From Yahoo! Finance… Stocks appear to be slogging their way to new highs over the past year. Yet underneath the surface, it seems there’s been a good, old-fashioned rotation into more defensive stocks. Here’s how investors could play it. How to play smarter defense in a defensive market For inquiring minds, more insight… Mark Newton and Brian Barnier previously explained in “Defensive rotation defies broader measures” how neither broader technicals nor fundamentals supported the defensive rotation that took hold in January. In today’s Yahoo! Finance video, there are two exit doors available to investors concerned about the current market: One…
Author: Brian Barnier
The UK is not doomed to EU punishment and economic demise. The UK has negotiating leverage. Two examples – UK net exports and exchange rates — illustrate all is not lost. Indeed the UK may emerge stronger. “Markets” can get it wrong. Markets generally underestimate the UK’s negotiating leverage, just as they underestimated chances of Brexit and panicked after the vote. Who has more to lose? When jobs dominate elections, national exports matter. The UK’s trade deficit with most members of the European Single Market (European Union plus Iceland, Liechtenstein, Norway and Switzerland) means that trade barriers would tend…
Idealized “business cycles” don’t exist. This note concludes a series that aspires to illustrate how misunderstanding business cycles created problems for investors and the Fed – and how these can be overcome. Investment models are broken when they are blind to change. Mistakes about price levels occur when observers: Mistakenly believe aggregate price measures (including, core, trimmed, sticky and others) reflect those of individual products people buy. Miss lower product costs, deleveraging, global dilution, disjointed regulation and hollowing-out of middle class. Wait for “too much money chasing too few goods” to result in inflation or “reflation” (depending on cycle…
Potential GDP is widely used in quantitative (quant) and other investment models that select investments (such as sector rotations) based on what an economy is capable of producing if resources were more fully used. As it is a rather mysterious bit of math, investors often just take it as a given. Yet, because it glues together so many assumptions, investors would do well to poke on it. With a fresh look, Potential GDP is higher than generally assumed mostly because more resources are available and inflation pressures are lower. Inflation pressures are lower because a) the official unemployment rate doesn’t…
Idealized “business cycles” don’t exist. Business cycle causes and consequences have long been debated in economics. Yet, this debate is often out sight of investors. This note continues a series that aspires to illustrate why business cycles shouldn’t be the primary lens for investing. Three insights from Part 2 kick off: Household debt deleveraging has slowed, and may have been aborted as seen in the rise in consumer credit. Federal government switched between pro- and counter-cyclical at different times. Nonfinancial corporate business debt has the strongest sense of cycle with peaks in 1974, 1989, 2001 and 2009. Yet, the…
Germany has been stung by the European Central Bank’s (ECB) quantitative easing (QE) missteps. Low interest rates hurting savers is a distortion that often leaps to mind. Two more distortions also matter — goods and equity prices. http://www.wirtschaft-tv.com/us-oekonom-barnier-deutsche-maerkte-in-einer-blase This video reinforces points we’ve long illustrated; starting with why the ECB’s QE is ineffective because Mario can’t fight Minecraft. In the Minecraft game resources are relatively abundant. In the world of globally traded goods, especially with Germany’s massive export economy, supply scarcity isn’t the constraining factor. Thus, prices fall and consumers buy more. For these products, when prices increase, including due…
Idealized “business cycles” don’t exist. Business cycle causes and consequences have long been debated in economics. Yet, this debate is often out sight of investors. This note continues a series that aspires to illustrate why business cycles shouldn’t be the primary lens for investing. Business cycle abstractions hide differences in sources and uses of funds Looking at business cycles only in terms of GDP abstracts from the spending of real people. It’s like looking at only the S&P 500 average without considering the differences in each of the 500 companies. A step toward clarity is to distinguish sources and…
Idealized “business cycles” don’t exist. Business cycle causes and consequences have long been debated in economics. Yet, this debate is often out sight of investors. This note kicks-off a series that aspires to illustrate why business cycles shouldn’t be the primary lens for investing. What do these assertions have common? “This bull market lasted too long compared to history, so now I’m bearish,” “The rise and fall of the business cycle is the great constant for investors,” and “Invest in utilities because we’re in a middle bear.” They’re all based on a flawed understanding of “business cycles.” “Business cycles”…
