Posted on : By : PPD1962 Posted in : Asset Allocation|Equities

Equities: are US stocks too expensive?

QUESTION: are US stocks too expensive?

ANSWER: Yes, is the conclusion of The Economist, and TurnerStreet.

Equity Risk Premium (“ERP) is a great indicator of whether a market is expensive.  Even with the 0.2% fall in the S&P500 since the article was written a month ago, it isn’t enough to temp TurnerStreet back into equities.  Additionally, annecdotally, we aren’t hearing great things about future earnings.

ACTION PLAN:

  1. Firstly, if you have never heard of ERP before reading this article or understand what it signifies, you are just punting securities, derivatives, etc, rather than investing.  You should get a licensed investment manager.
  2. The most significant means to increasing your wealth is getting the asset allocation correct.  For most people, that means knowing when to put money into equities and when to take it out.  The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what percentage of my portfolio should be equities.
  3. Once you establish how much to allocate to equities, then it is a question of which equities.  For the DIY folks, that will most likely be an index.  For professional investment managers, it will buying individual stocks.
  4. Contact TurnerStreet if you wish to buy our current asset allocation recommendation, and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.
IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors.  Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors.  Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.
Posted on : By : PPD1962 Posted in : Asset Allocation|Debt|Equities

AA: US gets downgraded

QUESTION: is the credit rating downgrade a big deal?

ANSWER: Yes.

The US debt markets have been the global benchmark for decades, but now with political disfunction it isn’t certain that global, or even US markets, are

ACTION PLAN:  Fitch Ratings’ credit downgrade of the US was well considered and appropriate with the further breakdown of political system in the US.  The decline started in 1994 when Newt Gingrich started the “Contract with America” which was rubbish economics but aimed at the “deporables”.   FoxNews, which was entertainment masquerading as news at the time (and still is) took up the idea to boost it viewer ratings.  By 2020, 74m Americans voted for DonaldTrump despite his inability to coherently to string a couple sentences together and some serious ethical issues and poor financial management, but it wasn’t enough to overtake the 81m who voted for  Joe Biden.  Last week, a Gringrich’s successor to the House Speakership, KevinMcCarthy, suggested various “Deep State” plots (but no fake moon landings, yet). There are now not an insignificant number of Republicans in Congress who would be willing to shut down the government to facilitate regime change and help Trump get back into power, and avoid the possibility of his criminal conviction.  This is not a sign for political or currency or interest rate stability.  It will also affect the premium that US stocks trade at, and the value of equity indices.

ACTION PLAN:  Review your stock holdings and ask yourselves are these stocks priced for perfection or are there better global alternatives.  Contact TurnerStreet if you wish to buy the list of the stocks it buys for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors.  Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors.  Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.
Posted on : By : PPD1962 Posted in : Equities

Equities: diversification from your home market

QUESTION: if diversification is a good idea, why don’t more American investors do it?

ANSWER: The same reason Australian, German, et al don’t…parochialism.

This The Economist article gives a few more reasons and some of the economic theory, in plain English, behind them.  The bottom line is that geographic bias doesn’t make much sense.  While there aren’t as many global champions outside the US as there are inside, there are plenty to add sensible diversification in a number of industries (banks, autos, commodities, industrial, consumer, etc).

ACTION PLAN: Contact TurnerStreet if you wish to buy the list of the stocks it buys for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors.  Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors.  Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.
Posted on : By : PPD1962 Posted in : Asset Allocation|Cash|Debt|Equities

AA: debt default by the US government?

QUESTION: is a debt default by the US government likely?  If so, what to do about it?

ANSWER: Probably, yes, so “risk-off.”

For a long time, I thought the Republican leadership in the US congress were crazy, but not so crazy to default on the government debt.  However, when I consider how the crazies, and their supporters are now rationalising the January 6 US Capital attack suggesting pardons, et cetera, it isn’t obvious to me that debt default would be off the table.  Why?  Damaging the Biden administration and winning the MAGA supporters is the aim of Republicans and compared to invading the US Capital and the attempted insurrection, defaulting on debt is trivial.

