Weekly Cycle: Market Outlook for 07.16.2018

Weekly Cycle: Market Outlook for 07.16.2018

Each week, we review the stock market using a specific set of information sources in order to cut through the noise generated by media publishing attention grabbing headlines. Weekly updates give e the opportunity to play trends while not overreacting on a daily basis.

 

“Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day-if you live long enough-like most people, you will get out of life what you deserve.”

― Charles Munger, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

 

Market Performance

Performance of a handful of macro indexes, as well as index and ETFs on specific sectors of particular interest.

 

Observations:

  • VNQ (Vanguard REIT index) up over 8% over last 90 days
  • SPY up slightly oer last week
  • MJ down over 7% vs last year
  • VWO (emerging markets) down over 8% over last 90 days

 

Technical Indicators

Based on data and info from TradingView (Click for 30% off a pro subscription)

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

 

Observations:

  • SPY remains bullish, BOND remains bearish
  • MJ is down significantly from a week ago
  • XHB has surged in the last week
  • HACK very positive after 2 weeks of somewhat weaker scores

 

OldProf’s Risk Analysis

Each week, at the Dash of Insight blog, OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf writes in Weighing the Week Ahead: Anything Goes!

“Short-term trading conditions continue at highly favorable levels. Actual volatility remains low.”

“I continue to find that anyone with a reasonable approach to economics and any sort of analytical track record shares this basic thesis. Despite this, the people getting air time and page views are those whose recession forecasts are of the “kick the can” variety. They are now focused on 2020. How have their two-year forecasts done in the past?1

 

StockTrader Recap

Mark Hanna publishes a weekly Market Recap full of charts and insight on news and market trends at StockTrader.

This week, Mark writes in Weekly Market Recap Jul 15, 2018

“TRADE WARS ™!!!! certainly seems like a “sell the rumor, buy the news” event.”

“Short term: Very choppy on the S&P 500 of late but a new “higher high” (a high higher than the previous high – in this case early June) was hit.  NASDAQ same story but now all time highs.2

 

Articles of note

— A macro data update from Fat Pitch blog shows continuing positivity around the economy. 

“The macro data from the past month continues to mostly point to positive growth”

July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk

“In summary, the major macro data so far suggest positive but modest growth. This is consistent with corporate sales growth.  SPX sales growth in 2018 is expected to only be about 6-7% (nominal).

With the rise in earnings and the moderation in share prices, valuations are now back to their 25 year average. The consensus expects earnings to grow about 18% in 2018 and 10% in 2019. Equity appreciation can therefore be driven by both corporate growth as well as valuation expansion (chart from JPM).3

— More positive signs for the economy in general

“Currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight”

Investment and Recessions
Bill McBride Calculated Risk

“Currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight4

—  Many seem to think Chinese Tech industry is largely a copy of the American tech industry. Here’s an in-depth look at how it differs.

“Chinese tech isn’t an imitation of its American counterpart. It’s a completely different universe.”

Letter from Shenzhen
Logic Magazine

“Shenzhen is a city built on exceptions. David explains that when the Chinese government decided to experiment with capitalism in the 1980s, it didn’t want to expose existing major cities like Beijing or Shanghai to the risk of failure. Instead, the government chose Shenzhen, a tiny cluster of fishing villages, even building up a wall in some parts to demarcate the boundary between socialism and capitalism.
Since the beginnings of the experiment, Shenzhen has exhibited all kinds of hockey-stick-shaped growth that people in Silicon Valley talk about in hushed tones of exaltation. The population has skyrocketed from 30,000 to almost 12 million, the cost of living has gone up, innovation is surging, and the time it takes to create, design, or build a new product decreases day by day.5

— Here’s a bit of background on two Chinese tech giants; Tencent and Alibaba. 

“In 5 years, technology services will make up 65 percent of Ant Financial’s revenue, compared with ~34 percent in 2017”

Alibaba versus Tencent: who will win? – Chris Skinner’s blog
Chris Skinner’s blog

“Alibaba and Tencent. Both have market capitalizations that hover around half a trillion U.S. dollars. Both command sectors of the rapidly growing Chinese digital landscape: Tencent owns the leading gaming and messaging platform, while Alibaba rules e-commerce. Both are aggressive investors inside and outside China. Each is the pride of their not-quite-first-tier hometowns: Alibaba of the ancient city of Hangzhou near Shanghai and Tencent of shiny-new Shenzhen across the border from Hong Kong. Finally, both touch an astounding percentage of the world’s most populous country: Alibaba’s various online marketplaces count 552 million active customers; Tencent’s WeChat messaging service recently surpassed 1 billion accounts …6

— Vitaliy Katsenelson on Softbank’s Masayoshi Son and the outlook for Softbank. 

