Monetizing Events

Total nonfarm payroll employment rose by 253,000 in April

February was revised down by 78,000, from +326,000 to +248,000 (-24%)

March was revised down by 71,000, from +236,000 to +165,000 (-30%)

 The broad indexes showed welcome relief this past week and while much can be attributed to the Fed increase in interest rates it was the stronger than expected unemployment data that triggered a rebound in stock prices at the end of the week. This outcome for the week was not because of the strong growth in payrolls, but rather the revisions made to the previous two months, signaling that job growth isn’t as strong as it appears. The suggestion that the Fed needs to continue to raise rates is also, in my opinion, not without merit. Last week I drew attention to my opinion that the markets are too efficient to be predictable, and that’s simply because most predictions are built in hindsight, always obvious after the fact, as opposed to unpredictive before that fact. That’s why I choose to state, in my opinion, because unlike a casual belief, it’s my opinion, therefore, I own it. So, I’ve looked at hindsight, not without some skepticism, and concluded that whatever the future holds for employment payroll growth, I prefer to focus less on what hindsight tells me and more on what the present is telling me, I focus on events. What are events?

 There’s been plentiful discussion on AI, a little less, but still ample, on robotics, electric vehicles, have I missed anything that aren’t real events? Does the demand of markets provide predictable consideration or is it more of taking advantage of an event in process? Sometimes tracking an event leads to an outcome that is challenging. For example, AI is a worthwhile investment from the software to the hardware, but what about the applications? Healthcare companies are using AI to accompany vascular related blood tests with a second diagnostic opinion. In the realm of electric vehicles, AI is being used to introduce the efficient management needed for autonomous driving. Robotics, currently filling positions in warehouses, all the way to hospital operating rooms. These are some of the applications that in my opinion have future potential, and present application supports that.

Other events, right or wrong, I’ve been favoring the energy sector. Not just renewables, we have plenty of exposure to that, through energy storage and more commercial renewables such as Hydrogen fuels. But the importance of companies engaged in production and distribution of fossil fuels is also in my focus. Not because of the current platform, but where that platform is going, what event has been triggered. The revival of liquid natural gas (LNG) has met the demand of the global market, has been cleaned up to produce less than half the carbon of oil, all easily captured and stored for other industrial uses.  Oil companies have been pandering to an overly idealistic vision, in my opinion, suggesting their commitment to a future of safe energy, but are actually doing little in response. Except a few that are investing in the future of nuclear energy, such as Chevron (CVX), thanks to the introduction of nuclear fusion, a new technology, not to be confused with historically unclean nuclear fission, to fully meet unlimited renewable demands. Still too early to go all in, since most of the companies perfecting the process are private. But definitely an event space I’ll be watching.

 My ambition is to keep looking at technology, keep following the claims of change, and keep focused on interpreting the outcome of currently proven innovations as opposed to predicting the future of old ideas. Especially in this day and age, when the politization of the debt ceiling brews, the threats of nuclear war, the fear mongering over claims of a coming banking crisis.  By the way, I’ll cover the finance sector at another time, definitely a lot of potential events there, but for now too much from unpredictable distractions such as those external events just mentioned.   

ESG and Me

    Everything is inflated these days, food, energy, technology, pharmaceuticals and best not to forget, egos and other desperate drives for mental pleasure. I bring this up, because in my study of behavioral finance over the past two decades the focus has been less on popular culture as an industry, but a conduit for industries that feed it to monetize. A good example is the pandemic driven focus of the financial industry, and others, to embrace a future where investment will focus on ESG (Environmental, Social, and Governance) analysis. However, the one drawback to this approach, in my opinion, is that the analysis of ESG is non-financial, and hence a lot of stocks and especially ETF’s have both soared and bared the brunt of that fact.

