What we’re reading (10/3)
“Wall Street Thinks America’s Homes Are Overvalued” (Wall Street Journal). “U.S. single-family properties are the only type of real estate that has increased in value since interest rates began to rise in March 2022. After a brief dip in the months after the Federal Reserve’s initial hikes, house prices resumed their climb. Residential property values reached a record in July, based on the latest numbers from the S&P CoreLogic Case-Shiller Home Price Index. Commercial real estate hasn’t fared as well, falling 16% in value since March last year, according to property research firm Green Street. Offices and malls face different pressures, but even U.S. apartment values are off more than 20% since last year’s peak.”
“How Treasury Market Upheaval Is Rippling Through Global Markets, In 4 Charts” (MarketWatch). “Signs of stress in the Treasury market abound. As prices across the bond-market have slumped, some long-dated Treasury securities have been trading below 50 cents on the dollar. Moreover, a popular exchange-traded fund tracking U.S. government debt that matures in 20 years or longer cemented its lowest close on Monday since 2007.”
“Dow Loses More Than 400 Points And Goes Negative For 2023 As Interest Rates Spike” (MarketWatch). “The 10-year Treasury yield touched 4.8%, reaching its highest level in 16 years. The benchmark yield has surged in the past month as the Federal Reserve pledged to keep interest rates at a higher level for longer. The 30-year Treasury yield hit 4.925%, also the highest since 2007. The average rate on a 30-year fixed mortgage neared 8%.”
“Amazon Used Secret ‘Project Nessie’ Algorithm To Raise Prices” (Wall Street Journal). “The algorithm helped Amazon improve its profit on items across shopping categories, and because of the power the company has in e-commerce, led competitors to raise their prices and charge customers more, according to people familiar with the allegations in the complaint. In instances where competitors didn’t raise their prices to Amazon’s level, the algorithm—which is no longer in use—automatically returned the item to its normal price point.”
“‘Dumb Money’ Exposes The Baffling Allure Of Bad Investment Advice” (New York Times). “Much as we enjoyed the movie, we are economists, not movie critics. And as practitioners of the dismal science, we worry that some viewers will continue to be inspired to copy the heroes’ investment strategies, which is about as smart as driving home at 100 miles per hour after seeing ‘The Fast and the Furious.’”
What we’re reading (10/2)
“Americans Are Still Spending Like There’s No Tomorrow” (Wall Street Journal). “Interest rates are up. Inflation remains high. Pandemic savings have shrunk. And the labor market is cooling. Yet household spending, the primary driver of the nation’s economic growth, remains robust. Americans spent 5.8% more in August than a year earlier, well outstripping less than 4% inflation. And the experience economy boomed this summer, with Delta Air Lines reporting record revenue in the second quarter and Ticketmaster selling over 295 million event tickets in the first six months of 2023, up nearly 18% year-over-year. Economists and financial advisers say consumers putting short-term needs and goals above long-term ones is normal. Still, this moment is different, they say.”
“JPMorgan Boss Jamie Dimon Says AI Will Enable A 3.5-Day Workweek As He Reveals The Technology Is ‘Already Doing All The Equity Hedging’ For His Bank” (The Daily Mail). “Jamie Dimon said artificial intelligence is already being used in most parts of JPMorgan and that it will eventually likely shorten the work week to 3.5 days. In a Monday interview with Bloomberg TV, the Wall Street titan spoke about the development of AI is impacting his bank and what sorts of effects it will likely have on the working world in the future.”
“Why Stocks Are Likely To Be Especially Volatile This October” (MarketWatch). “You might think October’s historical volatility can be traced to the U.S. market crashes that occurred in 1929 and 1987, each of which occurred during that month. But you’d be wrong: October remains at the top of the volatility rankings even if those two years are removed from the sample. Nor is there any trend over time in October’s place in those rankings: If we divide the period since the Dow Jones Industrial Average DJIA was created in 1896 into two periods, October is the most volatile in both the first and second halves.”
“Microsoft C.E.O. Testifies That Google’s Power In Search Is Ubiquitous” (New York Times). “Satya Nadella, Microsoft’s chief executive, testified on Monday that Google’s power in online search was so ubiquitous that even his company found it difficult to compete on the internet, becoming the government’s highest-profile witness in its landmark antitrust trial against the search giant. In more than three hours of testimony in federal court in Washington, Mr. Nadella was often direct and sometimes combative as he laid out how Microsoft could not overcome Google’s use of multibillion-dollar deals to be the default search engine on smartphones and web browsers.”
“How 10-year Treasurys Could Produce 20% Returns, According To UBS” (MarketWatch). “Owners of 10-year Treasury notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management. The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market.”
October picks available now
The new Prime and Select picks for October are available starting now, based on a model run put through yesterday (September 30). As a note, I will be measuring the performance on these picks from the first trading day of the month, Monday, October 2, 2023 (at the mid-spread open price) through the last trading day of the month, Tuesday, October 31, 2023 (at the mid-spread closing price).
