Month: April 2018

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 18, 2018

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

Maintaining the theme of  The Economy and Markets  in the Spring issues of  IntelDigest, we continue today to discuss the near-term … what to expect over the next few months. In later issues, we will go into prospects for 2019 and 2020.

 

Fundamentally Sound Markets

As we have stated on several occasions, our premise for the remainder of 2018 is that the equities markets will continue to rise, even if increased volatility makes the ride somewhat like a roller coaster.  We still believe that the equities markets are fundamentally sound … here in the U.S. and in major economies around the world … and the “Melt Up” in the markets still has several months to run.

 

Dividend Yields

Volatility in the markets this year has sent all the stock averages dipping on three occasions, from as little as 5% to as much as 11%, starting in early February.  The S&P 500 has re-tested the initial lows (on February 8) several times, and has bounced up each time.

This action has had an interesting effect on Dividend Yields. Dividends are generally rising.  With stock prices falling during this period, the annual Dividend Yield on the companies in the S&P 500 has risen above 2%.  Comparing a 2% dividend yield on equities, which is taxed at a top Federal Income Tax rate of 23.8%, to the yield on the 10-year U.S. Treasury bond, which is taxed at a maximum rate of 40.8% … the situation definitely favors investment in equities.  As a result, investors are encouraged to see pullbacks in the stock markets as good buying opportunities.

Remember that Dividends will likely increase going forward, as a result of lowered Federal Income Tax on corporations.

 

Earnings Growth and Dividends

The initial results of corporate tax reform are being seen already as earnings reports for the First Quarter of this year are released over the next week or two.  According to FactSet’s Earnings Insights for April 6, “The estimated earnings growth rate for the S&P 500 is 17.1%,” which would mark the highest growth rate in seven years.

April is usually a strong month for dividend payments.  Most American companies pay quarterly, but many overseas companies pay only semiannually, which usually includes April.  In an article dated March 29 (titled “Stocks are About to Get a $400 Billion Dividend Boost”), Bloomberg quotes a note from strategists at Morgan Stanley, who state that as much as $400 Billion of dividends may be paid to investors between March and May.  This would be all global stock market dividends.

This is an argument for strong equities markets going forward. Another argument is Repatriation of cash from overseas.

We will discuss Repatriation of cash by American corporations in more detail in the coming weeks.  But, just for the sake of discussing near-term markets, know that many U.S. companies will be awash in cash after repatriating assets this year.  So, we expect to see lots of cash devoted to dividends and share buy-backs for the shareholders, bonuses for employees, and strategic mergers or expansion.

The bottom line for 2018 may well be corporate buy-backs and dividends totaling over $1 Trillion.

 

The Trump Trade War – Update

The Trump Administration rhetoric on trade has softened in the last two weeks.  And, there are more signs that negotiations with our trade partners, including China, are ongoing. Hopefully, negotiated settlements will forestall the imposition of the threatened new Tariffs, on ALL sides.

Recall that we have written that “… an honest-to-goodness Trade War could be just the thing which would derail our economic engine.”  Imposition of the Tariffs would be the equivalent of levying new “taxes” on both American consumers and American companies seeking to do business overseas.

We will continue to monitor this situation carefully.

In the meantime, the strong global economy continues to roll along, which typically results in a continued rise in the U.S. trade deficit.  The Commerce Department recently announced that the U.S. trade deficit rose 1.6% to $57.6 billion in February, the highest level in 9½ years.  Exports rose by 2.3% in February to $137.2 billion, while imports rose by 1.6% to $214.2 billion.

It is interesting to note that, although total trade grew 1.9% from $344.9 billion in January to $351.4 billion in February, imports from China declined 14.7% in the same period. Typically, the stronger the U.S. economy, the faster the trade deficit tends to rise;  therefore, robust GDP growth seems to be the primary reason for a larger trade deficit (not China).

 

Sometime in May, we will devote an issue or two to the subject of China … its economy, its trade practices, and the future of investment in China.

Until next week …

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 11, 2018

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

As we apprised you last week in  IntelDigest, The Economy and Markets will be the primary topic of discussion throughout April.  This issue, however, will be shorter than usual, as we attend to tax commitments on behalf of our clients.

