What a mess…

  • Share…the losses
  • Buying begets buying
  • A timely read
  • Mark your calendar
  • Going mainstream

The next time a millennial whines about pollution, climate change, or how ‘old folks’ are leaving the world in a mess, just show them this picture of the aftermath of the Glastonbury music festival…

chart image

Source: Daily Mail
Click to enlarge

…and then tell them to keep their opinions and their social justice crusades to themselves…at least for a while.

Now, on with the show…


Overnight, the Dow Jones Industrial Average gained 14.79 points, or 0.07%.

The S&P 500 rose 0.77 points, or 0.03%.

In Europe, the Euro Stoxx 50 index closed up 18.08 points, or 0.51%. Meanwhile, the FTSE 100 gained 0.31%, and Germany’s DAX index rose 0.29%.

In Asian markets, Japan’s Nikkei 225 index is up 74.42 points, or 0.37%. China’s CSI 300 index is down 0.24%.

In Australia, the S&P/ASX 200 is down 4.9 points, or 0.09%.

On the commodities markets, West Texas Intermediate crude oil is US$43.52 per barrel. Brent crude oil is US$46.02 per barrel.

Gold is trading for US$1,245.03 (AU$1638.20) per troy ounce. Silver is US$16.61 (AU$21.85) per troy ounce.

The Aussie dollar is worth 0.76 US cents.

Share…the losses

What a great job the world’s governments and central banks did after the 2008 financial meltdown, right?

Er, that’s open to debate.

The front page of today’s Financial Times announces:

Italy has moved to shore up confidence in its fragile banking system after agreeing to pump €5bn of taxpayers’ money into two failed mid-sized banks while handing their good assets to Intesa Sanpaolo, the country’s strongest lender.

We almost feel as though we’ve been transported back to 2008 or 2009.

The socialisation of losses…the privatisation of profits.

No wonder the share price of Intesa Sanpaolo [IM:ISP] closed up 3.5% today. Who doesn’t want a bunch of free profits landing in their proverbial lap?

As for the taxpayer, who doesn’t want a bunch of bad debt liability landing in their lap? What’s that, no takers? Tough. Government knows best. Apparently.

We flip the page. The headline on page three immediately catches your editor’s attention, ‘Brisk trade in used cars drives fears over growing consumer debt levels’. Just our kind of story. Needless to say, we weren’t about to turn the page again until we had satiated our thirst for doomy-gloominess.

We weren’t disappointed. The FT reported:

Consumer borrowing has grown, and a lot of it is being spent on cars that are bought on short-term contracts and resold. A healthy used-car market is a vital part of this chain. Things are calm on the surface. Glass’s Guide – an industry bible – has been publishing figures on the used-car market since 1933. It says the market has been consistently strong.

But consumer habits are changing. “However, the detail is the key,” said Rupert Pontin, director of valuations at Glass’s. Newer used-cars are losing more of their value and more quickly. One that is less than two-and-a-half years old is worth 57.6 per cent of its original value, down from 61.1 per cent in 2014.

The falling value of used cars explains why the shares of hire car firm, Hertz Global Holdings Inc. [NYSE:HTZ], are down over 91% since late 2014:

chart image

Source: Bloomberg
Click to enlarge

Why would used car values effect Hertz? Well, the car rental business isn’t just about how much they can charge for rentals. It’s also about whether they can offload vehicles at the expected resell value.

If resell values drop, the income from rentals may not be enough to cover the short-fall.

That’s a big deal for a business that survives on super thin margins even during good years. You’re looking at a profit margin of 2-3%. Typical for a commoditised business.

It’s a similar story for Avis Budget Group Inc. [NYSE:CAR]. Its shares are down over 59% since 2014.

Remember that at the same time, the key US blue-chip index, the S&P 500, is up over 26%. That’s a significant underperformance by the two big rental car companies.

So, as we’re wont to do, we chalk this up as another reason to be concerned about the current state of the world’s financial markets.           

Buying begets buying

And the following from Business Insider hasn’t done anything to diminish our bearishness:

There doesn’t appear to be much room for originality in the global market landscape.

Through conversations with portfolio managers, JPMorgan has found that investors are piling into the same positions. And it’s created a tenuous situation.

“This creates a problem as it limits upside with everyone having bought already, and raises downside if we all try to get out the door at the same time,” Jan Loeys, the head of asset allocation and alternative investments at JPMorgan, wrote in a client note.

A problem? You betcha.

Blame the disease of indexing. Index funds buy stocks according to a stock’s weight in an index. Because bigger companies tend to be more liquid and are components of more indices, there is a greater demand for their stock.

This pushes their share prices higher. That causes them to be a bigger share of the indices…which creates further demand.

This is a highly contagious disease. It affects active fund managers. Almost all active fund managers benchmark their performance against an index. That means the active fund managers tend to follow the indices closely, in terms of their own asset allocation.

So, they buy the big stocks too…pushing the price of big stocks higher…helping them to increase their proportion within an index…which creates more demand by passive fund managers…which creates more demand by active fund managers.

And on and on it goes. It makes you think that stocks can only ever go up. What could possibly go wrong?

A timely read

What could go wrong?

Coincidentally, before we left London on Sunday, to return to Dublin, we pottered around the Waterstone’s book store, near Trafalgar Square.

Perhaps subconsciously, our current state of thinking had an impact on the two books we decided to buy…

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

The Black Swan: The Impact of the Highly Improbable

To us, the timing seems just about perfect.

Mark your calendar

Remember to keep your calendar free on the evening of 20 July.

Something big is coming. Details soon.

Internet 2.0?

Meanwhile, a pullback in cryptocurrencies has some folks wondering if the bubble has burst, or is about to burst.

We won’t pretend to be an expert on Bitcoin, or any other cryptocurrency. But, the more we read about it, the more we believe the underlying premise of cryptocurrencies has substance to it.

Colleague, Sam Volkering, has been all over this opportunity for years — going back to at least 2010. And he’s ratcheted up his enthusiasm for it this year, showing his Revolutionary Tech Investor subscribers exactly how to invest in cryptocurrencies.

Clearly, it’s not for everyone. But if you like the idea of investing in a disruptive technology…a technology that could be the biggest breakthrough since the development of the internet, then this could be for you.

Going mainstream

On the subject, looks like cryptocurrencies are going mainstream. From Investopedia:

A June 2017 staff discussion note from the International Monetary Fund (IMF) suggests that banks should consider investing in cryptocurrencies more seriously than they have in the past. According to the IMF staff team responsible for the note, including prominent economists such as Dong He, Ross Leckow, and Vikram Haksar, “rapid advances in digital technology are transforming the financial services landscape.” These members of the IMF feel that such transformations generate new opportunities for consumers as well as service providers and regulators. The ultimate message of the report seems to be one of support for cryptocurrencies, as it outlines some of the ways that the fintech industry might be able to provide solutions for consumers related to trust, security, financial services, and privacy in this area.

If you haven’t yet considered adding cryptocurrencies to your investment portfolio, you may want to think about it. In our view, the best advice you can get on the subject is right here.