Yearly Archives: 2022

Why equities commentary often fails investors

Stock market analysis is too often couched in jargon and clichés that hinder rather than help the ordinary investor

06 OCTOBER 2022

GRAHAM BARR AND BRIAN KANTOR

The management of private savings is central to ensuring the stability of society and the improvement in living standards.

These savings, made by individuals, are generally accumulated through collective schemes such as pension and retirement funds. Those entrusted with the management of these savings have a critically responsible role. They are accorded high status and are well remunerated in rough proportion to the value of the assets they manage. By far the largest proportion of private savings entrusted to these wealth managers is invested in stock markets, both domestically and internationally.

So the performance of the stock market is of considerable interest to a wide sector of the public. Yet the financial jargon used to describe the day-to-day performance of the stock market is in many cases opaque, somewhat illogical and sometimes even misleading.

Outlined below are some common explanations that seem designed to exclude the wider public from the market’s inner sanctum.

Share price movements and what they reveal

Share prices are the perceived present value of the future rewards, mainly dividends, expected to flow from ownership of a company’s shares. These rewards depend on the company’s profits or earnings. Investors and professional traders constantly assess the effect on earnings of information arriving on the newswires.

These packets of almost continuously flowing information fall into two categories: those that confirm events that were generally expected, and those that come as a surprise and are often described as a “shock”.

The greater the divergence of opinion about what the future may bring, the more active trade in a share is likely to be,  and the more share prices may change from day to day

Information that is unexpected and therefore genuinely newsworthy will change perceptions of the economic future and the value of the companies that largely make up a modern economy. Market participants, with every incentive to do so, will try to work out how such news will affect listed companies and their share prices. The information might not refer directly to a particular firm but can  affect perceptions of the performance of the wider economy.

Therefore, any unexpected, genuine news can change the perception of the value of a company in the eyes of potential buyers and sellers of its shares. Trading of a share takes place at an agreed price between a buyer — who must think the price will rise on the basis of current and past information — and a seller, who believes the opposite. Thus trading only takes place when there is a divergence of opinion between buyer and seller.

What’s more, on any one day only a small fraction of shares in circulation will ever change hands; in fact, most shareholders do not trade their shares at all — they simply buy and hold.

The greater the divergence of opinion about what the future may bring, the more active trade in a share is likely to be, and the more share prices may change from day to day or even minute to minute. Heightened uncertainty will be reflected in temporarily volatile markets. The price of an individual share, or some index of a group of shares, can exhibit volatility when the news is truly surprising or shocking and market participants are taking some time to assess its implications.

In the light of the above, let’s look at the clichés offered by commentators that do little justice to this complicated reality.

Commentator: The stock market fell sharply today as sellers flooded the market

In fact, the only prices that are recorded are those of actual trades. So precisely as much share value is bought as is sold. Of course, negative news might indeed have flooded the market, causing a general downward assessment of most stock prices and recorded (last-traded) prices may fall pretty much across the board. But the maxim holds. Each buyer expects the share bought to go up. Each seller expects the share price to fall and as many shares are bought as are sold.

Commentator: The stock market fell steadily today as traders took profits after yesterday’s sharp rise

If a trader bought yesterday, thinking the price would go up according to the available information at the time, they might sell today on the basis of their expectation being realised in some part. But the person they sell to also presumably thinks that, according to today’s information and their analysis, the current price is attractive and will rise.

One will be right and one will be wrong, and the factor that makes one a winner and the other a loser is  generally unpredictable. But the notion of “taking profits” tends to imply that in the short run there is a split between clever people in the market who make money and dumb people in the market who lose money. The clever group (described by the commentator as “traders”) assessed that prices were too high relative to value, and therefore took profits by selling to the dumb group, who have failed to appreciate this and now sit with a (book) loss.

Commentator: We are clearly in the middle of a bull run. Almost all shares are trending upwards, and it looks as if one can’t go wrong putting money into this market.

Or, a variation on this theme:

The trend is your friend. The share price of X has moved up 50% in the past two months and I think another 50% rise is in sight.