What we’re reading (9/9)
“Xi Jinping Is Done With The Established World Order” (The Atlantic). “The world’s most powerful leaders gathered in New Delhi for the year’s premier diplomatic event—the G20 summit—but China’s Xi Jinping deemed it not worth his time. His absence sends a stark signal: China is done with the established world order. Ditching the summit marks a dramatic turn in China’s foreign policy. For the past several years, Xi has apparently sought to make China an alternative to the West. Now Xi is positioning his country as a full-on opponent—ready to align its own bloc against the United States, its partners, and the international institutions they support.”
“U.S., India, Saudi, EU Unveil A Massive Rail And Ports Deal On G20 Sidelines” (CNBC). “Global leaders announced a multinational rail and ports deal linking the Middle East and South Asia on Saturday on the sidelines of the G20 summit in New Delhi. The pact comes at a critical time as U.S. President Joe Biden seeks to counter China’s Belt and Road push on global infrastructure by pitching Washington as an alternative partner and investor for developing countries at the G20 grouping.”
“'The World Is Rapidly Evolving’: How Gen Z Is Rethinking The Idea Of College” (Insider). “Four million fewer teenagers enrolled at a college in 2022 than in 2012. For many, the price tag has simply grown too exorbitant to justify the cost. From 2010 to 2022, college tuition rose an average of 12% a year, while overall inflation only increased an average of 2.6% each year. Today it costs at least $104,108 on average to attend four years of public university — and $223,360 for a private university.”
“The Job Market Boom Is Over. Here’s Why And What It Means” (Wall Street Journal). “Overall job openings, a reflection of labor demand, peaked at 12 million in March 2022, about double the number of unemployed people looking for work the same month. That gap has since narrowed. Openings in July were much lower at 8.8 million compared with 5.8 million unemployed—showing easing but still elevated demand for labor.”
“How Safe Is Gold?” (Insider). “In short, the decision to invest in gold comes down to 1) the probability that an investor assigns to the prospect of international catastrophe and 2) the investor’s comfort level in ignoring that possibility. As an optimist, I find that an easy call: Forge ahead without it! However, I appreciate that others have different views. For them, a dollop of bullion may provide comfort worth its weight in...well, gold.”
What we’re reading (9/8)
“The Problem With Economic Data Is Getting Worse” (Wall Street Journal). “Revisions to economic data are widespread and normal. But occasionally the revisions are so big that they upend our shared understanding of what’s going on. The latest example comes from the U.K., where it turns out the economy grew much more than previously estimated. Rather than being the sick man of Europe with GDP still smaller than before the pandemic, and the weakest recovery in the Group of Seven industrialized nations, it has beaten Germany and grown in line with France (at least until their figures are revised).”
“Apple Could Be About To Make The Biggest Change To The iPhone In 11 years” (CNN Business). “Apple is set to unveil the iPhone 15 in just a few days, and it’s widely expected to come with a significant change. The iPhone 15 is heavily rumored to ditch Apple’s proprietary Lightning charger in favor of USB-C charging, marking a milestone for the company by adopting universal charging. The change could ultimately streamline the charging process across various devices — and brands.”
“‘I’m OK, But Things Are Terrible’” (Paul Krugman, New York Times). “[H]ere’s the funny thing: There’s substantial evidence that people don’t feel that they personally are doing badly. Both surveys and consumer behavior suggest, on the contrary, that while most Americans feel that they’re doing OK, they believe that the economy is doing badly, where “the economy” presumably means other people.”
“Why A Global Recession Is Unlikely” (Project Syndicate). “[T]hough the US Federal Reserve and the European Central Bank have been pursuing monetary tightening, demand has not collapsed, and supply is not piling up. Instead, recent recession forecasts were derived largely from statistical analyses of past data – analyses that did not adequately account for the impact and legacy of the COVID-19 pandemic.”
“Mattel’s Windfall From ‘Barbie’” (New York Times). “‘Barbie’ is close to grossing $1.4 billion and passed one of the “Harry Potter” movies as the top-grossing Warner Bros. film of all time. It could end up near the $2 billion mark. (The record-holder is 2009’s “Avatar,” at $2.9 billion.)”
What we’re reading (9/7)
“Health-Insurance Costs Are Taking Biggest Jumps In Years” (Wall Street Journal). “Costs for employer coverage are expected to surge around 6.5% for 2024, according to major benefits consulting firms Mercer and Willis Towers Watson , which provided their survey results exclusively to The Wall Street Journal.”
“Huawei Phone Is Latest Shot Fired In The U.S.-China Tech War” (New York Times). “In the midst of the U.S. commerce secretary’s good will tour to China last week, Huawei, the telecom giant that faces stiff U.S. trade restrictions, unveiled a smartphone that illustrated just how hard it has been for the United States to clamp down on China’s tech prowess. The new phone is powered by a chip that appears to be the most advanced version of China’s homegrown technology to date — a kind of achievement that the United States has been trying to prevent China from reaching.”
