Alchanati Campbell & Associates
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.
The Alchanati Campbell and Associates Team
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