Don't Just Think Big, Think Different
Lots of big news announcements last week. The Democratic ticket filled in with Kamala Harris, Russia supposedly created the first COVID vaccine, but the big news in markets seemed to be the stock splits of Apple (AAPL.O) and Tesla (TSLA.O). Both stocks jumped on the news, which I'll be honest I find hilarious. This was all over the news and a number of podcasts I listened to discussed this event. I will cover this more below, but many jumping into those stocks might be overreaching. There's a lot on the "new" diversification this week. By new, I mean not the traditional Bonds, value, or defensive sector investing. One asset that's different is water. Not many people think of water this way, but we have a short podcast on that with some notes on inflows into Water funds. In the miscellaneous section, I recommend clicking on the 'Taxes, VPNs, and Office Hours' article. It covers a lot of the questions around things we're all new to dealing with in the WFH environment.
Last week I was looking for a big surprise from DraftKings (DKNG.O). Well, they surprised alright, but the results were mixed. They missed big on EPS, but had better than expected Revenue. The stock ended up down small on Friday. Barrick Gold (GOLD.K) on the other hand surprised to the upside on both EPS and Revenue, but the stock sold off to end the day on a rough day for Gold. . However, the big news for Barrick last week was Berkshire Hathaway (BRK) disclosed a new holding of 20 million shares, which puts them as the #11 investor, holding 1.18% of outstanding shares. This was announced Friday, so let’s see how that drives the stock this week.
This week we’ve got a plethora of retail stocks reporting. It’s a lot of the big hitters too. A couple of competitive pairs Walmart (WMT) & Target (TGT), as well as Home Depot (HD) & Lowe’s (LOW) will be able to directly compare how they're doing versus the competition. The real name I’m watching is Foot Locker (FL). The Starmine predicted surprise is 87%. This is because of the large chunk of shops that readjusted their number last week. We have a huge dispersion in the estimates the low is $-0.87 and the high is $0.70. They don’t report until Friday, so look for any updates to broker estimates this week that may change this.
Best of the Week:
The Market Huddle is easily my favorite finance related podcast/YouTube overall. It’s a great blend of macro, fundamentals, technical, history, and a whole bunch of fun. This week I think Kevin and Patrick hit on all of these. The first interview was with Steve Van Metre and he put forth some views that made me reconsider some of my positions. Steve is a Dollar and Bond bull and bearish on inflation and Gold. The most concerning chart Steve shared was this one below that shows the Money Multiplier, which he explained as the number of times money changes hands before it dies, aka pays down debt. The second part of the show is technical analysis, and the ‘This Week in Trading History’ talks John Meriwether. If you can’t give the whole two hours, I highly recommend listening to Steve’s Macro views that go for about 25 minutes starting at the 20 minute mark.
The Dollar and Bond Bull Markets are Not Over / Steve’s Charts - Listening time 110 minutes*
Best of the Rest:
A little more macro here from Vincent Deluard, Director of Global Macro for StoneX. Vincent joined the MacroVoices podcast to talk about the coming decade of negative real returns for the traditional 60/40 portfolio. He’s shared a bunch of additional research around this topic as well here. Vincent’s recommendation is similar to that of a report from GMO that we’ll see below. He thinks other assets will be required to grow your portfolio. Things like Gold, Inflation Swaps,Latin American assets (chart shared below), European Value, and maybe a little more Healthcare are a way to hedge against the coming inflation. If this whole episode is a little long for you, Vincent starts at the 11 minute mark and goes on for 32 minutes. I do recommend listening to Erik and Patrick at the beginning and end, but Vincent’s views are the highlight here.
Vincent Deluard: The Nuclear Winter of the 60/40 Portfolio - Listening time: 60 minutes
The 800-Pound Gorilla in the Market: a Decade of Negative Real Returns - Charts
This is why you should be careful trading in leveraged ETFs or ETNs. After Credit Suisse decided to delist the ETF, they also decided to let it trade on the OTC market instead of just closing it. Then they shut down the ability for Authorized Participants (APs) to create new shares. This thing then became like a rare Beanie Baby, trading at an obscene premium.
