Long Term Retirement Money and Fledgling Companies

 

An article titled Why to Buy Small Cap Stocks Now by Larry Light in Forbes Magazine prompted me to get in touch with Nancy Prial, CFA, Co-CEO, and Senior Portfolio Manager at Essex Investment Management.  Ms. Prial was mentioned several times in the article and had a quote that I thought would be helpful to Channelchek readers. As co-CEO and portfolio manager of a firm that has an enviable track record of investing in publicly traded fledgling companies (many founded during economic slumps), I looked forward to seeing how she’d respond.

For background, Ms. Prial told this to Forbes while discussing the market’s focus and where it could pay attention:

“Investors have chosen to shelter in larger, well-recognized
brand name companies with perceived safety and thus shunned stocks that were
under-followed, under-owned, under-appreciated.” – Nancy Prial, CFA

Channelchek asked this: “What stipulations would you have for an investor buying small or even microcap stocks in their individual retirement account.”

Nancy Prial’s response spoke from experience and is well worth reading for investors with longer-term assets such as those considered retirement savings in qualified money like a Roth or Traditional IRA.

 

Nancy Prial, CFA, described the benefits and pitfalls this way:

“Savvy investors have long understood the benefits of small cap stocks. They know that an allocation to a less-efficient area of the market can improve the risk/return profile of a portfolio. The inefficiencies increase as investors move down the market cap from small into micro where large, widespread information gaps and security mispricing can be exploited to achieve alpha. However, these same idiosyncrasies that make small and microcap stocks so compelling also underscore the need for careful stock selection and in-depth research. Active management, a focus on quality of management, product, balance sheet, thoughtful execution, and a long-time horizon can be critical for success in this sector of the market.”

The Opportunity Set

• “Less coverage and information inefficiencies create opportunity for appreciation as stocks get discovered by other investors”
• “Smaller stocks have historically generated higher risk-adjusted long-term returns”
• “Smaller stocks have historically outperformed inflation and have lower correlations to large cap stocks”
• “These smaller companies can provide exposure to the newest growth industries”
• “Microcaps, in particular, tend to be under-represented in most portfolios”

Potential Pitfalls

• “Thoughtful allocation is crucial as these stocks have a greater amount of specific risk than larger cap stocks. This risk means that prudent diversification remains important as well as choosing a portfolio percentage that matches an individual’s risk tolerance”
• “Active management with particular attention to the quality of the management team is necessary. There are many concept stocks in the small and microcap universe that have never developed or sold a product. Although it may be tempting to try to get in pre-product, we believe that the success rate is higher by only investing in companies that have a product and a market and with sufficient balance sheet strength to execute on their growth plans”
• “Avoid “penny stocks” and only invest in companies that are listed on a major exchange. Companies that are only listed on the OTC markets are there for a reason and are highly speculative”
• “Be patient as it is impossible to predict when a small or microcap company will be noticed by other investors. The best approach is to find a variety of well-positioned mispriced securities and then exercise patience. Long holding periods can help maximize the power of small and micro caps to deliver exceptional returns of the long term.”

 Take-Away

Regular consumers of the research, articles, and video interviews on Channelchek understand the benefit of digging a bit deeper in search of growth companies that could be months or years away from becoming big news items with market recognition and growth.  They understand that stock message boards aren’t the ideal place to gain wisdom and understand that two good options for gaining exposure to well-researched selections are hiring a professional manager, or taking time to dig into the research, and due diligence yourself. These would be coupled with continued monitoring and patients, — AAPL and TSLA were not overnight successes, the individuals and professionals that understood those companies’ prospects back early on, were rewarded.

Time is a key ingredient in the returns of any sector achieving its expected average return above alternatives. This could make an allocation to small or microcap stocks, in retirement funds, for those that are still years from retirement prudent. 

Paul Hoffman

Managing Editor, Channelchek

More To Discover on Channelchek:

Is it Smart to Avoid Brokers that Sell Order-Flow?	Blockchain, Beverages, and Baloney

Seeking Alpha Paywall Causes Frustration	Small Cap Names in a Big Crypto Market

Special Thanks from Channelchek to Nancy Prial CFA, Essex Investment Management for her time and insight.

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Is There Opportunity in the Suez Predicament?

 

Just shy of a week after its becoming lodged in the Suez Canal, teams have made some progress on the 1,300-foot ship owned by the Taiwanese company Evergreen Marine Corp. This has brought needed hope that the busy trade route could soon reopen. Clearing the stranded ship would help take its owners out of what has been a harsh global reaction. And it’s no wonder why it has been so pointed; although the shipping industry is expected to recover from the Suez incident, shipping is considered one of the important post-pandemic recovery sectors as global commerce builds to a more normal pace. The industry had a nightmarish 2020, that was coming to an end. In fact, two weeks before the ships grounding on March 23^rd, many shipping companies began to rally, outperforming the S&P 500. They have dipped since the mishap. This dip may open an opportunity for investors that missed the initial run. 

Notable companies whose research is available here on Channelchek are Pyxis Tankers (PXS) up 5.56% over the past month. Seanergy (SHIP) is off its highs but still up 7.44%, Genco Shipping (GNK) is up 9.18% after this incident, Grindrod Shipping (GRIN) 10.44%, Euroseas (ESEA) is down from its 2021 peak on March 15th but still up a sizeable 26.69% on the month, and Eurodry’s (EDRY) ascent seems to have slowed with a current gain of 24.83% month over month.

 

 

The below info-graphic provided by Visual
Capitalist shows the disruption this temporary event has on global shipping as 12% of all physical global trade passes through the Suez Canal.

 

 

Feel free to share this information.

Questions/comments can be directed to the Channelchek Team.

 

Related Investor Information:

NobleCon17 Transportation Panel Video D	Why Oil Prices Can Continue Going Up

 

Is There Opportunity in the Suez Predicament?

