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From Barron’s, September 14, 2020 (Part 2)

 

 

Pg 9, Up and Down Wall Street: NFL games are coming back with limited number of fans. This may draw some people away from trading stocks and options from home. But betting on sports and elections will be popular. Markets are volatile ahead of close elections. Delayed or contested elections would be negative for the market. That and high unemployment due to Covid-19 may lead to unrests. Congress has failed to agree on the next stimulus and the effects will be seen soon. Commodities [oil, lumber (limit-down days)] are sending warning signs. Fear gauge VIX has a hump around elections.

After the FOMC meeting this week, the Fed Chair Powell may explain more about the already announced average inflation target of 2%. Current CPI and core CPI are low y-o-y but rising; however, sequential inflation [e.g. for the last few months annualized] is rising at much faster rate. Surprising contributors to inflation are used-car prices [city dwellers may get around with 0-1 car, but suburbanites need at least 2 cars; when offices reopen, workers may initially drive instead of taking public transportation] and food prices [more cooking and eating at home but there are supply disruptions and purchase limits on many items]. Inflation has many moving components, but deflation is not seen as initially feared.

Republican skinny stimulus bill died in the Senate. Talks are also stalled between Democrats and WH. But delayed/failed stimulus bill will soon have negative impact on economic data. Politicians may just be waiting for [or need] the market shoe to drop.

 

Pg 13, Streetwise: EV truck company without a product, Nikola [NKLA] had a wild ride on production deal with GM and technology overhype accusations from a short-seller Hindenburg Research. Investors may want to be on the sidelines until the smoke clears. Netflix [NFLX] cofounder Reed Hastings [with coauthor INSEAD Professor Erin Meyer] has a new book, No Rules Rules: Netflix and the Culture of Reinvention. Tidbits from interview: NFLX has no interest in releasing movies in theaters; promotional products related to its movies/shows are coming; HBO Max is more comparable to NFLX than Disney+; NFLX is willing to pay up for talent; NFLX shorts have made the mistake of viewing it, an Internet entity, with traditional financial metrics.

 

Pg 14-15: FOMC Statement and Fed Chair Powell’s press conference on Wednesday.

Jill Frazer, the new CEO at Citi [C] broke glass ceiling at a big bank.

Facebook [FB] may build a billion-dollar videogame streaming business [Facebook Gaming]. Competitors are Twitch/AMZN, YouTube/GOOGL, AAPL. MSFT exited this market and sold its tiny Mixer to FB.

4.3 million US workers may have to stay home if schools remain closed and daycare for children isn’t available.

Data this week: NY Fed Empire State manufacturing survey, import/export prices, capacity utilization, industrial production on Tuesday; retail sales, business inventories, housing market index [remains at 35-yr high] on Wednesday; housing starts, weekly initial jobless claims on Thursday; UM consumer sentiment index, LEI on Friday.

 

Bullish Recommendations: Elanco Animal Health [ELAN; #2 behind ZTS; acquired Bayer Animal Health; distribution channels include veterinary clinics, online retailers; fwd net debt/EBITDA 5.2 (high) but should come down; 2018 spinoff from LLY; pg 32];

casual footwear Crocs [CROX; e-commerce growing (18.4% of sales); successful licensing deals with KFC/YUM, Nickelodeon/VIAC, DIS, etc; gave away 860,000 pairs to frontline healthcare workers (good PR); personalization with Jibbitz charms is popular (2% of sales in 2019 and rapidly growing); sells via wholesale and 360 company-owned stores/kiosks; sales Americas 50%, Asia-Pacific 30% (only 5% in China); pg 33].

 

Bearish Recommendations: See other stories

 