Why Did DGAZF Go From $400 To $24,000 In Just A Few Days?
Equities
The view on airline stocks is mixed, and you know what they say, “That’s what makes a market.” Barron’s had an article earlier in the week highlighting the positive views Citigroup’s Stephen Trent has for the industry, but on the side, a small finance blog, WolfStreet, was pretty adamant that the industry is not showing any real moves in TSA traffic. The last chart was shared by the MarketEar team from MPAS and it shows a seasonal chart of Jet fuel supplies.
Airline Stocks Are Soaring. Why One Analyst Sees More Gains Ahead.
There’s a lot of terribly written dialogue in this episode, but the information being shared is good. Water is a battleground globally and a huge factor in ESG. Some details discussed in this episode were China and India battling over water, 70% of global water use is used by the agricultural industry, and how climate change is affecting swings in availability. Using our Lipper Fund flows data, I took a look at flows over the last 12 months and going back to the end of 2015. I found only seven funds. Tortoise only goes back to Feb of 2017, so I tracked performance versus the Russell 3000 over that time. Results are mixed.If ESG is your goal with Water investing, I recommend using Refinitiv’s ESG fund rating to see how friendly the investments in these funds really are. Below is a screenshot of the largest fund, Invesco Water Resources ETF (PHO.O).
Beyond The Buzz: The Geopolitics Of Water Listening time: 23 minutes
All Star Charts put together a nice longish post with ten market updates shown in charts with a short explanation. My favorite was point number seven on the Value draw down versus Growth. “The researchers actually investigated value versus growth data dating back to 1871. What did they find? There was actually a bigger draw down in the ‘extended history’ period from 1890 to 1904 – notably, that was 14 years as well, but the draw down was bigger at 59%. From 1904 to about 1914, the draw down had been completely retraced as value stocks went on a tear to begin the 20th century.” Fingers cross on a recurrence of this rebound, because I’m a traditional value guy in my investment portfolio.
Weekly S&P 500 ChartStorm: Long-Term Perspective And Tactical Tips
Expanding on the chart above, I found this quarterly update from Wellington to useful. The author, Adam Berger, does a great job of discussing where we are now, what the possibilities are for the future (A: Back to before - 35% chance, B: Protracted Pain - 60% chance, & C: Tip of the Iceberg-5% chance), and how to think about this now and for the future. His main recommendations for the future are diversification beyond just traditional fixed income.
Back to before or protracted pain ahead?
Just a quick snippet from a Goldman Sach report shared by The MarketEar site. “A one-month, 96%-of-spot (roughly 25-delta) put option on the S&P 500 currently costs 1.1%. The premium is in its 85th percentile compared with the last five years, when the median cost of the same structure was 0.49%. However, compared with the past six months’ high-volatility period, the current premium is at its lowest level since February, and far cheaper than the median 1.9% premium over the past six months." I agreed with the idea of this as well. I cannot see the VIX getting much cheaper with the election now less than 90 days away. If one were to hedge their downside via SPX puts, now might be the time to get your best value. For retail investors, something like Cambria’s Tail Risk ETF (TAIL.K) has only been around since early 2017, but you can see a similar chart.
Corporate Debt
ETF purchases by the Fed look to have completely stopped as of the end of July. The article notes that 54% of the Fed’s corporate debt portfolio was in the BBB- ratings.The top holdings, as noted by CreditSights, were in AT&T, Comcast, Toyota, Ford, and Apple holdings $50-60M of each company’s debt.
Fed slows corporate debt purchases to trickle
A few weeks ago I used the Starmine Combined Credit model to find possible Fallen Angels, this week we’re looking at names that might be ready for an upgrade. The Verdad article below shows some improved returns for longer term debt that gets an upgrade. I took a look at names across the Americas with a market cap and Long Term debt more than $100M, as well as a difference of more than five ranks between the Starmine Implied Rating and S&P Long term issuer rating. That screen came up with 27 names across the region. Some small and some large companies and no particular stand out by industry.
