Posts tagged ‘investments’

Bridge to Vaccine or Nowhere?

We are approximately eight months into a global pandemic that has infected an estimated 18 million people and taken almost 700,000 lives. Everyone is wrestling with the ripple through effects that COVID-19 has not only had on our personal lives, but also on the broader aspects of our economy, including science, politics, economics, education, mental health, food supply, and transportation. The 7.8 billion people on the planet, including investors, are waiting for a bridge to a COVID-19 vaccine cure to come as soon as possible, so people and the world can begin returning towards normalcy.

The bridge to a COVID cure is not complete yet, but investors are currently paying notice and giving researchers the benefit of the doubt. Last month, stocks continued their advance with the S&P 500 catapulting another 5.5%. Since the low in March this year, stock prices have appreciated an astounding +49%, and are actually in the black (i.e., positive) for the year despite unemployment climbing above 11% and a massive 2nd quarter economic contraction in GDP of -32.9%. Some stock enthusiasm can be attributed to forecasted 3rd quarter GDP growth of 16%. The stock market story is even brighter, if you consider the technology-heavy NASDAQ index rose +6.8% for the month, +62% from this year’s low, and +20% for 2020.

With the destruction of lives and economic activity so severe, how can stock prices be so lofty? In short, after the economy ground to a virtual halt in March, business has been slowly getting better. At the heart of this improvement, the learning curve in treating this deadly virus has slowed the bleeding of the COVID-19 disease. The progress in controlling the virus can be seen in the declining number of daily COVID-19 cases (see chart below).

Source: The COVID Tracking Project

The stabilization and the beginning of a downward trend of cases can be explained with the successful application of therapeutics like remdesivir (manufactured by Gilead Sciences); generic steroids like dexamethasone; improved ventilator implementation in conjunction with blood thinners; and better compliance with social distancing/mask-wearing protocols.

In California, we appear to be on the right path of the curve, as well. Daily infections peaked at 12,807 however, and as of August 1st, daily COVID-19 cases declined to 6,542 (see chart below).

Source: The COVID Tracking Project

The hospitalization picture tells a similar story (see chart below). Even though the number of daily cases more than doubled nationally to record highs, the number of people hospitalized plateaued because of better treatment and the concentration of newly infected cases in the younger demographic age level.

Source: The COVID Tracking Project

In addition to current trends mending, optimism for a COVID-19 vaccine cure is also building, as I alluded to earlier. Economist and blog writer Dr. Ed Yardeni summed up the research developments well.

“The Trump administration has launched “Operation Warp Speed” with the goal of delivering 300 million doses of a safe, effective vaccine for COVID-19 by January 2021, as part of a broader strategy to accelerate the development, manufacturing, and distribution of COVID-19 vaccines, therapeutics, and diagnostics. Congress has directed almost $10 billion to this effort through supplemental funding, including the CARES Act. More than 100 clinical trials of dozens of potential coronavirus treatments are already underway around the world.”

If these timelines are correct, the bridge to a cure is almost here.

Housing Market on a Tear

One of the very positive byproducts of the pandemic has been the red-hot housing market (see chart below), which has been driven by record low interest rates and demand for COVID-friendly housing. People are migrating from tight urban quarters to the suburbs, where people can obtain a home office, a spacious backyard, and a swimming pool. This ravenous home demand is coinciding with generationally low interest rates, including a jaw-droppingly low 30-year fixed-rate mortgage hovering around 3%. All else equal, lower interest rates means consumers make lower monthly payments and can carry more debt, which improves home affordability.

Source: CNBC

Fears of a COVID Collapse

Although there have certainly been some tangible improvements since the depths of the pandemic, there are definite challenges ahead.

Consider the following challenges:

  • Consequences to Unmitigated Government Spending: Congress is working to approve another $1 – $3 trillion dollar stimulus package to buttress our strained economy during the COVID-19 crisis. In the short-run, this money can provide relief to millions of people and businesses that have suffered through the global pandemic. However, in the longer term, spending cutbacks will likely be necessary. Just like somebody going on an endless credit card spending spree, eventually the money borrowed and spent needs to be paid back, or alternatively, a credit limit will ultimately be reached. Sooner or later, the trillions of dollars in spending will trigger collectors (investors) to come knocking. Under these possible scenarios, fiscal responsibility will force dramatic cuts to benefits and services like Social Security, Medicare, education, and military, among other areas.
  • Rising China Tensions: It doesn’t take a genius to figure out our president’s view on China. All one needs to do is read his daily posts on Twitter. Our president’s commentary includes, but is not limited to, our massive trade deficits with China; political unrest in Hong Kong; Chinese consulate closure in Houston, Texas and American consulate closure in Chengdu, China; and blame regarding intellectual property theft and the spread of the “Wuhan” virus. These are only some of the factors contributing to the strained bilateral relationship between the United States and the #2 global economy, China.
  • Presidential Election: The November 3rd presidential election date is just around the corner, and the outcome will likely create uncertainty regarding the trajectory of future U.S. tax rates and other policies.
  • Burst in Tech Bubble? The top 1% of companies in the S&P 500 (Apple Inc., Microsoft Corp., Amazon.com, Alphabet Inc., Facebook Inc.) account for 22% of the value of the index, or more than $6 trillion in market value. Some observers explain this explosion in concentrated technology values by pointing a finger at the Federal Reserve’s zero-interest-rate policy and lack of government regulation, while others point to a behavioral shift in technology demand and usage.
  • Potential Inflation: The inflation threat has been created by trillions of dollars in money printing policies by the Federal Reserve. But it’s not only the trillions of U.S. dollars being printed by the Fed, it’s also trillions in euros, Japanese yen, and Chinese yuan being printed by other global central banks. As a result, the danger of rampant inflation could become a reality.

