Posts tagged ‘Politics’

No Pain, No Gain

Long-term success is rarely achieved without some suffering. In other words, you are unlikely to enjoy gains without some pain. Last month was certainly painful for stock market investors. On the heels of concerns over the Russia-Ukraine war, Federal Reserve interest rate hikes, China-COVID lockdowns, inflation/supply chain disruptions, and a potential U.S. recession, the S&P 500 index declined -8.8% for the month, while the technology-heavy NASDAQ index fell -13.3%, and the Dow Jones Industrial Average weakened by -4.9%.

For long-term stock investors who have reaped the massive +520% rewards from the March 2009 lows, they understand this gargantuan climb was not earned without some rocky times along the way. As you can see from the chart below, there have been no shortage of issues and events to worry about over the last 15 years (2007 – 2022):

  • 2008-2009: Financial Crisis
  • 2010: Flash Crash (electronic trading collapse)
  • 2011: Debt Ceiling – Eurozone Collapse
  • 2012: Greek Debt Crisis – Arab Spring (anti-government protests)
  • 2012: Presidential Elections – Sequestration (automatic spending cuts) – Cyprus Financial Crisis
  • 2013: Federal Reserve Taper Tantrum (threat of removing monetary policy accommodation)
  • 2014: Ebola Virus Outbreak
  • 2015: China Economic Slowdown
  • 2018: China Trade Tariffs – Federal Reserve Interest Rate Hikes
  • 2020: COVID-19 Global Pandemic – Recession
  • 2022: Russia-Ukraine War -Federal Reserve Interest Rate Hikes – Inflation/Supply Chain – Slowing China
Source: TradingView chart with Sidoxia notations

So, that’s the bad news. The good news is that after the stock market eventually bottomed (S&P 500) around each of these events, one year later, stock prices rebounded on average approximately +32%, and prices moved even higher in the following two years. Suffice it to say, in most instances, patiently waiting and taking advantage of heightened volatility usually results in handsome rewards for investors over the long-run. As Albert Einstein stated, “In the middle of every difficulty lies an opportunity.”

There have been plenty of false recession scares in the past, and this could prove to be the case again. Although I have noted some of the key headwinds the economy faces above, it is worth noting that current corporate profits remain at/near all-time record highs (see chart below) and the 3.6% unemployment rate effectively stands at/near generationally record low levels. What’s more, housing remains strong, and consumer balance sheets remain very healthy as a result of elevated savings rates that occurred during COVID.

Source: Ed Yardeni

The S&P 500 is already off -14% from its highest levels experienced at the beginning of the year. Although there are no clear signs of a looming recession presently, if history is a guide, much of the pessimism is likely already discounted in current stock prices. Stated differently, even if the economy were to suffer a garden-variety recession, we may already be closer to a bottom than the potential gains from a subsequent rebound. The 15-year chart shows that stock prices have become significantly more attractively valued in recent months.

Source: Ed Yardeni

Panic is rarely a profitable strategy, so now is probably not the best time to knee-jerk react to the price declines. Peter Lynch, arguably one of the greatest all-time investors (see Inside the Brain of an Investing Genius), said it best when he stated, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Market corrections are never comfortable, but successful, long-term investing comes with a price…no pain, no gain!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 2, 2022). Subscribe on the right side of the page for the complete text.

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

May 2, 2022 at 7:48 pm 1 comment

Insane Gain After Fed & Ukraine Pain

After a painful start to 2022, the stock market surged last month, with the S&P 500 index gaining a respectable +3.6%, while the technology-heavy NASDAQ index rose by +3.4%. With volatility on the rise, getting caught up in the emotions of the headlines can be challenging for some investors. At Sidoxia, we are determined to objectively stick to the facts and migrate investments to the areas of the market that provide the best risk-reward opportunities to our clients, based on their unique objectives and constraints. There certainly are some headwinds for investors to contend with, but for long-term investors, it’s also important to recognize the positive tailwinds and not miss the forest for the trees.

As I pointed out last month, we are coming off a heroic advance over the last three years (2019/2020/2021) with the S&P 500 soaring +90%. The hangover from COVID has created significant supply chain disruptions and widespread economic shortages. Adding the Russian invasion of Ukraine to the mix has been like pouring gasoline on the flames of inflation, especially when it comes to the energy and food sectors. As you can see from the CRB index below (a basket of 19 commodities ranging from aluminum to orange juice and live cattle to wheat), in recent years the index has been highly volatile in both directions, but is up +27% this year. Since the COVID-driven trough, prices have about tripled over the last two years, but that does not mean prices will fly to the moon forever.

Source: Trading Economics

Many traders have short-term memories. People forget that commodity prices approximately doubled after the 2008 Financial Crisis, only to experience a subsequent slow bleed over the next decade until prices were essentially chopped in half. As the saying goes, “price cures price.” In other words, as prices skyrocket, greedy capitalists and businesses then decide to take advantage of the high pricing environment by investing to produce more supply, which eventually leads to deflation. This supply expansion process takes time and will not happen overnight.

