Opinion Archives - Page 6 of 9

Golden Rule of Successful Trading/Investing

Posted on January 4, 2023January 5, 2023 by phoffman@channelchek.com

One Should Never feel Forced to Trade or Get Involved Because They are Bored

Most start off a New Year with great intentions. These often include saving money, starting a family, or finding a better job. A co-worker of mine is intent on skydiving before year-end – whatever. To each their own. For many involved in the markets, 2023 has become the year they want to further improve their trading. This usually begins with stepping back, reminding themselves of trading basics, then not falling into old habits weeks later. Another step is developing new understanding and new companies. It also includes not trading with the need to make back last year’s losses in a hurry.

There is one trading basic that is often ignored because it feels like it conflicts with other goals. But it doesn’t. It is knowing when being uninvolved is the best decision. Doing nothing without feeling you may be missing something takes practice for most. It may take more practice for those that have experienced the thrill of a mostly green trading account.

Trade No Stock Before its Time

Over the holidays, family members would ask, “should I buy Tesla?” or “should I be buying Apple down here?” My mom would instead ask, something that in my mind is a similar question. She’d ask, “when are you going to get married?” These are all similar because Tesla and Apple, when considering the whole universe of stocks, are probably not the best fit for the accounts of these people. Similarly, in the absence of finding a good personal fit, unless someone is holding a gun to one’s head, I believe in waiting for circumstances with a high probability of a positive outcome. Don’t get involved because you’re bored, or because you think you have to is the message.

If your win rate is over 50%, you’re doing better than average, this is as true in trading as it is in relationships. If you force either, your success rate goes down, and you’ve wasted time, money, and invited frustration. Yet so many investor/traders willy-nilly jump into something because they are bored, feel they are missing out, or are told it is what they are supposed to be doing.

Forcing trades, no matter how tempting it may be, how bored you are, or how much FOMO you’re experiencing, has a lower chance of being successful than if you wait for your perfect setup. Sitting on your hands so you can’t press the “Buy” button is preferable to being in the situation of trying to unwind a trade you spent too little time waiting to come to you. Good opportunity doesn’t always arrive on schedule, but if you have capital tied up in a mistake, you may not be able to jump at a real match for your portfolio later on.

Trading is Not Glamorous

The definition of booyah is “expressing triumphant exuberance.” If you yearn to say “booyah” or do any other kind of touchdown dance, you may find you will pull the sell trigger too early. A main key to trading is knowing what you want, then patience. Patience is one of the most important skills you can have as a trader. You need to have the control and the discipline to wait for a quality setup according to your individual strategy. It may take a while, but confidence the trades will come helps. Develop a trading strategy so you know the guidelines you will adhere to; abandoning that strategy just to be involved, over time, will cause you to be worse off.

Consistently successful traders will tell you that one of the most important things to remember with trading is that you should never let your emotions control your actions. If you can’t think rationally if you aren’t planning your trade and trading your plan, sit on your hands until you can. Really, defund your account, find another way to get your thrills. Because if you force a trade and it works out anyway, you have reinforced a bad habit. Many trading accounts of good people got fried in 2022 because they did the wrong thing in 2021, but in 2021 they were bailed out by the markets. Doing the wrong thing and succeeding is costly because you tend to repeat it.

A hail Mary pass sometimes meets the desired goal in a football game, swinging for a home run in baseball and connecting certainly can lead to exuberance and even a winning game. But most often, these are low-probability irrational plays if you actually want to win. Increase your time on base, work on your short plays, study your opponent, or whatever other kind of reference helps convey this thinking. Because saying “I do” to a stock without successful due diligence is like asking to eventually lose. If you just want excitement, then maybe you could consider skydiving.

Final Thoughts

We’re all always learning. Channelchek is a good way to discover less explored companies and to either learn or be reminded of things that may enhance your positive outcomes. Sign up now, there’s no paywall, just good info not found on more mainstream investment sites. Go here.

Paul Hoffman

Managing Editor, Channelchek

Michael Burry Expects Huge Swings in 2023

Posted on January 3, 2023January 3, 2023 by phoffman@channelchek.com

Image: Michael Burry on the Set of “The Big Short” (Twitter, @michaeljburry)

Washington’s Economic Playbook According to Michael Burry

One benefit to Elon Musk purchasing Twitter and ridding the platform of many of the auto posts on well-followed accounts is that the well-followed Michael Burry is no longer deleting his tweets the same day as posted. Burry, who began the new year tweeting with a very clear economic roadmap, said less than a month ago that he trusts Elon. As far as the hedge fund manager’s 2023 economic roadmap, his expectations show that he is critical of all those in Washington that have a hand on the economic steering wheel and continue to resist oversteering.

While it can be frustrating for someone like Burry or any investor to forecast missteps by those that most impact the economy, especially if the official entities continue to repeat their behaviors, there is some consolation in the idea that patient investors can use these repeated actions to enhance their account’s performance.

Burry’s New Year’s Message

In 50 words, Dr. Burry, the investor made famous by Christian Bale’s portrayal of him in the 2015 movie The Big Short, said that he expects that inflation for this part of the interest rate, or market cycle, has already passed its high. In fact, he expects that it will be unmistakable, as the year progresses, that the US has fallen into a recession. A recession that can’t be denied or redefined because it will be that deep.

With this economic weakness, the hedge fund manager expects that we will not only see lower CPI readings but by the second half of this year, inflation may even turn negative – deflationary readings.

Burry then goes on to say that this will cause stimulus from both the fed and fiscal policy. This stimulus will be overdone if keeping inflation at bay is the goal. He expects we will have an inflationary period that may outdo the one we are coming off., Burry tweeted. “Fed will cut and government will stimulate. And we will have another inflation spike.”

Take Away

If you ask ten experts what will happen over the next 12 months, you will get ten or more conflicting projections. The Scion Asset Management CIO is often correct on what will eventually occur but just as often as he is right, he is far off on the timing. The scenarios that seem obvious to him have in the past played out a lot slower in the economy and marketplace.

His first tweet in 2023 said that he expects more of the same from the folks in Washington, including the Federal Reserve and the US Treasury. The fed is now pushing hard on the economic brake pedal, which will could cause activity to reach recessionary levels. He expects that this will be followed by a panic move to the gas pedal that will create shortages, increased demand, and consumer price increases.

If he is correct, this means different things to investors with different time horizons. But it appears that Burry expects the tightening cycle to end soon.

Paul Hoffman

Managing Editor, Channelchek

Source

Burry New Year’s tweet

https://nypost.com/2022/12/09/michael-burry-deletes-twitter-account-despite-declaring-elon-musk-has-his-trust/

Most Interesting Articles on Channelchek in 2022 (Editor’s Choice)

Posted on December 30, 2022December 30, 2022 by phoffman@channelchek.com

The Year 2022 Brought Many Twists and Turns to Share with Readers – the Editor Picks His Favs

All markets are interconnected. In fact, markets are impacted by weather, war, worry, Washington, wages, waste, and that’s just the W’s. So each day, as Channelchek prepares to deliver research, articles, and pertinent video content to subscriber’s inboxes, we plow through a mountain of information and hope to share what is either not being addressed or covered, or present front page news from the point of view of seasoned investors, not rookie news writers.

Below are five articles that were published throughout the year on Channelchek. Although I have favorites not included here, and these are not the most read, I believe the below told a slightly different story than the mainstream narrative. As a content provider to this popular investment research platform, my job is not to call the market, it is to provide thoughts and knowledge to help you make decisions on small and microcap stocks and the overall universe of investment opportunities. Still, the content team is proud when, for example, the entire newswire exploded with the word “pivot” that we then reminded our readers there was nothing indicating a pivot was imminent or even being discussed among FOMC members. As most Channelchek content providers are investors, analysts, and market watchers, we were also proud to serve our readership by being among the first to dig through the $AMC $APE dividend and define the true effects to stakeholders.