Pg 17: Cover Story, “Yes, It’s a Stock Market Bubble. That Doesn’t Mean Trouble for Investors Just Yet”. The tech bubble may get bigger. Covid-19 forced the economy to shutdown and that with unprecedented Fed monetary easing [ZIRP; QE with buying Treasuries, MBS, corporates, HY, munis] has created a situation where a few tech companies have done quite well. Several companies that have come to the market via IPOs and SPACs have no earnings or revenues or even products. There was a swift correction in Nasdaq Comp in early September. But the tech bubble may continue to inflate until everyone buys into the new paradigm. Ratio of Nasdaq 100 to SP500 at 3.4 is now above its 2000 dot.com bubble peak. With many people stuck at home with little to do or watch, retail trading in stocks and options has gone up sharply [44% of volume]; many are speculating in highflyers and companies in or near bankruptcy [note that there is no middle; low/no-cost and fractional trading are also contributing]. Top 5 companies in SP500 [AAPL, AMZN, MSFT, GOOGL, FB] account for 25% of the market-cap of SP500; IT XLK, consumer-discretionary XLY and communication services XLC are quite top heavy. Some former small companies are now huge [TSLA, ZM, PTON, etc]. Fwd P/Es of highflyers are quite rich. Don’t count on the Fed to take away the punch bowl soon. Risks include worsening Covid-19, faltering economy [without timely assist from DC], election uncertainties. The best hopeful case may be gradual rotation into economically sensitive cyclicals and reopening trades but beware of a bumpy transition.

 

Pg 20: Options trading by institutions [SoftBank, etc] and retail investors is driving this tech rally and magnifying market volatility. Options volume is at a record and single-stock option volume has been very strong. There is lot of speculative activity in cheap short-term out-of-the-money [OTM] options that is generated by FOMO. Options-dealers have to hedge with appropriate buys/sells in the stock market. Heavy options volume also influences the fear gauge VIX that is based on near-term option prices; there have been unusual moves in VIX on some days [e.g. VIX rising/falling with stocks, while its typical move is opposite]. [Never seen a regular full-length feature on options before]

 

Pg 23 [in paper copy, this has the looks of a cover story]: Stocks have defied expectations in this crisis year – fastest plunge into bear market; lightening speed recovery; swift tech selloff. SP500 is being driven by 5 top stocks [GOOGL, AMZN, AAPL, FB, MSFT] that may have +15% revenue growth in 2020, while the rest 495 may have -5% revenue decline. R1000 fwd-growth-P/E 31, fwd-value-P/E 19 and rotation to value and cyclicals is overdue; in a sustained rotation, broad indexes may be flat. Some industries like travel, retail, etc may be permanently affected by the pandemic. Also look for opportunities overseas. Risks: Persistent high unemployment; unresolved Covid-19; elections. Fed policy change to average inflation of 2% may mean lower rates for longer; ultimately, easy monetary policies, fiscal stimulus and unprecedented deficits may cause inflation. Bond investors should lower duration risk but take some credit risk; income investors should also look at preferreds and dividend-paying stocks.

Projections from 6 strategists: Kostin/GS, Wilson/MS, Fredericks/BLK, Malik/Nuveen-TIAA, Subramanian/BAC, Yardeni/Yardeni.

SP500 2020 YE [Yearend]: 3,250-3,650; EPS $125-130

10-yr Treasury Yield 2020 YE: 0.75-1.15%

Fed Funds 2020 YE: 0-0.25% [as current]

Gold 2020 YE: 1,866-2,300

US GDP 2020: -5.5% to -3.8%

 

SP500 2021 YE: 3.800-3,850; EPS $155-170

10-yr Treasury Yield 2021 YE: 0.75-1.45%

Fed Funds 2021 YE: 0-0.25% [as current]

Gold 2021 YE: 1,850-2,500

US GDP 2021: +2.9% to +6.1%

 

Pg 28: Treasuries are not acting as good ballasts. In fact, in the early September stock selloff, Treasury prices also fell. Some point to Treasury rally YTD but that was driven by strong Fed easing. Now the Fed has a new policy for symmetric [or average] inflation target of 2% and has also ruled out negative [nominal] Fed fund rates and those are not helping Treasuries. The upside is capped [due to yield floor near 0%] while the downside is substantial [due to 2% average inflation goal]. Avoid longer durations; unfortunately, the total bond market duration has also gone up. Prefer shorter durations [SHY, VGSH, BSV] and munis. Outside of the US, strangely, the overvalued European and Japanese bonds may be more attractive [for institutions] as their rates can become even more negative [so, their upsides are not capped]. Some EM bonds are also attractive.

 

Pg 30: Several new SEC regulations are more business-friendly and less investor-friendly. These include best-interest regulations; principles-based rules with vague definitions and metrics; fund disclosures; corporate disclosures [Reg S-K]; regulating proxy advisors; loosening the definition of accredited investors; encouraging companies to remain private longer, etc.

 

Pg 34: Comanagers Austin Hawley and Chuck Bath of concentrated large-cap value DHLAX [ER 0.96%] like to buy quality companies at discounts [due to temporary/transient factors] and hold them for several years for their compounding effect. Holdings include ABT, PEP, GOOGL, DIS [proceeds came from UAL at the start of pandemic].

