Tag Archives: investing

globalization and the stock market

September 20, 2016 By in economics, Strategy, Uncategorized Tags: , , , , , , Leave a comment

For most of the thirty years I’ve been a professional investor, there has been a very dependable, high-beta link between world economic growth and world trade.   When economies were expanding, trade would expand at a much higher rate;  when economies were slowing, or contracting, developments in world trade were much more negative.

 

What was equally important for an investor was that although the economic data were clear from the outset, for many years equity investors in the US and Europe were slow to figure out what was going on.  As a result, from the 1970s through the 1990s there was plenty of outperformance to be had simply by overweighting multinationals and global transport companies during economic expansions and underweighting them during slowdowns.  Of course, one also had to give at least some consideration to currencies–that is, to make sure that a company had its revenues generally in harder currencies and its costs in weaker ones.  Still the main idea was to exploit the high sensitivity of trade to world growth.

 

Today’s equity markets have caught on.  It’s now part of most equity portfolio managers’ tool kits to favor multinationals and transports in upturns and shy away during downturns.

 

What I find interesting–and important–is that the economics seem to have changed over the last half-decade.  Over the past few years, global trade has grown no faster than the world in general.  It’s not 100% clear why this is so, but a reasonable guess is that the era of global production reshuffling between developed and developing nations to take advantage of lower labor costs, newer, more efficient plant and stronger management is over.

If this is right, and if I’m correct that stock markets haven’t really caught on to the new reality yet, then multinationals will be disappointing vs. expectations and the (more difficult) place to look for outperformance is with domestic firms within a given national arena.

There are also political implications (although I usually find political speculation irrelevant for making stock market gains).  Maybe the anti-trade stance of both Hillary and Trump is a case of fighting the last war.  The new economics would also suggest that the Trump campaign is much more deeply rooted in notions of white supremacy we thought had been left behind in the 1960s than we would like to believe.

 

 

online ordering/delivery and supermarkets/drugstores

September 19, 2016 By in Uncategorized Tags: , , , , , , 2 Comments

In Manhattan, where I spend a considerable amount of time, a reasonable rule of thumb is that household goods and food both cost about twice what they would in nearby suburbs.  Part of this premium, I’m sure, has to do with high rents and the logistics of getting inventory into the city.  But I also think that if we could see into the management control books of the firms involved, we’d see that these urban locations are extraordinarily profitable.

Online is changing this situation in two ways.  Anyone who is able to wait a day or two–and who has a way of accepting delivery safely–has been shifting away from bricks and mortar.  Just as important, fringe areas in the city, which have few (if any) drugstores/supermarkets, become more attractive as neighborhoods because traditional infrastructure is no longer as crucial as it once was.

 

On the other end of the population density spectrum, the Wall Street Journal recently reported that in rural areas online ordering is also supplanting supermarkets–at least for non-perishables–in much the same way that Wal-Mart disrupted mom-and-pop retailers a generation ago.  The Journal cites a Kantar Retail study that shows 30%+ of rural shoppers are now members of Amazon Prime and almost three-quarters are online shoppers of some sort.

What had once been protecting the margins of local rural retailers is the cost of shipping items to out-of-the-way locations.  But with the near-ubiquity of free/membership shipping (meaning the bargaining power of, say, Amazon to lower shipping costs), this barrier has been substantially reduced.

 

My guess is that the biggest winners from this rural trend are local convenience stores.  Since these are typically linked with gasoline stations, which have long benefited from lower oil prices, I think they’re no longer hidden gems.  The idea that locals will have more money to spend may mean the convenience stores will run for longer than the consensus expects.  During a correction maybe, but right now I’m not a buyer.

 

index fund gains in the US

September 15, 2016 By in index funds, indexing, Uncategorized Tags: , , , Leave a comment

According to a survey reported in the Financial Times and done at the newspaper’s request by Morningstar, assets in US index mutual funds now comprise a third of total domestic mutual fund assets.  That’s up from 25% this time three years ago.

Nevertheless, actively managed assets under management have risen by 14%, despite the market share shift.  So the fees being collected by active managers are up.  This is doubtless due mostly to the fact that markets have been rising.  The S&P 500 is up by about a third over the three-year span, the Bloomberg Treasury index by 12%.  Watch out, though, if markets flatten or begin to decline.

 

More bad news:  the FT is reporting that 90.2% of US active equity managers underperformed their benchmark, after deducting fees, over the twelve months ending June.  Not numbers that will stem outflows.

