Alchanati Campbell & Associates
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.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.