Paul Volcker and his Federal Reserve colleagues are lauded for “breaking the back of inflation” in 1981. Yet, success came from more than high interest rates. Volcker’s victory The 1970s “stagflation” (stagnating output and high inflation) was new. Paul Volcker, named Federal Reserve Board chair in August 1979 by President Carter, pushed the Federal Funds rate to nearly 18% to convince businesses, labor unions and consumers to stop raising prices and wages in fear of further price increases. At the 35th anniversary of that feat, we ask, “Was it just rates?” To investigate, we start by noticing significant differences…
In baseball, don’t take the field to defend when you’re still at bat. Current defensive rotations defy technical and fundamental data. This analysis provides bonus insights to extend the Yahoo! Finance video with Mark Newton and Brian Barnier. Mark Newton – Chief Technical analyst/Managing Member, Newton Advisors, LLC: The rotation towards defensive leadership this year has been nothing short of astounding. After nearly five months of trading for 2016, with equities within striking distance of all-time highs, we see steady outperformance by Utilities, Telecom and Consumer Staples, ranked 1, 3 and 5 in this year’s Top performing sectors (of the…
Traders are hitting the panic button due to weak corporate sales. Yes, sales are down. But, traders are missing the more troubling longer term trend. Adjusting for prices and exchange rates, traders should panic less, but investors should be more concerned. Today, about half of S&P 500 CEOs are captaining “sales submarines” – companies with real (price level-adjusted) sales decreases (quarter over year prior quarter). It was a shock to those who heard it recently and spurred a defensive trading reaction. But, should it have been a shock and what does it really mean? 1. The Trend No, it…
France has been pounding the U.K. in labor productivity gains since 2010. But, is that the real story? No. Short term changes really don’t matter and averages hide answers. Digging into the data, the U.K. is stronger. Headlines herald France beating the U.K. in the labor productivity competition. The U.K. has consistency lost to France every quarter since 2Q2010, winning then only by the slimmest of margins — 1.8% to France’s 1.7%. Has the U.K. performed as badly as headlines suggest? No, the U.K. isn’t the loser over the longer time-frame of workforce, regulatory and industry change. Over the…
“Retire at 30 with 30 stocks” sounds so appealing, but is it true? Of course, it depends on factors used, rebalancing period and macro. The 4Rs go a long way to finding the right factors. Rewind your mind back to university… From whom did you get better investing advice? From your financial management professor or your financial markets professor? For many of us, it was our financial management professors. Why? They taught us about causes of improved financial performance, and forced us think about financial magic versus business models. To help us fit the pieces together, they illustrated with…
Investors seeking companies with strong value creation must first peel off the veneer of balance sheet engineering. To do this, investors need the right data and analytical “lens.” In a sideways market, the “go to” approach for higher returns is smarter stock picking. Yet, success requires: 1) Sufficiently easy access to detailed data and 2) Right method or “lens” through which to view the data. Without these an investor is structurally blind. In today’s economy, share buy-backs and heavy use of low-cost debt are common. These can be good or bad. Regardless, investors need to peel off this financing…
Company quarterly results are misleading investors because the reference point has changed. For today’s dynamics, investors should ask sharper questions about sales, product cost structure, capex and risk. Company results need to be recalibrated by investors to adjust for shifts in trends including economics, technology, global trade and value chains. Yet, most companies don’t publish the needed data. So, investors must ask – starting with these five questions: 1. How many units were sold and where? Look at a big picture, the sales gap from the pre-2008 trend is frightening to institutional and individual investors, down by over 25%. Recall,…
Stock market bubbles are best measured by how much stock prices rise above the fundamentals of ringing cash registers. Viewed this way, Japan has the biggest bubble among five industrial countries. Central bankers wanted a Quantitative Easing (QE) “wealth effect” where stock price increases would pump-up consumer spending and thus business production. Their hope was that stock prices and business production would raise together – a balance that would avoid stock market bubbles. Instead, central bankers got what they feared — bubbles as stock prices rose faster than the tangible economy. Faced by bubbles, the new priority for central…