With gasoline prices exceeding $4/gallon nationally, and breaching $6/gallon in my Southern California backyard (see chart below), it should come as no surprise that oil companies are taking advantage of the lucrative environment by drilling for more oil.

Source: GasBuddy.com

The rising Baker Hughes drilling rig count below reflects the miracle of supply-demand economics operating in full force. As prices rise and accelerate during geopolitical shocks like we have experienced in Ukraine, naturally supply rises, which eventually depresses prices until an equilibrium is reached. Even our government is now attempting to increase supply by releasing up to 180 million barrels of oil from our country’s Strategic Petroleum Reserve (the largest release in the almost 50-year history of the reserve), while also pushing for penalties on those energy companies sitting on unused permits (i.e., not producing oil on leased oil land). High energy prices will most certainly become a hot-button political issue in the upcoming midterm elections.

Source: Trading Economics

Adding to investor anxiety, our Federal Reserve is embarking on an interest rate hiking cycle that is expected to take the targeted Federal Funds interest rate from effectively 0% to a range around 2.5% over the next couple of years. The Fed’s goal is to increase the cost of borrowing, thereby slowing down the economy and reducing inflation. On the surface this sounds scary, but do you remember what happened the last time the Fed tapped the interest rate brakes during 2015 – 2018? Despite the Fed raising interest rates from 0% to 2.5%, the stock market increased dramatically over that timeframe. The current Fed interest rate cycle may more closely resemble 1994 when the Fed aggressively hiked rates from 3% to 6%. Similar to now, back then stock prices swung wildly throughout the year to eventually finish the year flattish.

If Things Are So Bad, Why Are Prices Going Up?

In the face of such horrible and scary headlines, how can prices still go up? The short answer is that companies are making money hand over fist and the economy remains strong (3.6% unemployment rate; record 11.3m job openings3% forecasted growth in 2022 GDP) in a post-COVID recovery world, where consumers remain financially healthy and are now looking to spend their shelter-in-place savings on vacations, houses, and cars (all healthy industries).

Not only are corporate profits at record levels, they are also expected to grow at a healthy rate (+10% in 2022, +10% in 2023) after mind-boggling growth of +50% in 2021 (see chart below).

Source: Yardeni.com

Could the headwinds previously described cause prices to go lower? They certainly could, but valuations remain attractive given where interest rates currently stand. If interest rates rise dramatically, all else equal, then that will be challenging for all asset pricing. Moreover, discounting or forecasting future Russian military actions is a difficult chore as well, which could also potentially throw a curve ball at investors.

In the meantime, what are companies doing with this flood of growing cash? Well, besides combing the job boards in search of hiring a scarce number of qualified workers, investing in technology to improve productivity, and expanding geographically to grow revenues, companies are also returning gobs of cash to investors in the form of record, swelling dividends and share buybacks (see charts below).

Darling Dividends

The gift that keeps on giving. Dividends now amount to more than half a trillion dollars and they are still growing.

Source: Yardeni.com

Beautiful Buybacks



As you can see, the trajectory of buybacks are more volatile and discretionary than dividends, but record profits are driving more than $1 trillion in share buybacks on an annualized basis – not too shabby.

Source: Yardeni.com

Although there are plenty of reasons for investors to rationalize a run for the hills, there remains some extraordinarily strong fundamental tailwinds intact. In spite of the economic pain caused by Ukraine, the Fed, and inflation, there are plenty of reasons to remain optimistic. The strong economy, impressive profit growth, historically low interest rates (even though slowly rising), cash-rich corporations, and attractive valuations mean there is still ample room for future market gains.

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, 2022). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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, 2022 at 1:37 pm Leave a comment

End of the World or Status Quo?

If you were the chief executive of a newspaper, television, or magazine company, what headline stories would you run to generate the most viewers and readers? Which subjects will you choose to make me impulsively grab a magazine in the grocery line, keep me glued to the television news, or suck me in to click-bait advertisements on the web? For example, what topics below would you select to grab the most attention?

·      Hurricane or Sunshine?

·      High Speed Car Chase or Cat Saved from Tree?

·      Bloody Murder or Baby’s Birthday?

·      Messy Divorce or Wedding Celebration?

·      Impeachment or Bipartisan Legislation

·      End of the World or Status Quo?

If you selected the first subject in each pair above, you would likely gain much more initial interest. In choosing a winning topic, the saying goes, “what bleeds, leads.” In other words, scary or controversial stories always grab more attention than feel-good or status quo narratives. And that is why the vast majority of media outlets are drawn to negativity, just as mosquitos are attracted to bug zappers. This phenomenon can be explained in part with the help of Nobel Prize winner Daniel Kahneman and his partner Amos Tversky, who conducted research showing the pain from losses is more than twice as painful as are the pleasures experienced from gains (see chart below).

The significant volatility seen in the stock market recently from the Russian war/invasion of Ukraine is further evidence of how this fear dynamic can create short-term panics.