I think you’ll find these five articles are still compelling, and if you have not registered for no-cost insights to your inbox each day, here’s your chance to start the New Year from a slightly different investment angle.

Click Here to Register.

#1 More Behind AMC’s APE Dividend than Meets the Eye

“So, ladies and gentlemen, gentlemen and ladies, TODAY WE POUNCE.” This is how the AMC Chairman began his letter to shareholders on August 4. The company announced a unique dividend to be awarded to listed shareholders later in the month. The impact of the dividend is still being felt and discussed among market participants.

#2 The Truth About the Fed Pivot Rumors

In this article explaining the Fed not pivoting but instead doubling down on describing a strong hawkish bias does not necessarily mean bad news for investors in stocks. It’s a follow-up article to Don’t Fear the Rate Hike, which was widely read and shared on social media. There is information in the above Fed pivot article that I am certain will be as pertinent in 2023 as it was in 2022.

#3 What Investors Haven’t Yet Noticed About the Value in Some Biotechs

If you’re shopping for a wallet and one comes complete with $100 worth of cash inside and is priced at $60, would you think there is value to this purchase? A situation similar to this has evolved in many biotech stocks. The article was written in late May, and although it has only played out for a few companies in the sector, conditions still exist for a feeding frenzy in biotech stocks. Information within the article could also apply to other sectors that have lost popularity post Covid19.

#4 Reading Between Michael Burry’s Lines

The only real contact hedge fund manager Michael Burry has with the outside world is Twitter posts (which, since Musk’s arrival, Burry now promises not to delete), his quarterly SEC filing of holdings, and every four or five years he will allow an interview with Bloomberg via Bloomberg Msg. Investment content providers are all over every tweet and quick to tell the world what it means. There are even YouTube channels that exist only to guess at what Burry’s portfolio at Scion may hold and what Burry (maybe) thinks. They do this because many readers swarm to learn more about what he is preparing for.

Some of the most widely read and long-lived content on Channelchek are articles about this guru. Still we promise to only present his tweets, filings, and thoughts when the information seems useful.

#5 What Sectors Do Best With a Strong Dollar?

Written in late April, this article hit a need that stayed important to readers throughout 2022. While the exact numbers are no longer current, the knowledge of how one market impacts another is always worth tucking away in the back of your brain so that, as an investor or trader, you can be early on building a position rather than later when the trade may have already hit the news and lost the bulk of its move. While there are always moving pieces, especially when it comes to currency strength, this article, most often discovered through Google searches, is super short but contains useful information.

Happy New Year

Thank you for letting us be a part of 2022. In the coming year, we have plans to continue everything we are now doing and add on some features that we believe will provide users with relevant information not found in too many other places.

If you have not yet signed up, now is a great time to make sure you don’t miss anything. Click Here.

Paul Hoffman

Managing Editor, Channelchek

Why You Should Treat Your Trading Account Like a Used Car Lot

Posted on December 30, 2022December 30, 2022 by phoffman@channelchek.com

Smaller Losses and Bigger Gains Come with Mindset

I don’t think I’m a very good businessman. I act too much with the heart. – Pelé

If you treat the holdings in your trading account with any attachment, your ability to sell at the right time will be hindered, and your profit potential will suffer. Ideally, an active trading account accumulates when the selling volume reaches a peak, prices are cheap, and lightens up when prices are sufficiently above the purchase price. Or when there appears to be better used for the account’s capital — including moving to cash equivalents.

The Pelé quote above reminds me of many active traders; they enjoy the rush of playing and know they can only claim a victory when on the field and in play. These traders often stay on the field too long and accumulate losing positions. The markets are not a game where the odds of winning or losing are equal on any given day. Trading the markets is better thought of as a business that, at times should increase inventory and at times scale down.

Think of Your Trading Account as a Business

I struggled this week as I had two positions in the red that, for tax reasons, I should let go of to offset gains and the taxes that go along with those gains. These positions are not acting poorly, but they are negative, and they both are taking longer than I had hoped to pay off. Each easily allows me to immediately purchase a similar position without upsetting the IRS. But I have hesitated to sell all week.

If trading is a business, one does what is believed to net the most profit – always. I’m usually pretty good at this, but these two small positions would represent my first losses of the year in my trading account (hurray for me). I was fortunate enough to spot the market’s relentless one-direction trend in 2022, this allowed me to ride the downward waves. The trend seems to be continuing, so exiting these two holdings and getting back into something with similar attributes makes solid business management sense. But it isn’t that easy, I’m a competitive person. The “sportsman” side of me did not want to take any losses after dozens of wins. Today, the last day of the year, I woke and told myself the intelligent thing is doing what should net more money – not what will net bragging rights over win percentage.

There are many other reasons people don’t sell when the probabilities indicate they should. One is not pre-determining if the trade is behaving as expected; another is falling in love with a stock and not wanting to part with it. Another is knowing you were once up and not wanting to permanently lock in something that is now red. Another may be “addiction to the game,” this burns money; a good trader should be comfortable sitting with a large cash position for weeks or months if that is what makes the most business sense.

All of these feelings that impact behavior are part of being human. There are plenty of other outlets to act on feelings outside of the markets, but investing requires you to act as though you are running a business. Don’t fall in love with your positions, and if they aren’t treating you well, get rid of them.

Car Lot Owner Mentality

This may not work for everyone, but I think of my trading account (not retirement savings) as a used car lot. I am the manager and every one of the cars represents something I want to sell. If you look at your account in this way, stocks are just inventory. If times are good and prices are rising on my inventory, I want to slow down the pace of my selling. When times ahead look as though people may not want the kind of inventory on my lot, I can’t sell fast enough, even if at a loss. The cash then raised serves as dry powder that stands ready to be invested in cars/inventory/stocks believed to be more in demand. Inventory that will provide more of a profit.

By thinking of my account as a car lot, I avoid 95% of the mental, “acting with the heart” trading missteps that I see others get trapped by. I still have a 5% problem that includes wanting a perfect score.

Investors buying and selling on an exchange have a huge advantage over managers of a car lot. For most exchange traded securities, finding someone to close out your position with does not require someone walking in off the street that just happens to want what is on your lot. Investors of securities have sell buttons that alert the investment community that you are unloading. Even thinly traded securities will have someone take the other side of the trade at the right price. There are no other businesses in the world where unwanted inventory is this easy to unload. Traders are like car lot owners with this unique advantage.

Don’t Coddle the HODL Model

While buy and hold may be a good long-term portfolio strategy for retirement money or other long-term assets, holding without reason other than the investment community encourages you to “HODL” forever and not to throw in the towel can get you in trouble. The HODL community encourages investors of certain assets to Hold On for Dear Life; this isn’t trading; it’s a recipe for an ulcer.

When does it make sense to close out a position? In general, there are some marketplace related reasons to unwind a position. These are reasons that are related to the company, changes in the markets, or better opportunity elsewhere. Or non-market-related outside reasons. Perhaps one wishes to use some of the profit to put in a pool, or they wish to stem possible losses while waiting for better clarity. Outsiders encouraging an entire community to hold a position to help push up its price only works until greed kicks in and those sworn to HODL realize the stock is up for unnatural reasons and they should be among the first out.

Kneejerk market reactions to news or events can cause a wave of selling or buying that then settles down and reverses somewhat. This may provide an opportunity to unwind positions into the feeding frenzy and re-enter it when the market settles in at a more level-headed price.