“Labor’s Message To Corporate America: Time To Pay Up” (The Hill). “The return to 1928 inequality levels did not happen by accident, and its correlation with the unionization rate is no coincidence. There has been a war on workers and their unions since the 1970s. Along the way, greed spun out of control and our country’s riches, which might have gone to workers, increasingly went to corporate America and Wall Street.”
“In-N-Out, Weirdly, Is A Climate Change Indicator” (Slate). “Aesthetically, In-N-Out Burger is all-in. Iris Apfel has her bug glasses; In-N-Out has its palms. ‘It’s kind of their thing,’ Vonderheide agreed when I spoke with him. Tiny red palms dot the restaurants’ wallpaper. Palms adorn wrappers, awnings, paper hats—and, usually, parking lots. Scan California’s freeways and you’ll see them everywhere: a pair of palms swaying in the breeze, standing sentry over your beloved animal-style fries.”
“Small Cap Value: Waiting For The Jumpstart” (Validea). “Things are even more compelling in the small-cap value universe. Using Validea’s Market Valuation tool, I’ve looked at the absolute valuation of small and mid-cap value stocks through various valuation ratios. As you can see, small/mid-cap value has rarely been so cheap (our data goes back to 2006). The other periods of this level of cheapness came mostly during the Great Financial Crisis (2008/2009) and during the COVID crash (2020).”
What we’re reading (9/6)
“Real-Estate Doom Loop Threatens America’s Banks” (Wall Street Journal). “With the commercial real-estate market now in meltdown…trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.”
“The Mistake-Prone Federal Reserve Could Be Sending Us Into Recession” (New York Post). “Milton Friedman famously taught that inflation is always and everywhere a monetary phenomenon. Had the Fed heeded this teaching, it wouldn’t have paved the way for multi-decade-high inflation in 2022 by allowing the broad money supply to balloon by a staggering 40% between the beginning of 2020 and the end of 2021. Despite that experience, the Fed is now letting the money supply contract at a pace unprecedented in the post-war period. That could be setting us up for the opposite problem of great economic weakness and another period of flirting with inflation. At this year’s start, a number of regional banks, including most notably Silicon Valley Bank, failed as a result of large interest-rate-induced losses on their bond portfolios.”
“Markets Brief: Will The Fed Really Cut Rates 5 Times Next Year?” (Morningstar). “As of Sept. 1, futures prices indicate that traders anticipate about 1.2 percentage points of rate cuts next year, according to Bank of America rates strategist Meghan Swiber. If the Fed lowers rates a quarter-point at a time, that would mean roughly five cuts over the course of the year. In contrast, strategists at Bank of America are anticipating just 0.75 percentage points of cuts in 2024. Swiber attributes the difference to the risk baked into futures markets.”
“Even Charter Thinks That Cable TV Sucks Now” (Insider). “Just how broken is cable TV? So broken that Charter, the second-biggest cable company in the US with nearly 15 million subscribers, says it's willing to walk away from the business entirely. Charter is currently locked in an ugly dispute with Disney over what are called carriage fees, or how much it pays to give its subscribers access to channels like ESPN. That's led to a blackout of Disney-owned channels that's taken the US Open, among other programming, off the air.”
“Five Steps To Navigating Fiduciary Duties In The ESG Era” (Dealbreaker). “The landscape of fiduciary duties is evolving rapidly, and ESG (Environmental, Social, and Governance) considerations are at the forefront of this transformation. Corporate boards find themselves under the scrutiny of various stakeholders, including investors, politicians, regulators, clients, and activists, each with strong opinions on how ESG should be integrated into corporate decision-making. Strong corporate governance is essential in this context. Fiduciary duties are the bedrock upon which responsible corporate governance is built.”
What we’re reading (9/5)
“Goldman Cuts US Recession Chances To 15% On Improved Inflation” (Bloomberg). “Goldman Sachs Group Inc. now sees a 15% chance the US will slide into recession, down from 20% previously as cooling inflation and a still-resilient labor market suggest the Federal Reserve may not need to raise interest rates any further.”
“The Fed’s Inflation Fight Will Push The 10-Year Treasury Yield To 5%” (MarketWatch). “All Federal Reserve Chairman Jerome Powell has to do now to finish the job is to artfully maneuver U.S. monetary policy so inflation slides to 2% without derailing economic growth. Easier said than done. After a long decline, real wages are rising and indicators of consumer sentiment have improved. The Chips and Science Act and the Inflation Reduction Act, along with enthusiasm for artificial intelligence, have triggered booms in factory construction for semiconductors, electric vehicles, green industries, cloud infrastructure and software development. To finance federal incentives and more health-care spending, the federal deficit for the fiscal year ending in September will likely hit $1.85 trillion. That’s 6.9% of GDP and well-above the average for advanced industrialized economies.”
