Category: Markets

Is Leisure the Overlooked Market Sector?

Posted on by phoffman@channelchek.com
Image Credit: Asad Photo Maldives (Pexels)

Travelers Gonna Travel!– Travel & Leisure Sector May Ignore the Recession

Economic activity in the U.S. contracted during the first half of the year. At the same time, inflation is running at 40-year highs. Investors looking to keep their money productive with reduced risk have focused on consumer staples and companies providing necessary services where demand isn’t impacted much by price. This is what experienced investors do when the economy falters. But this economy seems a bit different than previous periods of shrinking economic activity and rising prices. Jobs are still plentiful, and one industry, with a lot of pent-up demand leftover from the pandemic, is gearing up to exceed all expectations. That sector is leisure. We take a look below at the potential strength in the industry, where opportunities may be found, and how you could reduce timing risk with stocks on your shopping list.

Current State

More than half of Americans see leisure travel as a budget priority right now; in fact, 62% of Americans took at least one overnight trip between mid-May and mid-August. This is according to the latest The State of the American Traveler report compiled by Destination Analysis. Consumers continue to prioritize experiences over alternatives in their budget. As the U.S. Moves out of Fall and into the colder months, it appears the trend will continue. Chuck Artillio is co-owner of SinglesSki.com, winter-oriented travel, and leisure company. He told Channelchek, “Last year at this time, business was robust, yet bookings, as we stand now for the coming season, are already up over 100%.” Artillio added, “I’ve never seen anything like this before.”

The Destination Analysis survey also expects industrywide strength in demand for travel and leisure services in the last quarter of the year. The results show Fall and early Winter trip expectations are high. Over a quarter of Americans expect to take a trip in either October (26.6%), November (24.8%) or December (28.4%). This is up from June when 20% said they expected to take a trip in the fourth quarter of 2022.

Source: US Global Investors

The survey indicates that typical holiday travel includes visiting friends & family as the top driver for late year. However, second on the list of purposes for travel is the desire to return to a destination, followed by general atmosphere, and food & cuisine.

Source: US Global Investors

The survey produced hard data that showed Americans continue to prioritize having fun and relaxation when traveling. This, of course, can mean different things to different people. The majority said being in a quiet/peaceful location (82.5%) followed by beach time (69.7%), chilling-out poolside (67.3%), enjoying culinary experiences (65.6%), and luxury hotel experiences (60.4%).

Do Expectations Provide Opportunities?

An industry research report published this week titled, Entertainment & Leisure Industry Report: Ideas For Your Investing Shopping List, contains some ideas for interested investors. The authors of the leisure industry report include Michael Kupinski, Director of Research at Noble Capital Markets. Overall, Kupinski and Noble’s research associates find the current state of the economy as one that provides a “discount rack” of stocks that can weather a further downturn and may be the first to rise as the recovery seems imminent. He provides information and careful analysis on some stocks that he believes have favorable attributes, go here for in-depth details of these companies.

The analysts suggest investors develop a shopping list and concede that recognizing a turning point in market direction is the “hard part.” But they have suggestions for that as well. These include nibbling at the targets on your list to scale in over a period of time. This averaging in to stocks on your shopping list will lower the risk of picking one day to pile in, which may turn out to be bad timing.

Take Away

Down markets bring opportunity. They always have, and there is no reason to believe this time will be different. Finding sectors with promise, as the travel and leisure sector is now showing, then diving into research to select those in the sector with the most promise, followed by a decision to average in to the market, is one recognized way to put yourself in a position to benefit from the current “discount rack” that many stocks now seem to be on.

Paul Hoffman

Managing Editor, Channelchek

When PPI and CPI are Correlated, and When they are Not

Posted on by phoffman@channelchek.com
Image Credit: Cottonbro (Flickr)

The Connection Between Producer Price (PPI) and Consumer Price (CPI) Inflation

Does a higher PPI mean a higher CPI? A newly released report shows U.S. suppliers raised prices by 0.4% in September from August, when the Producer Price Index report had shown a 0.2% drop. The inflation measure that has impacted the stock market most severely this year is the Consumer Price Index. The two Bureau of Labor Statistics (BLS) releases are related but not directly correlated and are often used to measure different things by economists and those in industry.

The PPI rose 8.5% in September from a year before, down from its 8.7% annual increase in August and 11.3% in June. – BLS

How CPI and PPI are Different

The PPI for personal consumption includes all marketable production sold by U.S.-domiciled businesses for personal consumption. The majority of the products sold by domestic producers come from non-governmental sectors. However, government produces some marketable output that is under the PPI umbrella. In contrast to the PPI’s components, CPI includes goods and services provided by businesses or governments when direct costs to the consumer are levied.

The most heavily weighted item in CPI is rent. It’s weighted at 24% of the index. What the BLS calls owners’ equivalent rent is the implied rent occupants would have to pay if they were renting their homes. This is how the Bureau of Labor Statistics captures the cost of housing for owner-occupied and rented housing. This heavily weighted component is not in PPI – obviously, owners’ equivalent rent is not a domestically produced output.

The PPI for personal consumption and the CPI also differ in their treatment of imports. The CPI includes, within its basket, goods and services purchased by domestic consumers and therefore includes imports. The PPI, in contrast, does not include imports because imports are, by definition, not produced by domestic firms.

How PPI Impacts CPI

The PPI trends often work their way into consumer price movements, but not at a one-to-one basis or even a standard delayed interval. The demand component of consumer’s impact, what the consumers are willing to consume at certain price levels, is at play with what is charged for goods at the retail level. So even if the cost to manufacture goods has risen, passing the cost on is not always possible without hurting sales. At some level of price increases, demand decreases. This is different for each type of product. For instance, food, medical care, and housing may not be impacted as much as recreation, clothing, and other items which are easier to put off or do without.

Companies are trying to manage higher costs without alienating consumers who are weary of price increases. So far in the 2022 U.S. economy, consumer spending has remained strong despite the rate of CPI, but economists worry that we’re approaching a tipping point.

The Fed has raised the benchmark federal funds rate at its last three meetings by 0.75 percentage points, it now sits in the range of 3% and 3.25%. Officials have indicated they are prepared to raise rates over the course of their final two gatherings this year to around 4.25%.

Today, with consumer inflation running at a four-decade high and savings measurements trending lower, consumers are expected to begin to change buying habits. This overall is bad for business and the economy, which is why the Federal Reserve is expected to continue its fight against price increases, despite their lack of popularity with the financial markets.

“Monetary policy will be restrictive for some time to ensure that inflation moves back” Fed Vice Chair Lael Brainard (October 10).

Prices have begun to fall for some goods and services, including commodities, freight shipping, and housing. Those declines have led some Fed watchers to warn that the central bank risks tightening financial conditions too much.

Take Away

Increases in producer prices are passed to consumers when they can be. However, there is only so much a consumer is willing to pay for a purchase they can put off or substitute for something cheaper. This has ramifications for investors.

Companies where demand will wain when prices rise, may find earnings weaken; these could include producers of discretionary goods. Stocks that are shares of consumer staple companies may not feel the brunt of consumer pushback; those that produce more cost-effective brands, including white label providers, may outshine their brand name competitors if consumers increase their substituting for lower priced alternatives. Health care is one area where demand changes little as prices change at the producer or consumer level.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/ppi/methodology-reports/comparing-the-producer-price-index-for-personal-consumption-with-the-us-all-items-cpi

https://www.wsj.com/articles/producer-prices-inflation-september-2022-11665541647?mod=hp_lead_pos2

The Week Ahead – FOMC Minutes and CPI Late Week

Posted on by phoffman@channelchek.com

Potential for a Change in Sentiment if Suprised by this Week’s FOMC Minutes, Jobs, and Inflation

When the world’s trading partners move interest rates in concert with each other, their actions are much smoother, this is because currency flows, which influence exchange rates, are less inclined to reprice dramatically. The U.S. has been comparatively aggressive in raising rates. This is part of why the Bank of England (BOE) shoring up its bond market, and the Japanese hawkish hesitancy has created disruptions and a historically strong U.S. dollar.

