Posts filed under ‘International’

No April Fool’s Joke – Another Record

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 3, 2017). Subscribe on the right side of the page for the complete text.

Having children is great, but a disadvantage to having younger kids are the April Fool’s jokes they like to play on parents. Fortunately, this year was fairly benign as I only suffered a nail-polish covered bar of soap in the shower. However, what has not been a joke has been the serious series of new record highs achieved in the stock market. While it is true the S&P 500 index finished roughly flat for the month (-0.0%) after hitting new highs earlier in March, the technology-laden NASDAQ index continued its dominating run, advancing +1.5% in March contributing to the impressive +10% jump in the first quarter. For 2017, the NASDAQ supremacy has been aided by the stalwart gains realized by leaders like Apple Inc. (up +24%), Facebook Inc. (up +23%), and Amazon.com Inc. (up +18%). The surprising fact to many is that these records have come in the face of immense political turmoil – most recently President Trump’s failure to deliver on a campaign promise to repeal and replace the Obamacare healthcare system.

Like a broken record, I’ve repeated there are much more important factors impacting investment portfolios and the stock market other than politics (see also Politics Schmolitics). In fact, many casual observers of the stock market don’t realize we have been in the midst of a synchronized, global economic expansion, helped in part by the stabilization in the value of the U.S. dollar over the last couple of years.

Source: Investing.com

As you can see above, there was an approximate +25% appreciation in the value of the dollar in late-2014, early-2015. This spike in the value of the dollar suddenly made U.S. goods sold abroad +25% more expensive, resulting in U.S. multinational companies experiencing a dramatic profitability squeeze over a short period of time. The good news is that over the last two years the dollar has stabilized around an index value of 100. What does this mean? In short, this has provided U.S. multinational companies time to adjust operations, thereby neutralizing the currency headwinds and allowing the companies to return to profitability growth.

Source: Calafia Beach Pundit

And profits are back on the rise indeed. The six decade long chart above shows there is a significant correlation between the stock market (red line – S&P 500) and corporate profits (blue line). The skeptics and naysayers have been out in full force ever since the 2008-2009 financial crisis – I profiled these so-called “sideliners” in Get out of Stocks!.

As the stock market continues to hit new record highs, the doubters continue to scream danger. There will always be volatility, but when the richest investor of all-time, Warren Buffett, continues to say that stocks are still attractively priced, given the current interest rate environment, that goes a long way to assuage investor concerns.

Politically, a lot could still go wrong as it relates to healthcare, tax reform, and infrastructure spending, to name a few issues. However, it’s still early, and it’s possible positive surprises could also occur. More importantly, as I’ve noted before, corporate profits, interest rates, valuations, and investor sentiment are much more important factors than politics, and on balance these factors are on the favorable side of the ledger. These factors will have a larger impact on the long-term direction of stock prices.

With approval ratings of Congress and the President at low levels, investors have had trouble finding humor in politics, even on April Fool’s Day. Another significant factor more important than politics is the issue of retirement savings by Americans, which is no joke. As you finalize your tax returns in the coming weeks, it behooves you to revisit your retirement plan and investment portfolio. Inefficiently investing your money or outliving your savings is no laughing matter. I’ll continue with my disciplined financial plan and leave the laughing to my kids, as they enjoy planning their next April Fool’s Day prank.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, FB, AMZN, 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.

April 3, 2017 at 12:03 pm Leave a comment

Double Dip Expansion?

Ever since the 2008-2009 financial crisis, every time the stock market has experienced a -5%, -10%, or -15% correction, industry pundits and media talking heads have repeatedly sounded the “Double Dip Recession” alarm bells. As you know, we have yet to experience a technical recession (two reported quarters of negative GDP growth), and stock prices have almost quadrupled from a 2009 low on the S&P 500 of 666 to 2,378 today (up approximately +257%).