The foundation may not be fully sturdy yet, but a clear bridge to a recovery is under construction, and the blueprint confirms we have the pieces needed for completion (i.e., a vaccine). As I pointed out in last month’s newsletter (Record Rebound), volatility has been a constant throughout the rebound. Given the pace and questionable sustainability of the bounce, active management is necessary. At Sidoxia Capital Management (www.Sidoxia.com), we continue to prudently manage our client portfolios with the purpose of meeting their customized objectives. Getting from here to achieving your financial goals is a serious challenge, and reaching your economic destination requires a well-designed bridge that won’t collapse.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 3, 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 GILD, AAPL, AMZN, GOOGL, FB, MSFT and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in TWTR 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.

August 4, 2020 at 9:41 am Leave a comment

Pedal to the Metal Leads to Record Rebound

Like a race car pushing the pedal to the metal, the stock market sped to its best quarterly stock market gains in decades. The +20% rebound in the 2nd quarter S&P 500 index was the best result achieved since 1998. Moreover, the Dow Jones Industrial Average saw its largest quarterly gain (+18%) since 1987, and the technology-heavy NASDAQ index (+31%) saw the most appreciation since 2001. While a snap-back after a shockingly dismal 1st quarter should come as no surprise to many investors, the pace of this rebound is unlikely to be sustainable at this trajectory, given the challenging economic backdrop and COVID public health crisis.

Racing Ahead Via Re-Opening

After experiencing six months of the coronavirus pandemic, the country has been re-opening across all 50 states at differing paces. We can see the benefits of a V-shaped recovery in various indicators, such as the following:

  • Airline Traffic
Source: Calafia Beach Pundit
  • Hotel Occupancy
Source: Calculated Risk
  • Gasoline Consumption
Source: Calculated Risk

Thanks to unprecedented support from the Federal Reserve in the form of trillions of dollars in stimulative money printing that has been injected into the economy (see chart below), and trillions of government support (including 4.8 million PPP [Payroll Protection Program] loans totaling $519 billion), the economic benefits of the re-openings have been tangible. Not only did the economy unexpectedly add 2.5 million jobs last month, but economic growth is also projected to rebound in the back-half of 2020. More specifically, Treasury Secretary Steven Mnuchin recently testified in front of Congress that 3rd quarter economic growth (GDP – Gross Domestic Product) is currently projected at +17%, and 4th quarter at +9%.

Source: Dr. Ed’s Blog

The Stubborn Virus Remains

Many Americans feel liberated from the lifting of stay-at-home orders, but if the re-openings are not handled with proper precautions, the consequences can result in an economic equivalent of serious speeding tickets or jail time. We have experienced this phenomenon firsthand as a surge of new COVID-19 infections has spread predominately across the Southern and Western states, skewed towards younger Americans.

Now that the economic genie has been released out of the bottle, it’s going to be very difficult for state governors and city mayors to stuff the genie back in. Even if the new surge in COVID-19 cases continues, we are more likely to see required health guidelines instituted (e.g., mandatory mask wearing) or rollbacks in certain re-opening phases (e.g., closures of bars, restaurants, and other large gathering establishments). For instance, Disneyland (ticker: DIS) hit some speed bumps when the company just announced its re-opening originally scheduled for mid-July has been delayed indefinitely.

Although COVID infections have been on the rise, driven in part by complacent or irresponsible younger individuals not adhering to social distancing and mask-wearing recommendations, the healthcare treatment regimens have kept the level of deaths at a flat rate (see chart below) and national hospitalization rates at a relatively stable level (see chart below).

Source: IMHE
Source: CDC

The Bridge to a Vaccine

Despite the recent rise in COVID-19 cases, investors have been focused more on the half-glass full developments relating to the pandemic. Approved therapeutics, such as remdesivir by Gilead Sciences Inc. (GILD) and dexamethasone, have proven effective in treating COVID. In addition, ventilator and PPE (Personal Protective Equipment) supplies have become plentiful; virus testing has risen dramatically (see also COVID Comeback); and contact tracing is slowly improving. If you layer in the more than 100 vaccines being developed, including expected Phase 3 trials this year by Pfizer Inc. (PFE), Moderna Inc. (MRNA), Astrazeneca PLC (AZN), Glaxosmithkline PLC (GSK), and Johnson & Johnson (JNJ), there is room for optimism. With all these developments, coupled with more stringent guidelines by governors/federal government/health agencies, and more responsible behavior by individuals (i.e., social distancing, personal hygiene, mask wearing), especially in hot spot regions, there is a credible bridge to managing the virus until a vaccine is approved.

The stock market has been racing ahead at an amazing pace in recent months (+41% since late-March), but with the COVID public health crisis starting to overheat the engine with rising COVID cases, investors should not be shocked to see the driver tap the economic brakes a little in the coming months. For long-term investors like my clients, Sidoxia Capital Management will continue to take advantage of opportunities, while pushing to safely avoid the risky potholes, during these highly volatile times. In periods like these, when your race car has created a large lead, it’s perfectly okay to reassess your circumstances and temporarily take your foot off the pedal before the next turn.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 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 GILD, MRNA, PFE, JNJ, AZN, GSK, 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.

July 1, 2020 at 3:23 pm 2 comments

What the Heck & What Now?

The Covid-19 viral pandemic that hit our shores in early 2020 shut down the economy to a virtual halt, and unemployment has skyrocketed to an estimated 19%, as 30 million people have now filed for unemployment benefits over the last six weeks (see chart below). Shockingly, we have not seen joblessness levels this high since the Great Depression. All this destruction has investors asking themselves, “What the heck, and what now?