“Elon Musk Blames The ADL For 60% Ad Sales Decline At X, Threatens To Sue” (CNN Business). “X owner Elon Musk is threatening to sue the Anti-Defamation League for defamation, claiming that the nonprofit organization’s statements about rising hate speech on the social media platform have torpedoed X’s advertising revenue. In a post on X, formerly known as Twitter, Musk said US advertising revenue is ‘still down 60%, primarily due to pressure on advertisers by @ADL (that’s what advertisers tell us), so they almost succeeded in killing X/Twitter!’”
“FTC Antitrust Suit Against Amazon Set For Later This Month After Meeting Fails To Resolve Impasse” (Wall Street Journal). “Top members of Amazon’s legal team had a video call with FTC officials on Aug. 15. The so-called last-rites meeting, which is often a final step before a court battle, was a chance for the technology giant to make its case to the regulator to head off a possible lawsuit that officials have been working on for many months. During such meetings, companies have the opportunity to offer to pre-emptively change their business practices in order to avoid a lawsuit. But, Amazon’s lawyers didn’t offer specific concessions, the people said.”
“TikTok Has Transformed The Concert Experience” (Vox). “The age of streaming media has brought with it increased access to concert footage, front-row fancams, and highly mobilized fanbases who approach everything about the concert season like it’s their job. From buying tickets (good luck) to prepping for the big night by carefully planning the perfect concert outfit, these fans do it all — and many of them do it on camera, sharing the whole experience with other die-hards online.”
What we’re reading (9/4)
“Investors Head Into Fall With Jitters After Summer Rally” (Wall Street Journal). “The S&P 500 is up 18% so far this year, even after falling in August for its first monthly decline since February. The benchmark index rallied in the final week of the month, finishing near its monthly highs for the sixth consecutive month. Now investors are questioning whether stocks can continue defying expectations and hang onto this year’s gains.”
“Empty Office Buildings Are Blank Slates To Improve Cities” (The Week). “It's been three years since the Covid-19 pandemic prompted many to begin working from home, but the trend has continued to show its staying power even as other aspects of society have returned to pre-pandemic conditions. Because of this, many office buildings in cities have remained empty, leaving city planners and officials scrambling to figure out what to do about the empty spaces.”
“Column: Businesses Keep Complaining About Shoplifting, But Wage Theft Is A Bigger Crime” (Los Angeles). “Former Home Depot Chief Executive Bob Nardelli went on Fox Business the other day to warn that a surge in shoplifting by organized gangs showed that America was descending into ‘a lawless society.’ ‘We’ve got to get this back under control,’ Nardelli intoned gloomily, after videos of smash-and-grab teams in retail stores had spooled behind him. ‘I fear where this is headed.’ There isn’t much to say about Nardelli’s sepulchral comments, other than that he has a hell of a nerve. Back in June, Nardelli’s former company settled a class-action lawsuit with workers alleging widespread wage theft for $72.5 million.”
“Silicon Valley’s Elites Can’t Be Trusted With The Future Of AI. We Must Break Their Dominance–And Dangerous God Complex” (Fortune). “We can take Silicon Valley’s open-source technology and build something that benefits the masses. Altman surely believes that his company is doing good for the world and is uniquely positioned to deliver advanced AI, but even one of OpenAI’s top funders, Elon Musk, has distanced himself from this project due to concerns over its profit-seeking motives.”
“The Discredited Phillips Curve Cannot Be Discredited Enough” (Forbes). “Despite the obvious correlation between growth and falling prices, economists still stick to the belief that rising unemployment and business failure are essential ingredients to what they imagine is a ‘low-inflation’ environment. And it’s not ideological. While one guesses much of the Fed is populated with Democrats, the American Enterprise Institute is a prominent think tank largely populated by Republicans. Yet AEI’s lead economist in Michael Strain recently observed to the New York Times that the ‘more that good news becomes good news, the higher the likelihood of a recession.’ Imagine a growth-focused Republican associating job loss and bankruptcy with ‘good news’ as is, but where it gets worse is in it vivifying Strain’s embrace of the discredited Phillips Curve.”
What we’re reading (9/3)
“The Disappointing Bet That Could Turn Into The Biggest IPO Of The Year” (Wall Street Journal). “An AI boom is considered likely to boost demand for chips that go in servers, rather than in smartphones and home computers, where Arm is biggest. Still, Arm pitches itself as a likely beneficiary, saying growth in AI-enabled systems, such as self-driving cars, could mean more demand for chips using Arm designs. ‘Arm will be central to this transition,’ the IPO prospectus says.”
“Avoid Trendy Economics” (Econlib). “With the rise of social media (especially Twitter), it has becomes easier to observe changes in the zeitgeist. Over the past few years, I’ve seen the following trends: 1. Claims that increases in the minimum wage do not have negative side effects. 2. Claims that we don’t have to worry about big budget deficits when the interest rate is low. 3. Claims that changes in the money supply don’t impact inflation. 4. Claims that neoliberalism no longer works, and that we need an industrial policy. In each case, trendy pundits rejected long established economic principles. And now the chickens are coming home to roost.”