Over the last nine years, so-called experts have been warning of an imminent stock market collapse from the likes of PIIGS (Portugal/Italy/Ireland/Greece/Spain), Cyprus, China, Fed interest rate hikes, Brexit, ISIS, U.S. elections, North Korea, French elections, and other fears. While there have been plenty of “Double Dip Recession” references, what you have not heard are calls for a “Double Dip Expansion.”

Is it possible that after the initial 2010-2014 economic expansionary rebound, and subsequent 2015-2016 earnings recession caused by sluggish global growth and a spike in the value of the U.S. dollar, we could possibly be in the midst of a “Double Dip Expansion?” (see earnings chart below)

Source: FactSet

Whether you agree or disagree with the new political administration’s politics, the economy was already on the comeback trail before the November 2016 elections, and the momentum appears to be continuing. Not only has the pace of job growth been fairly consistent (+235,000 new jobs in February, 4.7% unemployment rate), but industrial production has been picking up globally, along with a key global trade index that accelerated to 4-5% growth in the back half of 2016 (see chart below).

Source: Calafia Beach Pundit

This continued, or improved, economic growth has arisen despite the lack of legislation from the new U.S. administration. Optimists hope for an improved healthcare system, income tax reform, foreign profit repatriation, and infrastructure spending as some of the initiatives to drive financial markets higher.

Pessimists, on the other hand, believe all these proposed initiatives will fail, and cause financial markets to fall into a tailspin. Regardless, at least for the period following the elections, investors and companies have perceived the pro-business rhetoric, executive orders, and regulatory relief proposals as positive developments. It’s widely understood that small businesses supply the largest portion of our nation’s jobs, and the upward spike in Small Business Optimism early in 2017 is a welcome sign (see chart below).

Source: Calafia Beach Pundit

Yes, it is true our new president could send out a rogue tweet; start a trade war due to a tariff slapped on a critical trading partner; or make a hawkish military remark that isolates our country from an ally. These events, along with other potential failed campaign promises, are all possibilities that could pause the trajectory of the current bull market. However, more importantly, as long as corporate profits, the mother’s milk of stock price appreciation, continue to march higher, then the stock market fun can continue. If that’s the case, there will likely be less talk of “Double Dip Recessions,” and more discussions of a “Double Dip Expansion.”

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

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.

March 19, 2017 at 12:34 pm Leave a comment

Super Bowl Blitz – Dow 20,000

team

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 2017). Subscribe on the right side of the page for the complete text.

If you have been following the sports headlines, then you know the Super Bowl 51 NFL football championship game between the four-time champion New England Patriots and the zero-time champion Atlanta Falcons is upon us. It’s that time of the year when more than 100 million people will congregate in front of big screen TVs across our nation and stare at ludicrous commercials (costing $5 million each); watch a semi-entertaining halftime show; and gorge on thousands of calories until stomachs bloat painfully.

The other headlines blasting across the media airwaves relate to the new all-time record milestone of 20,000 achieved by the Dow Jones Industrials Average (a.k.a., “The Dow”). For those people who are not glued to CNBC business television all day, the Dow is a basket of 30 large company stocks subjectively selected by the editors of the Wall Street Journal with the intent of creating an index that can mimic the overall economy. A lot of dynamics in our economy have transformed over the Dow’s 132 year history (1885), so it should come as no surprise that the index’s stock components have changed 51 times since 1896 – the most recent change occurred in March 2015 when Apple Inc. (AAPL) was added to the Dow and AT&T Inc. (T) was dropped.

20,000 Big Deal?

The last time the Dow closed above 10,000 was on March 29, 1999, so it has taken almost 18 years to double to 20,000. Is the Dow reaching the 20,000 landmark level a big deal in the whole scheme of things? The short answer is “No”. It is true the Dow can act as a fairly good barometer of the economy over longer periods of time. Over the 1998 – 2017 timeframe, economic activity has almost doubled to about $18 trillion (as measured by Gross Domestic Product – GDP) with the added help of a declining interest rate tailwind.