So, we will concentrate on the near-term … what to expect over the next few months.  In later issues, we’ll discuss prospects into 2019 and 2020.

The Age of Volatility

This long Bull Market, which began in 2009, has been longer than most.  And, 2017 was a most unusual year, featuring abnormally-low volatility.  Markets moved steadily Up, with nary a pause to rest.  Everything seemed to be coming up roses!

But, everything changed in January, and volatility came roaring back.  We have entered an  Age of Volatility, where market corrections of 5-10% are expected to be a regular and normal occurrence going forward.  As we stated last week:

The  Age of Volatility  will certainly last through the end of 2018, until the beginning of the next major recession.  The “Melt Up” in equities is in the “Ninth Inning” … just a few more months of possible gains in select stocks.  For the bulk of the investment markets, we are moving into a new era.  There will be significantly fewer “trending” stocks and more “reversion to the mean.”

The path forward will feature choppy trading, extreme swings up and down, and headaches for “bulls” and “bears” alike.

Fundamentally Sound Markets

We still believe that the equity markets are fundamentally sound … here in the U.S. and in major economies around the world … and the “Melt Up” in the markets still has several months to run.

As recently as February 14 … after the first correction of 2018 … we wrote that “… certain factors support the continued “Melt Up” of equities, both domestically and internationally, for another few months.”  Among those factors:

* low Interest rates continue to undergird the health of the equities markets

* world economies are stable

* strong earnings in the largest U.S. corporations

* positive technical indicators signifying continued strength … the Advance/Decline Line and market breadth moving up

Add to this the effects of the massive Christmas present which Congress handed to American companies in the Tax Cuts and Jobs Act of 2017 (TCJA).   Financial results for the first quarter under the new tax regimen will be reported this month.  The news is expected to be very good for U.S. equities.

Are U.S. Stocks Expensive?

* We have made this point on several occasions over the last few years:

Although stock prices have been at historical highs, they have NOT been overvalued, when ultra-low interest rates are factored in.

Now, we add two more factors which support the “value” of current stock prices:

* The aforementioned Tax Cuts, which will improve earnings for most American companies … by some estimates, the earnings of companies in the S&P 500 Index are expected to rise by 27% over the next 12 months

* The recent Corrections in the markets, which have brought many stock prices back to earth

As a result, one of the most prevalent measures of “value” used by investors … the Price/Earnings (P/E) Ratio … has fallen back in line with its 25-year average, based on estimated earnings in the coming year.

The P/E ratio measures the value of company stock by comparing the stock price (in the numerator) to the company earnings (in the denominator).  The P/E ratio of U.S. stocks had climbed pretty high over the course of 2017, which caused concern among many analysts and investors.

However, 2018 has brought a significant change in this measure.  Recent corrections in market prices have brought prices (the numerator) down, while the Tax Cuts are expected to bring earnings (the denominator) up.

So, the abnormally-high P/E ratios of 2017 are giving way to P/E ratios much closer to the long-term norm in 2018.  Stocks which seemed “expensive” a few months ago now trade in a “reasonable” range.

U.S. stocks, as a group, now trade at the same forward P/E ratio as two years ago, in March/April of 2016.  This measure of the “value” of these stocks remains the same.  However, over the same period of time, the “price” of many of these stocks has moved much higher, bringing large gains for investors.

More next week ….

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

APRIL 4, 2018

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.

 

Is the stock market making you queasy? Well, get used to it! The Age of Volatility has begun!

We will discuss Markets and The Economy over the next few weeks in  IntelDigest.  We begin, today, with the immediate causes of Volatility and taking the first step into a new era in the Markets.

 

The Trump Tax

We have written that “… an honest-to-goodness Trade War could be just the thing which would derail our economic engine.”

Trump is overriding the positive aspects of the 2017 tax legislation by imposing new “taxes” on Americans, across the board.  These “taxes” are in the form of Tariffs.  Both U.S. Tariffs which Trump plans to impose on foreign goods, which will raise prices on products purchased by all Americans.  And, retaliatory Tariffs proposed by our trading partners/adversaries, such as China, which amount to a “tax” on American businesses striving to sell American products overseas.

