Author: Andrew Packer

Economy

Of Dollars and Data: The Yield Curve Just Inverted… Now What?

Posted on by Andrew Packer

Investors are aware of the macroeconomic implications of the yield curve inverting. But they need more than that. They need a specific investment strategy for handling a potential recession emerging in the coming months.

How an investor will fare comes down to their asset allocation. Specifically, the percentage of assets in certain different types of sectors. Typically, financial analysis tends to make a trade-off between stocks and bonds.

As Nick Maggiulli notes over at Of Dollars and Data, however, when stocks get risky, bonds are no safe-haven.

With the Federal Reserve raising interest rates, bond yields are rising. But that’s another way of saying that bond prices are falling. that’s because a decline in price is what drives the yield higher.

Based on the data, one-year after a yield curve inversion, stocks could be the best game in town. They tend to return 4.7 percent. While that’s just more than half their average return of 9 percent, it may be better relative to a drop in bond prices needed to drive yields higher.

With bonds averaging 4 percent after inflation one year after a yield curve inversion, the data gives stocks a nod here.

You can read the full analysis on the trade-off between stocks and bonds for today’s market conditions here.

Economy

A Wealth of Common Sense: The Predictive Power of the Yield Curve

Posted on by Andrew Packer

With the yield curve inverting in recent weeks, investors should feel duly warned. This indicator has a stellar record of predicting a recession. But an economy doesn’t turn on a dime. It takes a long time for trends to play out.

That’s why it’s possible the stock market could have a massive rally before a recession hits. That’s occurred several times in the past, including in 1999/2000 and 2008, and even in late 2019.

In A Wealth of Common Sense, Ben Carson outlines past yield curve inversions, and what it’s meant for the economy and stocks in the months that follow.

However, the past two recessions have seen a far more activist approach by the Federal Reserve and other central bankers.

In short, rather than simply cut interest rates, these banks have intervened in credit markets. And they have been injecting trillions of dollars of liquidity into the financial system.

That makes it likely we’ll see more market crashes like the one in March 2020, where a fast-acting Fed papered over the system so quickly that fastest start to a bear market also ended the soonest.

Central bank intervention may also make yield curves less useful as an indicator as time goes on. If it takes more than 18 months from now for a recession to start, we may have a better idea if that’s true.

To read the full blog post and view the corresponding charts, click here.

Income investing

Sure Dividend: Will Tesla Ever Pay a Dividend?

Posted on by Andrew Packer

As markets get volatile, investors often seek the safety of companies that pay out a dividend. When traders make big moves in that direction, it tends to deflate the prices of growth stocks rapidly.

But over time for any company, growth will slow. Product lines will mature. And, eventually, a company’s best option for its cash flows might be to send them off to shareholders to enjoy in the form of a dividend.

Even many high-growth names have found a way to keep up their projects while rewarding shareholders with cash. Big tech names like Apple (AAPL) and Microsoft (MSFT) have been solid dividend payers for years.

What would it take for Tesla Motors (TSLA) to pay one?

For starters, shares have already returned about 1,900 percent over the past three years. Dividend yields tend to be in the low single-digits, and take time to grow as a company continues to expand. So it may seem that a growing share price will drive returns for some time.

Yet, as noted on Sure Dividend, Tesla has been issuing new shares over time, which has diluted existing shareholders. And the company has a rising debt load. These are two signs the company is still in a high-growth phase, and likely won’t pay a dividend anytime soon.

But if the company’s fundamentals improve enough over time, that’s a possibility. But investors shouldn’t hold their breath waiting.

Go here to read the full analysis of what’s holding back Tesla from paying a dividend.

 

Economy

The Big Picture: Sources of SPX Earnings Growth

Posted on by Andrew Packer

While the market can be volatile on a daily basis, stocks tend to go up or down over time as earnings improve. There are many ways that earnings can improve.

