Posts filed under ‘Asset Allocation’
From Rocket Ship to Roller Coaster
The stock market has been like a rocket ship over the last three years 2019/2020/2021, advancing +90% as measured by the S&P 500 index, and +136% for the NASDAQ. After this meteoric multi-year rise, stock values started to come back to earth in 2022, and the rocket ship turned into a roller coaster during January. More specifically, the S&P 500 fell -5% for the month and the NASDAQ -9%. Yes, it’s true volatility has increased, and your blood pressure may have risen with all the ups and downs. However, the fact remains the economy remains strong, corporate profits are at record levels, unemployment is low, and interest rates remain at attractive levels despite nagging inflation (see chart below) and the removal of accommodative monetary policies by the Federal Reserve.
Math Matters
I did okay in school and was educated on many different topics, including the basic principle that math matters. This notion rings especially true when it comes to finance and investing. As I have discussed numerous times in the past, money goes where it is treated best, which is why interest rates, cash flows, and valuations play such a key role in ultimately determining long-term values across all asset classes. This concept of money seeking the best home applies equally to stocks, bonds, real estate, commodities, crypto-currencies, and any other asset class you can imagine because interest rates help determine the cost of holding and using money.
Normally, mathematics teaches us the lesson that more is better when discussing financial matters. And currently the stock market is compensating investors significantly more for investing in stocks relative to investing in bonds – I have reviewed this concept repeatedly on my Investing Caffeine blog (see Going Shopping: Chicken vs. Beef ). Currently, investors are getting paid about +5% to hold stocks based on the forward earnings yield (i.e., the inverse of the stock market’s Price-Earnings ratio of 20x) vs. the +2% yield on the 10-Year Treasury Note (1.78% more precisely on 1/31/22). What’s more, historically speaking, stock investors typically get rewarded with an earnings yield that doubles about every 10 years, whereas bond yields usually remain stagnantly flat, if bonds are held until maturity.
With that said, I am always quick to point out that diversification in a portfolio is important (i.e., most people should at least own some bonds), even if bonds are currently very expensive relative to other asset classes (see Sleeping on Expensive Financial Pillows). If bond yields climb significantly to the point where returns are more competitive with stocks, I will likely be buying significantly more bonds for me and my Sidoxia (www.sidoxia.com) clients.
Fed Jitters
The recent stock market volatility is reinforcing the idea that the Federal Reserve’s more aggressive stance regarding hiking interest rates is making many investors very anxious – just not me. I have lived through many tightening cycles in my lifetime and lived to tell the tale. It is true that all else equal, higher interest rates generally depress asset values, but it is also important to place the current interest rate environment in historical context. Although the Federal Funds interest rate target is expected to increase to 2.5% over the next few years (currently at 0%), this forecast is nothing new and there is no guarantee the Fed can successfully pull off this feat. Many people have short memories and forget the Fed hiked interest rates 10 times from the end of 2015 through 2018. In the face of this scary period, the stock market (S&P 500) still managed to approximately climb a respectable +22% (albeit with some volatility). Furthermore, if you give the Fed the benefit of the doubt of achieving this uncertain target, this 2.5% level is very appealing and still extremely low, historically speaking (see chart below).
When discussing interest rates and inflation, investors should also expand their views globally to the other 95% of the world’s population. Many investors are very myopic in their focus on U.S. interest rates. It is important to understand that rates are not just low here in the United States, but also low almost everywhere else as well. While international interest rates have bounced marginally higher in recent months, those countries’ long-term international rates, by and large, remain tremendously low too – in most cases even lower than rates in the U.S. (see chart below). Yes, the Fed has some control over short-term interest rates in the U.S., but considering other crucial forces that are depressing long-term global rates is worth pondering. Factors such as globalization and the pervading expansion of deflationary technology into our personal and work lives are contributing to disinflation. Valuable conclusions can be synthesized beyond digesting the pessimistic and nauseating analysis of Jerome Powell’s Congressional testimony, along with the needless wordsmithing of recent Fed minutes.
In order to earn above-average, financial returns in your portfolio over the long-run, experiencing unsettling volatility and corrections is the price of doing business. Flying on rocket ships might be fun, but sometimes the rocket can run out of gas, and you are forced to jump on a roller coaster. The ups-and-downs can be frustrating at times, but if you stay on for the full ride, you will almost always end with a smile on your face when it’s over.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2022). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Cash Is Trash
The S&P 500 stock market index took a breather and ended its six-month winning streak, declining -4.8% for the month. Even after this brief pause, the S&P has registered a very respectable +14.7% gain for 2021, excluding dividends. Nevertheless, even though the major stock market indexes are roaming near all-time record highs, FUD remains rampant (Fear, Uncertainty, Doubt).
As the 10-Year Treasury Note yield has moved up to a still-paltry 1.5% level this month, the talking heads and peanut gallery bloggers are still fretting over the feared Federal Reserve looming “tapering”. More specifically, Jerome Powell, the Fed Chairman and the remainder of those on the FOMC (Federal Open Market Committee) are quickly approaching the decision to reduce monthly bond purchases (i.e., “tapering”). The so-called, quantitative easing (QE) program is currently running at about $120 billion per month, which was established with the aim to lower interest rates and stimulate the economy. Now that the COVID recovery is well on its way, the Fed is effectively trying to decrease the size of the current, unruly punch-keg down to the volume of a more manageable punch bowl.
Stated differently, even when the arguably overly-stimulative current bond buying slows or stops, the Federal Funds Rate is still effectively set at 0% today, a level that still offers plenty of accommodative fuel to our economy. Although interest rates will not stay at 0% forever, many people forget that between 2008 and 2015, the Fed Funds Rate stubbornly stayed sticky at 0% (i.e., a full punch bowl) for seven years, even without any spike in inflation.