Although the stock market as measured by the S&P 500 index has gone gangbusters over the last three years, almost doubling in value (2019: +29%, 2020: +16%, 2021: +27%), the S&P 500 has hit an air pocket during the first couple months of 2022 (-8%), including down -3% in February. The year started with turbulence as investors became fearful of a Federal Reserve that is entering the beginning stages of interest rate hikes while cutting stimulative bond purchases. And then last month, the Russian-Ukrainian incursion made investors even more skittish. Like always, these geopolitical events tend to be short-lived once investors realize the impact turns out to be less meaningful than initially feared. As you can see below, the worst economic impact is forecasted to be felt by Russia (consensus on 2/24/22 of approximately a -1.0% hit to economic growth), more than twice as bad as the -0.2% to -0.4% knock to growth for the U.S., Europe, and the world (see chart below). The Russian hit will likely be worse after accelerated sanctions.

Source: The Financial Times (2/24/22)

As it relates to Ukraine, many Americans don’t even know where the country is located on a map. Ukraine accounts for about only 0.14% of total global GDP (i.e., a rounding error and less than 1% of total global economic activity). Russia, although larger than Ukraine, is still a relative small-fry and represents only about 3% of total global economic activity. If you live in Europe during the winter, you might be a little more concerned about Vladimir Putin’s recent activities because a lot of Europe’s energy (natural gas) is supplied by Russia through Ukraine. For example, Germany receives about half of its natural gas from Russia (see chart below).

Source: The Financial Times

Russia, on the other hand, is larger than Ukraine, but the red country is still a relative small-fry representing only about 3% of total global economic activity. When it comes to energy production however, Russia is more than a rounding error because the country accounts for about 11% of global energy production (#3 country globally behind the United States and Saudi Arabia). By taking all these factors into account, we can confidently state that Russia and Ukraine have a very low probability of solely pulling the global economy into recession.

If history repeats itself, this conflict will turn out to be another garden variety decline in the stock market and an opportunity to buy at a discount. It’s virtually impossible to predict a short-term bottom in stock prices has been reached, but over the long-run, stock investors have been handsomely rewarded for not panicking and staying invested (see chart below).

Source: Marketsmith

At the end of the day, the daily headlines will continually attempt to sell the negative story that the world is coming to an end. If you have the fortitude and discipline to ignore the irrelevant noise, the status quo of normal volatility can create more exciting opportunities and better returns for long-term investors.

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 1, 2022). Subscribe on the right side of the page for the complete text.

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

March 1, 2022 at 4:52 pm 1 comment

From Rocket Ship to Roller Coaster

The stock market has been like a rocket ship over the last three years 2019/2020/2021, advancing +90% as measured by the S&P 500 index, and +136% for the NASDAQ. After this meteoric multi-year rise, stock values started to come back to earth in 2022, and the rocket ship turned into a roller coaster during January. More specifically, the S&P 500 fell -5% for the month and the NASDAQ -9%. Yes, it’s true volatility has increased, and your blood pressure may have risen with all the ups and downs. However, the fact remains the economy remains strong, corporate profits are at record levels, unemployment is low, and interest rates remain at attractive levels despite nagging inflation (see chart below) and the removal of accommodative monetary policies by the Federal Reserve.

Source: Calafia Beach Pundit

Math Matters

I did okay in school and was educated on many different topics, including the basic principle that math matters. This notion rings especially true when it comes to finance and investing. As I have discussed numerous times in the past, money goes where it is treated best, which is why interest rates, cash flows, and valuations play such a key role in ultimately determining long-term values across all asset classes. This concept of money seeking the best home applies equally to stocks, bonds, real estate, commodities, crypto-currencies, and any other asset class you can imagine because interest rates help determine the cost of holding and using money.

Normally, mathematics teaches us the lesson that more is better when discussing financial matters. And currently the stock market is compensating investors significantly more for investing in stocks relative to investing in bonds – I have reviewed this concept repeatedly on my Investing Caffeine blog (see Going Shopping: Chicken vs. Beef ). Currently, investors are getting paid about +5% to hold stocks based on the forward earnings yield (i.e., the inverse of the stock market’s Price-Earnings ratio of 20x) vs. the +2% yield on the 10-Year Treasury Note (1.78% more precisely on 1/31/22). What’s more, historically speaking, stock investors typically get rewarded with an earnings yield that doubles about every 10 years, whereas bond yields usually remain stagnantly flat, if bonds are held until maturity.

With that said, I am always quick to point out that diversification in a portfolio is important (i.e., most people should at least own some bonds), even if bonds are currently very expensive relative to other asset classes (see Sleeping on Expensive Financial Pillows). If bond yields climb significantly to the point where returns are more competitive with stocks, I will likely be buying significantly more bonds for me and my Sidoxia (www.sidoxia.com) clients.

