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The Retired Investor: Corporate Activism Comes of Age
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For decades, corporations stuck to their knitting, while letting Washington and the voters decide how to deal with social and political issues. But times are changing as companies become bigger and more powerful.
Corporations are speaking out on issues from LGBTQ rights to gun control. To some politicians, managements and their boards are throwing their weight around in ways that make elected officials uncomfortable. At first, I dismissed much of their actions as simply rhetoric, or just good public relations, but more companies are speaking out frequently on many issues.
Take the gun control issue. U.S. politicians on both sides of the aisle have failed to pass legislation that would reign in the slaughter of our citizens (especially our children) for decades. In response, some companies such as Salesforce, Shopify, Amazon, Walmart, and eBay, have taken matters into their own hands. Several companies have simply banned sales of firearms on their platforms, or have refused to supply e-commerce software to gun sellers. Their actions have all but stopped online sales of firearms in the U.S.
Other issues such as abortion, LGBTQ, and voting rights have also been taken up by a wide spectrum of corporations. Film studios have boycotted the state of Georgia, for example, over abortion rights, while Bank of America and PayPal forced North Carolina to roll back a bathroom bill that discriminated against transgender people.
Most of the big social media companies such as Facebook, Twitter, and Google, are actively attempting to limit misleading or false information, as well as hate speech, on their platforms. To their credit, the backlash from some politicians and individuals has not deterred them from pursuing those goals — and they are succeeding.
And while the country continues to debate and argue over the need to require vaccinations, corporations are not waiting around for Washington to make up their minds on that either. Proof of vaccinations started with retail shops and restaurants, which are on the frontline of potential contagion from the latest surge of the coronavirus Delta variant cases. Since then, the number of employers who are posting jobs requiring proof of vaccination is steadily increasing. The number of job postings on Indeed.com, an online employment website, for example, requiring vaccinations as a job condition, has increased by 90 percent over the last month. Google, Netflix, Disney, Morgan Stanley and Facebook are just some of the big companies involved in this trend.
You might also remember President Biden's effort to raise the minimum wage to $15 an hour as part of the $1.9 trillion COVID relief package. It was shot down back in February by the Senate parliamentarian, who would not include it as part of the reconciliation budget process. Republicans refused to back it, claiming that it would hamper small businesses in various parts of the country. Fast forward to today. Corporations, both large and small, took matters into their own hands. As of June 2021, almost 80 percent of U.S. workers are now making more than $15 an hour, according to a Washington Post newspaper survey.
Corporations have always had a fair amount of influence and power in this country, but it has usually been exercised in cloakrooms and behind the scenes. Now, however, companies face a groundswell of pressure from a socially aware public (as well as their own employees) to right perceived wrongs.
A big change has occurred within certain elements of our society. The vast majority of millennials, Gen Xers, and baby boomers believe that companies they buy from should be investing and supporting causes they care about. And if not, boycotting a company or brand, they have learned, is far more effective than writing a letter to your congressperson.
National politics are at an impasse with neither party willing to compromise on issues as diverse (or deadly) as climate change, health, or even raising the debt ceiling. Clearly, part of this new corporate direction is meant to fill a power vacuum in Washington. Critics argue that affecting policy changes through unelected corporate leaders is troubling at best.
It is. But at the same time, with public confidence in our leaders and institutions at an all-time low, the consumer (voter) evidently feels more confident in corporations and the brands they identify with to get things done than they do in some politician they rarely if ever see.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: Stocks Grind Higher
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The major indices have been working higher over the last few weeks, while rotation among sectors continues unabated. The higher markets climb, the more investors begin to question how long the bull market can sustain its upward trajectory.
"Thin" would be the way I would describe the movement upward in the S&P 500 Index. The same term could be used for the slight downward drift in the NASDAQ and technology stocks in general this week. It is August, after all, and volumes dry up as many on Wall Street take vacations.