Because the economy continues to improve, current consensus projections by economists show the first interest rate increase of this cycle (i.e., “liftoff”) to occur sometime in 2022 and subsequently climb to a still extraordinarily low level of 2.0% by 2024 (see “Dot Plot” below). For reference, the projected 2.0% figure would still be significantly below the 6.5% Fed Funds Rate we saw in the year 2000, the 5.3% in 2007, or the 2.4% in 2019. If history is any guide, under almost any scenario, Chairman Powell is very much a dove and is likely to tap the interest rate hike brakes very gently.
Low But Not the Lowest
In a world of generationally low interest rates, what I describe as our low bond yields here in the United States are actually relatively high, if you consider rates in other major industrialized economies and the trillions of negative-interest-rate bonds littered all over the rest of the world (see August’s article, $16.5 Trillion in Negative-Yielding Debt). Although our benchmark government rates are hovering around 1.5%, as you can see from the chart below, Germany is sitting considerably lower at -0.2%, Japan at 0.1%, France at 0.2%, and the United Kingdom at 1.0%.
Taper Schmaper
As with many government related policies, the Federal Reserve often gets too much credit for successes and too much blame for failures, as it relates to our economy. I have illustrated the extent of how globally interconnected our world of interest rates is, and one taper announcement is unlikely to reverse a four-decade disinflationary declining trend in interest rates.
Back in 2013, after of five years of quantitative easing (QE) that began in 2008, investors were terrified that interest rates were artificially being depressed by a money-printing Fed that had gone hog-wild in bond buying. At that time, pundits feared an imminent explosion higher in interest rates once the Fed began tapering. So, what happened after Federal Reserve Chairman Ben Bernanke broached the subject of tapering on June 19, 2013? The opposite occurred. Although 10-Year yields jumped 0.1% to 2.3% on the day of the announcement, interest rates spent the majority of the next six years declining to 1.6% in 2019, pre-COVID. As COVID began to spread globally, rates declined further to 0.95% in March of 2020, the day before Jerome Powell announced a fresh new round of quantitative easing (see chart below).
Obviously, every economic period is different from previous ones, and fearing to fall off the floor to lower interest rate levels is likely misplaced at such minimal current rates (1.5%). However, panicking over potential exploding interest rates, as in 2013 (which did not happen), again may not be the most rational behavior either.
What to Do?
If interest rates are low, and inflation is high (see chart below), then what should you do with your money? Currently, if your money is sitting in cash, it is losing 4-5% in purchasing power due to inflation. If your money is sitting in the bank earning minimal interest, you are not going to be doing much better than that. Everybody’s time horizon and risk tolerance is different, but regardless of your age or anxiety level, you need to efficiently invest your money in a diversified portfolio to counter the insidious, degrading effects of inflation and generationally low interest rates. The “do-nothing” strategy will only turn your cash into trash, while eroding the value of your savings and retirement assets.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
A Better Mousetrap
How do you earn better investment returns for your retirement? The short answer: You must find a better mousetrap.
In the current economic environment, finding a better mousetrap to prevent infestations inside your investment portfolio can be a challenge. Concerns over the COVID delta variant, rising inflation, Federal Reserve policy (i.e., “tapering”), and geopolitical tensions (Afghanistan) remain looming in the background. However, the economy continues to expand at a healthy pace (+6.6% Q2 – Gross Domestic Product growth has soared to record heights (see charts below).
The rising economic tide has lifted various stock market indices to new record highs. For the month, the S&P 500 and Dow Jones Industrial Average powered ahead +2.9% and +1.2%, respectively. For the year, these hot results are even more singeing – the S&P 500 has surged +20.4% and the Dow +15.5%.
All good things eventually come to an end, so protecting your financial home against damaging economic rodents is paramount. How you will defend your savings against an inevitable correction and insidious inflation is essential.
Investing with a better mousetrap will allow you to catch better returns, accelerate your retirement, and help avoid the infestation of inflation eating away at your nest egg. If you turn on any financial channel or click on an investment advertisement, chances are someone will attempt to sell you some overpriced, whiz-bang strategy or investment mousetrap that claims to capture amazing, quick results. More often than not, those assertions are complete lies. As Granny Slome always used to tell me, “If it sounds too good to be true, then it probably is.”
Mousetrap Characteristics
What should you be looking for in your investing mousetrap? Here are five characteristics to build upon:
1) Have a long-term time horizon. There is no reliable get-rich-quick scheme that will consistently make you money. Whereas, investing over the long-term in a diversified portfolio generally affords you the luxury of “compounding”, the phenomenon that Einstein called the “eighth wonder of the world.” Chasing the meme stock du jour, crypto currency flavor of the month, and/or the daily day-trading strategy parroted on TV will only lead to a pool of financial tears.
2) Invest in low-cost investment vehicles and strategies. The less you pay in fees, taxes, and transaction costs means the more you can keep for yourself. Investing in low-fee ETFs (Exchange Traded Funds), liquid low-spread securities, and $0 commission trading platforms, along with maintaining long-term holdings to minimize taxes, are all approaches to keeping more money for your growing retirement nest egg.
3) Obtain a customizable strategy to fit your risk tolerance and financial situation. Everyone has a unique financial profile and risk appetite. What’s more, everybody’s situation does not remain static. Circumstances change and life has a way of throwing curveballs at you. Finding a competent investment professional, who is also a fiduciary, is easier said than done, but if you are able to work with an advisor like Sidoxia Capital Management (www.Sidoxia.com), this will afford you the benefit of making prudent adjustments to your situation as it changes.