A company could find a way to earn more for the same amount of revenue, and increase its profit margins. Or they could grow overall revenue even if margins stay the same or decline. And many companies have learned that they can increase their earnings per share by regularly buying back shares and shrinking the float.

Over at The Big Picture, Barry Ritholtz has looked over the latest data compiled for earnings growth in the S&P 500 for 2021.

The year-over-year numbers are impressive. Every source that could contribute to earnings growth did so last year.

A surge in stock buybacks led to a 0.6 percent decline on average, compared to a 0.3 percent rise on average. Revenues rose by 19 percent on average versus a 3 percent gain on average.

But the biggest winner came from increased profit margins, which rose 51.8 percent on average versus a 2.8 percent average.

That’s an amazing jump higher, and one that may be difficult to replicate going forward. That may be another reason why stocks have been sagging recently. Following the depressed levels of 2020, 2021’s numbers represent both a return to normal and some slight real growth on top of that.

The full blog, with all the charts and graphs showing the changes, can be read here.

Economy

Meet Kevin: A Warning for Stocks

Posted on by Andrew Packer

The stock market has retraced part of its losses over the past few months. But when hitting a key technical level, stocks have started to fall again.

On the Meet Kevin YouTube channel, the key charts and trends show why the market is faltering now, and why a further drop may be likely. More importantly, the charts show where investors can likely ride out a potential storm in the months ahead.

While the chart data shows that inflation expectations are rapidly dropping as the Federal Reserve has started to raise interest rates, the market has responded by acting in a way that’s caused the Treasury yield curve to invert. That’s usually a warning sign of a recession ahead.

However, looking at key stocks like Apple (AAPL), it’s clear that some stocks are holding up well as a flight-to-safety play. And companies like Tesla Motors (TSLA) are also performing well, thanks to the company’s strong production and further growth ahead this year.

While some traders might want to consider looking at quality brand names in a market selloff, comparing a stock’s performance relative to bond yields can give a sign of where investors are going for safety – and where stocks are diverging.

Overall, markets are in a nuanced place where some stocks will perform better than others. Those worried about rising rates should see where companies are correlating with those rising yields.

You can view the full video on YouTube here.

 

Economy

Ray Dalio: Principles for Dealing with the Changing World Order

Posted on by Andrew Packer

Billionaire investor Ray Dalio believes that the future ahead will be vastly different than what we have experienced in our lifetime. A world of relative peace and abundance is giving way to a more chaotic world.

However, while the world may change, a simple understanding of what is happening and what is likely to occur based on prior similar events can lead investors to best benefit from these changes.

Because these trends have happened before, successful traders can apply the lessons of history. What has happened before tends to happen again and again.

For instance, we’re in the middle of a big cycle involving the rise and decline of a world-leading nation. Dalio sees the United States as on the wane. That follows decades of dominance. It’s also been more than 50 years after the last series of crises that emerged as the country cut the tie between gold and the US dollar.

A series of indicators can be used to determine what state a leading global nation is in, and if it is improving or on the decline.

Dalio walks through what can occur to reinvigorate the United States, and what individuals can do to prepare for the uncertainties ahead.

You can watch the full 43-minute video on YouTube here.

Economy

Wall Street Silver Official Podcast: Energy Crisis Leading to Food Shortage This Year

Posted on by Andrew Packer

Traders have largely been focused on precious metals, energy, and commodities like wheat in the past month, as Russia’s invasion of Ukraine has had major impacts on those markets.

However, both countries are large producers of fertilizer. Production looks set to come in at devastatingly low levels this year. That suggests that the combination of high energy prices and high fertilizer prices will continue. That will likely lead to outright food shortages.

As Steve St. Angelo explains, Europe is first in trouble given their huge energy imports from Russia. The Eurozone imports as much as 75 percent of natural gas from Russia.

Fertilizer companies are already starting to report cut production due to high energy prices. Or, for a total lack of natural gas at any price. The commodity is key component for manufacturing fertilizer, and the disruption to the supply now is only just starting.

