June picks available soon
We’ll be publishing our Prime and Select picks for the month of June before Wednesday, June 1 (the first trading day of the month). As always, we’ll be measuring SPC’s performance for the month of May, as well as SPC’s cumulative performance, assuming the sale of the May picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Tues., May 31). Performance tracking for the month of June will assume the June picks are bought at the open price (at the mid-point of the opening bid and ask prices) on the first trading day of the month (Wed., June 1).
What we’re reading (5/22)
“'The Democratization Of Investing’: Index Funds Officially Overtake Active Managers” (Yahoo! Finance). “For the first time in history, retail investors’ index fund holdings exceed their holdings in actively-managed funds, according to new numbers from Morningstar Direct. As of March 31, Morningstar says, retail investors had $8.53 trillion invested in index mutual funds, while $8.34 trillion worth of assets were invested in actively-managed funds.”
“Stock Market Bottom Remains Elusive Despite Deepening Decline” (Wall Street Journal). “Data have continued to suggest that this year’s selloff, while painful, hasn’t yet resulted in the type of shifts in investing behavior seen in prior downturns. Investors continue to have a hefty chunk of their portfolios in the stock market. Bank of America Corp. said this month that its private clients have an average of 63% of their portfolios dedicated to stocks—far more than after the 2008 financial crisis, when they had just 39% of their portfolios in stocks.”
“Davos Is Back And The World Has Changed. Have The Global Elite Noticed?” (CNN Business). “The last two years have dramatized and clarified what has been true for some time now, which is an elite plutocratic class is not just leaving the rest of the world behind, but is thriving precisely by stepping on the necks of everybody else," said Anand Giridharadas, author of the book ‘Winners Take All: The Elite Charade of Changing the World.’”
“If You Expected Bitcoin to Mimic Gold, You Haven't A Clue About Gold” (RealClear Markets). “[G]old has long been viewed as the inflation hedge par excellence. If the conventional wisdom about gold is to be believed, the rising prices that some deem inflation instigate a rush into the yellow metal that exists as a safe haven of sorts against rising prices; investors once again rushing to gold’s safety on the way to bidding it up. The seeming mystery here is why Bitcoin hasn’t outperformed gold.”
“Doom and Gloom: When Will It End?” (Charles Schwab). “There is no perfect signal of when bear markets end. What we do know is that in bear markets, from a technical perspective, support becomes less relevant and resistance becomes more relevant. Assessing technicians' consensus, as an example, resistance sits somewhere between 4330 and 4400 on the S&P 500, a range (for now) that represents a key hurdle.”
What we’re reading (5/19)
“Stock Markets Finish Volatile Session Lower As S&P 500 Extends Decline” (Wall Street Journal). “U.S. stocks and bond yields fell, with the S&P 500 flirting with a bear market, in a continuing selloff driven by investor fears that the economy could be pitched into a recession. The major indexes dipped early in Thursday’s session, a day after tumbling 4%, before recovering ground. They ultimately finished lower, with all three on track for weekly losses of at least 2.9%. Concerns about consumer spending, which helped lift the market out of pandemic lows, have weighed on stocks and bond yields.”
“Markets Haven’t Acted Like This Since 1981 — And Here’s How That Played Out” (MarketWatch). “‘Just like today, the world’s central banks were obsessed with ‘breaking the back’ of inflation, which, like a monster in a horror movie, kept appearing to die before coming back with second and third winds,’ says Dhaval Joshi, chief strategist for BCA Research’s Counterpoint. ‘Just like today, the central banks were desperate to repair their badly damaged credibility in managing the economy.’”
“The Key 10-Year Treasury Yield Is Tumbling To Its Lowest Point In Weeks As Softening Economic Conditions Fuel Speculation Of A ‘Fed Pivot’ On Rates” (Insider). “On Thursday, data from the Philadelphia Fed showed a considerable slowdown in manufacturing activity in the mid-Atlantic region. The Philly Fed Index dropped by 15 points in May to 2.6, well below the Econoday consensus estimate of 16.1. Last week, consumer sentiment fell to its lowest since 2011, with the University of Michigan's May gauge driving down 9% to 59.1.”
“Goldman, JPMorgan Strategists See Recession Fears As Overblown” (Bloomberg). “Goldman Sachs Group Inc.’s David J. Kostin and JPMorgan Chase & Co.’s Marko Kolanovic say investor fears of imminent recession in the US are overblown -- leaving room for an equities recovery as the year progresses, in Kolanovic’s view. The benchmark S&P 500 has slumped 18% from its January record, approaching bear market territory.”
“Elon Musk’s Next Target” (DealBook). “Elon Musk is the latest prominent figure to push back on one of the hottest trends on Wall Street and in corporate America: E.S.G., the idea of valuing companies based on how they follow environmental, social and governance principles, rather than just chasing profits. Musk called E.S.G. a “scam” after S&P Global, the manager of a popular E.S.G. index, publicized that it had kicked Musk’s electric car company Tesla out of the index[.]”