4) Find an understandable and transparent investment strategy. If your advisor or investment manager cannot explain the strategy and outline the specific costs/fees, then you should look elsewhere. Understanding the objective and strategy of your investments is critical, otherwise volatility can lead to emotional, sub-optimal decision-making. Hidden costs compromise the integrity of the investment advisor, so do not associate yourself with these sketchy people.
5) Rely on proven results. Past results do not guarantee future returns, however, aligning your investment strategy with time-tested results can provide you peace of mind. At the end of the day, your investments need to perform, and having an experienced investment manager is a valuable asset for you.
There is never a shortage of concerns in the financial markets, in both good and bad times. Rather than lose sleep and nervously chew down your fingernails, relax and spend your time finding a better mousetrap.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Return to Rationality?
As the worst pandemic in more than a generation is winding down in the U.S., people are readjusting their personal lives and investing worlds as they transition from ridiculousness to rationality. After many months of non-stop lockdowns, social distancing, hand-sanitizers, mask-wearing, and vaccines, Americans feel like caged tigers ready to roam back into the wild. An incredible amount of pent-up demand is just now being unleashed not only by consumers, but also by businesses and the economy overall. This reality was also felt in the stock market as the Dow Jones Industrial Average powered ahead another 654 points last month (+1.9%) to a new record level (34,529) and the S&P 500 also closed at a new monthly high (+0.6% to 4,204). For the year, the bull market remains intact with the Dow gaining almost 4,000 points (+12.8%), while the S&P 500 has also registered a respectable +11.9% return.
The story was different last year. The economy and stock market temporarily fell off a cliff and came to a grinding halt in the first quarter of 2020. However, with broad distribution of the vaccines and antibodies gained by the previously infected, herd immunity has effectively been reached. As a result, the U.S. COVID-19 pandemic has essentially come to an end for now and stock prices have continued their upward surge since last March.
Insanity to Sanity?
With the help of the Federal Reserve keeping interest rates at near-0% levels, coupled with trillions of dollars in stimulus and proposed infrastructure spending, corporate profits have been racing ahead. All this free money has pushed speculation into areas such as cryptocurrencies (i.e., Bitcoin, Dogecoin, Ethereum), SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (GameStop Corp, AMC Entertainment), and highly valued, money-losing companies (e.g., Spotify, Uber, Snowflake, Palantir Technologies, Lyft, Peloton, and others). The good news, at least in the short-term, is that some of these areas of insanity have gone from stratospheric levels to just nosebleed heights. Take for example, Cathie Wood’s ARK Innovation Fund (ARKK) that invests in pricey stocks averaging a 91x price-earnings ratio, which exceeds 4x’s the valuation of the average S&P 500 stock. The ARK exchange traded fund that touts investments in buzzword technologies like artificial intelligence, machine learning, and cryptocurrencies rocketed +149% last year in the middle of a pandemic, but is down -10.0% this year. The Grayscale Bitcoin Trust fund (GBTC) that skyrocketed +291% in 2020 has fallen -5.6% in 2021 and -48.1% from its peak. What’s more, after climbing by more than +50% in less than four months, the Defiance NextGen SPAC fund (SPAK) has declined by -28.9% from its apex just a few months ago in February. You can see the dramatic 2021 underperformance in these areas in the chart below.
Inflation Rearing its Ugly Head?
The economic resurgence, weaker value of the U.S. dollar, and rising stock prices have pushed up inflation in commodities such as corn, gasoline, lumber, automobiles, housing, and a whole host of other goods (see chart below). Whether this phenomenon is “transitory” in nature, as Federal Reserve Chairman Jerome Powell likes to describe this trend, or if this is the beginning of a longer phase of continued rising prices, the answer will be determined in the coming months. It’s clear the Federal Reserve has its hands full as it attempts to keep a lid on inflation and interest rates. The Fed’s success, or lack thereof, will have significant ramifications for all financial markets, and also have meaningful consequences for retirees looking to survive on fixed income budgets.
As we have worked our way through this pandemic, all Americans and investors look to change their routines from an environment of irrationality to rationality, and insanity to sanity. Although the bull market remains alive and well in the stock market, inflation, interest rates, and speculative areas like cryptocurrencies, SPACs, meme-stocks, and nosebleed-priced stocks remain areas of caution. Stick to a disciplined and diversified investment approach that incorporates valuation into the process or contact an experienced advisor like Sidoxia Capital Management to assist you through these volatile times.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, AMC, SPOT, UBER, SNOW, PLTR, LYFT, PTON, GBTC, SPAK, ARKK or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Consumer Confidence Flies as Stock Market Hits New Highs
As the economy starts reopening from a global pandemic that is improving, consumers and businesses are beginning to see a light at the end of the tunnel. The surge in the recently reported Consumer Confidence figures to a new one-year high (see chart below) is evidence the recovery is well on its way. A stock market reaching new record highs is further evidence of the reopening recovery. More specifically, the Dow Jones Industrial Average catapulted 2,094 points higher (+6.2%) for the month to 32,981 and the S&P 500 index soared +4.2%. A rise in interest rate yields on the 10-Year Treasury Note to 1.7% from 1.4% last month placed pressure on technology growth stocks, which led to a more modest gain of +0.4% in the tech-heavy NASDAQ index during March.
Comeback from COVID
With a combination of 150 million vaccine doses administered and 30 million cumulative COVID cases, the U.S. population has creeped closer toward herd immunity protection against the virus and pushed down hospitalizations dramatically (see chart below).