  I don’t want to suggest that ESG isn’t important. For many years the investment industry has rewarded companies that had CEOs, hired for the sole purpose of breaking up a company, selling its remaining parts while also announcing significant layoffs. Albert Dunlap was the most revered, even happily referred to as “Chainsaw Al” because of his particularly misguided passions.  And speaking of layoffs, there was a time when, in general, a company with market challenges would see their stock rewarded when 15% of the workforce was laid off, solely to improve the balance sheet. Now fast forward to last year’s pandemic when companies within the Fortune 500 had to layoff millions of employees in the face of a crashing economy, many smaller businesses serving the quarantined consumer had only a little time before closing was the only option. The changes and responses on the back of something other than profit taught the business community that employees are more than just a number on a balance sheet, and the communities are more than just a piece of land to build office space. In short, as the technology industry saved the day with massive hirings, the healthcare industries and their employees moved with unparalleled speed to find a vaccine, even the government came through with a package aimed at stimulating the economy by sending money to the unemployed and struggling businesses. And although the government could easily be accused of seeing people as nothing more than numbers, or votes, the impact on the investing community has been a huge influence on investing patterns that exist through today. Last Friday was the big day in the labor markets and the follow through in the capital markets further serves as a welcome reminder that the reopening of the economy is inevitable, variant or not.

  So, the new platform for analysis, which has been mine for some time, is including the governance of the company’s management and social values of the companies’ responsibilities and products. Unfortunately, much has to be done to guide our focus on what the political and social media influence is on what constitutes adequate governance. Something other than the usual, such as what products are accepted in typical fashion of appeasing the few at the expense of the many.  And most of all recognizing genuine corporate actions of setting targets for reductions in carbon emissions, investing resources to develop new products, and choosing suppliers that are better prepared for the transition to a low (not zero)-carbon economy, over those companies and social institutions that are simply pandering to the narrative. The challenge theses days is not to cease analyzing both, but to take the lead away from the Algochums that can exploit volatility for only so long until professionals realize it’s shortcoming on genuine fundamentals, genuine ESG ambitions, and what the presence of genuine skepticism can bring to finding a good investment with a great future. 

Literally or Seriously

“I still think cash is trash”

- Ray Dalio

I love listening to successful investors and this influential one in particular made the statement that cash is trash in 2020, a hot comment that was taken out of context and then picked up by more than a few pundits. First of all, I don’t believe cash is trash, but it can be a distraction and any distraction is the primary nemesis of the investor. When it comes to endless distractions, will the economy open or not open, does the drug work or not work, will the President say foolish things or will the endless debate over the severity of circumstances, continue to be ignored. I have a simple trick I learned when I was the age of a millennial. In a world pumped each day with hyperbolic claims and ingratiating displays in everything from technology to art I’ve found it served me well to take it all in seriously, but not literally. In the capital markets learning to navigate the constant barrage of distraction is to differentiate what not to take literally, what stimulus, drug trials and Fed activity will contribute to the future, and what to take seriously, that something is being done to return to normalcy. Translation, caution might be warranted, that’s why we keep cash while we remain involved.

Markets

This week was expected to be filled with earnings reports. So far, the 1st Quarter releases have been mixed, and as expected some releases were decent but widely void of guidance of where earnings are expected to be in three months when they report for the 2nd Quarter. And while the market has been doing well on the back of companies expected to perform well because of, or in spite of, the virus, it was companies such as Pepsi (PEP) that produced better earnings that saw its stock price rise while those companies that produced weaker earnings than expected saw their prices diverge. Two examples was United Parcel Service (UPS) saw a price decline while Alphabet (GOOGL) saw their stock price go up. This is a phenomenon that I think will continually favor the technology companies that have the capital to withstand whatever the length or breath of the economic outcome will be. I’m confident both companies will see improved earnings over time. Another push for the rise in the broad indexes this week was the release of the favorable outcome of studies by Gilead (GILD) regarding their drug Remdesivir. Interesting as lit was only last week that concerns were raised by a study of the same drug in China. So, overall, the market was looking for good news and got some. 