 

Just shy of a week after its becoming lodged in the Suez Canal, teams have made some progress on the 1,300-foot ship owned by the Taiwanese company Evergreen Marine Corp. This has brought needed hope that the busy trade route could soon reopen. Clearing the stranded ship would help take its owners out of what has been a harsh global reaction. And it’s no wonder why it has been so pointed; although the shipping industry is expected to recover from the Suez incident, shipping is considered one of the important post-pandemic recovery sectors as global commerce builds to a more normal pace. The industry had a nightmarish 2020, that was coming to an end. In fact, two weeks before the ships grounding on March 23^rd, many shipping companies began to rally, outperforming the S&P 500. They have dipped since the mishap. This dip may open an opportunity for investors that missed the initial run. 

Notable companies whose research is available here on Channelchek are Pyxis Tankers (PXS) up 5.56% over the past month. Seanergy (SHIP) is off its highs but still up 7.44%, Genco Shipping (GNK) is up 9.18% after this incident, Grindrod Shipping (GRIN) 10.44%, Euroseas (ESEA) is down from its 2021 peak on March 15th but still up a sizeable 26.69% on the month, and Eurodry’s (EDRY) ascent seems to have slowed with a current gain of 24.83% month over month.

 

 

The below info-graphic provided by Visual
Capitalist shows the disruption this temporary event has on global shipping as 12% of all physical global trade passes through the Suez Canal.

 

 

Feel free to share this information.

Questions/comments can be directed to the Channelchek Team.

 

Related Investor Information:

NobleCon17 Transportation Panel Video D	Why Oil Prices Can Continue Going Up

 

What to Expect from the Fed in 2021 – Bottom Line

 

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for
substantial further progress to be achieved.”

The above quote, taken from yesterday’s comments by Federal Reserve Chairman Jerome Powell, may have been intended to calm fears that the Fed may be removing some of their intense market accommodation. Leading up to this meeting, there was also concerns of additional fiscal stimulus that was feared may fuel inflation pressures and a concomitant rise in rates. This would undermine a smooth recovery. The statement after the FOMC meeting went a long way in addressing those concerns.

Economics is a social science and is impacted greatly by the actions of the masses. If the masses are confident, then there is more upward economic activity.  If the masses have concerns or doubts about the future, that very pessimism could undermine what could have been greater expansion. So, the Fed in its statements is inclined to be careful and put its more optimistic face forward. This is without regard to whether the economy is floundering or overheating. Their exuding confidence that they are in the driver’s seat and their “GPS” may show a need for some rerouting, but an expected “ETA” toward recovery is better than last projected, is what can be expected from any Fed statement.

New Economic Projections by the Fed

Most of the projections toward the Fed’s targets announced yesterday (March 17, 2021) were improved over the statements given in December. They now place their median estimate for 2021 Gross Domestic Product (GDP) at 6.5%, and 3.3% for 2022. This is significantly higher than the December forecasts of 4.2% and 3.2%. The Fed sees a reduction in unemployment and forecasts that it will reach 4.5%, the prior forecast was 5%. The unemployment rate for February was 6.2% as reported by the Department of Labor.

The inflation numbers the Fed targets are not the headline CPI-U (urban consumers) that we most often see reported or even the CPI-W (urban wage earners) that is used for COLA in many retirement plans and Social Security calculations. The Fed instead reviews Personal Consumption Expenditures inflation (see link in Sources). The Fed’s preferred price-growth gauge is projected to reach 2.4% in 2021, up from the previous 1.8% estimate. They anticipate inflation will then fall to 2% in 2022 and reach 2.1% the following year. In his post-meeting remarks, Fed Chairman Powell warned that the U.S. may experience higher than 2% inflation during 2021 but that any increases would taper next year.

 

Actions the Fed
Expects to Take

The short and the long of it is the Fed is not expected to raise rates before the end of 2023. As for the details, the FOMC is targeting maximum employment and inflation at the rate of 2 percent over the longer run. Inflation has been well below the 2% target. As a policy measure to achieve a long-term 2% rate of price increase, the Fed will aim for inflation moderately above 2 percent for some time so that inflation averages 2 percent over time. The goal is for longer-term inflation to be well anchored at 2%.

The Fed expects to maintain its accommodative (easy money) monetary policies until the Inflation goals are achieved and the economy nears full employment. The target range for the federal funds rate will be held at 0 to ¼%. They expect that this is the appropriate level until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent.” 

Additionally, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month. The goal of these purchases is to support the flow of credit to households and businesses.

Take-Away

We all have a stake in the economy, investors, workers, home-buyers, business owners, retirees, everyone. Actions the Fed does and does not take impact all of our lives. The main role of the Fed is to maintain a sound banking system by using the tools of monetary policy to maintain stable prices and reach maximum employment. The two are often at odds with each other.

Actions taken during 2020 in response to a medical crisis had a severe impact on the economy, which leaves the Fed (among others) in unchartered waters. The Feds projections have improved dramatically since December and are likely to be revised again along with expected actions to achieve their goals.

As for the overall outcome of the FOMC meeting, the stock and bond markets got what they were looking for, the Fed doesn’t see inflation as a problem, and it expects it will continue its extreme accommodative stance. Home-buyers may not have to rush to beat a mortgage rate surge, business owners can feel confident that the Fed is working to improve conditions, workers can feel confident that they haven’t been forgotten, and retirees can breathe a sigh of relief that the Fed feels inflation is well under control.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Should Stock Market Investors Worry About Inflation?

How Much is a Trillion?

The Correlation Between Stocks and Unemployment

Will Janet Yellen as U.S. Treasury Secretary be Good for Investors?

 

Sources:

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210317.pdf

https://www.federalreserve.gov/newsevents/pressreleases/monetary20210317a.htm

https://www.bls.gov/web/laus/lauhsthl.htm

https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=A%20measure%20of%20the%20prices,reflecting%20changes%20in%20consumer%20behavior.

https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp?reloaded=true

 

Inflation Expectations, FOMC Meetings, and Investor Anticipation

 

The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings during the year to take the pulse of economic measures that it’s targeting and to adjust policy when necessary. The FOMC has at times added phone or in-person meetings in-between those regularly scheduled. In 2021 all eight of the meetings are held over two days. A statement is expected after each meeting from which Fed-watchers and investors pick over even the smallest word change from the previous statement to base their reaction.