Forecasts for 2nd quarter economic activity (Gross Domestic Product) are estimating an unprecedented decline of -12% (see chart below) with some projections plummeting as low as -34%. Despite the dreadful freefall in the stock market during March, along with the pessimistic economic outlook, the major stock indexes came back with a vengeance during April. More specifically, the Dow Jones Industrial Average soared +2,428 points, or +11% for the month. The other major indexes, S&P 500 and NASDAQ, catapulted higher over the same period by +13% and +15%, respectively.

Source: The Atlanta Fed

Certainly, there have been some industries hurt by Covid-19 more than others. At the top of the misery list are travel related industries such as airlines, cruise lines, and hotels. Retailers like Neiman Marcus, Pier 1, and JCPenney are filing for bankruptcy or on the verge of closing. Restaurants have also been pummeled (partially offset by the ability to offer pickup and delivery services), and entertainment industries such as sporting arenas, concert venues, movie theaters, and theme parks have all painfully come to a screeching halt as well. Let’s not forget energy and oil companies, which are battling for their survival life in an environment that has witnessed oil prices plunge from $61 per barrel at the beginning of the year to $19 per barrel today (with a brief period at negative -$37…yes negative!) – click here for an explanation and see the chart below.

Source: Trading Economics

What the Heck?!

With all this horrifying economic data financially crippling millions of businesses and families coupled with an epidemic that has resulted in a U.S. death count surpassing 60,000, how in the heck can the stock market be up approximately +34% from the epidemic lows experienced just five short weeks ago?

I was optimistic in my Investing Caffeine post last month, but here are some more specific explanations that have contributed to the recent significant rebound in the stock market.

  • Virus Curve Flattening: The wave of Covid-19 started in China and crashed all over Europe before landing in the U.S. Fortunately, as you can see from the chart below (U.S. = red line), social distancing and stay-at-home orders have slowed the growth in coronavirus deaths.
Source: Our World in Data via Calafia Beach Pundit
  • Fiscal Stimulus: The government fire trucks are coming to the rescue and looking to extinguish the Covid fire by spraying trillions of stimulus and aid dollars to individuals, businesses, and governments. Most recently, Congress passed a $484 billion bill in stimulus funding, including $320 billion in additional funding for the wildly popular Payroll Protection Program (PPP), which is designed to quickly get money in the hands of small businesses, so employers can retain employees rather than fire them. This half trillion program adds to the $2 trillion package Congress approved last month (see also Recovering from the Coma).
  • Monetary Stimulus: The Federal Reserve has pulled out another monetary bazooka with the announcement of $2.3 trillion dollars in additional lending to small businesses  . This action, coupled with the long menu of actions announced last month brings the total amount of stimulus dollars to well above $6 trillion (see also Recovering from the Coma for a list of Fed actions). You can see in the chart below how the Fed’s balance sheet has ballooned by approximately $3 trillion in recent months. The central bank is attempting to stimulate commerce by injecting dollars into the economy through financial asset purchases.
Source: Dr. Ed’s Blog
  • Improving Healthcare System: Treatments for sick Covid patients has only gotten better, including new therapeutics like the drug remdesivir from Gilead Sciences Inc. (GILD). Dr. Anthony Fauci, the NIAID Director (National Institute of Allergy and Infectious Diseases) stated remdesivir “will be the standard of care.” With 76 vaccine candidates under development, there is also a strong probability researchers could discover a cure for Covid by 2021. With the help of the Defense Production Act (DPA), the government is also slowly relieving critical manufacturing bottlenecks in areas such as ventilators, PPE (Personal Protective Equipment) and Covid test kits. Making testing progress is crucial because this process is a vital component to reopening the economy (see chart below).
Source: Calculated Risk
  • Economy Reopening: After I have completed all of Netflix, participated in dozens of Zoom Happy Hours, and stocked up on a year’s supply of toilet paper, I have become a little stir crazy like many Americans who are itching to return to normalcy. The government is doing its part by attempting a three-phase reopening of the economy as you can see from the table below. You can’t fall off the floor, so a rebound is almost guaranteed as states slowly reopen in phases.

What Now?!

In the short run, it appears the worst is behind us. Why do I say that? Covid deaths are declining; Congress is spending trillions of dollars to support the economy; the Federal Reserve has effectively cut interest rates to 0% and provided trillions of dollars to provide the economy a backstop; our healthcare preparedness has improved; and global economies (including ours) are in the process of reopening. What’s not to like?!

However, it’s not all rainbows, flowers, and unicorns. We are in the middle of a severe recession with tens of millions unemployed. The Covid-19 epidemic has created a generation of germaphobes who will be hesitant to dive back into old routines. And until a vaccine is found, fears of a resurgence of the virus during the fall is a possibility, even if the masses and our healthcare system are much more prepared for that possibility.

As the world adjusts to a post-Covid 2.0 reality, I’m confident consumer spending will rebound, and pent-up demand will trigger a steady rise of economic demand. However, I am not whistling past the graveyard. I fully understand behavior and protocols will significantly change in a post-Covid 2.0 world, if not permanently, at least for a long period of time. Before the 9/11 terrorist attacks, nobody suspected air travelers would be required to remove shoes, take off belts, place laptops in bins, and carry tiny bottles of mouthwash and shampoo. Nevertheless, a much broader list of social distancing and safety codes of behaviors will be established, which could slow down the pace of the economic recovery.