This week begins with Columbus Day; the bond markets are closed, and so are the banks. Stock market participants shouldn’t expect guidance from interest rate moves related to bond trading. The futures market will be active; moves from Interest rate futures from tickers such as ZB=F can be helpful while bonds are silent.  

Monday 10/10

  • 1:30 PM ET Federal Reserve Vice Chair Lael Brainard discusses restoring price stability at the National Association of Business Economics (NABE). Attend via Zoom.
  • Columbus Day, the potential for thin trading and big price swings.

Tuesday 10/11

  • NY Fed 5-year inflation expectations for one- and three-year-ahead inflation expectations had posted steep declines in August, from 6.2 percent and 3.2 percent in July to 5.7 percent and 2.8 percent, respectively. Investors will be watching to see if the declining expectations continue.
  • NFIB Small Business Optimism Index (NFIB), is a monthly survey that asks small businesses if they have plans to increase employment, plans to expand capital spending, increase inventories, expect economic improvement, expect higher retail sales, is now a good time to expand, current job openings, and earnings trends in their business. Health in small businesses can be an indicator of overall economic health and stock market strength. This report is released at 6 am last month, the index was 91.8, and the consensus is 91.5.
  • The Labor Department’s JOLTS has, in recent years, been referred to as the “Quits” report. The report tracks monthly changes in job openings and contains rates of hiring and quitting. The word JOLTS stands for Job Openings and Labor Turnover Survey.

Wednesday 10/12

  • The Producer Price Index (PPI) from the Bureau of Labor Statistics (BLS) is an inflation gauge that measures the average change over time in the prices received by U.S. producers of goods and services. The prices are typically considered input costs for final products and can impact CPI, it may also impact company costs of production and, therefore, profits. The trend has been lower, YOY PPI has been running at 8,7%, the consensus is for 8.4%.
  • The Mortgage Bankers Association (MBA) creates a statistic from several mortgage loan indexes. The Mortgage Applications index measures applications at mortgage lenders. It’s considered a leading indicator and is especially important for single-family home sales and housing construction. Both are considered foundational in a strong economy. L
  • ast week, the Purchase Index was -12.6%.
  • 10 Year Treasury Note Auction is held in the middle of each month and settles on or around the 15th (depending on weekends). The yield is a benchmark for 30-year mortgages and has recently been noted by investment markets because it has been trading at a yield lower than shorter maturities; this inversion of the yield curve has some market players suggesting a recession is expected in the future. Any surprises at the auction will reverberate through the stock market.
  • FOMC minutes (September meeting) – We’d all love to be a fly on the wall at the Fed’s meetings. The minutes detail the issues debated and the consensus among policymakers. This, of course, has ramifications if the contents of the minutes demonstrate an above-average hawkish or dovish change in tone. The Federal Open Market Committee issues minutes of its latest meeting three weeks after the meeting.

Thursday 10/13

  • US Consumer Price Index (CPI) is the inflation indicator most widely broadcast. With inflation being a primary focus, this will be the big number coming out this week. The number represents a basket of goods considered typical for an urban consumer and is taken as the change in the cost of that basket of goods. A percentage is derived from the change. CPI is also reported with food and energy removed as it is considered that other non-economic factors influence these prices. The August report indicated CPI rose 0.6% for the month and 8.3% YOY. Expectations are for a slowing to 0.4% for September and a YOY rate of 8.1%.
  • U.S. Jobless Claims, which represent the prior weeks of employment are expected to have increased to 225,000 from 219,000. From jobless claims, investors can gain a sense of how tight or how loose the job market is. If wage inflation takes hold, interest rates will likely rise, and bond and stock prices will fall.  Remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

Friday 10/14

  • U.S. retail sales have been lackluster, neither rising nor falling. As we head toward Thanksgiving and Black Friday sales levels, the market will be taking more and more interest in how strong the consumer is. Expectations for September are a rise of 0.2 percent overall, down 0.1 percent when excluding vehicles and up 0.4 when also excluding gasoline. The number is released at 8:30 am.
  • Business inventories are expressed in dollar value held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. Rising inventories can be an indication of business optimism that sales will be growing in the coming months. However, if unintended inventory accumulation occurs, then production will probably have to slow while those inventories. The consensus is for a 0.9% increase after only increasing 0.6% for August.
  • U.S. Baker Hughes Rig Count tracks weekly changes in the number of active operating oil & gas rigs. Rigs that are not active are not counted. Components in the data are the United States and Canada, with a separate count for the Gulf of Mexico (which is a subset of the U.S. total). A significant increase or decrease could have ramifications on energy costs in North America. The rig count for the prior period in North America was 977, with 762 of those being from the U.S.

What Else

It is a light week for economic releases and Fed governor addresses, but late week could see a dramatic change in market sentiment as the Fed Minutes, CI, and even employment has the potential to impact thinking.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/calendar.htm

http://global-premium.econoday.com/byweek.asp?cust=global-premium

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

Reading Between Michael Burry’s Lines

Posted on by phoffman@channelchek.com
Image Source: @michaeljburry (Twitter)

Michael Burry’s Advice for Companies to Become Better Values

After my morning coffee and check on stock futures, I peruse Twitter. Coffee is necessary when you may need to translate cryptic messages from tweeters like Dr. Michael Burry. This week, the hedge fund manager, famous for his foresight and creativity in shorting subprime mortgages before the mortgage crisis in 2008, has been very active on the microblogging platform. Two tweets from October 5th are newsworthy, considering their source, their insight, and the concern they convey are described below.

The first reads: “Low price/cash flow businesses are different today vs. 2000 because they will buy back stock, buy back debt at a discount, and in general manage capital structure better. Makes them statistical value – math problems that more or less must work out.”

The second says, “Companies that are heavily leveraged but have the cash flow and termed out debt have options today, including reducing their debt loads at a significant discount brought on by higher rates. But as Graham said, in such a case, better off buying the stock.”

Taking these two tweets together, they make sense. Twenty years ago, interest rates were the lowest they had been since 1965; during the last week in December, plummeting 30-year mortgage rates had broken below 6%. Despite cheaper money, corporate treasurers and finance officers didn’t use the situation to shore up their capital structure and build a better base to grow on. The equity markets were weak from August 2000 until May 2009, after the financial crisis that in part came about because of how the cheap money was used.

Companies that are not stretched and are earning money today have the choice of strengthening their financial foundation by either buying their stock at today’s bearish prices. A stock buyback has the effect of reducing shares available in the market as they are now in the company’s treasury. Reduced float tends to increase the price and benefits shareholders. The company does have the option of selling these shares should an opportunity present itself where it would like to raise capital selling previously available shares.

Burry also mentions leveraged companies. Having just come off of 40-year lows in interest rates, it was, in many cases, prudent for companies to leverage themselves with cheap money. These loans, present-valued at today’s higher rates, can be negotiated and paid off at a discount. For companies with adequate cash flow, they may be able to substantially reduce debt for a fraction of the principal amount. Here is how to best get your head around this, if you are a lender and the borrower is paying you 2%, and rates are now 6%, how much less than the borrowed amount would the borrower have to give you in order for you to do better than breaking even? You can lend one-third of the money at 6% and earn the same cash amount. So the borrower is in a great negotiating position.