FOMC Meeting

The March 16-17, 2021 FOMC meeting takes place one year after the novel coronavirus was declared a pandemic. The announcement on Wednesday is highly anticipated and has the potential to send the markets in either direction as new economic concerns over inflation and rate movements are likely to be addressed. Money managers and individuals have their ears open for any hint of inflation. An increase in inflation would cause bond investors to hold out for more yield to compensate for inflation’s erosive impact on invested balances. For the past year, the Fed has been guiding the U.S. economy through the pandemic-forced-slowdown by holding rates very low with all the old tools, and many new ones they had never used before, such as buying bond ETFs when rates rise above a certain level.

Inflation

The subject of inflation has not been the topic of investor conversation since 2018. If you recall, in the last quarter of 2018, the stock market plummeted 17%. The cause was largely investor concern that unemployment had fallen to a 49-year low, oil prices were rising, and inflation wasn’t being contained by the previous 7 bump-ups in short-term interest rates. Businesses were beginning to experience mounting pressure for higher wages which would have worked its way into prices. Not just the U.S. markets were impacted, rising U.S. Treasury rates inspired global stock market sell-offs. Rates also rose as the ten-year USTN yield increased to 3.25% during October of 2018.

Inflation and rising interest rates certainly put fixed-income investors at risk. But would it be the end of the world for domestic businesses and those that invest in them? Companies that exclusively do business in the U.S. and don’t have concerns about exchange rates and cost of materials from overseas have far less to be concerned about long-term. Businesses that export may actually increase business. Short term, the stock market could react to the unknown that any change brings, but long-term, native companies supplied by and doing business in the U.S. may have natural protection from rising prices.

Stocks

Some of us remember or have read about the inflation and the lost years of the stock market during the ’70s. The U.S. economy is very different from when we were first taken off the gold standard and OPEC began more tightly controlling oil prices. Asher Rogovy is the Chief Investment Officer at Magnifina, LLC, a New York-based investment advisor that takes a long-term view with their client’s portfolios. He explains rising inflation and equity price risk this way, “Inflation is when prices rise, and this includes asset prices. Over the long-term stock prices rise along with inflation, as do other investment assets. The key here is long-term, because inflation may cause short-term volatility in stock prices. Stock prices are sensitive to interest rates, which are affected by inflation expectations.” Rogovy further explains that this isn’t the 1970s economy, ”Anyone investing during the 1970s remembers the damage caused by the oil crisis. In this case, persistent inflation held stock prices down for a long time. However, today’s economy is structurally different. In the 1970s, many manufacturing stocks were hurt as the cost of energy rose which cut profit margins. Today’s service-based stocks are less sensitive to input prices.”

The idea that inflation leads to higher asset prices is widely held. Andrew M. Aran, Managing Partner at Regency Wealth Management out of New Jersey, agrees but says that post-pandemic may be a bit different. “A pick-up in inflation has historically been good for stock returns as growing demand bodes well for corporate sales and earnings. This time could be different as stock valuations are high, and there may be some disruptions to supply chains and labor. High valuations currently reflect both the anticipated increase in spending as the economy reverts toward normalcy and the low cost of financing. The latter is likely to rise if and when inflation rises.” Said Aran, he then concluded by also suggesting that long term, equities should eventually take their queue from small increases in inflation, “…stock price/earnings multiples may contract partly offsetting revenue growth. Supply chains may not be able to keep up with demand and delays could extend the sales cycle [reduce asset turnover] while labor may need higher wages to incentivize them to work in an environment of liberal government unemployment support. Higher corporate earnings may also give cover to increased corporate taxes in 2022 and further pressure earnings. Once markets normalize, incremental inflation should translate into higher stock prices.”

 

 

Take-Away

The Fed Chair J. Powell has as recently as a month ago reiterated his resolve to keep rates low. If inflation should incrementally tick up, the Fed is not likely to remove the proverbial “punch-bowl” before the economy has fully opened. So, the risk is inflation, without the Fed combatting the causes. Equity investors in for the long term may already be exactly where they should be in the event of rising prices. Cash would devalue and fixed income would be in a bear market with tremendous potential to harm those investors.

The March FOMC meeting will have investors of all stripes paying attention to every nuance of the post-meeting announcement. The major indices are at their all-time highs giving them a longer way to fall than ever before in history. So the market seems to be looking for causes to be concerned. Put another way, the fear of missing out (FOMO) is being tested by the fear of staying at the party too long.

The truth that can’t be denied for long-term equity investors, inflation is of small concern. It may even drive more investors out of interest-rate sensitive sectors such as real estate and bonds and into the stock market.

 

Paul Hoffman

Managing Editor, Channelchek

Channelchek Insight from the Beginnning of the Pandemic:

A Significant Indicator of the Feds Resolve

Do Market Scares Provide Uncommon Opportunity?

Climbing a Wall of Worry

What Does the Fed Purchasing ETFs Mean for Equity Investors?

 

Sources:

https://www.wsj.com/articles/global-stock-markets-dow-update-03-15-2021-11615797300

Stay up to date. Follow us:

Stay up to date. Follow us:

 

$1.9 Trillion in Terms we can Better Relate To

Whether one finds the new $1.9 Trillion Covid Relief Bill heartwarming or blood-boiling is a matter of personal philosophy. What we can all agree on related to the stimulus package, The American Rescue Plan, is that it is a lot of money – a trillion is a very big number that most of us can not even fathom.

Two Ways to
Better Comprehend a Trillion

Rather than just use the word “huge” to describe a trillion, or even $1.9 trillion, I want to put it in terms that are better understood.  Using my trusted HP 12c, I began entering the number one trillion and quickly found that my 20-year-old calculator only allowed for nine zeros — not the required 12 places after the number one. The number I tried to input was a thousand times higher.  I adapted by using 1 x 10^12.