One of the most extraordinary fictions is that a share price exhibits animal-like behaviour. That is, if you look at the performance of a stock you might be tempted to conclude that it follows a predictable path in the same way that an animal would. So if a stock price has moved in one direction and established, say, an upward trend, then it is likely to continue to do so; thus mimicking the instincts of an animal,  which is more likely to continue moving in the same direction than suddenly change course.

The identification of patterns of future movements finds its nadir in the dark art known as technical analysis. In this world, share prices are assumed to move along predictable future paths when the past prices have formed some pattern. For example, in the jargon of technical analysis, share prices can be expected to break down after they have formed a “triple top” or break out when prices have formed a “flag” formation. It could be regarded as extraordinary that such analysis has gained currency, invoking the notion that the movement of a share price is akin to a living creature that habitually walks along a designated path.

Of course, once such analysis is accepted by market participants as actually indicating future behaviour, then market players will act accordingly and  the share price prediction can become self-fulfilling. In other words, if technical analysts see a “triple top”, knowing that in their world this heralds a break down they may sell the share — which will lead to a price plunge  exactly as they had predicted.

It must be made clear that though some stock market analysis may push the limits of logic, this does not detract from the fact that the stock market is a central investment vehicle for society.

It allows investors to plug into the extraordinary growth of modern economies, which are supported and driven by the explosive rise in technological innovation. Stock market analysts and portfolio managers have a pivotal role to play in ensuring the delivery of these returns to the savers in society who wish to secure their future.

The colourful, but often obtuse, commentary made by pundits should not detract from this fact.

 

Barr is emeritus professor of statistical sciences at the University of Cape Town (UCT); Kantor chairs the Investec Wealth & Investment Research Institute and is emeritus professor of economics at UCT

Are market safe to invest in

Daily Maverick

The grim prospect of the EFF governing SA looms

By Ray Hartley and Greg Mills

What the EFF really wants is a weak ANC that depends on it to stay in power so that it can use its relatively small share of the vote to propel it — and its pecuniary leaders — into government.

The vote for a new mayor of Johannesburg has come and gone and the DA’s Mpho Phalatse has been replaced by the ANC’s Dada Morero. The meeting which took this decision is being contested and it is unclear where this will end.

What is clear is the emerging shape of a possible post-2024 coalition — and it does not look good.

In November last year, the EFF’s Julius Malema pronounced on coalitions: “There’s nowhere where the EFF is going to vote with the ANC. We are going to disrupt them to teach them a lesson.”

Not for the first time, the EFF has been exposed as an opportunistic and intrinsically untrustworthy political player. When the opportunity to reattach itself to the disrupted rents flowing from Johannesburg arose, it simply turned 180 degrees without apology and without apparently an ounce of remorse.

When ActionSA broke its deal with the DA-led city government and offered the Speaker position in the Johannesburg Council to the IFP (supposedly as a first step in ActionSA seizing the mayoral post), the EFF voted with the ANC, Patriotic Alliance and Cope to throw out the coalition which had been making headway in restoring shattered governance to Johannesburg by rooting out corrupt contracts and getting the public service back on a delivery footing. All of this in a climate of national decline as power outages hammered residents and severely damaged infrastructure.

There are many takeaways from this sorry saga. One is that an eight-party coalition is inherently unstable. That a party with a single seat can turn tail and upend a government, is costly for a big city already broken by years of neglect, but would be disastrous at a national level. Functional coalitions require two or three big parties to make sense, not a swarm of personality parties.

Voters — and party funders — need to think hard about this in the run-up to 2024.

The significance of the EFF’s pivot towards the ANC should also not be underestimated. Until now, the EFF has been coy, pretending that it loathes the ANC and wants to see its demise. This, it turns out, has been disingenuous. What the EFF really wants is a weak ANC that depends on it to stay in power so that it can use its relatively small share of the vote to propel it — and its pecuniary leaders — into government.

A populist coalition

The Johannesburg pivot puts into sharp focus the possibility of a populist coalition at national level should the ANC’s support decline to below 50% in the 2024 election.

The ANC has been holding on to a 50%-plus victory with its nails, according to the most optimistic polls, and is likely to fall into the mid-40s, according to others. Given that this polling was done before the collapse of the electricity supply which has ushered in an unprecedented monthlong nightmare of rolling blackouts, the possibility of a sub-50% ANC is on the rise.