Economics

Today the Federal Reserve Board voted to leaving interest rates alone. Not surprising since the only rate they influence, the Fed Funds Rate, is already at .25%, leaving little room to do anything. Chairman Powel’s speech was filled with data about what the Fed has done and what remains at its disposal. He also stated the public health crisis still posed considerable risks to the economy over the medium term. This is an interesting comment in that it is a more cautious statement than provided at the last Fed meeting and it appears to accept that the economy will reopen before the evidence of economic revitalization will be released. On the same day, the 1st Quarter estimated GDP growth was -4.8% at an annual rate. The biggest drags on growth were consumer spending, business investment and commercial construction. However net exports were uncharacteristically positive as was the home building sector, the latter also a contributor to this week’s strong market. In total, predictions of the future of the economy are going to change from month to month while the market is ending the day having recovered nearly 60% of the late March low. No distraction there?

In Closing

An error too many investors make is perseverating over a dismal stock investment or gloating over a winning decision. The solution is easy, sell both. If one looks at cash as an investment rather than a defense against shouts of the coming end of the stock market, tracking performance along with a natural inclination to always look for better investments will steer the investor to tactically utilize a bed of cash rather than simply sleep on it.

Is It Ever Different This Time

“If you walk around with an umbrella all the time, sooner or later it’s gonna rain”

- Me in response to economists who are perpetually negative

There is a common notion among the pundits and financial elite, that they know better. Whether from experience or education the passion for the truth is frequently hindered by the conclusion on what the truth is, or at least is supposed to look like. This has been the status quo since the beginning of the capital market exchanges and it has conditioned the environment for one outcome, people are either bullish or bearish. And just like politics, many have come to simply rest on their choice based on past successes. And that is how the narrative is spreading now, because the markets have recovered from every major financial and economic calamity since the depression, is why many investors never veer from perpetual optimism. And it is worth noting the saying, it is never different this time around. Maybe not yet.

Markets
The week began with a collapse in oil. Oil is a commodity, just as copper and other metals, and everything in between from textiles to food products. They all have been adapted to the futures market. The futures market is an exchange located in Chicago designed around contracts that represent an agreement to buy a specified amount of a commodity or financial product at a specified point in the future. The primary purpose was intended to hedge risk in rapidly expanding industrializing world. Today, it is the playground of international speculators with no intent of taking delivery (where would you put a barrel of oil?) but to ring the cash register, reckless of the outcome to neither an industry nor an economy. So, as the broad indexes finished the week continuing their primary recovery from the March lows nearly half of the entire move, oil presented an extra push after opening the week in negative territory. In my opinion, price activity appears hesitant, with only each day’s earnings results providing coverage. For now, the strategy of participation and patience is keeping accounts involved without hindrance of the ample cash available for opportunity.

Economies
Unemployment Claims increased by 4.4million, Existing Home and Single Family Home Sales dropped -8.5% and -15.4% respectively, Orders For Durable Goods declined -14.4%, Retail Sales declined -8.7% in March alone and it goes on and on. The reason I bring this up is because with each passing week the economic damage wrought by the virus becomes more evident with each published set of data. And with nearly $4 Trillion dollars of stimulus signed off as recently as today it’s important to remember that in addition to the unemployed and underemployed in the country, large companies, small companies, schools, hospitals, religious and non-profit organizations and even state and municipal governments are struggling to remain financially viable. To top it off today the NY Fed released a statement projecting a -.40% contraction to first quarter GDP and an updated projected contraction of -7.79% GDP for the second quarter. That it feels like a surreal recession that easily can make one anxious blurs as to how we are going to get out from under its weighty uncertainty. Well, the markets are telling us we will.

