Tag Archives: strategy

parts of an email from yesterday

September 9, 2020 By in Basic Concepts, Constructing a Portfolio, economics, stock market, Strategy Tags: , , Leave a comment

I guess you’ve seen all the stuff about huge buying of options on individual tech stocks, both by Bar Stool-style traders and by Softbank, driving tech stocks up.  My guess is that has ended for now.  If so, it will probably take a week or so for trading in the big tech names to settle down.

I’ve read that when the Tokyo market found out what Son had been up to, and had made $4 billion on speculative options trading, Softbank dropped by 8% (?), losing shareholders $20 billion in market value.  That’s because what he did is bet-the-company crazy.

One of the things I’ve noticed is that some second-line names are doing much better (meaning falling more slowly) than what must be Robinhood-ish favorites.


It’s never clear what triggers a market selloff.  In this case, though, it’s doing a healthy thing by readjusting relative values among different groups of stocks–something I’ve thought would happen by a temporary reversal of leadership in an uptrend.

I think the fact that at zero interest rates stocks are the only game in town means stocks will drop to some longer-term trend line, stabilize, and then begin to move up again.  A hope, not a belief–at the close today NASDAQ seems to have hit the bottom of a channel it’s been in since April.  (It’s also about 25% above its March high, which says these are not bargain-basement levels.)


Over the past 5 trading days, NASDAQ is down by -9.2%, the S&P by -5.5%, and the Russell by -4.7%, so there is outperformance of a sort by the R2000.
Very often after a big selloff, market leadership changes.  That didn’t really happen in March, although afterwards the R2000 began to keep up more with the S&P for several months.  My sense is that the market wants to broaden out to find non-tech stocks that will do well over the next year or two.  This is why consumer discretionary names have been doing well recently.  But because some kinds of tech are going to be long-term winners, the move has to be based on finding consumer names that have good growth prospects, not just that they’re in another sector. 

The market hasn’t gotten conviction yet with this idea, probably in large part because Trumponomics gets loonier by the day.  The near-term economic outlook in the US had already been deteriorating before his latest China ideas, and won’t have a chance to be better unless he’s defeated in November.

Then there’s the human side of things. Who’d have thought we’d see George Wallace reincarnated, or the Waffen SS recreated, or scary abuse of power in the Justice Department–or that the Joint Chiefs would feel the need to say they would not obey any Trump orders to use troops to deny Americans their civil rights.

 
The last two paragraphs both bear on stocks like NWL.  Arguably, NWL is a true “value” name.  That is, all the bad stuff–and more–that could reasonably be expected to happen has already taken place and been factored into the stock price.  So it has some downside protection. It’s also economically sensitive and non-tech; and maybe if management can use the company’s assets competently, good things will happen. 

Another way of putting this is that in a world where TSLA can be down 30% in a week maybe the value formula of dead money for now with the hope of upside later on isn’t so bad to have as part of a portfolio.

end game (iii): if Biden wins…

August 27, 2020 By in administration economic strategy, economics, Strategy, Uncategorized Tags: , , , , Leave a comment

As I mentioned earlier in the week, the investment implications of a Trump reelection are straightforward. As an American, I’d be deeply shocked and disappointed by the implied repudiation of traditional American values. As an investor, I’d expect a continuation of the “flight capital” market we have been in for some time, with a return of the domestic economy-centric Russell 2000 names to the bear market they had been in for most of Trump’s time in office, until late March of this year.

I find the stock market consequences of a Biden victory much harder to handicap. My thoughts so far:

–the transition of power might not be smooth. Trump has already declined to say he will accept the election result if he loses. He has begun to disrupt mail service on the, perhaps mistaken, idea that this will suppress more votes for Biden than for him. More “dirty tricks” may be in the offing. He may also end up testing the limits of the law by pardoning himself for any crimes he may have committed before or while in office.

Worries about abuse of power may have some negative effect on stocks around election time. It’s equally possible, though, that, sensing defeat, traditional Republicans will distance themselves from Trump in advance (as some seem to me to be already doing this), signalling that party loyalists should no longer follow Trump, thereby minimizing the damage he might otherwise do. It’s hard to know, but it says volumes about Trump that musing about what amounts to a post-election coup attempt doesn’t sound totally crazy. Can we be even remotely similar to Moscow 1991?