We’ve all seen graphics with stacks of money on football fields or bills placed end to end, circling the globe, or to the moon and back; none of those measurements resonated with me. I wanted to try measurements that myself and others are more experienced with, like how long is a year, and more personal and down-to-earth such as heartbeats.

How many dollars a day is a trillion since the year One? The year 1AD was a long time ago. We’ll call it 2020 years ago because rounding down a touch barely changes the end result. Multiplying years by 365, we get 737,700.  Channelchek readers are sharp and would know this is wrong, so I went back and multiplied by 365.25 to account for leap years (which certainly existed then). So the number of days since the year one, before Jesus learned to walk, is 737,805. That’s a lot of days! The question is, how much money per day would you have to collect each day since the calendar switched from BC to AD to hit a trillion? Simple division tells us $1,355,371.68 per day, each and every day (anno domini).

That result, for my digestion, is easier to comprehend; I have a sense of how long a year is and understand millions better than trillions or even billions. Multiplying by 1.9 I learn, the amount of the current stimulus package, if paid back without interest, over 2020 years would equate to daily installments of $2,575,206.19. Wow!

A second way I looked at one trillion is how many dollars per heartbeat over a lifetime would you have to receive in order to have a trillion dollars and also $1.9 trillion. The CDC lists the average life span as 79 years (rounded up from 78.7). The average healthy heartbeat averages 70 per minute. 70 per minute is 4200 per hour, and in 24 hours, 100,800 over a day. Again allowing for leap years, 100,800 x 365.25 is 36,817,200 beats per year.

If you live for only 79 years, you will have had about 2,908,558,800 heart beats according to this math. A quick search around the medical sites tells me that our non-exact science (fuzzy math) largely agrees with theirs. Dividing one trillion into almost 3 billion heartbeats equals 343.81, or by this example, you’d have to receive $343.81 for every heartbeat from your first breath until your last to reach $1 trillion.

 

 

In stimulus package terms (*1.9), The American Rescue Plan is the same dollar amount as an individual’s lifetime of heartbeats at $653.24 per beat.

 

Take-Away

There’s a line in the movie Austin Powers where, after being frozen since the 1960s, the villain, Dr. Evil is thawed and declares he wants to hold the world ransom for “One Million Dollars.” He’s quickly reminded that $1 million is not that big of a deal anymore.  He quickly upped the number. When we hear or see something often, we begin to become numb to what it means, or in the case of large numbers, the true magnitude. Today, billionaires are the new millionaires, and a trillion doesn’t sound like much now that the US is in debt by tens-of-trillions.

Becoming grounded often means understanding what we’re actually looking at. Although the above was fun and surprising for me in some ways, I prefer to look at these large numbers, particularly as it relates to debt in this way. Suppose the full US national debt is $28 trillion while US GDP (the size of the economy) is $22 trillion. That is a debt-to-GDP ratio of 127%, which exceeds World War II levels. The trend in the US, even during the booming Trump years, was not paying down debt but increasing it. This trend is not economically sustainable.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

The Correlation Between Stocks and Unemployment

Who Gets to Participate in Private Offerings?

What is the Future of Entertainment Consumption?

Small Cap Names in a Big Crypto Market

 

Blockchain, Beverages, and Baloney

 

Blockchain is a digital distributed ledger of transactions in a decentralized database. It continuously updates digital records in real-time across a network of computers. As a means of eliminating huge amounts of record-keeping, its use is very powerful. But the word “blockchain” by itself also has power; the very word, at times has taken the lead driving stock price.  Just adding it to a company name, has in the past, attracted new investors to the company’s stock. There were times when innocent, unaware investors have been duped.

A Lesson in Blockchain Frenzy

The year was 2017. The cryptocurrency market was experiencing an amazing bull run which drove bitcoin past $20,000 for the first time (by late 2018 it fell back below $4,000). Many speculative digital coin offerings were springing up during this crypto-frenzy. A large percentage of these so-called blockchain projects were barely legitimate or outright scams.

The Long Island Iced Tea Company (OTC: LBCC) was trading at about $3 per share.  They decided to rebrand their modestly successful beverage company to perhaps take advantage of capital that was flowing into the digital asset space. The beverage maker made a simple name change to Long Branch Chain Company and had its ticker symbol adjusted from LTEA to LBCC. This move led to an almost immediate tripling of the bottled tea’s stock price.

Other than the name change, the LBCC’s blockchain strategy was never defined. Management had early on stated that it would be “shifting its primary corporate focus toward the exploration of and investment in opportunities that leverage the benefits of blockchain technology.” LBCC had also announced plans to acquire Bitcoin mining hardware. These plans were never carried out. The Nasdaq stock exchange eventually delisted the company, in part because they believed management was not being forthright with investors. This caused the stock that had at one time approached $10 to fall to $1.10 per share. The delisting pushed investors to over-the-counter desks to exchange shares.

 

 

Long Island Iced Tea Update

This past week, on February 22, almost three years after the name change, the U.S. Securities and Exchange Commission (SEC) revoked Long Blockchain’s stock registration. This revocation effectively bans or prevents public investors from trading in the company’s shares. The SEC stated that Long Island’s “blockchain business never became operational” and that the firm has failed to report on its financial results for the past 3 years.

The company is still making its beverages, primarily ready-to-drink iced tea and lemonade, under the “Long Island” brand.

Investment Lesson

Information, both trustworthy and dubious is plentiful in today’s digital communication world. We’re now aware of more options of things we can do with our money and we have more ways to investigate. Looking behind the curtain should be easier than ever. Hardly anyone makes a retail purchase like an appliance without reading reviews. Dining out at a new restaurant, for many,  involves checking to see how many stars Yelp visitors have given it.  Investing in a company is arguably more important than buying a microwave or ordering a poke bowl. Yet, credible company research is often the last place many investors turn, even though it can steer them through hype. There are layers of information from management plans, to accounting methods, to the industry as a whole that investors should, if not understand, find a source of trustworthy research.