What we’re reading (5/18)
“Will US Inflation Lead To Recession?” (Project Syndicate). “Rapid consumer price inflation in the United States is masking signs of an economic slowdown that could threaten the longevity of current growth. While nominal personal consumption spending grew by 3.4% between October 2021 and March 2022 (the most recent month for which data are available), accounting for higher prices shows that personal consumption spending was flat overall. And inflation-adjusted retail sales look even worse, having been flat since March 2021.”
“Cautionary Tales From Cryptoland” (Harvard Business Review). “My overwhelming feeling is that Web3 projects seem to be a solution in search of a problem. It often seems like project creators knew they wanted to incorporate blockchains somehow and then went casting around for some problem they could try to solve with a blockchain without much thought as to whether it was the right technology to address it, or even if the problem was something that could or should be solved with technology at all.”
“Wave Of Layoffs At Startups Foretell A Slow Summer For Venture Investing” (Forbes). “‘It just dried up overnight,’ venture investor Dharmesh Thakker told Forbes. It’s left many founders in a state of shock, said Thakker, a general partner at Battery Ventures in Menlo Park, California. It’s also left many startup employees without jobs. So far this month, more than 5,400 workers have been let go, according to data from Layoffs.fyi, a website that tracks tech employment.”
“Melvin Capital To Close Funds, Return Cash To Investors” (Wall Street Journal). “Melvin Capital plans to close its funds and return the cash to its investors, capping a stunning reversal for a firm that lost big on the surge in meme stocks last year and on wagers on growth stocks this year. In a letter to investors that was reviewed by The Wall Street Journal, Gabe Plotkin, Melvin’s founder, wrote that he reached his decision after conferring with Melvin’s board of directors during a monthslong process of reassessing his business.”
“‘Pharma Bro’ Martin Shkreli has been released from prison early and sent to a halfway house” (Insider). “Shkreli posted a selfie on his Facebook page Wednesday with the caption: ‘Getting out of real prison is easier than getting out of Twitter prison.’ He was likely referencing his 2017 suspension from the platform for harassing a journalist.”
What we’re reading (5/17)
“The Fed Has A New Plan To Avoid Recession: Party Like It's 1994” (CNN Business). “The history of central bank rate hikes does appear to support the inevitability of an economic downturn, but there have been rare instances when the Fed has made a soft landing: Once in 1965, and again in 1984 and 1994.”
“Powell Says Fed Has Resolve To Bring U.S. Inflation Down” (Wall Street Journal). “‘Restoring price stability is a nonnegotiable need. It is something we have to do,’ Mr. Powell said in an interview Tuesday during The Wall Street Journal’s Future of Everything Festival. ‘There could be some pain involved.’”
“Ben Bernanke Sees ‘Stagflation’ Ahead” (New York Times). “‘Even under the benign scenario, we should have a slowing economy,’ he said. ‘And inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,’ he predicted. ‘So you could call that stagflation.’”
“AQR Gets Rewarded For Its ‘Sins’” (CityWire). “Asness’s Greenwich, Connecticut-based quant shop AQR has nine mutual funds across various alternative categories sitting top or near top of their peer groups. In some cases, they are ahead of the competition by an eye-watering margin…much of the firm’s outperformance is down to what Asness has previously described as a ‘sinning a little’ – namely factor timing, specifically overweighting value.”
“What Is The Point Of Crypto?” (Vox). “The claims proponents have long made about cryptocurrency — that it’s an inflation hedge, that it’s digital gold — appear increasingly dubious. Well before the current downturn, a lot of what was going on was fishy. Hackers have stolen tens of millions of dollars in crypto, and the sector is rife with stories about various scams. One big trend in the space might pretty blatantly be a Ponzi scheme.”
What we’re reading (5/16)
“Wall Street Is Heading Into A Summer From Hell — And Top Investors Say It's Going To Bring A Near-Biblical Reckoning To The Market” (Insider). “After years of inflating, it's becoming clear that the ‘everything bubble’ has burst. Since the start of 2022, the S&P 500 has fallen by more than 18%, and the tech-heavy Nasdaq is down almost 30%. A punishing combination of still hot inflation, hiked interest rates, war in Europe, lockdowns in China, unprofitable companies facing reality, and recession fears is making it clear that this isn't just a short-term drawdown — it's a pivotal shift for markets.”
“For Tech Startups, The Party Is Over” (Wall Street Journal). “Last year, e-commerce startup Thrasio LLC was expected to be valued at $10 billion or more in a funding deal that would have led to the four-year-old company going public. The deal didn’t happen, and Thrasio, which buys and aggregates retailers that sell on Amazon.com Inc., continues to burn through the more than $3.4 billion of debt and equity it had raised. In recent weeks Thrasio has cut close to 20% of its workforce, announced a new CEO, tapped the brakes on acquisitions and scaled back engineering projects, according to former employees and an internal company memo reviewed by The Wall Street Journal.”
