, and beating our potential. Because all potential is is a label, and I only wear non-branded shirts. The Market. The labor force participation of 25 to 54-year-old men has been falling since the 1960s. In 1969, the participation rate was 96% and in 2015, 89%. Why? Because of health conditions, disability, the rise of opioid prescriptions, and the rise of trade, automation, and outsourcing of work. All this talk of a recession might cause a recession… Some believe that companies should focus their energy on maximizing shareholder value and should not concern themselves with giving to charity. By maximizing shareholder value, those shareholders can decide whether to make donations or not. Others say companies care more than just profits; they care about the customers, the market, the government, and the environment around them. The more people multitask, the worse they are, not just at other mental abilities, but at multitasking itself. The Muni market had a record $52.9 billion of inflows through the end of July. The US budget deficit will hit $1 trillion in 2020. China imposed additional on $75 billion worth of US goods. Fed Chairman Jerome Powell said that the US economy is in a favorable place but faces significant risks. Trump orders American companies to find an alternative to China. Shareholder Yield by Meb Faber. This is a short research piece on capital allocation and investing. “Returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use in deploying capital and raising capital. Dividends and their reinvestment represent a major portion of a stock investor’s total return over time. Reinvested dividends represent over half of an investor’s annualized returns (over the period of 1871-2011). By reinvesting dividends and compounding the portfolio returns, the final value of the total return portfolio turns out to be 99.8% higher than the non-dividend portfolio. Dividends contribute virtually all of the final portfolio value versus a price only return. A study done by Elroy Dimson, Paul Marsh, and Mike Staunton showed that higher dividends yielding stocks outperformed low dividend-yielding stocks in 20 countries from 1975-2010. One of the most important qualities of a successful investment analyst is the ability to adapt to change. Companies have been lowering their dividend payout ratios for the past 70 years. One of the reasons for this is beginning in the late 1990s, share buybacks have outpaced dividend payments. The purpose of a company is the maximize long-term value.” Hunter S. Thompson on the topic of advice. To presume to point a man to the right and ultimate goal- to point with a trembling finger in the right direction is something only a fool would take upon himself. All advice can only be a product of the man who gives it. What is truth to one may be a disaster to another. We seek to understand the goal and not the man. Every man is the sum total of his reactions to experience. We strive to be ourselves. A man must choose a path which will let his abilities function at maximum efficiency toward the gratification of his desires. Decide how to want to live and then see what you can do to make a living within that way of life. Why is an inversion of a yield curve an indicator for a recession? Take the 2-year treasury bill and the 10-year treasury bill. When investors think a near-term economic downturn is becoming more likely, they prefer to hold longer-maturity bonds. Why are investors pricing in more risk for a recession? Because of the slowing in global industrial production and trade volumes. But, bank balance sheets are strong, household leverage is manageable, and the personal savings right is high concluding that the financial stability risks are still moderate today. What is the purpose of a corporation? It used to be to maximize shareholder value. Now it is: delivering value to our customers, investing in our employees, dealing fairly and ethically with our suppliers, and supporting the communities in which we work. Companies should maximize shareholder welfare not market value by Oliver Hart and Luigi Zingales. Milton Friedman states that a corporate executive is the employee of the owners of a public company and has a direct responsibility to his employer. He states the desires of the owners are to make as much money as possible while conforming to society’s rules. That there should be a clear separation between the goals of companies and the goals of individuals and government. But most of these “owners” care more than making money. They care about ethical, moral, social, environmental, and governance issues. Why would they not want the public companies they invest in to have the same sentiment and care? Pension Funds. A Pension Funds is a very desirable employment benefit. Essentially, after you retire, you continue to receive an annual payment equal to a certain percentage of your salary. This percentage is usually based on your position as well as your years of experience with the company. Generally speaking, this fund invests money for the employees. The manager of the fund has to get enough of a return on investments to actually make the obligated payments. If they don’t hit that level of return, the employer is going to have to pay the difference. This represents a defined benefit plan. There is also a defined contribution plan, which a 401k is. Essentially, every year, employees pay certain amounts into their 401k. These amounts are invested into the market and grow with the market. The difference here is that the employer is not responsible for ensuring a specified payment amount. The risk is transferred to the employee, along with the potential for exponentially greater returns. Nowadays, very few private entities offer defined benefit plans and opt for defined contribution plans instead. Government entities, however, still pay defined benefit plans. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
