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What Are Markets Pricing In?

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This article was originally published on UPFINA.

It’s possible the economy bounces back in August and September due to the decline in COVID-19 cases and the fiscal stimulus. We got early positive news from the household pulse survey. As you can see from the chart below, employment increased 1.9 million. If we start seeing better jobless claims reports and the household pulse survey is strong next week, the monthly BLS reading should be ignored for being weak because it will be old news. The stock market might rise on a weak report next Friday which would cause many to scream the market isn’t pricing in the changes to the economy. The market is usually looking at earnings and the economy. You have to think ahead. We say usually because sometimes in extreme euphoric or pessimistic situations, the market doesn’t properly price in anything.  

Even though it’s possible that the July labor report might be old news because there might be an underlying trend of improvement since the survey week, you’re probably curious what the report will show. Based on historical seasonal changes to the household pulse survey, we can say there will be about 2.2 to 4.7 million job losses. The unemployment rate is very likely to increase because there will be job losses and the measuring gap will close. While the stock market might ignore this report, it will be politically important. If there isn’t a stimulus passed by then, there will be added pressure since the data will be weak. Timing is very important since the stimulus will likely pass in early August. The most important part being debated is how much added federal unemployment support there will be and for how long.  

Weak Dollar Impact

One of the aspects causing the weak dollar is COVID-19’s relatively high impact on America this summer compared to Europe. The dollar has fallen the most in relation to the euro. On Thursday, the euro rose to $1.18 versus the dollar which is the highest since June 2018. The dollar index is down about 4% in the past month. Let’s not get too excited about this movement as there has been virtually no change in the dollar index in the past 3 years. There is much more historic action in gold than the dollar.

As you can see from the chart above, the media & entertainment and software & services have the highest correlation with the dollar which means their earnings are hurt when the dollar falls. On the other hand, materials, real estate, and energy are helped the most by a weak dollar since commodity prices rise when the dollar falls all else being equal. The market will price these industries based on how sustainable it thinks the trend is. As we mentioned in a previous article, when oil prices went negative for a day, energy stocks didn’t react. Because many are predicting rates to stay low forever, they are willing to pay higher multiples.

Expectations Imputed In The 10 Year Yield

On Wednesday, the Fed didn’t hike or cut rates and gave similar guidance to its last meeting. The Fed has more tools in its chest and the market believes it. However, given the current environment, there’s no need to change the messaging and policy. The key lever is additional fiscal stimulus. The Fed is much more worried about deflation than inflation which is fair because inflation hasn’t been a problem for over a decade and we have an 11.1% unemployment rate. The Fed’s fear of deflation is justified.

The chart below shows the term premium and short rate expectations imputed by the current 10 year treasury yield. The term premium is driven by investors’ expected level of the risk free rate and their compensation for holding it. The term premium is negative as investors believe rates will say low for years (some even say forever).

You can argue that with all this stimulus and the Fed completely abandoning its concern of inflation that there is risk inflation surprises to the upside. We aren’t saying there will be a spike in inflation like the 1970s, but there could be a cyclical spike in inflation and rates if the economy recovers from this blip of weakness in July. When everyone is leaning in one direction, it doesn’t take much to change prices. This is like how minor weakness in a tech firm’s earnings report can cause its stock to fall because most people are already long it.

What Investors Need To Look For

The chart below shows what investors need to seek and what they need to avoid. The problem with value traps is they are cheap, but the reason they are cheap is sustainable. In other words, investors are pricing in a long term change/disruption to the business. One of the most important tasks investors need to do is to determine which changes are long term and which are short term. COVID-19 is a great example as investors grapple with whether the movement towards technology is sustainable or if it will revert when the virus is gone. Nothing is certain.

Many retail investors are gambling. Rational risk averse investors might get frustrated when gamblers win. Just because it’s unlikely and tough for gamblers to win, doesn’t mean it can’t happen. Sometimes, the person investing determines if it’s a gamble. If a person has expert knowledge on a field, their trade is less of a gamble than it is for most people.  

Investors seek optionality and resilience. Optionality means there is more than one way to win. Resilience means the business model has a moat. Resilience means even in unfavorable circumstances, the business will be fine. If a company does well in all economies, you don’t need to predict where the economy is headed to invest in it.

Conclusion

Let’s wait until next week’s household pulse survey before we say the labor market is back to improving. This report goes along with our expectation for an improvement. It’s ahead of schedule. There had barely been a decline in COVID-19 cases by July 21st. Imagine how much the labor market will improve once COVID-19 cases really fall. A weak dollar is bad for software stocks. That could help change their trend which has been overdone to the upside. Investors expect rates to stay low forever. The best investments have optionality and resilience. Avoid gambling and value traps.