Investors chasing companies because the crowd is or because it gives the appearance of being involved in something it isn’t can be avoided. Present-day examples of companies rebranding to attract capital is, of course, the so-called covid stocks. There are many examples of companies rebranding or getting their name viewed as a Covid Stock that probably should not be. The result is a dramatic increase in the volume of shares traded and share price. For example, Kodak (KODK) climbed 2,441% in one week last year by rebranding itself as a covid stock. It wouldn’t surprise me if begin to see the same with “green” publicly traded companies.

It’s more critical than ever to read the “reviews” and find out how many “stars” something is given and why. In the world of trading equities, this means finding company research providers of high integrity and heightened knowledge of the company.

 

 

Research, analysis, and company data are reasons why Channelchek’s usage keeps expanding. Registered users on the platform are free to explore what veteran, FINRA registered equity analysts are saying. With tens of thousands of research downloads and even more investors hearing directly from companies’ management on the YouTube channel, regular visitors to Channelchek are apt to improve their chances of being able to read the tea leaves.

Take-Away

Make it your business to know what you’re investing in and know what you own. Find sources of analysis you trust. Treat every investment with more care than a $25 Amazon purchase. Beware of artificially sweetened tea offerings. And, with the current frenzy toward ESG, be cautious, it’s not that easy being green.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Small-Cap Names in a Big Crypto Market

Managing Investment Portfolio Risk

Lithium Ion Battery Recycling Heats Up

 

 

Sources:

https://www.sec.gov/Archives/edgar/data/1629261/000149315218001393/ex99-1.htm

https://www.sec.gov/Archives/edgar/data/1629261/999999999721000824/filename1.pdf

https://www.coindesk.com/nasdaq-believes-publicly-traded-firm-long-blockchain-mislead-investors

https://www.coindesk.com/nasdaq-believes-publicly-traded-firm-long-blockchain-mislead-investors

https://www.crowdfundinsider.com/2017/12/126347-former-long-island-iced-tea-corp-now-long-blockchain-corp-signs-convertible-debt-facility-support-blockchain-pivot/

https://arstechnica.com/tech-policy/2017/12/iced-tea-company-stock-triples-after-adding-blockchain-to-name/

https://www.crowdfundinsider.com/2017/12/126259-long-blockchain-corp-withdraws-proposed-public-offering-company-pivots-beverage-based-business/

https://stocktwits.com/symbol/LBCC

https://www.coindesk.com/long-blockchain-risk-exchange-removal

Stay up to date. Follow us:

Stay up to date. Follow us:

 

Why Elevated Unemployment isn’t Hurting Stocks

 

Trends in unemployment and the coinciding trend in stock market valuation have run counter to each other over the years. It is not a 100% negative correlation as stock market strength, and weakness tends to also follow other measures. These could include disposable income, consumer optimism, debt levels, and other factors. The other related measures don’t always track each other, so one factor normally takes precedence. Often, it’s whichever indicator the market decides to give more weight to in any time period — when they’re headed in different directions, the market obviously can’t move with them all.  But, unemployment as a contra-indicator of overall market direction is very strong.

It was reported yesterday by the BLS that Jobless claims declined by 111,000 from the previous week to a seasonally adjusted 730,000. This is the lowest in over two months and the sharpest one-week decline since August. The direction seems positive, but prior to last March, unemployment benefits had never (notice no time period in “never”) topped 700,000. The percentage unemployed in April 2020 reached 14.7% which is the highest rate since the Great Depression.

How Important is the Rate of Unemployment?

Direction matters to the market more than any absolute number. Market participants want to know if something is getter better or worse than yesterday, not a year ago, or even 90 years ago.

The most recent relationship coincides with a weakened job market that has not grown since the 2020 election.  Hiring has averaged only 29,000 a month from November through January. Numbers can be deceiving as well. Although the headline unemployment rate reported was 6.3% in January, a broader measure that incorporates those that may have become exasperated and discontinued their job search, borders on 10%.  So the picture is improving but not good by many standards.

All told, 19 million people were receiving unemployment aid as of Feb. 6, up from 18.3 million the previous week. About three-quarters of those recipients are receiving checks from federal benefit programs, including programs that provide jobless aid beyond the 26 weeks provided for in most states.

A Look at the S&P 500 Versus Unemployment  over the past 20-years (Orange line is Unemployment
as reported by the BLS)

 

Last week’s drop in applications was concentrated in two states, California and Ohio, where they fell by a combined 96,000. Ohio officials had said earlier this month that a surge in new applications was driven in part by a jump in potentially fraudulent claims. That now appears to have faded. Other factors outside the norm that may have impacted the numbers are the winter storms and power grid problems in Texas during the week. It’s difficult to factor out that “noise” and there is always a certain level of noise including natural disasters, fraudulent claims, temporary industry shutdowns, etc.

It helps to see the way unemployment and the market (measured by the S&P 500) track in order to visualize if we have deviated from an established pattern. Obviously, a pattern that is easy to get your head around, when a lot of people are out of jobs and the economy isn’t very promising, stocks sink. And when the unemployment rate drops because payroll numbers have risen, stocks rise. Keep reading, so you know just how closely correlated the two are. 

Look at that chart above; the two lines are almost perfect inverses to each other, until the coronavirus spike last Spring. They cross during large economic shifts such as the dot-com bubble around Y2k, again at the 2008-2009 financial crisis, ad in 2014 as the unemployment rate perked up to pre-recession lows, stocks climbed to new highs. Last year the two lines raced in opposite directions when the decision was made to reduce the number of people headed to a job every day.  Since the economic shutdown, the unemployment rate has been reduced by more than half after reaching 14.7% last April. As for stocks, they have risen about 70%, from the late March 2020 bottom. The market improved some before the jobless rate fell; this is likely in anticipation of the improvement. A decrease in those unemployed was presumed to be easy to anticipate as a turn in the economy was presumed to be hinged on medical approvals in the works.

Take-Away

It is not irrational to understand why stocks are near their all-time highs while unemployment is near their numerical highs. As long as the unemployment rate continues to fall, history suggests stocks will continue to rise. The weekly employment numbers contain information worth paying attention to under any economic conditions.

