I like to think about stocks in two related ways–concept and valuation.
Valuation is the price we pay for a stock today.
It’s a function of three things:
–the worth of the company as it stands now,
–the prospects for future earnings growth which will make the worth figure higher or lower tomorrow, and
–how these variables compare against the situation with every other publicly traded stock.
Concept is a bit more complicated. It’s three elevator speeches,
–one about how the company stacks up in terms of possible market share gains vs other publicly traded companies;
–one about prospects for the industry the company is in;
–a third about the shape of the overall economy–the US vs the rest of the world–which tells us whether to favor importers, exporters or whether this is a crucial distinction to make here and now.
To my mind, the most important of the three over the past few years has been the third.
Three reasons, all consequences of Washington politics.
–the first is the attempt to lower interest rates, as a way of decreasing the cost of government borrowing–put another way, to allow the government to borrow more than it could otherwise. This move has had the effect of weakening the dollar as foreign holders of Treasuries do this to lower their perceived risk.
–the second is tariffs, which not only raise the price of foreign finished goods but also the cost of imported raw materials used domestically.
–the last is the strong use of force by ICE that has the effect of retarding the growth of the domestic workforce or even shrinking it. …think of the Korean workers that ICE led off in chains last year, as they tried to open a battery factory in Georgia.
My basic idea has been to avoid the US consumer economy where possible, to focus instead on companies that have costs in $US and foreign revenues, avoiding $US revenues/foreign costs wherever possible. IT, especially software, is a prime example.
This has worked exceptionally well, until around a month or two ago.
A reasonable question to ask, but in any event the one I’m asking myself, is why the change?
The possibilities, as I see them. Either this is an issue of valuation, and the market will soon rotate back to the previous winners, or the market is now signaling a longer-lasting shift toward the domestic economy.
My guess is that it’s the former. My reason for thinking this is that low-end domestic retail has been especially weak over the past couple of months.