Regardless of the recovery pace, over just a few short months, we have already placed our hands around the throat of the virus. There are bound to be future setbacks related to the pandemic. Physical and economic wounds will take time to heal. Turbulence will remain commonplace during these uncertain times, but volatility will create opportunities as the recovery continues to gain stronger footing. Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 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 GILD, Zoom, Netflix , and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in Neiman Marcus, Pier 1, and JCPenney 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.

May 1, 2020 at 3:22 pm 3 comments

This Too Shall Pass

storm

Ever since December 31st last year when China alerted the WHO (World Health Organization) about several cases of unusual pneumonia in Wuhan, a port city of 11 million people in the central Hubei province, the dark coronavirus (Covid-19) clouds began to form. Last week, the storm came rumbling through with a vengeance.

I have been investing for close to 30 years, so facing these temporary bouts of thunder and lightning is nothing new for me. Although the pace of this week’s -3,583 point drop in the Dow Jones Industrial Average was particularly noteworthy, we experienced a more severe -5,000 point correction a little more than a year ago due to China trade war concerns and our Federal Reserve increasing interest rates. What happened after that year-end 2018 drop? Stock prices skyrocketed more than +7,800 points (+36%) to a new record high on February 12th, just a few weeks ago. Over the long-run, stock prices have always eventually moved up to new record highs, but this week reminds us that volatility is a normal occurrence.

This week also reminds us that the best decisions made in life generally are not emotionally panicked ones. The same principle applies to investing. So rather than knee-jerk react to the F.U.D. (Fear, Uncertainty, Doubt), let’s take a look at some of the current facts as it relates to coronavirus (Covid-19):

  • The number of deaths this season in the U.S. from the common flu: 18,000. The number of deaths in the U.S. from coronavirus: 2 individuals (both in WA with underlying health conditions).
  • The number of new coronavirus cases in China is declining. Confirmed infections have fallen from more than 2,000 per day to a few hundred. People are going back to work and companies like Starbucks are re-opening their China stores for business.
  • Coronavirus is relatively benign compared to other contagious pathogens. Roughly 98% of infected individuals fully recover, and deaths are limited to people with weakened immune systems, who in many cases are suffering from other illnesses.
  • Previous viral outbreaks, which were significantly more fatal, were all contained, e.g., SARS (2003-04), MERS (2012), and Ebola (2014-16). In each instance, the stock market initially fell, and then subsequently fully recovered.
  • Although the coronavirus has accelerated in areas outside of China, there are dozens of different companies currently developing a vaccine. If a working vaccine is discovered, a rebound could occur as fast as the drop.
  • Governments and central banks are not sitting on their hands. Coordinated efforts are being instituted to curtail the spread of the virus and also provide liquidity to financial markets.

The actual death toll from the coronavirus is relatively small compared to other pandemics, catastrophes (e.g., 9/11), and wars. However, the hangover effect from the fear, uncertainty, and panic that can manifest in the days, weeks, and months after global events can last for some time. I expect the same to occur in the coming weeks and months as the drip of continued coronavirus headlines blankets social media and the news.

I don’t want to sugar coat the economic impact from a potential pandemic because quarantining 60 million people in China, instituting global travel bans, and closing areas of gathering has and will continue to have a material economic impact. Although history would indicate otherwise, it is certainly possible the current situation could worsen and lead to a global recession. Even if that were the case, I believe we are more likely closer to a bottom, than we are to a top, especially given how low interest rates are now. More specifically, we just hit an all-time record low yield of 1.13% on the 10-Year Treasury. In other words, putting money in the bank isn’t going to earn you much.

sp chart 2020

Source

In summary, the current situation experienced this week is nothing new – we’ve lived through similar situations many times (see chart above). The short-run headlines can get more painful, but in the meantime, you can wash your hands and bathe in Purell. This too shall pass.Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 2, 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 and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in SBUX 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.

March 2, 2020 at 6:34 pm 1 comment

Movie Deja Vu – Coronavirus

movie

I have seen this movie before. I love the stock market, but I do actually have other outside interests, including seeing movies. What better indoor winter activity than watching movies?! The Hollywood excitement continues this Sunday for the 92nd Academy Awards. My popcorn consumption has been generous this year as I have seen seven of the nine Best Picture nominated films with the exception of Jojo Rabbit and Little Women.

With a lifetime of movie watching under my belt, there is no shortage of redundant movie themes, whether it’s happy endings in romantic comedies, triumphant patriotism in war flicks, or gory blood spatters in horror films. Just as repetitive as these story lines have been in films, the redundant theme of pandemic health panics continues to plague investors every time a new contagious disease is announced. The newest debut is coronavirus. While coronavirus is playing on the big screen, the presidential impeachment trial, and January 31st Brexit deadline have been sideshows. Stay tuned for that breaking news!

Doctor Wade’s Diagnosis

Although I have not added M.D. to my list of professional credentials (CFA, CFP), Dr. Wade has enough medical experience to identify historical patterns. Most recently, the media covering the Wuhan coronavirus originating in the central Chinese province of Hubei (see map below) has unnecessarily terrorized the global masses with F.U.D. (Fear, Uncertainty, Doubt). While we likely know the ending of this health scare movie (i.e., humanity survives and life goes on), the timing, and scope remain uncertain.

wuhan

2020: Sickness After Healthy Start

After an healthy start to the 2020 stock market show (S&P 500 index zoomed +3.3% higher), investors viewing the coronavirus plot unfold subsequently were sickened with an S&P decline of -3.4% to finish the month slightly down from year-end (-0.2% from December 31st to January 31st). The Dow Jones Industrial Average was hit slightly worse, down 282 points for the month to 28,256, or -1.0%.

