I’ve just updated my Current Market Tactics page.
Category Archives: Portfolio management
what about last Wednesday?
That’s the day the S&P 500 took a dramatic 2% plunge, with recent market leaders doing considerably worse than that, right after the index had reached a high of 2400.
Despite closing a hair’s breadth above the lows–normally a bad sign–the market reversed course on Thursday and has been steadily climbing since. The prior leadership–globally-oriented secular growth areas like technology–has also reasserted itself.
My thoughts:
–generally speaking, the market is proceeding on a post-Trump rally/anti-Trump agenda course. Emphasis is on companies with global reach rather than domestic focus, and secular change beneficiaries rather than winners from potential government action that have little other appeal
–while trying to figure out whether the market is expensive or cheap in absolute terms is extremely difficult–and acting on such thoughts is to be avoided whenever possible–the valuation of the S&P in general looks stretched to me. Tech especially so. This is especially true if corporate tax reform ends up being a non-starter. My best guess is that the market flattens out rather than goes down. But as I wrote a second or two ago absolute direction predictions are fraught with peril
–tech is up by 17.0% this year through last Friday, in a market that’s up 6.4%. Over the past 12 months, tech is up by 35.2% vs. a gain of 16.8% for the S&P. Rotation into second-line names appears to me to be under way, suggesting I’m not alone in my valuation concerns
–currency movements are important to note: the € is up by about 10% this year against the $, other major currencies by about half that amount. Why this is happening is less important, I think, than that it is–because it implies $-oriented investors will continue to favor global names
–the next move? I think it will eventually be back into Trump-motivated issues. For right now, though, it’s probably more important to identify and eliminate faltering tech names among our holdings (on the argument that if they can’t perform in the current environment, when will they?). My biggest worry is that “eventually” may be a long time in coming.
the Trump rally and its aftermath (so far)
the Trump rally
From the surprise election of Donald Trump as president through late December 2016, the S&P 500 rose by 7.3%. What was, to my mind, much more impressive, though less remarked on, was the 14% gain of the US$ vs the ¥ over that period and its 7% rise against the €.
the aftermath
Since the beginning of 2017, the S&P 500 has tacked on another +4.9%. However, as the charts on my Keeping Score page show, Trump-related sectors (Materials, Industrials, Financials, Energy) have lagged badly. The dollar has reversed course as well, losing about half its late-2016 gains against both the yen and euro.
How so?
Where to from here?
the S&P
The happy picture of late 2016 was that having one party control both Congress and the administration, and with a maverick president unwilling to tolerate government dysfunction, gridlock in Washington would end. Tax reform and infrastructure spending would top the agenda.
The reality so far, however, is that discord within the Republican Party plus the President’s surprisingly limited grasp of the relevant economic and political issues have resulted in continuing inaction. The latest pothole is Mr. Trump’s refusal to release his tax returns–that would reveal what he personally has to gain from the tax changes he is proposing.
On the other hand, disappointment about the potential for US profit advances generated by constructive fiscal policy has been offset by surprisingly strong growth indications from Continental Europe and, to a lesser extent, from China.
This is why equity investors in the US have shifted their interest away from Trump stocks and toward multinationals, world-leading tech stocks and beneficiaries of demographic change.
the dollar
The case for dollar strength has been based on the idea that new fiscal stimulus emanating from Washington would allow the Fed to raise interest rates at a faster clip this year than previously anticipated. Washington’s continuing ineptness, however, is giving fixed income and currency investors second thoughts. Hence, the dollar’s reversal of form.
tactics
Absent a reversal of form in Washington that permits substantial corporate tax reform, it’s hard for me to argue that the S&P is going up. Yes, we probably get some support from a slower interest rate increase program by the Fed, as well as from continuing grass-roots political action that threatens recalcitrant legislators with replacement in the next election. The dollar probably slides a bit, as well–a plus for the 50% or so of S&P earnings sourced abroad. But sideways is both the most likely and the best I think ws can hope for. Secular growth themes probably continue to predominate, with beneficiaries of fiscal stimulation lagging.
Having written that, I still think shale oil is interesting …and the contrarian in me says that at some point there will be a valuation case for things like shipping and basic materials. On the latter, I don’t think there’s any need to do more than nibble right now, though.
more trouble for active managers
When I started in the investment business in the late 1970s, fees of all types were, by today’s standards, almost incomprehensibly high. Upfront sales charges for mutual funds, for example, were as high as 8.5% of the money placed in them. And commissions paid even by institutional investors for trades could exceed 1% of the principal.
Competition from discount brokers like Fidelity offering no-load funds addressed the first issue. The tripling of stocks in the 1980s fixed the second. Managers reasoned that the brokers they were dealing with were neither providing better information nor handling trades with more finesse in 1989 than in 1980, yet the absolute amount of money paid to them for trading had tripled. So buy-side institutions stopped paying a percentage and instead put caps on the absolute amount they would pay for a trade or for access to brokerage research.
All the while, however, management fees as a percentage of assets remained untouched.
That appears about to change, however. The impetus comes from Europe, where fees are unusually high and where active management results have been, as I read them, unusually poor.
The argument is the same one active managers used in the 1980s in the US. Stock markets have tripled from their 2009 lows and are up by 50% from their 2007 highs. All this while investors have been getting the same weak relative performance, only now they’re paying 1.5x- 3x what they used to–simply because the markets have risen.
So let’s pay managers a fixed amount for the dubious services they provide rather than rewarding them for the fact that over time GDP has a tendency to rise, taking corporate profits–and thereby markets–with it.
The European proposal to decouple manager pay from asset size comes on the heels of one to force managers to make public the amount of customer money they use to purchase third-party research by allowing higher-than-normal trading commissions. Most likely, customer outrage will put an end to this widespread practice.
Both changes will doubtless quickly migrate to the US, once they’re adopted elsewhere.
what a good analysis of Tesla (TSLA) would contain
A basic report on TSLA by a competent securities analyst would contain the following:
–an idea of how the market for electric cars will develop and the most important factors that could make progress faster or slower. My guess is that batteries–costs, power/density increases, driving range, charging speed–would end up being key. Conclusions would likely not be as firm as one might like.
–TSLA’s position in this market, including competitive strengths/weaknesses. I suspect one main conclusion will be that combustion engine competitors will be hurt by the internal politics of defending their legacy business vs. advancing their electric car position. The ways in which things might go wrong for TSLA will be relatively easy to come up with; things that could go right will likely be harder to imagine.
–a detailed income statement projection. The easy part would be to project (i.e., more or less make up) future unit volume and selling price. The harder part would be the detail work of breaking down unit costs into variable (meaning costs specific to that unit, like labor and materials, with a breakout of the most important materials (i.e., batteries)) and fixed (meaning each unit’s share of the cost of operating the factory). An important conclusion will be the extent of operating leverage, that is, the degree to which fixed costs influence that total today + the possibility of very rapid profit growth once the company exceeds breakeven.
There are also the costs of corporate overhead, marketing and interest expense. But these are relatively straightforward.
The income statement projection is almost always a tedious, trial-and-error endeavor. Companies almost never reveal enough information, so the analyst has to make initial assumptions about costs and revise them with each quarterly report until the model begins to work.
–a projection of future sources and uses of cash. Here the two keys will be capital spending requirements and debt service (meaning interest payments + any required repayments of principal). Of particular interest in the TSLA case will be if/when the company will need to raise new capital.