It’s time to start thinking about the outline of that ANC-EFF future. What will happen to government and governance? Where will South Africa go?

The consequences of this would be stark, most notably:

The likelihood of the EFF’s Julius Malema being given a senior role in the national government, possibly even the deputy presidency;

The likelihood of agreement on policies which have hitherto been elusive, most notably the revival of the “appropriation without compensation” of land and nationalisation of the Reserve Bank;

The likelihood of a shift towards nationalisation or, at the very least, aggressive state regulation and taxation of the private sector;

A shift in momentum within the ANC towards the dominance of the Radical Economic Transformation faction, which supports State Capture and shares the EFF’s looney tunes economic policies; and

The return of a virulent (and possibly violent) mutation of State Capture. The EFF looted the VBS bank while in opposition. What will happen when it is helping to run the Treasury is moot.

As has occurred in all other countries where this sort of populist economics has been implemented — think Zimbabwe and Venezuela — this will result in capital flight on a grand scale, the collapse of the currency and hyperinflation. The flight of skills and talent will grow exponentially. You know the sorry story.

The EFF has a bullying mentality in opposition. A magistrate has just made the unbelievable finding that it is okay for EFF leaders to push around police officers. Once its hands are on the levers of power, you can expect this to take on a new dimension. Look out for the collapse of constitutionalism, the defiance of court orders and the use of the security forces and legislation to suppress criticism — all under the guise of exorcising the ghost of apartheid which will be summoned for a series of cameo appearances.

Until now, the view has been that the above scenario is unlikely given the EFF’s public antipathy towards the ANC and its bold public statements that it will never vote with it. It has even gone so far as to support DA votes on the “better the devil you know” principle. The Johannesburg decision changes all of that.

When the possibility of power arises, it turns out the EFF will seize it, devil or no devil. From Johannesburg it appears the opportunism of other, smaller parties could, unwittingly or not, assist it in its aims.

South Africa, you have been warned. DM

When will petrol cars be phased out?

Bloomberg

Bloomberg NEF published its annual long-term electric vehicle outlook today, a deep look at the future on two, three, four and more wheels. The trends are clear: Despite the challenges of a pandemic, supply-chain crunches and trouble sourcing critical minerals, electric vehicles are eating into the transportation system and taking bigger bites every year.

Before we jump into the future, it’s worth mentioning the present state of EVs. At the end of this year, there will be more than 27 million electric passenger vehicles on the road out of a global fleet of more than 1 billion. There are currently fewer than 2 million electric buses and commercial vehicles plying streets worldwide.

There are also just short of 300 million electric two- and three-wheelers — the scooters, trikes and tuk-tuks that dominate roads in Asia. Electrifying every one of these segments contributes to reducing global oil consumption. Today, it’s these smallest vehicles that are denting oil demand most, although not enough to make global oil consumption fall, at least yet.

Today’s fleet is a result of yesterday’s habits, so to speak. With another year of global auto sales behind us, we can definitively point to the peak of a more than century-long trend of increasing internal combustion engine car sales.

In 2017, global new vehicle sales reached 87 million, and all but 1.1 million had an engine. That year will end up being the all-time high for deliveries of internal combustion cars. Sales dropped below 82 million in 2019, and in 2020 they plummeted to fewer than 70 million. ICE car sales will probably tick back up, but EVs are the predominant reason total auto sales will get back to where they one were sometime around the middle of the decade.

As sales rise and fall, so shall the fleet. BNEF expects that the world’s fleet of ICE cars, excluding hybrids and plug-in hybrids, will peak at just over 1.2 billion this year, dropping only slightly in 2023.

And after that, the decline is marked. By the end of the next decade, the global fleet of cars with an engine, rather than a battery or fuel cell, will be less than half the size it is today.

That switch in the source of automotive growth obviously has implications for carmakers, which have already devoted tens of billions of dollars of capital to electrification.

Most of the biggest manufacturers, in fact, are already aiming more than half their capital expenditures and research-and-development spending to EVs and digital efforts, which is self-fulfilling. Today’s investment serves tomorrow’s output. If investment is going electric, then so will production and sales.