“You can think of [Softbank] as buying a stock at a roughly 50% discount to the market value of its assets or as a way to buy Alibaba at less than half its current price”

What Would You Get if You Crossed Warren Buffett, Richard Branson and Steve Jobs? (Updated)
Vitaliy Katsenelson Vitaliy Katsenelson Contrarian Edge

“Like Apple co-founder Jobs, Son is blessed with clairvoyance. He saw the internet as an transformative force well before that fact became common knowledge. In 1995 he invested in a then-tiny company, Yahoo!, earning six times his investment. But he didn’t stop there; he created a joint venture with Yahoo! by forming Yahoo! Japan, putting about $70 million into a company that today is worth around $8 billion. (Yahoo! Japan is a publicly traded company listed in Japan.)7

— Sticking with Softbank, here’s an article from the NYTimes Dealbook on how underpriced SFBY is compared to the underlying assets. 

“SoftBank’s stake in Alibaba alone is now worth nearly $132 billion, or 40 percent more than SoftBank’s market cap.”

Investing in SoftBank Is Becoming a Bet on Its Founder’s Deal-Making Prowess
www.nytimes.com

“If those deals go through, what would be left of the company is essentially a gigantic, publicly traded venture capital firm. Its holdings would include:■ A 27 percent stake in Alibaba Group, the Chinese internet behemoth■ A 43 percent stake in Yahoo Japan■ A stake in ARM, the British designer of computer chips■ An investment in its nearly $100 billion Vision Fund, the much-ballyhooed tech investment vehicle that owns stakes in Uber and much more8

— On the Irreverent Investor, Michael Batnick presents a simple momentum strategy idea that has outperformed the S&P 500 index. 

a simple momentum investing strategy “outperformed the S&P 500 with significantly lower drawdown”

Simple Momentum

“Here are the rules: If the S&P 500 outperformed 5-year U.S. treasury notes over the previous twelve months, invest 100% of this portfolio in the S&P 500 in the following month. If the 5-year U.S. treasury notes outperformed the S&P 500 over the previous twelve months, invest 100% of this portfolio in bonds in the following month. That’s it. Pretty simple.9

— Mike Williams takes a rational look at the prospects of trade wars and believes it’s bluster than will go the way of countless other scares. 

“And the reality break here is that China has few attractive options other than making trade fairer.”

Like Water Off a Black Swan’s Back
Mike Williams Alan Steel

“The bluff and bluster will go the way of Brexit, Chinese Yuan devaluation fears (Acts I, II, II, IV, V, VI and VII), Ebola outbreaks, the outrage at the Border (I mean the Janet Reno version – not the current remake), and everything else that was previously going to throw the globe into the pits of hell.
10

 

 

 

 

 

  1. https://dashofinsight.com/weighing-the-week-ahead-inflation-on-the-horizon/
  2. https://www.stocktrader.com/2018/07/15/weekly-market-recap-jul-15-2018/
  3. http://fat-pitch.blogspot.com/2018/07/july-macro-update-economy-is-fine-trade.html
  4. http://www.calculatedriskblog.com/2018/07/investment-and-recessions.html
  5. https://logicmag.io/04-letter-from-shenzhen/
  6. https://thefinanser.com/2018/06/alibaba-versus-tencent-will-win.html/
  7. https://contrarianedge.com/2018/07/09/what-would-you-get-if-you-crossed-warren-buffett-richard-branson-and-steve-jobs-updated/
  8. https://www.nytimes.com/2018/07/13/business/dealbook/softbank-valuation-masa-son.html
  9. http://theirrelevantinvestor.com/2018/07/09/simple-momentum/
  10. https://www.alansteel.com/media-centre/letter-from-america/2018/07/like-water-off-a-black-swan-s-back/

Kodak’s dubious attempt at blockchain

Here’s Kevin Roose in the New York Times on Kodak’s ‘dubious’ attempt at blockchain and their KodakCoin.

In theory, photographers will be able to upload their images to a platform called KodakOne, create a blockchain-based license for each image, and use web-crawling software to scour the internet looking for copyright violations. Instead of using dollars, photographers can have clients pay them in KodakCoins.

KodakCoin’s initial offering, scheduled for Wednesday, is expected to raise as much as $20 million. But there are few details about what that money will be used for, or why a similar system could not be built without the blockchain. There is also a more obvious question: Why would photographers want to be paid in digital tokens, rather than cash?

In several calls with KodakCoin leaders, I couldn’t get straight answers to these questions. And KodakCoin’s white paper, a technical document that details the plans for the currency, is a 40-page mishmash of marketing buzzwords and vague diagrams…

When we first heard about this project, we questioned Kodak’s ability to make this happen and don’t think any better of their chances now:

First, despite the name, KodakCoin is not actually a Kodak project. The company behind the offering, WENN Digital, is a California-based affiliate of a British photo agency that specializes in paparazzi photo licensing. Under their licensing agreement, Kodak will not receive any direct revenue from the public offering. It will receive a minority stake in WENN Digital, 3 percent of all KodakCoins issued and a royalty on future revenue.

Cameron Chell, a lead adviser to the KodakCoin project, told me that the initial offering represented a “seminal moment” for Kodak, and that the company’s interest in blockchain technology was a savvy long-term investment

Now, about those coins. You might think that a digital currency that is trying to “democratize photography and make licensing fair to artists,” in Mr. Clarke’s words, would be easily accessible. But because of regulatory requirements, KodakCoins will be available only to so-called accredited investors in the United States. An accredited investor is defined as a person with a net worth of $1 million or more, or an annual income above $200,000.