Fed Jitters

The recent stock market volatility is reinforcing the idea that the Federal Reserve’s more aggressive stance regarding hiking interest rates is making many investors very anxious – just not me. I have lived through many tightening cycles in my lifetime and lived to tell the tale. It is true that all else equal, higher interest rates generally depress asset values, but it is also important to place the current interest rate environment in historical context. Although the Federal Funds interest rate target is expected to increase to 2.5% over the next few years (currently at 0%), this forecast is nothing new and there is no guarantee the Fed can successfully pull off this feat. Many people have short memories and forget the Fed hiked interest rates 10 times from the end of 2015 through 2018. In the face of this scary period, the stock market (S&P 500) still managed to approximately climb a respectable +22% (albeit with some volatility). Furthermore, if you give the Fed the benefit of the doubt of achieving this uncertain target, this 2.5% level is very appealing and still extremely low, historically speaking (see chart below).

Source: Federal Reserve Economic Data (FRED)

When discussing interest rates and inflation, investors should also expand their views globally to the other 95% of the world’s population. Many investors are very myopic in their focus on U.S. interest rates. It is important to understand that rates are not just low here in the United States, but also low almost everywhere else as well. While international interest rates have bounced marginally higher in recent months, those countries’ long-term international rates, by and large, remain tremendously low too – in most cases even lower than rates in the U.S. (see chart below). Yes, the Fed has some control over short-term interest rates in the U.S., but considering other crucial forces that are depressing long-term global rates is worth pondering. Factors such as globalization and the pervading expansion of deflationary technology into our personal and work lives are contributing to disinflation. Valuable conclusions can be synthesized beyond digesting the pessimistic and nauseating analysis of Jerome Powell’s Congressional testimony, along with the needless wordsmithing of recent Fed minutes.

Source: Edward Yardeni

In order to earn above-average, financial returns in your portfolio over the long-run, experiencing unsettling volatility and corrections is the price of doing business. Flying on rocket ships might be fun, but sometimes the rocket can run out of gas, and you are forced to jump on a roller coaster. The ups-and-downs can be frustrating at times, but if you stay on for the full ride, you will almost always end with a smile on your face when it’s over.

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 1, 2022). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

February 1, 2022 at 4:07 pm Leave a comment

The Rocket Science of Investing – Armageddon Yet to Arrive

In the face of an incredibly scary global pandemic, the stock market completed a phenomenal year (S&P 500 rocketed +27%) closing at a new all-time monthly record high, after also posting incredible results in 2020 (+16%) and 2019 (+29%). Naturally, the follow-on question I get most is, “What about next year?” And to this question, I annoyingly provide the same answer as the most successful long-term investor of all-time, Warren Buffett, “I have no idea.”

But with that said, despite lacking the skill of 100% clairvoyance, my investment firm Sidoxia Capital Management and our strategies have performed quite well over the long-run for numerous reasons. As it turns out, the power of compounding, coupled with low-cost, tax-efficient investing can produce quite spectacular results. Throw in some good stock picking, and that is frosting on a cake recipe of success. Thank you Amazon.com Inc. +5,544%, Apple Inc. +2,394%, and Alphabet Inc. 880%, among many other fruitful investments since Sidoxia’s inception in 2008.

Lessons Learned Over 30 Years

I’ve been doing this thing called investing for about three decades now and I’ve learned a few things over the years, most prominently that investing is not rocket science. Warren Buffett has correctly described investing as similar to dieting. In other words, both are easy to understand but difficult to execute because they require discipline.

If you want your investments to succeed, consider some of these investing nuggets:

  • Invest for the Long-Run: Markets move in all directions, but if you can avoid myopia and short-termism, you will be much better positioned for investment success.
  • Avoid Investment Fads: Invest where you get the most bang for your buck – stick to sound investments selling at reasonable prices. Stay away from expensive, speculative, frothy areas, or at least keep that exposure of your portfolio to a minimum.
  • Turn off the TV and Silence your Phone: Regardless of what you hear, the world is not ending. COVID, inflation, and Federal Reserve monetary policies may dominate the headlines du jour but this is nothing new. The stock market has increased more than 7-fold in value since the 2009 stock market lows, even in the face of many frightening news stories (see Ed Yardeni’s list of panic attacks since 2009).
  • Understand Stock Prices Do Go Down: We have been spoiled in recent years with above-average returns, but that does not mean you need to panic when prices do decline or that you need to try to time the market. There can be years when stock prices do not appreciate (reference the post-2000 and post-2008 periods), however, those who wisely rebalanced and dollar-cost-averaged positions in their portfolio were handsomely rewarded for their discipline and patience over the long-run.
  • Volatility Can Be a Good Thing: Periods of volatility offer you the ability to rebalance your portfolio and take advantage of opportunities that disruption creates.
  • Optimize Your Investments Based on Your Time Horizon and Risk Tolerance: At Sidoxia, we customize investment portfolios to meet our clients’ unique circumstances and risk appetite. It’s important to have your investments diversified across a broad array of asset classes in a low-cost, tax efficient manner.
  • Get Assistance: If you don’t have the time, discipline, or interest to manage your investments, find an experienced professional who is a fiduciary (i.e., someone who legally places your interests first) and implements time-tested investment strategies. Sidoxia should be able to assist you in identifying an appropriate investment manager. 😉

What Now for 2022?

