Alchanati Campbell & Associates
Self-driving scenario testing, Tesla in the green, #150, GDP, junk wrapped in junk and bitcoin for hedging?
The Market. Roughly 60% of the time a 10% correction (historically) did not lead to a bear market while roughly 40% of the time it did. Returns on U.S. leveraged loans and collateralized loan obligations have outperformed other fixed-income asset classes. Investors are more concerned with risks associated with higher interest rates. Banks appear to be chasing increasingly dangerous deals and forgoing protections against borrowers going bust. Sales of new single-family houses were down 13.2% in September year-to-date. Despite a tightening labor market, companies have so far not felt compelled to increase wages to retain workers. Inflation: In order for expected changes in the general price level to not effectively alter business or household decisions, it needs to be 2%.
The Moral Machine. A game-like platform that would pull together people’s decisions on how self-driving cars should prioritize: humans over pets, passengers over pedestrians, more lives over fewer, women over men, young over old…And if the car should swerve (action) or stay on course (inaction)? Example: A little boy is crossing the street and your self-driving car is unable to stop in time; you can either let the car drive forward and kill the boy or you can turn the wheel and kill an older man on the sidewalk. Which do you choose? Results: countries with more individualistic cultures are more likely to spare the young and spare more lives.
Dunbar’s number. The bigger the brains, the larger the social groups. Animals with larger brains should be able to remember more individuals and manage more relationships. 150 is Dunbar’s number. Humans could have no more than 150 meaningful social relationships. Smaller funds usually perform better than larger funds. Companies that grow to over 150 members start having more disputes and disagreements within the group.
GDP. Gross Domestic Product grew at a 3.5% growth rate in this past quarter, just nudging the estimated growth. However, this is down from the growth rate experienced in the second quarter of 2018. PCE, or Personal Consumption Expenditures, measures price changes for goods/services and is the Fed's preferred method of monitoring inflation. The third quarter of 2018 saw PCE growth of 1.6%, far off the estimated 2.2%. This information would lead us to believe that inflation is stable for now. Consumer spending also grew 4% this quarter, which is a good sign, being that it accounts for roughly 66% of economic activity. This consumer spending growth was countered by nearly an 8% decrease in business spending. Remember way back in 2017 when those corporate tax cuts came into play? The assumption then was that businesses would have more cash at their disposal to invest in their operations and further stimulate the economy. Fixed investments, investments such as factories, actually had a negative contribution to GDP. The decreased investments and decreased business spending would suggest that C-Level executives are not too eager to spend money right now and are potentially bracing for something. Moreover, and probably more alarming, net exports took away nearly 1.8% points from GDP. In other words, the entire saga with China and NAFTA is definitely being noticed by the economy. Perhaps, as many analysts are suggesting, companies are importing excess goods now, so they don’t get hit with potential tariffs later.
Junk Yard or Gold Mine? The Debt/EBITDA ratio is a common way in which rating agencies grade corporate bonds. Companies with a high debt/EBITDA are less capable of paying their debts, and because of this, their corporate bond ratings fall. According to Moody’s, bonds of “Ba” rating and below are considered non-investment grade or are popularly referred to as “Junk” bonds. Because companies that issue junk bonds have a higher relative chance of default, the junk bonds incur a risk-premium to reward investors for taking on excess risk. Lately, junk bond yields have been outpacing other securities. In October, S&P 500 total returns (-0.70%) have fallen below Bloomberg’s High-Yield US Corporate Bond Index (1.45%). Despite growing concerns of an economic slowdown, investors seem confident that leveraged companies will be able to pay down their debts.
Portfolio construction. There has been an investing trend of dollars flowing from higher-cost products to lower-cost products (supports the trend of banks ridding their products of high expense ratios). Investors are becoming increasingly discerning when it comes to factoring cost into the investment-selection process (low costs are important to achieve investment success).
Broke the break-even line. A big win for Tesla this week as the Q3 earnings report shows Tesla is profitable by a comfortable margin. Tesla reported a revenue of $6.82 billion and a profit of $2.90 a share which blows away the estimated 15-19 cent loss per share that Wall Street analysts were expecting. The end of the third quarter marks the culmination of over a years’ worth of efforts to streamline the manufacturing process and bring the world’s first sensible mass-market electric car to fruition. Over the course of the company’s history, CEO Elon Musk has made several “bet the company” moves. First when making the Tesla Roadster, then the Model S and X, and finally the Model 3. Each time Tesla over-leveraged the company and faced bankruptcy if the success was not found, and each time the bet paid off and paved the way for the next round of production and innovation. With the huge success of the Model 3, the road looks clear for Tesla’s next projects which include the Tesla Semi, Tesla Roadster, the Model Y, a new Giga factory in China, and full self-driving capabilities.
Bitcoin: digital gold? A possible hedge? Over the last week, we have seen immense volatility in the current U.S. stock market, with shifts from 1-4% each day. During this time, Bitcoin has not had more than a 1% movement each day, starting the week at $6427, and ending today around $6410. Due to this, we have seen a few comments come out from the media asking if bitcoin is the NEW digital gold, or if it’s a potential hedge to use in your portfolio. My answer to both of these? No and No. Bitcoin isn’t the new digital gold; in the current state it’s not a low-risk hold of value and has no physical backing like gold has. It’s possible that we see Bitcoin become a hedge in the future, but as of now, there has been a complete lack of correlation between the crypto markets and the stock markets. What does this mean? Well to be a hedge, the two assets need to be negatively correlated, so for Bitcoin to become a hedge, we would need to see money leave the stock market during fear, and go into the crypto market, which would mean an inverse relation to the price movement of Bitcoin and the stock market (SPX, RUT), we would also need to see the inverse hold true, with during times of greed, money will leave bitcoin and go into the stock market. If this becomes a reality, we could also see a future of bitcoin being a reliable hold of value.
The Alchanati Campbell and Associates Team
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