That shift has major implications for infrastructure, as well, both at the street level and for whole countries’ grids. BNEF anticipates there will be at least $1 trillion worth of investment in EV charging networks by 2040 to construct and install 339 million charging connections in its base-case scenario.

If governments are serious about hitting net-zero emissions in the transport sector, charging infrastructure will need more than $1.4 trillion for just under half a billion chargers.

Energizing this new, vast system of cars and chargers will require a significant amount of electricity. EVs could increase global electricity demand by more than 4,700 terawatt-hours by 2040. That’s more than the current total consumption of the US. By 2050, the increase could be more than 8,800 terawatt-hours, more than China’s consumption last year.

EVs could account for between 10% and 13% of global electricity demand in 2040, and between 15% and 21% in 2050.

The electrification of road transport is well underway. There are hundreds of millions of personal electric vehicles on the road, and more than a million commercial vehicles and trucks.

EV sales are growing fast and the internal combustion era is starting to fade. In less than two decades, EVs will also begin to reshape our grids, the investment that goes into building them and the strategies that enable their growth. And if countries increase their efforts to reach net-zero emissions by 2050, we will see even more dramatic change.

Do not panic, manage your risk, and buy the dip, Markets may be slightly overreacting.

By Francois Stofberg 1 Jun 2022

During the first week of May, the Federal Reserve (US Fed) in the United States increased interest rates by 0.5%, for the first time since 2000. During the last week of the month, the South African Reserve Bank (Sarb) followed suit. We agreed with the decision of the US Fed but disagreed strongly with the decision of the Sarb.

While inflation in the US is exceptionally high, in fact, at a 40-year high, inflation in South Africa is not expected to breach the Sarb’s upper limit of 6% this year.

Whereas consumers in the US have just come out of the ten greatest years of wealth accumulation, consumers in SA have faced one hardship after the other.

Unemployment in the US was recently still at record lows, whereas unemployment in SA is still [generally] setting record highs. While South Africans struggle to secure employment, there are still more job vacancies than unemployed individuals in the US. And so, the list goes on.

Even though the Fed has made it abundantly clear that it is aware of the impact of its decisions on the US economy, showing that it is unwilling to risk forcing the US economy into a recession, investors are still fearful of a policy error. The month of May, therefore, brought no relief to markets or the weary, fearful investors that they represent. After what appeared to be a strong start, even the Johannesburg Stock Exchange (JSE) gave up its gains. Year-to-date, the JSE was down more than 7% at the end of May. Luckily, this is nowhere near the year-to-date contraction of roughly 26% that we have seen on the technology-heavy Nasdaq Composite.

But interest rate concerns are not the only drag on markets.

Other stressors

Markets have been worn out by the ongoing war in Ukraine and its impact on livelihoods, inflation, and global growth. There has also been a lot of concern about China’s zero-Covid policies that have caused work stoppages at ports and factories, which have fuelled the property slump and fears about a global recession. But we have continually reiterated that China has its reputation to protect, both externally and internally.

In true form, the Chinese central bank then announced that it would reduce one of its key interest rates. The five-year prime loan rate that governs how lenders base their mortgage rates was cut from 4.60% to 4.45%. This decrease will not only boost market sentiment and demand but should also ease global

In general, I, therefore, still believe that the markets are slightly overreacting. I am not saying that a recession is not possible, but even if this is the case, recessions usually do not last too long; in the US, recessions are typically between 15 and 17 months.

All the market volatility that we have been experiencing is, therefore, the perfect buying opportunity.

It is not the time to be getting out of the market but, like Warren Buffett, we are greedy when others are fearful.

So, if you are still saving towards a specific goal, like retirement, do not stop, but rather continue adding to your investment. Maybe also consider increasing your allocation. This will reduce your average entry price, which will increase your long-term potential returns.

If you are retired, ensure that you have managed your risk appropriately, that is, that you have enough income to get you through this short-term volatility (up to two years) so that you do not have to realise your losses and sell out of your equity positions. In the odd case that you are over-exposed and have not been managing your risk appropriately, speak to your financial advisor.

But most of all, do not panic!

Dr Francois Stofberg is senior economist at Efficient Wealth.

