@theMarket: Markets Hope for Trade Breakthrough
This Saturday evening, Donald Trump and Xi Jinping will sit down to dinner in Buenos Aires at the G-20 conference. Investors are holding their breath, hoping that the two might come to some agreement that could lower tensions and avert a full-out trade war between the U.S. and China.
Given past rhetoric and the president's mercurial temperament, anything could happen. Xi Jinping and his advisors, after years of dealing with Washington, believe if they just hang tough and wait Trump out, the outcome will be "business as usual" on their terms.
Unfortunately, Wall Street and the media have created another binary event out of the dinner. Either there is a breakthrough, in which case the markets roar higher, or there is no deal and stocks fall back to the lows and maybe break them. I wish it were that easy.
The trade relations between our two countries are complicated. I mean really complicated and no single dinner or event is going to solve it. A new economic relationship with China will take months, even years, and require talks on many fronts. Tariffs are just one small issue in these talks, although the president uses that issue constantly in his tweets and rallies.
Whether he is truly that naïve (a possibility) or is just using a dumb-down approach for the benefit of his political base, is unknown. His rhetoric on many other issues (immigrants, the wall, jobs, the media, Mueller, etc.) indicates that he believes his audience has little understanding and even less patience on the issues that beset us than he does.
Clearly, the president has had a "bad hair day" on several fronts this week. GM's announced layoff of 14,000 U.S. workers and the closing of several factories damage his MAGA claims of bringing high-paid jobs back home. Mueller's investigation looms closer and new revelations on his Russian dealings during the presidential campaign have surfaced. And then there is the stock market's decline, which the president believes is his true opinion poll. Something positive out of this weekend might distract the public from these negative developments.
If we consider his "new" North American trade agreement signed this week in Argentina as a template, there is a chance that Trump could claim another trade victory on the China front. Most readers have realized by now that only marginal changes were made in this updated Mexico, U.S., Canada trade pact.
He could use this same kind of sleight of hand in negotiations with China. We know, for example, that the Chinese have already offered a number of concessions to the U.S. on trade, although the administration has not been forthcoming in revealing the details. It would be easy (as it was with Mexico and Canada) to claim victory by simply accepting superficial changes to an existing trade pact.
As for this weekend, if I were passing the gravy, I would agree to a joint statement with Xi after dinner that indicates "progress." Some nebulous statement from Xi, such an increase of soybean purchases by China, or postponing the January deadline on tariff increases by the U.S. from "Don, the Con" could give the markets new hope without much content.
In the meantime, you may be wondering why the markets turned around this week. Fed Chairman Jerome Powell, in a speech before the Economic Club of New York, announced that interest rates were just below a level where further rate hikes might not be necessary. Investors liked that — a lot. As a result, the S&P 500 Index has gained back some of its losses since Oct. 3. It is now down 6 percent from the beginning of last month, and up slightly for the year.
Good news out of Buenos Aires could ignite a Christmas rally and send the Dow up 500-700 points in a short period of time. Bad news might do the opposite. As it stands, November was a positive month for the markets. Stay tuned for the fireworks.
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The Independent Investor: Sustainability Investing and Millennials
The demand for sustainability investments is growing. Companies that offer measurable social and environmental impacts that address issues like world hunger, climate risk, poverty and access to health care, seem like a good investment for those socially-minded. Finding companies that also provide a good financial return at the same time is not so easy.
Sustainability investing is different from the decades-old trend called "social investing." Generally, social investments are those that bet on solar power, clean water, or the avoidance of "sin stocks" such as tobacco, guns or liquor companies. Most of these areas were not viable investments without a great deal of government help.
The idea of sustainability goes far beyond that concept. In this modern-day make-over, the idea is to use your money to solve some of these enormous global environmental, social and governance (ESG) issues and also make a profit over the long-term. Of all social groups measured, it is the Millennials who profess the most interest (80 percent) in social-impact investing. An increasing number of younger investors (28 percent) are putting their money where their mouth is. They want to select investments that reflect their own values and personal priorities.
After all, when you think about it, they are inheriting a world that we, the Baby Boomers, have totally messed up. Just look around you. Our fossil fuels are burning the planet alive. The air in China, or in Mexico City among many other locales, is so bad citizens routinely wear masks. Millions are starving. Water is fast disappearing from much of the earth.
I know, I know, I can already see your eyes glaze over. By this time, most oldsters of my generation have tuned out these warnings. Most Boomers are immune to socially-responsible rants. They don't want to hear it, have no solution for it, and don't want to face the guilt and shame of their actions.
But realize that there are one and maybe two generations of our population that want (and need) to do something about it. Given that the millennials and the Gen Z populations are the ones who will inherit this earth, from their point of view, they need to tackle these problems, because for them it is a life or death proposition.
A number of studies predict that Millennials are poised to receive more than $30 trillion of inheritable wealth. The money is already starting to flow in as my generation kicks the bucket. These young investors are fully-versed on the issues they face. For example, by 2050, an estimated 2 billion more people will crowd into the earth's cities and towns. Global demand for food, water and energy will drive the need for innovative improvements in infrastructure simply to handle the demand for additional resources.