 

Pg 36: Funds that outperformed their peers during financial crisis [07/2007-03/2009] and Covid-19 selloff [2/19/20-3/23/20] and have attractive upside/downside capture ratio [U/D CR] include large-cap value AMRMX, YACKX; conservative-allocation [30-50%] VWINX.

 

Pg 37: Microsoft [MSFT] new Xbox Series S and X will have purchase and subscription pricing [over 2 years]. Many games will also be bundled with subscription prices. This may be gamechanger for gamers and investors.

 

Pg 39: Several companies have reversed recent Covid-19 related dividend cuts/suspensions: KIM, FL, EL, LZB, DKS, etc. Some have increased dividends: ITW, MLM, INTU, LRCX, etc. The worst may be over for dividends.

 

Pg 41: Cutting reliance on China [or, decoupling] is possible, but is it worth the costs? China itself has been doing some curtailing – its imports/exports as % of Chinese GDP rose from 1998-2006 but have been declining since 2006 and are now at the levels of 1997-98; in dollars, imports/exports are flat since 2014. What is interesting is that both imports and exports have moved in tandem and that was due to government policies [subsidies/incentives, regulations] so as not cause major imbalances. For all the talk about favoring globalization [Belt and Road Initiatives, etc], China has in fact been deglobalizing. But the pandemic and US-China trade friction show that China remains critically dependent on the US and others in some areas of technology and food. Chinese government response to pandemic has also been limited to cheap business loans and some currency weakening [but no big stimulus for population]. China has also not been able to shift its economy to domestic consumption. So, in spite of its efforts, China has not succeeded in decoupling. And this would be hard for the US to do too. For the US, Chinese imports account for only about 3% of US total demand, 9% of US manufacturing demand; US companies have invested $300 billion in China over 30 years.

 

Pg 42: Kurt Schacht, CFA Institute, former Chair of the SEC Investor Advisory Committee. The SEC and DOL are chipping away on investor protections. The DOL is reversing its longstanding 1998 Avon Letter on proxy voting. That Letter required ERISA plan fiduciaries to treat proxy voting like plan assets and to use due diligence in voting proxies in the best interests of beneficiaries. The Letter indirectly also affected non-ERISA plans. The DOL now want to change that so that ERISA plans act prudently only on matters that may have economic impact on the plans. Moreover, plans cannot tie proxy votes to specific financial metrics. In other guidance, the DOL has said that ESG factors cannot be primary factors in ERISA plans. The DOL has allowed only short 30-day comment periods for its controversial proposals but has received thousands of objections. These hasty actions of DOL are misguided and harmful for investors.

 

Supplement1, 2020 Top Independent Advisors with several soft features.

 

Supplement2, PENTA has social impact and change theme and inspirational stories related to pandemic. Features include Malinda Gates [Bill & Malinda Gates Foundation], Karlie Kloss [Kode With Klossy], Tina Tchen [Time’s Up Foundation] on gender equality; impact investing and philanthropy by former athletes Devean George, Warrick Dunn, Antonio Davis, Derrick Morgan; actress Lupita Nyong’o on protecting African Wildlife; NASA astronaut Jessica Meir on space travel; designer masks; Rolex Perpetual Planet sponsored expeditions [mountains, oceans, islands]; whiskey makers experimenting with modernization and also production of hand sanitizers; popularity of private jets; family legacy trusts; cautions about opportunity zone investments; financial planning advice from LA Angels’ Albert Pujol [have clear goals, involve kids early, contribute to charities (his Pujols Family Foundation, wife’s Open Gate International)].

 

Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.

If you want to follow Warren Buffet/BRK into Japan, there are many options.

OEFs: PRJPX, HPJNX, HJPSX, MJFOX, FJPNX, FJSCX, DFJSX, CNJSX, SAESX

ETFs: SCJ, DFJ, ZJPN, EWJ, JPN, DXJS, JPXN, DBJP, HEWJ

CEFs: JOF,JEQ

Gold ETFs [GLD, IAU, etc] are holding record amounts of gold. Demand for jewelry, bars, coins remains very weak. Easy monetary policies by global central bankers are bullish for gold.

YBB
8 Replies
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Contributor ○

Re: From Barron’s, September 14, 2020 (Part 2)

Excellent summary......made my day!