The less likely alternative to default is massive upheaval by pushing all the way to the edge of default which will leave markets thinking it might just be next time.

The least likely outcome is the Republicans say sorry, and just do what every previous congress has done and increased the debt ceiling.

The solution for investment managers is go “risk-off” at least until we know whether default occurs in the next couple of weeks because even if it doesn’t, there isn’t a likely bounce for the reason outlined above and the general valuation of stocks.

However, even if you go risk off and the US government defaults, you might still have a problem depending where you put your money.  What is considered going to cash is often exposure to 4-week US Treasury Bills: see most broker cash accounts; money market funds; “narrow” banks, etc.

DISCLOSURE: TurnerStreet Advisors went risk-off and into cash on 19 May 2023.

 

 

Posted on : By : PPD1962 Posted in : Equities|Realty|Uncategorized

Realty: is Australian residential property worth buying?

QUESTION: should an investor buy Australian residential property?

ANSWER: probably not.

Damien Klassen, who is one of the few analysts who does the numbers on Australian property (rather than just saying it will keep going up forever so it is always a buy), wrote a terrific article on affordability  Essentially, property is either extremely unaffordable (the mortgage cliff is coming) or we are looking at a global recession: neither will deliver stellar returns for investors in the medium term.

Interesting, while the government regulator in Australia, ASIC, requires entities like us, and Mr Klassen, to be licensed to advise on equities, any body can give unlicensed advice on property.  In fact, buyers normally hear from agents (employed by the vendors) that property is going up: no qualifications and no explicit disclosure of how much they are earning in spruiking properties.

Posted on : By : PPD1962 Posted in : Debt|Private Equity|Realty|Uncategorized

REALTY: nobody told Blackstone you can’t lose money on property

In a stunning, and not the first this year, Blackstone is defaulting on a property backed bond it issued: see here.

Investors should note if that with interest rates rising, still, there will in more defaults associated with property investments.  Offices are difficult to repurpose into residential, so don’t try to “catch the falling knife”.

Cash is still king.

Posted on : By : PPD1962 Posted in : Equities

Equities: will the S&P500 fall 27% to 3,000?

QUESTION: Is investing legend and perma-bear, Jeremy Grantham, going to be correct about the S&P500 falling 27% to 3,000 sometime this year?

ANSWER: Maybe.

Almost any asset valuation could be justifiable, mathematically, when interest rates were close to zero.  Hence when interest rates rose, valuations dropped.  It appears that Mr Grantham’s thesis is that that correction hasn’t been strong enough and there are other factors that may impact valuations (e.g. that old-fashion thing called earning per share).

That said, I’m fairly confident risks of the index going up 27% is much lower than the risk it will go down 27?

Posted on : By : PPD1962 Posted in : Equities|Realty

Property: buy office REITs for housing exposure?

QUESTION:  The Economist wrote an interesting article about offices being converted to resident…is there a real estate investment trust (“REIT”) opportunity?

ANSWER: No.

There is no doubt that a small proportion of office buildings would make terrific homes, but a REIT is likely to have far more office buildings that would be poor conversions.  The economics of buying an office building and knocking it down to build residential may work on certain streets in the world (e.g. Central Park South or something that is directly opposite Sydney Harbour), but generally it doesn’t.

Posted on : By : PPD1962 Posted in : Equities

DAX and SPX: why the difference?

QUESTION: Despite the energy situation in Germany, and Europe, the DAX index has substantially outperformed the S&P500 index, why?

ANSWER:  Yes, the DAX has outperformed but not as substantially as most believe because the indices are differently calculated.

The most obvious difference is that the DAX is an accumulation index (i.e. it adds dividend payments to change in stock prices) while the SPX is a non-accumulation index.  Fundamentally, the DAX has less exposure to tech stocks.

However, we expect more downside risk to the DAX (energy and China exposure) that SPX (continued tech weakness and US political risk).