“The Myths We Tell Ourselves About American Farming” (Vox). “‘These factory farms operate like sewerless cities,’ said Tarah Heinzen, legal director of environmental nonprofit Food and Water Watch. Animal waste is ‘running off into waterways, it’s leaching into people’s drinking water, it’s harming wildlife, and threatening public health.’ Yet in practice, the Environmental Protection Agency appears to be largely fine with all that.”
“A S.A.D. Story: What Can We Learn From The 1970s?” (Paul Krugman, New York Times). “[T]he mechanism behind the Biden disinflation has been fundamentally different from the mechanism behind the Ford disinflation. The story that most easily fits the facts is long transitory — the gradual resolution of economic disruption caused by Covid and its aftermath.”
“Cash Piling Up On The Sidelines” (LPL Research). “Higher rates this year have created a high bar for cash coming off the sidelines. Assets in money market funds have climbed to nearly $5.6 trillion, a record-high and a notable 18% increase year to date. For reference, money market funds invest in short-term, high-quality debt or cash equivalents and are intended to provide investors with low-risk income generation and stable liquidity. It is important to note that money market funds are not considered ‘risk-free’ like U.S. Treasuries and are not protected by the Federal Deposit Insurance Corporation (FDIC), which generally insures deposits up to $250,000 per bank.”
September picks available now
The new Prime and Select picks for September are available starting now, based on a model run put through today (August 31). As a note, I will be measuring the performance on these picks from the first trading day of the month, Friday, September 1, 2023 (at the mid-spread open price) through the last trading day of the month, Friday, September 29, 2023 (at the mid-spread closing price).
What we’re reading (8/29)
“Expensive Drugs Targeted For First U.S. Price Negotiations” (Wall Street Journal). “The U.S. government named 10 drugs that will be subject to the first ever price negotiations by Medicare, taking aim at some of the most widely used and costliest medicines in America. At stake is arguably the government’s strongest effort to date to tackle high drug costs—if drugmakers can’t persuade courts to scuttle the negotiating powers that Medicare was granted last year.”
“US Job Openings Decline To 8.83 Million, Lowest Since Early 2021” (Bloomberg). “US job openings fell in July by more than expected to a more than two-year low, offering fresh evidence that labor demand is cooling. The number of available positions decreased to 8.83 million from 9.17 million in June, the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, or JOLTS, showed Tuesday. It marked the sixth decline in the last seven months.”
“While The Mall Food Court Struggles To Survive, Costco Thrives” (Salon). “Mall food courts are struggling to survive, there's no doubt about it. But elsewhere, one food court is managing to do the exact opposite. In fact, it's been staying strong for years. And it doesn't look like it's going out of business anytime soon. That's, of course, the one-and-only Costco food court, the beloved addition to the wholesale warehouse.”
“Is The US Economy Seeing An Upsurge Of New Firms?” (Conversable Economist). “I have written from time to time over the years about concerns that the number of start-up firms in the US economy has been stagnant (for example, here, here and here). This is a matter of general concern, because start-up firms are often the ones providing a jolt of new goods and services, new jobs, new competition, and new energy in a dynamic economy. However, there are some preliminary sources of data which suggest that since the end of the pandemic, the rate of new US business start-ups may be on the rise.”
“You Are A Morale-Driven Machine” (Alexey Guzey). “1. To have high morale is to believe that you are able to do the things you want to do; to have low morale is to believe the opposite. 2. Either state is stable, and your brain will act to reinforce it, so that reality matches its expectation. 3. Everything - everything - either increases or decreases morale. Morale is your motive force, and you live or die by its maintenance.”
What we’re reading (8/26)
“The Recession Should Probably Be Here By Now” (Axios). “According to Wall Street's most talked-about recession indicator, the long-awaited economic downturn should be nearly upon us…And yet, there's virtually no evidence the U.S. economy is contracting, putting this indicator's run of correctly predicting recessions — it's called every one since 1955 — in peril.”
“Why The Stock Market’s Summer Doldrums Are Not A Problem” (New York Times). “By bidding down bond prices and raising yields (prices and yields move in opposite directions, as a matter of basic bond-market math), traders have indicated that they consider the economy to be stronger and inflation to be more persistent than had been expected a few months ago. The downgrade of U.S. Treasury debt by the Fitch Ratings agency also contributed to the run-up in rates on Treasury securities. And because Treasuries serve as benchmarks for virtually every other bond and, indeed, for every other investment in the global economy, higher rates have made stocks less appealing in comparison.”
“Despite What Powell Says, The Fed Is Likely Done” (Wall Street Journal). “Speaking at the Kansas City Fed’s annual symposium in Jackson Hole, Wyo., Powell on Friday provided a classic on-the-one-hand, on-the-other-hand speech. On the one hand, the unwinding of pandemic distortions and the Fed’s rate increases ‘are now working together to bring down inflation.’ On the other hand, “the process still has a long way to go.’ Bank lending standards ‘have tightened’ and ‘growth in industrial production has slowed,’ but gross domestic product growth ‘has come in above expectations’ and ‘the housing sector is showing signs of picking back up.’”