Also contributing to investor optimism have been the rising values of investments and real estate assets thanks to an improving economy and COVID case count. As you can see from the chart below, the net worth of American households has more than doubled from the 2008-2009 financial crisis to approximately $130 trillion dollars, which in turn has allowed consumers to responsibly control and manage their personal debt. Unfortunately, the U.S. government hasn’t been as successful in keeping debt levels in check.
Spending and Paying for Infrastructure Growth
Besides focusing on positive COVID trends, investors have also centered their attention on the passage of a $1.9 trillion stimulus bill last month and a new proposed $2.3 trillion infrastructure bill that President Biden unveiled details on yesterday. At the heart of the multi-trillion dollar spending are the following components (see also graphic below):
- $621 billion modernize transportation infrastructure
- $400 billion to assist the aging and disabled
- $300 billion to boost the manufacturing industry
- $213 billion to build and retrofit affordable housing
- $100 billion to expand broadband access
With over $28 trillion in government debt, how will all this spending be funded? According to The Fiscal Times, there are four main tax categories to help in the funding:
Corporate Taxes: Raising the corporate tax rate to 28% from 21% is expected to raise $730 billion over 10 years
Foreign Corporate Subsidiary Tax: A new global minimum tax on foreign subsidiaries of American corporations is estimated to raise $550 billion
Capital Gains Tax on Wealthy: Increasing income tax rates on capital gains for wealthy individuals is forecasted to raise $370 billion
Income Tax on Wealthy: Lifting the top individual tax rate back to 39.6% for households earning more than $400,000 per year is seen to bring in $110 billion
Besides the economy being supported by government spending, growth and appreciation in the housing market are contributing to GDP growth. The recently released housing data shows housing prices accelerating significantly above the peak levels last seen before the last financial crisis (see chart below).
Although the economy appears to be on solid footing and stock prices have marched higher to new record levels, there are still plenty of potential factors that could derail the current bull market advance. For starters, increased debt and deficit spending could lead to rising inflation and higher interest rates, which could potentially choke off economic growth. Bad things can always happen when large financial institutions take on too much leverage (i.e., debt) and speculate too much (see also Long-Term Capital Management: When Genius Failed). The lesson from the latest, crazy blow-up (Archegos Capital Management) reminds us of how individual financial companies can cause billions in losses and cause ripple-through effects to the whole financial system. And if that’s not enough to worry about, you have rampant speculation in SPACs (Special Purpose Acquisition Companies), Reddit meme stocks (e.g., GameStop Corp. – GME), cryptocurrencies, and NFTs (Non-Fungible Tokens).
Successful investing requires a mixture of art and science – not everything is clear and you can always find reasons to be concerned. At Sidoxia Capital Management, we continue to find attractive opportunities as we strive to navigate through areas of excess speculation. At the end of the day, we remain disciplined in following our fundamental strategy and process that integrates the four key legs of our financial stool: corporate profits, interest rates, valuations, and sentiment (see also Don’t Be a Fool, Follow the Stool). As long as the balance of these factors still signal strength, we will remain confident in our outlook just like consumers and investors are currently.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Investors Ponder Stimulus Size as Rates Rise
Stock prices rose again last month in part based on passage optimism of a government stimulus package (currently proposed at $1.9 trillion). But the rise happened before stock prices took a breather during the last couple of weeks, especially in hot growth sectors like the technology-heavy QQQ exchange traded fund, which fell modestly by -0.1% in February. As some blistering areas cooled off, investors decided to shift more dollars into the value segment of the stock market (e.g., the Russell 1000 Value index soared +6% last month). Over the same period, the S&P 500 and Dow Jones Industrial Average indexes climbed +2.6% and +3.2%, respectively.
What was the trigger for the late-month sell-off? Many so-called pundits point to a short-term rise in interest rates. While investor anxiety heightened significantly at the end of the month, the S&P 500 dropped a mere -3.5% from all-time record highs after a slingshot jump of +73.9% from the March 2020 lows.
Do Rising Interest Rates = Stock Price Declines?
Conventional wisdom dictates that as interest rates rise, stock prices must fall because higher rates are expected to pump the breaks on economic activity and higher yielding fixed income investments will serve as better alternatives to investing in stocks. Untrue. There are periods of time when stock prices move higher even though interest rates also move higher
Take 2013 for example – the yield on the benchmark 10-Year Treasury Note climbed from +1.8% to 3.0%, while the S&P 500 index catapulted +29.6% higher (see charts below).
Similarly to now, during 1994 we were still in a multi-decade, down-trending interest rate environment. However, from the beginning of 1994 to the middle of 1995 the Federal Reserve hiked the Federal Funds interest rate target from 3% to 6% (and the 10-Year Treasury yield temporarily climbed from about 6% to 8%), yet stock prices still managed to ascend +17% over that 18-month period. The point being, although rising interest rates are generally bad for asset price appreciation, there are periods of time when stock prices can move higher in synchronization with interest rates.
What’s the Fuss about Stimulus?
One of the factors keeping the stock market afloat near record highs is the prospect of the federal government passing a COVID stimulus package to keep the economic recovery continuing. Even though there is a new administration in the White House, Democrats hold a very narrow majority of seats in Congress, leaving a razor thin margin to pass legislation. This means President Biden needs to keep moderate Democrats like Joe Manchin in check, and/or recruit some Republicans to jump on board to pass his $1.9 trillion COVID stimulus plan. If the bill is passed as proposed, “The relief plan would enhance and extend jobless benefits, provide $350 billion to state and local governments, send $1,400 to many Americans and fund vaccine distribution, among other measures,” according to the Wall Street Journal.