“Bitcoin, NFTs, SPACs, Meme Stocks — All Those Pandemic Investment Darlings Are Crashing” (Los Angeles Times). “Over the last few weeks and months, almost every financial asset has come hurtling back to Earth after high-altitude flights…fad assets such as cryptocurrencies, nonfungible tokens (NFTs), blank-check companies (or SPACs), and meme stocks such as GameStop, have taken the biggest hits.”
“Crypto Plunge Exposes The Folly Of Taxing Unrealized Gains” (RealClear Markets). “[It’s been] a tough break for people with a great deal of exposure to the cryptocurrency market, but it would have been far tougher had they already had to pay taxes on gains that have since been wiped out. After all, someone who bought Bitcoin at its value of about $30,000 in July of 2021 would have ended the year with about $17,000 in unrealized gains per Bitcoin — “gains” which have since disappeared.”
“SPACs Are Sputtering. Desperate New Terms Could Send Them Into A Death Spiral.” (Institutional Investor). “The stock prices bear out the analysis. More than 300 companies that have gone public via SPAC mergers since the start of 2018 have averaged a loss of about 33 percent from the IPO price of the SPAC, versus an average loss of 2 percent for the 1,000 other companies that chose to go public through a traditional IPO as of mid-April, according to Renaissance Capital, which tracks IPOs. Compared with the S&P 500, which gained more than 50 percent during that time, the SPAC numbers are little short of a disaster.”
What we’re reading (5/15)
“Global Growth Is Slowing, But Not Stopping—Yet” (The Economist). “[S]o far, what people say and what people do seem to be different things. Global restaurant bookings on OpenTable, a reservations website, are still above the pre-pandemic norm. In America hotel occupancy still shows sign of improvement. A high-frequency measure of Britons’ spending habits, constructed by the Office of National Statistics and the Bank of England, shows little sign that people are holding off on social activities, or on purchases that could be deferred.”
“Ex-Goldman CEO Blankfein Says Recession Possibility Is ‘Very High Risk Factor’” (CNBC). “‘There’s a path. It’s a narrow path,’ said Blankfein, who retired from Goldman Sachs several years ago and now holds the title of senior chairman. ‘But I think the Fed has very powerful tools. It’s hard to finely tune them, and it’s hard to see the effects of them quickly enough to alter it, but I think they’re responding well. It’s definitely a risk.’”
“Investors Stay Put, Because They Can’t Think Of Better Options” (Wall Street Journal). “Many traders say they are on the prowl for other investments, but even tried-and-true alternatives have lost their allure. A dash for cash—a usual strategy during turmoil—looks less appealing when inflation is hovering above 8%, chipping away at purchasing power. Investing in real estate can feel like a nonstarter when mortgage rates are rising and home prices have soared to records. The only option, some investors say? Sitting tight.
“Panic In The Crypto Marker Has Janet Yellen’s Attention” (CNN Business). “Investors in stocks, bonds and commodities are all on edge right now. But in the market for cryptocurrencies, unease has morphed into full-on panic, catching the attention of regulators in Washington tasked with maintaining financial stability.”
“Is There A Housing Shortage Or Not?” (Construction Physics). “We…can’t infer much from the fact that US homebuilding rates per capita are lower than they were in the past, because we would expect that to happen at some point soon regardless.”
What we’re reading (5/12)
“Crash Of TerraUSD Shakes Crypto. ‘There Was A Run On The Bank.’” (Wall Street Journal). “The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin. Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market. This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday.”
“Bitcoin Is Increasingly Acting Like Just Another Tech Stock” (New York Times). “The growing correlation helps explain why those who bought the cryptocurrency last year, hoping it would grow more valuable, have seen their investment crater. And while Bitcoin has always been volatile, its increasing resemblance to risky tech stocks starkly shows that its promise as a transformative asset remains unfulfilled.”
“Shaky Stocks Send S&P 500 To The Bear Market Brink And Back” (Bloomberg). “More hair-raising volatility in the S&P 500 pushed the index within spitting distance of a 20% drop, a decline that puts markets on covers of newspapers and holds ominous meaning for the economy. Down as much as 1.9% Thursday and 30 points from a bear market before a last-hour rally, the benchmark appears destined to decrease for a sixth straight week, something it hasn’t done since June 2011.”
“Investors Haven’t Begun To Price In Recession: Here’s How Far The S&P 500 Could Fall” (MarketWatch). “The battered S&P 500 index is not pricing in a recession, according to DataTrek Research. ‘At 4,000, the recession odds imbedded in S&P are close to zero,’ said DataTrek co-founder Nicholas Colas in a note emailed Tuesday. The S&P 500 (SPX) a stock benchmark measuring the performance of large U.S. companies, has dropped more than 16% this year after closing Monday at 3,991.24.”
