Global Market Comments
October 25, 2024
Fiat Lux
Featured Trade:
(OCTOBER 23 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (JNK), (CCJ), (VST), (BRK/B), (AGQ), (FCX), (TM), (BLK), (NVDA), (TSLA), (T), (SLV), (GLD), (MO), (PM)
Posts
Global Market Comments
June 14, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(JUNE 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (AVGO), (ARM), (GM), (TSLA), (SQM), (FMC), (ALB), (AAPL), ($VIX), (AMZN), (MO), (NFLX), (ABNB)
Global Market Comments
June 9, 2022
Fiat Lux
Featured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (FSLR), (TAN), (MO)
Global Market Comments
October 28, 2021
Fiat Lux
Featured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (MO)
Global Market Comments
January 14, 2021
Fiat LuxFeatured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (MO)
Looking at the New Year equity allocations, it’s truly astonishing how much money is pouring into ESG investing. Maybe it was another year of blistering head worldwide that did it. It now accounts for one-third of all US equity investment.
Last year, BlackRock, one of the largest fund managers in the country, made a major new commitment to ESG investment by rolling out several new ETFs. I thought I’d better take him seriously, as his firm is one of the largest money managers in the world with $7 trillion in assets.
So what the heck is ESG investing?
Environmental, Social, and Governance investing (ESG) seeks to address climate change in any way, shape, or form possible. Its goal is to move the economy and capital away from carbon-based energy forms, like oil (USO), natural gas (UNG), and coal (KOL), to any kind of alternative.
I am always suspicious of investment themes that are politically correct and ideologically directed, as they usually end in tears. I can’t tell you how many people I know who invested their life savings in solar companies to save the world, like Solyndra, Sungevity, American Solar Direct, and Suniva, only to get wiped out when they went under.
As laudable as the goals of these companies may have been, they were unable to deal with collapsing prices, Chinese dumping, and the harsh realities of doing business in a cutthroat competitive world.
As a venture capital friend of mine once told me, “Technology is a bakery business”. If you can’t sell your products immediately, you go broke. Technology always drops prices dramatically and if you can’t stay ahead of the curve you don’t stand a chance.
Still, what I believe is not important. The fastest growing group of new investors in the market today are Millennials, and they happen to take ESG investing very seriously.
There does seem to be a method to BlackRock’s madness. Over the past year, ESG-influenced funds have grown from 1% to 3.6% of total investment. Other major fund families like Vanguard have already jumped on the bandwagon.
ESG can include a panoply of activities, including recycling, climate change mitigation, carbon footprint reduction, water purification, green infrastructure, environmental benefits for employees, and greenhouse gas reduction. There are many more.
There is even an ESG rating system for funds and companies produced by firms like Refinitiv, which scores 7,000 companies around the world based on their environmental sensitivity. Companies like United Utilities Group PLC, the UK’s largest water company, get an A+, while China’s Guangdong Investment Ltd, which supplies water and energy to Hong Kong, gets a D-.
It goes without saying that companies from emerging nations tend to score very poorly. So do manufacturing companies relative to service ones, and energy companies versus non-energy ones.
The ESG concept began in 2005, when UN Secretary General Kofi Annan wrote to 50 global CEOs urging them to take climate change seriously. A major report by Ivor Knoepfel followed a year later entitled “Who Cares Wins.” The report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. The snowball has been rolling ever since.
Themed investing is not new. “Sin” stocks have long been investment pariahs, including alcohol and tobacco companies. As a result, these companies trade at permanently low multiples. The newest investment ban is on firearms-related companies.
ESG investment may be about to get a major tailwind. The laws of supply and demand have oil prices disappearing up their own exhaust pipe. Overproduction by US fracking companies has caused supply gluts that will lead to chronically lower prices. The US happens to have a new 200-year supply of oil and gas, thanks to the fracking revolution.