Gabe

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Re: From Barron’s, September 14, 2020 (Part 2)

Once I and my family gets covid vaccine, we are going to binge going and eating out

 

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Re: From Barron’s, September 14, 2020 (Part 2)

The lack of strong dynamic separation or independence between the SP500 and the megagrowth leaders (APPL, GOOG, MSFT, AMZN, FB, etc.) creates an allocation challenge, perhaps especially for those of us who don't trade individual stocks. For example, I can take money out of TRLGX or FCNTX and put it into VINIX but still have most of the volatility risk. Mid- and small-cap indexes haven't been that enticing recently.

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Re: From Barron’s, September 14, 2020 (Part 2)

There  are many funds that have very little or no FAANG, but they are not performing well at all.

Primecap funds are good example of large growth funds and then any fund/etf based on value indexes.

 

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Re: From Barron’s, September 14, 2020 (Part 2)

"China . . . its imports/exports as % of Chinese GDP rose from 1998-2006 but have been declining since 2006 and are now at the levels of 1997-98."

Two points worth mentioning.  At my old job when I discussed about China trends with my counterparts in China, they used to give me examples of how China itself was moving its manufacturing to other countries because it wants to diversify its domestic economy from manufacturing in general and low end manufacturing in particular.   China through its government controlled organizations owns a lot of mines and farm land in Africa, Australia, and Brazil so much that China behaves like these countries are its outposts.  China imports a lot of food.  I am not sure they count all the imports as imports if they are just bringing home their own overseas production.   

They also try to control a lot Asian countries.  I am waiting to see how China-Pakistan relationship develops / ends.  I am expecting China to be smarter than the US in their relationship and investment with Pakistan.

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Re: From Barron’s, September 14, 2020 (Part 2)

Thanks Yogi... !

When you put on a trade against incipient and realized market spikes it is best to stick to the plan in that trade.  I cleaned out my trades in Lumber several weeks ago selling all my trade shares and about half my LT positions in ACAZF and about 20% of my RYN shares.   I will miss those dividends but 6% to 10% Ultra ST trades in ROTH and RO / IRAs are a gift and I thank the builders and home improvers for a nice windfall.  From the Joe Camel /\ ah pundits believe nothing of what you hear and only half of what you think you see.  Tax advantaged dividends will likely be repealed not just decreased from 15% to 25%.  This is going to crush the markets, the seniors, and retirees who the DEMs USED to treat as a core constituency.  Now anyone with enough $ to  actually retire to a middle class life style will be targeted as being among the wealthy aristocrats to be guillotined.  Those with inflated public pensions, who do not rely on interest and dividend income being confiscated, especially from the most effectively bankrupt states and cities of course will get special tax breaks.  

Skinny stimulus will not die until Republicans are kicked out clearing the way for the bailouts of the 10 worst Actuarial nightmare states and city pension trust funds.  There is no hope that the public pension trusts in the worst shape will institute reforms to bring them into line with ERISA over a 10 to 15 year period.  So ERISA seems under attack but Barons is reporting on ancillary guide lines not on private pension systems being allowed to pursue profligacy and pay out largesse that creates hopeless under funding .  Madame DEATH was not wrong just a little early in her analysis.  Who would have thought + 10 years ago these fiascos would be allowed to worsen and never face the consequences of the political hacks of yesteryear creating hopeless UNFUNDED liabilities, and those of today refusing to acknowledge reality and  work towards reforms.  

So there is no Stimulus II or III and the economy will start to reflect that into the election, which is exactly what the Dems want to insure their victory. Typical MARXIST 5 year plan planning.  A step back in the first year to create  and sustain the Owellian utopia in the out years.  "Markets are volatile ahead of close elections."  AND ! the first year of a new administration is typically a recessionary one. 

