Alchanati Campbell & Associates
The Market: Charles Schwab cut their trading fees/commissions on equities and options trading to zero. This caused brokerage stocks like Ameritrade (TDA) and E*Trade (EFTC) to decline significantly, with the result of all major brokerage companies cutting their trading fees to 0. We have tariffed our way into a US and global manufacturing recession. US service industries are slowing down. Gen Xers are saving little, are the most debt-burdened of all the generational groups (balances averaging $134,000) and will be expected to have larger sums for retirement. 42% of Gen Xers are focused more on paying off debt than on saving for retirement. Rumors of tariffs placed on $7.5 billion EU, manufacturing data weakening, the labor market tightening, hiring slowing, and consumer demand decreasing… some of the reasons why stocks are falling. Expect more hedging with Gold and Bonds. Corporate insiders are selling stock at an impressive pace and corporate stock buybacks have been slowing. We might see additional rate cuts this month. US yields are relatively higher than other developed regions such as Europe and Japan, so the US has more room to compress. The European Central Bank is signaling that interest rates in the eurozone will remain negative for a long time, pushing investors further into risk to seek some return. Secret of getting people on the right track for retirement: Have a mandatory savings system in place! A robust labor market, rising wages, and low interest rates continue to support consumption and housing.
Are Markets Efficient? This theory states that market prices reflect all available information, so there is no mispricings and no such thing as “value” investing. Risk aversion shifts throughout time and readily available information changes and grows with time. But it is almost impossible to test this theory. You can ask yourself: Can you beat the market? And, are prices, right? Prices fluctuate too much to be able to be explained by a rational process, and returns do have different variations according to asset class and investment instruments. If markets were efficient, there would be no such thing as “bubbles”. Bubbles represent misinformation and “overvalued” securities. Bubbles are when prices exceed a rational valuation of the securities being traded. Is there a difference between value and pricing? In value investing, you invest on the basis of the company’s fundamentals being misrepresented and on the positive future free cash flow growth. Based on the terminal growth rate, your expected return from the weighted average cost of capital, and the intrinsic value of the company, you buy or short the company based on the difference between its intrinsic price and current price. So if markets are not efficient, where are the inefficiencies and how inefficient are they? This question shows the favor between value stocks versus growth stocks.
The best bars in the world.
Slowing of Global Manufacturing. Recent manufacturing data leads us to the worst period for manufacturing since the last major recession (2007-2009). This is shown through the ISM index (Institute for Supply Management), which has been in a steady downfall since the majority of tariffs were imposed on China starting in June 2018. This was only made worse this last week, with ISM falling from 49.1% to 47.8%. Although a small fall, the ISM has a key point of 50%, with numbers above indicating an increasing business environment, and below the contrary. The main reason for this sharp downward movement has to do with the trade war and tariffs the US and China have been imposing. Although the cause is pretty clear, the effects can get pretty complicated. People tend to believe this is an indicator of an impending economic slowdown, with manufacturers forecasting lower demand, and a potential recession. Personally, I disagree with both of the former arguments. I believe this is solely the effect of a decrease in the supply of raw materials from China, and manufacturing becoming more expensive in the US. Realistically, manufacturing only accounts for about 11% of the US’s total GDP, while it accounts for 27% of China’s GDP.
The single greatest mistake investors make. Recency bias. Trend following. Momentum investing. The illusion in which a thing that has recently come to one’s attention suddenly seems to appear with improbable frequency shortly afterward. Not using technical indicators and fundamentals which creates blind spots. A psychological dynamic that operates according to well-defined psychological principles based on the belief that past growth in market prices is strong evidence for more growth in the future. Most recently, this has been shown in 2019’s IPOs. IPOs are the hottest, new companies that go public; where investors like you and I can publicly trade them and buy ownership in them. Since inception returns: Beyond Meats +120%, Peloton -11%, Uber -29%, Lyft -50%, Pinterest +12%, Zoom +25%, Levi Strauss -12%, Fiverr -50%, Slack -36%, Chewy -30%, and CrowdStrike Holdings +10%. This shows that trend following and buying into “hype” is not a smart investing plan, and its very risky and most of the time not profitable.
Productivity and Motivation. Productivity is the name we give our attempts to figure out the best uses of our energy, intellect and time as we try to seize the most meaningful rewards with the least wasted effort. It isn’t about working more or sweating harder, it is about making certain choices in certain ways. Productivity rises when people do the same kind of tasks over and over. Repetition makes us faster and more efficient because we don’t have to learn fresh skills with each new assignment. To motivate ourselves, we must feel like we are in control. When people believe they are in control, they tend to work harder and push themselves more. When we start a new task or confront an unpleasant chore, we should take a moment to ask ourselves “why”. If you can link something hard to a choice you care about, it makes the task easier. The best productivity strategies: assign a fixed period of time to a task, schedule it and stick to it. Prioritize. Politely decline (say no!) so that you can focus on the most important work. Moving around does a lot for you. Clear your desk of distracting devices and see how much more you get done with fewer distractions. Take short breaks. Eat well. Choose when to check your email. Organize your workspace. Wake up early.
China’s Debt. We've all heard about how China's economy is seeing slower growth, and how many analysts believe this will lead to a global economic pull-back. One interesting aspect of China's economy is their debt level. In the first quarter of 2019, China's debt was over 300% of its GDP, up from a year ago. To put it into perspective, the United States', which has an infamous debt, debt-to-GDP ratio was just over 106, meaning total debt was 106% of GDP. China has nearly triple that.
What led to all this debt? The Chinese government pumping out credit in order to spur economic growth. Now that growth is slowing down, this debt issue is becoming more serious.
One interesting venture that this debt was used on is Ghost Cities. Essentially, China has constructed about 50 cities, each designed to house hundreds of thousands of people, and most are completely empty. On the one hand, individuals believe that this has allowed China to boost its infrastructure and investment in property. Furthermore, each city has the potential to create jobs. However, I have a more critical view. I see the construction of these ghost cities has a faux method of mimicking economic growth. Obviously, China's economy has seen immense legitimate growth. Yet, these Ghost Cities are not authentic infrastructure enhancement. It’s a way of creating fake, unsustainable jobs that there is no demand for. In doing so, they are disrupting the natural supply and demand market. Furthermore, there is no plausible way to continue this process. They can't just keep building cities that nobody will live in. I believe that this "project" headlines the debt issue, and this debt issue is one that will lead the already in progress depression of the Chinese economy.
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.