The question is: can you also make money by fixing these issues? The jury is still out on whether the two can be accomplished together, but initial results are encouraging.
Sustainability investing is experiencing a compound annual growth rate of over 100 percent. Granted, it is still only a niche market, representing only 18 percent or so of the wealth and asset management industry. A recent study by mega-broker Morgan Stanley, which evaluated over 10,000 funds and managed accounts, show that sustainability investing has usually met and often exceeded the investment performance of comparable traditional investments.
Environmental, social and governance (ESG) investment performance achieved an annualized return of 10.2 percent versus the bench market S&P 500 equity Index return of 9.7 percent.
Since all of the challenges facing the world are also long-term in nature, it makes sense that global pensions funds, especially in Europe and Japan, would be interested in this area. Given their own long-term investment views, global pension managers have invested about $23 trillion or 26 percent of managed assets in these areas.
To date, there are 50 ETFs(exchange-traded funds), and about 250 open-end mutual funds that offer access to the ESG/sustainability area. ESG funds (as they are called) have the least assets among the eleven smart-beta categories according to a Bloomberg survey. But before you start buying, investors should beware that most of these investments are extremely illiquid, experience enormous amounts of price volatility, and should be thought of as very speculative, long, long-term investments at best. They are not for widows, orphans or 98 percent of retail investors.
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@theMarket: It Is a Black Friday on Wall Street
Black Friday sales are in full swing. Normally, today is all about the retail trade. Consumers spend the day waiting in line, picking up heavily discounted "door buster" deals, and generally starting their holiday gift shopping. This year, it appears traders are also holding their own Black Friday sales.
The day after Thanksgiving, the stock and bond markets are open for a half day. Few turn up for work, so trading desks are usually manned by a skeleton crew, volumes are light and the indexes meander about the center line. As such, what happens on Black Friday has little consequence in the grand scheme of things.
The real action is before a holiday, especially one that coincides with a long weekend, like this one. In volatile markets, such as the one we have this year, few traders want to go "long" stocks through this long weekend. Their preference is to sell before the holiday and re-examine things when they come back on Monday.
This year, thanks to the Trump trade war fears, the concerns over raising interest rates, and a possible slowing of the economy next year, stocks continued their two-month, long decline on Friday. As I warned readers last week, if the S&P 500 Index failed to hold 2,720, the next stop would be somewhere around 2,600. That is exactly what happened.
So here we are testing the lows that we put in back in February. From a technical point of view, we have a classic case of a "double bottom." That's when stock indexes reach a low, bounce up, and then re-test that low once again. At times it only takes a few weeks or months. In this case, it took longer. Many times, a correction will not be over until a double bottom occurs. Are we at that point now?
I would like to say yes, so I will, but there are conflicting signals. Take sentiment indicators, for example. The number of bulls has dropped to a little less than 40 percent. That's a good sign if you are looking for a contrary indicator. But back in February, bullish sentiment hit a low of 24.7 percent. That would seem to indicate that investors will need to become even more bearish before this pullback is over.
We are also seeing some early signs of "divergence." Back in October, when the S&P 500 hit 2,600, the peak daily reading of new lows for individual stocks was just under 18 percent. But this week, those same stocks hitting new lows was a mere 4.16 percent. So, what?
When you have a situation where the broader market is making new lows (like Tuesday), while the percentage of stocks trading to new lows shrinks, it is considered a positive divergence. If we see this continue next week, it would be a signal that investors are being more selective in their sales rather than just committed to a wholesale selling of all equities. That would be another positive sign.
What would be a bad sign, is if the S&P 500 Index failed to hold this 2,600 level. That would indicate more pain in the near future and lower stock market averages across the board.
Against this backdrop, it is interesting to note that according to early reports, this year's holiday shopping season is starting off with a bang. Consumer confidence is fueling higher holiday spending, even while the stock market is selling off the retail stocks that will most benefit from this trend.
Hang in there, folks, this too shall pass.
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The Independent Investor: The Origin of Black Friday
As you finish your turkey and prepare to get an early start on Black Friday shopping, you might wonder how shopping became such an integral part of your Thanksgiving holiday. The term has followed a circuitous route through our financial history.
Although the term "Black Friday" is a new phenomenon, its origins date back to the late 19th century. The term was first associated with a stock market crash on Sept. 24, 1869.
Two speculators, Jay Gould and James Fisk, tried to corner the gold market. This created a boom-and-bust atmosphere in gold prices. That volatility spilled over into stocks. Before it was all said and done, stocks lost 20 percent of their value, while commodities fell by over 50 percent. Neither speculator was ever punished for their deeds (sound familiar?) due to political corruption within New York's Tammany Hall. The term Black Friday, however, was used to describe that period of our financial history for the next century.
It wasn't until 1905 that the day after Thanksgiving had anything to do with shopping. It was in that year that a Canadian department store, Eaton's, launched the first Thanksgiving Day parade in downtown Toronto. Santa lead the parade in a horse-drawn wagon, while Eaton's benefited by seeing an uptick in shopping at their store the following day.
