U.S. Economic & Financial Markets Outlook- Third Quarter GDP Registers 2.9% As All Eyes Focus On the Election! (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)
In October, the Dow Jones Industrial Average fell .61%, the S&P 500 dropped 2.06%, and the NASDAQ retreated 2.11%. Third quarter U.S. GDP growth came in at 2.9%, nearly double the 1.5% pace during the second quarter. As Thanksgiving and the all important shopping season approaches, it appears the U.S. economy keeps chugging along at the slow growth rate it stalled out at over the last five years. The performance of most sectors remains pretty much the status quo with autos, housing, lodging, travel, and health care in solid shape. Areas lagging include energy, retail, mall based real estate, and some areas of technology. Financial services has been helped by the red hot merger and acquisition area, but still burdened by a flat yield curve which crimps lending margins. Additionally, uncertainty about the ultimate outcome of the highly contentious Presidential and Congressional elections are thought to have a depressing impact on consumer confidence and spending patterns.
With respect to corporate earnings, banks are in very sound shape with capital ratios high and fixed income, currency, and trading results showing much improvement. The technology sector is being led by the semiconductor segment, where large deals have broken out in a variety of different sub sectors. Energy remains burdened with too much inventory, now crimping refining margins in addition to inflicting pain on exploration and production realizations. Fierce competition and supply from OPEC, led by the Saudis, Iran, and Iraq, certainly is not helping, either. Other commodity markets continue to remain in deep recovery mode, and caution remains the dominant approach across the corporate landscape. A final result regarding the election will be with us in a few days, and at that point, maybe market psychology will change. Of course, what the result is remains the key question for all involved, including those of us with their capital on the line.
Global Economic & Financial Markets Outlook- Non China Asia Keeps Humming As Europe Struggles, South America Majors Rock On! (All country index data provided by the market data section of the Wall St Journal, October 31, 2016.)
As the fiscal year draws ever closer to years end, the major themes of global stock index performance continue on the same course. Mainland China has been difficult for investors, as has Japan. Both major country indexes have dropped around ten percent (-7.5% for Japan, -12.3% for Shanghai). On the brighter side, strong outcomes in Thailand (+16.0%), Indonesia (+17.8%), Taiwan (+11.6%), and India (+7.8%) shows there is broader strength in the global environment, or, at the very least, capital flows find plenty of countries attractive for investment other than the traditional heavyweights of Asia.
Consistent with this idea, but in a different hemisphere, South America giants Brazil and Argentina have enjoyed magnificent years (+53.1% and 48%), while Chile (+13.5%) and Mexico have also been strong. If you want to draw conclusions about the effectiveness of the global monetary policy of negative interest rates, note the poor showings of Europe (-6 to -8%), Japan, and Switzerland (-10.30%). It might lead policy makers to reconsider the viability of the current unconventional approach toward the lack of global demand.
Y H & C Investments: Sector Analysis: Defense Still Rules the Day As Mining, Telecoms, Utilities, and Yes, Energy, Stay Solid! !(All country index data is provided by the market data section of the Wall St Journal, October 31, 2016. 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)
The persistent defensive mindset of U.S. investors continues to remain in place as the new calendar year slowly approaches. With the all important 2016 elections one week away, the bunker mentality persists as the best performing sectors remain in mining (+78%), gold (+93%), and other precious metals (+52.04%). Taking a strong second includes mobile telecommunications (+20.93%), followed by utilities and energy (both are up 12%). Pipelines have seen a strong recovery in 2016 (+42%) after a dismal 2015. On the more aggressive side of the investment world, technology has seen plenty of interest (+10.86%) with the semiconductor chip area leading the way (+17.38%), Peering into 2017, the major question to consider is will a definite outcome to the election bring a more expansionary approach from capital allocators, or does the buyer beware mentality become a more permanent feature of the investment landscape?
Y H & C Investments: The Art of Contrarian Thinking: Good Investors Use Currency Fluctuations As Opportunities!