“The Forgotten Stage Of Human Progress” (The Atlantic). “Many books about innovation and scientific and technological progress are just about people inventing stuff. The takeaway for most readers is that human progress is one damn breakthrough after another…But the insistence on invention often overlooks the fact that we’re running low on the capacity to deploy the tech we already have.”
What we’re reading (5/11)
“Inflation Slipped In April, But Upward Pressures Remain” (Wall Street Journal). “The Labor Department’s consumer-price index reading last month marked the first drop for inflation in eight months, down from an 8.5% annual rate in March. The decline came primarily from a slight easing in April gasoline prices, which have since reached a new high. Broadly, the report offered little evidence that inflation was cooling.”
“For Tens Of Millions Of Americans, The Good Times Are Right Now” (New York Times). “‘Maybe it’s easier to focus on the negative, but a huge number of people, maybe 40 million households, have been doing pretty well,’ said Dean Baker, an economist who was a co-founder of the liberal-leaning Center for Economic and Policy Research. ‘You’d have to go back to the late 1990s to find a similar era. Before that, the 1960s.’”
“Fed Confronts Why It May Have Acted Too Slowly On Inflation” (New York Times). “Several current and former Fed officials have suggested in recent days that, in hindsight, the central bank should have reacted more quickly and forcefully last fall, but that both profound uncertainty about the future and the Fed’s approach to setting policy slowed it down.”
“The Stock Market Is Freaking Out Because Of The End Of Free Money. It All Has To Do With Something Called ‘The Fed put’” (Fortune). “It took a while to sink in after last week, but investors had a full freak-out from Friday through Monday when they realized just how serious the Federal Reserve is about fighting inflation.”
“Fed’s Barkin Says ‘Volcker-Like Recession’ Unnecessary To Bring Inflation Down” (Market Watch). “The Federal Reserve doesn’t need to engineer a ‘Volcker-style recession’ to get inflation under control, said Richmond Fed President Tom Barkin on Tuesday. With the Fed’s benchmark policy rate at 83 basis points, ‘we are still far from the level of interest rates that constrains the economy,’ Barkin said.”
What we’re reading (5/10)
“NFTs Are Plunging In Popularity? Yeah, That Makes Sense.” (MSNBC). “two problems the market is facing. First, the number of active traders has plummeted from almost a million accounts at the start of the year to about 491,000, NBC News reported Thursday. A lack of new interest or sustained interest in an asset is rarely a good sign for its longevity. Second, there’s been a flood of supply. “There are about five NFTs for every buyer, according to data from analytics firm Chainalysis,” the [Wall Street] Journal reported.”
“I Bonds: The Nearly Risk-Free Asset Yielding 9.6%” (U.S. News & World Report). “The U.S. Department of the Treasury recently announced that I bonds will pay a 9.62% interest rate through October 2022, their highest yield since they were first introduced back in 1998. These I bonds are protected against inflation and backed by the U.S. government, making them essentially risk-free investments – the only way these investments fail is if Uncle Sam doesn't pay his debts.”
“‘Buy The Dip’ Believers Are Tested By Market’s Downward Slide” (Wall Street Journal). “Individuals’ willingness to backstop markets throughout this year’s selloff demonstrates that the group—for now—has been more resilient than analysts and trading professionals anticipated. Few were surprised when individual investors pounced on small dips as the market churned higher last year, helping the S&P 500 cruise to 70 records and rewarding those who waded in.”
“A Legal Test For Evaluating Modern Corporate-Executive Self Dealing” (RealClear Markets). “Corporate executives increasingly proudly proclaim that they’re acting in the interests of parties – ‘stakeholders’ – other than their shareholder bosses, creating an agency problem…[t]o be sure, they usually append a line asserting that their actions are also in the long-term interests of shareholders, in some nebulous and ill-defined way. But if these self-serving assertions are sufficient…then the self-dealing exception to the business-judgment rule has been eliminated, and the ability of shareholders to have even the most tenuous control over the actions of their managers has been eliminated.”
“Data And Market Power” (Jan Eeckhout and Laura Veldkamp, NBER). “[W]e craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups.”
What we’re reading (5/9)
“Stocks Slide To Lowest in 2022 As Rout Continues” (Wall Street Journal). “The most punishing market selloff in years showed no signs of abating Monday, with U.S. stock indexes sliding to new lows for 2022 and other assets, like oil and bitcoin, tumbling as well.”