–interest rates will likely remain low for a long time. This is a distinct plus for stocks, for three reasons: they will remain attractive vs. the two other liquid asset classes, cash and bonds; bonds are unlikely to fall in price because of rising short-term interest rates, a development that would lead investors of all stripes to rebalance away from stocks; and the cost of carrying the mammoth amount of debt run up under Trump–with more possibly needed to repair damage he has done–will remain low. In fact, as I’m writing this, there are reports that the Fed will soon announce its intention to retain near-zero interest rates for the next half-decade

–income taxes will certainly go up, both for wealthy individuals (this doesn’t matter so much for the economy as a whole because the rich don’t tend to change their spending very much as income goes up and down) and for corporations. This latter means the 50% or so of S&P earnings that come from US operations will fall by, let’s say 8%. The resulting 4% drop in overall earnings is not good, but it comes closer to being a rounding error in analysts’ estimates than a serious shortfall. In today’s volatile stock trading, it amounts to maybe two or three down sessions in a row

–on the other hand, there’s lots of low-hanging economic fruit begging to be picked. The Trump economic program is a hodge-podge of wackiness, whose effect has been to please rich donors but to retard overall GDP growth, not foster it. Closing the borders to immigration, for example, shrinks GDP expansion by more than a third. Placing tariffs on imports has squeezed real incomes; retaliation has decimated the revenues of exporters, especially farmers. Trump’s central concept–restore low-wage manual labor jobs to the US while driving computer and engineering firms out of the country because they employ non-white foreigners–is about as loony as it gets. So too encouraging Detroit to keep on making gas-guzzlers while the rest of the world turns electric. Hard to quantify, but just ending insane programs has got to be good

–there are thornier issues to face, as well. Trump left actual tax reform both out of the name and the provisions of the Tax Cuts and Jobs Act of 2017, which did nothing to address sweetheart industry tax breaks that have long since passed their sell-by date. National infrastructure is four years older and creakier without having been touched …nor have Social Security or Medicare problems been addressed

–then there’s other senseless Trumpish stuff, like the ultra-strange attack on the viability of major domestic research universities, a national treasure, by denying deep-walleted foreigners access to them. The point is there are enough shoot-yourself-in-the-foot Trump things to just stop doing, for the resulting positives to dwarf the losses from a higher corporate tax rate and reversal of the tax giveaway to the rich.

my preliminary conclusion

Delegitimize white racists and let foreign workers back in and the country will be on the road to economic expansion again. No more crazy gains like in 2020 so far, but a shot at +10%. Maybe all the running next year will be in domestic consumer names.

end game (ii): Keynes, Kondratiev and Schumpeter

August 26, 2020 By in economics, Strategy, Uncategorized Tags: , , , , Leave a comment

The nineteenth century in Europe ushered in a deep change in the metaphor used to explain how the world works. The earlier (Enlightenment) view was that the universe was like a magnificent watch, made in the dim past and kept running by God, the ultimate craftsman. What you see is what you get.

By 1820, the metaphor was already moving quickly from mechanical to biological–evolution; conflict, sometimes violent, driving the process; the unconscious nature of much of what happens, both on an individual and a social level.

Yes, more stuff changes in the 20th century, but what’s important for us as investors is that these are creative fictions created to explain the world of 200 years ago continue to live in economic theory.

cast of characters

The nineteenth-century thoughts enter 20th century economics in a number of ways:

–Nikolai Kondratiev (1892 – 1938). His take on Hegel, formulated in the 1920s, was that the western world follows a 40- 60-year economic cycle. The first half exhibits robust growth. That’s followed, however, by a secular decline and, at least in the version I learned as a young analyst, the destruction of existing production apparatus through world war. Rebuilding from the rubble would start a new long cycle in motion. Some Kondratiev theorists also suggest there’s also a “super” Kondratiev cycle lasting a century+, the high point of which was reached in rebuilding from WWII. (In other words, my whole life would be on the downslope. Very depressing)

–Joseph Schumpeter (1883 – 1950). His version of Hegel is “creative destruction.” In his view, entrepreneurs ultimately use loose credit as a way of continually expanding their businesses to the point where supply of goods/services completely outstrips demand. This causes severe recession–a mini-Kondratiev experience. But like a phoenix rising from the ashes, a new upcycle emerges from the destruction of the old.

