Alchanati Campbell & Associates
Yield curves, foreign tension, life advice, competition, and the U-curve.
The Market. S&P 500 up .17%, Dow up .37%, Nasdaq down .03%, Crude Oil at $70.51/barrel, and Gold down .29% at $1,318.40/ounce.
Flatness in yield. The Treasury Yield curve was at its lowest level since August 2007 from weaker-than-expected US inflation and high demand for bonds at the recent bond auction. Flattening of the yield curve signals that inflation is not a problem. But the curve flattening toward inversion (when 3 month yields are higher than 10 year yields) has historically preceded recessions, but there are still two additional rate hikes planned this year.
Smart Beta versus Factor Investing. Smart Beta weights by company fundamentals, ranks companies by their size, has a long position only, and measures volume, liquidity, and momentum. This strategy trims positions in companies whose price is rising, but their fundamental value isn’t changing, and buys companies whose prices are falling, but their fundamentals remain the same. Factor investing weights by market capitalization, helps investors understand the behavior of an asset, buys out-of-favor companies, and has long and short positions. This strategy uses ‘factors’ like value, small-cap, momentum, low volatility and quality(dividend payers), and yield.
Life advice. Be true to yourself- live the life you want to live. Focus on what is true to yourself. Take a break, meditate, or take time off. Don’t forget to show love- be selfless. It’s not about the hours in the day, it’s how you use them. Right is might, and when you do your work and figure it all out, all the other noise will disappear. Don’t give up. You need to know your limitations- you shouldn’t do what you don’t understand. You always live to fight another day. Do something you love. Everything you do really means two things. Find the smartest people you can, surround yourself with them, and shut up and listen.
Competition is bad. Americans live in a competitive world. Our universities, job markets, and sports teams all instill within us a competitive drive. Venture Capital investor and Co-founder of PayPal, Peter Thiel disagrees with this notion. In his book Zero to One, Thiel lays down the criteria he uses to determine what companies to invest in. One of the criteria is competition vs monopoly; only invests in companies that are designed to be monopoly businesses. Theil uses Tesla as an example. The automotive industry is multi-trillion dollar industry, with a plethora of highly competitive firms vying for a slice of the pie. A company who plans to compete in this broad market is doomed to fail. Successful firms in this market, like Telsa, are firms that refine their market to a small niche. Tesla is the only company that is producing a luxury, eco-friendly automobile. Because Tesla defines their market in such refined terms (Luxury x Eco x Car), they are able to succeed within the larger automobile industry (Car). When determining what companies to invest in, determine whether the firm is competing in a large market or if it is the only player in a niche market. Theil offers in conclusion, “All failed companies are the same: they failed to escape competition”.
Throwback to 2015. Iran had been trying to develop and enhance its nuclear program maintaining that its program would only be used for peaceful purposes within the country. However, that was not the leading belief amongst the rest of the world, as most countries feared that the program would be used for nuclear weapons which could decimate any country. To curb this, economic sanctions were imposed on Iran. In 2015, Iran agreed on a deal with the United States, the United Kingdom, France, China, Russia, and Germany to lift the devastating sanctions. In return, Iran agreed to let these countries closely monitor the development of its nuclear program, as well as restricting the usage of key elements of nuclear…anything. It’s a bit too much science for a market letter, but it is an interesting process to read up on.
Flash forward. This past Tuesday, President Trump re-imposed economic sanctions on Iran, withdrawing the United States from the aforementioned deal. While the U.S. is only one of the countries involved in the deal, the remaining European powers within the deal will need to "pick up the slack" in a sense, and economically help Iran. If they are unable to do that, its likely that Iran will dramatically speed up its nuclear program to a level akin to 2015. If the nuclear tension wasn’t enough, his U.S. violation of the 2015 deal will also lead to billions of dollars in lost deals that U.S. companies agreed to within Iran. Boeing, for example, will be missing out on roughly $20 billion.
Conflict. Emmanuel Macron, President of France, stated that the U.S. decision would eventually lead to conflict. This is unfortunately appearing to be the case. Since the events on Tuesday, tensions within the Middle East have increased at an exponential rate. Particularly, foreign tensions between Iran and Israel have escalated. Tuesday night, Israeli troops were put on alert, anticipating airstrikes on Israeli sites within Syria. Residents of Golan Heights, which shares a border with Syria, were told to prepare to take cover in shelters, indicating that civilians are in the crossfire. By Thursday, both Iranian and Israeli forces were targets of airstrikes, with Syria unfortunately being used as the battleground.
Oil. Whether it is justified or not, one key thing stands out when thinking about the Middle East from a market standpoint: oil. However, Crude Oil prices tend to follow a hidden, private algorithm. It truly is virtually impossible to see exactly how oil prices will react to geopolitical events. Following the renewed sanctions, Iran's ability to produce barrels of oil is obviously hindered. With a decrease in production, its reasonable to assume that crude oil prices will rise. However, Saudi Arabia has the capability to more than make up for the barrel production that will be lost with the Iran deal withdrawal. This would help stabilize the prices. Still though, it is likely that there will be a fairly significant lag between the U.S. decision and a prolonged change in oil prices, as Theresa May, Prime Minister of Britain, stated that there would need to be a discussion with President Trump on how the sanctions would impact foreign companies operating within Iran. Additionally, the decrease in exports would take time to come to light.
Who caused the Bay Area’s Housing shortage? 48% of those polled say tech companies are a major reason and 57% say that developers are a major reason. Before ‘Silicon Valley’ came to be in the Bay Area, it was more affordable. Benefits of ‘Silicon Valley’ are there are more jobs available and real estate values are skyrocketing. A solution to this shortage is an increase in new housing.
The U-curve. Happiness through adulthood is U-shaped. Life satisfaction falls in our 20s and 30s, hits a trough in our late 40s before increasing until our 80s. The “midlife crisis” is a stereotype and is simply due to the passing of time. At your “midlife”, you might have feelings of discontent and a feeling of wasted life, but as the years pass, how you feel about life changes. Older people feel less stress and regret, dwell less on negative information, and are better at regulating their emotions.
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.