For those complaining of performance biased to the FAANGMT and tech in general, there are plenty of those other funds like OAKMX and PARWX that have decent very LT performance but the reason the indexes keep adding MORE tech is because the progenitors believe and see that, that is where the majority of earnings growth and revenue growth is going to come from over the next several years. So now is the time   ?  to start a smaller position in FDEQX for Fido customers who face $2500 min initial investments in non-proprietary funds and build that up with DCAing DOWN until you have the plus $1800 that would provide most of the cash to meet the $2500 needed for PRMTX, LGLAX, or in the CLOUD a MSEQX.  Over at SHWAB most min new investments are just $100 and at TD $1000.  Most Fido O/E funds now trade like NTF ETFs.  ST fees, min initials, and min subsequent purchase amount have been MOSTLY eliminated.  There are still a few like FLTMX that may still have trading restrictions.   Fidelity generally only carries ST trading fees an restrictions on non-proprietary funds for 30 to 60 days.  Some with 90 day ST restrictions as Schwab enforces.  TD expecting you to hold for 6 months in these volatile markets to get out from under ST fees.  They even often charge pernicious ST fees on some 'C' share trades that normally are supposed to only be 1% on shares headless than one year.  FIDO does not really adequately disclose that ST trades in non-proprietary funds that carry a 2% penalty to the fund also charge a $50 fee for FIDO on EACH trade. Watch out out there.  Zero commissions in stock and ETF trading have to be offset someplace. 

Risks to high Flier STOCKs may include high P/Es and High Forward P/Es but as the markets correct those P/Es tend to drop off with the Stock prices, making the classic strategy of DCAing still effective.    

PG 28 Barons effectively pointing out that the bond rally is finally over with rates now pushing up tightly against a zero interest rate bound condition.  Bond Fund investors are going to find it rough going in investments that are NOT bonds and have no par values, no YTM, and no protection from their 90% owned either personally or through their lazy RIA money manager's exposures to RETAIL investors. Most of those are still led to believe that what happened in the 4th Quarter of 2018 was just an aberration and not classic Econ 101. Ditto for the perhaps a little less exposed in Balanced funds. Retail investors who perceive Bond Funds as "SAFE" are very quick to sell when losses start to accrue against higher rates asserting.  So the Banks, Pension funds and Insurers who own actual bonds, that they at least plan to hold to maturity , lie in wait .  In a bond market panic they cherry pick from bond fund managers the best paper and the fund managers facing strong redemption demands have to sell what they can and often find no bids of substance for the stuff they would prefer to sell.  But they have to meet those redemption requests.  

As so many of these bankrupt proof by law Cities and states go down the road to the Puerto Rican model of resolution schemes, and the Merged FED and TREASury step up with $$50 billion to bail them out there are likely to be some serious dislocations in interest rates across the board.  Mostly in LT rates where the Fed has the least ability to plug the breaches.  In supporting ST markets the Fed has current and near term maturities it can use for refundings.  But to fund even more LT insolvent debt they need to print money  with electron streams.  And then an ensuing serious stock market decline brought on by marxist economics further exacerbating the under fundings of these public pension trust funds with lots of money in the bond and stock markets.  The FED is already buying the Muni debt of Illinois.  The other basket cases as CT, KY, PA, NJ, and many cities as NYC will follow.  But $50 billion may still not be enough toward avoiding large scale public employee layoffs as Public employee unions that can not be unions,  NEVER accept Wage and benefit cuts to preserve jobs.  In March at MATX , top level executives took a 20% pay cut, middle level execs took a 15% pay cut and lower level execs took a 10% pay cut.  This was to preserve the jobs and avoid lay offs of the rest of the company work force.  The company later reported record 2nd qtr revenues on the COVID fallouts benefiting . 

 

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Re: From Barron’s, September 14, 2020 (Part 2)

"Pg 28: Treasuries are not acting as good ballasts. In fact, in the early September stock selloff, Treasury prices also fell. Some point to Treasury rally YTD but that was driven by strong Fed easing. Now the Fed has a new policy for symmetric [or averageinflation target of 2% and has also ruled out negative [nominal] Fed fund rates and those are not helping Treasuries. The upside is capped [due to yield floor near 0%] while the downside is substantial [due to 2% average inflation goal]. Avoid longer durations; unfortunately, the total bond market duration has also gone up. Prefer shorter durations [SHY, VGSH, BSV] and munis. Outside of the US, strangely, the overvalued European and Japanese bonds may be more attractive [for institutions] as their rates can become even more negative [so, their upsides are not capped]. Some EM bonds are also attractive."

VTEB(Munis) + EMB are down since 08/11/2020 but DBLEX did much better

vteb.PNG 

 

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Re: From Barron’s, September 14, 2020 (Part 2)

 


@waffle wrote:

Once I and my family gets covid vaccine, we are going to binge going and eating out

 



For me that will depend on how effective the vaccine is and whether a high percentage of people are vaccinated.  I'm not optimistic about the later at this point.

 

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