TREND IS YOUR FRIEND
Low volatility precedes high volatility
UNTIL IT ISN'T
Invest by looking out the windshield
WHAT IS 5G?
...and why should I care?
U.S. DOLLAR UPDATE
SUMMARY OF INVESTMENT THEMES
THE TREND IS YOUR FRIEND
It’s generally easy to feel good about allocating capital into a low-volatility stock market. Unfortunately, making investments when it feels easy often ends in heartache. By many measures, the U.S. stock market has rarely been more expensive or calmer than today.
As of July, according to Sierra…
- It’s been 261 days and counting without even a 5% correction in the S&P 500
- The first half of 2017 had the second smallest intra-year pullback (-2.8%) for the S&P 500 since 1950! (Smallest was in 1995)
- The VIX (widely followed measure of expected S&P 500 volatility for next 30 days) has closed under 10 a total of 11 times since May 8th, something it had done only 20 times in the prior 27 years!
- According to Oaktree Capital’s Howard Marks…
- The S&P 500 is trading at 25 times trailing 12 month earnings, compared to a long-term median of 15.
- The Shiller Cyclically adjusted P/E ratio is currently 30 versus a historic mean of 16. It was only exceeded in 1929 and 1999 (with hindsight clearly bubbles)
Most people can’t think of a reason that might cause stock market trouble anytime soon. It’s exactly then when investors tend to fail to price in risks they cannot see that potential trouble lurks. Currently, with a negative catalyst so difficult to find and the return on cash equivalents below 1%, people worry more about being underinvested than they do about losing money. It is precisely at times like these that astute investors should exercise prudence in their investment strategy.
Remember, rarely are companies invincible. The iPhone is only 10 years old and look at how that product changed not only mobile phones, but e-commerce. Widespread internet use is still only 20 years old and it has changed the face of our society in countless ways. Can you predict the future 5, 10, 20 years out? Be careful forecasting too optimistic assumptions for companies, years into the future. The competitive landscape can change fast. As Howard Marks says, “The logic that says it will work forever always collapses…No market, niche or group is likely to outperform the others forever.”
UNTIL IT ISN'T
Keep in mind that since 2009 the world’s central banks have been in the corner of investors who wish to take risk. Rates have been maintained at low rates and quantitative easing has helped push investors into riskier assets as they search for returns. But, over the past year or so, they have shifted gears. The wind is no longer at our backs. We now are 4 rate hikes into the current U.S. tightening cycle. Janet Yellen has announced she intends to reduce the Feds balance sheet as well. In Europe, asset purchases have been reduced by roughly 25% from earlier this year. It seems conditions are getting tighter not easier. As investors, we need to be forward looking. Unfortunately, many invest through the rear view mirror.
Once in awhile someone asks what they should read to learn about personal finance and investing. Do people really want to learn and read about all the different theories? Many books have some ideas I agree with and some I don’t. Does the average person on the street want to read and decide what they believe in or do they just want to be told what to do?
Humans want things to be easy. Investing books that promise the “secret” to investing, personal finance books advertising 5 easy things to become a millionaire are often best sellers. Unfortunately, there are no shortcuts. Investing is definitely not easy and the moment you think it is, the market will often smack you up side the head with a large loss. Markets change and evolve over time and a strategy that is working today often may not work at some point in the future.
Investing requires patience, thinking and experience. Unfortunately, many people lack patience, thinking is hard and time consuming and experience only comes with time in the markets. Most people don’t like to think or don’t have a desire to accumulate the skills needed to complete the task.
Here is an example in my life. I don’t know how to change the oil in my car. This seems like an easy task. I know a number of people who change the oil in their cars. At some point they acquired the knowledge and expertise and devote the time to this task. However, I was never taught how to do it. I haven’t spent any time or money reading or watching videos learning how to do it, and honestly I lack the desire and the time to do it. I have someone else do it. A mechanic and my dealership, the guy at the quick lube, etc. The money I pay someone to do it for me is essentially the cost of me not learning how to do it, having the time to do it, nor the desire to do it.
There are many financial advisors in the world today who will offer to help you invest your savings. But, there is no guarantee that the advice you receive will be any good or appropriate for you. Additionally, and what is even harder is that you may have received good advice and received a poor outcome or received bad advice and received a good outcome. For instance, you could have inherited a million dollars and the advisor told you to put it all in Apple stock in 2009. Most likely that was terrible advice to put your entire inheritance into one stock. What if it was Bear Stearns in 2005, or Enron in 1999 or General Motors, or American Airlines? Each of those enormous, well-esteemed companies declared bankruptcy shortly after and investors lost everything. But, that advice worked out because Apple stock has done so well.