Broaden Investment Base

If you are a used car lot owner during a recession, you may opt to only half-fill your lot and make sure the cars in inventory are affordable to the community you serve. If the economy fires up and money is then widely available, you may want to maximize your inventory and make sure they are cars that will net the most profit. It is important to know a lot about different classes of cars. This is how you run that business, minivans and crossovers some years, even if you like British sports cars.

For trading, after the pandemic plunge in early 2020, the markets had solid trends. First up with many sectors outpacing the others. Then it trended down, with many sectors outpacing the others. Understanding the sectors and companies within the sectors allows better decisions. If you have spent all your time wondering whether you should get into Apple or Tesla at the exclusion of others, while oil companies or utilities were what had a clear trend, or in Nasdaq 100 stocks because the media always talks about them, when small-caps were making their move, you may wish to broaden your focus.

Take-Away

Internal trouble exiting positions impacts more self-directed investors than will ever admit to it on social media (or actual in-the-flesh interaction). If thought of as inventory and a tool for maximizing return, the trouble is put in a place most can handle, as a “business owner,” you are buying what you feel you can sell. That is the only reason to buy. If you don’t know if you can sell it higher tomorrow, but there is something that you believe you can, then perhaps it is time to evaluate dumping, even at a loss, to pick up something else.

Cash can often be that something else. Earning 4% annually on a short t-bill isn’t sexy, but having that liquid holding when opportunity presents itself, allows you to pounce. There is nothing worse than seeing something very clearly as a winning trade and not having the capital to load up on it.

Paul Hoffman

Managing Editor, Channelchek

Two Non-Wall Street Economists Share Their 2023 Projections

Posted on December 29, 2022December 29, 2022 by phoffman@channelchek.com

Inflation, Unemployment, the Housing Crisis, and a Possible Recession: Two Economists Forecast What’s Ahead in 2023

With the current U.S. inflation rate at 7.1%, interest rates rising and housing costs up, many Americans are wondering if a recession is looming.

Two economists discussed that and more in a recent wide-ranging and exclusive interview for The Conversation. Brian Blank is a finance professor at Mississippi State University who specializes in the study of corporations and how they respond to economic downturns. Rodney Ramcharan is an economist at the University of Southern California who previously held posts with the Federal Reserve and the International Monetary Fund.

Both were interviewed by Bryan Keogh, deputy managing editor and senior editor of economy and business for The Conversation.

Are we headed for a recession in 2023?

Brian Blank: The consensus view among most forecasters is that there is a recession coming at some point, maybe in the middle of next year. I’m a little bit more optimistic than that consensus.

People have been calling for a recession for months now, and this seems to be the most anticipated recession on record. I think that it could still be a ways off. Consumer balance sheets are still relatively strong, stronger than we’ve seen them for most periods.

I think that the labor market is going to remain hotter than people have expected. Right now, over the last eight months, the labor market has added more jobs than anticipated, which is one of the strongest streaks on record. And I think that until consumer balance sheets weaken considerably, we can expect consumer spending, which is the largest part of the economy, to continue to grow quickly.

[But this] doesn’t mean that a recession is not coming. There’s always a recession somewhere down the road.

Rodney Ramcharan: Indeed, yes, there’s a likelihood that the economy is going to contract in the next nine months. The president of the New York Fed expects the unemployment rate to go up from 3.5% currently to somewhere between 4% to 5% in the next year. And I think that will be consistent with a recession.

In terms of how much worse it can be beyond that, it’s going to depend on a number of things. It could depend on whether the Fed is going to accept a higher inflation rate over the medium term or whether it’s really committed to getting the inflation rate down to the 2% rate. So I think that’s the trade-off.

Will unemployment go up?

Blank: [Unemployment] hasn’t risen much, and maybe it’ll pick up to somewhere close to 4%. Many are expecting something like four and a half percent. And I think that’s certainly possible. And I think that we can see small upticks in the coming months.

But I don’t think it’s going to rise as quickly as some people are expecting, in part because what we’ve seen so far is a lack of labor force participation. Until more people enter the labor market, I think there are going to be plenty of jobs to go around.

What is your outlook on interest rates?

Ramcharan: As people find it more and more difficult to find jobs, or to get jobs as they begin to lose jobs, I think that’s going to dampen spending. And we’re seeing that now as the cost of borrowing has gone up sharply, and the Fed is expecting that.

The expectation is the federal funds rate will go up to 5% by next year. If you tack on another couple of points, because of the risk involved, then the cost to borrow to buy a home could potentially get up to 8% for some people. And that could be very expensive.

And the flip side of this for businesses is there’s potentially going to be a slowdown in cash flow. If consumers are not spending, then the revenues that businesses depend on to make investments might not be there.

The additional piece in this puzzle is what the banks will then do. I think banks are going to begin to curtail the extension of credit. So not only will interest rates go up for the typical consumer and the typical business, it’s also likely that they are more likely to experience denial of credit, and so that should together begin to slow spending quite a bit.

After massive increases in housing prices, what caused them to suddenly drop?

Ramcharan: As the Fed lowered interest rates, there was a massive shift among the population for various reasons. They decided that housing was the right investment or the right thing. And so when 50 million people all collectively decide to buy homes, the supply of homes is reasonably constrained in the short run. And so that led to this massive increase in house prices and in rents.

In the last three months, the housing market has cooled sharply. We’re now seeing house prices beginning to fall. I would imagine, going forward, the housing market cooling is going to be a major driver behind the slowdown in the inflation rate and in real estate investment trusts. So that’s positive.

Our recent election just changed the composition of Congress. How will that affect the economy?

Blank: Certainly, when we have a divided Congress, we’re less likely to see decisions made that involve passing legislation that might support the economy. And I think it’s likely the Republican House is going to become a little bit more conservative with spending.

And so if we do start to see a downturn, I think you’re less likely to see legislation that might help support an economy that could be in need of it. That is going to make the job of the Federal Reserve more important.

How certain are these predictions?

Ramcharan: I just want to be careful here and let your viewers know that we’re making these statements based on theory, because the inflation that we’re experiencing now comes about from a pandemic, and there really is no evidence, there’s no data available, that people can look to to say, “What happens to an economy after a pandemic?” That data does not exist.

So we’re trying to piece together the data we do have with the theories we do have, but there’s a huge band of uncertainty about what’s going to happen.

Watch the full interview here.

Investment Entry and Allocation Thoughts for 2023

Posted on December 28, 2022December 28, 2022 by phoffman@channelchek.com

As the Bear Market Melts Down, Where Will the Grass Be Greenest?

Bear Markets and snowmen have one thing in common; they don’t last forever.

The entry point into an investment can have a huge impact on performance. Exits tend to be more critical when the stock has shown that it is not performing as planned. While this kind of exit may result in a loss, it allows the investor to preserve capital, liquid assets they can deploy if another good entry presents itself. The major stock market indices for 2022 are down 20% and more. Has this sell-off provided for performance-producing entry points in some stocks? Let’s look where we are as the countdown to 2023 has already begun.

About this Bear Market

Bear markets end – they always have. Pinpointing an exact bottom is not possible, so trying to be the first in for that great entry point may include a few false starts and some unhoped-for exits. The current slide in the stock market started around January 1, 2022. This was because some doubted whether inflation was transient at the time; by March, most understood the Fed was concerned that price increases were pervasive.