Valuable Vaccines
Fresh off the press, we just received additional good news on the COVID vaccine front. The U.S. Food and Drug Administration (FDA) approved the third vaccine for COVID-19 by Johnson & Johnson (JNJ). This J&J treatment is also the first single-dose vaccine to be distributed, unlike the other two vaccines manufactured by Pfizer Inc. (PFE) and Moderna Inc. (MRNA), which both require two shots. Johnson & Johnson expects to ship four million doses immediately and 20 million doses by the end of March.
So far, over 50 million doses of the COVID vaccines have been administered, and the White House believes they can go from currently about 1.5 million injections per day to approximately 4 million people per day by the end of March. The combination of the vaccines, mitigation behavior, and a slow march towards herd immunity have resulted in encouraging COVID trends, as you can see from the chart below. However, the bad news is new COVID cases, hospitalizations, and deaths still remain above peak levels experienced last spring and summer.
Revived Recovery
Thanks to the improving COVID trends, a continued economic recovery driven by reopenings, along with fiscal and monetary stimulus, business profits and revenues have effectively recovered all of the 2020 pandemic losses within a year (see chart below).
But with elevated stock prices have come elevated speculation, which we have seen bubble up in various forms. With the rising tide of new investors flooding onto new trading platforms like Robinhood, millions of individuals are placing speculative bets in areas like Bitcoin; new SPACs (Special Purpose Acquisition Companies); overpriced, money-losing cloud software companies; and social media recommended stocks found on Reddit’s WallStreetBets like GameStop (GME), which was up +150% alone last week. At Sidoxia Capital Management, we don’t spend a lot of time chasing the latest fad or stock market darling. Nevertheless, as long-term investors, we continue to find attractively valued investment opportunities that align with our clients’ objectives and constraints.
Overall, the outlook for the end of this pandemic looks promising as multiple COVID vaccines get administered, and the economic recovery gains steam with the help of reopenings and stimulus. If rising interest rates and potential inflation accelerate, these factors could slow the pace of the recovery and limit future stock market returns. However, if you follow a systematic, disciplined, long-term investment plan, like we implement at Sidoxia, you will be in a great position to prosper financially over the long-run.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in MRNA, PFE, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, JNJ, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Market Drops as GameStop Pops
The stock market started with a bang this year with the S&P 500 index at first climbing +3% in January before ending with a whimper and a monthly decline of -1%. This performance followed a strong finish to a wild 2020 presidential election year (the S&P 500 rose +16%). There has been plenty of focus on the coronavirus health crisis and vaccine distribution (100 million doses in 100 days), along with debates over a $1.9 trillion proposed relief package by newly elected President Joe Biden, but there has been another story stealing attention in the financial market headlines…GameStop.
If a global pandemic and a populist attack on the Capitol were not enough for investors, the Reddit (WallStreetBets) and Robinhood revolution coordinated a mass attack on privileged hedge funds and short sellers by squeezing out-of-favor stocks like GameStop (Ticker: GME) to stratospheric levels (up +1,625% to $325/share in January alone) causing an estimated $20 billion of losses for many wealthy elites. To put the meteoric rise into perspective, before GameStop shares reached $325, the stock was valued below $20/share last month and has climbed more than 100x-fold from a low $2.57/share nine months ago (see chart below).
What Exactly Happened?
Well, millions of users on the social media platform Reddit banded together on a forum called “wallstreetbets” (see graphic below). WallStreetBets was established in 2012 and had approximately 1 million subscribers at the beginning of 2021 – today it has more than 7 million subscribers. Millions of these anti-establishment WallStreetBets followers effectively colluded together to inflate the share price of GameStop by ganging up on the many short sellers who were betting that GameStop share price would drop. In other words, Reddit-Robinhood buyer gains led to short seller losses. One hedge fund in particular, Melvin Capital, lost billions of dollars on its GameStop short bet and saw its fund performance decline by a whopping -53% in one month…ouch!
The Reddit WallStreetBets forum may have served as the match in this wildfire, but in order to trigger an inferno, a brokerage account is needed. A trading platform allows individual traders on Reddit to level the playing field against the hedge fund professionals and short sellers. The fuel for the GameStop detonation was Robinhood, a fintech (Financial Technology) brokerage firm founded in Silicon Valley in 2013 by two Stanford University graduates. The mission of the company is to “democratize finance for all.” But let’s not forget what Thomas Jefferson noted, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.” The Reddit-Robinhood mob certainly proved this point.
Although Robinhood was initially seen as a saint in the free trading revolution, eventually many of the brokerage company’s disciples became disenfranchised. Many users subsequently turned on the company and considered Robinhood a villain that was rigging the system when CEO Vlad Tenev halted the ability of its 13+ million users to buy GameStop shares.
Many traders came to the conclusion that Robinhood was working to save the perceived hedge fund bad guys by the firm temporarily terminating user purchases in GameStop stock. Mr. Tenev blamed regulatory capital requirements as a reason for disallowing Robinhood-ers to buy GameStop last week, which was a major contributing factor to why the stock price plummeted by -44% on January 28th. The following day, Robinhood partially reversed its stance and subsequently allowed minimal daily purchases of one share.
How Does Short Selling Work?
In the stock market, you can make gains by buying shares that go up in price, or you can make profits by short selling shares that go down in price. If you buy a stock, the most money you could lose is -100% of your original investment. For example, if you invest $1,000 into GameStop stock by buying 50 shares at $20 each, if the stock price goes to $0, the most the investor/trader could lose is 100% of their $1,000 original investment.