“China Is On Edge As Fallout From Its Real Estate Crisis Spreads” (New York Times). “A model Chinese real estate developer in a sector replete with risk takers is teetering on the edge of default. Short of cash, one of China’s biggest asset managers has missed payments to investors. And billions of dollars have flowed out of the country’s stock markets. In China, August has been a dizzying ride.”
“Are We Ready For A $100 Billion Catastrophe? How About $200 Billion?” (Wall Street Journal). “Now, industry estimates peg a replay of Andrew today at two or even three times the inflation-adjusted number, potentially adding up to a $90 billion or even $100 billion insurance loss. And that is before considering what might have happened had Andrew—or Hurricane Irma in 2017, if it had continued on an early course and intensity—actually hit Miami directly, with modeling firm Karen Clark & Co. estimating that insured losses in such a scenario could be $200 billion.”
September picks available soon
I’ll be publishing the Prime and Select picks for the month of August before Friday, September 1 (the first trading day of the month). As always, SPC’s performance measurement for the month of August, as well as SPC’s cumulative performance, will assume the sale of the August picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Thursday, August 31). Performance tracking for the month of September will assume the September 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 (Friday, September 1).
What we’re reading (8/24)
“VinFast, Arm And Other Index Orphans Miss Out On Billions From Passive Investors” (Wall Street Journal). “The two stocks sit in a weird no-man’s-land between countries, qualifying neither for their home index nor the S&P 500, thanks to their decision to list outside their home countries. They’re in a growing group of companies including the Italian fashion designer Prada, the Swedish music streamer Spotify and the German vaccine maker BioNTech, which miss out not only on the trillions of dollars tracking domestic indexes and index futures but also on global index money.”
“How Jackson Hole Became An Economic Obsession” (New York Times). “Mr. Powell will be speaking at a moment when the Fed’s next moves are uncertain as inflation moderates but the economy retains a surprising amount of momentum. Wall Street is trying to figure out whether Fed officials think that they need to raise interest rates more this year, and if so, whether that move is likely to come in September. So far, policymakers have given little clear signal about their plans. They have lifted interest rates to 5.25 to 5.5 percent from near zero in March 2022, and have left their options open to do more.”
“Macro Illusions — Which Ones Are You Suffering Under?” (Marginal Revolution). “I am not saying all of these (or even most of these) are wrong. I am saying that various doctrines appeared to be ‘quite true’ on a temporary basis, and yes I stress that word temporary. Then they are not true, or at least not obviously true any more. So which are the macro delusions of our current time? I would nominate a clear winner for number one: 1. Enough government action on the demand side can fix macroeconomic problems and ensure full employment Maybe sometimes that is true. But it is not always true, and I hope you all can be wiser than the people who got caught up in earlier macroeconomic illusions, or should I call them delusions? Furthermore, all discussions of the Phillips curve — no matter what the point of view — should be conducted with this blog post in mind.”
“Wall Street Funds Discuss Potential Bankruptcy Plan For WeWork” (Wall Street Journal). “A group of Wall Street firms that lent hundreds of millions of dollars to WeWork is exploring the possibility of a bankruptcy filing that could help the company exit from expensive office leases, one of several options under discussion, according to people familiar with the creditors’ talks.”
“Nordstrom Rack And Macy’s Stores Are Ransacked By Groups Of Thieves Who Made Off With Thousands Of Dollars Worth Of Designer Purses In California” (DailyMail). “A Nordstrom Rack in Riverside has been ransacked by a band of six thieves who made off with thousands of dollars worth of designer handbags. The incident comes as Southern California experiences a wave of ‘flash robberies’, where a group of thieves overwhelm a store's employees and security before making off with as many items as possible. The department store on Canyon Springs Parkway was hit first on July 10 and again just weeks later in a separate incident on August 14.”
What we’re reading (8/23)
“SEC Takes On Private Equity, Hedge Funds” (Wall Street Journal). “The [new] rules restrict the ability of private-equity and hedge funds to entice large investors by offering them special deals, known as side letters, for better terms than other investors. The SEC will also require private funds to provide their investors quarterly financial statements detailing their performance and expenses, and to undergo annual audits.”
“Corporate America’s Chief Critic, Carl Icahn, Gets His Comeuppance” (New York Times). “[I]n May, Mr. Icahn, 87, found out what it’s like to be on the receiving end when Nathan Anderson, a 39-year-old short seller, published a report questioning the setup at Icahn Enterprises, his publicly traded company. Mr. Anderson suggested that the company was paying shareholders a dividend it could not afford. This month, Icahn Enterprises succumbed to the pressure, slashing its dividend by half. ‘It is very, very embarrassing for Carl because this guy beat him and beat him at his own game,’ said Mark Stevens, the author of a 1993 book titled ‘King Icahn: The Biography of a Renegade Capitalist.’”
“A Deep Crisis In China Would Pose A Choice For Two Leading Powers” (Hank Paulson). “Yet all those who would celebrate China’s daunting challenges should consider the emerging risks that come with them — and be careful what they wish for. A deep crisis in China, should it come, would pose a choice for two leading powers: Can China pivot from the path that has delivered it here? And can the United States remain confident in the things that make it so much more resilient?”