In the short-run, stock indexes like the Dow have a spottier record in correlating with economic variables. At the root of short-term stock price distortions are human behavioral biases and emotions, such as fear and greed. Investor panic and euphoria ultimately have a way of causing wild stock price overreactions, which in turn leads to poor decisions and results. We saw this firsthand during the inflation and subsequent bursting of the 2000 technology bubble. If that volatility wasn’t painful enough, last decade’s housing collapse, which resulted in the 2008-2009 financial crisis, is a constant reminder of how extreme emotions can lead to poor decision-making. For professionals, short-term volatility and overreactions provide lucrative opportunities, but casual investors and novices left to their own devices generally destroy wealth.

As I have discussed on my Investing Caffeine blog on numerous occasions, the march towards 20,000 occurred in the middle of arguably the most hated bull market in a generation or two (see The Most Hated Bull Market). It wasn’t until recently that the media began fixating on this arbitrary new all-time record high of 20,000. My frustration with the coverage is that the impressive phenomenon of this multi-year bull market advance has been largely ignored, in favor of gloom and doom, which sells more advertising – Madison Avenue execs enthusiastically say, “Thank you.” While the media hypes these stock records as new, this phenomenon is actually old news. In fact, stocks have been hitting new highs over the last five years (see chart below).

dji-07-17

More specifically, the Dow has hit consecutive, new all-time record highs in each year since 2013. This ignored bull market (see Gallup survey) may not be good for the investment industry, but it can be good for shrewd long-term investors, who react patiently and opportunistically.

Political Football

In Washington, there’s a different game currently going on, and it’s a game of political football. With a hotly contentious 2016 election still fresh in the minds of many voters, a subset of unsatisfied Americans are closely scrutinizing every move of the new administration. Love him or hate him, it is difficult for observers to accuse President Trump of sitting on his hands. In the first 11 days of his presidential term alone, Trump has been very active in enacting almost 20 Executive Orders and Memoranda (see the definitional difference here), as he tries to make supporters whole with his many previous campaign trail promises. The persistently increasing number of policies is rising by the day (…and tweet), and here’s a summarizing list of Trump’s executive actions so far:

  • Refugee Travel Ban
  • Keystone & Dakota Pipelines
  • Border Wall
  • Deportations/Sanctuary Cities
  • Manufacturing Regulation Relief
  • American Steel
  • Environmental Reviews
  • Affordable Care Act Requirements
  • Border Wall
  • Exit TPP Trade Deal
  • Federal Hiring Freeze
  • Federal Abortion Freeze
  • Regulation Freeze
  • Military Review
  • ISIS Fight Plan
  • Reorganization of Security Councils
  • Lobbyist Bans
  • Deregulation for Small Businesses

President Trump has thrown another political football bomb with his recent nomination of Judge Neil Gorsuch (age 49) to the Supreme Court in the hopes that no penalty flags will be thrown by the opposition. Gorsuch, the youngest nominee in 25 years, is a conservative federal appeals judge from Colorado who is looking to fill the seat left open by last year’s death of Justice Antonin Scalia at the age 79.

Politics – Schmolitics

When it comes to the stock market and the economy, many people like to make the president the hero or the scapegoat. Like a quarterback on the football field, the president certainly has influence in shaping the political and economic game plan, but he is not the only player. There is an infinite number of other factors that can (and do) contribute to our country’s success (or lack thereof).

Those economic game-changing factors include, but are not limited to: Congress, the Federal Reserve, Supreme Court, consumer sentiment, trade policy, demographics, regulations, tax policy, business confidence, interest rates, technology proliferation, inflation, capital investment, geopolitics, terrorism, environmental disruptions, immigration, rate of productivity, fiscal policy, foreign relations, sanctions, entitlements, debt levels, bank lending, mergers and acquisitions, labor rules, IPOs (Initial Public Offerings), stock buybacks, foreign exchange rates, local/state/national elections, and many, many, many other factors.

Regardless to which political team you affiliate, if you periodically flip through your social media stream (e.g., Facebook), or turn on the nightly news, you too have likely suffered some sort of political fatigue injury. As Winston Churchill famously stated, “Democracy is the worst form of government except for all the other forms that have been tried from time to time.”