As I made clear earlier, at Sidoxia, we do not attempt to predict the directions of markets, but rather we look to opportunistically take advantage of many different dynamic areas that we believe provide the best risk-adjusted return potential for our clients.

However, although we freely admit we are not Nostradamus, we do closely follow a wide spectrum of areas in financial markets to best position our investments. Here are some thoughts on some hot-button issues that are top-of-mind as we enter 2022.

Stocks Remain Attractive: Stocks are still attractively priced broadly considering where interest rates stand today. Most people don’t realize that stock prices are actually cheaper today than they were a year ago because earnings will be up roughly +50% in 2021 (see chart below) and stock prices are only up +27%. Stated differently, the price of the market as measured by the forward price-earnings ratio (P/E) has declined, even though the stock market has melted up. Under a different lens, stocks are also attractively priced if you consider bonds are generally yielding 1-2% versus the 4-5% on stocks as measured by the earnings yield of the S&P 500 index (corporate earnings/price of the index), which can be calculated as an inverse P/E ratio. Regardless, if stock prices do indeed decline this year, while bond yields remain in the same general ballpark, then stocks will only become even more attractive.

Source: Yardeni Research

Federal Reserve Tightening Doesn’t Mean Game Over for Stocks: We have seen this movie before (see chart below). What happened the last time quantitative easing (QE) stopped and the Fed raised its Federal Funds interest rate target? Ten-year interest rate yields went down, and stock prices went up – not necessarily immediately, but ultimately investors were compensated for not knee-jerk selling.

Source: Yardeni Research

Inflation Does Not Appear to Be Spiraling Out of Control: Just take a look at the paltry yield of the 10-year Treasury Note, currently at 1.51%. And please do not just consider the low interest rates here in the U.S., but also internationally in markets like Germany with negative 10-year interest rates (-0.18%) or near-0% interest rates in Japan (0.07%). If inflation were indeed considered a systemic risk, global yields in large developed markets would not be hovering around 0%. Furthermore, COVID-related supply chain bottlenecks appear to be abating. As you can see from the chart below, the average business delivery times have been coming down in recent months as supply disruptions subside – an improving trend for overall prices.

Source: Yardeni Research

The Global Pandemic Deserves Watching: There are plenty of reasons to remain concerned, however science and natural immunity may have brought us closer to neutralizing this health crisis. A worldwide focus on creating vaccines, antiviral drugs, monoclonal antibodies, and other COVID treatments has allowed the global health community to more effectively treat those infected with COVID, while simultaneously lowering the number of related hospitalizations and deaths. There is even hope for areas that have lower vaccination rates than the U.S., for example India (see chart below), which you can see has experienced a dramatic fall-off in COVID cases in part because of the large number of previous infections and subsequent natural immunity created.

Source: Google

There are always talking heads and so-call pundits predicting Armageddon in the stock market, but as you can see from the facts presented, record highs in the stock market aren’t currently painting this picture for 2022. Profits have been gargantuan, interest rates remain near generational lows, valuations remain reasonable, and there are reasons to be optimistic regarding the COVID pandemic. Investing is never easy, but it is not rocket science, if you remain disciplined and patient. Follow this advice and your portfolio should benefit in 2022 and beyond.

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 (January 3, 2022). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 3, 2022 at 3:42 pm 1 comment

Ohhh Omicron! From Panic to Possibility

If you have recovered from your Thanksgiving turkey and stuffing food coma, you have probably woken up to the sound of a new health scare alarm …Omicron. Where does the name Omicron come from, and why is it named after a Greek alphabet letter? The short answer is the system was created to avoid public confusion with complicated scientific names (e.g., B.1.1.529) and also to mitigate the stigma assigned to a region of origination. Apparently, Spaniards weren’t happy with the name “Spanish Flu” and China didn’t appreciate the “Wuhan Virus” moniker. More specifically, Omicron is the new COVID variant originating from South Africa and believed to be more contagious than other forms of COVID, albeit potentially not as severe.

I am not an epidemiologist and also not a COVID expert, but I do know it is a little early to panic over something scientists have not fully researched with fewer than 100 identified cases as of last week. The good news is that early data is showing mild symptoms in infected individuals and the vast majority of these people impacted by Omicron have been unvaccinated (87%), therefore implying the vaccines are indeed providing protection.

Omicron isn’t the first COVID variant and will likely not be the last. Like the flu, which produces new strains every year, new COVID strains such as Omicron are likely to surface on a regular basis. Luckily, our country is home to the world’s most prolific vaccine makers and reformulated boosters are likely to be a common staple in our healthcare regimen. In fact, the CEO of Pfizer, Inc. (PFE) believes it’s possible to have an Omicron vaccine in 100 days, if needed.