“How Scary Is China’s Crisis?” (Paul Krugman). “I think we can answer a more conditional question: If China does have a 2008-style crisis, will it spill over in a major way to the rest of the world, the United States in particular? And there the answer is pretty clearly no. Big as China’s economy is, America has remarkably little financial or trade exposure to China’s problems.”
“Mark-To-Market Is Not As Simple For Banks As Is Assumed” (RealClear Markets). “Looking back to 2008, it’s no revelation that investors (feverishly trying to mark-to-market) were very skeptical about the mortgages on the books of banks. This is markets at work. Still, marking all 15-year mortgages to market at the time arguably would have been as fraudulent of an exercise as not doing so.”
What we’re reading (8/23)
“Goodbye Bathtub And Living Room. America’s Homes Are Shrinking.” (Wall Street Journal). “Home prices are near record highs, frustrating millions of potential buyers who feel priced out of the housing market. Home builders are having to find ways to make their product more affordable to increase their pool of customers. Shrinking the size of a new single-family home is an increasingly popular way to do it. Smaller homes can help cost-constrained buyers facing high mortgage rates. They also boost the bottom line for builders who are contending with spiraling labor and construction costs.”
“Housing Market Affordability Is Worse Now Than At The Height Of The Housing Bubble In 2006” (Fortune). “On Monday, the average 30-year fixed mortgage rate reached 7.48%, marking the highest level since the year 2000. Even prior to this recent surge in mortgage rates, housing affordability, as monitored by the Atlanta Fed, had already deteriorated beyond the levels seen at the housing bubble’s peak in 2006. Once this latest mortgage rate surge is factored in, August 2023 will become the worst month for housing affordability this century.”
“Wall Street Is Declaring Victory Too Early — The US Is Still Headed For A Recession” (Insider). “[J]ust because the economy's flight path seems gentle now doesn't mean that there won't be turbulence ahead. According to top Wall Street strategists and economists I've spoken with in recent weeks, there's plenty of evidence that a recession is on the way. In other words, bulls are declaring victory far too early.”
“Even Millionaires Are Feeling Financial Insecure, Report Finds” (CNBC). “Even doctors, lawyers and other highly paid professionals — also referred to as the ‘regular rich’ — who benefit from stable jobs, homeownership and a well-padded retirement savings account said they don’t feel well off at all. Some even said they feel poor, according to a recent survey conducted by Bloomberg.”
“What To Know About China’s Real Estate Crisis” (New York Times). “Major developers are faltering as they face huge losses, struggle with mountains of debt and miss payments to lenders. A long-running building boom that propelled China’s growth has come to a halt, threatening the jobs and savings of millions of households. China’s markets have tumbled and its currency has weakened as officials take action to spur growth.”
What we’re reading (8/21)
“Goldman Sachs Weighs Selling Part Of Wealth Business In Broad Strategy Revamp” (U.S. News & World Report). “Goldman Sachs is weighing the sale of a part of its wealth business, it said on Monday, as it shifts its focus back to serving the ultra-rich and away from high-net-worth clients in mass markets. The Wall Street bank is evaluating alternatives for its registered investment adviser (RIA) unit, called Personal Financial Management (PFM), which manages about $29 billion, it said in a statement.”
“Betting Against U.S. Debt Has Cost Ackman This Year” (Institutional Investor). “The short of 30-year U.S. Treasuries, first undertaken in April of 2022, cost Pershing Square Holdings 4.1 percentage points during the first half of the year, according to a just-released semiannual report to investors. The bet was the biggest loss for the portfolio, whose gross gains were 10.9 percent for the six-month period. During that time Pershing Square drastically underperformed the stock market, which gained 16.9 percent during the same time.”
“Subway Sandwich Chain Nears Sale” (Wall Street Journal). “Roark Capital is nearing a deal to buy the Subway sandwich-shop chain for about $9.6 billion. After a long, heated auction, a deal for the closely held company could be finalized this week, people familiar with the matter said. Roark has been battling it out with a group of rival private-equity firms including TDR and Sycamore, and in recent days pulled ahead.”
“What Happens To All The Stuff We Return?” (The New Yorker). “Most online shoppers assume that items they return go back into regular inventory, to be sold again at full price. That rarely happens. On the last day of the R.L.A. conference, I joined a ‘champagne roundtable’ led by Nikos Papaioannou, who manages returns of Amazon’s house-brand electronic devices, including Kindles, Echos, and Blink home-security systems. He said that every item that’s returned to Amazon is subjected to what’s referred to in the reverse-logistics world as triage, beginning with an analysis of its condition. I asked what proportion of triaged products are resold as new. ‘It’s minimal,’ he said.”