External Events
Well if I did not say it, but the price of oil should stay low. Consider that the level of demand grows into tangible energy renewables, such as electric automobiles, and the increasing use of solar, wind, nuclear and geothermal technologies, all focused on reinventing the existing electric grid. And what about the companies that will see value in offsite employment. New York City which boasts per sq. prices in Midtown Manhattan listed on Zillow (ZG) at nearly $4,000 might very well see a contributor in preserving the long term management of a company’s balance sheet. Entertainment, Sports, and other industries that consume enormous costs on behalf of the spectator, who may or may not come back in droves is a potential dilemma. Personally, I am looking forward to watching baseball even when it begins its season in empty stadiums. I can understand the optimism that is driving the markets right now, even as I’m a little skeptical of it at the same time. It all points to a world in change, a lot to get through, but change does not care. It never has.

Analysis is Not Interpretation

Bureau of Labor Statement on the Employment Situation

Nonfarm payroll employment rose by 273,000 in February, and

the unemployment rate was little changed at 3.5 percent.

Incorporating revisions for December and January, which

increased payroll employment by 85,000, monthly job gains have

averaged 243,000 over the past 3 months

Good news, in my opinion any job growth over zero is good news and over 200K is very good news. That said, this particular employment report is as of a date just before the general public took containing the newly discovered coronavirus into their own hands. In that time a number of companies beginning with United Airlines (UAL) announced a temporary halt to new hires. No news has emerged of companies laying off employees with the exception of industries, such as manufacturing and energy, that have been cutting back for longer than our current situation has been in the news. This all points to the likelihood that Nonfarm Payrolls may in fact moderate over the next few months, but what about the economy?

The Markets

In spite of a growing state of oversold technical indicators the broad indexes continued to move lower on the back of relentless uncertainty regarding the coronavirus. Although there was a brief respite when it become more likely that a less disruptive candidate may run against the current president, the gains were given up quickly by the end of the day, but not all of the recent gains were erased. This is important to note, because the amount of noise surrounding the challenge of battling the coronavirus, besides being swamped with so much contradiction, is covering up an important fact. Yes, the Dow Index, the S&P500 Index and the Nasdaq Index have all declined nearly 14%, but yes, they were also up 3.6%, 5.04% and 9.65% respectively for 2020. That was before the outbreak of the virus which kept delivering contradiction after contradiction from the thinly veiled announcements released by the Chinese’s government to including tying the hands of the World Health Organization from any onsite investigation. The result, people started to panic, egged on by the media, by the election process and absorbed by the markets overbought to the point of reckless speculation and recent recollection, mostly from those over 40, that the whole mess smelled like the financial crisis of 2008. By the end of this week, nothing has changed, and while this isn’t a financial crisis, how much of a health crisis is still unknown. Buying value, managing risk and maintaining ample cash remains the best strategy for now.

The Economy

The important take away of the Fed decision to lower rates early in the week was that it was done more for insurance than for any clear indication of economic slowdown. While most market participants, including myself, believe moderation in economic activity is inevitable, a resulting recession is less so. This is because of two potential outcomes. The first is the possibility of there being a discovery of a treatment for coronavirus patients, and the second because this slowdown could vey well give the economy a much needed pause before events begin to show more clarity and thereby present the kind of economic lift often seen after blistering hurricanes and other natural disasters that cities and states often find a resurgence in capital and energy to rebuild. As far as interest rates go the drop in mortgage rates is likely to complement the stable rise in new home buying around the country witnessed for the last few months. And the potential for finding within the challenge of overreliance on Chinese exported health products a reason to reconsider moving some of those non domestic production facilities back to stateside. In all, the economy still remains on track, but with uncertainties to remain cautious of.

External Events

Coming into today a question was posed as to the severity of the current market collapse. I mentioned that no such collapse had taken place, at least compared to the corrections of over 20% in 2016 and 2018, and that what did collapse is the civility of a typical market correction. In short, the coronavirus introduced a unique uncertainly and the current electoral process carried its own messy baggage, and instead of watching corporate fundamentals or economic indicators, such as todays unemployment data, endless interpretation is targeted at the very situations that have no analytical foundation, or at least not yet. Hence our newfound community of algorithms have protocols written around interpretation of events with the goal to outperform human analysis, and in the end offer no better result than reckless volatility. And the current environment feels a lot worse than it is compared to a handful of challenging corrections the broad indexes have experienced over the last ten years. That’s not an invitation to not be alert, the opportunities are comingled with said challenges and for now buying, and selling brings welcome value into the accounts and relegate profits and error to the cash bin. Always leaving extra cash, for another day, and another day is fact we can count on without interpretation.

