In November, the Dow Jones Industrial Average rose .2%, the S&P 500 was flat, and the NASDAQ composite increased .8%. The United States economy continues to grow at an annual rate in the range of one to three percent with slight variations in quarterly fluctuations. Over the last few weeks, third quarter GDP was revised upwards to 2.1% (from 1.5%). Real personal consumption was 3.0% (revised down from 3.2%). As Janet Yellen and the Federal Reserve Board prepare to raise interest rates for the first time in over half a century, the central question investors are contemplating is what will the effect be on both markets and the domestic economy?
For most investors, including myself, it is surprising the low interest rate environment, in place for so long, has not led to a dramatic improvement in consumer spending. As employment figures have slowly ticked higher, the combination of low energy prices and cheap borrowing costs have helped consumers cut personal debt totals. As for the urge to splurge, uh, well, not so much. Going into the last month of the year, corporate profits remain robust, but will decline for the first time in several years when compared to the previous annul. Much of the decline stems from the chopping in end prices across the entire commodity complex. Most of these products sit at multi-year lows, so the expectation across these industries, along with plenty of others, is for continued consolidation, and probably in a major way. It would be consistent with investments banks benefiting from a record year for merger and acquisition activity. Other industries which will probably participate include health care, pharmaceuticals and biotechnology, and the financial services arena. With interest rates still at rock bottom levels, balance sheets flush, plenty of borrowing capacity, and ever higher regulatory burdens from a populist administrative posture, expect more of the same in 2016.
From a valuation and investment perspective, paying extra high prices for credit still seems foolish. With over ten thousand choices in equities, plenty of opportunities remain in
what has been an ocean of meager performance in 2015. What you buy and what price you buy it at, as always, is the prime question.
As has been the case for the entire year, capital flows continue to seek refuge in areas where central banks are keeping monetary policy loose. One only has to peruse the performance of countries across the pond in the European Union to see evidence of the strategy. The returns have been strong, and in some cases, spectacular. For example, Hungary's 42.6% year to date posting stands out, as does Denmark's 32.4% achievement. More typical of the continent would be Belgium (+14.2%), France (+15.4%), Germany (+15.2%), Italy (+18.7%), and Portugal (+11.7%).
Conversely, if one turns to Asia, Japan leads the way, up 13.9%, along with New Zealand (+9.6%). China (-8.5%), Indonesia (-12.7%), (Singapore -15.0%), Taiwan (-9.8%), and Thailand (-9.0%) all continue to struggle. Looking ahead, it will be interesting to see what are the ramifications of central banking policies which diverge (U.S. vs Europe/Japan/China) and whether capital continues to flow towards easing.
Y H & C Investments: Sector Analysis: Industry Analysis Shows These Categories- Good, Bad, and Tossups! (All country index data is provided by the market data section of the Wall St Journal, November 30, 2015. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
Just like when you are a student and you get letter grades for academic achievement (or lack thereof), investors evaluate industry groups based on capital appreciation versus standard index results. In order to keep ratings simple, let's use good for acceptable returns, bad for below index, and tossups as anything in between (for better or worse). In 2015, areas which have been good include Consumers ((+6.41%), Health Care (+3.75%), Financials (+.50%), and Defense (+14.77%).
Places to avoid would be Oil and Gas (-15.25%), Basic Materials (-10.36%), Utilities (-9.49%), and Real Estate (-2.27%). The tossups category is broad but throw in Media (+.98%), Telecom (-3.0%), Technology (+5.2%), and Aerospace (-2.68%). Keep in mind individual securities and sub sectors will have different outcomes than the broader industry group. They will depend on factors specific to a company or grouping. Also, a well structured portfolio will include industry groups or specific enterprises which will not have positive results each year.
Y H & C Investments: The Art of Contrarian Thinking: When Looking For Value, Think Busted IPO's And Forget the Fresh Stuff! (Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
Investment banks love to hype the latest and greatest. You know the old adage, 'Strike While the Iron Is Hot.' Well, it also applies to capital market transactions. Any hot trend in the world, but especially in business, is potentially a way to opportunistically capitalize on popularity. As a buyer of pieces of businesses, freshly minted initial public offerings historically have not proven assets to own for a long period of time. A prime reason is because the high price of the stock means buyers receive very little for their purchase.
However, it is possible to advantageously benefit from IPOs if one is patient. When one waits a year after a company goes public, a great percentage of the time you can buy these public company's at far cheaper prices than when they first become available. There are actually different markets as the main market is the secondary market, versus the controlled process of an IPO. Here are a few recent examples where this was the case- Facebook (O:FB), Twitter (N:TWTR), Wingstop (O:WING), GoPro (O:GPRO), Noodles (O:NDLS), and The Container Store (N:TCS), among others. There are several factors as to why prices recede over time, but one main one is insider lockups on options and founder stock, as well as investment banking syndicate restrictions all favor the patient buyer. After the selling is over, you may find a company you really wanted at a far better price.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.