Three weeks into 2020 and things continue apace. The world has been to the brink of war and back (remember that?), the impeachment trial is finally underway, and now there’s fears of a new global pandemic. Meanwhile, markets are up over 2% on the month, which annualizes to another 30% year. Which is absurd, so don’t get your hopes up.
As for the “why”, well it’s certainly not due to fundamentals. Global trade (as measured by the Baltic Dry Index) is at a 9-month low and falling, and the IMF has cut their global growth forecast to 2.9%, which is the lowest since the financial crisis...and those forecasts tend to be optimistic. But thankfully the Fed shows no signs of slowing their repo operations, so the market has the green light to keep going higher. The Fed even - get this - floated the idea of lending directly to hedge funds during the next liquidity crisis.
Bonjour mis amis! Cette newsletter arrive du France, ou est cette auteur pour deux mois pour regard le clime economique et political de l’Europe...mais est comme ca truque de “Flight of the Conchords”. Parlez-vous Frances? Eh...no.
So fear not, that will be the end of the French. Language, anyway. The French themselves will be around for a while still. Despite themselves.
We managed to catch part of the Tour de France last week...and by “catch”, I mean there was a parade of...floats? But they weren’t really floats, they were decorated cars. One was a giant chicken. And they going at a solid 20mph, too, not your leisurely float pace. And people were harnessed in to the top/back/sides throwing knick-knacks at you as they whizzed by.
After accumulating a big pile of free loot, you wait and wait and then watch some cars go by with about three times the value of the car in bikes on the roof rack, and then BAM! The riders fly by and are gone in about 10 seconds. There wasn’t even time to look for the different jersey colors, though in hindsight we got a good picture of Peter Sagan and whoever was king of the mountains in Stage 15. There’s probably a nice, drawn-out analogy there between cycling strategy and investing...teamwork, pacing, endurance, and so forth. But that’s not where we’re going with this. No. Instead, we are going to take you on our own little tour of France, and try and discern what makes the French so, well...French.
If last month was Roger Moore as 007, then we’re closing out this summer series with Michael Bay. That’s right - it’s time for stock valuation, replete with explosions, special effects, and very confusing cuts in the action sequences.
Stocks, also referred to as “equity”, are shares of ownership in a company. These used to be issued as actual stock certificates (really decorative pieces of paper), but now it’s just digital 1’s and 0’s. Kind of like the cash in your bank account. When you buy a stock, you expect to make money in two ways. One is by collecting a dividend (which right now averages just under 2% for the S&P 500). The other is by the stock price going up.
Unlike bonds, there is no intrinsic starting point for stock valuation. There is neither a maturity date nor a future value, which makes them more or less impossible to actually value. Not kidding - there are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuation. But that uncertainty is also where the fireworks come in, and why stocks swing they way they do.
Bonds, unfortunately, are nowhere near as exciting as the actual 007. Or at least, they’re not supposed to be. Maybe a Roger Moore 007 though, those were all pretty boring. A bond is an IOU - a promise to give your money back in the future with periodic fixed interest payments in the meantime. They used to be issued as actual certificates, with little coupons that you would clip off every six months and turn in to receive your interest payment, but alas, those days are gone.
So, if you get your money back (let’s call that amount “100”) at some point in the future and in the meantime are collecting interest payments, how much is that bond worth? 100? 102? 96?
Last month we started big - economic theory big. Now we’re going to look at stocks and bonds. More specifically, what are they and how do you know what they’re worth?
As beach season gets into full swing, we’ll try and keep your brains from going all washed-up-jellyfish. And we’re starting big - economic theory big.
Have you heard of Modern Monetary Theory (MMT)? It’s all the rage right now and is completely absurd. Why, you may ask? Good question! Let’s take a whirlwind tour through the history of economic theory to find out.
Welcome to 2019! The depths of winter have arrived, and with them temperatures in the US that are literally colder than Antarctica. But fear not dear readers! We have prepared this January newsletter with you in mind, and hope you will find the content stimulating enough to keep you warm.*
Have you heard of Modern Monetary Theory? If not, you just did. And you’ll probably hear more of it soon, because it’s like an Acme Portable Hole for the government’s Wile E. Coyote. It just can’t help itself.
The World Cup this summer threw off our newsletter scheduling a bit, as school is now well in session and we have yet to do a “What is…?” newsletter. But fear not! This one has been a long time coming - we tried looking back to see which previous newsletter promised this current one, but stopped when we looked back through four to no avail. But better late than never, as they say, so without further ado: what exactly is inflation?