Even if Omicron ends up spreading faster than other variants like Alpha, Beta, Gamma, Delta, Lambda, Mu, and Nu, our healthcare system is much better equipped to deal with Omicron compared to previous pandemic variants. Not only do we have access to the strongest supply of vaccines on the planet, but the United States also has built a stronger testing infrastructure (the CDC shows more than 13 million tests conducted over the last week, excluding California). What’s more, pharmaceutical companies have created very effective therapeutics, including Paxlovid, a game-changing antiviral pill manufactured by Pfizer. The recent Paxlovid trial conducted in combination with the antiviral drug ritonavir showed a reduction in hospitalization and deaths by -89%.

Another fortunate aspect to this new variant is that the rise of Omicron is occurring amidst an improving backdrop of plummeting hospitalizations and COVID-related deaths here in the U.S. (deaths after the recent surge are down more than -50%).

Markets Remain Near Record Highs

Source: Invetors.com

With all these scary Omicron headlines, one would expect a collapse in equity markets. Well, at least not yet. The S&P 500 was actually down less than -1% for the month and remains up a whopping +22% for 2021 (see 5-year chart above). And the tech-heavy NASDAQ index did even better, closing slightly higher for the month and up a similar amount for the year (+21%).

Driving the buoyant stock market performance this year, on the heels of a strong stock market last year (S&P 500 climbed +16%), has been the surge in corporate profits (see chart below). As I like to point out to investors, over the long-run, stock prices follow the direction of earnings, whether we are talking about the overall stock market or individual stocks. Although prices and earnings have both moved up and to the right, neither prices nor profits move in a straight line. One must assume price volatility (i.e. risk) if you want to experience the reward (i.e., long-term returns that substantially beat inflation).

Source: Calafia Beach Pundit

Other Flies in the Ointment

Besides Omicron, there are still some prominent flies in the ointment. Federal Reserve Chairman Jerome Powell just signaled to Congress yesterday that the Fed’s reduction in its bond-buying stimulus program (i.e., “tapering”) could finish a few months early. In other words, the Fed could remove the punch bowl sooner than anticipated – perhaps by as early as this March. Subsequent to the completion of the tapering, industry observers now expect a greater than 50% probability for the first interest hike to occur by June 2022.

If this is not enough to ruffle your post-Thanksgiving feathers, then consider the threat of persistent inflation. Even Fed Chair Powell threw in the towel by officially removing the word “transitory” from his description of inflation. Inflation is not exploding to the double-digit extremes of the 1980s, but as you can see from the chart below (green line), five-year inflation expectations now exceed 3%.

Source: Calafia Beach Pundit

Lastly, the other date to mark on your December calendar, besides the Christmas holiday, is the 15th because that is the date Congress could hit the debt ceiling limit. This high-stakes game of chicken occurs every year or so. This contest between Democrats and Republicans is used as a negotiating tool in the hopes of advancing political agendas. If an agreement is not reached to increase the debt limit, a government shutdown, and then ultimately a government default would transpire. History tells us this will never happen, but the mere game of political brinksmanship could rattle markets in the short-run.

All these risks and fears are nothing new. Financial markets have flourished in the face of worse crises than Omicron, monetary policy changes, inflation, and debt ceilings. The key to sustainable wealth creation is taking a long-term view and being opportunistic in the face of volatility. Shrewdly pivoting your perspective from panic to possibility is essential on the path to prosperity.

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 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in PFE and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

December 1, 2021 at 12:33 pm Leave a comment

No Red Blood, Just Green Flood

Normally, investors equate the month of October with scary, blood-curdling screams because horrifying losses during the 1929 and 1987 crashes occurred during this month. Fortunately, for those invested in stocks, they experienced the opposite this last month – a flood of green (new all-time record highs), despite a whole host of frightening factors, including the following:

·       Inflation

·       Supply chain disruptions

·       Federal Reserve monetary policy

·       COVID variants

·       Evergrande’s impact on China and commercial real estate

·       Cryptocurrency volatility

·       Expanding government deficits and debt (stimulus/infrastructure)

·       Government debt ceiling negotiations

·       Declining corporate profit margins

·       Meme stocks

·       And more…boo!

Even though this Halloween season has introduced these many spooky fears, investors still experienced a sugar-high during October. More specifically, the S&P 500 catapulted +6.9% this month (+22.6% Year-to-Date), Dow Jones Industrial Average +5.8% (+17.0% YTD); and NASDAQ +7.3% (+20.3% YTD). With the COVID Delta variant subsiding (see chart below), economic activity rising (Q4 GDP is estimated at +4.8%), and corporate profits going gang busters (33% growth and 84% of corporations are beating Q3 estimates), it should come as no surprise that stock market values continue to rise.

Source: Calculated Risk

As I mention regularly to my readers, there is never a shortage of things to worry about when it comes to your investments, money, and savings. Emotions tend to highjack rational reasoning as non-existent boogeymen scare people into do-nothing decision-making or suboptimal choices. Investing for the long-run requires dedication and discipline, and if you do not have the time and fortitude to do so, it behooves you to find an experienced, independent professional to assist you.