Michael Burry makes no secret of the fact that he is an avid reader. “Graham” refers to Benjamin Graham the “father of value investing.” Burry reminds us that, according to this historically significant, well-published value investor, investors and companies are generally better off buying back their own stock.

Take Away

There are showmen that are on TV and keep their jobs by keeping viewers glued to their TV sets, and there are others that comment on the market for less-commercial reasons. Those on TV and writing on well-read sites like Yahoo Finance are worth reading to understand what others are reading. Proven, outside the mainstream thinking is worth paying attention to in order to diversify the information your weighing as an investor.

You can even think of it this way; no one pays Burry for advertising on Twitter accounts used by Burry or some other well-followed investors. Whereas mainstream news only exists because of paid-for advertising from companies and industries that they cover. This doesn’t mean he will always be correct, but, who might be less biased?

Paul Hoffman

Managing Editor, Channelchek

Source

Twitter @michaeljburry

Wisdom of Crowds in Predicting and Forecasting

Posted on by cpatches
Image Credit: slgckgc (Flickr)

Nobel Prizes, Election Outcomes and Sports Championships – Prediction Markets Try to Foresee the Future

Who will win Nobel Prizes in 2022? Wikipedia posits a handful of contenders for Physiology or Medicine, about 20 different possible winners for the Peace Prize and several dozen potential winners of the Literature Prize. But since the Swedish Academy never announces nominees in advance, there are few insights indicating who will win, or even if the eventual winner is on a given list.

Are there ways to predict the future winners?

The Delphi approach, named after the oracle in ancient Greece, gathers multiple rounds of opinions from a group of experts to generate a prediction. Gambling firms provide betting odds on the likelihood that specific competitors will win. Crowdsourced competitions, such as the Yahoo Soccer World Cup “Pick-Em,” have participants predict individual contest winners and then aggregate the results.

Another approach is a prediction market that provides insight into what people expect will happen in the future by creating a stock market-like environment to capture the “wisdom of the crowd.” Groups and crowds often are collectively smarter than individuals when many independent opinions are combined.

This article was republished  with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Daniel O’Leary, Professor of Accounting and Information Systems, University of Southern California.

As an accounting and information systems professor at the University of Southern California, I investigate issues related to the crowd both in my research and in my teaching. Here’s how prediction markets harness what the crowd thinks to forecast the future.

The Wisdom of the Market

In prediction markets, participants buy and sell stocks. Each stock’s price is tied to a different event happening in the future. Information about the future is captured in the stock prices.

For instance, in a prediction market focused on the Nobel Peace Prize, maybe Greta Thunberg is trading at $0.10 while Pope Francis is trading at $0.15, and the stocks for the entire group of candidates add up to sum to $1. The prices reflect the traders’ aggregated beliefs about the probability of their winning – a higher price means a higher perceived likelihood of winning.

Examples of Prediction Markets

Anyone can get in on the prediction game by trading on one of these markets or even just checking out which stocks are up or down.

Market nameURLAffiliated university
Iowa Electronic Marketshttps://iemweb.biz.uiowa.edu/University of Iowa
PredictIthttps://www.predictit.org/University of Wellington
Hollywood Stock Exchangehttps://www.hsx.com/N/A
Polymarkethttps://polymarket.com/marketsN/A
Table: The Conversation, CC-BY-ND  Get the data

Prediction markets have various ways of setting stock prices. The Iowa Electronic Markets took following approach during the 2020 U.S. presidential election:

  • Stock DEM2020 pays off $1 if the Democratic candidate wins, and $0 otherwise,
  • Stock REP2020 pays off $1 if the Republican candidate wins, and $0 otherwise.

The stock prices capture the probabilities of each candidate winning, in two mutually exclusive events. If the price of DEM2020 is $0.52, then that is treated as the probability of that event occurring – a 52% chance. If DEM2020 is $0.52, then REP2020 is $0.48.

Prediction markets may use real money, or they can use play money. Google’s market used what it called “Goobles,” while the Hollywood Stock Exchange uses Hollywood Dollars. The Iowa Electronic Markets and PredictIt, both sponsored by universities, use real money. Researchers have found that there are no differences in the performance of markets using real money versus those using play money.

Although using play money makes it possible for many people to participate, one potential challenge for prediction markets that don’t use real money is gaining and maintaining interested participants. Despite using different devices to keep up engagement, such as leader boards indicating who has accumulated the biggest portfolio, there is literally no money on the table to keep participants interested in the market.

Market participants who know more about the game might better predict winners. Image Credit: Marco verch (Flickr)

Participants Bring Their Knowledge to the Market

Prediction markets and crowdsourcing do not function in a vacuum.

Researchers have found that information about events finds its way into the prediction processes from various sources. For example, when I analyzed the relationship between the betting odds and the Yahoo Pick-Em crowd’s guesses for the 2014 FIFA World Cup, I found that there was no statistical difference between the proportion of correct guesses in each. My conclusion is that either the crowd’s guesses incorporated the betting odds information or the crowd’s guesses added up to the same result by some other means.

Generally, prediction markets use play money or are run by non-profit universities to study markets, elections and human decision making. Although gambling houses can take bets for many activities, external prediction markets are more restricted in the activities they can be used to investigate, and are typically limited to elections. However, internal prediction markets – run within a corporation, for instance – can explore almost any topic of interest.

Typically, prediction markets function better with informed participants. Although using so-called inside information is illegal in some markets, including the New York Stock Exchange, there generally are no such limitations in prediction markets, or other crowdsourcing approaches. If those with inside information were to participate in a prediction market, it would likely lead to more accurate stock prices, as insiders make trades informed by their knowledge. However, if others find out that a participant has inside information, then they may very well try to gain access to that info, follow the insider’s actions or even decide to leave the unfair market.

The accuracy of prediction markets depends on many factors, including who is in the market, what their biases are and how heterogeneous the participants are. Accuracy can also depend on how many people are in the market – more is generally better – and the extent to which they are informed about the events of interest.

Researchers have found that prediction markets have outperformed polls in presidential elections roughly 75% of the time. But accurate results are not guaranteed. For example, prediction markets did not correctly predict that Donald Trump would win the U.S. presidency in 2016.

Who Will be in Stockholm for the Ceremony?

In 2011, Harvard University economics faculty had a real-money prediction market site, referred to as “the world’s most accurate prediction market.” The site had been used for predicting the Nobel Prize in Economics, but Harvard advised the site to shut down.

I couldn’t find any current public prediction markets active for the 2022 Nobel Prizes.

For the moment, perhaps the closest to participating in a Nobel prediction market would be to place a bet at one of the gambling houses that takes bets on the Nobel Prizes. Or find a Nobel Prize Pick-Em site, propose such an event to an existing prediction market or build your own prediction market using some of the available software.

If you know of one, let me know, I want to play.

What Traders and Investors Know, But Forget to Do

Posted on by aweinsoff@channelchek.com
Image Credit: Anna Nekrashevich (Pexels)

When Markets are Stormy, Remind Yourself of these Three Rules

Investing is necessary to help build for a future where inflation hasn’t eaten away at savings. But when the investment markets have been at their most difficult in years, most long-term investors have found their investment portfolios have gone into reverse. Many have then committed more cash to their eroding positions as the “buy the dip” thinking, up until recently, has, overall, worked out. 