The post What Are Markets Pricing In? appeared first on UPFINA.

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By: UPFINA
Title: What Are Markets Pricing In?
Sourced From: www.vintagevalueinvesting.com/what-are-markets-pricing-in/?utm_source=rss&utm_medium=rss&utm_campaign=what-are-markets-pricing-in
Published Date: Thu, 30 Jul 2020 19:46:23 +0000

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The Ins and Outs of Covid’s Impact On Marijuana Stocks

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How The Pandemic Has Shaped The Present Day In The Cannabis Industry

In just a few short months, the entire world was flipped on its head by the Covid-19 pandemic. While most markets had been adversely affected, marijuana stocks managed to escape with more than it came in with. For that reason, the past few months in the cannabis industry have actually been quite good for pot stocks. But, there are some ways in which this pandemic has affected marijuana stocks, that may not be as obvious. Of course, we all know that the demand for marijuana has shot up in the past few months. But, we haven’t fully discussed the other ways in which the Coronavirus has had a role in the cannabis industry.

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It’s worth mentioning that it is extremely hard to identify anything concrete at this point in time. The pandemic is an ever-changing situation that continues to affect pot stocks and the cannabis industry in a big way. Although we more or less know what could happen in the next few months, the specifics arguably remain a mystery. For this reason, it is worth examining how the cannabis industry and marijuana stocks have been affected to this point, to see what may happen in the near future.

Pre March 2020 Was a Rough Period for Marijuana Stocks

Prior to March of this year, we saw major losses with many of the most popular pot stocks to watch. This includes the giants like Canopy Growth Corp. (NYSE:CGC), which shed a decent amount of value in only a short period of time. In addition to pot stock losses, a lot of companies found themselves in a tough position financially. Because of this, a lot of mergers and acquisitions that were supposed to occur, did not end up happening. Although this in itself is not an indicator of anything too bad, it has halted progress in the cannabis industry.

Mergers and acquisitions have become extremely popular amongst leading marijuana stocks. And with that, we have seen some companies become behemoths in their respective industries. Without this, it means that an avenue of growth may have been closed off for some time. But, it does seem as though we are in a better place currently in the cannabis industry. This means that there may be more options for marijuana stocks to have mergers and acquisitions in the near future.

Pot Stock Supply Chains Have Been Rocked

When we look at products producing cannabis companies, we see that a lot of these products are coming from China. One of the main product producers in the cannabis industry, KushCo Holdings Inc. (OTC:KSHB), has reported that there are massive halts in the time it takes to get products from China. This is understandable considering the current state of the pandemic, but regardless it does have a large effect on the cannabis industry. Marijuana stock long term

Many believe that soon, the supply chain could once again regain its efficiency, but this may be a ways away. For now, all we can do is wait for factories to reopen, allowing product producing cannabis companies to once again, make a living. With all of this in motion, it appears as though we may see some bright times ahead for pot stocks and the cannabis industry at large.

The post The Ins and Outs of Covid’s Impact On Marijuana Stocks appeared first on Marijuana Stocks | Cannabis Investments and News. Roots of a Budding Industry.™.

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By: J. Samuel
Title: The Ins and Outs of Covid’s Impact On Marijuana Stocks
Sourced From: marijuanastocks.com/the-ins-and-outs-of-covids-impact-on-marijuana-stocks/
Published Date: Wed, 05 Aug 2020 19:15:35 +0000

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US Stock Market More Extreme Than In March

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This article was originally published on UPFINA.

Just because the S&P 500 has regained almost all of its bear market losses and COVID-19 cases are starting to fall doesn’t mean we aren’t living in unprecedented times. There are some aspects of the current market that are even more extreme than this March. The most amazing situation in markets might be that the 10 year yield is at about 50 basis points which is near a record low in history, while the Fed is embarking on the most extreme path towards boosting inflation ever. If the Fed is successful, rates will spike. It’s amazing how much confidence stock traders have in the Fed to support equity prices and how little confidence bond holders have in the Fed to boost inflation and growth.

Last week, Powell stated the Fed will end its 1 year examination of policy communication and implementation “in the near future.” The Fed is still looking over the mistake it made to raise rates and shrink the balance sheet. The Fed would have been releasing its findings and updating policy anyway. With inflation lower than when it started this journey, it’s hard to overestimate the lengths the Fed will go to, to boost inflation. Powell stated the policy statement which should come in the next few weeks, will be “really codifying the way we’re already acting with our policies. To a large extent, we’re already doing the things that are in there.” This is enhanced forward guidance.