Saudi Arabia just floated their oil monopoly, Saudi ARAMCO, raising a record $26 billion. When Saudi Arabia wants to get out of the oil and gas business, so should you. It’s not because they can’t think of new ways to spending money that they’re unloading it.
That’s why I have been advising followers to avoid energy investments like the plague for the past decade. My recent trade alerts for oil have been on the short side. It’s just a matter of time before alternatives rule the world.
Who is the greenest company in America? That would be electric car and autonomous driving firm Tesla (TSLA). Perhaps ESG investing helps explain the tripling of the share price since June.
What is the top-performing listed stock of the last 30 years? Tobacco company Altria Group (MO), the old Philip Morris.
It’s proof that investment shaming doesn’t always work.
Global Market Comments
September 30, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or INTERESTING TIMES ARE UPON US)
(MO), (PM), (FXB), (SPY), ($INDU), (GS), (MTCH), (USO), (UUP)
“May you live in interesting times.” The question is whether this old Chinese proverb is a blessing or a curse.
Our beleaguered lives have certainly been getting more interesting by the day, if not the hour. Trump has been withholding military aid from foreign leaders to fish for dirt on those who may run against him in 2020. The prospects of the Chinese trade negotiations seem to flip flop by the day.
Prospective IPOs for Saudi ARAMCO and WeWork have been stood up against a wall and shot. The Altria (MO) - Philip Morris (PM) merger went up in smoke. Brexit (FXB) has turned into a runaway roller coaster that has lost its brakes. And that was just last week!
All of this is happening with the major indices (SPY), ($INDU) mere inches away from all-time highs, with valuations at the high end of the decade-old band. A worse risk/reward for initiating new positions I can’t imagine. I think I’ll go take a long nap instead.
There are times to trade and there are times to engage in research and this is definitely time for the latter. That means when it is time to strike, you already have a list of short names on which to execute. The worst time to initiate research is when the Dow is down 1,000 points.
I believe the markets are gridlocked until we get a good look at Q3 corporate earnings. If they are as bad as the macro data is suggesting, markets will tank. If they aren’t, we may see a begrudging slow-motion grind up to new highs.
Our launch of the Mad Hedge Biotech and Healthcare Letter was a huge success. Let me tell you, we have some real blockbusters lined up in our newsletter queue. The Tuesday letter will have a link that will enable you to get in at the $997 a year founders’ price. Otherwise, you can find it in our store now for $1,500 a year. Please click here.
The WeWork IPO is on the Rocks, with the CEO soon to be fired for self-dealing. In any case, the company has minimal added value and will not survive the next recession when the bulk of its tenants walk. Don’t touch this one on pain of death, even down three quarters from its original valuation.
Watch out for October, says Goldman Sachs (GS), which will see a volatility (VIX) spike 25%. Shockingly poor Q3 corporate earnings results could be the trigger with almost every company negatively impacted by the trade war. This could set up our next entry point on the long side.
The Saudi ARAMCO IPO is on the skids in the wake of the mass drone attack. Terrorist attacks on your key infrastructure is not a great selling point for new shareholders. It just underlines the high-risk investing in the area. The world’s largest IPO may get cancelled.
A huge killing was made on the Thomas Cook affair. It looks like short sellers raked in $2.7 billion in profits on the collapse. Some 600,000 mostly British travelers were stranded or had future vacations cancelled.
Thomas Cook never figured out the Internet, were destroyed by the collapse of the pound triggered by Brexit and, horror upon horrors, bought an airline. It’s all great news for surviving European tour operators and discount airlines. Airfares are already rising.
The S&P Case Shiller ticked up in July, showing that the National Home Price Index rising 3.2%. It’s the first positive move in more than a year. It’s got to be super-low interest rates finally kicking in. But the real move up won’t start until SALT deductions come back in 18 months.
That went over like a lead balloon. From the moment Trump started speaking at the United Nations, stocks went into free fall, dropping 450 points from top to bottom. It’s trade war against everyone all the time with his withdrawal from globalization. Oh, and if you want to resist America’s incredible military might, we will crush you. It’s not what traders wanted to hear.