Fed Chair Powell, along with many Fed Presidents, began speaking hawkishly to not unduly surprise and unsettle markets as the central bank unwound the liquidity used in response to the novel coronavirus. What followed was unprecedented. Overnight lending rates went from an effective 0.08% to an effective 4.33% during the course of the year. This is more than 52 times the base lending rate at the start of the year. With these increases, no wonder the bear market continued.

Where Are We Now?

Expectations of overnight rate hikes in 2023 are for another 0.50%-0.75% increase leaving the target at, or just north of, 5%. This increase in the cost of money is small (.17 times) compared to the massive (52 times) rocking the markets in 2022.

So rate hikes are expected to be much lower as a percentage of current rates next year. And after the last FOMC meeting, markets have seemingly repriced lower with this expectation. If all goes as it is thought it will, the market is already priced for the worst. This is a bullish sign.

Put another way; most believe that with Fed funds beginning 2022 around zero, we’re likely much closer to the end of the Fed Funds tightening than to the beginning.

Inflation (CPI) for December won’t be reported until January 12, 2023. The latest CPI numbers show YoY up 7.1% in November, a slowing from 7.7% in October, which tapered from 8.2% the month before. The November reading of 7.1% taken by itself is a long way away from the Fed’s 2% target. But the trend in the CPI and PCE deflator also suggest the Fed is likely to monitor previous hikes to see if they will have the desired impact.

The Fed Has Been Transparent

The Fed lowered rates in line with what they promised during the pandemic. Then after some transient talk, they raised rates as they expressed they would in 2022. Following the December FOMC meeting, they suggested they were not at the end, but the voting members’ expectations for where they will settle is an average of 5.40%. The forward-looking stock market, if they believe the Fed will again do as promised, should recognize this is a much lower increase. It is perhaps near the time to begin to build on positions. This could be the entry point many investors have been waiting for.

Small Cap Phenomenon

The chart below shows how much small cap stocks outperformed during the 12- months following the pandemic plunge. While small cap outperformance has been experienced during the past century of stocks’ post-sell-off periods, one only has to look back to the pandemic plunge to remember that it was small-caps (depicted below as IWM) that had been beaten down the most and by far outran the other major indices for the next year from the low of 2021.

Could this small cap phenomenon occur again after markets reach the bottom? Data demonstrates that small cap stocks tend to lead following a period of economic dislocation. One reason is US small caps have more of their business within the states and as a bonus, do well with a rising dollar. Current conditions suggest exploring smaller stocks. They have outperformed large caps following nearly every bear market of the last century. And today, the dollar has risen above its six-month high and is trending higher. While past movement comparisons don’t always include all the crosscurrents of the future, a strong argument could be made that a turnaround is near and small caps may again be the leaders by a wide margin.

Some Disclosure

Channelchek, the investment information platform you’re now reding has small cap stocks as its primary focus. The deep platform provides data on over 6000 stocks, with quality research updated regularly on many of them. Channelchek also provides videos and articles that may inspire informed stock selection. Stock selection, rather than just plowing investment dollars into an indexed ETF, may be preferable as indexed ETFs include sectors and stocks that may not be worthy of your portfolio.

Diversification across asset classes, sectors, and market capitalizations is considered prudent for long-term portfolios; individual allocations can be built on depending on where we are in the business and interest rate cycle. This includes an allocation to small cap equities, which perhaps should be expanded if the Fed is near the end of its tightening cycle. It could always be reduced later if the economy is deep into a growth cycle.

Take Away

Although we do not have a crystal ball to know exactly when the best entry point in any company stock is, if a century’s worth of data is any guide, the period following the end of a market downturn has been a good time to increase exposure to the small cap sector.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/news.release/cpi.nr0.htm

https://www.newyorklifeinvestments.com/insights/investing-in-small-caps-following-a-market-downturn

https://tradingeconomics.com/united-states/interest-rate

Why Central Banks Will Choose Recession Over Inflation

Posted on December 19, 2022December 19, 2022 by phoffman@channelchek.com

The Difficult Reality of Rising Core and Super-Core Inflation

While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023.

Even though December is here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.

In the context of governments deficits that are hardly declining and, in some cases, increasing, investors must take into account the danger of a significant reduction in the balance sheets of central banks. Both the quantitative tightening of central banks and the refinancing of government deficits, albeit at higher costs, will drain liquidity from the markets. This inevitably causes the global liquidity spectrum to contract far more than the headline amount.

Liquidity drains have a dividing effect in the same way that liquidity injections have an obvious multiplier effect in the transmission mechanism of monetary policy. A central bank’s balance sheet increased by one unit of currency in assets multiplies at least five times in the transmission mechanism. Do the calculations now on the way out, but keep in mind that government expenditure will be financed.

Our tendency is to take liquidity for granted. Due to the FOMO (fear of missing out) mentality, investors have increased their risk and added illiquid assets over the years of monetary expansion. In periods of monetary excess, multiple expansion and rising valuations are the norm.

Since we could always count on rising liquidity, when asset prices corrected over the past two decades, the best course of action was to “buy the dip” and double down. This was because central banks would keep growing their balance sheets and adding liquidity, saving us from almost any bad investment decision, and inflation would stay low.

Twenty years of a dangerous bet: monetary expansion without inflation. How do we handle a situation where central banks must cut at least $5 trillion off their balance sheets? Do not believe I am exaggerating; the $20 trillion bubble generated since 2008 cannot be solved with $5 trillion. A tightening of $5 trillion in US dollars is mild, even dovish. To return to pre-2020 levels, the Fed would need to decrease its balance sheet by that much on its own.

Keep in mind that the central banks of developed economies need to tighten monetary policy by $5 trillion, which is added to over $2.50 trillion in public deficit financing in the same countries.

The effects of contraction are difficult to forecast because traders for at least two generations have only experienced expansionary policies, but they are undoubtedly unpleasant. Liquidity is already dwindling in the riskiest sectors of the economy, from high yield to crypto assets. By 2023, when the tightening truly begins, it will probably have reached the supposedly safer assets.

In a recent interview, Bundesbank President Joachim Nagel said that the ECB will begin to reduce its balance sheet in 2023 and added that “a recession may be insufficient to get inflation back on target.” This suggests that the “anti-fragmentation tool” currently in use to mask risk in periphery bonds may begin to lose its placebo impact on sovereign assets. Additionally, the cost of equity and weighted average cost of capital increases as soon as sovereign bond spreads begin to rise.

Capital can only be made or destroyed; it never remains constant. And if central banks are to effectively fight inflation, capital destruction is unavoidable.

The prevalent bullish claim is that because central banks have learned from 2008, they will not dare to allow the market to crash. Although a correct analysis, it is not enough to justify market multiples. The fact that governments continue to finance themselves, which they will, is ultimately what counts to central banks. The crowding out effect of government spending over private sector credit access has never been a major concern for a central bank. Keep in mind that I am only estimating a $5 trillion unwind, which is quite generous given the excess produced between 2008 and 2021 and the magnitude of the balance sheet increase in 2020–21.

Central banks are also aware of the worst-case scenario, which is elevated inflation and a recession that could have a prolonged impact on citizens, with rising discontent and generalized impoverishment. They know they cannot keep inflation high just to satisfy market expectations of rising valuations. The same central banks that assert that the wealth effect multiplies positively are aware of the disastrous consequences of ignoring inflation. Back to the 1970s.

The “energy excuse” in inflation estimates will likely evaporate, and that will be the key test for central banks. The “supply chain excuse” has disappeared, the “temporary excuse” has gotten stale, and the “energy excuse” has lost some of its credibility since June. The unattractive reality of rising core and super-core inflation has been exposed by the recent commodity slump.