How many cryptocurrency-obsessed millionaire photographers do you know?

 

via Kodak’s Dubious Blockchain Gamble at The New York Times

Amazon enters healthcare

Amazon, Berkshire Hathaway and JPMorgan Chase announced on Tuesday that they would form an independent health care company to serve their employees in the United States.The three companies provided few details about the new entity, other than saying it would initially focus on technology to provide simplified, high-quality health care for their employees and their families, and at a reasonable cost. They said the initiative, which is in the early planning stages, would be a long-term effort “free from profit-making incentives and constraints.”

via Amazon, Berkshire Hathaway and JPMorgan Team Up to Disrupt Health Care at The New York Times

Looking beyond Bitcoin riches

From the New York Times recent article on looking beyond Bitcoin (and the crypto mania), which has seen too much of a focus on money. There are true technology changes and there will be some big winners. Well worth a read. Here’s a few more excerpts:

The true believers behind blockchain platforms like Ethereum argue that a network of distributed trust is one of those advances in software architecture that will prove, in the long run, to have historic significance. That promise has helped fuel the huge jump in cryptocurrency valuations. But in a way, the Bitcoin bubble may ultimately turn out to be a distraction from the true significance of the blockchain. The real promise of these new technologies, many of their evangelists believe, lies not in displacing our currencies but in replacing much of what we now think of as the internet, while at the same time returning the online world to a more decentralized and egalitarian system. If you believe the evangelists, the blockchain is the future. But it is also a way of getting back to the internet’s roots

The article cites the move from open protocols to the current state of internet we have now.

For all their brilliance, the inventors of the open protocols that shaped the internet failed to include some key elements that would later prove critical to the future of online culture. Perhaps most important, they did not create a secure open standard that established human identity on the network. Units of information could be defined — pages, links, messages — but people did not have their own protocol: no way to define and share your real name, your location, your interests or (perhaps most crucial) your relationships to other people online.

Facebook is the ultimate embodiment of the chasm that divides InternetOne and InternetTwo economies. No private company owned the protocols that defined email or GPS or the open web. But one single corporation owns the data that define social identity for two billion people today — and one single person, Mark Zuckerberg, holds the majority of the voting power in that corporation.

And there’s a good summation of the ultimate potential of blockchain to fix some of the problems that have arisen.

The blockchain evangelists think this entire approach is backward. You should own your digital identity — which could include everything from your date of birth to your friend networks to your purchasing history — and you should be free to lend parts of that identity out to services as you see fit. Given that identity was not baked into the original internet protocols, and given the difficulty of managing a distributed database in the days before Bitcoin, this form of “self-sovereign” identity — as the parlance has it — was a practical impossibility. Now it is an attainable goal. A number of blockchain-based services are trying to tackle this problem, including a new identity system called uPort that has been spun out of ConsenSys and another one called Blockstack that is currently based on the Bitcoin platform. (Tim Berners-Lee is leading the development of a comparable system, called Solid, that would also give users control over their own data.) These rival protocols all have slightly different frameworks, but they all share a general vision of how identity should work on a truly decentralized internet.

 

Full article at Beyond the Bitcoin Bubble at The New York Times

Crypto & Taxes, in the NYTimes

“Every time you transfer a cryptocurrency, you might trigger a gain and pay a tax,” said Selva Ozelli, a tax lawyer and accountant who has recently written about the tax implications of virtual currencies.In late 2016, the I.R.S. made it clear that it was searching for cryptocurrency tax evaders: The agency sent a broad request to Coinbase, the largest Bitcoin exchange in the United States, requesting records for all customers who bought digital currency from the company from 2013 to 2015.Coinbase balked, but a court ruled that it must provide the records of roughly 14,000 customers, fewer than 1 percent of its patrons, who made transactions involving more than $20,000 of virtual currencies.

via When Trading in Bitcoin, Keep the Tax Man in Mind at www.nytimes.com

The IRS problem with Crypto

Cryptocurrencies could pose a huge threat to governments should they be unable to collect taxes.

But the bigger concern about cryptocurrencies may be the damage they could do, in the long run, to government finances through lost tax revenue.

The core technology underlying cryptocurrencies, known as blockchain, is premised on anonymity: Transactions are public but linked only to an electronic address. This is a big part of what makes blockchain attractive.

But anonymity is also the main fuel for the underground economy, which is now conducted largely via cash. The underground economy is a significant source of lost tax revenue. The Internal Revenue Service estimates that it loses around $500 billion annually because of unreported wages alone. And the underground economy in the United States — estimated at 8.4 percent of output — is relatively small compared with those of other countries.

If cryptocurrencies were to replace cash as the preferred anonymous medium of exchange, they could significantly expand the underground economy because they are so much more convenient than cash.

via Opinion | Why the I.R.S. Fears Bitcoin at The New York Times