How do we know this infectious coronavirus disease scare shall too pass? Well, over the last few decades, there have been many more lethal diseases that have been put to bed. Here’s a list of some of these high profile, safely-controlled infectious diseases:

  • Severe Acute Respiratory Syndrome (SARS)
  • Middle East Respiratory Syndrome (MERS)
  • Ebola
  • Zika Virus
  • Bird Flu
  • Swine Flu
  • H1N1 Virus
  • Mad Cow
  • Hoof-and-Mouth

A chart comparing the severity and timing of some of the major viruses can be seen below.

corona compare

While the human impact has been tragic, coronavirus has also struck a blow to the global economy. The pandemic prequel that mostly closely matches coronavirus is SARS, which also originated in China during 2003 in the province of Guandong. Most notable to me is the fatality rate for coronavirus of just 2.2% versus 9.6% for SARS. While coronavirus is less deadly than SARS, coronavirus is objectively more contagious than SARS and could have an incubation period of 14 days (significantly longer than SARS, which could increase the rate of infections). In fact, there were more confirmed cases of coronavirus in one month than all the reported cases of SARS identified over a span of nine months. Even so, as the chart shows, coronavirus deaths remain the lowest.

Economic Impact

The damaging economic impact of the coronavirus pandemic continues to escalate rapidly on a daily basis as governments, global health agencies, corporations, and individuals respond. Even though coronavirus appears to be much less lethal than SARS, we can scale current economic estimates based on the relative costs incurred during SARS. Some reports show the 2003 SARS situation costing the global economy $40 – $60 billion and 2.8 milllion Chinese jobs, while the potential hit in lost global growth from coronavirus could total $160 billion, according to Warwick McKibbin, a Australian National University economics professor.

The Chinese government fully realizes the amount of financial destruction caused by the SARS outbreak, and therefore is not sitting idly as it relates to the coronavirus. Back during SARS, the government did not institute quarantine measures nor publish the SARS’ genome (necessary to test and track virus) until four months had passed. After the first coronavirus patient was diagnosed around December 1st (two months ago) and the spread of the virus accelerated, the Chinese local governments expanded mandatory factory shutdowns for the Lunar New Year from January 31st to February 9th. What’s more, Wuhan, a city of 11 million residents at the epicenter of the illness, recently closed the area’s outgoing airport and railway stations and suspended all public transport. Chinese government officials have since extended the travel ban to 16 neighboring cities with a combined population of more than 50 million people, including Huanggang, a city next to Wuhan with 7.5 million people, essentially placing those cities on lock down.

Private companies are taking action as well. Companies such as Disney, Tesla, Amazon, Google, Apple, McDonalds, Starbucks, and more than a dozen airlines, cruise lines, casinos, and other global companies with significant footprints in China are suspending operations, temporarily shutting factories and instituting travel restrictions.

No Need to Panic Yet

Before you quarantine yourself in your basement, and take full-body showers in hand sanitizer, let’s take a look at some of those annoying things called facts:

  • There have been zero (0) coronavirus deaths in the United States, and eight diagnosed cases (at time of press).
  • There have been approximately 10,000 Americans killed by the flu since October 2019.

Apparently casual American observers are unable to filter out the true signals being lost in the avalanche of blood-curdling, panicked virus headlines. Tufts Medical Center infectious disease specialist Dr. Shira Doron highlighted this message when she stated the following, “The likelihood of an American being killed by the flu compared to being killed by the coronavirus is probably approaching infinity.” Of the limited number of coronavirus deaths thus far, one study of 41 Wuhan coronavirus death cases showed the median age is around 75 years old. For most people (i.e., those who are not elderly or young children), I guess the moral of this story is to turn the TV off, go get your flu shot, and fall asleep with few worries.

There may be some more coronavirus pain and suffering ahead until this tragic human and economic pandemic comes under control. During the SARS outbreak (November 2002 – July 2003), peak-to-trough stock prices temporarily fell by -16% before marching upwards to new record highs. However, if this movie finishes like so many other similar infectious diseases, the coronavirus fever should break soon enough, and investors will be satisfied with new opportunities and another happy ending to the story.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 3, 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 and certain exchange traded funds (ETFS) and DIS, TSLA, AMZN, GOOGL, AAPL, and MCD, but at the time of publishing had no direct position in SBUX 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.

February 3, 2020 at 3:22 pm 2 comments

Investors Give Thanks and Feast on New Record

turkey wade

There were many things to be grateful over the Thanksgiving holiday, including personal finances for many. Stock market investors were especially thankful for the new record highs achieved in the S&P 500 index, which rose a heaping +3.4% last month, bringing 2019 stock market gains to a whopping +25.3%. Any concerns over politics, China trade, global monetary policy, Brexit negotiations, slowing economic growth, and other fears have been overshadowed by record corporate profits, generationally low interest rates, historically low unemployment rates, rising wages, strong consumer confidence, and hopes of an economic recovery abroad.

Despite the strong advances, concerns remain over a bubble or a stratospheric stock market. These worries of inflated gains seem overblown, if you consider stocks were down -6.2% in 2018. In other words, if you combine 2018-2019, so far, the two-year period averages an +8.4% annualized return – a more reasonable advance. One thing is for sure, this bull market, which started in early-2009, has been no turkey. Since the S&P 500 bottomed at 666 in March of 2009, the index finished the month at over 3,140 – almost a quintuple in value over a 10-year period (not too shabby).