In the meantime, the impeachment moved forward, with younger Democrats forcing Pelosi’s hand. The Ukraine scandal, a Trump effort to have candidate Joe Biden arrested, was the stick that broke the camel’s back. Fortunately, the stock market could care less. Stocks rose 20% during the last impeachment in the 1990s.
US Consumer Confidence dove in September from 133 estimated down to 125.1 as trade war concerns take their toll. It’s one of the first September data points to come out and presages worse to come. News fatigue has to be a factor.
Bitcoin Crashed 15% to a new three-month low, hitting $7,944. Other cryptos fell 20%. All of the explanations were technical as they always are with this bogus asset class.
The Vaping Crisis demoed the Altria-Philip Morris merger. Suddenly, the crown jewels are toxic and about to be made illegal. The Juul CEO has resigned and the company may be about to go down the tubes. One of the largest mergers in history that would have created a $200 billion company has been tossed on the dustbin of history.
In a rare positive data point, New Homes Sales soared 7.1% in August to a 713,000 annualized rate. Median sales prices rise by 2.2% YOY to $328,400. Inventories drop from 5.9 to 5.5 months. The big numbers are happening in the south and west. Historically low-interest rates are kicking in big time.
The FTC Slammed Match Group (MTCH), the owner of Tinder and OK Cupid, for security lapses and scamming their own customers. Apparently, that gorgeous six-foot blond who speaks six languages who want to meet me if I only subscribed doesn’t actually exist. Oh well.
Q2 GDP final read came in at 2.0% with no change from the last report. Coming quarters will almost certainly be worse as the chickens come home to roost from a global trade war. We may already be in a recession and not know it. Inventories are building at a tremendous rate. Certainly, Fortune 500 CEOs think so.
Tesla deliveries may hit new high in Q3, topping 100,000, according to last week’s leak. The stock is back in play. It looks like I am going to get a new entertainment package upgrade too.
The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of 336.07% and my year-to-date accelerated to +39.47%. The tricky and volatile month of September closed out +3.08%. at My ten-year average annualized profit bobbed up to +34.53%.
Some 25 out of the last 27 trade alerts have made money, a success rate of 92.59%. Under-promise and over-deliver, that's the business I have been in all my life. It works.
I took profits in my short position in oil (USO) earlier in the week, capturing a 12% decline there. That gives me a rare 100% cash position. I’m itching to get back in, but conditions right now are terrible
The coming week is all about the September jobs reports. It seems like we just went through those.
On Monday, September 30 at 9:45 AM, the Chicago Purchasing Managers Index for September is out.
On Tuesday, October 1 at 10:00 AM, the US Construction Spending for August is published
On Wednesday, October 2, at 8:15 AM, we learn the ADP Private Employment Report is out for September.
On Thursday, October 3 at 8:30 AM, the Weekly Jobless Claims are printed. At 3:00 PM, we get US Vehicle Sales for September.
On Friday, October 4 at 8:30 AM, the September Nonfarm Payroll Report is announced. Last month was a big disappointment so this month could set a new trend.
The Baker Hughes Rig Count is released at 2:00 PM.
As for me, I’ll be camping out with 2,500 Boy Scouts at the Solano Fair Grounds to attend Advance Camp. That’s where scouts have the opportunity to earn any of 50 merit badges in a single day.
I will be teaching the Swimming Merit Badge class. The basic idea is that if you throw a scout in the pool and he doesn’t drown, he passes. Personally, I wanted to take the welding class. The bonus is that we get to ride nearby roller coasters at Six Flags for free.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
McDonald?s (MCD) has always figured large in my life.
I grew up next door to one of the first five stands built in the country, in the Los Angeles metropolitan area. That?s when visionary milkshake mixer salesman, Ray Kroc, started to franchise his revolutionary new ideas for delivering fast food.