In our last issue, we showed you that:

In a survey conducted this week by CNBC.com, the threat of a Trade War is rapidly becoming the top economic fear on Wall Street.  Nearly two-thirds of the survey respondents see Trump’s trade policies as negative for overall economic growth and likely to cause job losses in the U.S.

Protectionism tops the list of worries on Wall Street, far outpacing concerns over inflation, terrorism and even Federal Reserve actions.

 

Certainly, historically-high stock valuations and concerns over rising interest rates contribute to increased Volatility in the Markets.  However, the roller-coaster-effect which will define this year is directly attributable to the Trump Trade Policies.

The Age of Volatility will certainly last through the end of 2018, until the beginning of the next major recession.  The “Melt Up” in equities is in the “Ninth Inning” … just a few more months of possible gains in select stocks.  For the bulk of the investment markets, we are moving into a new era.  There will be significantly fewer “trending” stocks and more “reversion to the mean.”

The path forward will feature choppy trading, extreme swings up and down, and headaches for “bulls” and “bears” alike.

 

Finding Value

We are moving away from growth stocks and an era of skyrocketing tech toward a “Value” model.  Here are a few different approaches to finding Value in the markets.

 

Individual Stock-Picking

April is traditionally a very strong month.  A study by Bespoke Investment Group shows that April has been the strongest month of the year over the last 50 years, with an average 2.04% gain.  Over the last 20 years, April gains have been even better, averaging +2.39%.

This April will also feature the first corporate quarterly sales and earnings reports under the new tax law.  Most U.S. companies should benefit greatly from the Tax Cuts and Jobs Act of 2017 (TCJA);  many are paying lower federal income tax rates, starting in this quarter, and most large multi-national companies will repatriate Billions of Dollars of earnings from overseas accounts (at low tax rates) this year.

So, many individual companies … especially traditional “Value” stocks … are expected to report blockbuster results in the next few weeks, which will reward their investors.

 

Exchange-Traded Funds (ETFs)

There should also be room in your portfolio for more “passive” funds, such as ETFs.  Broad sector trends can be easier to spot than finding the best individual companies in an industry.  For example, our clients have been able to maintain positions in the Mobile and Electronic Payments sector and the Cybersecurity sector by investing in IPAY, the Prime Mobile Payments ETF, and HACK, the Prime Cyber Security ETF, respectively.

ETFs also provide diversification, protecting the investor from negative events which may affect one company …. bad earnings report, cyber attack, lawsuit, retirement of a key leader, or dozens of other unpredictable events.  Holding a basket of dozens of stocks reduces the overall volatility in the portfolio.

ETFs are easy to trade … their high trading volume makes for a very liquid market.

ETFs also allow the investor to easily own a piece of very expensive stocks, which may be valued at Hundreds of Dollars for each share.  For example, an investor can buy XLK, the Technology Select Sector SPDR Fund, for $65 per share.  This fund holds shares in dozens of stocks including Apple, Alphabet (Google) and Microsoft.  A single share in these companies would cost $117, $1,020, and $90 per share, respectively.

 

True Diversification

Be sure to identify exactly what companies are represented in the funds which you are considering.  You are not truly “diversified” if you own two or three different funds which invest in the same companies!

We advocate for “market intelligence” and “true” diversification among sectors.  Market Intelligence refers to studying and learning the differences among companies and sectors.  For example, two companies may look alike and operate in the same industry, and seem to be twins to the outside observer.  But, a prudent investor looks for the factors which differentiate the growing company from the stagnant company.

Similarly, exchange-traded funds should be examined for their management, investments, and weighting.

For example, the S&P constructs its index fund based on the market cap, as indicated by the float.  The float is the number of shares outstanding, less shares held by insiders.  As a result, the index over weights shares with low insider ownership, such as Western Union;  it under weights shares with high insider ownership, such as Berkshire Hathaway.

The prudent and intelligent investor would do the opposite!

We like to seek opportunities among companies overlooked by the indexes.  And, as the aforementioned “Melt Up” plays out over the course of this year, we will be changing gears and looking for Value moving forward.

As indicated, we will be discussing The Economy in  IntelDigest throughout April.