Central banks cannot accept sustained inflation because it means they would have failed in their mandate. Few can accurately foresee how quantitative tightening will affect asset prices and credit availability, even though it is necessary. What we know is that quantitative tightening, with a minimal decrease in central bank balance sheets, is expected to compress multiples and valuations of risky assets more than it has thus far. Given that capital destruction appears to be only getting started, the dividing effect is probably more than anticipated. And the real economy is always impacted by capital destruction

About the Author

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

Daniel Lacalle is a professor of global economy at IE Business School in Madrid.

The Markets Seem to Just Keep Saying “NO!” to Fed Chair Powell

Posted on December 15, 2022December 15, 2022 by phoffman@channelchek.com

Fed Chairman Powell is Being Ignored by the Markets – What Next?

Is Fed Chairman Powell getting the George Costanza treatment from the bond market? I asked myself this as I listened to the Chair double down on his hawkishness yesterday while at the same time watching the bond market yawn. Rates were effectively unchanged out in the periods. It reminded me of the Seinfeld episode where George tells his girlfriend, point blank, I’m breaking up with you.” She simply replies, “No.” Similar to George, Powell’s wishes are not being recognized by the market which would be hurt by them. Today mortgage rates dropped along with treasury yields, this all makes Powell’s job tricky.

The FOMCs final episode of the 2022 season ended as expected with a 50 bp increase, and the Fed Chairman addressing reporters and trying to be taken seriously by the markets. Afterall, he can say he’s raising rates all he wants to slow growth, if lending rates don’t rise, the Fed doesn’t achieve its goal. Since October 24, the Fed has raised overnight rates 1.25%. As seen below in the chart, despite the increase from a 3% target to a 4.25% target (which is a 42% increase in bank lending rates), the ten year which is a benchmark for consumer lending rates, declined by 0.75% (which is an 18% decline).

U.S. 10- Yr. Treasury Note Market Rates

What’s Going On?

Markets are forward looking. Currently they seem to be, more farsighted than usual. As Chairman Powell repeats after each increase that officials anticipate that “ongoing increases” in the Fed Funds rate will be “appropriate,” this would be expected by someone of Powell’s experience to cause the market to look toward rate increases and shift the yield curve higher. The Fed has done more than this. The official one-year-out Fed forecast is for the Fed funds rate to end 2023 at 5.1% and 4.1% for 2024. These were 4.6% and 3.9% previously. Mortgage rates today hit recent lows.

Meanwhile overnight interest rates this year have increased by 50 times from where they started (.08% to 4.00%). By comparison the benchmark Treasury was trading at 1.73% at the start of the year, so its level has gone up by two times.

But the current market has been so forward-looking in 2022, that each time the Fed puts on its hawkish face, the bond markets take it as more assurance that the U.S. will fall into a recession. They trade on the reassurance that the Fed will need to ease, and it effectively eases borrowing rates as benchmark yields decline. The bond and even stock markets expect the tightening to be transitory. They also only half listen to the Fed Chair because they know how wrong he was when he suggested inflation was transitory just one year ago.

CPI is also causing markets to be optimistic. Two consecutive consensus misses of inflation have led the participants to believe we are getting very close to the peak for interest rates, and rate cuts will soon be on the agenda. The Fed has been doing everything it can to change people’s minds.

The Fed’s View

While the market may be saying “no” and not allowing Powell to impose higher rates along the curve, the Fed certainly is going to keep trying. A 2% inflation target with inflation running approximately three times this won’t allow for an easing of policy. Even if overnight Fed Funds are so high that they are near historical norms.

For the Fed to accept what the market is pricing for, it will want to see substantial evidence that inflation is slowing. This will take more than just one or two months, where core inflation has come in less than the market was expecting. It isn’t an exact science to bring down inflation, but mathematically to get inflation to 2% YoY, over time, we need to see month-on-month readings averaging 0.17% MoM. We are not close, considering it is the core PCE deflator that the Fed pays the most attention to. In fact, the Fed just revised its inflation forecast upward because the core PCE deflator is likely to be stickier than core CPI. The revision has its core PCE estimate at 3.5% for the end of 2023 versus 3.1% previously, with 2024 revised up to 2.5% from 2.3%.

Take Away

What happens when monetary policy throws us huge increases in Fed Funds in seven out of its eight meetings, and late in the year, the interest rate markets decides, “No?”

It seems the Fed is working on its ability to jawbone rates higher. We saw this after the FOMC meeting with Powell doubling down on his rhetoric. We can expect more Fed addresses trying to move rates in a way that direct action concerning overnights has failed to accomplish. In the end, it’s the markets that set levels; if the bond market and stock market participants keep taking this hawkish language as recessionary, the hawkish stance could continue to backfire on the Fed.

Comments from Fed Chair Powell emphasized that the FOMC wants financial conditions to “reflect the policy restraint that we’re putting in place”. After all, inflation is indeed still running well above target, the jobs market and wage pressure remain hot, and activity data is pointing to a decent fourth-quarter GDP report after a healthy 2.9% growth rate in the third quarter. Will he succeed? If my memory serves me correctly, in the Seinfeld episode George wound up engaged to the woman he was breaking up with.

Paul Hoffman

Managing Editor, Channelchek

Fed Pivot, Money Supply, and Investment Returns

Posted on December 13, 2022December 13, 2022 by phoffman@channelchek.com

Image Credit: Karolina Grabowska (Pexels)

Why Investors Are Obsessed with the Fed “Pivot”

“Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas,” writes economist Daniel Lacalle, PhD. In his latest article, published below. LaCalle takes on the journalists and economists that see market risk differently than himself. This is a thought-provoking read for anyone who has been living on a diet of mostly CNBC, and Yahoo Finance, as exposure to diverse market viewpoints is considered healthy. – Paul Hoffman, Channelchek

Obsessed Investors

In a recent Bloomberg article, a group of economists voiced their fears that the Federal Reserve’s inflation fight may create an unnecessarily deep downturn. However, the Federal Reserve does not create a downturn due to rate hikes; it creates the foundations of a crisis by unnecessarily lowering rates to negative territory and aggressively increasing its balance sheet. It is the malinvestment and excessive risk-taking fuelled by cheap money that lead to a recession.

Those same economists probably saw no risk in negative rates and massive money printing. It is profoundly concerning to see that experts who remained quiet as the world accumulated $17 trillion in negative yielding bonds and central banks’ balance sheets soared to more than $20 trillion now complain that rate hikes may create a debt crisis. The debt crisis, like all market imbalances, was created when central banks led investors to believe that a negative yielding bond was a worthwhile investment because the price would rise and compensate for the loss of yield. A good old bubble.

Multiple expansion has been an easy investment thesis. Earnings downgrades? No problem. Macro weakness? Who cares. Valuations soared simply because the quantity of money was rising faster than nominal GDP (gross domestic product). Printing money made investing in the most aggressive stocks and the riskiest bonds the most lucrative alternative. And that, my friends, is massive asset inflation. The Keynesian crowd repeated that this time would be different and consistently larger quantitative easing programs would not create inflation because it did not happen in the past. And it happened.

Inflation was already evident in assets all over the investment spectrum, but no one seemed to care. It was also evident in non-replicable goods and services. The FAO food price index already reached all-time highs in 2019 without any “supply chain disruption” excuse or blaming it on the Ukraine war. House prices, insurance, healthcare, education… The bubble of cheap money was clear everywhere.

Now many market participants want the Fed to pivot and stop hiking rates. Why? Because many want the easy multiple expansion carry trade back. The fact that investors see a Fed pivot as the main reason to buy tells you what an immensely perverse incentive monetary policy is and how poor the macro and earnings’ outlook are.