One of my fondest childhood memories was when my mother used to take us out to dinner there. At 15 cents a burger you fed seven growing kids for a buck and still had money left over for French fries. We brought our own cokes in an ice chest to save money.
I always gummed up the works by asking for a hamburger that had mustard only and no pickles. I clearly did not fit into the company?s stripped down Speedee Service business model.
In high school, I managed to land a coveted minimum wage job ($1 an hour) under the Golden Arches. I learned first hand the harsh realities of working for a living, and that you didn?t necessarily want to know how the sausage was made.
Then, the Big Mac came out, the blockbuster beef equivalent of a Saturn V rocket. Chicken McNuggets, Egg McMuffins, and Filet of Fish followed (for the Catholics on Fridays), and it seemed the company could do no wrong.
In a few decades, the company grew into the world?s largest restaurant, expanding its list of franchises to a staggering 36,000 shops in 119 countries.
It became the planet?s largest consumer of beef and potatoes in the world. Its presence is ubiquitous on US military bases around the world. Its chocolate shake is said to be able to withstand a nuclear attack.
However, since 2011, the stock has largely failed to perform, and has greatly underperformed the S&P 500. Its business model is aging. Its menu needs a major reworking.
The company has suffered sales declines at existing locations in five out of the last six quarters, with the rate of decline accelerating this year.
The problem is that people just don?t want to buy what they make anymore.
I went into a store the other day, and I was appalled. It was almost empty.
The few customers it had all seemed sick, obese, or unemployed, wearing polyester clothes. They periodically ducked outside for a quick cigarette.
They needed a double bacon cheeseburger like a hole in the head. Health was not their priority. They were a market that was literally dying.
It is becoming increasingly clear that the American market is moving beyond McDonald?s. Can the long vaunted company now play catch up?
This is the big problem. Millennials, those aged 18-34, which should be the company?s highest growth market, aren?t showing much interest in the company?s secret sauce.
They are, in fact, adopting a complete different life style that doesn?t have Ronald McDonald anywhere in it. They are very cautious in what they put in their young bodies.
Think organic, locally grown, low fat, low calorie, non-GMO, high fiber, and no artificial hormones or coloring anywhere. Think of health food, and you don?t exactly run off to a McDonald?s to eat. McDonald?s has a serious brand problem.
Organic foods are booming, seeing sales growth of 30% a year nationally, with far higher profit margins.
If you don?t believe me, look no further than the stock chart of Whole Foods (WFM) below, which at one point, saw its shares gain 116% relative to (MCD).
This is also a generation that is vastly more environmentally conscious that the Gen Xer?s and baby boomers before them. Beef is the single most environmentally destructive food product you can buy, with all the waste and methane byproducts.
One quarter pound beef patty requires a profligate 450 gallons of water to produce. That?s double the daily ration for a family of four here in drought suffering California. And who knows what the hell they are putting in it to preserve it down a very long global supply chain.
McDonald?s did make some limited progress on this front by announcing that they would no longer put ?pink slime? into their beef patties. If you don?t know what ?pink slime? is, then you don?t want to know. Suffice it to say that it is definitely not a great new marketing angle for health food nuts.
The company is also encountering ferocious competition for the fast food dollar from the new, rapidly growing ?fast casual? industry. These include Five Guys, Shake Shack (SHAK), Chipotle Mexican Grill (CMG), and Panera Bread (PNRA).
These companies are all snapping up the high margin end of the market, even though any one of them is miniscule in size when compared to McDonald?s. Collectively, they are nipping at Ronald McDonald?s heels.
I can?t even get my own kids to eat at McDonald?s anymore, they preferring the legendary In and Out Burger on the West Coast (no double entendre intended), which emulates the McDonald?s stripped down menu of the early 1950?s.
(In and Out is a fascinating business story for another day, as the $2 billion, 300 stand LA based company is now controlled by a 33 year old four time married heiress named Lynsi Snyder.)