How the Modern Stock Market is Affected by War

A look at investor attitudes to war and uncertainty in the modern era.

By DEBORAH D’SOUZA Updated January 31, 2022

Lately, Russia has been saber-rattling and building up its military presence on its border with Ukraine, a sign that Putin may soon invade–and drawing the U.S. and NATO into war. There is also the ongoing possibility of an armed conflict between the U.S., its allies, and Iran.

So far the U.S. has spent an estimated $6.4 trillion on wars post 9/11, a sizeable piece of the GDP. But how do wars affect the economy and stock markets? Security experts are weighing in, and only time will tell, but investing experts are sending out reminders that past wars didn’t push U.S. equities lower long-term.

KEY TAKEAWAYS

While war and defense spending can be a sizeable portion of the U.S. GDP, wars often have little sustained impact on stock markets or economic growth at home.

Markets largely have ignored recent conflicts related to the Middle East and Iran.

A war between Russia, Ukraine, and NATO allies, however, may have a more severe impact, especially on commodity prices.

Markets Often Shrug it Off

LPL Financial research notes that stocks have largely shrugged off past geopolitical conflicts. “As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits,” said LPL Financial Chief Investment Strategist John Lynch, referring to the January 2020 U.S. airstrike that killed Iranian general Qasem Soleimani. “We would not be sellers of stocks into weakness related to this event, given stocks have weathered heightened geopolitical tensions in the past.”

“From the start of WWII in 1939 until it ended in late 1945, the Dow was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%,” wrote Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management, in an article about counterintuitive market outcomes. “The relationship between geopolitical crises and market outcomes isn’t as simple as it seems.”

When Markets Can Suffer

History tells us periods of uncertainty like we’re seeing now are usually when stocks suffer the most. In 2015, researchers at the Swiss Finance Institute looked at U.S. military conflicts after World War II and found that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. However, in cases when a war starts as a surprise, the outbreak of a war decreases stock prices. They called this phenomenon “the war puzzle” and said there is no clear explanation why stocks increase significantly once war breaks out after a prelude.

Similarly, Mark Armbruster, the president of Armbruster Capital Management, studied the period from 1926 through July 2013 and found that stock market volatility was actually lower during periods of war. “Intuitively, one would expect the uncertainty of the geopolitical environment to spill over into the stock market. However, that has not been the case, except during the Gulf War when volatility was roughly in line with the historical average,” he said.

In terms of the Iran conflict, however, investors have had a muted reaction to the headlines. “If 2019 taught us anything, it’s that you have to try as best as possible to keep to your process and not get caught up in the headlines,” said Strategas technical analyst Todd Sohn to The Washington Post. “In a sad way, I wonder if we’ve become used to it. I wonder if the market has learned to discount these events.”

“Part of the reason for the calm may lie in the changing structure of global oil markets and how the U.S. economy has become less vulnerable to energy price swings,” said JPMorgan Funds chief global strategist David Kelly in a note. “Part of the reason may be purely psychological. Today’s investors have seen the stock market recover from both 9/11 and the Great Financial Crisis, arguably the greatest geopolitical and economic shocks of our time. This makes it easier for investors to shrug off other events.”

A conflict with Russia can also cause volatile oil markets, as Russia is a key producer of crude oil and natural gas, with pipelines feeding many parts of Europe. If Russia were to shut off the spigot, or have its oil infrastructure damaged, it could lead to higher energy prices. Interruptions to the ports around the Black and Baltic Seas could also create even bigger shipping headaches and lead to food inflation as grains and other staples remain stuck at sea.

The Bottom Line

“Over the last few years, markets have been conditioned not to overreact to political and geopolitical shocks for two reasons: first, the belief that there would be no significant subsequent intensification of the initial shock; and second, that central banks stood ready and able to repress financial volatility,” said Mohamed Aly El-Erian, the chief economic adviser at Allianz, in a Bloomberg column.

But he warned that investors buying the dip should use a selective overall strategy. “This includes emphasizing up-in-quality trades that are anchored by robust balance sheets and high cash-flow generation, resisting the strong temptation for large-scale shifts away from U.S. assets in favor of international investments, and reducing exposure to inherently less-liquid market segments that have experienced beneficial spillovers from extraordinary central bank stimulus and the general reach for yield and returns,” he said.