Whether by managing several billion for a large mutual fund or by keeping my household’s stock portfolio out of trouble, I’ve learned a lot. Most of what has been fruitful seems basic but is often forgotten when battling the markets. The information is easy to convey, the actions take discipline. Here are three key thoughts and actions to help you make decisions.

Know that There are Good and Bad Days

Do you fish? Most people understand fishing. You use past experience and current conditions to estimate (guess) what kind of fish might be biting. You then gather the right equipment and bring yourself to the place where you’re most likely to catch something worthwhile and at a time when the fish are most likely to satisfy your desire to catch them.

You choose the tackle that has been most productive for whatever you’re fishing for, get your lines in the water, and then sit patiently.

More often than not, when fishing, things don’t go as planned. The fish may not be as eager to get caught as you had hoped, or you might quickly catch as much as your freezer can hold, or the law allows. Sometimes a boat comes by and cuts your line. Stuff happens.

If the fish aren’t biting, you evaluate if waiting will yield more than fishing elsewhere. If they instead are biting like crazy, and there seems to be a storm approaching, it might be best to reduce your risk and head back before being caught in a storm. Often the best fishing is right before or after a storm, mid storm is a net negative and could be damaging.

Treat investing like fishing. Learn the best spots for the current conditions. This could be industry sectors, or segments based on market cap., within the categories, ask what companies have the highest probability of a positive outcome. Read up on the companies and see what professional analysts are saying about the financials, business model, management, and outlook. As with fishing, the old guy at the dock that has been fishing the area for years may steer you into (or out of) a boatload of success. Still, use your own judgment, and never act on a hot tip blindly.

Investing, like fishing, can be most successful before or after a storm. Taking positions in the middle is for thrill seekers, not investors. 

Have a Plan

Seems simple enough. If you are fishing, you may schedule yourself for what time of day the fish are likely to be feeding, and if they aren’t, how long, you’ll wait before you try a different lure or a different location? You’re likely to have several hooks in the water at different depths and a plan to switch to whichever depth is getting the most action.

Moving to a different fishing spot when the one you’re at is still productive may seem unreasonable, but if other fishermen have moved to fish where you are, taking your current catch and moving to where you think you’ll do better can be smart.

As a portfolio manager, I held dozens of positions simultaneously, they all had a purpose. If I couldn’t say what the expectations were of any position, I got rid of it. Rolling the dice is expensive. My portfolio objective was to beat the benchmark and consistently be a top-five fund in the category. My plan to accomplish the objective was to have pre-assessed the possibilities before entering any position. I also told myself what I’d do when any of them occurred. In this way, I had a plan for most all scenarios.

The plan helped prevent me from ever trying to take more out of a trade than it is willing to give. It also forced me to never enter a position without having done my homework on the company and the environment in which the company operates.

Technology makes it easier than ever to do preliminary reading and research. Channelchek and other outlets for quality research, coupled with information and tools usually provided by your broker, means today’s retail investor has more than most professionals did in 2000.

Part of the plan should be when to do nothing. The top portfolio managers get paid quite well to do very little each day except monitoring positions in case something, based on their plan, happens. Don’t ever transact because you’re bored. Each position should have a purpose, if there is something else that is likely to better provide that purpose, no-cost trading makes it efficient to adjust your holdings. But if it is doing everything it should, doing nothing is often the best action. Sit on your hands.

Plan your trade, trade your plan, and get out when it is not the best commitment of your money.

Know What You Trade

I’m a student of and a participant in the markets, I suppose I’m also a teacher of sorts, but I never stop learning. This makes me a generalist in many categories, with above-average knowledge in a few. It’s important to know your investment realm. If your fishing is to stand waist deep in water with a flyrod catching more than anyone else on the river, it doesn’t mean you’d have the ability to go offshore and have any success. In fact, offshore, you’d probably throw up. Flyfishing and deep sea fishing are related but not the same. If you knowledgeably trade a few small-cap mining stocks and decide to one day buy TSLA or AAPL, your experience may not translate well.  If either one dropped $50 a share, it might make you want to throw up.

Knowing different investment types and sectors better so you can focus on those you’re best suited to is, like everything else, education and experience.

Learn to decipher what is good information and what is mostly entertainment. Then immerse yourself. Don’t feel that you have to go where the crowd is. Social media has been powerful in getting us to follow the crowd, but defining the right or best thing for us is critical to any success. No one knows what you want more than you, no one knows what you can stomach better than you, and not everyone enjoys any type of fishing or any type of investing. For those people, there are food stores and wealth managers or funds.

Take Away

No matter the caliber of trader/investor, when markets are turbulent, it’s a good habit to refresh yourself on basics. These investing basics include you don’t always have to be in the market – you can expect to run into problem periods, it’s better to avoid these storms than have to rebuild afterward. Also, pre-thinking actions in an “if this, then that” format before even entering a position will prevent bigger problems and provide greater success. Decision-making while the market is either making you euphoric or the market is punching you in the face is the wrong time.  Better decisions are made when thinking clearly. If you don’t think you enjoy investing, leave it to someone else, not everything is for everybody.

For those wishing to hone their expertise, try to learn about everything, but pick a few specialties. I know people that only trade the FAANG stocks and have superior performance. I know others that focus only on biotech and overtime have done well. Then there is the person that only invests in companies with products or services they themselves use, no matter what your focus is, read up on the company and understand how it trades and what its business is impacted by.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nasdaq.com/articles/three-rules-successful-traders-follow

Cathie Wood’s New Fund Provides Investors with $500 Access to Private Tech

Posted on by cpatches
Image Source: @CathieDWood (Twitter)

Ark Invest’s New Disruptive Technology Fund has a Unique Value Proposition

Not all companies worth owning are publicly traded. Yet, many still need capital, and some could serve smaller investors well. Cathie Wood’s latest fund, which launched on September 27, is intended to bring venture investing to those with $500 or more to invest. The focus is on private companies.

The fund’s launch is on a platform provided by Titan which itself is a young disruptive company, providing advantages to many investors and potentially disrupting the old methods.

About the Fund

The Ark Venture fund will be an interval fund. This means it is a closed-end fund that doesn’t trade on a stock exchange. Interval fund restrictions are most often used when many of the holdings in a fund are illiquid (i.e., don’t trade on the open market). The restrictions make it easier for the fund to focus on return without worrying about managing inflows and outflows.

The ARK Venture Fund will invest in early to late-stage private tech companies and venture capital funds. Public tech companies are also permitted. Access to the fund investments will occur on Titan. Titan is a disruptive platform on phone apps and tablets that allows investors to curate strategies created and managed by popular investors.

As with other Ark Invest funds, the fund’s investment theme is disruptive innovation. ARK defines “disruptive innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the world works. The platform Titan itself is an example of disruptive technology.

Image Source: Titan.com

About Titan

The first thing you see on Titan’s home page is a line that reads, “Investment management, made modern.” It invites you to use its platform to,  “Build a portfolio of managed stocks, crypto, real estate, private credit, venture capital & more.”

The innovative idea behind Titan is it uses technology to provide an investment platform that enables individuals to orchestrate a portfolio made up of “titans”: a set of curated investment strategies, spanning public equities to real estate to credit to crypto, each created and managed by professionals or “titans” like the CIO of ARK Invest.

The overriding purpose of Titan is to provide access to investments retail investors had been held away from.