I get the question a lot, “Wade, don’t you think the stock market is crazy now and it is going to crash soon? It’s gone up so much and is at a record high.” Just because the stock market hits a record level doesn’t mean it will stop going up. In fact, since 2013, the S&P 500 has hit 38 new, monthly record highs (see chart below). For each of these new records, I have listened to anxious investors brace themselves for another crash resembling the 2008 financial collapse. The only problem is the 100-year flood normally doesn’t come every 10 years, and as history often proves, record highs often beget future new record highs.

0719

Be Careful to Whom You Listen

There are always varying opinions about the level and direction of future stock prices, but I always warn investors to be careful about following the judgments of television talking heads, especially when it comes to economists, strategists, and analysts, all of whom typically have very little experience in actually investing. These prognosticators typically are very articulate and persuasive but have little-to-no experience of really managing money. Traders generally fall into the useless camp as well because their opinions are moving at the speed of light based on the everchanging headlines du jour, thereby making this fickle advice worthless and ineffective. Instead, investors should pay attention to successful long-term investors who have proven the ability to make and preserve wealth through years of up-and-down markets. You don’t have to believe me, but when the most successful investor of all-time, Warren Buffett, says the stock market is ridiculously cheap,” it probably makes sense to pay more attention to his words of wisdom versus the latest political headline or dangerous and speculative day trader advice to buy-buy-buy or sell-sell-sell!

Although Warren Buffett freely provides his opinions, he openly admits he has no idea what direction stock prices will do in the short-run. So, if the greatest investor of all-time cannot predict short-term direction of stocks, then maybe you shouldn’t try to predict either? Case in point, corporate profits were up over 20% in 2018 (see chart below) and stock prices went down, while this year corporate profits have been essentially flat and stock prices have catapulted approximately +25%. This goes to show you that short-term stock movements can be incredibly difficult to predict. You will be much better off by focusing on making sound investments and following a suitable strategy based on your unique objectives and constraints.

op ear

Source: Dr. Ed’s Blog

You may have gotten some heartburn by feasting on too much turkey, mashed potatoes, stuffing, and gravy, however investors are feasting on new record stock market highs despite investor anxiety. When the anxiety eventually turns to euphoria and gluttony, from fear and skepticism, then that will be the time to reach for the Tums antacid.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 2, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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.

December 2, 2019 at 7:36 pm 1 comment

Missing the Financial Forest for the Political Trees

forest

In the never-ending, 24/7, polarizing political news cycle, headlines of Ukraine phone calls, China trade negotiations, impeachment hearings, presidential elections, Federal Reserve monetary policy, and other Washington based stories have traders and news junkies glued to their phones, Twitter feeds, news accounts, blog subscriptions, and Facebook stories. However, through the incessant, deafening noise, many investors are missing the overall financial forest as they get lost in the irrelevant D.C. details.

Meanwhile, as many investors fall prey to the mesmerizing, but inconsequential headlines, financial markets have not fallen asleep or gotten distracted. The S&P 500 stock market index rose another +1.7% last month, and for the year, the index has registered a +18.7% return. As we enter the volatile fourth quarter, many stock market participants remain shell-shocked from last year’s roughly -20% temporary collapse, even though the S&P 500 subsequently rallied +29% from the 2018 trough to the 2019 peak.

Why are many people missing the financial forest? A big key to the significant rally in 2019 stock prices can be attributed to two words…interest rates. Unlike last year’s fourth quarter, when the Federal Reserve was increasing interest rates (i.e., tapping the economic brakes), this year the Fed is cutting rates (i.e., hitting the economic accelerator). Interest rates are a key leg to Sidoxia’s financial four-legged stool (see Don’t Be a Fool, Follow the Stool). Interest rates are at or near generational lows, depending where on the geographic map you reside. For example, interest rates on 10-year German government bonds are -0.55%. Yes, it’s true. If you were to invest $10,000 in a negative yielding -0.55% German bond for 10-years starting in 2019, if you held the bond until maturity (2029), the investor would get back less than the original $10,000 invested. In other words, many bond investors are choosing to pay bond issuers for the privilege of giving the issuers money for the unpalatable right of receiving less money in the future.

The unprecedented negative-yielding bond market is reaching epic proportions, having eclipsed $17 trillion globally (see chart below). This gargantuan and growing dollar figure of negative-yielding bonds defies common sense and feels very reminiscent of the panic buying of technology stocks in the late 1990s.

negative yield crop

Source: Bloomberg

At Sidoxia Capital Management, we are implementing proprietary fixed income strategies to navigate this negative interest rate environment. However, the plummeting interest rates and skyrocketing bond prices only make our bond investing job tougher. On the other hand, declining rates, all else equal, also make my stock-picking job easier. Nevertheless, many market participants have gotten lost in the financial trees. More specifically, investors are losing sight of the key tenet that money goes where it is treated best (go where yields are highest and valuations lowest). With many bonds yielding low or negative interest rates, bond investors are being treated like criminals forced to serve jail time and pay large fines because future returns will become much tougher to accrue. In my Investing Caffeine blog, I have been writing about how the stock market’s earnings yield (current approximating +5.5%) and the S&P dividend yield of about +1.9% are handily outstripping the +1.7% yield on the 10-Year Treasury Note (see Going Shopping: Chicken vs. Beef ).

Unless our economy falls into a prolonged recession, interest rates spike substantially higher, or stock prices catapult appreciably, then any decline in stock prices will likely be temporary. Fortunately, the economy appears to be chugging along, albeit at a slower rate. For instance, 3rd quarter GDP (Gross Domestic Product) estimates are hovering around +2.0%.