The Fed could specify the exact inflation rate it would need to see before raising rates. Evans of the Chicago Fed talked about not raising rates until inflation hits 2.5%. The bond market doesn’t believe the Fed. You can argue it’s completely unrealistic to even mention 2.5% inflation because of how far away the economy is from that. You can think of this like an unprofitable company saying it won’t issue new shares until it reaches an unrealistic goal on margins. It can be a critical mistake for the Fed to be so dovish if all the policy does is raise stock prices. That would create an even worse problem without generating higher inflation. As we mentioned, the stock market is confident in the Fed and the bond market isn’t. If they are both correct, this policy will only lead to trouble.

Are Stocks Cheap?

Lower rates lead to higher stock prices, but at a certain point the situation gets out of control. Investors won’t use current rates to value stocks unless they think they are here to stay. As you can see from the chart below, the equity risk premium is quite high because of how low rates are which makes stocks attractive. If the Fed does whatever it takes to convince people low rates are here to stay, it encourages stock speculation. That does nothing to increase inflation. We just had one of the longest bull markets in history while inflation was low. In other words, if the Fed fails to boost inflation like it has in recent history, we will have a more perverse version of the last cycle. If the Fed is successful at generating inflation, it could cause stocks to crash because then they will be expensive. It would be a disaster for Americans to have their bond and stock portfolios lose value simultaneously.

The Winning Formula

We’ve spent a lot of time on what could go wrong. Let’s look at the positive side. It’s possible this latest policy clarification increases inflation modestly. That might only cause a small decline in growth stocks. It depends on how overvalued you think they are. If the fiscal stimulus and the decline in COVID-19 cases help create a cyclical recovery, we could see a sector rotation into these value stocks without a market implosion. Steady low inflation in a growing economy is better than near zero inflation in a recession.

Now Stocks Matter

Many people have criticized the Fed for caring too much about the stock market. Now, the stock market matters more than ever because of how many retail investors are involved. According to Citadel Securities, retail investors account for 20% to 25% of stock market trading which is up from the historical range of 10%. The problem with supporting the stock market is it becomes so big that you have to support it. The S&P 500 is too big to fail.

The chart above shows the huge spike in retail trading activity on Robinhood that began in March 2020. Bullish investors are so focused on the economic recovery, they are missing this classic sign of a market top. The stock market isn’t supposed to top after a recession. However, the conventional wisdom also said we needed to see a retest of the March lows, which never happened. This has been a year like no other. Surely at a time when there is intense retail speculation and high concentration you can see how this looks more like a late cycle rally than an early cycle one.

Extreme Concentration

The market is extremely concentrated in a few mega cap tech stocks. There are price targets that put Apple ($480) and Amazon ($4,200) with the same market cap as the Russell 2000 (if it stays where it is now). As you can see from the chart below, the top 6 S&P 500 companies (the FAAMNGs) now have a higher market cap than all Canadian and European stocks. This is a great viewpoint; GDP only has a tangential relation to market cap. The net difference between all European and Canadian stocks and the top 6 American stocks has fallen by over $2 trillion since February.  

Conclusion

The Fed is about to embark on a more extreme monetary policy by codifying when it will hike rates. Some will say these inflation suggestions of 2.5% are so far outside where inflation has been in the past decade that the Fed is essentially saying it will never hike rates. That’s what investors need to hear to value stocks based on current rates. The Fed doesn’t want to disrupt the stock market. That could create negative consequences. The problem is the more important the stock market gets, the worse a correction would be for the everyday person. Unfortunately, the masses tend to get involved in the stock market at the exact wrong time historically, causing more damage to the economy than there ordinarily would be.

The post US Stock Market More Extreme Than In March appeared first on UPFINA.

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By: UPFINA
Title: US Stock Market More Extreme Than In March
Sourced From: www.vintagevalueinvesting.com/us-stock-market-more-extreme-than-in-march/?utm_source=rss&utm_medium=rss&utm_campaign=us-stock-market-more-extreme-than-in-march
Published Date: Wed, 05 Aug 2020 20:21:16 +0000

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Unusual Variable For Labor Market Recovery

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This article was originally published on UPFINA.

Unless you have children and are dealing with the economic ramifications of COVID-19, you might not realize its importance. As you can see from the chart on the left, caring for children not in school or at daycare was the 3rd most common reason people weren’t at work from May to July. It’s no surprise, given the uniqueness of this situation, that the share of people not working due to child care more than tripled (to almost 2%) from where it was before this pandemic.