About Venture Capital

Venture capital is a form of non-public capital provided to companies by investors that have enough confidence in management and the company’s business model to expect above-average earnings. Because these companies don’t trade on public exchanges, investments, usually from family offices, well-off investors, and investment banks, have been the traditional sources of capital.

Though it is deemed risky for investors to commit funds to VC, the potential for above-average returns is an attractive inducement for investors. For new companies or ventures that have a limited operating history, this is the market they often turn to.

Take Away

ARK’s step into less-liquid assets departs from Wood’s earlier strategies, the success of which elevated her to all-star investor status as the value of ARK ETFs like the ARK Innovation ETF (ARKK) soared last year. ARKK has plummeted 60% so far in 2022, a much steeper decline than the 21% decline in the S&P-500-tracking ETF, the SPDR S&P 500 ETF Trust (SPY).  

ARK has struggled on offerings this year. The firm announced the closure of its Transparency ETF (CTRU) at the end of July, and its eight remaining ETFs, including the ARK Innovation ETF (ARKK) have dramatically underperformed broader markets.

Related Information

Information on private offerings available through Noble Capital Markets may be available to you. Are you a qualified investor? Learn more by going here and discovering the various qualifiers and what may be obtainable by you.

 Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/Archives/edgar/data/1905088/000110465922011382/tm225314d1_n2.htm

https://www.businesswire.com/news/home/20220927005065/en/Titan-Announces-Exclusive-Partnership-With-Cathie-Wood%

https://www.etf.com/sections/features-and-news/woods-ark-ventures-low-cost-private-equity-investing?

https://apps.apple.com/us/app/titan-modern-investing/id1322024184

Will Your 60/40 Balanced Portfolio Turn the Corner?

Posted on by cpatches

Owning a Balanced Diversified Investment Portfolio Has Been Like Watching a Train Wreck

From the time that most realized the Fed would aggressively deal with inflation, watching the classic 60/40 balanced portfolio has been like watching a slow train wreck.

Diversification, balance, a 60/40 allocation have been the marching orders from those “in the know.” But what do you do when you’re terribly sure that the 40% in bonds will be worth less tomorrow, and the 60% in a standard stock index is more likely to be down than up? This is the question investors, wealth managers, and retirees have been faced with since early in 2022. The Chair of the Federal Reserve promised to raise rates, so the 40% allocation in bonds has been almost guaranteed by a Federal agency to perform worse than cash in your pillow case, and when interest rates rise, the economy does worse, which at first weighs down stock indexes.

Advisors want their customers to sleep better at night, so they tell them not to worry, no one can call the market, you don’t want to miss the up days. Every time, the markets have bailed them out, and there is no reason not to think that there won’t continue to be eventual increases on one side or the other of the investment pie chart. Meanwhile, missing predictable down periods are just as important to exceptional long-term results as being invested when values rise.

60/40 101

The classic portfolio of 60% stocks and 40% bonds touted in articles by wealth managers and certified by textbooks on investing may no longer provide the same level of returns that it delivered previously. Or it may be going through a period where the direction of stocks and bonds is highly correlated – and it will at some point turn the corner to balanced performance.

From the 1980s until recently, a portfolio of 60% stocks and 40% bonds did well for investors and for good reason. The mix consistently provided investors with attractive risk-adjusted returns, with total returns often equal to or better than those of the S&P 500 Index and with lower volatility. In a more natural market, rates come down (bond bull market) when the economy is weak, which brings stock prices down (stock bear market) and visa versa. The investor always has positions in a bull market to partially offset losses from the other side of the portfolio.

Recent History of Balanced Portfolios

But this strategy hasn’t really worked for decades. Many haven’t noticed because its not working has benefitted investors. Debt and equity prices have moved in the same direction. Both stocks and bonds have reached new highs through last year. Investors aren’t critical when they’re making money, but both markets joined hands long ago and have been mostly moving in the same direction. Here’s your evidence; in 1982, a 30 year-treasury bond was issued, paying over 14%. Today the 30-year is paying 3.65%.  So the bond market, with slight ups and downs, has been strong for most of the last 40 years. The S&P 500 in 1982 closed at 120. Today, the same index is at 3,675. Both markets, although not always trading hand in hand, more often than not rise and fall together.

Image: 60:40 Blackrock portfolio performance since 2011 (Koyfin

60/40 in 2022

The protection of hiding behind a broad, diversified index of stocks and conservative (supposedly uncorrelated) bonds is certainly showing its weakness this year.  Persistent structural inflation adding to interest rates and negative GDP growth have battered both markets. It exposes that 60/40 is not perfect and that set-it and forget-it could cause many to have large drawdowns that will require huge percentage increases in the future.

What to Do

When the most powerful mover of assets transparently says they are going to do something that will impact the markets, believe that the odds are that they will. In other words, don’t fight the Fed. This could mean a slight to a total reduction in bonds, why watch your bond portfolio become a train wreck. And if you are in bond funds, a move to individual bonds offers the solace of at least knowing they mature at par.

The stock portfolio is trickier. The equities market will turn around when there are signs that the economy has bottomed out. Currently, there are some signs of weakness, but mostly expectations of great weakness as we know the Fed is resolved to tame inflation. Investors will race to be first in on the most recent dip. Selectively picking stocks that have a good reason to outperform now and be strong later when bullishness returns is likely smarter than holding a broad-based index. The broad-based economy is headed lower, so it stands to reason the broad-based indexes have further to fall.

Don’t be a stranger to analysts’ reports on individual companies. Expert, unbiased analysis of sectors and individual stocks can help you uncover those that are unlinked to negative world events or are taking advantage of global changes.

Cash was trash when rates were near zero. Currently, a three-month T-Bill yields around 3.75%.  Other short and safe securities are closer to 4%. When there is a recognizable turnaround, you’ll want ammunition. Keep some dry powder to be able to pounce; today’s short interest rates provide returns above those expected in the major indexes. Check with your broker to find out how to invest in short-term agencies, T-Bills, or broker CDs so you are ready for when the Fed says they are in a wait-and-see mode, for when GDP shows we are clearly not in a recession, for when corporate earnings are on the rise, and for when interest rates on bonds are closer to a level that produces low inflation numbers.

Take Away

Stocks and bonds have mostly been moving in the same direction for a very long time. Both were moving up, so no one noticed.

Cash is also an option in any portfolio, and you’re now getting paid more. If the Fed continues to suggest rates are rising, it practically ensures lower bond prices. Move to cash or carefully selected equities. Look for quality analysis of sectors and stocks before jumping into a stock. News stories, statistics, and often research and analysis on small-cap opportunities are available for those signed-up for Channelchek emails, along with many other no-cost perks.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://ycharts.com/indicators/30_year_treasury_rate#:~:text=30%20Year%20Treasury%20Rate%20is%20at%203.65%25%2C%20compared%20to%203.50,long%20term%20average%20of%204.78%25.

Zero-Commission Brokers are Not in the Clear Yet, Says SEC

Posted on by cpatches
Image Credit: Karlis Dambrans (Flickr)

Gary Gensler Backs off on Payment-For-Order-Flow, But Promises Something More Comprehensive

The Securities and Exchange Commission (SEC) chairman has softened his harsh talk against the brokerage practice of payment-for-order-flow (PFOF). While securities brokers and investors in the industry breathed a sigh of relief with the news that the practice won’t be banned, firms like Robinhood (HOOD), Etrade (ETFC), and Charles Schwab (SCHW) may have something else to worry about.

About PFOF

There are harsh critics of the practice of PFOF, and there are strong advocates. Proponents of the model say it provides investors more liquidity, while those that oppose the practice question if retail traders are getting the best price.