When it comes to your finances, getting excited over Dow 20,000 or despondent over politics is not a useful or efficient strategy. Rather than becoming emotionally volatile, you will be better off by focusing on building (or executing) your long-term investment plan. Not much can be accomplished by yelling at a political charged Facebook rant or screaming at your TV during a football game, so why not calmly concentrate on ways to control your future (financial or otherwise). Actions, not fear, get results. Therefore, if this Super Bowl Sunday you’re not ready to review your asset allocation, budget your annual expenses, or contemplate your investment time horizon, then at least take control of your future by managing some nacho cheese dip and handling plenty of fried chicken.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, T, FB 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.

February 4, 2017 at 8:02 am Leave a comment

Stocks Winning Olympic Gold

 

medals

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2016). Subscribe on the right side of the page for the complete text.

The XXXI Olympics in Rio, Brazil begin this week, but stocks in 2016 have already won a gold medal for their stellar performance. The S&P 500 index has already triumphantly sprinted to new, all-time record highs this month. A significant portion of the gains came in July (+3.6%), but if you also account for the positive results achieved in the first six months of 2016, stocks have advanced +6.3% for the year. If you judge the 2%+ annualized dividend yield, the total investment return earns an even higher score, coming closer to +8% for the year-to-date period.

No wonder the U.S. is standing on the top of the economic podium compared to some of the other international financial markets, which have sucked wind during 2016:

  • China Shanghai Index: -15.8%
  • Japan Nikkei Index: -12.9%
  • French Paris CAC Index: -4.3%
  • German Dax Index: -3.8%
  • Europe MSCI Index: -3.5%
  • Hong Kong Heng Sang Index: -0.1%

While there are some other down-and-out financial markets that have rebounded significantly this year (e.g., Brazil +61% & Russia +23%), the performance of the U.S. stock market has been impressive in light of all the fear, uncertainty, and doubt blanketing the media airwaves. Consider the fact that the record-breaking performance of the U.S. stock market in July occurred in the face of these scary headlines:

  • Brexit referendum (British exit from the European Union)
  • Declining oil prices
  • Declining global interest rates
  • More than -$11,000,000,000,000.00 (yes trillions) in negative interest rate bonds
  • Global terrorist attacks
  • Coup attempt in Turkey
  • And oh yeah, a contentious domestic presidential election

With so many competitors struggling, and the investment conditions so challenging, then how has the U.S. prospered with a gold medal performance in this cutthroat environment? For many individuals, the answer can be confusing. However, for Sidoxia’s followers and clients, the strong pillars for a continued bull market have been evident for some time (described again below).

Bull Market Pillars

Surprising to some observers, stocks do not read pessimistic newspaper headlines or listen to gloomy news stories. In the short-run, stock prices can get injured by emotional news-driven traders and speculators, but over the long-run, stocks and financial markets are drawn like a magnet to several all-important metrics. What crucial metrics am I referring to? As I’ve reiterated in the past, the key drivers for future stock price appreciation are corporate profits, interest rates, valuations (i.e., price levels), and sentiment indicators (see also Don’t Be a Fool).

Stated more simply, money goes where it is treated best, and with many bonds and savings accounts earning negative or near 0% interest rates, investors are going elsewhere – for example, stocks. You can see from the chart below, economy/stocks are treated best by rising corporate profits, which are at/near record high levels. With the majority of stocks beating 2nd quarter earnings expectations, this shot of adrenaline has given the stock market an added near-term boost. A stabilizing U.S. dollar, better-than-expected banking results, and firming commodity prices have all contributed to the winning results.

jul 16 gdp

Price Follows Earnings…and Recessions

What history shows us is stock prices follow the direction of earnings, which helps explain why stock prices generally go down during economic recessions. Weaker demand leads to weaker profits, and weaker profits lead to weaker stock prices. Fortunately for U.S. investors, there currently are no definitive signs of imminent recession clouds. Scott Grannis, the editor of Calafia Beach Pundit, sums up the relationship between recessions and the stock market here:

“Recessions typically follow periods of excesses—soaring home prices, rising inflation, widespread optimism—rather than periods dominated by risk aversion such as we have today. Risk aversion can still be found in abundance: just look at the extremely low level of Treasury yields, and the lack of business investment despite strong corporate profits.”