Rather than getting spooked by supply chain fears and inflation plastered all over the newspapers and media outlets, the real way to compound wealth over the long-term is to do what Warren Buffett says, and that is “buy fear, and sell greed.” Unfortunately, our Darwinian instincts embedded in our DNA are naturally designed to do the contrary…”buy greed, and sell fear.” The goal is to buy low and sell high (not buy high and sell low).

Yes, it’s true that over the last year, semiconductor lead times have almost doubled to 22 weeks, and Chinese container shipping costs have about increased 10-fold to over $20,000 (see charts below). However, the economic laws of supply and demand remain just as true today as they did in 1776 when Adam Smith wrote Wealth of Nations (see also Pins, Cars, Coconuts & Chips). Chip makers are building new fabs (i.e., manufacturing plants) and worker shortages at the ports and truck driver deficiencies are slowly improving. Supply scarcity and higher prices may be with us for a while, but history tells us betting against capitalism isn’t a wise decision.

Source: The Wall Street Journal

Not worrying about all the economic goblins and witches can be difficult when contemplating your investments and savings. Nevertheless, as I have consistently reminded my investors and readers, the key pillars to understanding the health of the investment environment are the following (see also The Stool):

·       Interest rates

·       Earnings (Corporate profits)

·       Valuations (How cheap or expensive is the market?)

·       Sentiment (How greedy or fearful are investors?)

The good news is that a) interest rates are near historically low levels; b) corporate profits are on a tear (+33% as mentioned above); c) valuations have come down because profits have grown faster than stock price appreciation; and d) sentiment remains nervous (a good thing) as measured by the massive inflows going into low (negative) yielding bonds. If you consider all these elements, one should not be surprised that we are at-or-near all-time record highs. Obviously, these investment pillars can reverse directions and create headwinds for investors. Until then, don’t be startled if there is more green flood rather than red blood.

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 (November 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 1, 2021 at 4:15 pm Leave a comment

Sleeping on Expensive Financial Pillows

Everybody loves a good night’s sleep and that requires a comfortable pillow. Unfortunately, many investors are overpaying for their pillows in the form of overpriced, interest-rate sensitive bonds. If you aren’t careful, your retirement dreams could turn into financial nightmares. More specifically, if the composition of your investment portfolio is overly skewed towards bonds, you stand to lose substantial amounts of money if/when interest rates and inflation persistently increase.

In the short-run, pillows manufactured in the form of bonds can feel cozy in a world of low volatility and generationally-low interest rates. However, investors should also ask themselves, how much longer can this unprecedented 40-year bull market in bonds last? Interest rates approached 20% in 1980 and they stand closer to 1% today (1.24% to be more precise). What may now seem like a cozy bond portfolio may eventually lead to unnerving insomnia.

Source: Trading Economics

We already have negative interest rates in numerous countries around the world and inflation (a rise in general price levels) is running hot at about 5% annually. What this means is investing in a 10-Year Treasury Note yielding 1.24% effectively means you are losing almost -4% per year in purchasing power, if inflation remains at 5% (see chart below). There are numerous investing strategies used to fight inflation, but historically stocks’ ability to raise prices through pricing power has been a useful vehicle to fend off the melting of money’s value.

Source: Calafia Beach Pundit

Despite short-term increases in inflation, getting a good night sleep hasn’t been an issue in 2021 as it relates to the stock market. For the month, the S&P 500 stock index was up +2.3% to a new record, and for the year it has surged +17%. The story for the Dow Jones Industrial Average looks similar – for the month rising +1.3% and year-to-date to +14%.

Thankfully, there haven’t been any night terrors yet either in the bond market. Nevertheless, short-term results have been more of a mixed bag. For the month, the iShares Aggregate Bond Market ETF (Exchange Traded Fund – AGG) rose +1.0% and for 2021 slipped -2%.

In spite of stocks being a great place to invest over the last decade or so, solely investing in stocks is not always rainbows and unicorns. The price you pay for longer-term stock outperformance is shorter-term volatility, which can be disruptive to your sleeping patterns. Case in point, the -35% drop in the S&P 500 index at the start of the COVID-19 global pandemic when anxiety and volatility were at extreme levels.
Despite the market continuously hitting new highs, investors are not completely out of the woods yet as spiking Delta variant cases threaten the trajectory of the current economic recovery.

Source: CDC

Although stocks can feel like stiff, uncomfortable pillows in the short-term, in the long-run, historically those stiff, uncomfortable stocks become vastly more comfortable than bonds. Over the last five years, stock prices have dramatically outperformed bonds by +99% (S&P vs. AGG).

Determining your asset allocation is a monumental decision that should be driven by various factors, including risk tolerance, time horizon, income needs, taxes, and other factors such as your personal objectives. Therefore, even if you subscribe to the premise that stocks outperform in the long run, that doesn’t necessarily mean all retirees should load up solely on a diet of stocks.