“The Dollar Is Stronger. Who Wins? Who Loses?” (New York Times). “Fundamentally, a flood of foreign money into U.S. businesses and investments has been driving up the value of the dollar. In fact, a variety of actions that have unsettled the stock and bond markets have worked together to boost the greenback’s value against other currencies. These include the Fed rate increases, Russia’s war in Ukraine, global sanctions on Russia, soaring commodity prices, China’s lockdowns, and Europe’s and Japan’s economic slowdowns.”
“Contra Simpleton Pundits, ‘The Fed’ Didn’t Cause The Stock-Market Correction” (Forbes). “A Federal Reserve that projects its well-overstated influence through the most risk-averse financial institutions on earth is the all-weather explanation for everything stock-market related. Never explained is how. The stock market is risky, banks studiously avoid risk, but minor Fed fiddling with the short rate for credit supposedly tells the market story. What’s sad is the narrative rarely even rates the most basic of interrogation.”
“Fed Warns Of Worsening Market Liquidity In Stability Report” (Bloomberg). “‘According to some measures, market liquidity has declined since late 2021 in the markets for recently-issued U.S. cash Treasury securities and for equity index futures,’ the U.S. central bank said in its Financial Stability Report.”
“Wait, Trader Joe Was A Real Guy?” (CNN Business). “Joe Coulombe, a struggling convenience store owner in Los Angeles, decided in 1967 to open a grocery chain to appeal to the small but growing number of well-educated, well-traveled consumers that mainstream supermarkets were ignoring. ‘I have an ideal audience in mind,’ he told the Los Angeles Times in 1981. ‘This is a person who got a Fulbright scholarship, went to Europe for a couple of years and developed a taste for something other than Velveeta’ ordinary beer and Folgers coffee, he said.”
What we’re reading (5/8)
“Market’s 2022 Slide Has Already Changed Investor Behavior” (Wall Street Journal). “For much of the past two years, individual investors had rushed to the options market to place ultrabullish bets on stocks. Options bets became synonymous with the frenzy surrounding meme stocks, as shares of companies such as GameStop Corp. and AMC Entertainment Holdings Inc. soared. Now, much of that speculation appears to be winding down. Net call option volumes in single stocks recently hit the lowest level since April 2020, according to Deutsche Bank.”
“Day Trader Army Loses All the Money It Made In Meme-Stock Era” (Bloomberg). “It’s ending as fast as it began for retail day traders, whose crowd-sourced daring was the pre-eminent story of pandemic equities. Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains, according to an estimate by Morgan Stanley. The calculation is based on trades placed by new entrants since the start of 2020 and uses exchange and public price-feed data to tally overall profits and losses.”
“Market Pain Isn’t Over, But You Will Get Through This” (New York Times). “If you are looking for patterns in the market’s wild swings, the answer is simple: The financial markets are coming to grips with a stunning policy change by the Federal Reserve. Over the last two decades, financial markets may have become so accustomed to encouragement from the Fed that they just don’t know how to react, now that the central bank is doing its best to slow down the economy.”
“Airbnb CEO Brian Chesky, Who Recently Announced Employees Can Work From Home Forever, Calls The Office An ‘Anachronistic Form’ And ‘From A Pre-Digital Age’” (Insider). “‘I think that the office as we know it, is over,’ he [AirBnB CEO Brian Chesky] told Time. ‘We can't try to hold on to 2019 any more than 1950. We have to move forward.’”
“Three World Wars: Fiscal-Monetary Consequences” (George J. Hall and Thomas J. Sargent). “This paper describes how the US government made ‘the public pay for’ surges in expenditures associated with three world wars. We apply an approach of Becker (1962) by focusing exclusively on a consolidated government budget constraint and ignoring other parts of macroeconomic models…It is striking how little of the War on COVID-19 has thus far been financed by explicit taxation, even compared to World Wars I and II.”
What we’re reading (5/7)
“Policy Has Tightened A Lot. Is It Enough?” (Neel Kashkari). “We are seeing the power of forward guidance: the FOMC has signaled where policy is headed in the future and markets have adjusted in anticipation of those policy moves, including both expected increases in the funds rate and decreases in the balance sheet. Because the FOMC has strong credibility with market participants, they take our forward guidance seriously, as they should.”
“How You Know When The Fed Has Lost Control” (Global Macro Monitor). “When your fave local coffee house has eliminated the 15 percent gratuity option on Square. That is today relative to a fortnight ago, folks. Racking my brain to find the Gruatity supply chain disruption here. Anyone? Classic case of inflationary expectations becoming deeply imbedded in the economy or is it possibly a relative price shift as political power moves to favor labor vs. Das Kapital? We think a bit of both. Mr. Powell has a lot of wood to chop, if he could chop wood. But can and will he? We suspect today’s stock market mega ramp is not exactly what the Fed wanted. ‘Reducing demand to dampen inflation?’ Total the oppo today, folks. Wealth effect. The Fed needs asset prices lower in the near term.”