Stability, secureness, and independence. Every human strives for freedom. Freedom from debt, freedom from sick addictions, freedom from inequality, freedom from poor treatment, freedom from non-democratic countries, freedom to run and explore in the wild... And most are born into freedom; born with natural rights granted to them by nature or God that cannot be restricted or denied by any government or individual. But is anyone ever truly free? We are all governed by externalities. We commit ourselves to paths: professions, partners, schools, lifestyles; losing out on the opportunities that our third-dimensional selves are enjoying in other worlds. We will never be free, but for most, we’ll never be caged like animals or restricted to a preordained life. Who is free? People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom. Only the disciplined ones in life are free. If you are undisciplined, you are a slave to your moods and your passions. Free people can speak freely, but if you fear to speak, you aren’t free. What truly has the potential to shape us is our freewill, who we decide we want to be. And the only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion. The Market. Argentina’s stock market dropped by 49%. The Consumer Price Index rose 3.4% in July. The US delays China’s tariffs. Germany’s economy is near a recession. When companies invest outside of their domestic markets, the most immediate risk that they are exposed to is exchange rate risk (cash flow and revenues are affected by the exchange rate). The Bank of Israel found that mutual funds that added “!” to their names had a significant decline in their net flows. WeWork filed for IPO. The two-year and 10-year yields inverted, causing mass selling and increased market volatility. This inversion was a signal for many people that a recession is in the near future. Over-Tourism. The number of international tourist arrivals totaled 1.4 billion in 2018. Why the increase? People are traveling more. Disposable incomes have grown around the world, people are living longer, people are having fewer children, the world is becoming more peaceful and accessible, technology has advanced, booking vacations have become easier, transportation has become cheaper, safer, and more available, and tourism is a big portion of revenue for many countries. The tourism industry has reached $8.8 trillion in 2018 and supports 10% of all jobs on the planet. Stockholders versus non-stockholders. The consumption of stockholders is more volatile and highly correlated with the excess return on the stock market. In the 1990s, ¾ of US families held no stock. The fraction of households owning stock increases with average labor income. Also, more educated households tend to own stock. According to a study done by N. Gregory Mankiw, stockholding families spend approximately 25% more capita on food than non-stockholding families. Negative interest rates. Around $15 trillion of outstanding bonds worldwide now trade at negative yields. Rising life expectancy increases desired saving while new technologies are capital-saving and are becoming cheaper. This savings glut tends to push the natural rate of interest lower. A savings glut is when savings exceed investments. This depresses the natural real rate of interest. People value future consumption during their retirement more than today’s consumption. Meaning, they are willing to accept a negative interest rate and bring it about through their saving behavior. A slowing manufacturing sector increased trading tensions through added tariffs, and the tightening of the monetary policy are all adding to the uncertainty and to negative interest rates. Rules of Thumb by N. Gregory Mankiw. Learn from the right mentors. Mentors determine your professional outlook in much the way that parents determine your personal outlook. Mentors give you your values. They teach you what kind of behavior to respect and what to avoid. Work with good co-workers. Have broad interests. Allocate time and crew. The cost of saying yes can become intolerable. Have fun. Find out what you like to do, and then find someone who will pay you to do it. The new finance. There are assets whose average returns can not be explained by their beta. Returns are predictable over the business cycle and longer horizons. The dividend-price ratio and the term premium can predict substantial amounts of stock returns. Bond returns are predictable; a steeply upward sloping yield curve means that expected returns on long-term bonds are higher than on short-term bonds or the next year. Past winning funds seem to do better than average in the future, and past losing funds seem to do worse than average in the future. Times of past volatility indicate future volatility and volatility is higher after large price drops. Why dividends are important. Over the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities. Portfolios consisting of higher dividend-yielding securities produce returns that are attractive relative to lower-yielding portfolios and to overall stock market returns over long measurement periods. Stocks with high and apparent sustainable dividend yields that are competitive with high-quality bond yields may be more resistant to a decline in price than lower-yielding securities because the stock is in effect “yield supported”. The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings. The payment of dividends has been declining and the repurchase of shares have been increasing. Keep Climbing, The Alchanati Campbell and Associates Team Dear Reader,
If time was all I had. If you aren’t careful, your life can be determined by time. Hourly pay, age, work ethic, sex... Life will be turned into a Formula 1 race where you’re ranked by lap time or the countdown to your last breath. Bring me someone who places any value on their time, who reckons the worth of each day, who understands that they are dying daily, and I’ll give you whatever you desire. But you wouldn’t be able to; that special someone wouldn’t have time for you. Ask yourself: would you rather sacrifice time to have more money or money to have more time? What is more important to you? I believe in time-saving expenses (car washes, house cleaners, gardeners, drivers). Outsourcing work to free-up time for yourself. It helps determine how much you’re worth. Time is your friend; impulse, urges, and procrastination are your enemies. Putting things off is the biggest waste of life: it snatches away each day as it comes and denies us the present by promising the future. Lost money can be found, but lost time is lost forever. Everybody wants to know the secret: how do you do more with less of your time? You need to have a fighting mentality. You need to know what makes Sammy run. Time passes when you’re not looking. And