The Retired Investor: Carbon Market Comes of Age
At the beginning of this year, the global price of carbon was $24.05 per ton of CO2. In order to achieve the emissions reduction goals of members of the Paris Agreement, prices need to reach a range of $50-$100 per ton of CO2. That makes buying carbon an attractive investment.
The ongoing concerns about climate change have spawned several emission trading schemes over the last decade. The reasoning is simple: if left unchecked, carbon emissions (among other factors) will have a material impact on our environment and will do severe damage to the global economy.
The ratification of the Kyoto Protocol of 2007, by world governments, effectively addressed the challenge, establishing rules of carbon emissions. And in the process created an entirely new asset class.
Today, whatever system a government chooses has at its core, a cap-and-trade system. Emitters of carbon must by law either limit carbon emissions to the level allocated by their government, purchase additional carbon emissions permits in the marketplace, or pay a fine for exceeding their emission limits. This has created a new commodity: carbon emission permits.
The European Union Emission Trading Scheme (EU ETS) is by far the largest such scheme in the world. It has also become the model for most of the world's governments. Carbon emissions, according to the Financial Times, was the top performing commodity in recent years, growing fivefold in the last four years. By the end of 2020, the three largest global carbon futures exchanges had a market size of $260 billion.
In April 2021, on Earth Day, President Joe Biden hosted a "Leaders' Summit on Climate," and promised to reduce emissions by 50-52 percent below 2005 levels by 2030. The U.S. was just one country, among many. The EU, the U.K., and China promised similar, if not larger, reductions. Carbon emission pricing was the central theme of the summit and is the key, fundamental component for achieving the summit's reduction goals.
Prices have risen by 70 percent this year in response to the aggressive goals set by the EU, which is targeting a 55 percent reduction in greenhouse gases by 2030 and net-zero by 2050. The hope is that as the price of carbon credits continue to rise, polluting companies will at some point decide to invest in reducing emissions rather than purchasing increasingly expensive credits.
The re-opening of the world's economies is also a bullish development for carbon pricing as industrial companies and utilities increase output and carbon emissions, which is sparking even more demand for carbon credits. And adding to that trend, new carbon markets seem to be popping up every month. Cap-and-trade carbon pricing exists in 24 national and sub-national markets currently. Another 19 more markets are in the development or consolidation phase.
Some American institutional investors and pension funds are gaining access to this market either directly, or through Exchange Traded Funds (ETFs). The retail crowd is still relatively absent from this asset class.
In addition, as far as I can tell, the carbon market is uncorrelated with other risk assets. The underlying asset, the EU ETS, is a liquid instrument with a well-understood prospective risk premium. Its risk-adjusted returns have outperformed traditional asset classes such as equities, bonds, and other commodities. In my opinion, it appears to be a case of making some real money over the long-term, and, at the same time, contributing to the greater good by helping to address climate change and a much-improved global environment.
|Write a comment - 0 Comments|
The Retired Investor: Gold Regains Its Mojo
In inflationary environments, investors historically have hedged their bets by buying gold. However, this time around, the precious metal has languished as investors bought alternative investments. But times are changing.
The primary alternative to buying gold has been cryptocurrencies. Bitcoin and Ethereum, two of my 2021 buy recommendations (for those with a strong stomach) have enjoyed spectacular gains in 2021. Bitcoin, at one point in May, had gained almost 100 percent, while Ethereum saw gains of more than 400 percent.
In addition, other commodities held more interest than gold for most investors. In January 2021, I recommended investors focus on some specific commodities, especially oil, copper, and soft commodities, like food and lumber. I listed gold as my last pick among those commodities.
That proved to be the correct approach because I recognized that the world had moved on, at least temporarily from something as arcane as gold. In today's internet world among the Robin Hood traders and GameStop crowd, gold was simply not be as attractive as digital currencies. There are plenty of arguments for why that could be the case. Bullion, for example, is expensive to hold, and rising interest rates increases the cost of holding it. Gold is cumbersome, while digital transactions are easy and far more efficient. And while gold is still used in several products, copper, lumber, and oil are far more leveraged to a re-opening global economy.
It is not as if gold has gone nowhere. Gold made what I consider a cycle low back in November 2020 at $1,767.20 an ounce. Today, that same ounce of gold will fetch $1,882.70. That's roughly a 6.5 percent gain. That's much better than the risk-free rate in the bond market but compared to the stock market's 12 percent gains it has been disappointing at best.
However, recently gold has begun to perk up and I believe we may be on the cusp of a new move higher in this precious metal (and silver along with it). Why the change in attitude? The increased worry over how high and how fast inflation will rise and the dollar's sharp decline has investors nervous. At the same time, other commodities are at record peak prices, while gold has done little.
In addition, recent arguments that crypto currencies are the Twenty-First Century's "new gold" is beginning to unravel as speculation within that asset class runs amuck.