Technically, we are trading in the middle of a monthly range in many sectors. A cursory view of some of the sectors reveals that semiconductors and FANG stocks are weakening, transportation, materials, and industrials are gaining, and retail and small caps are basically flat. Large cap stocks, in general, are outperforming all others.
Commodities like oil and precious metals have been taken out to the woodshed over the last week. The main trigger for this downdraft has been the strengthening U.S. dollar as well as rising yields in the bond market.
Remember, the greenback is a safe haven when times are uncertain. The explosion in the number of Coronavirus Delta variant cases worldwide has foreign investors flocking to the dollar. A strong dollar hurts commodities, since they are priced in U.S. dollars and therefore makes the price of commodities more expensive.
Friday's (Aug. 13, 2021) U.S. consumer sentiment data didn't help the mood. Sentiment plunged to the lowest level in almost a decade as Americans grew more concerned about the surge in Coronavirus and its potential impact on the economy.
Good news on the infrastructure front helped counter some of those concerns. The materials and industrial sector got a lift, although the passage of the $1 trillion plan was already baked in to stock prices for the most part. Next up, we can look for the debate over the $3.5 trillion, anti-poverty, climate plan, which is expected to be a Democrat-only initiative. That initiative includes tax increases for the wealthy and for corporations. It will need to go through a special process called reconciliation as part of a budget resolution.
Republicans have already dissed the plan, protesting that it will add to the inflation rate (doubtful), and increase costs to the American family (specifically, those who make more than $450,000 annually). But there is no guarantee that the progressive and moderate/conservative wings of the Democratic Party will come to an agreement on this initiative.
Touted as the largest expansion of the nation's safety net since the "Great Society" of the 1960s, the proposal will require compromise on both sides of the Democratic Party. Some question whether it can be done. I suspect that President Biden is up to the task. He is the first President in decades to forge a bi-partisan infrastructure program with a deeply divided Congress.
Over in the bond market, traders have been pushing yields higher in advance of the Jackson Hole Economic Symposium scheduled for Aug. 26-28, 2021. Every year, investors eagerly await the speech of the Federal Reserve Bank Chairman hoping to pick up clues as to the Fed's next policy move. They should know by now that this is an international symposium of central bank leaders. It is not a Federal Open Market Committee meeting. The FOMC meeting is the appropriate place to announce and discuss U.S. policy. That will happen in September 2021 and will likely include some more information on when Fed bond buying may begin to taper.
Some question whether the taper will occur at all as long as we continue to face the onslaught of the Delta variant. Overseas, the pandemic is continuing to delay and cause new bottlenecks in the global supply chain. China, for example, just shut down the world's third largest shipping port due to a coronavirus quarantine.
As for the markets, I still believe we can eke out another 100 points or so in the S&P 500 Index, although we are heading into the worst seasonal period of the year for stocks. As has been the case all year, the market's fate is intricately dependent on the progress, or lack thereof, of the coronavirus.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Back-to-School Season
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It is not an easy decision. On one hand, consumers want to go out and shop for their children's upcoming school year. But at the same time, they are concerned that if they do, they might catch the coronavirus. There is no easy answer.
This 2021-2022 school year was supposed to usher in a new beginning. As such, retailers are still expecting sales of clothes, school supplies, and college dorm décor items to increase by 5.5 percent from last years' depressed COVID-levels. Even so, that still won't match 2019's 6.7 percent increase, but it is getting close, or was until the Delta variant arrived.
I thought that parents have the extra cash to spend, given the rounds of government stimulus checks, enhanced unemployment benefits, and the child-tax credits that have been arriving in the mail over the last few months. The question will be whether those parents go out and splurge during the back-to-school season (mid-July through early September), or hold back.
If they splurge, then apparel will likely lead the list of items most in demand, and understandably so. Last year, during the great shut-in, you could wear the same sweat pants and T-shirts all week long and no one would be the wiser. But today, more families are hoping to go out, impress classmates, or start going back to the office, and if that is the case they want to look good.