lastly, NEVER say that you’re too busy. If you actually cared, you would make the time. The Market. Cultural norms and culturally shaped emotions have a substantial impact on the domain of morality and the process of judgment. Hedge fund managers perform better under pressure especially when there is a high management fee at risk. Empress Trees mature several times faster than your average Oak or Pine and absorb about 103 tons of carbon a year per acre. If people were just to work hard, avoid drugs, alcohol and violence, and stop having children out of wedlock, poverty would be rare. The Feds expect one more rate cut in 2019 and two more in 2020. By devaluing a currency, the exchange rate is pushed down and borrowing costs are cut down. This is what China did. US assets are overvalued, hitting around 275% of nominal GDP. Cyclical stocks are decreasing while defensive stocks are increasing. The 10-year Treasury and 3-month Treasury rate spread is negative. (3-month: 2.05, while 10-year: 1.75). Russia wants to “d-dollarize” the Russian economy. Key risks to the global economy today include weakening of production growth and expansion of lower-quality debt. The Japanese government plans on people driving flying cars by the 2030s. The 12-month average of wage growth is 3.7%. The present cyclical economy. The International Monetary Fund and Organization for Economic Cooperation and Development have lowered their global growth estimates. Global growth and momentum has weakened, and growth is set to continue to decline. With the current trade war between China and the US, consumers and businesses are exposed to disruptions in trade and business investments. Most of Europe’s economy is experiencing negative rates (25% of the global market trade at negative rates). Corporate debt of the lowest quality has been rising, totaling $1.3 trillion today. But, consumer confidence is still high and investors are still enthusiastic, shown in the surge of recent IPOs. Wage growth. Hourly earnings have stagnated since 1979. Why is there a dilemma in wage growth? Globalization, the decline in union membership, computerization, and low inflation are some of the causes of the wage decline. With cheap labor abroad, Americans are losing jobs to outsourcing and streamlined production processes. In 2016, only 6.4% of the workforce was unionized. The Phillips Curve states that when unemployment is low, inflation is high because if employers cannot find workers, they will need to offer higher wages (high demand for workers equals nigger increases in pay). Macroeconomic shocks increase wage inequality in countries where wages are flexible and unemployment in countries where wages are constrained by institutions. Higher minimum wages reduce wage inequality. So does stricter employment protection legislation, more generous benefit replacement ratios, longer benefit duration, and higher union density. Different firms also pay different wages according to sectors and occupations. Day Reconstruction Method. How people spend their time and how they experience the various activities and settings of their lives. How do people use their time? How do people enjoy their time? What affects people’s enjoyment? Time pressure is an important determinant of enjoyment at work. If people feel stressed for time, they will not enjoy their work. Sleep quality has an effect on your enjoyment at home. People who have slept 7 hours or more are less tired throughout a full day than those who slept for 6 hours or less. Importance of religion and household income have an effect on household activities. For your well-being, it is important to know what influences your enjoyment. Micro V Macro influences in business. Microeconomics boils down to household decisions and choices which individuals make in their day-to-day lives. These decisions have a direct effect on goods and resources through supply and demand. Macroeconomics involves larger-scale decisions, and economic factors such as interest rates, unemployment rate, phases of the business cycle, inflation, etc. In a business setting, microeconomics relates to everything which has a direct effect on the business. This includes customers, suppliers, resellers, the general public, competitors, and other interested parties. All of these factors influence the supply which a business may provide, the demand their product will garner, the price which they will offer the product for, the # of employees they need to hire, and other day-to-day operations. These could be considered unsystematic, or firm-specific factors. Macroeconomics is broader and encompasses components of the country's economy, and influences which affect entire industries/countries. The easiest example of this would be trade deals with China. These macroeconomic influences affect how most businesses in an industry operate and form strategies. These factors include economic, demographic, technological, natural/physical, political/legal, and cultural. These factors are considered systematic, or relating to the entire market. It's important to have a fundamental understanding of both of these influences when conducting a top-down analysis, running a business, or even just looking at the market. Moral luck. Our lives are substantially shaped by circumstances that lie beyond our control. And the way we blame ourselves, the way we blame others, and the sentiments we have play a crucial role in expressing our humanity. The moral judgments we actually make conflict with the judgments that we think we ought to make. And our commonsense either thinks luck exists or doesn’t exist. Agricultural emissions. The majority of agricultural emissions come from raising livestock (more than 70 billion raised annually). The biggest single source is from manure and cow burps.The countries that cause the most agricultural emissions, which account for 11% of global greenhouse gases, are China, India, Brazil, and the US. What are countries doing to reduce agricultural emissions? By reducing food loss and waste, shift to healthier and more sustainable diets, achieve replacement-level fertility rates, and increase livestock and pasture productivity. Keep Climbing, The Alchanati Campbell and Associates Team |
AuthorWHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now. Archives
July 2020
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