McDonald?s is one of the world?s largest and best managed companies. In 2014 it generated an impressive $4.8 billion profit on $27.4 billion in sales, producing a not too shabby net margin of 17.5%. So we?re not, by any means, talking chapter 11 material here.
But it is going ex growth, and that invites a lower stock multiple, and a lower stock price, something you, as equity investors should be aware of. Is (MCD)?s position in the Dow Average 30 at risk?
Yikes! That would be a disaster for shareholders!
The company has seen the writing on the wall. It recently brought in a new CEO, Steve Easterbrook, to shake things up. But so far, all of the changes he has implemented have been administrative in nature. There is no category killing super burger anywhere on the horizon.
McDonald?s does still have some huge advantages. Its efficiencies, purchasing power, and economies of scale are epic. But the business is so enormous that any incremental change is unlikely to move the needle on the earnings front.
It is the classic dilemma when navigating a supertanker.
Another headache arises from the snowballing minimum wage, or living wage movement, which has McDonald?s squarely in its crosshairs. This promises to be a big political campaign issue in 2016.
Several cities, like San Francisco and Seattle, have already boosted pay from $8 to $15 and hour, which would substantially increase (MCD)?s operating costs and cut its price advantage.
It is possible that McDonald?s could go the route of so many other legacy industries that were born here, and then migrated abroad when the home market disappeared. I?m thinking about cigarettes (Altria Group (MO), Kentucky Friend Chicken (YUM), and coal (PEA).
Indeed, on my last trip to China, I ate regularly at McDonald?s, and couldn?t help but notice that it had become the country?s hot high end date. But the burden of proof lies on the current management as to whether they can pull this off.
So, you won?t find me buying (MCD) shares anytime soon. If you must own it for that generous 3.6% dividend, at the very least you should be writing covered calls against your position to take in premium income to offset the lack of capital appreciation.
In the meantime, I?ll be grabbing a double cheeseburger and chocolate shake at In and Out Burger, even though the lines there can be miserable.
Watch Out, McDonald?s!
Long the domain of hedge funds and large banks, the carry trade has gone mainstream. Individual investors are increasingly resorting to the techniques employed by the masters of the universe to boost trading and investment returns.
But they lack the risk control infrastructure and discipline employed by the big boys. As with other innovations of yore, the net result has been to build up more risk in the system than many realize. This always ends in tears, not just for the players, but for everyone.
The ?carry trade? is just another way of buying low and selling high and doing both at the same time. In its newest incarnation, retail investors borrow cheap overnight money from their discount brokers and invest in high dividend paying stocks. Favorite targets have included REIT?s, tobacco, and utilities. They then use broker margin facilities to double up the bet. Large individual players can obtain private credit lines that increase leverage even further.
Let me give you an example with one of the favorite target stocks, Altria (MO), the old Phillip Morris. The dividend yield today is 5.40%. Take out the 2% cost of funds provided by online broker TD Ameritrade, and that brings the net down to 3.40%. Double is up with margin and it rises to 6.80%. In a zero return world that is quite a pick up. This is no doubt why the stock has risen 20% since October, bringing the total return up to 26.80%.
There is only one problem with this picture. What happens when the stock goes down? Leveraged positions are subject to margin calls, whether the customer is willing or not. While there is abundant margin in rising markets, it has the habit of disappearing of disappearing in falling ones. Read the fine print in your margin agreement and you will find that your friendly broker has the right to call in their loans at any time without notice.
They have a long history of doing this after sharp selloffs, right when distress is the greatest. Many traders only find this out when they get an email telling them their entire position has been liquidated at market. I can tell you from hard earned experience that there is no person in the world more blind to reason that a margin clerk.
Bunch up a lot of liquidations of these carry trades and you could throw gasoline on any fires that ignite during a market correction. Who might provide the matches? The government, which is expected to substantially raise taxes on dividends after the next election. High dividend stocks that were last year?s stars could become this year?s goats. Be careful that your carry trade doesn?t carry you out.
Will High Dividend Stocks Become This Year?s Goats?