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 The "WHAT'S UP?" Newsletter

The Friday Newsletter, Specials, Saturday Night Rants and Monthly Book Summaries
Alchanati Campbell & Associates

What's up Market Forecasting, Allocation, and Returns?

2/21/2020

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Dear Reader,

​
The Market.
  • Megatrends for the next decade: urbanization, investing in early growth technology, a slowdown in global population growth, and aging populations.
  • S&P Global expects the outbreak to "stabilize globally in April 2020, with virtually no new transmissions in May”.
  • Expect the Fed to "abide by what futures markets price in as it pertains to rate cuts”.
  • Since the stock market's rise over the past week, traders have pushed expectations down from two rate cuts this year to one.
  • Yield Curve Control:
    • The Fed would target some longer-term rate and stand ready to buy long-term bonds to keep the rate from rising above its target (to stimulate the economy if QE does not work).
  • The greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high.
    • While the global health crisis adds uncertainty to the economic outlook, we believe the economic and market risks will be temporary. With the cycle extended and recession risks reduced, we favor equities over the hard duration and generic corporate credit and have started the year with a constructive view toward risk. 

Following the Crowd. There has been this concept that has gained attention recently that stems from a subreddit on Reddit. The subreddit, “Wall Street Bets”, is a platform where investors and such are able to comment and speak to each other about options trading, their portfolios, and the market as a whole. The concept I am referring to is “pumping” or some people may call it “trend following”. In the US Equity market, the two hottest stocks recently have been Tesla and Virgin Galactic. Tesla has gained 150% in the last 3-months and Virgin Galactic 296% in the same period. Pumping is when investors/traders all agree to buy stock or calls in the same company, pushing the stock higher. With Tesla’s cult and the profiteers who are looking to make an easy buck, they all jump on the bandwagon and this has proven to generate crazy returns. Some could say that this is illegal, and that the SEC could get involved soon, but so far this unethical style of investing has made people very wealthy.
 
How to Maximize Return During Market Panics. Bull markets are all different. In the 2000s, companies with exposure to emerging markets and commodities were the biggest winners. In the 2010s, the FANG stocks and other tech and software stocks drove the expansion. And in the future, renewable energy, cybersecurity, and tech can be the drivers of the next expansion, nobody knows. Crises are more predictive and are more alike. The smallest, cheapest, and the most conservative capital deployment of stocks perform much better during crises. Companies that are profitable and cash generative also tend to do well during recessions. Private equity or distressed debt funds perform horribly, and if you want to invest in debt, dedicated public debt is an optimal way.
 
Sales-to-Price Ratio. There has been a lot of chatter of how overvalued the market is and how its too expensive to enter in now. The ideology is, knowing that the market should contract soon, why should I invest into these higher prices? Valuation can never help us with market timing. An overpriced market can always become more overpriced. Based on the sales-to-price ratio, the nominal total annual return for US stocks over the next decade is about 4.5%.
 
Market Volatility. For the past few weeks, the market has been jumping to new highs despite global worries surrounding Coronavirus. Production factories have been shut down, with some companies stating that they are moving production out of China. Despite this, the market has hardly reacted as one would expect. In the past few days, the markets have been sliding as investors are moving to hold safer assets such as gold and cash, the former being at all-time highs. Just to add more confusion to the investing world, the 30-Year Treasury Bond is at an all-time low, further inverting the yield curve. Widely believed to be a signal of recession, this has been taken mostly in stride. Why? Some possible reasons lay in the governmental intervention. The Fed has shown that it will go against traditional indicators to stabilize the market. The Trump administration has repeatedly shown it will do whatever is necessary to ensure industries keep growing through the use of tax cuts and subsidiaries, the deficit be damned. 
 
 Factor Rotation. Heard of sector rotation? How about its new friend Factor Rotation. Over popularized at the turn of the century, sector rotation is an investment strategy that tries to predict the business cycle and overweight industries which expect to outperform in that scenario. In a general sense, when someone believes the market is overheating and due for a cool down, they would start moving their portfolio into Healthcare, Consumer Staples, and Utilities. When they believe we are on our way out of this cool down, they would start investing in Financials, Technology, Consumer Discretionary, and Materials. At the onset of the expansion, they would start moving towards industrials and energy. This strategy, which seems simple, usually underperforms the SPX, as its relatively hard to constantly predict the business cycle. Now another strategy, which has been around for a while, but is just now becoming mainstream is factor rotation. Factor rotation instead invests in companies that share common characteristics, for example, strong financials, constant dividend growth, and relatively low debt, which would make up a defensive strategy. Although this will allow investors to increase their general active specific factor, it keeps the factor tilt relatively the same as would be for sector rotation, which means it still requires a general reliance on detecting the business cycle.
 
The Millionaire in the Capitol.  There are currently three billionaires running for president. Donald Trump with an estimated net worth of $2.48 billion, Tom Steyer with an estimated net worth of $1.6 billion, and Michael Bloomberg the 8th richest person in the world with an estimated net worth of $65.2 billion. The United States has a long history of wealthy presidents dating back to the very first. George Washington had an estimated net worth of $587 million (in 2016 dollars), and over half of all U.S presidents had a net worth over $2 million placing them within the wealthiest 10% of the population. Despite its long history of wealthy leaders, the U.S has never had three billionaire presidential candidates. While these candidates are running for various reasons, they are a reflection of current social sentiment. Voters across America feel that there is a correlation between the ability to lead and be successful and earning a large amount of money or the “smart businessman” argument, but many others also feel that large amounts of wealth lead to corruption, inequality, and the ability to buy the election. Traditionally, U.S presidential campaigns have been funded by donations from average Americans, political fundraisers for the wealthy, and more recently corporate donations to Super Pacs, but this year we have seen another option. Bloomberg has taken no donations and yet has spent $450 million of his own money to fund his campaign and join the democratic race. For some background, here are some of the wealthiest leaders in the world. Keep in mind that as we go down this list the estimates are less accurate and, in most cases, the large net worth is due to the corruption of world leaders and their ability to funnel public assets or national resources to their personal wealth. French President Emmanuel Macron $31.5 million, President of Chad Idriss Deby $50 million, Turkish President Recep Tayyip Erdoğan $50 million, Prime Minister of Singapore $51 million with an annual salary of $1.6 million, President of Rwanda Paul Kagame $500 million, President of Kenya Uhuru Kenyatta $500 million, President of Azerbaijan Ilham Aliyev $500 million, President of South Africa Cyril Ramaphosa $550 million, President Teodoro Obiang Nguema Mbasogo of Equatorial Guinea $600 million, President of Gabon Ali Bongo Ondimba $1 billion, Bashar al-Assad leader of Syria $1.2 billion, President of China Xi Jinping $1.5 billion, Sebastian Pinera President of Chile $2.8 billion, leader of the Czech Republic Andrej Babiš $3.7 billion, leader of North Korea Kim Jong-un $5 billion, and President of Malaysia Mahathir Mohamad $45 billion. 
A few other notable cases are Sheikh Khalifa Bin Zayed Al Nahyan who is the leader of the United Arab Emirates and has an estimated personal net worth of around $18 billion. King Salman of Saudi Arabia with an estimated personal net worth of $17 billion, while the royal family has a net worth that may be as high as $2 trillion. Ali Khamenei, supreme leader of Iran had a claimed and estimated net worth as high as $95 billion. Lastly, Vladimir Putin with a very rough estimated net worth of $200 billion. 
 
 
Keep Climbing,


The Alchanati Campbell and Associates Team
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     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. 

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