Earnings estimates have been falling for 2022 and 2023 all year. The latest S&P 500 earnings’ growth estimates published by Morgan Stanley show a modest 8 and 7 percent rise for this and next year respectively. Not bad? The pace of downgrades has not stopped, and the market is not even adjusting earnings to the downgrade in macroeconomic estimates. When I look at the details of these expectations, I am amazed to see widespread margin growth in 2023 and a backdrop of rising sales and low inflation. Excessively optimistic? I think so.

Few of us seem to realize a Fed pivot is a bad idea, and, in any case, it will not be enough to drive markets to a bull run again because inflationary pressures are stickier than what consensus would want. I find it an exercise in wishful thinking to read so many predictions of a rapid return to 2% inflation, even less, when history shows that once inflation rises above 5% in developed economies, it takes at least a decade to bring it down to 2%, according to Deutsche Bank. Even the OECD expects persistent inflation in 2023 against a backdrop of weakening growth.

Stagflation. That is the risk ahead, and a Fed pivot would do nothing to bring markets higher in that scenario. Stagflation periods have proven to be extremely poor for stocks and bonds, even worse when governments are unwilling to cut deficit spending, because the crowding out of the private sector works against a rapid recovery.

Current inflation expectations suggest the Fed will pivot in the first quarter of 2023. That is an awfully long time in the investment world if you want to bet on a V-shaped market recovery. Even worse, that pivot expectation is based on a surprisingly accelerated reduction in inflation. How can it happen when central banks’ balance sheets have barely moved in local currency, reverse repo liquidity injections reach trillion-dollar levels every month and money supply has barely corrected from the all-time highs of 2022? Many are betting on statistical bodies tweaking the calculation of CPI (consumer price index), and believe me, it will happen, but it will not disguise earnings and margin erosion.

To cut inflation drastically three things need to happen, and only one is not enough. 1) Hike rates. 2) Reduce the balance sheet of central banks meaningfully. 3) Stop deficit spending. This is unlikely to happen anytime soon.

Investors that see the Fed as too hawkish look at money supply growth and how it is falling, but they do not look at broad money accumulation and the insanity of the size of central banks’ balance sheets that have barely moved in local currency. By looking at money supply growth as a variable of tightness in monetary policy they may make the mistake of believing that the tightening cycle is over too soon.

Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas. Betting on a Fed pivot by adding risk to cyclical and extremely risky assets may be an extremely dangerous position even if the Fed does revert its pace, because it would be ignoring the economic cycle and the earnings reality.

Central banks do not print growth. Governments do not boost productivity. However, both perpetuate inflation and have an incentive to increase debt. Adding these facts to our investment analysis may not guarantee high returns, but it will prevent enormous losses.

About the Author

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

Why Rate Increases May be Nearing an End

Posted on December 13, 2022December 13, 2022 by phoffman@channelchek.com

Arguments Can be Made for Rates Being Too Low and for Rates Being Too High

The Federal Reserve has raised the Fed Funds rate from an average of 0.08% in January 2022 to its current 4.05%, and a likely adjustment to 4.25% to 4.50% tomorrow. Inflation, as measured by CPI and even the Fed’s favorite, the PCE deflator, has been showing a decreasing rise in prices. So investors within all affected markets are asking, how much more will the Fed raise rates? Ignoring any suggestion that “this time it’s different,” I looked at US interest rates and inflation going back to 1962 and may have found enough consistency and historical norms to help determine what to expect now and why.

Are Increases Nearing an End?

I’ll start with the conclusion. The data suggests that the movement of market rates depends on whether higher current inflation is being caused by temporary or long-lived factors. The 10-year Treasury Note market believes current inflation is mostly temporary. This is shown by its yield, having touched 4.25% in late October, and then falling. The ten-year is now near 3.50%, despite the 0.75% increase in overnight rates implemented on November 2. If the combined wisdom of the Treasury market is reliable, this suggests FOMC rate increases are nearing an end. Perhaps one more smaller hike and then a wait-and-see period. The Fed would then monitor prices while past increases work their way through the economy.

Powell’s Concerns

At his last address on November 30^th, Fed Chair Jay Powell indicated he’d rather go too far (with tightening) and then reignite the economy rather than err on the side of not doing enough and having a bigger problem. The markets and the media largely ignored this, but it’s important to know what the Fed Chair believes is prescient and is sharing publicly. Powell also said, “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” And then he said something very telling, Powell added, “It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Market Thinks Inflation is Temporary

But, the markets are overjoyed by the last two months of inflation data. Despite what the nations top central banker is saying. Markets may be right, but if they are wrong (bond and stock markets) spotting it early can help stave off losses. If inflation, which is lower than it had been, but not historically low, proves more permanent, for example, if employers continue to have to bid up the price of workers, and demand for goods causes commodity prices to rise, then the Fed will have paused too early. This will lead to a more difficult challenge for the Fed as compared to tightening too much. The data used in this article are from the Federal Reserve Economic Data (FRED) maintained by the Federal Reserve Bank of St. Louis.

Actual and Expected Inflation

The St. Louis Federal Reserve publishes a market estimate of expected average inflation over the next ten years. It is derived from the 10-year Treasury constant maturity bond and 10-year Treasury inflation-indexed constant maturity bond. It was first published in 2003. Over 2003-2021, 10-year inflation expectation averaged 2.0%, the same as GDP deflator inflation. During the second quarter of 2022, the expected 10-year inflation was 2.7%, or less than 1.0 percentage point above its 2003-2021 average. In contrast, GDP deflator inflation was 7.6%. A significant wedge exists between current and expected inflation.

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

Beginning with the end of the last recession on April 1, 2020, the Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department.

Take Away

The Market’s expectation of 10-year average inflation is dramatically different from current inflation, even at inflation’s new lower pace. This implies the market believes it to be temporary.

If the market’s expectation of inflation is accurate, there is an average difference between Fed Funds and the PCE deflator of 1.6% (since 1962). The last read on PCE was October 2022 at 6%. Reducing this by 1.6 would provide a Fed Funds level of 4.4%. This level is in line with historic averages and likely where we will be after the FOMC meeting wraps up on December 14. This comparatively high rate relative to where we began the year may be considered neutral.

Will the Fed stop at neutral? Are the markets right? Powell said he’d rather err on the side of going beyond what is needed, which suggests the Fed will continue some. As for the markets, being on the side of the markets is how you make money, but getting out before trouble arises is how you keep the money. Markets are not always accurate forecasters and since economic behavior and debt levels tend to adjust slowly, prudent portfolio management suggests it is wise to keep an eye out for today’s interest rates still being too low.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm

https://beta.bls.gov/dataQuery/search

Vanguard Drops Net Zero Pledge – Will Others Follow?

Posted on December 9, 2022December 9, 2022 by phoffman@channelchek.com

Will Asset Managers Start Stepping Back from ESG Pledges?

The Net Zero Asset Managers (NAZM) initiative is an international group of 291 asset managers with 66 trillion in combined AUM. They all signed that they are committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. This week the number of asset managers was reduced by one as Vanguard, with $8.1 trillion AUM left the agreement. Vanguard said it made the decision in an effort to better speak for itself on its views and to be certain to balance client’s needs and returns along with climate impact in its funds’ investments.

“Industry initiatives like NZAM can advance constructive dialogue, but they can also create confusion about the views of individual firms. We want to provide greater clarity that Vanguard speaks freely on important matters such as climate risk. After a considerable period of review, we have decided to withdraw from the NZAM in order to provide clarity on what our investors want about the role of index funds and how we think about material risks, including climate-related risk,” said Alyssa Thornton, a spokesperson for Vanguard.