As an example, the crypto world is in the midst of a massive decline (evenas I write this). Bitcoin has fallen from a high of $64,000 to Wednesday's low of $33,700, which is almost a 50 percent decline. Ethereum and Dogecoin have also incurred similar losses. The argument that it is a hedge against inflation or rising interest rates seems to be suspect given recent events.
I have noticed over the last few months an increasing number of Wall Street firms including Goldman Sachs and Credit Suisse have warmed to the prospects of gold. Some respected analyst forecasts are expecting gold to move much higher. Twelve out of 32 analysts are predicting that gold will average $2,000 an ounce this year. The median forecast with half above and half below, averages $1,965 an ounce.
I expect that all these forecasts could be low. I am putting gold at the top of my commodity list for the second half of 2021. Silver could be a close second. For investors interested in this area, keep in mind that gold and silver mining stocks usually outperform the metals by a ratio of 2-3 to one. Remember, however, that commodities overall, and precious metals in particular, are highly aggressive investments.
|Write a comment - 0 Comments|
@theMarket: Inflation Fears Weigh on Investors
Most stocks took it on the chin earlier this week. Technology shares lead the rout, but it didn't take long before just about everything else followed tech lower. By the end of the week, it was as if nothing had happened. That's called "chop." Get used to it.
The Consumer Price Index (CPI), which investors use to gauge future inflation, took the lion's share of the blame for the downdraft in equities. Economists had warned that we should expect a higher monthly reading (0.2 percent) for April, but the data came in at 0.8 percent. That computes to a 4.2 percent price gain year-over-year and was almost triple the rate that anyone had expected.
The market reaction was swift. Interest rates spiked higher along with the dollar, while equities dropped. The carnage continued for three straight days, taking the S&P 500 Index down 4.2 percent from its high of 4,238. Traders waited until the index hit its 50-day moving average at 4,056 before buying the dip. A relief rally on Thursday and Friday repaired about half the damage.
The CPI shock was not a one-off, statistical aberration, however. April's Producer Price Index (PPI) was also released this week, showing a jump of 6.2 percent versus a year ago. That was the largest increase since the Bureau of Labor Statistics started tracking the data in 2010. The monthly increase of 0.6 percent was twice the expected gain.
Economists were quick to explain that the numbers were not as bad as they appeared, since a year ago the economy was in a free fall. Prices were at their lows during the pandemic, so comparisons were bound to be stronger than expected and will continue to be so for the next several months. They have a point and investors seemingly calmed down a bit.
Over the past few months, the fear of uncontrolled future inflation, fueled by governmental stimulus and a growing economy, has been a primary concern among traders. There is presently a tug of war between the Fed, which believes that this spike in inflation will be transitory at best, and the inflation bears who argue that there is no such thing as transitory.
This week, the market algo computers sold stocks on the CPI news and it took cooler heads a day or so to prevail largely on the news that the Center for Disease Control (CDC) announced they were lifting inside mask restrictions for those who have been vaccinated. That revived the bulls, who piled into the re-opening trade once again
I had written last week that the best investors could expect from the markets over the next few weeks would be marching in place. I warned that there was also a real possibility we could experience a 5-10 percent decline in the S&P 500 Index and worse in the NASDAQ. Well, this week we lost almost 5 percent in the benchmark S&P 500 and closer to 10 percent in a lot of technology stocks. Some of those high-flying, next generation stocks with no earnings or sales have experienced a 30-50 percent pull back in the last few weeks. Some may be tempted to get back into these names but now is not the time, in my opinion. Better to focus on value and cyclical stocks that have real earnings, dividends and a strong balance sheet.
It is after all, the month of May, and so far it has lived up to the admonition to "sell in May." It is quite possible that we will see the same kind of chop in the markets for a while. If so, I advise readers to sit on your hands, do nothing and ignore the noise. Otherwise, it could be you who ends up on the chopping block.
|Write a comment - 0 Comments|
The Retired Investor: A Labor Shortage Solution
The hiring boom that was expected in April 2021 fizzled. Last Friday's nonfarm payrolls report came in at 266,000 jobs gained compared to over a million expected. It was the biggest miss in decades.
Politicians and many corporations were quick to provide a ready scapegoat for that failure. They blamed it on the weekly payments of $300 in federal unemployment aid through September 2021, on top of the regular unemployment benefits paid out by the states. In short, the fault apparently lies with the Biden administration's stimulus package. If the president and the Democrats had not provided these overly generous benefits, more workers would be thrust back into the work force in order to eat and pay their bills. Hogwash!
Many of these complaints are coming from service providers in the restaurant and retail trade where the median wage is around $11 a hour versus more than $20 a hour in other occupations. Non-partisan economists can find no evidence to support these wild claims, but there are two factors that could explain the lack of available workers.