(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)
Traveling to foreign countries is always an interesting experience. Aside from dealing with the long airport lines and full cavity body searches, many people find the journey of going to a far away land as incredibly exciting. When you go to these far away places, one of the routines you become accustomed to is exchanging U.S dollars for the local currency. Many people get surprised by the different amounts of local money they have once their dollars are turned in. When the dollar is strong, U.S citizens benefit by having more foreign capital to use and vice verse when the dollar is weak. Conversely, foreign travelers love to come to the United States when their currencies are strong relative to the U.S. dollar. Over the last few years, when the dollar was very weak, many foreigners came here not just to splurge on vacations, but to buy prime real estate locations in large urban cities where good situations are difficult to find. The same phenomenon has been taking place in Canada, specifically Toronto and Vancouver, as the Canadian dollar (loonie and toonie) fell versus many major international currencies, especially the Chinese Yuan and Renmimbi. Clearly, fluctuating global currencies are a constant in volatile international capital markets. Consequently, there can be plenty of ways to capitalize on the wide swings of currencies. Let’s take a look at a few examples to see what is clear evidence of this strategy.
In the latter part of 2015, commodity prices swung to a generational low and the currencies of any country which is dependent on these commodities saw their currencies also hit generational lows. The most foremost example of this was Brazil. At the time, it’s South American neighbor, Argentina, saw a change in their political leadership which changed the economic approach toward a more market friendly administration. Brazil’s currency, the Real, dropped to a low of 4.0938 to a dollar on January 15 of 2016, right about the time our stock markets were at the bottom of their correction at the start of the year. The currency has since rebounded to trade at 3.1563 to the dollar, about a 20% gain. Great, you say, so how could you have benefited? If you want exposure but don’t believe in individual stock picking, you could have bought the Brazilian Index (Bovespa) through an ETF at Vanguard, Blackrock (NYSE:BLK), or Fidelity. Your return to date would be 47.3%, not accounting for currency translation (of course, right?) You also could buy the Index and hedge the currency risk of the Real as well. Just owning the index leaves you exposed to the downside of a Real swoon again, but you also benefit from Real appreciation, which you can see from the return. If you believe in picking individual stocks, the obvious candidate would have been oil giant Petrobras (PBR-A). The trade would have been a big winner, like the ETF, as it currently trades at $11.37, up from just $3.30 at the start of the year. Naturally, this seems almost too good to be true with these kinds of gains, right? Well, it should be understood a big help was a similar political event as what happened in Argentina also took place in Brazil, with President Dina Rousseff getting impeached. The dramatic change in more market friendly leaders helped stoke the fire of investors looking for outsized returns. It is not something one should rely on as an investment strategy.
A second example of taking advantage of currency weakness has been similar softness in other currencies in North America, like the Mexican Peso and Canadian Loonie. Those stock indexes, the IPC and the S&P/TSX Composite, are ahead by 12.3% and 14.1% respectively. As was the case with Brazil, you can buy these indexes using exchange traded funds, both unhedged and hedged. More representative of the difficulty of investing in individual stocks of foreign countries, consider the stock of Blackberry (TO:BB), BBRY. It began the year at over $9 per share, and currently sells for $7.37. The lesson is the operational results of any individual company are usually going to take far more importance than the currency fluctuation, with a few very rare cases like when the Russian Ruble dropped nearly 40% in 2015 (yes it has rebounded). Maybe the most prominent example of currency weakness in a country, which still festers today, is the lingering drip of the pound lower. If you recall back in June, the Brexit vote immediately chopped nearly 10% off the value and rocked the FTSE market lower. A repercussion of Pound weakness has been improved results from luxury giants whose customers find cheaper luxury items like high end watches, purses, bags, shoes, and clothing far more affordable.
If you are looking for other safer ways to benefit from currency volatility, consider large on line travel bonkers Expedia (NASDAQ:EXPE) and Priceline (Y H & C Investments owns EXPE) as global travelers will constantly seek to use attractive exchange rates to their benefit. Using the same premise, you can always buy the large money center banks like Citigroup Inc (NYSE:C), Barclays PLC (NYSE:BCS), and JP Morgan Chase (NYSE:JPM). These institutions make markets in foreign exchange and have many profitable activities which revolve around exchange rate fluctuation. Don’t forget to pay attention to a specific business which may be doing extremely well when you visit your exotic location. It may be part of a publicly traded company you can buy on an exchange in the U.S. or as part of an ETF.
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