Hedging Human Risk

People invest in their job, their careers, their businesses, whatever it takes to meet the costs of survival while at the same time most invest in their passions as well. These passions are familiar and include relationships, children, sports, cooking, music and a host of hobbies that reflect different outcomes to our different social moods but all exist for the same purpose, to hedge our risks. The point is our lives are the constant management of what we’ve chosen to personally organically invest in so why shouldn’t our financial based investments be managed the same way? Who says they aren’t?

The Beta Factor

For those familiar with the term Beta*, it is basically a measure of how a company’s stock in the S&P 500 Index will trade against the S&P 500 Index as a whole. Simply put, beta measures the expected volatility of a given stock in comparison to its index. In the realm of the human condition we sometimes measure volatility as unruliness, and I see this in part stemming from the tremendous uncertainty we face in our lives. Granted even with the mitigating effects of wealth there is a lot we can’t control in spite of the intellectual army of motivators that tells us differently. I bring this up because from a standpoint of uncertainty the markets are in the same proximity to solutions. In short, we’re all being beta tested. But beta in my world also refers to risk and where risk can be measured, in our lives as in the markets, the outcome can be better visualized, if not reached with greater, probability. This is not to suggest that beta alone predicts the future, only to say that beta influences our social mood which in my opinion is a much better measure of whatever the future holds. Our human asset allocation defines our aggregate social mood and in turn our markets respond.

The Financial Factor

So, our jobs may present a degree of risk that our love of, say, sports, helps to relieve, but one person may view sports as an unsafe space and prefers to couch binge-watch videos. In investment management the challenge is exactly the same, some investments, such as Tesla (TSLA) has influenced many a social mood, but so has Apple (AAPL). Which do you think is a safer investment? In choosing the proper investment once can consider putting more into one over the other and thereby affecting the combined risk. The basis for investing and living this way, is in my opinion, the challenge of managing uncertainty.

The Mood Factor

In his writings on socioeconomics, Robert Prechter of Elliot Wave fame, long ago challenged the conventional wisdom of evaluating the markets from past data. Instead of the obvious lapses in predictive accuracy, Socionomics** focused, and still does, instead on the cultural and social environment and it’s influence on the overall social mood. A perfect example was the introduction of the cellphone, but so to was the introduction of the mini skirt. And in each of these instances there is much to invest in, through time and money, with the outcome filling the same void, namely a more profitable (fulfilling) future. It is for this reason that I approach research and analysis from the standpoint that not even your friendly neighborhood algorithm can predict the future of the stock market with any semblance of accuracy without consideration of understanding the current social mood. This is AI’s biggest hurdle.

The Interesting Factor

Of the interesting factors that fuel our social moods which in turn impact our markets and the world around us is the presence of a virtual tsunami of emotion that consumes so many of us. Much of it technology driven much of it also permeates our media, our institutions and our lives. But as with most tsunamis, they create more false and negative outcomes. Because of this tide of distraction our industry is slow to distinguish itself in the 21^st century invitations to Socionomic research and Thematic analysis. In fact, I see the problem with almost all financial, technological and economic predictions is that they are based upon the linear extrapolation of past trends into the future. Some might say present trend quantification gives tech an edge, I say, now, is already the past.

The importance of managing the investments and thereby the expectations of clients and participants is crucial in learning what the catalysts of those expectations are. I believe that understanding how humans, starting with myself, hedge uncertainty (risk) is the key to more probable predictions of outcome. Dependence on hindsight and causality can be like a game of telephone, and we know how that works out.