Do you expect a year from now, the U.S. unemployment rate will be lower than today?  Factor that into your stock market forecast. What actually happens remains to be seen. Over the past 20 years, the unemployment-stock market correlation has held a reliable inverse relationship. Is the market still ahead of itself in predicting further improvement in stocks? As always, we can only look at stats from the past, never the future.

 

Suggested Reading:

What Stocks do You Buy When the Dollar Goes Down?

How Did the Stock Market Perform Under Each President?

Managing Investment Portfolio Risk

 

 

Sources:

Unemployment Insurance Weekly Claims

Stay up to date. Follow us:

Stay up to date. Follow us:

 

The Stock Market Measured in Four-Year Presidential Terms

 

The Presidents that President’s Day honors can all be said to have sacrificed quite a bit to serve their country. The role for most would be the epitome of a stressful job. Over time history judges them on their many accomplishments and becomes more tolerant of what was perceived as failings. Part of this Presidential history and measure of success are the statistics compiled during their time in office. Statistics are not necessarily the fairest measure of success with economic growth, the pressure to go to war, civil unrest, and all the other issues they are confronted with. After all, their office is only fractionally in control of anything. Still, there is some meaning in the data. Studying stock market history can better help us recognize trends should they begin to recur. With this in mind, let us look back at the citizens that we chose to sit in the oval office and review the returns of the S&P 500 under their watch.

The S&P 500 began providing measurements to the public back in 1957, with data provided back to earlier in the decade. So our review begins in 1953, on the day President Eisenhower was inaugurated.

 

President Eisenhower (Ike) Served as President for two terms; during the first four-year term, investors saw the market shoot up by 70.7%. During the second term, investors were treated to an increase of 34.4%. This growth masks the three recessions Eisenhower faced during his two terms in office. The recessions of 1953 and 1958 were in large part tied to more restrictive monetary policy from the Federal Reserve, while another recession began in 1960 after the Fed had doubled interest rates over two years.

 

President Kennedy (Jack)   Inaugurated in 1961 and assassinated in November of 1963; the combined return during his time in office and Vice President Johnson’s completion of the second term was a 44.3% increase. Kennedy ran on the slogans “Getting America Moving Again” and “A Time For Greatness.” However, the economy remained sluggish, and unemployment remained high at 6.8% when he took office. The only bear market under his term is said to have been triggered by his doing battle with U.S. Steel over prices. Wall Street rarely approves of the government dictating what private companies can do.

 

President Johnson (LBJ) was sworn in following Kennedy’s assassination. During his reelection term, the country enjoyed a rise in the S&P 500 of 17.4%. When LBJ took office, he quickly passed tax cuts proposed by Kennedy.   There was a lot of speculation and probably overvaluation during his term.  Johnson held a “guns and butter” policy that held the notion the taxpayer could pay for both the Vietnam War, along with “Great Society” social programs.  

 

 

President Nixon (Dick) was in the oval office as the country experienced 16.8% growth during his first four years. He was reelected but resigned two and a half years into his second term.  Nixon remains one of the most “progressive” Presidents in U.S. history based on the use of government directly controlling business.  The economy experienced high unemployment and a high inflation rate (stagflation) along with sluggish growth during the ’70s. Because of this, in 1970, Nixon took the unusual step of using an executive order and imposed a freeze on wages and prices with hopes that declaring increasing prices illegal would help. A year later, he protected the faltering dollar’s value by taking the currency off the gold standard. The short-term result of the economic meddling was a stock market crash that halved the value of the S&P 500 between January 1973 and October 1974.

 

President Ford (Gerry) presided over the last two years of Nixon’s second term. He inherited many of the economic problems started by LBJ and compounded by Nixon’s actions. Stagflation continued, but the stock market began trending up again in 1975.

 

President Carter (Jimmy) The ‘70s were not a good time economically. Although the market rose 27.9%, The Feds easy money policies used to aid high employment resulted in skyrocketing prices. Under Carter, the country was handed the painful “medicine” it needed to regain health. The Fed tightened monetary policy and pushed interest rates all the way up to 20%. Interest-sensitive sectors saw sales plummet.  Industries, such as housing and cars, were crippled by the increase in interest rates to double-digits. However, the circumstance halted any pricing power (inflation). These steps helped lead to Carter’s failed reelection bid while also setting the stage for some of the better economic times during the next decade.

 

President Reagan (The Gipper) The first years of the new decade produced one of the longest recessions in the post-war period; that downturn served to break the vicious cycle of inflation. The U.S. came out of recession in November of 1982. Weary businesses then expected inflation to return, the steady hand of the Fed helped keep those risks at bay. Reagan, who had majored in economics, took the policy reins and implemented his version of supply-side economics (the theory that growth can be created by reduced taxes minimum lower regulations). During Reagan’s first term stocks moved up 30.1 % and continued another 67.3% during his second. The stage was set for the U.S. to lead economically for years to follow.

 

President Bush (Poppy) The Fed continued to have moderate growth and tame inflation as its goal and target. If given a choice of one over the other, keeping inflation down was their priority. Although the stock market rose 51.2% during Bush’s four years, the Fed had been applying the economic brake pedal by raising rates to counter inflation. The economy responded by slowing toward the end of Bush’s term.

 

 

President Clinton (Bubba) stepped in as positive economic conditions all converged. The markets rose 79.2% during his first term and 72.9% during his second four years. Inflation fell to less than 3%, and the U.S. experienced the first decade-long expansion in history. The peacetime economy freed up some of the brightest minds that might otherwise have found employment designing weaponry. Instead, they graduated college and created technology benefitting the masses and fostering productivity. These tech companies and the potential they held led the stock market to a record high. Fed Chairman Alan Greenspan dubbed the period of high growth and low inflation the “Goldilocks Economy” suggesting that it was a fairy tale existence. He also warned of “irrational exuberance.”