Similar to the Olympics, achieving success in investing can be very challenging, but if you want to win a medal, you must first compete. If you’re not investing, you’re not competing. And if you’re not investing, you have no chance of winning a financial gold medal. Just as in the Olympics, not everyone can win, and there are many ups and downs along the way to victory. Rather than focusing on the cheers and boos of the crowd, implementing a disciplined and diversified investment strategy that accounts for your time horizon, objectives, and risk tolerance is the championship approach that will increase your probability of landing on the Olympic medal podium.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

Plan. Invest. Prosper. 

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.

August 1, 2016 at 1:39 pm Leave a comment

EU Marriage Ends in Messy Brexit Divorce

divorce

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2016). Subscribe on the right side of the page for the complete text.

What Just Happened?

Breakups are never easy, especially when they come as a surprise. That’s exactly what happened with last week’s “Brexit” (British exit) referendum results. History was made when 51.9% of the United Kingdom (U.K.) voters from England, Scotland, Wales and Northern Ireland cast their vote to divorce (“Leave”) their country from the European Union (EU). In the end, the 48.1% of U.K. voters could not generate enough support to “Remain” in the EU (see chart below). Despite torrential downpours in southern Britain, voter turnout was extraordinarily high, as 72% of the 46.5 million registered voters came out in full force to have their voices heard.

Divorce is never cheap, and UK Prime Minister David Cameron paid the ultimate price with his defeat in the Brexit referendum…the loss of his job. Immediately following the release of the referendum results, Cameron, the British Prime Minister since 2010 and leader of the Conservative Party, immediately announced his resignation, effective no later than October 2016 after the selection of his successor.

brexit votes

Source: Bloomberg

One of the reasons behind the shock of the Brexit Leave decision is the longstanding relationship the U.K. has had with the EU. European Union membership first began in 1957 with Belgium, France, Germany, Italy, Luxembourg, and Netherlands being the founding countries of this new political-economic union.

A few decades later, the U.K. officially joined the EU in 1973 with Ireland and the Denmark, shortly before Margaret Thatcher came into power. If you fast forward to today, some 43 years after U.K. originally joined the EU, the Brexit decision represents the largest turning point in European political history. Not since the 1989 falling of the Berlin Wall and the subsequent demise of the Cold War in the Soviet Union has such a large, earth-moving political shift occurred.

Today, there are 28 member countries in the EU with Croatia being the newest member in 2013. Despite the Brexit outcome, there still is a backlog of countries wanting to join the EU club, including Turkey, Serbia, Albania, and Montenegro (and this excludes Scotland, which has voiced an interest in leaving the U.K. for the EU).

What Were Investors’ Reactions?

Financial markets around the world were caught off guard, given many pre-referendum polls were showing the Remain camp with a slight edge, along with British betting parlors that were handicapping an overwhelming victory for the Remain camp. Here’s a summary of stock market reactions around the globe from June 23rd to June 30th:

U.S. (S&P 500): -0.7%

U.K. (FTSE 100): +2.6%

Japan (Nikkei): -4.1%

Germany (DAX): -5.6%

Hong Kong (Hang Seng): +0.4%

China (Shanghai): +1.3%

India (BSE): -0.0%

Surprisingly, modest monthly gains achieved in the S&P 500 prior to the Brexit vote (up +0.8%) were quickly pared after the results came in but remained positive for the entire month (up +0.1%). For the year, U.S. stocks are up a limited +2.7%, which isn’t too bad considering investors’ current mood.