Retailers are hoping that the desire to look fresh and fashionable will convince consumers to venture out, and browse the malls and department stores once again. It is those brick-and-mortar stores that suffered the "ground zero" economic impact (along with restaurants) during last year's closing of the economy.
However, weighing against these expectations is the upsurge of the Delta variant Coronavirus mutation. As the number of cases rise, more consumers are beginning to throttle back their plans to visit stores. Shoppers are once again growing wary of dressing rooms, public bathrooms, and the food courts. New shoes, dresses, and denim purchases might not be worth the risk of infection, at least for the time being.
That would be a blow to the shopping season. In just one area, industry experts were expecting back-to-school spending for children in grades up to K-12 to reach $32.5 billion, which would average about $612 per student. But the Delta strain of Covid-19 is not the only risk facing retailers.
Labor shortages are a problem throughout the economy. The scarcity of sales clerks and cashiers, for example, could translate into long check-out lines, especially for those who worriy about safe-spacing within confined spaces. To make matters worse, there may also be a lack of popular merchandise due to supply-chain bottlenecks.
The novel coronavirus Delta case surge throughout Asia has caused shipping bottlenecks. COVID-19 cases have created labor shortages in the main export ports, and in the apparel trade. That could be a problem for U.S. retailers. Just a few countries in Asia supply most of the apparel consumed by the U.S. fashion industry. China, Vietnam, India, and Bangladesh account for more than 40 percent of U.S. apparel imports.
It is still too early to predict whether consumers' desire to outfit their kids and themselves will win over the continued presence of the coronavirus. The verdict, like so many outcomes today, will depend on how bad the health issue becomes in the next few weeks.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: Higher Stocks Climb, Cheaper They Get
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As stocks hit record high after record highs, it might be normal to expect that equities will just get too expensive and collapse under their own weight. Not necessarily.
One of the investor's favorite valuation metrics is called the forward price/earnings (P/E) ratio. The concept is quite simple: compute the market value of any stock and divide it by what the company is projected to earn over the next 12 months. If the ratio is higher than the long-term average, consider it expensive. It is considered cheap (generally) when the stock trades below that average.
The P/E ratio you can compute for an individual stock can also be applied to a market index, such as the benchmark S&P 500 Index. In late August 2020, the forward P/E of the S&P Index hit a high of 23.6. At the time, the index was trading at a bit more than 3,500. Intuitively, you might think that today that ratio would be much higher given the gains in the market. However, at the end of July, 2021 that forward P/E was 21.2 — lower than a year ago — despite a gain of 25 percent in the S&P 500 Index.
A 21.2 forward P/E is still expensive compared to the 10-year average of the ratio, which is 16.2 percent. Yet, according to one Charles Schwab equity strategist I admire, Liz Ann Sonders, an investor shouldn't place too much weight on long-term historical averages.
During the early months of the pandemic, no one knew what companies were going to earn, so analysts took the most conservative approach, and cut earnings estimates drastically. That caused the forward P/E ratio to move higher. Since then, as more information was forthcoming, earnings estimates have risen even faster than stock prices.
Second quarter's earnings results are a great example of this. More than 90 percent of S&P 500 companies have beat estimates on both the bottom and top line. That is to be expected in a booming economy, and will lead to even lower P/E ratios. Low interest rates also provide an added boost to earnings because the cost of borrowed money is much lower.
Investors should also remember that a growing percentage of companies in the S&P 500 Index are technology companies that reflect today's market realities. As such, tech companies command higher valuations, since their prospects of future growth are much higher. It is just something to remember when you hear someone citing forward P/Es as a reason to sell the market.
All the worries that have plagued investors last week still exist. And as is its custom, stocks continue to climb this wall of worry as we enter the month of August. As I expected, the averages have been volatile on a daily basis with the NASDAQ clearly leading stocks higher.
I had coached readers to keep their eyes on the Semiconductor index as a "tell" on how bullish the markets remain. That index made a new all-time high this week, and appears poised to continue its gains. Technology shares have been the best performers lately. I believe they will continue to take the lead as long as the number of Delta variant coronavirus cases continue to climb.