“Was The ‘Bond King’ Great?” (Institutional Investor). “He felt he, and his peers, were untested. Since the early 1980s, when he and a handful of other well-known managers got their start, market conditions had been so favorable for bonds that the bond investors couldn’t actually claim to be great — at least not yet. Interest rates were still on a decades-long, relatively steady march lower, which is fuel for higher bond prices. (One of the simpler finance equations: The price of a bond rises as interest rates decline.)”
“Does China Have Hidden Reservoirs Of Growth Potential?” (Noah Smith). “Within the last year, I’ve noticed a distinct souring on the topic of China’s growth prospects among the commentariat. This makes sense, of course. Between seemingly never-ending Covid lockdowns, a protracted crash in the vast real estate sector, Xi’s weird crackdown on internet companies, and the fear of Russia-like sanctions in the event of a conflict, there are now a lot more reasons to worry that China’s amazing catch-up growth story is drawing to an end. In fact, these new stumbles come on the heels of longer-term trends that have relentlessly pushed down China’s growth prospects — slowing productivity growth, reduced opportunities for copying Western technology, and rapidly aging demographics.”
“Companies Are Stuck Between Their Workers And Politicians” (DealBook). “It’s not hard to suss out the reasons that employee activism started to rise. With the government seemingly incapable of action on complex issues that affect the lives of Americans, employees started turning to their companies as institutions with the money and clout to affect change. Companies have financial power, and when they threaten to take action on a political issue, they can get results.”
What we’re reading (5/6)
“S&P Suffers Longest Weekly Losing Streak In Decade: Markets Wrap” (Bloomberg). “At the end of a week marked by fickle trading, quick reversals and heightened anxiety, the S&P 500 failed to stay in the green and fell to its lowest level in about a year. The gauge posted its fifth straight weekly drop -- the longest losing streak since June 2011. The tech-heavy Nasdaq 100 underperformed. Treasury 10-year yields remained above 3%, while the dollar rose. Gasoline futures in New York settled at a record high.”
“Ex-Fed Official Says Rates Of At Least 3.5% Will Be Needed To Slow Inflation” (Wall Street Journal). “‘Even under a plausible best-case scenario in which most of the inflation overshoot last year and this year turns out to have been transitory, the funds rate will, I believe, ultimately need to be raised well into restrictive territory,’ said Richard Clarida, referring to the federal-funds rate, in remarks prepared for delivery Friday at a conference at Stanford University’s Hoover Institution.”
“Consumer Debt Soared By $52 Billion In March” (CNN Business). “Paying off credit card debt is about to get even more difficult for those who don't make the minimum monthly payment: The Federal Reserve on Wednesday announced a half-point rate hike as part of a series of actions intended to address rampant inflation. That means interest rates will rise on everything from credit cards to car loans, pressuring household budgets even further.”
“What Is Happening To The People Falling For Crypto And NFTs” (New York Times). “‘On the one hand we’re seeing problem after problem after problem on a scale that has not been seen in most technologies,’ she told me. On the other hand, well-funded companies are running Super Bowl ads pushing crypto to the public, and big financial firms are gearing up to let people invest in digital currencies as part of their retirement funds. And much of this stuff is unregulated.”
“500 Kilos Of Cocaine Found In Coffee Bags At Nespresso Plant” (Moneyweb). “Nespresso said employees immediately informed the police on Monday after discovering a suspicious substance at its production site in Romont. The cocaine is more than 80% pure and its market value is estimated at more than 50 million francs ($50.6 million), the police said.”
What we’re reading (5/5)
“Dow, S&P 500 Slide More Than 3% As Investors Reassess Fed Comments” (Wall Street Journal). “The stock market took its biggest U-turn since the early days of the pandemic Thursday, with the Dow Jones Industrial Average posting its largest decline this year just 24 hours after its largest gain since 2020.”
“2022 Selloff Has Left The U.S. Stock Market Undervalued” (Morningstar). “[W]e think this selloff has pushed the broad U.S. equity market down too far. Following this downturn, our measure of market valuation is now well into the undervalued territory. According to a composite of the stocks followed by Morningstar’s equity research analyst team, the broad U.S. equity market is now trading at a 12% discount to fair value.”
“Who Wins From Carnage In The Credit Markets?” (The Economist). “For bondpickers, divergence will be further fuelled by a withdrawal of liquidity from the market. On June 1st the Federal Reserve will begin winding down its $5.8trn portfolio of Treasuries; by September, it intends to be shrinking it by $60bn a month. That amounts to the disappearance of an annual buyer of 3% of publicly held Treasuries, whose yields are thus likely to rise. As a result corporate borrowers will have to work harder to convince investors to buy their debt rather than seek the safety of government paper. Such a buyers’ market means more scrutiny of debt issuers, and more variance in the yields they have to offer.”
