A fornt page article in today’s Financial Times points this out–that virtually all the performance in the US market is coming from a small number of mega-cap tech/AI companies.

The FT conclusion is that this almost always an indicator of bad news down the road.

My thoughts:

–yes, but how far down the road are we talking about?

–it seems to me that why this is the case in the current US stock market is at least as important as that it is. My belief is that rotation would long since have begun, except that, due to current administration economic policies, we’re not exactly spoiled for choice. The domestic consumer economy is unusually weak because of tariffs, efforts to reduce the work force, and by arresting and imprisoning/deporting potential workers. ICE’s very public killing of citizens protesting ICE activities aren’t exactly encouraging tourism, either. And the fact that the currency has fallen through the floor can’t be cood for cost of goods, or, for that matter, an inducement to foreign investor participation in the US market

–in a weak currency, slow growth economy, the most favorably placed firms are those with $US costs and foreign revenues. Even better if they have little or no plant and equipment in the US and/or have operations that can easily be shifted out of the country

–the worst place to be in a situation like the current one is having foreign currency costs and domestic sales. For a while, I thought that beaten down domestic consumer firms with strong brand names (measured by cumulative advertising expenditure, if nothing else) would be attractive takeover targets. But I’ve since come to think that the recent reputational damage to the US brand recently has caused potential foreign acquirers to lose interest

There are also rules on how big a position in a given company can be as a percentage of the entire portfolio, in vehicles offered to the public. These rules are typically stated as not allowing a purchase of a security if doing so raises the total position size above a specified, usually quite large, threshold. The practical effect can be that a concentrated fund will be able to sell shares of its big winners but not buy them back if the price falls. So the portfolio manager may hesitate to do so.

I was struck in reading the Financial Times the other morning that the paper ran three articles that touched on Trump administration policies.

–The first is that the world’s reserves of just-in-case petroleum are being depleted at a rate that suggests being completely tapped out occurs in about a month. No one knows for sure what will happen to the crude oil price then, but it will presumably not be a decline

–Number two is that the oil majors have told Washington that they won’t speed up their drilling plans because of the Hormuz crisis. Strange–but for this administration probably more like par for the course–no one seems to understand much about the way the world works or to have done enough contingency planning to approach them before attacking Iran. The reality is, though, that all extra drilling or faster extraction from underground would do would be to wreck the fields–meaning reduce the amount of oil ultimately recoverable–where faster pumping might be feasible

–The third is that the administration seems to be taking extraordinary steps during this possible crisis to shut down alternative energy sources. Kind of like planning to ensure an energy shortage happens no matter what rather than to prevent one. My read is that this is not a Machiavellian plot from the administration, but rather that no one is driving the bus. A more depressing thought would be that no one knows how to drive

The chief economic result of the administration’s escapades to date, as I see it, has been to crush the dollar. Yes, everyone’s poorer, but it’s hard to put a finger on who’s responsible or why this is happening. $7 a gallon gasoline is different, I think, because it’s much more concrete.

It’s unclear to me where the safe spaces are to hide. My initial reaction is that it makes AI even more attractive, because everything else will be so much worse off. The one thing that the last few weeks’ trading has indicated is the market belief, initially at least, is that the negative impact of higher crude prices will be worse outside the US than in. If so, in a weird way US tech companies are that much more attractive.

…this by the government that also gave us ICE deportations, a huge fall in the value of the dollar, the war in Iran and a looming oil price crisis.

why I think it’s a really bad idea

the data are readily available

We’re living in the 21st century. Even the smallest companies have had easy and cheap access to sophisticated management control software for decades. Maybe some of this involves trade secrets–things like a country-by-country breakout of a multinational’s sales and profits–but for a long as I’ve been reading them (close to half a century) this level of detail is not required and companies have long since become very good at muddying these waters. So I don’t see reformatting the readily available data to fit SEC specifications as being an incredible hassle.

So whether you release data four times a year, or twice or once is more or less how many times a company pushes the “SEC format” button.

foreign companies, British, Australian, Irish for example, have steadily been relisting in the US.

…this despite the more extensive disclosure required here, well more than double what may be required in their home markets. The reason, I think, is that the increased disclosure leads to higher PE multiples placed by investors on company earnings. That’s because they have greater ability to assess what the company is really worth.

most growth companies compensate key employees primarily through stock options

So if I’m correct that less disclosure leads to lower PEs, and I’m very sure that this is right, the simplest response to the company-damaging move to less disclosure would be to relocate–to, say, Canada.

why would anyone choose the less disclosure road?

… especially given the possibility that in a less disclosure world companies would be worth less, not more. The only reason I can come up with is that there are firms whose operations for whatever reason can’t stand the light of day are chomping at the bit to raise equity capital.

About a month ago. the S&P 500 was down by about 7% ytd. The Energy sector was up by about 40%

Today, in the early afternoon, the S&P is now ahead ytd by 4%, with the Energy sector up by 31%.

At the same time, memory maker Micron is up by 78% ytd. The 4 TB solid state drive my family gave me as a birthday gift last November has tripled in price to $500 and the 4 TB CF express card I bought for my video work somewhat earlier (a year?) than that for ~$200 now sells for close to $2000.

Another way of putting this:

…as a human being, a citizen and a former infantryman, I find the war against Iran deeply disturbing, if for no other reason, the apparent lack of any thought or planning put into the decision to attack by the administration, and the equally unsettling unwillingness of Congressmen of both political parties to take effective action to stop it.

…but taking that hat off and donning my stock market visor, there are other sectors of the market that are far more important. Energy is only 4% of the index; but IT makes up about a third; and the consumer is about 15%. There is an overall negative impact on the economy from the sharp rise in the oil price caused by the war, since the US imports about 6.5 million barrels of oil daily in addition to the 13.5 million or so we produce. Presumably, this implies a further contraction to spending, with most of the burden borne by families with average or below-average incomes, and in addition to the cost of the tariffs.

Another thing to keep in mind: since the war’s beginning, the US stock market is no longer lagging the rest of the world’s bourses. This is presumably because, generally lacking large oil reserves, economies in Europe and the Far East are being hurt more deeply than the US.

The Organization of Petroleum Exporting Countries was formed in 1960. It only came to prominence in the mid-1970s, however. That’s when OPEC set production quotas for member countries–and put oil prices on the long road from a selling price of $1 or so a barrel to the current $100-ish.

Late in the last century, there was plenty of discussion about “peak oil.” Back then it meant the day when global demand would exceed the ability of the world’s oil nations to supply their black gold and would result in a sharp increase in prices. Great for oil producers, not so much for consumers.

Today, though, the term has come to mean peak demand, the time when alternative energy sources begin to replace significant amounts of petroleum.

The cartel itself can be divided into two camps, nations like Saudi Arabia or the United Arab Emirates, which have oil reserves that can continue to produce for decades and decades, and other members whose reserve lives are relatively short. The former group, which has to date dominated OPEC policy making, has a strong economic interest in keeping prices low–in order to delay the shift to alternative energy sources. The latter want the highest possible price today. They have no need to plan for the decades ahead.

It seems to me that the UAE is effectively joining the second group, which implies to me that it believes we’re now at, or past, peak oil. The trigger, I’d imagine, is the US attack on Iran, whose chief long-term result may end up being underlining the attractiveness of alternative energy sources. And although it will take some time, I imagine that leaving the cartel frees it to substantially increase its production.