There was an article in the June Tybee Island Beachcomber that mentioned in passing the use of cats as currency on Tybee, and how it made everyone wealthy until inflation came along. This may or may not have actually happened here, but something similar definitely did happen with pepper in China, and tulips in what was then the Dutch Republic, and paper money in Weimar Germany, Zimbabwe, present-day Venezuela and others. So let’s let the proverbial (or possibly literal?) inflationary cat out of the bag and take a look at it.
We have carved out some time in between World Cup group stage matches this month to bring you part two in our Price is Right series - how to value stocks. Those of you wanting a refresher on the time value of money and bond valuation before we move on can find yourselves suitably refreshed here.
Facetiously, stocks are worth what someone is willing to pay for them. Unlike bonds, there is no intrinsic starting point for valuing stocks. With bonds, you get your money back at maturity (hopefully), so it’s fairly straightforward to use that as an anchoring point and work backwards to a reasonable valuation. Stocks, on the other hand, have neither a maturity date nor an expected future price, which makes them more or less impossible to actually value. Not really kidding about that. There are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuations. If you want to make the big bucks on Wall Street, you go work for an investment bank and spend all your time trying to figure out how much companies are worth.
But saying “whatever, it’s all made up anyway” two paragraphs into a note isn’t particularly satisfying. So let’s take a look at common methods of valuation, and then we’ll see if we can learn anything about what those methods have to say about current stock market valuations.
Ever look at that dollar in your pocket and wonder, “What’s so special about this piece of paper?” Remember when that bill used to say “Silver Certificate” across the top instead of “Federal Reserve Note”? What about “Gold Certificate”? If you answered “yes” to that last one, a very happy 90th birthday to you, since those stopped being printed in 1933.
Well that’s the question for today: what’s the difference between sand dollars and dollar dollars, and why is one investable and not the other? The short answer is there aren’t enough sand dollars. The longer answer is...
If you’ve never spent a Sunday watching Antiques Roadshow on PBS, your life is missing something. Especially the British version of Antiques Roadshow. The gist of the show is that a bunch of appraisers travel around and set up shop in various small towns here and there, and then people bring all of the stuff that has been lying around their attic for the last 25 years to see if it’s worth anything.
It has even spawned its own hilarious meme. At its core, Antiques Roadshow works for two reasons: one, it’s a big play-along treasure hunt so that everybody can be a couch Ray Dalio (fun fact: not only does Ray Dalio run the world's largest hedge fund, his submarine just found a $17B shipwreck treasure); two, it answers the age-old question of “that’s worth how much?” that has also fueled such long-running classics as The Price is Right and House Hunters.
In this month’s note, we are going to try and answer the question of “that’s worth how much?” with regard to stocks and bonds, a long running soap opera that’s on from 9:30am to 4pm daily (weekdays, anyway. That aren’t federal holidays.)
For those of you who perhaps missed it, ATI Wealth Partners is being featured in a series on young investors in USA Today. The first two articles came out earlier this month, you can check them out here and here.
What now? Is it time to sit back and rest on our laurels? No! It is time to forge an empire. And by “forge an empire” we mean “bring back the summer educational series!” Those of you who were with us this time last year hopefully remember the What is…? articles on cash and stocks that we wrote last summer. If not, feel free to click the links and refresh your memory, we'll wait.
(starts mental countdown.....3.....2.....1....) Ready? Good.
This month we’ll be looking at options - if you’ve talked investing with us at all you’ve probably heard us mention options at some point. We think they are a valuable tool for both conserving and building wealth (especially given the current market environment), and are something we regularly use in our clients’ portfolios. Hope those pencils are sharpened. This is summer school 201 now, it’s time to kick it up a notch.
Knowing these terms will help an investor navigate the bond universe. By Jeff Brown Contributor
Welcome back to the second installment of our “What is…?” series. Last month we took a look at cash, and the role we believe it should play in your investments. Yes, it is now September, yes summer is almost over, no we don’t blame you if you’ve forgotten last month’s note. Feel free to read over it again and refresh your memory.
This month we are going to look at “securities” - specifically stocks and bonds. Now, the term securities is fairly broad and encompasses basically anything you can or could buy and sell in a financial market. Mortgage-backed securities (MBS) were all the rage a decade ago. As were other acronymed things like CDS and CDO. We considered giving in-depth explanations on these, but feel that by and large Margot Robbie has it covered, so suffice it to say that securities can be almost anything.
The two most common types of securities, and what most people are usually referring to when they talk about investing (us included), are stocks and bonds. So let’s start with what exactly these things are that you may be buying, and how they end up in your portfolio they way they do.
Have your red pill ready? Good. Let’s go.
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