“The Myth Of The Genius Tech Inventor” (New York Times). “It’s practically an insult in Silicon Valley to say that an executive is extremely capable at running a company. Inventors, not great managers, are often the ones celebrated in technology…[b]ut the fixation on an individual’s ingenuity above all other abilities is a selective memory of tech history. Triumph is often the result of imagination combined with obsessive business savvy.”
“Tiger Is Suffering One Of The Biggest Hedge Fund Drawdowns In History” (Financial Times). “Back of the envelope calculations based on the reported $35bn size of Tiger’s overall public equities book at the end of last year indicate that it has probably suffered a nominal loss of at least $15bn in 2022…. To put that into perspective, Citadel lost 55 per cent for an estimated $8bn loss in the 2008 financial crisis, which led CNBC to camp a van outside its Chicago headquarters and nearly caused it to perish.”
What we’re reading (5/4)
“Fed Raises Rates By Half A Percentage Point — The Biggest Hike In Two Decades — To Fight Inflation” (CNBC). “The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation. ‘Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,’ Fed Chairman Jerome Powell said[.]”
“A Minsky Moment For Venture Capital?” (Financial Times). “Venture capital returns have puked this year. The next dangerous stage is investor outflows.” Apparently, Refinitiv’s venture capital index is down 46 percent year-to-date.
“Everything’s A WeWork Now” (Wired). “[W]hile WeWork has become a cautionary tale, office life in the US has quietly embraced several of its core tenets. Many workers who spent the last two years at home—a small portion of the overall labor force—are being called back to offices that look different from the ones they vacated in 2020, with fewer desks and more open spaces designed to foster collaboration.”
“The Era Of Cheap And Plenty May Be Ending” (New York Times). “[A]s the pandemic and the war in Ukraine continue to weigh on trade and business ties, [the] period of plenty appears to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation and the world’s economy.”
“American Consumers Are Shopping, Traveling And Working Out Like It’s 2019” (Wall Street Journal). “Live Nation, which owns Ticketmaster, said concert ticket sales were up 45% as of February 2022 compared with the same period in 2019, the last full prepandemic year. As of February, the company had 30% more concerts planned for 2022 than 2019. Membership levels at gym chain Planet Fitness in January surpassed prepandemic levels following a stretch in which some 25% of the nation’s gyms closed, according to industry data.”
What we’re reading (5/3)
“US Stocks End Higher In Choppy Trading Session As Oil Prices And Bond Yields Fall Ahead Of Critical Fed Decision” (Insider). “US stocks closed higher Tuesday as investors prepare for a key interest rate decision from the Federal Reserve at the conclusion of its meeting tomorrow. The central bank is expected to ramp up monetary policy tightening at the end of its meeting on Wednesday as part of its campaign to tamp down inflation that is running at 40-year highs. Wall Street is broadly expecting the Fed to hike rates by 50 basis points.”
“Elon Musk Plans To Take Twitter Public A Few Years After Buyout” (Wall Street Journal). “Mr. Musk said he plans to stage an initial public offering of Twitter in as little as three years of buying it, according to people familiar with the matter. The deal is expected to close later this year, subject to conditions including the approval of Twitter shareholders and regulators, the company has said.”
“America Is Trying To Fix The Chip Shortage One Factory At A Time” (Vox). “This new crop of chip factories, sometimes called fabs, won’t be ready in time to solve the current chip shortage. These facilities will take years to build, and even when they’re completed, they won’t produce as many chips as the US uses. Still, the government thinks the fabs could play a critical role in blunting the impact of a future crisis, like climate change or another pandemic.”
“SEC Launches A Hiring Spree To Fight Cryptocurrency Fraud” (CNN Business). “The additional 20 positions will result in almost a doubling in size of the agency's Cyber Unit, which is also being renamed the Crypto Assets and Cyber Unit to reflect the group's growing mission, the SEC said in a release. The Cyber Unit was first founded within the SEC's enforcement division in 2017.”
“Watchdogs Take A Swipe At Apple Pay” (The Economist). “There is not yet an app to keep track of the growing number of antitrust complaints against Apple. But perhaps there should be. On May 2nd the European Commission, the EU’s executive arm, added another to the pile. Following an investigation begun in 2020, it sent the smartphone-maker a ‘statement of objections’, saying that, in the commission’s view, Apple is abusing its power in the market for smartphone payments.”
What we’re reading (5/2)
“10-Year Treasury Yield Hits 3% For First Time Since 2018” (Wall Street Journal). “The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, surged at the start of U.S. trading and reached as high as 3.008% in the afternoon, as traders braced for the outcome of this week’s Federal Reserve meeting. It then slipped below 3% to settle at 2.995%, according to Tradeweb, up from 2.885% Friday.”
“US Stocks Reverse Course To Close Higher Even As 10-year Treasury Hits 3% And Fed Rate Hike Looms” (Insider). “The S&P 500 led stocks lower for much of the day, falling as much as 1% before investors began to buy the dip and push the broader market higher near the end of the day. The Nasdaq finished up by nearly 2%.”