Low Rates Aid Housing Market

Thanks to low interest rates, the housing markets remain strong. As you can see from the chart below, new home sales continue to ratchet higher over the last eight years, and lower mortgage rates are only helping this cause.

new home sales

Source: Calafia Beach Pundit

The same tailwind of lower interest rates can be seen below with rising home prices.

house prices

Source: Calculated Risk

Consumer Flexes Muscles

At 3.7%, the unemployment rate remains low and the number of workers collecting unemployment is near multi-decade lows (see chart below).

weekly unemploy

Source: Calafia Beach Pundit

It should come as no surprise that the more employed workers there are collecting paychecks, the more consumer confidence will rise (see chart below). As you can see, consumer confidence is near multi-decade record highs.

con con

Source: Calafia Beach Pundit

Although politics continue to dominate headlines and grab attention, many investors are missing the financial forest because the political noise is distracting the irrefutable, positive effect that low interest rates is contributing to the positive direction of the stock market and the economy. Do your best to not miss the forest – you don’t want your portfolio to suffer by you getting lost in the trees.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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.

 

 

October 1, 2019 at 3:36 pm Leave a comment

Chinese Checkers or Chess?

chess

There’s been a high stakes economic game of trade going on between the United States and China, but it’s unclear what actual game is being played or what the rules are? Is it Chinese checkers, chess, or some other game?

Currently, the rules of the U.S.-China trade war game are continually changing. Most recently, the U.S. has implemented 15% in added tariffs (on approximately $125 billion in Chinese consumer imports) on September 1st. The president and his administration appreciate the significance of trade negotiations, especially as it relates to his second term reelection campaign, which is beginning to swing into full gear. However, game enthusiasts also understand you can’t win or truly play a game, if you don’t know the rules? In that same vein, investors have been confused about the U.S.-China trade game as the president’s Twitter account has been blowing up with tariff threats and trade discussion updates. As a negotiating tactic, the current unpredictable trade talks spearheaded by the Trump administration have been keeping investors guessing whether there will be a successful deal payoff. Until then, market participants have been sitting on the sidelines watching the stock market volatility unfold, one tweet at a time.

Here’s what the president has planned for other tariffs:

  • October 1: Tariffs on $250 billion in Chinese goods rise to 30%.
  • November 17: Europe auto tariff deadline.
  • December 15: 15% tariffs on $160 billion in Chinese goods.

This uncertain game translated into all the major stock market averages vacillating to an eventual decline last month, with a price chart resembling a cardiogram. More specifically, after bouncing around wildly, the S&P 500 decreased -1.8% last month (see chart below), the Dow Jones Industrial Average dropped -1.7%, and the tech-heavy Nasdaq fell -2.6%.

sp aug

Politically, there is bipartisan support to establish new trade rules and there is acknowledgement that China has been cheating and breaking trade rules for decades. The consensus among most constituencies is especially clear as it relates to Chinese theft of our intellectual property, forced technology transfer, and barriers for U.S. companies to invest in China.

Beyond trade talks, China has been stirring the geopolitical pot through its involvement in the political instability occurring in Hong Kong, which is a Special Administrative Region (SAR) of China. For over five months Hong Kong has had to deal with mass demonstration and clashes with police primarily over a proposed extradition bill that Hong Kong people fear would give mainland China control and jurisdiction over the region. Time will tell whether the protests will allow Hong Kong to remain relatively independent, or the Chinese Communist party will eventually lose patience and use an authoritarian response to the protesters.

Inverted Yield Curve: Fed No Longer Slamming Breaks in Front of Feared Recession

Another issue contributing to recent financial market volatility has been the so-called “inverted yield curve.” Typically, an economic recession has been caused by the Federal Reserve slamming the breaks on an overheated economy by raising short-term interest rates (Federal Funds target rate). Historically, as short-term rates rise and increase borrowing costs (i.e., slow down economic activity), long-term interest rates eventually fall amid expected weak economic activity. When declining long-term interest rates fall below short-term interest rates…voila, you have an inverted yield curve. Why is this scary? Ever since World War II, history has informed us that whenever this phenomenon has occurred, this dynamic has been a great predictor for a looming recession.

What’s different this time? Unlike the past, is it possible the next recession can be averted or delayed? One major difference is the explosion in negative interest rate yielding bonds now reaching $17 trillion.

neg bonds

Yes, you read that correctly, investors are lining up in droves for guaranteed losses – if these bonds are held until maturity. This widespread perception as a move to perceived safety has not protected the U.S. from the global rate anchor sinking our long-term interest rates. United States interest rates have not turned negative (yet?), but rates have fallen by more than half over the last 10 months from +3.24% to +1.51% on the 10-Year Treasury Note. Will this stimulate businesses to borrow and consumers to buy homes (i.e., through lower cost mortgages), or are these negative rates a sign of a massive global slowdown? The debate continues, but in the meantime, I’m going to take advantage of a 0%-interest rate loan to buy me an 85″ big screen television for my new home!

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 3, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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.

September 4, 2019 at 3:51 pm Leave a comment

Are Stocks Cheap or Expensive? Weekly Rant and the Week in Review 4-7-19

The Weekly Grind podcast is designed to wake up your investment brain with a weekly overview of financial markets and other economic-related topics.

Episode 7

Weekly Market Review and This Week’s Rant: Are Stocks Cheap or Expensive?

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

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Spotify: open.spotify.com

April 8, 2019 at 1:22 am Leave a comment

March Madness Leads to Gladness

jump ball

As usual, there was plenty of “madness” in March, and this year did not disappoint. Just as is the case with the annual NCAA basketball tournament, certain investors suffered the agony of defeat in the financial markets, but overall, the thrill of victory triumphed in March. So much so that the S&P 500 index posted its largest first-quarter gain in more than 20 years. Not only did the major indexes post gains for the month, but the winning record looks even better for the year-to-date results. For 2019, the S&P 500 index is up +13.1%; the Dow Jones Industrial Average +11.2%; and the tech-heavy NASDAQ index +16.5% for the year. The monthly gains in the major indexes were more muted, ranging from 0% for the Dow to +2.6% for the NASDAQ.