In both these cases–as with Marx–the precondition of the new cycle starting is the utter collapse of the old. Recessions are bad, but the cleansing they do is important for progress to happen.

–John Maynard Keynes (1883-1946). Keynes’ interest was more practical, and perhaps more modest, than his Continental contemporaries’. His main focus was on the Great Depression of the 1930s and how to prevent a recurrence. In other words, his intent was to use monetary and fiscal policy to forestall the economic peaks and valleys that the others thought was the inevitable price to be paid for evolutionary progress.

relevance for today’s stock market

A preliminary point: Trump’s incompetence in office, both before the pandemic (his tariff and immigration policies had reduced real GDP growth from 2%-ish when he took office to near zero), and especially during it, is the main reason the US is in so much worse economic shape than other OECD countries. Getting him out of office would seem to me to be the #1 economic goal for the country.

The nearer-term question is whether Washington should go all in with fiscal support to blunt the negative effect of the pandemic on the domestic economy. Here’s where the clash of economic theories comes in (as well as another Trump blunder).

Conventional economics, represented by Keynes, argues that stopping the economic bleeding is the top priority. Among Trump’s financial backers, especially on Wall Street, however, Kondratiev/Shumpeter seems to me to be the prevailing view. I think the idea that greater destruction now will lead to better growth later is why the Senate is balking at providing further financial support.

What complicates the issue somewhat is Trump’s income tax “reform” enacted in 2017. That bill did a good thing by reducing the highest corporate tax rate from 35% (highest in the world) to 21%–something that was necessary to stem the flood of US companies fleeing to lower tax-rate regimes. But it did harm by failing to offset that loss by eliminating special interest tax breaks, and it lowered personal income taxes for the ultra-wealthy. The result was a $1 trillion federal deficit expected for this year, pre-pandemic. As things stand now, the deficit will likely hit $4 trillion.

Under Trump, the national debt has already increased by almost $7 trillion, to around $27 trillion, making the US one of the most indebted countries in the world. At some point, creditors will begin to worry that the country will not be able to repay. In the signature fashion that led to his companies’ multiple bankruptcies, Trump made this situation worse by suggesting the US is willing to default on debt held by foreigners. Typically, worry shows itself first of all in currency weakness of the type the dollar has seen over the past few months.

my take

First of all, you should realize I’m really out of my comfort zone with the politics here. For what it’s worth, though, I think the Kondratiev/Schumpeter crowd believes that withholding government help and letting people fend for themselves is conceptually the right move. This group seems to have the ear of Senate Republicans. The fact that their personal wealth will suffer most severely from currency weakness probably colors their thinking as well. Trump says he’s in favor of more government aid and could probably persuade Republican senators to change their minds. But he chooses not to.

So we’re kind of in no man’s land. I think this means that we’ll remain in the current “capital flight” stock market, no matter how long in the tooth it appears, for a while yet.

thinking out the end game (i)

August 24, 2020 By in administration economic strategy, economics, Strategy, Uncategorized Tags: , , Leave a comment

The Trump presidency has been an almost incomprehensibly huge disaster so far, both in terms of core American values and the operation of the economy–even before Trump’s worst-in-the-world handling of the pandemic.

Looking solely at narrowly economic factors, real GDP had flatlined, pre-COVID, as a result of his senseless tariff and immigration policies (I’m not necssarily anti-tariff, but at least try to have an objective and think out possible consequences–like destroying US agricultural exports to Asia–before putting them in place). On a longer view, he’s continuously undermining global faith in the dollar and the American banking system, as well as sowing the seeds for Shanghai to replace Wall Street as the world’s stock market capital. This will “hurt” China by speeding its ascent to world economic leadership.

In vintage Trump fashion, those damaged most badly by him have been his supporters.

In addition, Trump’s cognitive fastball, never of more than sandlot quality, seems to me to have regressed over the past year or so to somewhere south of mid-level Little League and slightly north of tee ball.