In a nutshell, what this compensation system does is when investors place trades for stocks, ETFs, and options, the broker uses market makers to execute the order. To compete for price and execution, market makers in the securities offer rebates back to retail brokers. The rebates add to the broker’s profit, which is in part what allows for “free trades.” Additionally, the net cost per share to the investor is often still below most other methods readily available to them.

PFOF provides a significant revenue stream for retail brokers that offer zero-commission trading. Stocks of these brokerage firms have been under downward pressure with the uncertainty of whether the practice that is banned in other countries would be banned in the U.S. The news that it won’t be banned is seen as positive by those in the online broker industry.

New Direction for PFOF

After harping on the idea of banning PFOF, SEC officials (as reported by Bloomberg) have indicated that a ban is no longer being considered. That has been followed by their promise that other changes to the execution mechanism are on the way.

While the final SEC plans for payment-for-order-flow are not known, it is expected that they will allow these brokers to conduct business, and it is not expected to be more profitable for the brokers – most expect it to make it more difficult to maintain current earnings. The Commission is, if nothing else, expected to propose changes that could affect the complicated system of the rebates designed to increase market makers’ trading volume. Additionally, the regulator is weighing a plan to force brokers to disclose more about how much trading with them costs compared with benchmarks, a metric known as price improvement. The metric would allow customers to be able to compare one firm to another.

The SEC may also better clarify requirements for brokerages on what is “best execution” of stock transactions. The scope of the overhaul by the SEC remains to be seen.

The SEC is expected to introduce its plan in the coming months, according to Bloomberg. The plan is likely to make the system more transparent and more competitive and to include regulations lowering access fees that exchanges charge the brokers to execute trades.

Paul Hoffman Managing Editor, Channelchek

Sources

https://www.bloomberg.com/news/articles/2022-09-22/sec-poised-to-let-wall-street-keep-payment-for-order-flow-deals?srnd=premium&leadSource=uverify%20wall

https://seekingalpha.com/article/4447377-how-does-robinhood-make-money?https://www.usfunds.com/resource/decision-to-switch-ethereum-to-proof-of-stake-may-have-been-based-on-misleading-energy-fud/?

Survey Says ESG Fund Managers Don’t Want to Divulge Too Much

Posted on by cpatches
Image Credit: NIO Inc.

ESG Fund Sponsors are Reacting to Increased Scrutiny

Cautious exchange-traded fund (ETF) sponsors are creating a smokescreen to avoid trouble for themselves.

Environmental, Social, and Governance (ESG) investing works best with openness and transparency. Until now, ETF and mutual fund managers have shown themselves eager to share their ESG guidelines and how the underlying investments fit. After all, achieving and maintaining a designation that allows your fund to grab a chunk of the $2.5 trillion category is good business. Pending regulations which could impact the underlying investments and fund’s ESG status’ have caused fund managers to exercise more caution than they have in the past when sharing information.

ESG Fund Survey

Sage Advisory is a $16.5 billion financial advisor serving clients that choose ESG as a theme for their investments. In each of the past four years, Sage has surveyed fund managers to produce their Stewardsip Report. The 2002 report was released today.

ETF providers that responded to the survey offered much less manager disclosure and transparency about their environmental, social, and governance activities compared with the previous year’s responses. According to the report, there was also a distinct change in tone. The advisory group wrote in its report, this is likely because of pending regulation in Europe and from the U.S. Securities and Exchange Commission that would more clearly define ESG investments. If something the fund manager is doing changes its category, the fund manager would prefer to know and take action before investors find out through a third party.

“There was a noticeable difference in terms of reading the responses, and seeing the restrained language, almost kind of a legalese language to the responses that had not been there in the past,” said Emma Harper, senior research analyst for ESG risk management at Sage Advisory who compiled the survey.

About the Survey

The ESG survey has 69 questions and covers seven areas of stewardship, including proxy voting, climate, and governance. Sage sent surveys to 34 ETF providers and received responses from 23 issuers, including seven of the ten largest ETFs in the U.S. by AUM. Including non-ESG assets, the respondents combined AUM is about $37.5 trillion.

Ms. Harper said, “It was almost by-the-book in the way they are explaining things, rather than all the flourishing details and pretty pictures of the things they can do.”

Harper said it was harder to get responses regarding proxy voting, specifically the number of times they voted against management. Large ETF providers have always tended to vote with company management and against shareholder proposals.

“Across the board this year, we had a number of providers saying ‘that’s confidential,’ or ‘here’s our voting record in general; go find that percentage for yourself.’ It wasn’t an easy straight answer for a number of them,” Harper said.

Regulators

Some asset management firms are thought by government watchdogs to be overstating ESG credentials. This suspected “greenwashing” could cause huge outflows if proven. Worse yet, regulators have been acting on concerns. German officials raided Deutsche Bank’s DWS unit over greenwashing claims, and the SEC fined BNY Mellon $1.5 million over misstatements about ESG for some mutual funds.

With one in three dollars in U.S. fund investments said to follow ESG industry rankings, the SEC’s fraud radar has been turned up, and they are investigating. The Commission is also proposing stronger disclosures and reporting, and wants to assure that a funds label accurately reflects its management style.

Currently, there are no standards that define ESG, just as there are no standards that define styles such as growth or value.

Take Away

In its report, Sage said it believes the proposed regulations and fines “has both positive and negative consequences.” Without a clear definition, investors will become frustrated and may find the sector less attractive. As greenwashing becomes more difficult and investors are better able to judge the fund’s purpose, investors can better understand the underlying assets. 

ESG funds and ESG investing became a big thing during the pandemic era investment craze. It was a sector that had high returns that fed on themselves as more investors chased its snowballing momentum. It now constitutes one out of every three dollars in a fund. As the sector ages and regulators require better definitions, the growth of funds may be hampered by a lack of available investments. Alternatively, the appetite for these funds may decline as other investment “fads” take its place.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sageadvisory.com/Form-ADV-Part-2A.pdf

https://www.sageadvisory.com/perspectives/2022-annual-etf-stewardship-report/

https://www.bloomberg.com/news/articles/2022-09-02/esg-funds-face-reckoning-as-bear-market-slows-investing

When Stocks Instead of TIPS are Better Hedges Against Inflation

Posted on by cpatches
Image Credit: U.S. Dept. of Treasury

What’s the Best Inflation Fighter for Your Savings? Stocks or TIPS?

At a minimum, an investor with an eye toward having more, not less, in the future needs to beat the rate of inflation. Ideally, since the investor ties up their money, the buying power in their account should provide the current inflation rate plus a risk premium over the medium to long term. During the past few months, a number of long-term savers/investors have asked me what I thought about TIPS as a means of exceeding inflation. I have strong opinions on these Treasury securities. My thoughts are rooted in having been a portfolio manager for the country’s second-largest fixed income fund manager back in 1996 when the U.S. Treasury asked for our input on the design of the new bond. The Treasury wanted us to approve of the bonds enough to invest in them – in early 1997 I pulled the trigger on $100 million in the first ever TIPS auction – that was 25 years ago, and there is now enough data to compare the performance of Stocks, TIPS and the rate of inflation. Which one provides better inflation “protection”?

Some Details on TIPS

If you aren’t aware of the intricacies and history of the Treasury Inflation-Indexed Securities, dubbed TIPS, as the working name for the project back in 1996, here’s what you should know in a two paragraphs.