With the spring planting season now underway, it’s likely that high energy prices will lead to lower food production. That’s because high energy prices lower fertilizer production.

Added to the lack of exports on the wheat market from Ukraine and Russia right now, and it’s likely that food shortages are a real possibility later in the year.

You can hear the full podcast episode here.

Economy

Game of Trades: This is Exactly Like the 1929 Yield Curve Inversion

Posted on by Andrew Packer

The 10-year Treasury yield curve has inverted relative to the 2-year yield. In other words, investors can get a higher yield on 2-year Treasuries than 10-years. This yield curve inversion has been a strong predictor for a recession within 18 months.

The Game of Trades YouTube channel looks at the current trend in yield curves and sees a strong similarity to that of the 1929 yield curve inversion. Does that mean investors should throw in the towel now?

Not yet. But traders should look for a lot bigger swings ahead. If the daily swings in the stock market in the past few months have been frustrating, it’s about to get worse.

The stock market started an 80 percent crash in late 1929. However, the yield curve started to invert in early 1928, and continued to worsen until the stock market peaked in August 1929. In other words, the curve stopped inverting as soon as the 1929 stock bubble burst.

In other words, an inverted yield curve doesn’t mean the market may drop yet—instead, it may first have a massive rally in the coming months. The stock market doubled between 1928 and its peak in 1929 as the yield curve started inverting back then.

You can view the full chart-laden video here.

Cryptocurrencies

The Blockchain.com Podcast: The Outlook for Central Bank Digital Currency with Author Michael Casey

Posted on by Andrew Packer

Following the Biden Administration’s executive order asking executive branch agencies to look into regulating cryptocurrencies and the potential for a central bank digital currency (CBDC), there’s been a lot of speculation out there as to what will happen next in the crypto space.

Author Michel Casey shares his views on why the United States won’t follow China into creating a central bank digital currency.

The decentralized nature of cryptocurrency projects fits in with America’s worldview. That’s opposed to the oppressive and top-down nature of a CBDC, at least as outlined by China.

The crypto space has evolved substantially in recent years. Even changes to the Bitcoin protocol, made by consensus, have acted to make the cryptocurrency more accessible to everyday traders and investors. And that’s without the need for government regulation.

Such regulations, when they happen, will likely be enough to bring more investors into the crypto realm.

CBDCs, in contrast, offer the potential to allow a government to shut someone out of a monetary system instantly. It could happen for any real or perceived offense. China’s push for a CBDC looks more like the ultimate surveillance and police state tool. That goes against the view of using crypto as a way to rethink what money is. Crypto can succeed best when it works as a mechanism for exchanging goods and services.

The full episode of the podcast can be heard here.

Personal finance

We Study Billionaires: The Billionaire’s Peak Performance Playbook

Posted on by Andrew Packer

It’s no surprise that many investors can fare well by following in the footsteps of the best investors out there—the billionaires inking huge deals and moving the market.

But those billionaire investors don’t do it alone. They have a number of personnel at their disposal to get the job done. One such person is a coach, who can help them get in the zone, just as an athletic coach might do with a star football player.

Billionaire coach and neurophysiologist Louisa Nicola joined the We Study Billionaires podcast. She spoke about how the best investors work to achieve their peak performance.

Some of the key takeaways are simple. Starting with a good night’s rest allows one to get refreshed and be at their best in any endeavor. In the fast-moving world of financial markets, starting out tired can put even the best investor starting the day behind the eight ball.

Other measures to keep the body healthy also play to mental health. That can be critical when making fast-paced decisions amid a rapidly-changing scenario, whether in the markets or on the field.

That’s why the world’s top athletes and investors also end up thinking alike, by getting into a consistent flow. This appeals to the brain’s sense of routine. Getting into a state of flow can help ensure strong and consistent performance.

The full episode of the podcast can be heard here.