Despite all this, and in spite of his deeply anti-American cultural values, he may still be reelected.

As a citizen, this is not the outcome I want. As an investor, however, the implications are more straightforward. As I see it, initially:

–the Fed would continue to compensate for Trump’s bungling by running extra-stimulative money policy. In fact, the Fed has just signaled that it would be willing to let inflation run for a considerable while (we should be so lucky) to make up for the damage done by years of price level stagnation

–voter endorsement of Trump’s racism would reduce the attractiveness of American consumer brands in foreign markets; we could no longer say we didn’t know what he stands for

–ultra-low interest rates will underwrite continuing stock market strength

–the pattern of strong performance of stocks with the least connection to domestic GDP and deeply sub-par performance from those with the greatest GDP ties, would continue–as domestic capital continues to flee his incompetence and racism

–technology companies will maintain their Wall Street listings but would begin to shift their highest value-added operations to other countries, if for no other reason than to be able to hire based on talent. If Trump’s current attack on domestic research universities continues, this move could be surprisingly swift. The only plus here is that Xi’s attack on Hong Kong removes the SAR, the obvious non-US destination, from consideration for dual listings by US firms. Singapore?

–investment in cutting edge plant and equipment in the US by multinationals would likely decline.

The stock market I’ve been using as a very rough template for the US today is Mexico in the 1980s. A second aspect of this model, something that would have been unthinkable a few years ago, is the eventual loss of faith in the local government. This shows itself in a number of types of financial behavior: the “capital flight” character of the stock market that we’re now seeing in the US; a deteriorating currency; and eventually, capital controls imposed to prevent citizens/residents from shifting assets out of the country. We’re not there yet. Signs for worry: accelerating trade/current account deficits, national debt so large that potential buyers no longer believe they’ll be repaid in full.

two common market fallacies

August 13, 2020 By in economics, Portfolio management, Strategy Tags: , , Leave a comment

market cap/GDP

I was reading an article on Yahoo Finance the other day that cited what it claimed was a Warren Buffett rule to gauge whether the US stock market is under- or overvalued. The idea is that if the total market cap of US stocks exceeds annual GDP (of the US) then stocks are overvalued. If market cap is less than GDP, stocks are undervalued.

On the surface, this sounds like it might make sense, since it is the US stock market, after all. And the health of the Treasury bond market is tied to the vigor of the US economy. Also, the idea was big in the 1980s, when market cap/GDP was used by Americans and Europeans as a rationale for not becoming involved in the Japanese stock market during a decade-long domestic economy boom there.

Two issues this idea ignores:

–multinational companies. In the case of the US, a good guess is that half the earnings of the S&P 500 come from outside the US. In fact, a very simple but effective way of approaching structuring a portfolio in the US market is to ask whether the US economy will likely do better than the rest of the world in the year ahead or worse. In the first case, the portfolio should overweight domestic-oriented stocks; in the second, internationally-oriented.

–how much of the domestic economy is publicly traded. In the case of the US, big sectors like real estate and housing have little representation. Germany, whose market cap has seldom, if ever, exceeded half of the country’s GDP, is the biggest counterexample for the cap/GDP idea. Two reasons: almost nothing is listed in Germany, and German citizens have historically had little interest in stocks.

For the record, I can’t imagine Buffett thinks this.

strong stock market = strong economy

Typically, this is the case, in my experience. But there are exceptions, like Mexico in the 1980s–and Germany almost always. In today’s US, it’s easy to see, by comparing the global NASDAQ with the US-centric Russell 2000, that stocks are strong in spite of weakness in domestically-oriented issues. In fact, somewhat like Mexico back then, the US market is underpinned by the near-zero interest rates made necessary by our extreme economic weakness.

A side note: over the past three months, the R2000 (+22.7%) has held its own with NASDAQ (+24.5%). Both have far outdistanced the S&P 500 (+17.5%). Why the R2000 strength? Three possible reasons (translation: I don’t know): counter-trend rally; the worst of the pandemic is already baked into R2000 prices; anticipation that Trump will not be reelected. My guess is some combination of the first two. I think it’s too early to be trying to figure out the election, although belief in four more years of Trump dysfunction should translate into shorting the dollar and the R2000.