September 18, 2020

 

The S&P 500 Index declined 0.6% this week, while the U.S. dollar rallied and bonds were basically flat. Mega-cap tech shares continue to see profit taking. The NYSE FANG+ Index is down over -10% this month, after rising +21% in August and +14% in July. 

Under the surface, there was more evidence of capital rotation favoring cyclical companies. For instance, stocks in the Industrial Sector hung in well this week, and are witnessing the strongest bout of relative strength since March. The Russell 2000 Index of small-cap companies also outperformed, rising +2.7%. 

Bottom-line:  We view the recent patch of market weakness as part of a healthy market rotation.

 

 

If Anyone Can Solve Social Security, It’s Probably Joel Greenblatt

 

 

Every serious investor is ultimately a combination of other investors they have admired and studied over the years. My top three influences are: Ken Fisher (macro), Paul Tudor Jones (trading), and Joel Greenblatt (bottom-up security analysis). 

Joel’s “Little Book That Beats the Market” is a book I recommend and give to friends and colleagues the most often. It’s also my favorite investment text. 

Joel has a new book I’m excited to read. One chapter addresses how we might improve our Social Security system:

“How about just copying Australia? Instead of contributing to Social Security, let’s divert all of those Social Security taxes to personal retirement accounts like the superannuation accounts that Australians have! That way everyone can start saving and investing as soon as they start working. Remember those compound interest tables, Investor A and Investor B? Getting started early is the key. “Stealing” those Social Security taxes from the beginning of an employee’s working career and investing them at higher rates of return than U.S. government bonds (while simultaneously supporting increased investment in the private economy) could potentially be a game changer for those who need it the most when retirement comes around.”

To learn more about why Australians have been much better at building up their retirement savings, checkout ValueWalk.

 

 

Bull Market In Zombie Firms: Bad For The Economy, Good For Stock Pickers

 

 

Almost one in five publicly-traded U.S. companies is a ‘zombie.’ The term zombie refers to a company that consistently fails to cover its debt servicing costs from current profits. The last time this many zombie companies roamed the markets was in the year 2000, when the tech bubble burst and killed many of them off for good. 

Zombie companies today exist in a golden age of low interest rates, relentless Fed accommodation, and corporate bond investors willing to shun risk in exchange for yield. The end result is bad companies getting propped up, which is also bad for the overall economy. When market manipulation prevents losers from losing, the system becomes less productive and growth stagnates.    

The good news for investors is that zombies are easy to avoid, provided you know how to read a balance sheet.

 

 

100 Million Reasons Mike Bloomberg Wants Biden To Win Florida

 

 

Last Sunday, Mike Bloomberg announced his plans to spend $100 million in Florida in an effort to help Joe Biden win the state. Reports indicate Bloomberg will focus his efforts on communications with Hispanic voters, who lean Democratic in the state but not as much as one might think. Equis Research, a Democratic Latino research firm, has Biden up 16 points over Trump for Florida’s Hispanic vote, which may seem stout, but not when compared to Hillary Clinton’s 27 point lead in 2016. 
 
Bloomberg’s massive spend reminds us there is still plenty of time for winds to shift in either direction. At the end of the day, “October surprises” in campaigns aren’t ultimately that surprising. They happen in almost every election cycle. 

This year, we may learn voters care more about the pandemic, race issues, or leadership style than the economy. In our view, Covid-19 trends may prove important in the home stretch. The graphic below illustrates a meaningful correlation between falling cases and deaths and rising poll numbers for Trump relative to Biden.

 

 

 

The Fed Commits To Lower For Longer Interest Rates

 

 

The Fed continues to telegraph a dovish monetary policy stance. The new piece of information we learned this week was that all 17 Fed officials said they believed rates would stay near zero at least through the end of 2021, and 13 officials predicted rates would anchor toward zero through 2023. This regime of low interest rates actually resembles the pattern we saw after the Financial Crisis, when it took the Fed until 2016 (6 years) to move rates off the zero boundary. 

In all, the outlook on interest rates is great for borrowers, bad for savers. That part of the story seldom changes.

 

 

The Work-From-Home “Revolution” Is Already Losing Its Luster

 

 

The mad dash to set up home offices and migrate out of cities is shaping a number of economic trends this year. For example, the housing market is booming and technology companies that support and service the digital economy are seeing strong growth and surging stock prices. This ‘work-from-home’ theme is not likely to be a one-way pendulum swing, though. 

Investors and consumers tend to over-correct during extreme economic conditions. Whether that means investing life savings in high-flying, unproven technology companies (late ‘90s), buying wildly inflated houses (2000’s), or making life decisions as though the world will never return to normal (now). The tendency to make big decisions in a reactionary manner coalesces with a very common investor behavior of biasing short-term decisions over long-term ones, which almost always ends up being the wrong thing to do.

In an interview with The Wall Street Journal, the CEO of Netflix, Reed Hastings, gave a big company leader’s perspective on the viability of working-from-home long-term.

Wall Street Journal: Have you seen benefits from people working at home?

Mr. Hastings: No. I don’t see any positives. Not being able to get together in person, particularly internationally, is a pure negative.

Wall Street Journal: Do you have a date in mind for when your workforce returns to the office?

Mr. Hastings: Twelve hours after a vaccine is approved.

 

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The Feel-Good Science Behind Healthy Habits, Explained by a Psychologist

 

The most popular course in Yale University’s prestigious history is called Psychology and the Good Life. Above all else, people want to be happy. 

Dr. Laurie Santos, the professor of psychology at Yale who teaches the course and also hosts a podcast called The Happiness Lab, emphasizes the importance of happiness-generating habits. Whether that’s devoting time to make social connections, performing random acts of kindness, exercising regularly, or making it a habit to avoid habits that make you feel bad (like checking social media too often), these are all behaviors we can automate - like brushing our teeth.  As Dr. Santos puts it, “once you turn good behaviors into automated habits, then your conscious mind doesn’t need to do any work.” 

Read the full article.

 

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This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.​​