“What's Driving The Historic Bear Market For Bonds?” (Morningstar). “The culprits are the usual suspects when bond prices decline. It’s the surge in inflation and the Federal Reserve’s moves to raise interest rates which are to blame. The central bank will be front and center this week when its policy-setting Federal Open Market Committee meets for the first time since it raised rates in March. The Fed is expected to raise interest rates by another half a percent Wednesday, which would be the first rate hike of that magnitude in 22 years.”
“Has Inflation Reached A Peak? Three Signs That Prices Could Soon Come Down” (CNN Business). “During the stagflation of the 1970s, both sticky and flexible inflation grew. But so far sticky inflation has remained relatively flat compared with flexible inflation, a good sign that this could still be temporary.”
“Measuring Knowledge” (James Heckman and Jin Zhou, NBER). “We examine if conventional, broadly-defined measures of skill are the same across people who are comparable on detailed knowledge measures. We reject the hypothesis of aggregate scale invariance and call into question the uncritical use of test scores in research on education and on skill formation. We compare different measures of skill and ability and reject the hypothesis of valid aggregate measures of skill.”
What we’re reading (5/1)
“Wall Street Reluctantly Embraces Crypto” (Wall Street Journal). “Hedge funds and other professional investors were already trading cryptocurrencies, but many money managers—from mutual-fund giants to pension funds—are increasingly eager to find a way into the crypto markets, executives said. Inflation and rising interest rates have damped expectations for returns on stocks and bonds, making cryptocurrencies more attractive.”
“Bonds Are Suddenly Getting Love From Investors Hedging Recession” (Bloomberg). “Investors plagued by fear and shunning stocks are rediscovering a time-honored antidote: U.S. government bonds. That may seem surprising, given that the Treasury market has been battered by its worst losses on record this year. But with yields holding at the highest in years, the Federal Reserve on course to raise interest rates aggressively in the face of surging inflation, and growth sputtering overseas, cash is flowing back in as investors seek to protect against the risk that the economy will tumble into a recession -- pulling the stock market further down with it.”
“Why A Fragile Stock Market Faces Danger From Rising Real Yields As ‘TINA’ Trade Fades” (MarketWatch). “Rising inflation-adjusted yields in the U.S. are undermining the long-running trade in which investors favor stocks over other asset classes, and are poised to hit the technology sector even harder. That trade — known as ‘TINA,’ an acronym for ‘There Is No Alternative’ to equities — is being increasingly tested by real yields, which have risen from below zero on expectations of aggressively higher interest rates by the Federal Reserve. Five-, 10- and 30-year inflation-adjusted yields are at their highest or least negative levels of roughly the past two years, according to Tradeweb.”
“Dissecting The Equity Premium” (Tyler Beason and David Schreindorfer, University of Chicago Press). “We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below -10%, but returns below -30% matter very little. In contrast, prominent asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above -10% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events in the models.”
“Netflix’s Big Wake-Up Call: The Power Clash Behind The Crash” (The Hollywood Reporter). “Sources say some Netflix executives began to worry about the burgeoning number of shows. ‘It was, ‘Hey, guys, do we think this is enough? Because we are cannibalizing our own shit,’ ’ says a former insider. And then there was Holland’s concern about the lack of curation and quality control. An important creative talent who had successes working with Holland muses: ‘I wonder if, say, a bonobo throwing shit at a whiteboard full of titles as a method of deciding what projects to make would have more or less success than all of these other ‘deciders’ who think they know what people want or don’t want.’”
April 2022 performance update
Friends, here with a monthly performance update. The key numbers are:
Prime: -1.21%
Select: -10.68%
SPY ETF: -9.11%
Bogleheads Portfolio (80% VTI, 20% BND): -8.29%
It goes without saying, but I am elated by this month’s results. As has been widely reported, it was the worst April for the U.S. stock market (as measured by the S&P 500) in 52 years. Discount rates continued rising sharply in the month, U.S. GDP declined, and the geopolitical crisis in Ukraine worsened. All told, trillions of dollars of notional financial asset value evaporated before our eyes. Against that backdrop, Prime mostly stayed afloat, falling negative only toward the end of the month, with the market as a whole performing nearly 9x worse. As I have said before, for a quasi-activist investor (even a model-driven one), volatility is a friend, as it is hard to beat the market when it is rising linearly in a low-volatility environment like 2021. The important point is that it is easy to achieve mechanically “amplified” market returns that go up more than the market when it is up and go down more than the market when it is down (e.g., through leverage). But it is very hard to beat the market on average when it is up and still outperform it when it is down.
Select fell along with the broader market, but a silver lining is that the gap between it at the Bogleheads benchmark widened somewhat. Let’s see what May brings.