“Is David Solomon On His Way Out At Goldman Sachs? The CEO Whisperer Weighs In” (CNN Business). “There are several reasons that all of this is happening right now. One is that we went through a recent era of lionizing CEOs, and now the pendulum has swung back to where we’re quick to vilify them. There’s just an outsized focus on short-term performance instead of long-term change when it comes to CEOs. But if you look at the five-year arc of David Solomon, the company is up by over 50% on nearly every performance measure.”
What we’re reading (8/20)
“Interest Rate Jitters Sink The Heavyweights Of Tech” (New York Times). “In the span of a month, the bottom has dropped out of the bull-market rally as investors have come to grips with the prospect of “higher for longer” interest rates worldwide. The sell-off in global stocks and bonds picked up steam on Thursday. And weary market watchers will be looking for more hints on the Fed’s view at next week’s Jackson Hole summit of central bankers and policymakers.”
“Why the Era of Historically Low Interest Rates Could Be Over” (Wall Street Journal). “Despite the Federal Reserve’s raising interest rates to a 22-year high, the economy remains surprisingly resilient, with estimates putting third-quarter growth on pace to easily exceed its 2% trend. It is one of the factors leading some economists to question whether rates will ever return to the lower levels that prevailed before 2020 even if inflation returns to the Fed’s 2% target over the next few years.”
“The US Mall Is Not Dying” (CNN Business). “Retail experts have long sounded the alarm on malls in the US. But malls are not going extinct, they are merely adapting to a new environment. In fact, many have reported robust occupancy levels and bigger crowds than before the pandemic, according to a recent market analysis from Coresight Research.”
“Have Airlines Gone Too Far With Their Extra Fees?” (BBC). “Airlines say that by ‘unbundling’ extras such as food and drink or cabin baggage from the ticket price, travellers get more choice and cheaper fares overall.”
“Nvidia Reports Earnings, Fed Gathers In Jackson Hole: What To Know This Week” (Yahoo! Finance). “Powell’s commentary [at Jackson Hole this week] on the path forward for interest rates, the overall state of the economy, and any suggestion inflation pressures are prompting a rethink of the Fed's current goals will be in focus.”
What we’re reading (8/19)
“WeWork Announces 1-For-40 Reverse Stock Split To Avoid Getting Kicked Off The New York Stock Exchange” (CNN Business). “The reverse stock split is a bid to boost WeWork’s ailing stock price and save its shares from getting delisted. Stocks must retain a $1 minimum closing price to continue listing on the NYSE. If a stock remains below that level for a ‘substantial period of time,’ NYSE rules state that the exchange reserves the right to remove it.”
“Aldi Is Getting Bigger. Here’s Why The No-Frills German Grocer Is Looking To The Southern U.S. For Growth” (CNBC). “The German retailer announced this week that it plans to acquire about 400 Winn-Dixie and Harveys Supermarket locations across the Southern U.S. As part of the deal, it would take over operations of the stores, which are in Florida, Alabama, Georgia, Louisiana and Mississippi, and put at least some of them under the Aldi name.”
“Wall Street, yields Tread Water As Investors Await Fed At Jackson Hole” (Reuters). “Yields on benchmark 10-year U.S. Treasuries stepped back after flirting with 16-year highs earlier in the week. Investors expected the Fed may hold interest rates higher for longer as the U.S. economy continued to show strength. ‘August historically has been a weak month for markets and it isn’t surprising that after a big rally to start the year, that investors would take a breather. The headlines haven’t changed all that much, but the lens with which investors are viewing those headlines has,’ said Blake Emerson, global investment specialist at JP Morgan Private Bank.”
“Something Has Changed On City Streets, And Amazon Is To Blame” (New York Times). “By law, two-way residential streets in Washington are supposed to be 34 feet from curb to curb, but many are a few feet narrower. The average car is about six feet wide, so parked cars on either side constrict a roadway quickly. Once you account for mirrors, swinging doors and the occasional mis-parked minivan or S.U.V., the two lanes of moving traffic might have only 13 or 14 feet of road space to work with. Drivers can move freely but cautiously, braking to pass. For Jacobs and other urban theorists, that’s perfect — these are not neighborhoods that shortcut-seeking motorists consider worthwhile to barrel through, or where playing children need to fear sudden surprises.”
“Failing Upward” (City Journal). “The FTC has had a busy summer. It proposed severe new disclosure requirements for parties seeking to merge. Joining forces with the Justice Department, it moved to de-modernize the government’s merger guidelines. (‘Weighted by the number of citations,’ observe Gus Hurwitz and Geoff Manne, ‘the average year of the 50 cases the FTC and Justice Department cite in support of their approach is 1975—ages ago in antitrust law.’) The agency launched an investigation of OpenAI, maker of ChatGPT, and signaled its intent to regulate artificial intelligence more broadly. It accused Amazon of using so-called dark patterns to trick users into subscribing to Amazon Prime. (It also claims that Prime is too hard to quit. Never mind that one can do so in fewer clicks than it takes to file a comment with the FTC.) And any day now, Khan is expected to file her biggest lawsuit of all: her long-planned quest to break up Amazon. The more Khan loses, it appears, the more ambitious she becomes.”