Firms that have signed the NAZM agreement are coming under a lot of pressure from states, pension funds, and others to defend how this is measurably best for the assets left in the care of the manager.

Vanguard, the world’s top mutual fund manager, official statement read, “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors.” Again, the themes are to not be beholden to outside control over its decisions and the company developing its own measurements of material risks from world energy-related moves.

Vanguard, said the change “will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns.”

Is This Going to Be a Trend?

There is a movement growing with large clients asking investment firms to explain how their energy-investment-related decision is in line with their fiduciary role. Roughly a week ago, Consumers’ Research and 13 state attorneys general asked the Federal Energy Regulatory Commission to review Vanguard’s request to own energy company stocks. “Americans are paying sky-high electricity rates and companies like Vanguard are making the problem worse,” Will Hild, executive director of Consumers’ Research, wrote in an op-ed for the Wall Street Journal.

Another issue Hild has with Vanguard is its meddling with strategic decisions and corporate governance at energy firms. Hild wrote, “With more than $7 trillion in assets under management, the Pennsylvania-based investment firm has publicly committed to pressuring utilities to lower their emissions.” Hild then accused, “Vanguard appears to be not only putting America’s critical infrastructure at risk but violating its agreement only to control utility company shares passively. To protect U.S. consumers and safeguard national security, FERC should investigate the company’s conduct.”

Vanguard isn’t the only firm of the 291 that are being questioned by their largest customers.

Today North Carolina State Treasurer Dale Folwell sent a letter to BlackRock’s board of directors calling for Fink to step aside because the CEO’s “pursuit of a political agenda has gotten in the way of BlackRock’s same fiduciary duty” to its investors. “A focus on ESG is not a focus on returns and could potentially force us to violate our fiduciary duty,” Folwell wrote. North Carolina has approximately $14 billion with Blackrock, and $111 billion under management.

BREAKING: North Carolina Treasurer @DaleFolwell just called for @BlackRock CEO Larry Fink to RESIGN, saying his obsession with driving ESG and net-zero objectives is at odds with BlackRock’s fiduciary duty to shareholders.https://t.co/LeGIfn9CJd
— Will Hild (@WillHild) December 9, 2022

But the fiduciary knife can be cut both ways. Those that are more concerned with any impact that continued fossil-fuel use would have on climate and economies stand behind the argument that it is not in anyone’s best interest not to follow a net zero 2050 goal. “It is unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks — a crucial part of their fiduciary duty,” said Kirsten Snow Spalding, a vice president at sustainability nonprofit Ceres and a NZAM founding partner.

Meanwhile in order to be able to best decipher how to view concepts like net zero investing, the Texas Senate Committee on State Affairs will hold a hearing on December 15 to discuss the impacts of environmental social governance (ESG) policies on state pensions. The panel has asked Vanguard, BlackRock, StateStreet and ISS to appear and answer questions about their ESG practices. Texas previously asked the four firms to turn over documents in August. The Lone Star state had subpoenaed BlackRock to provide additional documents in person after the firm failed to comply with certain aspects of the initial request.

Take Away

All trends, whether investment related or not go through a vetting period, followed by a continued push and pull to seek balance. Firms that have signed on to NAZM can do their own analysis and develop their own plans that best serve their customers. The NZAM may only get in the way. Yet, they don’t have to back-off of caring about and keeping in mind environmental principles, they can just better tailor them to those they are contracted to invest for. An outside global organization is less likely to understand how to be a fiduciary for a Vanguard fund that may be used in the Louisiana state pension system. And with more investment firms acting independently, more and better opportunities will grow from the competition.

ESG, which is in a related family, will also develop and evolve over time. Down the road, investors, analysts, and organizations providing ESG scoring can get revised measures on impact and adjust scoring based on effectiveness.

Paul Hoffman

Managing Editor, Channelchek

Sources

NetZeroAssetMgars (NZAM)

VanguardLeavesNZAM

VanguardPullsOut

VanguardAntiWoke

Is There a Better Drug Patenting System?

Posted on December 5, 2022December 5, 2022 by phoffman@channelchek.com

Image Credit: Alexandros Chatzidimos (Pexels)

Pharma’s Expensive Gaming of the Drug Patent System is Successfully Countered by the Medicines Patent Pool, Which Increases Global Access and Rewards Innovation

Biomedical innovation reached a new era during the COVID-19 pandemic as drug development went into overdrive. But the ways that brand companies license their patented drugs grant them market monopoly, preventing other entities from making generics so they can exclusively profit. This significantly limits the reach of lifesaving drugs, especially to low- and middle-income countries, or LMICs.

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 Lucy Xiaolu Wang, Assistant Professor of Resource Economics, UMass Amherst

Drug Patents in the Global Landscape

Patents are designed to provide incentives for innovation by granting monopoly power to patent holders for a period of time, typically 20 years from the application filing date.

However, this intention is complicated by strategic patenting. For example, companies can delay the creation of generic versions of a drug by obtaining additional patents based on slight changes to its formulation or method of use, among other tactics. This “evergreens” the company’s patent portfolio without requiring substantial new investments in research and development.

Furthermore, because patents are jurisdiction-specific, patent rights granted in the U.S. do not automatically apply to other countries. Firms often obtain multiple patents covering the same drug in different countries, adapting claims based on what is patentable in each jurisdiction.

To incentivize technology transfer to low- and middle-income countries, member nations of the World Trade Organization signed the 1995 Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS, which set the minimum standards for intellectual property regulation. Under TRIPS, governments and generic drug manufacturers in low- and middle-income countries may infringe on or invalidate patents to bring down patented drug prices under certain conditions. Patents in LMICs were also strengthened to incentivize firms from high-income countries to invest and trade with LMICs.

The 2001 Doha Declaration clarified the scope of TRIPS, emphasizing that patent regulations should not prevent drug access during public health crises. It also allowed compulsory licensing, or the production of patented products or processes without the consent of the patent owner.

One notable example of national patent law in practice after TRIPS is Novartis’ anticancer drug imatinib (Glivec or Gleevec). In 2013, India’s Supreme Court denied Novartis’s patent application for Glivec for obviousness, meaning both experts or the general public could arrive at the invention themselves without requiring much skill or thought. The issue centered on whether new forms of known substances, in this case a crystalline form of imatinib, were too obvious to be patentable. At the time, Glivec had already been patented in 40 other countries. As a result of India’s landmark ruling, the price of Glivec dropped from 150,000 INR (about US$2,200) to 6,000 INR ($88) for one month of treatment.

Patent Challenges and Pools

Although TRIPS seeks to balance incentives for innovation with access to patented technologies, issues with patents still remain. Drug cocktails, for example, can contain multiple patented compounds, each of which can be owned by different companies. Overlapping patent rights can create a “patent thicket” that blocks commercialization. Treatments for chronic conditions that require a stable and inexpensive supply of generics also pose a challenge, as the cost burden of long-term use of patented drugs is often unaffordable for patients in low- and middle-income countries.

One solution to these drug access issues is patent pools. In contrast to the currently decentralized licensing market, where each technology owner negotiates separately with each potential licensee, a patent pool provides a “one-stop shop” where licensees can get the rights for multiple patents at the same time. This can reduce transaction costs, royalty stacking and hold-up problems in drug commercialization.

Patent pools were first used in 1856 for sewing machines and were once ubiquitous across multiple industries. Patent pools gradually disappeared after a 1945 U.S. Supreme Court decision that increased regulatory scrutiny, hindering the formation of new pools. Patent pools were later revived in the 1990s in response to licensing challenges in the information and communication technology sector.