Stocks were not the only financial market disrupted after the Brexit announcement, foreign exchange currency rates were unstable as well. The British pound dived to a 30-year low shortly after the vote to a level of approximately $1.33/£, and was down more than -10% on the day of the announcement (see chart below). UK banks like Barclays PLC (BCS) and Lloyds Banking Group PLC (LYG) also saw their share prices significantly pressured as EU regulatory risks of losing access to European customers and negative global interest rates further squeeze the banks’ profit margins.

To put the currency picture into perspective, the value of the British pound ($2.64/£) peaked in March 1972 at a rate about double the U.S. dollar today. On the positive side of the ledger, a weaker British pound could help boost exports and vacation time to Stonehenge or London, but there is also a risk for a spike of inflation (or stagflation) on the country’s roughly $740 billion in imports (e.g., food, energy, and raw materials).

currency v ppp

Source: Calafia Beach Pundit

Why Did it Happen?

While economically prosperous regions like London and Scotland voted heavily for Remain, the message for change of the Leave camp resonated well with working class towns and rural areas of England (seen here). Besides a geographic split, there was also a demographic divide between voters. As you can see from the YouGov poll below, the majority of younger citizens overwhelmingly voted for Remain, and vice versa for older citizens as it relates to the Leave vote.

18-24: 75% Remain

25-49: 56% Remain

50-64: 44% Remain

65+: 39% Remain

While geography and demographics certainly played a key role in the outcome of the EU Leave referendum result, at the core of the movement also was a populist discontent with immigration and the negative economic consequences created by globalization. There are many reasons behind the sluggish economic global recovery, even if the U.S. is doing best out of the developed countries, but rightly or wrongly, immigration policies and protectionism played a prominent part in the Brexit.

At the heart of the populist sentiment of lost control to Brussels (EU) and immigration is the question of whether the benefits of globalization have outweighed the costs. The spread of globalization and expanded EU immigration has disenfranchised many lower skill level workers displaced by eastern European immigrants, Syrian refugees and innovative solutions like automated machinery, software, and electronic equipment. Economic history clearly shows the answer to the effectiveness of globalization is a resounding “yes”, but the post-financial crisis recovery has been disappointingly sluggish, so a component of the populist movement has felt an urgency to find a scapegoat. The benefits of globalization can be seen in the chart below, as evidenced by the increases in per capita GDP of the UK relative to Germany and France, after joining the EU in 1973. Many observers are quick to identify the visible consequences of globalization (i.e., lower-paying job losses), but fail to identify the invisible benefits (i.e., productivity, lower prices, investment in higher-paying job gains).

UK GDP Ratio

Source: The Wall Street Journal

What happens next?

While some EU leaders want to accelerate the Brexit transition, in actuality, this will require a long, drawn-out negotiation process between the still-unnamed new UK Prime Minister and EU officials. The complete EU-Brexit deal will take upwards of two-years to complete, once Article 50 of the EU Lisbon Treaty has been triggered – likely in October.

In light of the unchartered nature of the Brexit Leave vote, nobody truly knows if this decision will ultimately compromise the existential reality of the EU. Time will tell whether Brexit will merely be a small bump on the long EU road, or the beginning of a scary European domino effect that causes the 28 EU country bloc to topple. If the U.K. is successful in negotiating EU trade agreements with separate European countries, the Brexit even has a longer-term potential of benefiting economic activity.  Regardless of the EU outcome, the long-term proliferation of capitalism and democracy is likely to prevail because citizens vote with their wallets and capital goes where it is treated best.

What does Brexit Mean for Global Markets?

The short answer is not much economically, however there have been plenty of less substantial events that have roiled financial markets for relatively short periods of time. There are two basic questions to ask when looking at the economic impact of Brexit:

1) What is the Brexit impact on the U.S. economy?

If you objectively analyze the statistics, U.S. companies sold approximately $56 billion of goods to the U.K. last year   (our #7 trading partner). Even if you believe in the unlikely scenario of a severe U.K. economic meltdown, the U.K. trade figure is a rounding error in the whole global economic scheme of things. More specifically, $56 billion in trade with the U.K. equates to about .003 of the United States’ $18+ trillion GDP (Gross Domestic Product).