 

Since I’m getting such an unbelievably late start today, I’ll only make two points:

–in the investment organizations I’m aware of, management control is in the hands of professional marketers, not professional investors.  I think their giving a much higher priority to selling rather than making products is a substantial part of the underperformance problem for these firms.  It’s highly unlikely, I think, that marketers will volunteer to step down and turn the reins over to makers.  So I expect underperformance issues will continue.  If I’m correct, the next bear market could prove crushing for these organizations, since the combination of falling prices and client withdrawals will doubtless mean sharp declines in profits.  Where will the money come from to beef up research and portfolio management operations then?

–some large investment management firms known for active management are reported to be finally entering the index fund market themselves.  First of all, this seems to me to show the marketing bent of their managements, giving support to my first point.

In addition, index funds have very large economy of scale effects and the oldest/largest have been in existence for decades.  Because of this, I can’t imagine that Johnny-come-lately firms will ever have profitable index offerings.  The firms may subsidize their index funds  so that the fees for you and me will be on a par with bigger rivals’, but I don’t see how the subsidies can ever be taken away.  Yes, such firms may retain assets, but their bottom lines will be worse off than if they retained them.

the trouble(s) with the luxury goods industry

September 14, 2016 By in Luxury goods, Retail, Uncategorized Tags: , , , , , 5 Comments

For most of the past quarter-century, the publicly traded luxury goods industry, both companies based in the EU and in the US, has been a source of almost continual outperformance.

the old pattern

Its appeal rested (and I do mean the past tense) on two major trends:

–the gradual aging of the working population in the US and EU.  A twenty- or thirty-something in either area typically aspires to own a work wardrobe, a car and a house.  A forty- or fifty-something, in contrast, wants to own jewelry and a vacation house, and to go on a cruise.

So the rising affluence of older workers in the US and Europe has meant increasing demand for luxury goods.

–growth in Japan and the development of capitalism in China, beginning with Deng’s turn away from Mao in the late 1970s.  Again, increasing affluence has sparked higher demand for globally recognized luxury goods.  In addition, in China “gifts” (read: bribes) of luxury goods have long greased the wheels of bureaucratic approval of new projects–until the ongoing anti-corruption crackdown there began a few years ago, that is.

What has been less well understood is that the unit profits from selling a given luxury good in either China or Japan has been much, much higher than elsewhere (double would be my first approximation).  This means that if Japan/China accounted for 25% of a company’s sales (and a sales figure would typically be all a luxury goods firm would announce), they would represent half the company’s profits.

the new

–the rise of Millennials (the suit, car, house people) in the US and EU and the gradual retirement–and loss of income–of Boomers are putting a crimp in demand for luxury goods in these areas.

–luxury goods sales in Japan have hit a brick wall in recent years.  This is partly demographics, partly the immense loss in purchasing power that the Abenomics-induced depreciation of the yen has caused.

–the China case is a little more complicated.  The main reason for the falloff in Western luxury goods sales there is, of course, the anti-corruption campaign.  But even before this, there was a clear trend of high-end consumers in China away from foreign luxury brands and toward domestic ones.   It also seems to me that years of economic stagnation in the EU have further undermined the image of European brands as cultural symbols of power and influence.  So my guess is that even as/when the anti-corruption campaign runs its course, the bounceback of traditional European luxury goods sales will be muted.

my bottom line

Studying stock performance patterns of the past twenty or thirty years suggests that major selloffs of luxury goods stocks are always buying opportunities.  I don’t think this will be the case any longer.   This is not to say the stocks won’t go up in market rallies.  They likely will.  Bur they won’t be leaders.   And the best-known names will lag firms that primarily serve Millennials, as well as companies that tap into growing consumption in China.

the September 7th Job Openings and Labor Turnover Survey (JOLTS) report

September 9, 2016 By in Federal Reserve, JOLTS report, Uncategorized Tags: , , , , , , , , Leave a comment

The Bureau of Labor Statistics of the Labor Department released its latest JOLTS report on Wednesday.

The main results:

–nationwide job openings are now at 5.9 million, the highest figure in the 16 year history of the report.  This is substantially above the 4.5 million level of 2006-07.

–the rate of new hires has been flat for about two years at just over 5 million monthly.  While this is 5% – 10% below the rate of 2006-07, the very high number of job openings would have been consistent with an unemployment rate of 3% ten years ago.  This seems to me to be a point in favor of the idea that the main impediment to filling jobs is finding workers with needed skills.

–3 million workers are voluntarily leaving their jobs monthly.  This is a sign they’re confident of finding employment again without much difficulty.  That’s back to the pre-recession levels of 2006, and almost double the recession lows.

All of this argues that the US is at or near full employment.  On the other hand, however, there’s little sign of the upward pressure on wages that this situation would have produced in the past.

 

Whatever the reason for slow-rising wages, it seems to me there’s no reason in the employment figures for the Fed to maintain anything near the current emergency-room-low level of short-term interest rates.