Eq: Large Cap
(New York)
There are a lot of articles discussing data points which can help investors predict markets. Most have some value in them (though not all). In this vein, the Wall Street Journal has done some digging to assemble the eight best historical market signals. The first thing to know is that all eight predictors, each of which has a great track record, show that market returns over the next decade will be below average. Even the most bullish of the group says that returns will be way below what they have been over the last decade. Some of the eight predictors include the Household Equity Allocation, the Q Ratio, the Buffett Indicator, the CAPE, and the Dividend Yield. The Household Equity Allocation has historically been the most accurate, as households tend to have the highest allocation to stocks right before a crash.
FINSUM: That is quite a data set stacking up against the market. We expect a rough market and a recession within 18 months, but the gains until then could be good.
(New York)
Are you a growth investor or value investor? This has long been a bifurcating question, and has taken on increased importance in the last decade, as the former strategy has outperformed the latter by a wide margin. However, there are some occasions where a stock can be both. Using a simple screen, here are some companies priced like value stocks, but with the core expansion characteristics of growth companies. These include: Micron Technology, Energen Corp., Callon Petroleum, Cal-Maine Foods, Valero Energy, TimkenSteel Corp, and TRI Pointe Group.
FINSUM: Many of these might not be familiar names, but the selection is an interesting methodology and we think they are worth a look.
(San Francisco)
Here is some good news for mutual fund investors. While many ETFs have been absolutely hammered by the selloff in FANG shares, many mutual funds have largely evaded the losses. According to Goldman, the average large cap mutual fund is underweight three out of four of the FANGs. Mutual fund managers had frequently grown uncomfortable with the FANGs’ soaring valuations, and as such, many had trimmed their exposure.
FINSUM:Some of the benefits of active management (and the downside of passives) are really exemplified in this data. A win for mutual fund investors.
More...
(New York)
Technology, trade wars, and social attitudes are changing the world and economy rapidly. How can investors adapt their strategies to keep up and “future proof” their portfolios? Well, Barron’s has run a piece doing just that. The stocks chosen include: Bridgestone, BNP Paribas, Lix, Dabur India, and Bharti Infratel. Bridgestone, a Japanese tire company, seems as though it would be hurt by tariffs and the rise of Uber. However, the opposite is the case, as most tires are made close to where they are sold (so no tariffs), and the rise of Uber and self-driving cars will actually increase the most important performance metric for tire companies: miles driven.
FINSUM: We wrote an article espousing tire makers a few months ago but we like the view even better now. No matter who, or what, is driving a car, rubber will still meet road, meaning tires will be in demand. Further, since parking for self-driving cars may be expensive, we can imagine fleet operators keep them driving around 24/7, increasing demand for rubber.
(San Francisco)
Tech stocks have been through a rough patch, FAANGs especially. Facebook has been absolutely obliterated, while Netflix has had some steep falls. But is there still a bull case for the FAANGs? Barron’s says yes. Given Apple’s great numbers recently, the FAANGs have a little bit of momentum back. The core of the argument is dead simple—FANG stocks (leaving out Apple) are still growing at 35x the rate of the broader market, so it is hard not to see them rising. The article argues that the group is a generational trade that captures the growth of the internet.
FINSUM: When you get right down to it, the business models of the FANGs (lets leave Apple aside for a moment because it is a very different business) are very solid. We think investors will come around to that sooner rather than later.
(New York)
No this is not an article about a liquidity mismatch between ETFs and their underlying products, well at east not entirely. The FT has published a new article by an asset management industry insider arguing that to understand the implications of passive investing, one needs to look more broadly than ETFs themselves. In particular, the piece contends that it is the rise of algorithmic trading which is the true danger, as the technologies which now dominate market trading are agnostic of human-based warnings and insights, and instead simply trade on momentum. This means there are and will be dangerous run-ups and losses in shares. The article points out that only 10% of equity trading now occurs from traditional discretionary human traders. Overall, the piece warns that the current market structure runs very large risks of volatility getting out of hand, and ETFs being forced to dump way more shares than the market can absorb, compounding losses.
FINSUM: This argument is what we would refer to as a “snowball” risk, as it basically discusses the multiple levels of knock-on effects from an initial jump in volatility, which would then be followed by algorithmic selling, then ETF selling, and the cycle continues.