Interest rates were declining through the late 1990s and the Treasury Secretary Robert Rubin had a plan to lessen the government’s interest rate burden by issuing a bond with costs that would be lower with the declining inflation and interest rates. The Canadians, British, and Australians all had a bond type that floated with the countries’ inflation index. The Canadian-style bond had a fixed rate of interest where the principal accreted upward with an inflation index. On this new principal, an unaffected fixed-rate (coupon) would pay interest. The British and the Aussies paid the inflation addition with the coupon, the bondholder didn’t have to wait until maturity to be compensated for price increases. The U.S. adopted the Canadian system of accreting to principal.

The new bond was to be helpful to the U.S. Treasury, the conservative investor, and even the Federal Reserve. Inflation was sinking at the time, so investors were attracted in part to the idea that the securities effectively have a floor since the Treasury would never lower the principal accretion to below zero even if deflation became a problem. Retirees were told they should be thrilled to have a low-risk investment to choose from that paid inflation plus. The U.S. Treasury was looking forward to being able to reduce the interest costs of its debt as there were still bonds outstanding that were paying 14%. As for the Chairman of the Federal Reserve, Alan Greenspan, he was thrilled he’d have a constantly updating investor-driven mechanism that would indicate the market’s current expectation of inflation.

Inflation “Get Real”

Through the late seventies and into the early eighties, inflation was a big influencer on all household decisions. Durable items like washing machines were purchased sooner rather than later because they may cost much more later. Even borrowing to buy made good financial sense. As for investing or saving,  buying short bonds or CDs that always paid more than inflations and then reinvesting similarly when it came due provided the investor with a little more income than inflation (and sometimes a free toaster). The stock market had years where it had negative returns, but for the medium or long-term saver, it far exceeded inflation. This has not seemed to have changed. 

“Get Real” is a slogan that had been used by brokers trying to build enthusiasm for TIPS when they first came out. It refers to real yield, or put another way, the yield after inflation. TIPS were designed to pay the inflation rate plus an interest rate, so the investor earns a real yield. What no one anticipated when the securities were designed is the real yield could go negative, thus providing the investor with inflation minus whatever supply and demand decided.

The chart below demonstrates that over a recent 11-year period, TIPS paid negative real rates about a third of the time. They did not provide the investors with a return above the rate of inflation as originally envisioned.

Source: St. Louis Federal Reserve

Stocks are not designed to be correlated with the rate of inflation, but they generally do well when the economy is flourishing or expected to flourish (these periods tend to be associated with inflation). And equities fall off when there is a contraction or expectations of a bad business climate. The chart below uses the Russell 2000 Small-Cap Index as a measure of stock market performance. The period shown demonstrates that if one is looking to keep up with or beat inflation by any margin, Small-Cap stocks can be viewed as far superior to TIPS.

Source: Koyfin

During the period from August 2012 until August 2022, prices have risen a combined amount of 28.558%, according to a calculator provided by the Bureau of Labor Statistics. During the same period, an investment in TIPS provided 13.11% to the saver/investor. This equates to a real return of negative 15% over ten years. If the purpose of the investor is to keep up with and beat inflation, TIPS have failed as a decent option.

As for stocks, the downside over short periods has been much larger and deeper declines than TIPS. However, after year one, the declines were never large enough to show underperformance. TIPS failed its main goal of inflation plus. If an investor instead put money in small-cap stocks, they would have exceeded inflation by 110%.

While this is not predictive of the future, it is compelling evidence for anyone with a time horizon beyond a few years to look at the true risk profile of each. TIPS have performed worse than inflation. One reason for this is that bond prices have been held lower than the market would naturally have them because the Fed has taken so many on its balance sheet.

Take Away

The performance of the stock market over the medium to long term has a long history of beating returns of other assets, especially those of bonds. Treasury Inflation-Indexed Securities, the official name for the bond, does not have a “P” in it. The “P” was supposed to stand for “Protected.” Just prior to the first auction, the name was changed as government lawyers pointed out these may not protect the investor from inflation.

The Federal Reserve owns a third of the outstanding U.S. Treasuries, including a large allocation of TIPS.  This unnatural demand holds prices artificially below where the market would price them without the Fed’s impact. This skewing of the results would have been upsetting to former Fed head Alan Greenspan who felt the main appeal to the security was their ability to help predict future inflation.

Stocks have risks, and bonds have risks, if it’s inflation you’re looking to overcome, inflation-linked bonds have been historically off the mark.

Paul Hoffman Managing Editor, Channelchek

Sources

https://www.nytimes.com/1982/02/05/business/record-set-on-30-year-us-bonds.html

https://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm

https://www.bls.gov/data/inflation_calculator.htm

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Is the New Robinhood Investor Index Worth Monitoring?

Posted on by cpatches
Source: Robinhood (Modified)

Robinhood’s Latest Step Could Increase the Influence of its Customers

Robinhood made an exciting announcement at the close of business last week that went largely unnoticed. It is creating an index consisting of the most held stocks by its customers. For Robinhood ($HOOD) users and everyone else, this unique index will be useful intelligence to help serve as a barometer as to what top stocks users of the brokerage app are adding and which they are paring down. The Robinhood Investor Index will be based on the top 100 most owned stocks and is unique in how it is configured and weighted.

About the Index

The Robinhood Investor Index presents an aggregate view of its customers’ top 100 most owned investments (does not account for shorts) and tracks the performance of those investments. Unlike the S&P 500 or Nasdaq 100, the index isn’t weighted by the size of the company but instead by the “conviction” of the 20+ million investors using the app.

Robinhood will take a monthly snapshot of holdings of each ticker and look at the percentage each comprises of each customer portfolio. They’ll ensure that all customers are equally included by averaging the conviction for each investment across all customers. In this way, whether clients have $500 or $500,000 in their account, it is the weighting per account percentage, not shares or dollar value.

Robinhood plans to update the index once a month and will share the valuable insights reflecting where its customers are allocating their assets in the index. Robinhood says its data tells them that customers invest in the companies they’re passionate about, and the Robinhood Investor Index aims to make this known.

The index weights are re-calculated at the beginning of each new month, using data from the last trading day of the previous month. These monthly updates are expected to be published on a dedicated site within five trading days after the first trading day of each month. The index inception date for performance measurement is January 2020.

Performance

Robinhood says its customers tend to invest in what they know, entertainment, technology, and non-obscure staples in most of their lives.

For comparison, below is a look back to the beginning of 2020 (index inception date) comparing the Nasdaq 100 (NDX) in blue to the Robinhood Investor Index (RII) in green. Robinhood has shared that the evolution of its customer’s portfolios have shown an increased conviction to growth in electric vehicles with Tesla at the top, and growth in Ford and NIO, which has moved these holdings up the ranking system. Entertainment is also well represented, with Disney and AMC consistently among the top stocks. The sector representation, is diversified, also spanning financial services, energy and healthcare.

Overall, the RII leans towards large cap stocks with 75% in large-cap, 16% in midcap and 9% in small-cap.

Source: Robinhood

Why it is Very Different

The Nasdaq Composite Index is a market capitalization-weighted index of more than 3,600 stocks listed on the Nasdaq stock exchange. The index is constructed on a modified capitalization methodology. This modified method uses individual weights of included companies according to their market capitalization. Similar methods are used for other often quoted market indices. The holdings captured in the Robinhood index are directly invested in by its users and weighted in the proportion weighted in each of the user accounts.

The sectors are defined using the FactSet Revere Business and Industry Classification System (RBICS). Sectors may be excluded if they are not among the holdings with the highest conviction.

Market capitalization evaluation is broken into three categories, large-cap (greater than $10 billion), midcap (between $2 and $10 billion), and small-cap (between $300 million and $2 billion). The RII does not include securities considered microcap (below $300 million).