Stock Splits and Lower Priced Stocks
Josh Brown is the poor man’s Jim Cramer. What I mean is that some people absolutely love him and some hate him with a passion. Personally, I’m a fan. This is the first episode I listened to of his podcast, and it was mostly because Ed Yardeni was on and I wanted to hear more on the article I had already decided to share below. Like many, Ed is comparing the current environment to a historical period. Only, Ed is doing so with a positive tilt. Ed compared the coming technology improvements to those that drove the roaring 1920s. Josh also gives some brief opening comments on stock splits and retail investors. The last twenty minutes are Josh and Ritzholtz’s Director of Research, Michael Batnick, riffing on many topics in a quick fashion. It’s off their YouTube show, “What are you thinking?” They cover a bunch of top of mind topics in this section. I'll be adding this to my rotation.
The Roaring 2020’s with Dr. Ed Yardeni, Tesla stock split, Follow the Robinhood Money - Listening time: 59 minutes
Another Roaring Twenties May Be Ahead
The way Tesla and Apple have performed since announcing their stock splits, you’d think it’s a forgone conclusion that they’re going higher. TastyTrade did some research on this a number of years ago. This is an old screenshot from a 2015 report that shows it’s a little better than a coin flip for about a week, then they under-perform.
I doubt many of you are interested in reading a 52 page research paper, but I think the abstract of this is worth everyone’s time. The basics of this are that options on stocks with low prices are overpriced. Another one of the main points was that options become overpriced after stock splits. This is important with big names like Apple and Tesla announcing splits recently. While they won't exactly be low priced, their option contracts should see an uptick on this as well. You may have guessed that most of this comes because retail investors get involved. This also applies to the mini-index options being more expensive than the full size.
Miscellaneous
Not a great way to get your name into the news, but an executive at Virtu (VIRT.O) had their email hacked. The hacker stayed quiet for a few weeks, then struck with emails to accounting to send more than $10 million to Chinese bank accounts. Virtu was able to hold up $3.8 million of those wires, so that’s where the $6.9 million comes from. The FBI notes that this accounted for $1.7B of fraud in 2019, so Virtu is not alone.
BEC Scam Costs Trading Firm Virtu Financial $6.9 Million
There’s no way the blog that's name references the first Postmaster General is not going to share some of the opinions on the role the USPS will play in the 2020 election.There are many opinions from the left that the President is using the Post Office as a weapon. There are people that do not see any problems arising out of this situation, and think the left is overreacting. This would not be the first time the sitting President used the Post Office as a weapon. The final article on this subject is a little more business related. It highlights the new Postmaster’s ties to private business competing with the Post Office and how their might be a little conflict of interest there.
Postal Service warns 46 states their voters could be disenfranchised by delayed mail-in ballots
USPS official: Mail-in ballot surge will not impact service
After a couple hundred years it just stopped
Speaking of the Election, Nate Silver’s FiveThirtyEight site had opened its election predictor. This is an interesting follow to see the how portion as we move towards the November election.
FiveThirtyEight - 2020 Election Odds
We spoke about some of what this article reviews on our team call this week. I think this article provides a lot of things to make sure you think about now. This article goes a little outside my normal shares, but I think it provides some value as many of us are still working in a different environment.
Any article that references ‘American Psycho’ is getting shared. If you have never seen this movie, I recommend you get to it. Here’s the scene, they wrote about. I personally dislike business cards, in today’s digital age, I find them almost useless and even wasteful. I cannot tell you the last time I made it through even ¼ of the box I was given for a job. No matter what my opinions are, this is a well written article. I like the touch of history and personality. It doesn’t have much to do with the markets or the economy, but it does have to do with business.
This Is a Mostly True Story About… Business Cards
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