On the flip side, if you short a stock, the potential losses are limitless. For example, if you (or a hedge fund manager) shorts $1,000 of GameStop stock by selling 50 shares short at $20 each, if the stock price goes to $60, the short seller just loss -200% of their original investment [($20/shr – $60/shr) X 50 shares] = -$2,000. If GameStop goes to $100, the short seller loses -400%, and if GameStop price goes to $220, the short seller loses -1,000%. As you can see, the higher the price goes, there are infinite potential losses of the investor, trader, or hedge fund manager.
If a stock price continues to move higher, the only way for a short seller to stop the bleeding (i.e., close their short position or “bet”) is to buy shares. As a reminder, a buyer of stock closes their position by selling shares after they originally buy shares. A short seller closes their position by buying shares after they initially sell shares short. So again, if GameStop share price continues to move higher, the only way for GameStop short sellers to stop their losses is to buy more GameStop shares. This is the equivalent of pouring gasoline on a blazing fire because as millions of Reddit/Robinhood-ers are pushing GameStop’s share price higher almost every day, short selling hedge fund managers are left scrambling for the exits and forced to close their positions at even higher prices (i.e., larger losses).
What Does This All Mean?
Whether you are talking about speculation in Bitcoin, the rise of SPACs (Special Purpose Acquisition Companies), the increase in the number of IPOs (Initial Public Offerings), or the Reddit-Robinhood Revolution, risk appetite has been on the rise and long-term investors should proceed very cautiously. Just as many have experienced on trips to Las Vegas, big winnings can quickly turn to huge losses. Although it’s certainly fun to watch the individual Davids take down the hedge fund/short selling Goliaths, if the Reddit-Robinhood community gets too aggressive in its speculation, history shows us they will end up being the ones swimming in their tears or stoned to death.
If you need assistance navigating through all these land mines, please give us a call at Sidoxia Capital Management (949-258-4322) for a complimentary portfolio review.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2021). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in GME, AMC, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Technology: Let the Good Times Roll
Investing in technology, including the likes of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) has been a lucrative strategy over the last two decades, especially since the end of the bursting dot-com technology bubble in 2002. From the bottom in 2002 through the end of August 2020, the technology-heavy NASDAQ index has returned a staggering 959%.
Although not as dramatic, this year’s rebound in stock prices since the March peak of the COVID-19 pandemic crisis has been fierce. You may not have heard of stay-at-home and COVID-19 related stocks like Teledoc, DocuSign, and Zoom before the crisis but you certainly have now. Technology names and other “COVID stocks” have helped fuel the massive 31% rally in the NASDAQ from January until the end of last month. Many investors, including Sidoxia, are benefactors of this surge. However, good times rarely last forever.
Shifting Trends
Although technology investment generally comprises a larger percentage of “growth” style indexes, there are cycles or periods of time when “value” investment indexes have their time in the sun. For example, the NASDAQ index fell from a high of roughly 5,132 in March of 2000 to 1,112 in October of 2002 (-78%). The Vanguard Value index only fell about -33 over the same time period. Over the comparable time frame, the S&P 500 index lost -44% (see below).
Not a New Subject
Long time readers may think I sound like a broken record – I have been writing about the fruits of technology for well over 10 years. Those interested can revisit some those thoughts here:
–Investors Slowly Waking to Technology Tailwinds (2017)
–Rise of the Robots (2016)
–NASDAQ Redux (2015)
–NASDAQ and the R&D-Tech Revolution (2014)
–NASDAQ: The Ugly Stepchild Index (2012)
–Innovative Bird Keeps All the Worms (2011)
–Living Large – Technology Revolution Raises Tide (2010)
–Technology Does Not Sleep in a Recession (2009)
A Word of Caution
Despite my favor toward long term technology trends, every ride can’t last forever. It is important for investors to stop and take stock of how far and how fast any particular investment grows. Experienced, long term investors like Sidoxia have been able to find good opportunities regardless of a trend being in or out of favor.
When referencing the technology bubble 20 years ago, it is impossible to ignore then Fed Chairman Alan Greenspan’s “Irrational Exuberance” speech warning about high stock market valuations. That infamous speech was on December 5, 1996 – three and a half years before the peak. Had you sold out then you would have missed the NASDAQ’s massive 295% rally. In other words, it is impossible to time the market or predict how long and how far trends will continue, even when pockets of euphoria exist.
At Sidoxia, we constantly evaluate, monitor, and rebalance when needed – taking profits from winners while redeploying to attractive, under performing opportunities. Technology will not simply stop evolving, even if the mega trend rotates out of favor with investors. At present time it may be a volatile arena going forward and investors should be active in managing their risk.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 1, 2020). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, AMZN, GOOGL, FB, MSFT, TDOC, DOCU, ZM and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in VIVAX or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Fink & Capitalism: Need 4 Kitchens in Your House?
Do you need four kitchens in your house? Apparently financial industry titan Larry Fink does. If Mr. Fink were a designer for millionaire homeowners, he would advise them to use their millions to build more kitchens in their house (reinvest) rather than distribute those monies to family members (dividends) or use that money to pay back an equity loan from mom and dad for the down payment (share buybacks). Essentially that is exactly what is happening in the stock market. Companies that are generating record profits and margins (millionaires) are increasingly choosing to pay out larger percentages of profits to stockholders (family members) in the form of rising dividends and share buybacks. Contrary to Mr. Fink’s belief, corporate America is actually doing plenty with room additions, landscaping, and roof replacements – I will describe more later.