Retirees who need income or other risk-averse investors generally can’t afford to lose substantial amounts of their net worth, if stocks tank significantly during a recession. Not only could an all-stock portfolio not generate adequate income, an equity-heavy portfolio could also could lead to emotional sales after market declines, thereby locking in permanent losses at low levels. After these potential losses, there may not be enough time for stock losses to be recouped by retirees. If possible, most investors approaching retirement do not want to be forced to work as a greeter at Wal-Mart to compensate for stock losses.

Everybody’s financial situation is different, and everyone has varying risk tolerances and unique needs. As such, working with an independent, experienced, and professional advisor like Sidoxia Capital Management (www.Sidoxia.com) can assist you with structuring a proper asset allocation, so your investment pillows can help you achieve a good night sleep.

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 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

August 2, 2021 at 1:42 pm Leave a comment

Politics & COVID Tricks

Thanks to a global epidemic, trillions of dollars instantly disappeared during the first quarter of this year, and then, abracadabra…the losses turned into gains and magically reappeared in the subsequent two quarters. After a stabilization in the spread of the COVID-19 virus earlier this year, the stock market rebounded for five consecutive months, at one point rebounding +64% (from late March to early September) – see chart below. However, things became a little bit trickier for the recent full month as concerns heightened over the outcome of upcoming elections; uncertainty over a potential coronavirus-related stimulus package agreement; and fears over a fall resurgence in COVID-19 cases. Although the S&P 500 stock index fell -3.9% and the Dow Jones Industrial Average slipped -2.3% during September, the same indexes levitated +8.5% and +7.6% for the third quarter, respectively.

Source: Investors.com

Washington Worries
Anxiety over politics is nothing new, and as I’ve written extensively in my Investing Caffeine blog, history teaches us that politics have little to do with the long-term performance of the overall stock market (e.g., see Politics & Your Money). Nobody knows with certainty how the elections will impact the financial markets and economy (myself included). But what I do know is that many so-called experts said the stock market would decline if Barack Obama won the presidential election…in reality the stock market soared. I also know the so-called experts said the stock market would decline if Donald Trump won the presidential election… in reality the stock market soared. So, suffice it to say, I don’t place a lot of faith into what any of the so-called political experts say about the outcome of upcoming elections (see the chart below).

COVID Coming Back?

One of the reasons stock prices have risen more than 50%+ is due to a stabilization in COVID-19 virus trends. As you can see from the charts below, new tests, hospitalizations, and death rates are generally on good trajectories, according to the COVID Tracking Project. However, new COVID cases have bumped higher in recent weeks. This recent, troubling trend has raised the question of whether another wave of cases is building in front of a dangerous, seasonally-cooler fall flu season. Traditionally, it’s during this fall period in which contagious viruses normally spread faster.

Source: The COVID Tracking Project

Regardless of the trendline in new cases, there is plenty of other promising COVID developments to help fight this pandemic, such as the pending approvals of numerous vaccines, along with improved therapies and treatments, such as therapeutics, steroids, blood thinners, ventilators, and monoclonal antibodies.

Business Bounce

From the 10,000-foot level, despite worries over various political outcomes, the economy is recovering relatively vigorously. As you can see from the chart below, the rebound in employment has been fairly swift. After peaking in April at 14.7%, the most recent unemployment rate has declined to 8.4%, and a closely tracked ADP National Employment Report was released yesterday showing a higher than expected increase in new private-sector monthly jobs (749,000 vs. 649,000 median estimate).

Source: U.S. Bureau of Labor Statistics

From a housing perspective, house sales have been on fire. Record-low interest rates, mortgage rates, and refinancing rates have been driving higher home purchases and rising prices. Urban flight to the suburbs has also been a big housing tailwind due to the desire for more socially distanced room, additional home office space, and expansive backyards. Adding fuel to the housing fire has been record low supply (i.e., home inventories). The robust demand is evident by the record Case-Shiller home prices (see chart below).

Source: Calculated Risk

There are plenty of industries hurting, including airlines, cruise lines, hotels, retailers, and restaurants but the economic rebound along with government stimulus (i.e., direct government checks and unemployment relief payments) have led to record retail sales (see chart below). Spending could cool if an additional coronavirus-related stimulus package agreement is not reached, but until the government checks stop flowing, consumers will keep spending.

Source: Calculated Risk
Besides trillions of dollars in fiscal relief injected into the economy, the Federal Reserve has also provided trillions in unprecedented relief (see chart below) through its government and corporate bond buying programs, in addition to its Main Street Lending Program.

Source:The Financial Times

There has been a lot of political hocus pocus and COVID smoke & mirrors that have much of the population worried about their investments. In every presidential election, you have about half the population satisfied with the winner, and half the population disappointed in the winner…this election will be no different. The illusion of fear and chaos is bound to create some short-term financial market volatility over the next month, but behind the curtains there are numerous positive, contributing factors that are powering the economy and stock market forward. Do yourself a favor by focusing on your long-term financial future and don’t succumb to politics and COVID tricks.

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, 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 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, 2020 at 1:11 pm Leave a 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

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