Fear of contracting the coronavirus is one reason. Many millions of Americans avoided hunting for jobs in April because they were afraid they might be infected with the coronavirus. In the restaurant and retail business sectors (where the accusations are loudest), there is a much higher risk that can occur. Disruptions in schooling and child care also contributed to the anemic job hires, since 2 million or more women specifically were prevented from looking for work because of caring for children at home.
A third explanation involves economic theory. The economy has suffered, and continues to suffer, from a severe shock. As in all such shocks, growth and hiring are not likely to evolve smoothly, like clockwork. The economic data will be choppy, reflecting the fits and starts of an enormous economy coming back to some semblance of normalcy.
Surging consumer confidence has fueled demand as Americans want to buy, eat, travel, and shop. Many companies have been caught flat-footed by this sudden explosion in new business. They somehow expected that workers would magically appear just because they decide to reopen their business after months of lockdowns and hesitation and fear. But business owners have been spoiled by decades of cheap available labor, especially in the U.S. services sector, which now represents about 70 percent of the American workforce.
In times like these it is easy to fall back on all the old myths about the American workforce and their failings. I am hearing comments like "Why work when you can get more staying home?" or "stimulus and unemployment benefits are killing the workforce," and of course the old tried and true racially motivated "people just do not want to work."
Let me put an end to this crap. The U.S. is the most overworked, developed nation in the world. Today, 70 percent of American children live in households where all adults are employed and 75 percent of those women are working full time. In the U.S. 85.8 percent of males and 66.5 percent of females work more than 40 hours a week. And women make 87 cents for every dollar a man makes. Productivity per American worker has increased 400 percent since 1950. All the net gains in April's job growth went to men. Women, as a group, lost jobs.
My solution to the nation's dilemma of finding more workers is not to reduce unemployment benefits. That would simply lock our antiquated attitude toward labor. It is obvious to me that American companies, especially in the service sectors, need to pay higher wages to attract the workers they need. If they cannot do that and still make a profit, they should not be in business at all.
|Write a comment - 1 Comments|
@theMarket: Stocks Make New Highs
It has been the best quarterly earnings season in a long time. More than 87 percent of companies that have reported thus far have beat earnings estimates. That is a record and investors celebrated.
Last week, I mentioned that this earnings season has been a classic example of a sell-on-the-news. It has been especially so for companies in the technology sector, but not so much for investments in other areas. What, you might ask, does this say about the overall markets?
The most bullish interpretation is that we will continue to move higher making new highs after new highs. The Dow Jones Industrial Average made yet another new high yesterday, as did the S&P 500 Index. The NASDAQ is still off by 4 percent from its highs and the small cap Russell 2000 Index is off by 6 percent.
However, for the year thus far all the indexes have positive gains. The S&P at 12 percent is about ties with the Dow, while the small cap Russell and the technology-heavy NASDAQ are lagging. I have been warning investors since the beginning of the year that technology, especially the stay-at-home stocks, would be underperformers.
As we enter the second week of May, with the markets at, or close to, all-time highs, investors need to ask how much of the present macroeconomic data is already reflected in the price levels of the stock market. We know that coronavirus cases are falling and will probably fall further. We also know that this quarter and next will see economic growth spurt higher, while unemployment drops. I feel it would be safe to assume that the market has already discounted some of those future expectations.
However, don't think that Wall Street economists get it right all the time. Take April's unemployment report. Forecasts were for the economy to gain one million jobs last month. Instead, only 266,000 jobs were added. That was the largest miss since 1998. It immediately cast doubt on the timetable of economic recovery.
Expectations are that the economy is going to roar back, and with it corporate hiring plans. Friday's report, if anything, might reduce some of the more bullish enthusiasm of some financial analysts. That is a good thing, in my opinion.
The prospect for higher inflation is still a question mark, as is the future course of interest rates. Those two variables are interconnected and will occupy our attention for the foreseeable future. Sectors that benefit from inflation, like commodities, are outperforming. I expect they will continue to do so as the economy recovers. So-called “value' areas like industrials, transportation, and materials, as well as financials, have also done well and should also continue to gain, even if interest rates move higher.
The sectors that are hurt by inflation or higher interest rates, however, should underperform. The result could be a bifurcated market, something I believe we are witnessing at times right now. I am expecting markets to climb a little higher. My target for the S&P 500 Index is between 4,220 and 4,270. At this rate, we should hit my target by next week.
At that point, those invested in the three main indexes, you could see markets simply pause in the weeks ahead and trade in a range. That would be my most bullish scenario. The bearish story would be a classic May sell-off of possibly 5-10 percent. If that were to occur, the good news would be that the stronger sectors might mitigate some of the downside potential in the weaker areas.
I will be watching the transportation and energy sectors for clues. Those two areas should continue to gain if investors believe the re-opening trade is still intact. Weakness might indicate economic prospects have been fully discounted, in which case, the markets should follow their lead downward. Stay tuned and keep reading.
|Write a comment - 0 Comments|