As a consequence of corporate America’s increasingly shareholder friendly practices of returning cash, Fink believes this trend will stifle innovation and long-term growth in American companies. Here’s a snapshot of the supposed dividend/buyback problem Mr. Fink describes:
Source: Financial Times
Fink Mails Letter from Soapbox
For those of you who do not know who Larry Fink is, he is the successful Chairman and CEO of BlackRock Inc. (BLK), an investment manager which oversees about $4.65 trillion in investment assets. Mr. Fink ignited this recent financial controversy when he jumped on his soapbox by mailing letters to 500 CEOs lecturing them on the importance of long-term investing. What is Mr. Fink’s beef? Fink’s issues revolve around his belief that CEOs and corporations are too short-term oriented.
In his letter, Mr. Fink had this to say:
“This pressure [to meet short-term financial goals] originates from a number of sources—the proliferation of activist shareholders seeking immediate returns, the ever-increasing velocity of capital, a media landscape defined by the 24/7 news cycle and a shrinking attention span, and public policy that fails to encourage truly long-term investment.”
He goes on to bolster his argument with the following:
“More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
What Mr. Fink does not say in his letter is that large, multinational S&P 500 corporations driving this six-year bull run are sitting on a record hoard of cash, exceeding $1.4 trillion (see chart below). In this light, it should come as no surprise that CEOs are forking over more cash to investors in the forms of dividends and share repurchases.
What’s more, despite Fink’s assertion that share buybacks and dividends are killing innovation, he also fails to mention in his letter that 2014 capital expenditures of $730 billion are also at a record level. That’s right, CAPEX has not been cut to the bone as he implies, but rather risen to all-time highs.
It’s true that generationally low (and declining) interest rates have accelerated the pace of dividends/repurchases, however dividend payout ratios (the percentage of profits distributed to shareholders) of about 32% remain firmly below the long-term payout ratio of approximately 54% (see chart below) – see also Dividend Floodgates Widen. I find it difficult to fault many companies doing something with the gargantuan piles of inflation-losing cash anchoring their balance sheets. Don’t cash-rich companies have a fiduciary duty to borrow reasonable amounts of near-0% debt today (see Bunny Rabbit Market) in exchange for share buybacks currently providing returns of about 5.5% (inverse of 18x P/E ratio) and likely yielding 7%+ returns five years from now?
Source: Financial Times
The “Short-Term” Poster Child – Apple
There is no arguing that excessive debt eventually can catch up to a company. Our multi-year expanding economy is eventually due for another recession in the coming years, and there will be hell to pay for irresponsible, overleveraged companies. With that said, let’s take a look at the poster child of “short-termism” according to Mr. Fink …Apple Inc. (AAPL).
Of the roughly $500 billion in buybacks spent by S&P 500 companies in 2014, Apple accounted for approximately $45 billion of that figure. On top of that, CEO Tim Cook and his board generously decided to return another $11 billion to shareholders in the form of dividends. Has this “short-term” return of capital stifled innovation from the company that has launched iPhone version 6, iPad, Apple Watch, Apple Pay, and is investing into exciting areas like Apple Television, Apple Car, and who knows what else?
To put these Apple numbers into perspective, consider that last year Apple spent over $6 billion on research and development (R&D); $10 billion on capital expenditures; and hired over 12,000 new full-time employees. This doesn’t exactly sound like the death of innovation to me. Even after doling out roughly -$28 billion in expenditures and -$56 billion in dividends/share repurchases, Apple was amazingly able to keep their net cash position flat at an eye-popping +$141 billion!
Mr. Fink abhors “activist shareholders seeking immediate returns” but rather than deriding them perhaps he should send the greedy, capitalist Carl Icahn a personal thank you letter. Since Icahn’s vocal plea for a large Apple share buyback, the shares have skyrocketed about +85%, catapulting BlackRock’s ownership value in Apple to over $19 billion.
With respect to these increasing outlays, Mr. Fink also notes:
“Returning excessive amounts of capital to investors—who will enjoy comparatively meager benefits from it in this environment—sends a discouraging message.”
This would be true if investors took the dividends and stuffed them under their mattress, but an important message Mr. Fink neglects to address as it relates to dividends and share buybacks is demographics. There are 76 million Baby Boomers born between 1946 – 1964 and a Boomer is turning age 65 every 8 seconds. With many bonds trading at near 0% yields (even negative yields) it is no wonder many income starving retirees are demanding many of these cash-rich corporations to share more of the growing spoils via rising dividends.
Capitalism Works
After looking at a few centuries of our country’s history, one of the main lessons we can learn is that capitalism works – especially over the long-run. With about 200 countries across the globe, there is a reason the U.S. is #1…we’re good at capitalism. As our economy has matured over the decades, it is true our priorities and challenges have changed. It is also true that other countries may be narrowing the gap with the U.S., due to certain advantages (e.g., demographics, lower entitlements, easier regulations, etc), but the U.S. will continue to evolve.
In many respects, capitalism is very much like Darwinism – corporations either adapt with the competition…or they die. I repeatedly hear from pessimists that the U.S. is in a secular state of decline, but if that’s the case, how come the U.S. continues to dominate and innovate in major industries like biotechnology, mobile technology, networking, internet, aviation, energy, media, and transportation? Quite simply, we are the best and most experienced practitioners of capitalism.
Certainly, capitalism will continue to cultivate cyclical periods of excess investment/leverage and insufficient regulation. But guess what? Investors, including the public, eventually lose their shirts and behaviors/regulations adjust. At least for a little while, until the next period of excess takes hold. If Apple, and other balance sheet healthy companies allocate capital irresponsibly, capital will flow towards more aggressive and innovative companies. BlackBerry Limited (BBRY) knows a little bit about the consequences of cutthroat competition and suboptimal capital allocation.