2) What is the Brexit impact on the global economy?

The U.K.’s GDP amounts to about $3 trillion dollars. Of that total, U.K. exports to the EU account for a reasonably insignificant $300 billion. As you can see from the chart below, $300 billion in UK exports to the EU are virtually meaningless and coincidentally equate to about .003 of the world’s $78 trillion estimated GDP.

global gdp

Source: The National Archives

What to Do Next?

Like many divorces, the U.K. Brexit may be messy and drawn out, until all the details are finalized over the next couple years. It’s important that you establish a strong foundation with your investments and do not divorce the sound, fundamental principles needed to grow and preserve your portfolio. As is usually the case, panicking or making an emotional decision relating to your investments during the heat of some geopolitical crisis rarely translates into an optimal decision over the long-run. As I repeatedly have advised over the years, these periods of volatility are nothing new (see also Series of Unfortunate Events).

If you catch your anxiety or blood pressure rising, do yourself a favor and turn off your TV, radio, or electronic device. A more productive use of time is to calmly review your asset allocation and follow a financial plan, with or without the assistance of a financial professional, so that you are able to achieve your long-term financial goals. This strategy will help you establish a more durable, long-lasting, and successful marriage with your investments.

investment-questions-border

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), 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.

July 2, 2016 at 9:00 am Leave a comment

Yield Starving Foreigners Go Muni Hunting

hunter pointing rifle in blaze orange gear

In the current cold, barren, negative interest rate environment, foreign investors are getting hungry and desperate as they hunt for yield. In the hopes of kick-starting economic activity around the globe, central bankers are taking the drastic measure of establishing negative interest rate policies. This unusual endeavor is pressing international investors to chase yield, no matter how small, wherever they can find it.

One of those areas in which foreigners are hunting for yield is the U.S. municipal bond market (see FT article). On the surface, this sounds ludicrous. Why would an outsider living in Germany or Japan invest in a U.S. municipal bond that yields a paltry rate that’s less than 1.7%, especially considering those investors will not benefit from the tax-free income advantages offered to Americans?

As strange as it sounds, Natalie Cohen, Wells Fargo’s head of municipal research correctly pointed out this pursuit for municipal bond yield across continents boils down to simple math. “Even if [foreign investors] are not subject to the US tax code, a plus two is better than a minus one,” Cohen notes.

Although foreign investment in the $3.7 trillion municipal bond market is relatively small, the rapidly rising appetite for munis is clearly evident, as shown in the chart below.

Source: The Financial Times

Source: The Financial Times

With our country’s crumbling roads and bridges, these ever-increasing piles of foreign cash pouring into our municipal bonds are helping fund a broad array of U.S. infrastructure projects. Given the election season is upon us, this issue may gain heightened attention. Both likely-presidential candidates are highlighting the need for infrastructure investment as part of their platforms, and the NIRP (negative interest rate policies) agenda of international central banks may make these municipal infrastructure dreams a reality.

We Americans are no stranger to the idea of borrowing money from foreigners. In fact, the Chinese own about $1.3 trillion of our Treasury bonds. This is all fine and dandy as long as the international appetite for lending us money remains healthy. If our city, state, and federal governments become too addicted to the Chinese, Europeans, and Japanese loans, financial risks can/will grow to unmanageable levels. Guess what happens once our borrowings swell to a level that forces foreigners to question our ability of repaying their debt? Interest rates will accelerate upwards, our interest payments will balloon, and our deficits will widen. The consequences of these unfavorable outcomes will be devastating budget cuts and/or tax increases.

For the time being, we will gladly accept the charitable donations of foreign investors to help lower funding costs for our sorely needed infrastructure projects. Fortunately, for now fiscal sanity is prevailing. The post financial crisis political environment has scared municipalities from borrowing too much, as explained here by the FT:

“For local and state politicians grappling with pension reforms, new healthcare programs and — in Alaska, Texas and Oklahoma — a drag on finances from lower energy prices, the looming presidential election is also diminishing the appeal of [municipal debt] issuance.”