There are no short-cuts are simple rules with investing. But, a quality financial advisor can often help….just maybe not in the ways you may think. Our best attribute is the ability to help with behavioral coaching. Often, the individual investor is his own worst enemy. Excited by high prices and demoralized by low prices, the individual investor is predisposed to buying high and selling low. A good financial advisor can help talk you through investment decisions made in good times and in bad to help you identify your behavioral biases and navigate through them.
WHAT IS 5G?
“Change of a long-term trend is usually gradual enough that it is obscured by the noise caused by short-term volatility. By the time secular trends are even acknowledged by the majority they are generally obvious and mature.” – Robert Farrell
Many of us are aware that our mobile phones have been processing more and more data faster and faster each year….and we are paying more for it. We are still in the process of improving 4G with mobile speeds currently up to 150 Mbps and in select cities 4G+ offering up to 300 Mbps. What many don’t realize is that 5G (Fifth generation) speed is closer than you may think and may change the way data is transferred in transformative ways. “These are the kind of disruptions that happen once in a decade," says Hiroshi Lockheimer, senior vice president for Android, Chrome OS & Play at Google. Ericsson predicts that in North America about a third of the smartphone base, some 100 million subscribers, will be 5G-enabled by 2022. Globally, about 500 million subscribers will have 5G-capable smartphones. Samsung and KT, for example, have long planned to make 5G available for the Winter Olympics next year in Pyeongchang, South Korea.
5G is less about connecting two points so they can communicate to eachother as it is connecting everything to everything. Essentially, this is blanket spectrum run at a completely different frequency than 4G. 5G makes use of millimeter waves and “smart” antennas like this one manufactured by Ubiquiti Networks to create speed and depth in completely new ways. It should allow an unlimited amount of devices to function at one time without a drop in speed or connection. The largest benefit could be the “real-time” response called low-latency. This could allow for example, someone at a baseball stadium watching a live game to see a live stream on their phone of an alternative camera angle of exactly what they are watching. Have you ever noticed how at concerts, live sporting contests and other congested areas that speed is often much slower and batteries die faster? Additionally, have you ever noticed how networks like Verizon and AT&T are often large sponsors of these events? This allows the network providers access to experiment in dense areas where many people are trying to access 4G at once. 5G should attempt to free us from any delays. As more and more devices become “smart” the strain on bandwith and available spectrum should only increase. The thought is that 5G will eliminate these issues through an improvement in infrastructure.
Smart cars, autonomous driving, Internet of Things, etc. are part of a developing fabric of connectivity that will require massive data transfers, machine learning (A.I.), data segregation and cloud storage. This new interconnected system is part ingenious, part scary and part exhilarating. It is on its way. In fact, some of the infrastrucutre is being installed right now.
Verizon and AT&T are currently testing 5G wireless service in markets across the country, from rural areas to dense urban centers. 5G provides speeds up to 40 times faster than 4G, and it's expected to eventually impact connected everything from self-driving cars to robots. 5G tests have been conducted for the past few years in labs and prototype environments. The new pilot is in Ann Arbor, Michigan; Austin. TX; Atlanta; Bernardsville, New Jersey; Brockton, Massachusetts; Dallas; Denver; Houston; Miami; Sacramento; Seattle; and Washington, D.C.
Larger cells (antennas) will be used similar to how they are today with broad coverage on large towers or tall buildings. However, the change will be the massive amount of smaller cells, fitted into things like lampposts and inside stone and brick in new buildings. Computer algorithms will then have to decide which device needs a connection to which cell (antenna).
Chipmaker Qualcomm has the first 5G capable chip called X50 that is capable of download speeds of 5Gbps, which is currently 400X faster than current 4G download speeds. Smartphone manufacturers are expected to receive samples late this year. Fulll rollout is expected in 2018.
No one will ring a bell when it starts but the infrastructure development could be lucrative for companies focused on the backbone (the networks), delivery (towers and cells), storage (cloud solutions), data management (software) and many others. Although this is not a complete redo of our systems it is a massive overhaul. The hope is that 5G is the final frontier. Once the new hardware is in place, 5G will be all about software updates. It will be a much more flexibile solution. It seems to me to be similar to Elon Musk’s Tesla car system, where updates are automatically downloaded to the cars. As updates are needed to the 5G network they will be software updates to be downloaded rather than a new infrastructure buildout.