Patent pools create a one-stop shop for multiple patients, allowing multiple licensees to enter the market. Lucy Xiaolu Wang, CC BY-NC-ND

The Medicines Patent Pool

Despite many challenges, the first patent pool created for the purpose of promoting public health formed in 2010 with support from the United Nations and Unitaid. The Medicines Patent Pool, or MPP, aims to spur generic licensing for patented drugs that treat diseases disproportionately affecting low- and middle-income countries. Initially covering only HIV drugs, the MPP later expanded to include hepatitis C and tuberculosis drugs, many medications on the World Health Organization’s essential medicines list and, most recently, COVID-19 treatments and technologies.

But how much has the MPP improved drug access?

I sought to answer this question by examining how the Medicines Patent Pool has affected generic drug distribution in low- and middle-income countries and biomedical research and development in the U.S. To analyze the MPP’s influence on expanding access to generic drugs, I collected data on drug licensing contracts, procurement, public and private patents and other economic variables from over 100 low- and middle-income countries. To analyze the MPP’s influence on pharmaceutical innovation, I examined data on new clinical trials and new drug approvals over this period. This data spanned from 2000 to 2017.

The Medicines Patent Pool works as an intermediary between branded drug companies and generic licensees, increasing access to drugs. Lucy Xiaolu Wang, CC BY-NC-ND
i

I found that the MPP led to a 7% increase in the share of generic drugs supplied to LMICs. Increases were greater in countries where drugs are patented and in countries outside of sub-Saharan Africa, where baseline generic shares are lower and can benefit more from market-based licensing.

I also found that the MPP generated positive spillover effects for innovation. Firms outside the pool increased the number of trials they conducted on drug cocktails that included MPP compounds, while branded drug firms participating in the pool shifted their focus to developing new compounds. This suggests that the MPP allowed firms outside the pool to explore new and better ways to use MPP drugs, such as in new study populations or different treatment combinations, while brand name firms participating in the pool could spend more resources to develop new drugs.

The MPP was also able to lessen the burden of post-market surveillance for branded firms, allowing them to push new drugs through clinical trials while generic and other independent firms could monitor the safety and efficacy of approved drugs more cheaply.

Overall, my analysis shows the MPP effectively expanded generic access to HIV drugs in developing countries without diminishing innovation incentives. In fact, it even spurred companies to make better use of existing drugs.

Technology Licensing for COVID-19 and Beyond

Since May 2020, the Medicines Patent Pool has become a key partner of the World Health Organization COVID-19 Technology Access Pool, which works to spur equitable and affordable access to COVID-19 health products globally. The MPP has not only made licensing for COVID-19 health products more accessible to low- and middle-income countries, but also helped establish an mRNA vaccine technology transfer hub in South Africa to provide the technological training needed to develop and sell products treating COVID-19 and beyond.

Licensing COVID-19-related technologies can be complicated by the large amount of trade secrets involved in producing drugs derived from biological sources. These often require additional technology transfer beyond patents, such as manufacturing details. The MPP has also worked to communicate with brand firms, generic manufacturers and public health agencies in low- and middle-income countries to close the licensing knowledge gap.

Questions remain on how to best use licensing institutions like the MPP to increase generic drug access without hampering the incentive to innovate. But the MPP is proving that it is possible to align the interests of Big Pharma and generic manufacturers to save more lives in developing countries. In October 2022, the MPP signed a licensing agreement with Novartis for the leukemia drug nilotinib – the first time a cancer drug has come under a public health-oriented licensing agreement.

The “Pilgrims” of Today

Posted on November 24, 2022November 24, 2022 by Admin

Entrepreneurial Courage and Perseverance Define the Pilgrims

Originally Published November 27, 2019 (Channelchek)

This week, across the U.S., families and friends, young and old, will gather to celebrate the “most American” of holidays, Thanksgiving. The gatherings will most surely include traditional foods of the holiday while families enjoy their own tradition of sharing and gratitude. Thoughts may also drift to almost 400 years ago when in 1621 a determined group of 102 Pilgrims persevered to achieve a mission they believed in – an accomplishment that has had a positive impact for centuries. They met challenges from the very beginning during their two-month-long voyage on the Mayflower, and they struggled as the first Winter took the lives of half the population of settlers. These resolute individuals share many of the same characteristics as today’s newer business owners who are making sacrifices in their own lives, for a better tomorrow for themselves and their descendants.

Dictionary.com has four definitions for the word “entrepreneur,” the first reads: “a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.” It’s not a stretch to call the original settlers of Plymouth Massachusetts entrepreneurs. Their grit, ingenuity, initiative, and even willingness to learn and rely on others more experienced in their environment, was certainly entrepreneurial.

The Mayflower colonists did not go by the moniker “Pilgrims,” that tag came 200 years after their landing at Plymouth Rock. Instead they referred to themselves as the “Saints” to indicate their purity and feelings of being special or chosen. This feeling must have been a strong driver as they risked so much in a way that is extreme by any standard in modern America.

Today’s Pilgrims

The risk-takers today, at least those looking to sacrifice more than others for the dream of a better tomorrow, whether for themselves and their families or for the world at large, are the business entrepreneurs. Especially in fields that are “uncharted territory.” Some examples are companies relying on developing technology, scientific breakthroughs, or mineral exploration. As with most “firsts”, there are always unknowns, long lead times before any profit, and a shortage of capital. These are among the reasons building a business today, particularly in a groundbreaking field with unproven outcome, is a path taken by very few. Those that do, and then survive and thrive, have embraced being nimble, building alliances, persistence, belief in themselves, and asking for help when needed.

“All great and honorable actions are accompanied by great difficulties, and both must be enterprised and overcome with answerable courage.” – William Bradford, Second Governor, Plymouth Colony

Flexibility

The Pilgrims initially went to Holland, where they expected to be welcomed by people of different religions. Their main reason for having left England was to worship without constraints. The Pilgrims made their home at first in Holland, but the more secular life they found there was not going to lead to a future that matched their vision. They wanted to build their own colony where they would attract others who believed as they did – even if it meant starting with close to nothing. As entrepreneurs, they didn’t accept an undesirable outcome; they pivoted, changed their plans and redirected their effort, deciding to establish themselves and their future near Virginia’s Hudson River. While traveling, storms pushed them into Massachusetts, where they decided to rethink their plan once again. They then revised their plan and decided to find an area close to where they landed that would be suitable for farming.

To begin the two-month trip across the Atlantic, the Pilgrims borrowed money that, at the time, was an astronomical amount. The loan from, English capitalists looking to profit off the venture was for 1700 pounds. At the time, the average Englishman earned a tenth of a pound per day. As colonists, they first worked collectively to pay back this loan. They later divided acreage to work individually at farming their own land.

Alliances

After the first brutal Winter, the Pilgrims, who raised money in a business arrangement to finance their journey, again opened themselves up to being helped. This time by native Americans. They learned how to best plant corn, where to fish, and how to trap beaver and other furs. This helped lead the pilgrims to an abundance just one year later and a profit in their second year. Their debt was fully paid off in 23 years.

There are now over 10 million living Americans who are descendants of the Mayflower passengers. The undeniable traits of the entrepreneurs we now call Pilgrims have impacted the world. Entrepreneurs of today share the same traits and skills of those that came before; intention toward a dream, plan, persevere, adjust, negotiate, orchestrate help, and implement. The impact of entrepreneurs continues to shape the world and continue to have a positive impact on the future with their efforts.

Giving Thanks

Ideas have the ability to change the world. Those ideas that improve lives and positively impact the world are on the list of things we can be thankful for.

Paul Hoffman

Managing Editor, Channelchek