 

In a near-zero/negative rate environment, there certainly will be incentives for irresponsible governments and corporations to extend themselves too far with cheap debt. However, in the short-run, as starving foreigners hunt for yield in the U.S. municipal bond market, Americans have the opportunity of exploiting this foreign generosity for the benefit our country’s long-term infrastructure.

investment-questions-border

www.Sidoxia.com

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), 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.

May 14, 2016 at 3:30 pm Leave a comment

Want to Retire at Age 90?

sleep sit 90

Do you love working 40-50+ hour weeks? Do you want to be a Wal-Mart (WMT) greeter after you get laid off from your longstanding corporate job?  Do you love relying on underfunded government entitlements that you hope won’t be insolvent 10, 20, or 30 years from now? Are you banking on winning the lottery to fund your retirement? Do you enjoy eating cat food?

If you answered “Yes” to one or all of these questions, then do I have a sure-fire investment program for you that will make your dreams of retiring at age 90 a reality! Just follow these three simple rules:

  • Buy Low Yielding, Long-Term Bonds: There are approximately $7 trillion in negative yielding government bonds outstanding (see chart below), which as you may understand means investors are paying to give someone else money – insanity. Bank of America recently completed a study showing about two-thirds of the $26 trillion government bond market was yielding less than 1%. Not only are investors opening themselves up to interest rate risk and credit risk, if they sell before maturity, but they are also susceptible to the evil forces of inflation, which will destroy the paltry yield. If you don’t like this strategy of investing near 0% securities, getting a match and gasoline to burn your money has about the same effect.

negative bonds apr 16

Source: Financial Times

  • Speculate on the Timing of Future Fed Rate Hikes/Cuts: When the economy is improving, talking heads and so-called pundits try to guess the precise timing of the next rate hike. When the economy is deteriorating, aimless speculation swirls around the timing of interest rate cuts. Unfortunately, the smartest economists, strategists, and media mavens have no consistent predicting abilities. For example, in 1998 Nobel Prize winning economists Robert Merton and Myron Scholes toppled Long Term Capital Management. Similarly, in 1996 Federal Reserve Chairman Alan Greenspan noted the presence of “irrational exuberance” in the stock market when the NASDAQ was trading at 1,350. The tech bubble eventually burst, but not before the NASDAQ tripled to over 5,000. More recently, during 2005-2007, Fed Chairman Ben Bernanke whiffed on the housing bubble – he repeatedly denied the existence of a housing problem until it was too late. These examples, and many others show that if the smartest financial minds in the room (or planet) miserably fail at predicting the direction of financial markets, then you too should not attempt this speculative feat.
  • Trade on Rumors, Headlines & Opinions: Wall Street analysts, proprietary software with squiggly lines, and your hot shot day-trader neighbor (see Thank You Volatility) all promise the Holy Grail of outsized financial returns, but regrettably there is no easy path to consistent, long-term outperformance. The recipe for success requires patience, discipline, and the emotional wherewithal to filter out the endless streams of financial noise. Continually chasing or reacting to opinions, headlines, or guaranteed software trading programs will only earn you taxes, transaction costs, bid-ask spread costs, impact costs, high frequency trading manipulation and underperformance.

Saving for your future is no easy task, but there are plenty of easy ways to destroy your savings. If you want to retire at age 90, just follow my three simple rules.

Investment Questions Border

www.Sidoxia.com

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), but at the time of publishing had no direct position in WMT or any 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.

April 16, 2016 at 11:00 am 1 comment

Older Posts


Receive Investing Caffeine blog posts by email.

Join 1,472 other followers

Meet Wade Slome, CFA, CFP®

More on Sidoxia Services

Recognition

Top Financial Advisor Blogs And Bloggers – Rankings From Nerd’s Eye View | Kitces.com

Wade on Twitter…

Share this blog

Bookmark and Share

Subscribe to Blog RSS

Monthly Archives