Take Away

This new index could be of interest to financial professionals and other traders that monitor the activities of retail investors as a factor behind stock-market moves. The average age of Robinhood account holders is 32, this demographic has become an increasingly powerful driver of movement and it will be worth monitoring its trends.

Channelchek reports on index changes that we believe impact our readers. The Robinhood Investor Index, now in its infancy, will certainly be reported on in its early stages.

Sign-up for Channelchek news and research free to your inbox each day.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/robinhood-unveils-index-to-track-customers-favored-stocks-11662748639

https://robinhood.com/us/en/investor-index/

https://blog.robinhood.com/news/2022/introducing-the-robinhood-investor-index

What We Can Learn About Markets from September 11

Posted on by cpatches
Image: Jason Powell (Flickr)

September 11, a Retrospective Account of Investment Fallout and Recovery

I wasn’t in New York City on September 11, 2001. Just prior to 911, I had taken a position as CIO for a major Wall Street firm headquartered in lower Manhattan; however, the trading floor I was responsible for was about 50 miles east of ground zero. I took the position outside NYC to be closer to my home and family – the benefit of my decision became apparent all at once, at 8:45 am that Tuesday morning, then reinforced 18 minutes later.

Twenty-one years have passed since then, the children of the deceased are now adults, and financial activity is spread much further than one small area in lower Manhattan. Although much has changed, it’s important to look back and recognize how the investment markets handle devastation and, at the same time, recognize how humans here and around the world will band together when others need help.

Image Credit: Visual Capitalist

September 11, 2001

The opening bells at the New York Stock Exchange (NYSE) and Nasdaq were silent at 9:30 that morning. They remained silent until September 17, as traders and investors feared what their positions would be worth upon the reopening of the financial markets after the longest close on record.

Once reopened, the Dow Jones fell 7.1% or 684 points, setting a record at the time for the highest one-day loss in the exchange’s history. By Friday, the NYSE had experienced the greatest one-week decline in its history. The Dow 30 was down more than 14%, the S&P 500 plunged 11.6%, and the Nasdaq dropped 16%. In all, about $1.4 trillion in wealth disappeared during the five trading days. Since then, this record has only been surpassed once at the early stages of the pandemic.

In hindsight, the industries most negatively impacted make sense. Airlines and the insurance sectors lost tremendous value. A flight to quality made gold popular as the price per ounce leaped 6% to $287.  

Gas and oil prices quickly rose as fears that oil imports from the Middle East would be slowed or stopped altogether. Those fears lasted about a week; then, after no new attacks and a clearer understanding of the intentions of government officials, index levels returned to near their pre-911 levels.

The sectors that experienced major gains after the attacks include technology companies and certainly defense and weapons contractors. Investors anticipated a huge increase in government borrowing and spending as the country prepared to root out terror around the world. Stock prices also spiked for communications and pharmaceutical companies.

On the U.S. options exchanges, volatility in the markets caused put and call volume to increase. Put options, designed to allow an investor to profit if a specific stock declines in price, were purchased in large numbers on airline, banking, and publicly traded insurance companies. Call options, designed to allow an investor to profit from stocks that go up in price, were purchased on defense and military-related companies. Short-term profits were made by investors who were quick to execute.

The terrorism of September 11 will, doubtless, have significant effects on the U.S. economy over the short term. An enormous effort will be required on the part of many to cope with the human and physical destruction. But as we struggle to make sense of our profound loss and its immediate consequences for the economy, we must not lose sight of our longer-run prospects, which have not been significantly diminished by these terrible events. – Fed Chairman Alan Greenspan, September 20, 2001

Since September 11

Over the following 21 years, the major U.S. stock exchanges have taken steps to make physical disruption of trading more difficult. This includes dramatically increasing the percentage of trading that is electronic. While this has made the U.S. markets less vulnerable to physical attacks, it is feared that there is increased potential for cyberattacks. “As we have digitized our lives, which has generally been a great blessing, we have sown the seeds for even greater destruction in terms of the ability to hack into our systems,” said former Securities and Exchange Commission Chairman Harvey Pitt, who led the agency on Sept. 11, 2001. “That is today’s equivalent of a 9/11 attack. There is a potential ‘black swan’ event every single day.”

Major Market Indices Since September 11, 2001 (Source: Koyfin)

The investment markets have enjoyed above-average upward movement, despite the negative short-term impact of the black swan event. In the nearly 20 years since Sept. 11, the S&P 500, Nasdaq 100, and Russell 2000 Small-Cap index has risen more than four-fold. The bond market has also been strong (persistent low rates) despite increased borrowing to fund defense operations to finance America’s 911 response.

The U.S. economy itself has had long periods of expansion since 2021, even with the mortgage market crisis from December 2007 to June 2009, and the economic challenges from the response to the COVID-19 pandemic.

The costs, however, are likely to continue to be borne by taxpayers for generations. Interest-related costs alone on debt which financed military operations, including the long Afghanistan war, which was resolved last year when the U.S. withdrew after 20 years, and the protracted conflict in Iraq from 2003 to 2011, are high. The economic drag of these costs, while not fully measurable, are real.

The U.S. government financed the wars with debt, not taxes. Interest rates have been low, but taxpayers have already helped pay approximately $1 trillion in interest costs on the debt incurred to finance the two wars. These interest costs are expected to balloon to $2 trillion by 2030 and to $6.5 trillion by 2050 (according to the Watson Institute at Brown University). This places upward pressure on interest rates and places downward pressure on economic activity. One reason is that taxes used to fund interest costs take money from the economy without providing any stimulus or new material benefit.

Off Wall Street

September 11 radically changed the national mood and political environment. Polls and surveys taken just before the 911 attacks found Americans growing less certain about the direction of the country as a recession began to weigh down the ability to be optimistic. A full 44 percent of the country thought it was headed in on the wrong direction, according to the August 29-30, 2001 New Models survey.

Logic might suggest that after a successful attack, people’s attitudes toward the direction of the country would trend toward a worse future. Reporters, politicians, and spokespeople all predicted a terrible economic shock; their forecast seemed supported by the first week’s plunge in markets. But the events of that day seemed to give citizens purpose. In fact, statistics that indicated the “direction of the country” showed that optimism surged. An October 25-28 CBS/NY Times survey reported that people felt the country was headed in the right direction by a two-to-one margin. A sense of pride in who we are as a country and as individuals overcame negative economic news in an unprecedented way.

Take Away

It has been over two decades since what many of us think of as recent. The truth is, children born on September 11, 2021 or before are now of drinking age. But history can prepare us for new events. The market’s first reaction to tragic news is always down; when proven temporary, bargain hunters come in, then the market has always resumed its historical growth trend upward.

The markets now trade more digitally with almost no need for runners in lower Manhattan and far less open-outcry and paper jockeying by masses of people working for companies in one small section of Manhattan island. But the new threats are also real, a cyber attack on electronic records or transactions could be devastating in its own way.

Challenges even those caused by tragedy provide opportunity and even purpose. September 11, and its aftermath are proof of this.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=803387

https://www.weforum.org/agenda/2021/09/9-11-timeline-visualized-america-september-terror-attacks/

https://www.federalreserve.gov/boarddocs/speeches/2002/20020111/default.htm

https://www.visualcapitalist.com/wp-content/uploads/2021/09/911-terrorist-attack-timeline-full-size.html

https://www.brookings.edu/articles/flying-colors-americans-face-the-test-of-september-11/