Busy? Listen to Wade discuss this article and other topics each week on the Weekly Grind podcast:

 

While 2018 ended with a painful injury (S&P 500 -6.2% in Q4), on fears of a deteriorating China trade deal and a potentially overly aggressive Federal Reserve hiking interest rates, the stock market ultimately recovered in 2019 on changing perceptions. Jerome Powell, the Federal Reserve Chairman, indicated the Fed would be more “patient” going forward in increasing interest rates, and President Trump’s tweet-storm on balance has been optimistic regarding the chances of hammering out a successful trade deal with China.

With the new cautious Fed perspective on interest rates, the yield on the 10-Year Treasury Note fell by -0.28% for the quarter from 2.69% to 2.41%. In fact, investors are currently betting there is a greater than 50% probability the Fed will cut interest rates before year-end. Moreover, in testimony before Congress, Powell signaled the economic dampening policy of reducing the Fed’s balance sheet was almost complete. All else equal, the shift from a perceived rate-hiking Fed to a potentially rate-cutting Fed has effectively turned an apparent headwind into tailwind. Consumers are benefiting from this trend in the housing market, as evidenced by lower 30-year fixed mortgage rates, which in some cases have dropped below 4%.

Economy: No Slam Dunk

However, not everything is a slam dunk in the financial markets. Much of the change in stance by the Fed can be attributed to slowing economic growth seen both here domestically and abroad, internationally.

Here in the U.S., the widely followed monthly jobs number last month only showed a gain of 20,000 jobs, well below estimates of 180,000 jobs. This negative jobs surprise was the biggest miss in more than 10 years. Furthermore, the overall measure for our nation’s economic activity, growth in Gross Domestic Product (GDP), was revised downward to +2.2% in Q4, below a previous estimate of +2.6%. The so-called “inverted yield curve” (i.e., short-term interest rates are higher than long-term interest rates), historically a precursor to a recession, is consistent with slowing growth expectations. This inversion temporarily caused investors some heartburn last month.

If you combine slowing domestic economic growth figures with decelerating manufacturing growth in Europe and China (e.g. contracting Purchasing Managers’ Index), then suddenly you end up with a slowing global growth picture. In recent months, the U.S. economy’s strength was perceived as decoupling from the rest of the world, however recent data could be changing that view.

Fortunately, the ECB (European Central Bank) and China have not been sitting on their hands. ECB President Mario Draghi announced three measures last month that could cumulatively add up to some modest economic stimulus. First, it “expects the key ECB interest rates to remain at their present levels at least through the end of 2019.” Second, it committed to reinvesting all maturing bond principal payments in new debt “for an extended period of time.” And third, the ECB announced a new batch of “Targeted Long-Term Refinancing Operations” starting in September. Also, Chinese Premier Li Keqiang announced the government will reduce taxes, primarily Value Added Taxes (VAT) and social security taxes (SST). Based on the rally in equities, it appears investors are optimistic these stimulus efforts will eventually succeed in reigniting growth.

Volume of Political Noise Ratcheted Higher

While I continually try to remind investors to ignore politics when it comes to their investment portfolios, the deafening noise was especially difficult to overlook considering the following:

  • Mueller Report Completed: Robert Mueller’s Special Counsel investigation into potential collusion as it relates Russian election interference and alleged obstruction of justice concluded.
  • Michael Cohen Testifies: Former President Trump lawyer, Michael Cohen, testified in closed sessions before the House and Senate intelligence committees, and in public to the House Oversight Committee. In the open session, Cohen, admitted to paying hush money to two women during the election. Cohen called President Trump a racist, a conman, and a cheat but Cohen is the one heading to jail after being sentenced for lying to Congress among other charges.
  • Manafort Sentenced: Former Trump Campaign Chairman Paul Manafort was sentenced to prison on bank and tax fraud charges.
  • North Korea No Nuke Deal: In geopolitics,President Trump flew 21 hours to Vietnam to meet for a second time with North Korean leader Kim Jong Un on denuclearization of the Korean peninsula. The U.S. president ended up leaving early, empty handed, without signing an agreement, after talks broke down over sanction differences.
  • Brexit Drama Continues: The House of Commons in the lower house of the U.K. Parliament continued to stifle Prime Minister Theresa May’s plan to exit the European Union with repeated votes rejecting her proposals. Brexit outcomes remain in flux, however the European Union did approve an extension to May 22 to work out kinks, if the House can approve May’s plan.

Positive Signals Remain

March Madness reminds us that a big lead can be lost quickly, however a few good adjustments can also swiftly shift momentum in the positive direction. Although growth appears to be slowing both here and internationally, corporate profits are not falling off a cliff, and earnings remain near record highs (see chart below).

corp prof

Source: Calafia Beach Pundit

Similar to the stock market, commodities can be a good general barometer of current and future economic activity. As you can see from the chart below, not only have commodity prices remained stable in the face of slowing economic data, but gold prices have not spiked as they did during the last financial crisis.

gld v cmmd

Source: Calafia Beach Pundit

After 2018 brought record growth in corporate profits and negative returns, 2019 is producing a reverse mirror image – slow profit growth and record returns. The volatile ending to 2018 and triumphant beginning to 2019 is a reminder that “March Madness” does not need to bring sadness…it can bring gladness.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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 1, 2019 at 1:37 pm Leave a comment

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