While this technology implementation is still a ways off, it will be important to watch how it might change the fortunes of existing companies focused on current technology and those that are embracing the coming change. Similar to the changes to retailers’ fortunes as E-commerce changed the landscape of purchases, 5G has the potential to be a game-changer. Is your portfolio ready for 5G?
U.S. DOLLAR UPDATE
At the beginning of this year I was hard pressed to find a U.S. bank strategist who thought the dollar would be weaker in 2017. All the “fundamentals” pointed to s stronger dollar. The Fed was going to raise interest rates making the dollar more desirable. President Trumps economic policies were to favor U.S. based companies over foreign ones and the dollar was near its highs. Dollar debts by foreign countries would have to be repaid, resulting in higher demand for U.S. dollars. Ah how times have changed.
Seven months into the year, the tune of these strategists has completely changed. All kinds of fundamental excuses are being bantered about as the dollar has sold off virtually all year. Could it be that “fundamentals” don’t actually drive the currency markets? Could it be that strategists just extrapolate the current trend and find recent “news” to support their thesis? I don’t know but that seems more plausible. Here is an updated chart of the dollar’s range over the past two years.
In my opinion, nothing has changed on the U.S. dollar trade as of yet, but the decline this year has been a nice tailwind for companies selling goods overseas and for commodities such as copper, gold and other industrial metals. As long as the dollar stays within this channel that has lasted since late 2014 there is no action to take. However, a breakout one way or the other could be a major signal to U.S. based investors. In general, companies want a stable currency. A significantly strengthening currency is generally not good for risk based assets, while a declining currency isn’t good for the purchasing power of Americans but is generally a positive for risky assets. The current oversold nature of the dollar as is shown by the momentum on both the top and bottom of the chart coincides with what could be a good trade set-up in the dollar.
Be aware of your portfolio risk. We cannot predict what will happen or when….but we can prepare. The best football teams often have a great defense. Portfolio management starts with risk management. Be careful of getting too far out over your proverbial skis. Look for opportunity and stay nimble. This is going to get interesting.
If you haven’t followed me on LinkedIn make sure to connect with me. Since the beginning of the year, I have been a contributor to many major investment publications and it has been great getting to know some of the writers.
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- Rather than trying to “beat the market”, focus on beating inflation and the rate on cash. Plan for safety and liquidity while seeking positive returns.
- Equity valuations are very rich but masked due to the distortion of the Treasury curve. Volatility is returning to the markets and I think long/short managers are best positioned to capture this volatility by owning companies with strong businesses, barriers to entry, and good valuations and selling short weaker companies with high debt loads that have risen sharply with the broad market rally. I think this strategy of hedged equity may have the potential to produce attractive risk-adjusted returns if and when investors begin to question the valuations of companies. Stock investing involves risk including loss of principal. No strategy ensures success or protects against a loss. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor.
- Monsoon country investments. Attempting to take advantage of demographic, educational and investment possibilities in the countries surrounding the old spice routes of the Indian Ocean. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
- A potential U.S. infrastructure upgrade cycle may be around the corner. Moving from our current grade of D+ to B would require an investment of $3.6 trillion by 2020.
- Supply problems remain high across the energy asset class. While there isn’t a current shortage of energy on the planet, it is taking more and more energy and capital to discover, drill, transport and refine it. Long term Demand should continue to grow globally, particularly in China, India, and other developing countries.
- Potential food shortages due to inclement weather and higher demand from the emerging Asian middle class could result in a boon to agricultural land and potash fertilizer companies. International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
- The rise of E-Commerce has coincided with an increased desire for efficient warehouse distribution real estate. As e-commerce moves toward even faster delivery, positioning of distribution becomes even more important.
- Precious metals mining companies have been extremely beaten down over the past four years but are showing signs of life. Mining is an industry that spans hundreds of years. Companies that mine for commodities are often highly cyclical, meaning they have sustained moves both up and down. When investing in the mining space it is important to be a contrarian. Ideally, you would want to accumulate miners when sentiment is poor around them and sell them when sentiment is positive. Historically this has been a good strategy.
No strategy ensures success or protects against a loss.
Colin B. Exelby
Celestial Wealth Management
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- The fast pricing swings in commodities and currencies may result in significant volatility in an investor's holdings.
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