The Ides of August

We have now entered the longest economic expansion in history. Starting in June of 2009, this record-setting run has seen GDP grow a measly 25% total, far slower than all previous expansions. As is usually the case, the stock market sniffed out the end of the ’08-;09 recession early as they bottomed in March of 2009.

Interestingly, August is the only month of this record setting 10-year run that seen US stocks fall more often than they have risen. There is a plethora of reasons one can assign to why but since we usually don’t find out “why” until after the fact, it’s only the probabilities we need to pay attention to.

Even though there is only a slightly negative bias, the seasonality stats are telling us better months are ahead but more importantly our patience and investment fortitude may be tested in the short term. 

Just Follow the Money

This article appeared as a Bloomberg Opinion piece.

Saving for retirement can be a perilous endeavor in the U.S., thanks in part to the Trump administration’s moves to weaken safeguards against unscrupulous sellers of financial products. Now Congress is poised to make things worse -- by undermining protections governing the country’s most popular investment vehicle, the 401(k) plan.

Named after a once-obscure 1978 provision in the tax code, the 401(k) allows people to set up retirement-savings accounts through their employers, with income taxes deferred until the money is withdrawn. Employers and their chosen administrators assume fiduciary responsibility for the plans, meaning that they’re supposed to offer a menu of sensible investment options. Ideally, these include low-fee mutual funds, sometimes targeting a specific retirement date.

Amid growing concern about the number of people financially unprepared for retirement, Congress is considering tweaking how the 401(k) works. The overall intent of the relevant bipartisan legislation, known as the SECURE Act in the House and RESA in the Senate, seems admirable: Encourage people to save more. Among other provisions, the bills could help small employers band together to create efficient 401(k)s, and increase age limits for contributions to tax-deferred accounts.

Yet the bills also seek to encourage a currently rare option in 401(k) plans: annuities. In principle, this could be wonderful, if the bills permitted only true annuities -- that is, investments that pay a guaranteed, fixed sum of money each year -- and if the fees they charged savers were kept in check. Unfortunately, neither is the case.

Many annuities sold in the U.S. are complicated, overpriced products with payments determined by sometimes deceptive formulas that even sophisticated investors struggle to understand. Worse, the legislation specifically frees 401(k) providers from any hard obligation to pick the lowest cost products, allowing them wide leeway to consider a range of factors. That’s startling, given that excessive cost is the single greatest critique leveled against both 401(k) plans and many forms of annuities.

Granted, it’s possible that 401(k) providers will work with insurance companies to offer annuities with genuinely transparent, predictable streams of retirement income. The providers’ fiduciary duty should hold them to a higher standard than the insurance agents who typically peddle the worst products. Yet given 401(k) plans’ mediocre track record, coupled with the insurance industry’s long track record of selling inappropriate products, I wouldn’t bet on it.

Why would legislators expose savers to such risks? I won’t speculate, but I will note one potentially relevant fact: Over the past 30 years, according to OpenSecrets.org, people and entities associated with three organizations -- Mass Mutual Life Insurance, FMR (the parent company of Fidelity Investments) and the National Association of Insurance and Financial Advisors -- have collectively been the largest donors to Congressman Richard Neal (D-MA), who introduced the legislation in the House

Beyond Logical

Those that have studied mania’s or bubbles know the common theme that logic, common sense and discipline are thrown out the window. It’s all about investor sentiment (emotion) and the fear of missing out. They happen regularly with investments and sadly, all end the same way ….. the majority get taken to the cleaners. The most difficult thing about them is not that it is hard to see the bubble, but rather when it will burst. It will pop … they always do we just never know when.

The latest example – Beyond Meat

Beyond Meat's market cap just passed that of Conagra’s ...

Those that aren’t familiar with Conagra, they

·         Were founded in 1919

·         Make many food products under the brands Duncan Hines, Hunts, Slim Jim, Orville Redenbacher, Healthy Choice, PAM, Birds Eye, Earth Balance, etc.

·         Employ 18,000 people

·         Generated $9.5 Billion in revenue

Beyond Meat

·         Founded in 2009

·         Create fake meat products

·         Employ 383 people

·         Generated $95 Million revenue

Beyond Meat is now worth more than the market value of Shake Shack, Wendy's, Jack in the Box, Red Robin, Habit Burger, and Good Times ... combined

This one too, will end badly. I am happy for those that caught and continue to ride the euphoric wave higher, I just hope you have a management plan for when the party ends. At some point in the future it will be worth circling back around and seeing when and where it lands. Will we be able to add beyond meat to the forgotten pile of disasters of the past such as dot com stocks, beany babies, tulips, 2007 US real estate market and many, many others?

Any Questions?

Fundamentals or technicals. Technicals or fundamentals? Which method provides the best returns has been an ongoing, raging debate for years. When it comes to the markets there rarely ever one right answer. Both systems can work but a study (back test) was done to see which one provided better returns after signaling long term buy signals. The chart (back tested data) seems to finally put an end to the performance debate question anyway.

Which return would you prefer?

Boeing - Time for Take Off?

Its been a rough few months for Boeing. Their handling of the 737- Max crashes have been a public relations nightmare. There is no doubt this will be in future B-school case studies for now NOT to handle a crisis situation. In the end, just throw a whole bunch of money at it, sweep it under the rug and move on. 

Looking at the chart of Boeing’s stock, BA, it appears as if investors have started to feel the storm clouds are clearing. You can see where price peaked just a few days before it gapped down on the news of the Ethiopian Airlines crash.  From there it bottomed mid-May losing ~25% peak to trough. It consolidated for a month before it broke out higher on a substantial buying spike, making its first higher high since the start of the March decline. From then price went back to retest the breakout level, forming its first higher low and is now attempting to make its second higher high, once again on high volume.

A break higher here will confirm the end of the prior downtrend and providing an excellent low risk entry of a stock that has reversed its downtrend and begun a new uptrend.  With a first upside target at T1, 15% higher than Friday’s close, it offers a compelling reward to risk ratio for those who are looking for further exposure to US equities. With seasonality nearing a less interesting period of the summer doldrums, I would expect this requires an extra dose of patience for an upside target meet to materialize.