While I emphatically share Mr. Fink’s focus on long-term investing values (including his self-serving tax reform ideas), I vigorously disagree with his attacks on shareholder friendly actions and his characterization of rising dividends/buybacks as short-term in nature. In fact, increasing dividends and share buybacks can very much coexist as a long-term investment and capital allocation strategy.
The question of proper capital allocation should have more to do with the age of a company. It only makes sense that younger companies on average should reinvest more of their profits into growth and innovation. On the other hand, more mature S&P 500-like companies will be in a better position to distribute higher percentages of profits to shareholders – especially as cash levels continue to rise to record levels and leverage remains in check.
BlackRock’s Larry Fink may continue to urge CEOs to reinvest their growing cash hoards into superfluous corporate kitchens, but Sidoxia and other prudent capitalist investors will continue to exhort CEOs to opportunistically take advantage of near-free borrowing rates and responsibly share the accretive gains with shareholders. That’s a message Mr. Fink should include in a letter to CEOs – he can use BlackRock’s lofty, above-average dividend to cover the cost of postage.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including AAPL and iShares ETFs, but at the time of publishing, SCM had no direct position in BLK, BBRY or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Buy in May and Tap Dance Away
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (May 1, 2014). Subscribe on the right side of the page for the complete text.
The proverbial Wall Street adage that urges investors to “Sell in May, and go away” in order to avoid a seasonally volatile period from May to October has driven speculative trading strategies for generations. The basic premise behind the plan revolves around the idea that people have better things to do during the spring and summer months, so they sell stocks. Once the weather cools off, the thought process reverses as investors renew their interest in stocks during November. If investing was as easy as selling stocks on May 1 st and then buying them back on November 1st, then we could all caravan in yachts to our private islands while drinking from umbrella-filled coconut drinks. Regrettably, successful investing is not that simple and following naïve strategies like these generally don’t work over the long-run.
Even if you believe in market timing and seasonal investing (see Getting Off the Market Timing Treadmill ), the prohibitive transaction costs and tax implications often strip away any potential statistical advantage.
Unfortunately for the bears, who often react to this type of voodoo investing, betting against the stock market from May – October during the last two years has been a money-losing strategy. Rather than going away, investors have been better served to “Buy in May, and tap dance away.” More specifically, the S&P 500 index has increased in each of the last two years, including a +10% surge during the May-October period last year.
Nervous? Why Invest Now?
With the weak recent economic GDP figures and stock prices off by less than 1% from their all-time record highs, why in the world would investors consider investing now? Well, for starters, one must ask themselves, “What options do I have for my savings…cash?” Cash has been and will continue to be a poor place to hoard funds, especially when interest rates are near historic lows and inflation is eating away the value of your nest-egg like a hungry sumo wrestler. Anyone who has completed their income taxes last month knows how pathetic bank rates have been, and if you have pumped gas recently, you can appreciate the gnawing impact of escalating gasoline prices.
While there are selective opportunities to garner attractive yields in the bond market, as exploited in Sidoxia Fusion strategies, strategist and economist Dr. Ed Yardeni points out that equities have approximately +50% higher yields than corporate bonds. As you can see from the chart below, stocks (blue line) are yielding profits of about +6.6% vs +4.2% for corporate bonds (red line). In other words, for every $100 invested in stocks, companies are earning $6.60 in profits on average, which are then either paid out to investors as growing dividends and/or reinvested back into their companies for future growth.
Source: Dr. Ed’s Blog
Hefty profit streams have resulted in healthy corporate balance sheets, which have served as ammunition for the improving jobs picture. At best, the economic recovery has moved from a snail’s pace to a tortoise’s pace, but nevertheless, the unemployment rate has returned to a more respectable 6.7% rate. The mended economy has virtually recovered all of the approximately 9 million private jobs lost during the financial crisis (see chart below) and expectations for Friday’s jobs report is for another +220,000 jobs added during the month of April.
Source: Bespoke
Wondrous Wing Woman
Investing can be scary for some individuals, but having an accommodative Fed Chair like Janet Yellen on your side makes the challenge more manageable. As I’ve pointed out in the past (with the help of Scott Grannis), the Fed’s stimulative ‘Quantitative Easing’ program counter intuitively raised interest rates during its implementation. What’s more, Yellen’s spearheading of the unprecedented $40 billion bond buying reduction program (a.k.a., ‘Taper’) has unexpectedly led to declining interest rates in recent months. If all goes well, Yellen will have completed the $85 billion monthly tapering by the end of this year, assuming the economy continues to expand.
In the meantime, investors and the broader financial markets have begun to digest the unwinding of the largest, most unprecedented monetary intervention in financial history. How can we tell this is the case? CEO confidence has improved to the point that $1 trillion of deals have been announced this year, including offers by Pfizer Inc. – PFE ($100 billion), Facebook Inc. – FB ($19 billion), and Comcast Corp. – CMCSA ($45 billion).
Source: Entrepreneur
Banks are feeling more confident too, and this is evident by the acceleration seen in bank loans. After the financial crisis, gun-shy bank CEOs fortified their balance sheets, but with five years of economic expansion under their belts, the banks are beginning to loosen their loan purse strings further (see chart below).
The coast is never completely clear. As always, there are plenty of things to worry about. If it’s not Ukraine, it can be slowing growth in China, mid-term elections in the fall, and/or rising tensions in the Middle East. However, for the vast majority of investors, relying on calendar adages (i.e., selling in May) is a complete waste of time. You will be much better off investing in attractively priced, long-term opportunities, and then tap dance your way to financial prosperity.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE, CMCSA, and certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in FB or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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