Children are the least impacted by this virus, but they can spread it. NYC plans to reopen schools if its positive rate stays below 3% (NY is currently near 1%). It’s extremely difficult to have a child and work from home. The ones who have it the toughest are single parents and parents of young children. It’s also impossible to work from home if you don’t have a job that’s capable of that. It’s estimated that 15% of the labor force, which is 24 million people, are in 2 of the 3 situations that prevent them from working from home.

Low Educated Hurt The Most

As we described in articles in 2019 and early 2020, the labor market was fantastic for low income low education workers. They are hurt the hardest by recessions, but see great gains when the labor market is full. It’s back to square one for these workers as it will take at least a few quarters, if not years, to get back to how it was in 2019. In the meantime, there will be high unemployment. The consensus estimate is for 1.75 million jobs created in July (down from 4.8 million in June) which would bring the unemployment rate down 0.6% to 10.5%. We know the labor market weakened in July (rate of improvement fell) and that there were fewer people who could get back to work (easy fruit already picked). Plus, there were additional economic restrictions in the COVID-19 hotspots in the south and west.

The highly educated were the least impacted by this virus which is why the extra $600 per week from unemployment benefits was so critical. Congress is trying to pass another stimulus by August 7th which is when it’s scheduled to go on recess. If there’s something close to being done, they will push back the recess. The stock market is completely ignoring this. The logic is that the economy is so bad, Congress has no choice but to act. Secondly, the big tech stocks that are carrying the market will be insulated from any potential slowdown.

Specifically, in June, of those with an advanced college degree, 63.3% worked from home. 48% of people with a Bachelor’s degree worked from home. People who have a college degree or more are likely to work with computers at their job anyway, so working remotely isn’t an issue. On the other hand, 12.6% of those with a high school degree and 4.8% those who didn’t finish high school worked from home. Retail jobs for example can’t be done from home.

Weird Recession: The Negatives

This is a unique recession, where certain aspects of the economy were hurt more than normally and others were spared. On the negative side, the number of active small businesses fell 2.2 million from February to May. If these small firms don’t come back, either a new business will be created or the mega corps of the 2020s will eat up the new demand. The latter would only accelerate the recent trend towards monopolies. 83% of NYC restaurants and bars can’t pay their full rent. That’s because of the regulations on indoor dining even though the COVID-19 positive rate in NY has been near 1% for the past couple weeks. To make matters worse, 71% of landlords wouldn’t waive part of the rent, 61% wouldn’t defer payments, and 90% didn’t renegotiate leases.

The rule for taking PPP loans that become grants is that at least 60% of the money needs to go to paying employees. That doesn’t mean some of these firms receiving money don’t plan on laying off workers anyway. Between $291.6 million and $647.5 million in loans were given out to the over 150 companies that plan to layoff workers. From May 1st to July 17th, they had plans to cut 15,814 jobs. The chart above shows the type of layoffs. 44% were permanent or the business closed.

In total, 4.9 million PPP loans were given out. That’s $521.1 billion. Congress might add more money to the program which could help a lot as many firms have already spent the money. The best catalyst would be for the restrictions to be lowered and COVID-19 cases to fall. We’ve seen cases fall recently as it appears the worst of the 2nd wave is over. That’s critical to getting children back to school. Remember, the back to school shopping season is the 2nd most important shopping holiday season of the year.

Consumers Saving & Investing

Even with all these negatives, more people are buying cars, RVs, and boats as social distancing vacations have become common. In July, auto sales increased 11.1% from June to 14.52 million. There is literally a shortage of used cars because demand is so high. As you can see from the chart below, this was a rare recession in which credit card delinquencies fell as credit card debt itself also fell. Consumers are also investing more which could be a problem for the stock market like the late 1990s. Interactive Brokers had 913,000 new accounts created this year as of the end of July which was a 40% increase from last year. Robinhood peaked at 16th in the App Store on June 8th which was an intermediate term peak in the market. It’s currently the 89th most downloaded app.

Conclusion

Whether or not kids can go back to school will be huge in determining where the labor market is headed. If they go back to school, the unemployment rate might drop quickly. The higher the education someone has, the more likely they can work from home. Millions of small businesses have closed and NYC restaurants are struggling. Congress is expected to pass a stimulus this week. The market has literally no doubt about one passing. Credit card debt is falling and people are spending more on social distancing activities. They are also investing more which could create a boom & bust in the stock market.

The post Unusual Variable For Labor Market Recovery appeared first on UPFINA.

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By: UPFINA
Title: Unusual Variable For Labor Market Recovery
Sourced From: www.vintagevalueinvesting.com/unusual-variable-for-labor-market-recovery/?utm_source=rss&utm_medium=rss&utm_campaign=unusual-variable-for-labor-market-recovery
Published Date: Tue, 04 Aug 2020 20:33:13 +0000

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