 

President Bush (Dubya) is the only President since 1953 to have a four-year term with a negative stock market return. He had two of them. Stocks fell 12.5% during his first term and 13.5% during his second. A speculative bubble had formed around tech and dot-com companies during the ‘90s which unwound during his time in office. Toward the end of Bush’s second term, with interest rates above 5%, the Fed began slashing rates dramatically. The low rates set the stage for a housing bubble.

 

President Obama (Barry) the great recession which began in the financial sector under Bush had already had the “kitchen sink” thrown at it in terms of stimulus characterized by massive monetary injections and unprecedented corporate bailouts.  The Fed kept its foot on the gas pedal, this caused U.S. debt levels to increase a massive $8.6 trillion. The lengthy debt-fueled expansion under Obama’s two terms also saw a surge in technological innovation, earnings, and extremely low-interest rates that left many investors no choice but to put their savings in the rising equities markets.

 

 

President Trump (The Donald)  The United States was already eight years into the longest economic recovery in history when President Trump was elected. The market jumped immediately after he won the 2016 election.  From the time he was inaugurated as the 45^th President, it climbed another 67.4% (four years). Trump’s policies incentivized companies to repatriate back to the U.S. over one trillion in profits they were sheltering overseas from high U.S. taxes. Lower corporate taxes and more investible cash on U.S. soil pushed profits higher as the economy experienced some of its strongest numbers recorded. During the last year of his term, there was an intentional reduction in commerce as a reaction to a pandemic seeking to reduce the risk of workers infecting each other. Easy money and confidence in the future still provided for a double-digit year despite the pandemic.

 

Take-Away

The factors that move stocks within any period are many. They include; available financial capital, human capital, the global economic pace, taxes, natural disasters, war, national confidence, and prior economic momentum. The person sitting in the oval office can only influence a few of these. Often, that influence has a lag effect that has more impact years down the line. The above timeline includes over 70 years; with it, one can see how the policies of one presidency impacted the next. However, there is rarely a straight line of policy and result. Attributing one administration’s S&P 500 return to a prior administration is made even more cloudy by the market’s tendency to be forward-looking. The Federal Reserve Bank’s job is to maintain a sound banking system. The Fed reports to Congress and may have an agenda that conflicts with the executive branch in D.C..  The two could actually undermine the other. There are also immeasurables with great impact; these include trust. The forward-looking market doesn’t do well if it doesn’t trust that governmental policy won’t make unexpected changes that impact business and clouds investors ’ already faulty crystal ball. 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

The Limits of Government Tinkering

Workcations Add a New Class of  Traveler

Corporate Americas Fair Share of Taxes

 

 

Stay up to date. Follow us:

 

If Dollar Weakness Persists – What Stocks May Benefit?

 

The U.S. dollar has been declining in value since late Spring 2020. Although other newsworthy trends may have taken exchange rates out of the spotlight; a new year is usually a time when investors readjust their focus. The change of economic priorities in Washington also signals investors to consider readjusting their radar to find investment opportunities with higher likelihood of success. Should the declining $US Dollar trend continue it may turn out to have a sizeable impact on asset prices in various sectors during 2021.

The last time equity investors paid much attention to currency valuation was 2011. For the benefit of readers in the market for less than 10 years, we’ll quickly recap some basics such as: What is a weak dollar? Why is the dollar weak? And then move to the important question, what industries may benefit from a weak dollar?

Weak Dollar

Supply and demand of a currency cause it to move higher and lower based on demand, assuming a stable money supply. If demand for either goods or financial assets priced in a currency rise, it exerts upward pressure on the currency’s value. For example, consider oil demand since the COVID slowdown. Most oil is purchased on global markets in $US Dollars. If worldwide economic activity slows and there are fewer barrels being purchased, there is a lower demand for dollars to exchange for crude oil. This lower demand helps depress the currency’s value. Another common example is interest rates. Currencies will be exchanged in order to buy notes of a country that has higher yields net of native inflation (after adjusting for sovereign risk). This is why rising real U.S. interest rates vs. other nations ordinarily coincide with a strengthening dollar — lower rates have the opposite effect.

 

 

Since the 1980s money supply has mostly had a gentle upslope that steepened some starting in 2008. As mentioned above, an increase of supply of something without an offsetting increase in demand places downward pressure on the value of it (in this case the $USD). There has been an abrupt increase in the supply of money in circulation in recent months. The graph below of money supply (M1) shows the dramatic increase in currency.

 

Money Supply (M1) Since January 2000

Source: St. Louis Federal Reserve Bank

 

Although there are many factors that come into play when the push and pull of markets determine the price for anything, the two key economic ingredients remain supply, which has measurably increased, and demand which is slack because of artificially low rates and a slow world economy.

Impact on Stocks

As the pandemic fears lift and the cabin-fever of individuals from all over the globe help them decide they need a change of scenery, there will be interest in traveling to where their local currency goes the farthest. This makes travel and tourism companies located in the U.S. interesting as an investment. There’s potential for them to have the double benefit of increased overall travel and a weaker dollar steering international travelers to the U.S. Another industry with multiple tailwinds is entertainment. An interesting subset of entertainment is esports which has been enjoying growth in popularity since even before the lockdowns. Esports games know few boundaries for attracting audiences. As a result, many companies are not U.S. based, some of those publicly traded esports related companies that are may get an additional boost if the declining dollar trend continues.

Natural resource stocks are worth watching as well. If it comes out of the ground in the U.S. or a country with a closely correlated currency and is sold abroad someplace with a strong rising currency, the producer could experience higher profits on the same amount of work. Examples include mining of commodities used for building materials such as copper, silver, steel, etc.  Any mine operations transacting in U.S. dollars or a correlated currency may get an added currency kicker.

When it comes to asking who benefits from a weaker dollar, one can’t ignore large multinationals. Whether the company does most of its manufacturing in the states and exports those products, or has production facilities across the globe, if sales in a strong currency and converted back to a weaker dollar the company benefits. Larger companies received a great deal of attention last year. Conversely, it would make sense for investors to exercise caution and spend extra time analyzing companies that import a lot of materials or offshore labor. As many of these companies’ stocks have experienced a strong 2020.  Investors may prefer instead to determine the smaller suppliers of these large companies that are not as visible, yet benefitting. 