It is somewhat similar to the playbook investors used last year when COVID-19 had all of us on lock-down. No one knows how bad the Delta variant will be, nor if the next mutation, Lambda, will be worse. The fear is that the pandemic will begin to hold back the economy and maybe even result in some lock-downs causing investors to shun industrials, commodities, materials and financials in favor of Investing in FANG stocks, stay-at-home plays, and the Kathy Wood universe of new era, growth names that I call "Wood Stocks."
The latest non-farm payroll report reported on Friday (Aug. 6) was an upside surprise, however, with the economy adding back 943,000 jobs, while reducing the unemployment rate to 5.4 percent. Those numbers breathed some new life into those underperforming sectors, helping the overall market to continue to forge ever higher.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Buy Now, Pay Later
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When does a loan, not feel like a loan? That is the idea behind one of the more exciting new concepts being floated by the financial technology community. It is an idea that is just catching on here in the U.S., but it could challenge traditional credit cards overtime.
Are you really going into debt when you buy something and pay it off in a set number of installments? Technically, yes, but it doesn't feel that way, especially if you are paying 0 percent interest on the installments. That's evidently what Square, a leading financial service, digital payments company believes when it announced this week it was acquiring Afterpay, an Australian-based Buy Now Pay Later (BNPL) company in a $32 billion all-stock deal.
So why all the fuss over BNPL?
E-commerce companies are betting that younger Americans, who do most of their shopping on line, are not as excited as their parents and grandparents were with the benefits of credit cards. They may be unwilling, or unable to open credit card accounts. Instead, many millennials are following the example of Europeans, who have traditionally avoided credit cards and the debt that comes with them.
In Europe, where BNPL accounted for 7.4 percent of e-commerce payment methods last year, consumers are more willing to buy an item online, even though they may not have the full amount of the purchase available in their bank accounts. As long as they honor the terms of the installment agreement, everything turns out roses.
Here in the U.S., the idea is catching on. This holiday season, for example, I purchased a new Apple iPad for a loved one through PayPal Holding Inc. The company was offering a BNPL scheme called "Pay In 4" (installments) with no fees.
After reading the fine print, I realized that like so many of these offerings, if I missed a payment, I would be hit with penalties and fees and possibly damage my credit score. After researching the issue, I found out that nearly 40 percent of U.S. consumers who used BNPL have missed more than one payment, and 72 percent of those saw their credit score decline.
I am one of those people who pay off their credit card debt in full each month. I confess that I was so worried I would forget a payment, and incur a fee, that I ended up paying off the charge in two, rather than four, installments.
More and more retail websites, however, are now offering these services. The leading providers are Affirm Holdings, Inc., which just joined Apple in a BNPL deal in Canada, PayPal Holdings, Inc, Swedish-based Klarna and Afterpay/Twitter. It is estimated that in 2020, BNPL companies facilitated between $20 billion and $25 billion in U.S. transactions, but that only accounts for 1.6 percent of U.S. digital payments. The bet is that BNPL will grow as a result of online shopping and the culture clash around credit cards.
Let's face it, credit card debt in America has a bad reputation. Almost half of all Americans are carrying credit card debt. The average household credit card debt is $5,315. And while the percentage of revolvers (those who carry a debt balance on their cards) declined a bit during the pandemic, it still comprises 40.1 percent of all credit card holders.
But that has not stopped us from accumulating more and more credit card debt. Credit card balances increased by $17 billion in the second quarter 2021 (to $787 billion), according to the New York Federal Reserve's Household Debt and Credit report. While that is still below the $927 billion amassed prior to the onset of the pandemic, it continues to grow.
The optimists argue that younger American millennials don't want to be saddled with this kind of debt and fall in the trap of only paying down monthly charges forever and ever. Yes, BNPL is still debt, but only deferred and not forever, so there is little temptation to roll it over. The critics say that more than 40 percent of those using BNPL can't get access to traditional credit, either because their credit limit is maxed out, or they have poor or non-existent credit history.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