But it wasn't until 1924 that Macy's followed the Canadian lead by announcing their own parade. A similar increase in holiday shoppers convinced Macy's and soon other retailers across the nation, that Thanksgiving parades were good for business.
Retail sales on the Friday after turned out to be so good that the government got involved just to ensure that this extra business was here to stay. Congress passed a law in 1941 that made Thanksgiving the fourth Thursday in November. That allowed retail stores to plan their holiday shopping events every year on a predictable schedule.
It worked so well that the Friday after became just as important as the holiday itself. In the 1950s, shoppers began calling in sick on Friday to extend the holiday to a four-day weekend while also taking advantage of the shopping deals. It soon became a wholesale practice among workers across the nation. Businesses, after attempting (unsuccessfully) to discourage the practice, began giving that Friday off as another paid holiday and everyone was happy.
It wasn't until 1966, that the modern-day term "Black Friday" was officially coined in my home town of Philadelphia. It was there that the police department in the "City of Brotherly Love" used the term to describe the traffic jams, the free-for-all invasion of the town's department stores, and the well-publicized fisticuffs among shoppers that was becoming a tradition among consumers.
Since the 1920s, retailers had followed a "gentleman's agreement" to wait until Black Friday before advertising holiday sales. It worked. If one looks back through history, roughly half of all holiday shopping occurred on Black Friday. But that agreement began to unravel in the new millennium.
The advent of internet shopping spurred many retailers with a presence on the internet to extend the shopping holiday to include Mondays. On November 28, 2005, two marketing agents created the term "Cyber Monday." The concept proved an astounding success. Last year internet sales on that Monday reached $6.59 billion, making it the largest single internet shopping day of the year.
In 2011, retailers (ever a greedy group of buggers), disgruntled to see an increasing share of their brick and mortar sales being siphoned off by the internet, came up with a solution to make up those sales. Why not extend the shopping weekend by yet another day? Thus, the crowding out of Thanksgiving in exchange for more hours in the store.
At this point, I suspect someone will need to invent yet another catchy phrase to describe this national, five-day, retail spending spree. It is a trend that has all but obscured a day when, in the distant past, we came together as a family, to give thanks for something more than a 20 percent discount on a 4-D TV.
Nonetheless, as a traditionalist who is showing his age, I wish all my readers a Happy Thanksgiving. You can bet I will be spending it with my family, giving thanks for all I, and this nation, have received.
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@theMarket: Markets Need to Hold Here
This week saw a re-test of the October lows. That is to be expected in most stock market corrections. What is important to the future well-being of equities globally is that the averages do not decline much further from here.
That does not mean that if the S&P 500 Index, for example, falls by another percent or so the ball game is over. Remember, folks, calling the levels of the stock market is an art, not a science. Sure, we could overshoot (most times we do), thrash around a bit more, and then recover. What I don't want to see is a solid and definitive drop lower over a week or more.
On the S&P 500, if we were to break 2,685, the next level of technical support would be 2,603. That would, in my opinion, trigger a panicky rush for the exits. If the 2,603 support breaks, then who knows.
From a fundamental point of view, there isn't much different that has transpired since last week or, for that matter, the last few months. The elections are over, but the new Congress doesn't get a chance to bat until after the New Year. In the meantime, we are already hearing the
noise levels rise.
One Democrat, California's Rep. Maxine Walters, a ranking member of the House Financial Services Committee, has promised to roll back some of the bank deregulation of the past two years. Another Democrat warned that signing on to the new North American Trade Agreement will require "adjustments" in the deal.
At the same time, the FANG stocks, led by Apple, continue to batter the technology sector, dragging the NASDAQ index lower. Many individual stocks have already dropped 10 percent, which would technically qualify as a "correction."
In a race to the bottom, oil prices have also come under pressure, declining over 20 percent in the last month or so. In hindsight, the oil price was over-extended. Oil is in the throes of a sharp, short sell-off, which is exactly why most investors should steer clear of commodities. It takes a strong stomach to weather the ups and downs of a commodity cycle.
Both equities and energy, however, are due for a bounce, which should happen soon. The Iranian embargo, as I predicted, is not working out as well as the president had hoped this second time around. Since many nations did not and do not agree with Trump's unilateral decision to re-instate an embargo on Iranian oil, its effectiveness has been dramatically reduced. Cheating is rampant. Nations may be grudgingly forced to pay lip-service to the U.S. embargo but are looking the other way, allowing their companies to find ways around the Iranian oil embargo.
Of course, if you follow the financial news, the bulls of September have now all turned bearish. The TV Talking Heads are showcasing one "Permabear" after another, who are confidently predicting (for the 100th time in the last two years) that this time they are going to be
right. Calls that "The end is nigh," or "Run for the hills," should be ignored.
In this atmosphere of panic, pain and fear, try to remember the positives. Seasonality is in the bull's favor. The S&P 500 was up every year after a mid-term election since WW II. And if this were truly the end of the upside for this cycle, where was the blow-off top that has always marked the end of a bull market? No, it is too early to get defensive and it is way too late to sell.
Hunker down and wait. You will likely be rewarded.
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