While building a watch list for 2021, companies that import from nations experiencing strong currency gains versus the dollar may add have an added consideration as to upward potential.

Take-Away

There is no guarantee that the dollar will continue on its weaker trend. However, the ingredients that cause a weakening dollar seem to be heavily baked into the economic cake. The most recent stimulus may have even turned up the temperature higher by adding to the supply of cash in circulation.

It’s important to note that a strengthening or weakening dollar does not necessarily suggest a strong or weak stock market, it does however suggest sector rotation. The sectors with the higher probabilities of benefitting are those involved in exporting goods or in the case of entertainment, providing a service. The stocks that should be analyzed with the most caution are U.S. manufacturers that rely heavily on imports from countries with inflated currencies.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Metals and Mining Industry Report, Jan. 4, 2021

US Debt as a Percentage of GDP Skyrocketing

How to Invest in Esports

 

Are you subscribed to Channelchek’s active YouTube channel?

 

Sources:

St. Louis Fed, Money Supply

Foreign Exchange/Koyfin

How
the Dollar Impacts Commodity Prices

 

 

Zoomtowns: Your Vacation Getaway May Become Your New Home

 

Are home offices moving to even more remote locations? Everyone is aware that the pandemic has changed the way people work and live. Workers spend less time commuting to a central work place, and video meetings, often Zoom meetings, have replaced conference room meetings. People who didn’t know what Zoom was in 2019 have now become proficient in its operations. It would be easy to think that the shift is temporary, and things will go back to normal once the pandemic passes. This may not be the case. Management of companies has learned that employees can be just as effective (in many cases more effective) working from home.  While Zoom type meetings will never replace face-to-face meetings entirely, it’s very probable that many businesses will permanently become a combination of an in-office and work-from-home operation.

Adjusting

Employees have already begun adjusting to the change. If they are going to work from home, they want a high functioning home office setting. Working from the kitchen table may have been fine to finish up a late-night report, but it won’t work for an important teleconference meeting.  People want offices with doors they can close to assure some level of privacy. The result has been a run on home office furniture and equipment.  Forget paper towels. The new work-at-home employee wants a printer!

The new household are adding more entertainment options since restaurants, movies, theaters, and concerts are limited. It is easier to justify that extra cable or internet channel when less is being spent on other restorative activities. Games and puzzles have become popular again. The same can be said about exercise equipment. There are currently long wait times for trying to buy a treadmill to be delivered to their house. Bikes, roller skates and skateboards are in high demand. People are cooking more, shopping for specific pots and pans is uncovering shortages.

The pandemic is not only changing how people live within their home, it’s changing their home. People are adding additions, putting in swimming pools and spending money on landscaping. Existing and new home sales are soaring as people move to bigger, nicer homes. New homes are being built farther and farther away from urban centers as they commute less. Vacation homes are becoming more popular. People want to live in areas with nicer views. “Zoomtowns” near lakes and rivers or golf courses or mountains are exploding.

Zoomtowns

If you are not familiar with the term Zoomtown, be prepared to see it more often. NPR’s Planet Money defines Zoomtowns as housing markets that are booming as remote work takes off. Zoomtowns are spreading not only because of a decrease in commuting but also a decrease in entertainment venues associated with urban living. To quote Forbes, “your vacation getaway may be your next home.” People want more space because of the virus and that means getting away from crowded cities.

A paper published in the Journal of the American Planning Association shows that Zoomtown populations were already growing before COVID-19 hit. The study identified 1,522 small towns that were withing 10 miles of a national park, monument, forest, lake, or river, and at least 15 miles from a census-designated area. It then compared the growth rate of these towns versus the national average.  The popularity of Zoomtowns most likely reflects an increase in disposable income for the wealthy following the rise in the market, a tax decrease and sustained low interest rates.

The sudden boom in zoomtowns comes with the usual growing pains. Healthcare options are ill equipped to handle a larger, older population. Restaurants become overrun and stores providing necessities are rare. Staff is limited and often migratory. There is a lack of inexpensive housing for workers. Jonathan Thompson, a contributor to Writers on the Range, refers to the wave of urban workers moving to Zoomtowns as COVID migrants. Costs are rising quickly. As the exodus to Zoomtowns spreads, the towns are becoming denser, threatening the very reason people moved to these locations in the first place. That will only raise the value of undeveloped areas near natural beauty that could become the next Zoomtown.

Investment Play?

Investors can play the growing popularity of Zoomtowns in many ways. There will be increased need for cellular and internet services. Recreational equipment associated with water or golf courses will become more popular. General stores focused on rural areas should do well. Rural construction companies will see increased business. And of course, the Zoomtown could not exist without media companies like Zoom, Cisco Webex, GoToMeeting, Google Hangouts, etc.

 

Suggested Reading:

Which Stocks Do Well After a Presidential Election

Fintech Pirates are Looting Unsuspecting Trading Accounts

Many Investors are Keeping Their Powder Dry

 

Each event in our popular Virtual Road Shows Series has a maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

https://www.msn.com/en-us/money/smallbusiness/zoom-towns-are-exploding-in-the-west/ar-BB1a7IHq, Lilly Smith, Fast Company, October 17, 2020

https://health.clevelandclinic.org/heres-how-the-coronavirus-pandemic-has-changed-our-lives/, Cleveland Clinic, September 25, 2020

https://sonomasun.com/2020/04/08/four-ways-the-current-pandemic-has-changed-everyday-life/, Sonoma Valley Sun, April 8, 2020

https://www.forbes.com/sites/irenelevine/2020/09/15/zoom-towns-why-your-last-vacation-getaway-may-be-your-next-home/#7387273b3ad3, Irene S. Levine, Forbes, September 15, 2020

https://phys.org/news/2020-10-towns-rural-west.html, Lisa Potter, University of Utah, October 15, 2020

https://lasvegassun.com/news/2020/oct/14/zoom-towns-covid-19-shaping-population-trends/, Jonathan Thompson, Las Vegas Sun, October 14, 2020