The Fed is about to raise interest rates and shaft American workers – again

Robert Reich (former US secretary of labor) – as published by The Guardian (Feb’22)

 

Policymakers fear a labor shortage is pushing up wages and prices. Wrong. Real wages are down and workers are struggling

The January jobs report from the US labor department is heightening fears that a so-called “tight” labor market is fueling inflation, and therefore the Fed must put on the brakes by raising interest rates.

This line of reasoning is totally wrong.

Among the biggest job gains in January were workers who are normally temporary and paid low wages: leisure and hospitality, retail, transport and warehousing. In January, employers cut fewer of these workers than in most years because of rising customer demand combined with Omicron’s negative effect on the supply of workers. Due to the Bureau of Labor Statistics’ “seasonal adjustment”, cutting fewer workers than usual for this time of year appears as “adding lots of jobs”.

Fed policymakers are poised to raise interest rates at their March meeting and then continue raising them, in order to slow the economy. They fear that a labor shortage is pushing up wages, which in turn are pushing up prices – and that this wage-price spiral could get out of control.

It’s a huge mistake. Higher interest rates will harm millions of workers who will be involuntarily drafted into the inflation fight by losing jobs or long-overdue pay raises. There’s no “labor shortage” pushing up wages. There’s a shortage of good jobs paying adequate wages to support working families. Raising interest rates will worsen this shortage.

There’s no “wage-price spiral” either, even though Fed chief Jerome Powell has expressed concern about wage hikes pushing up prices. To the contrary, workers’ real wages have dropped because of inflation. Even though overall wages have climbed, they’ve failed to keep up with price increases – making most workers worse off in terms of the purchasing power of their dollars.

Wage-price spirals used to be a problem. Remember when John F Kennedy “jawboned” steel executives and the United Steel Workers to keep a lid on wages and prices? But such spirals are no longer a problem. That’s because the typical worker today has little or no bargaining power.

Only 6% of private-sector workers are unionized. A half-century ago, more than a third were. Today, corporations can increase output by outsourcing just about anything anywhere because capital is global. A half-century ago, corporations needing more output had to bargain with their own workers to get it.

These changes have shifted power from labor to capital – increasing the share of the economic pie going to profits and shrinking the share going to wages. This power shift ended wage-price spirals.

Slowing the economy won’t remedy either of the two real causes of today’s inflation – continuing worldwide bottlenecks in the supply of goods and the ease with which big corporations (with record profits) pass these costs to customers in higher prices.

Supply bottlenecks are all around us. Just take a look at all the ships with billions of dollars of cargo idling outside the Ports of Los Angeles and Long Beach, through which 40% of all US seaborne imports flow.

Big corporations have no incentive to absorb the rising costs of such supplies – even with profit margins at their highest level in 70 years. They have enough market power to pass these costs on to consumers, sometimes using inflation to justify even bigger price hikes.

“A little bit of inflation is always good in our business,” the chief executive of Kroger said last June.

“What we are very good at is pricing,” the chief executive of Colgate-Palmolive said in October.

In fact, the Fed’s plan to slow the economy is the opposite of what’s needed now or in the foreseeable future. Covid is still with us. Even in its wake, we’ll be dealing with its damaging consequences for years: everything from long-term Covid to school children months or years behind.

Friday’s jobs report shows that the economy is still 2.9m jobs below what it had in February 2020. Given the growth of the US population, it’s 4.5m short of what it would have by now had there been no pandemic.

Consumers are almost tapped out. Not only are real (inflation-adjusted) incomes down but pandemic assistance has ended. Extra jobless benefits are gone. Child tax credits have expired. Rent moratoriums are over. Small wonder consumer spending fell 0.6% in December, the first decrease since last February.

Many people are understandably gloomy about the future. The University of Michigan consumer sentiment survey plummeted in January to its lowest level since late 2011, back when the economy was trying to recover from the global financial crisis. The Conference Board’s index of confidence also dropped in January.

Given all this, the last thing average working people need is for the Fed to raise interest rates and slow the economy further. The problem most people face isn’t inflation. It’s a lack of good jobs.