M.J. Nodilo, President of Pathlight Investors, discusses how analyzing valuation discrepancies in international markets can lead to opportunities.
The following is an excerpt from our recent research piece "Behavioral Investing - Revisiting Facebook (aka Facebook Psychology)" The full report can be found here: http://www.pathlightinvestors.com/behavioral-investing-revisiting-facebook-aka-facebook-psychology
Every so often, we like to focus on investor psychology and how it impacts investor decisions and behavior—usually for the worse. Individual investors, unfortunately, have to struggle with fear and anxiety when it comes to their money. It typically doesn’t feel good to invest your money in a struggling enterprise whose stock price won’t stop sinking. Conversely, it typically feels great to pile money into an investment that is trumpeted on CNBC or by your friends. Regrettably, these actions can negatively impact long-term investment performance.
In this piece, we want to focus on Facebook, ticker FB. During the hype leading up to the Facebook IPO, we were so tired of hearing about Facebook that we’re shocked we had the stomach to bring it up again. But Facebook is a classic example of some of the worst parts of investor psychology, and it pays to learn from mistakes. A little over a year since the Facebook IPO, shares have been on a roller coaster but have nudged back up to the IPO price. Unfortunately, many of the Facebook believers from the IPO likely sold their shares for a loss in the interim.
The following is an excerpt from our recent research piece "Motown Blues: Detroit’s Demise into Bankruptcy" The full report can be found here: http://www.pathlightinvestors.com/motown-blues-detroit%E2%80%99s-demise-bankruptcy
Despite the reaffirmation of Detroit’s greatness by its luminaries Kid Rock and Ted Nuget, Detroit filed for bankruptcy on July 18th. This action marked the largest American city to file for bankruptcy. Detroit holds long-term debts (including pension obligations) estimated to be north of $18 billion. Briefly, I will touch on how Detroit got to its precarious situation, but more importantly, we will look at the prospects of bankruptcies in other cities and municipalities. Detroit’s problems are not isolated, and understanding the potential impact of this bankruptcy is important.
How D-town got here
The crisis has been brewing for decades. Fifty years ago the city was rich. GM, Ford, and Chrysler cranked out nearly all the cars sold in America. Detroit was home 1.8 million people. Today only 700,000 remain. Many are poor and poorly educated—82% have no more than a high school diploma. The city sprawls over an unmanageable 140 square miles (enough to swallow Boston, San Francisco, and Manhattan). Delivering services to barely-populated neighborhoods would be hard even if the city government were well-run, which it is not (The Economist, July 27, 2013).
The following is an excerpt from our recent research piece "Are Markets Addicted to Easy Money?" The full report can be found here: http://www.pathlightinvestors.com/are-markets-addicted-easy-money
Since the financial crisis-induced stock market lows of March 2009, the S&P 500 has gained 141% (as of June 30, 2013), all while U.S. gross domestic product (GDP) has shown mediocre growth at best. Many investors simply cannot understand why stocks have risen so much. Certainly, the low interest rate/easy money policies of the U.S. Federal Reserve (the Fed) and other global central banks have pushed would-be income seekers into stocks, but the questions remain: have equity markets become addicted to this drug, and what will happen when the Fed begins to truly tighten?
Let us start off by saying that we do not stand with the camp that believes equity markets have increased on nothing more than money printing. This camp tends to completely ignore the real economic improvements and strengthening of corporate and individual consumer balance sheets that have occurred over the last four years. This camp discounts any piece of positive economic news, brushing it aside with a reference to “Helicopter Ben” (comparing Fed Chairman Bernanke to a character dumping money out of a helicopter to the cheering crowd below). This camp seems to be rooting for another economic calamity, desiring to finally be proven right many years and many missed large stock market gains later.
Pathlight Investors’ Top Recommended Reads - July 2013. Looking for something interesting and informative? Here's some of the best we've found around the web during the last month. Enjoy!
Housing update from Fannie Mae – “housing was largely positive entering the spring/summer season, with various indicators such as home prices, home sales, and homebuilding activity showing signs of long-term improvement toward normal levels. Despite rising mortgage rates during the past month, which have affected refinance originations, affordability conditions remain high and should not present a significant obstacle to potential homebuyers” - http://goo.gl/4aPdt
“The great shrinkage” has been a bigger theme than the “great rotation” – shares outstanding are shrinking as a result of aggressive stock buybacks and this has been a much bigger factor than a bond-into-equity rotation behind the market’s advance. Business Insider http://goo.gl/TOhIr
Europe works on logistics of bank failures; officials are sorting out which creditors would see the biggest losses in the event of a failure. http://goo.gl/KnKEm
Greece – the current government is in “disarray” after the Democratic Left Party threatened to walk out of the current coalition. The Democratic Left could make a formal decision later Friday. PM Samaras’ New Democracy and its PASOK partner have 153 MPs (out of 300), so would maintain a slim majority even w/o the Democratic Left (and it sounds like a coupe independent MPs would back the Samaras regime, raising the 153 number to possibly around 160). No one is calling for snap elections (an encouraging sign). Reuters http://goo.gl/q9eFF
Immigration – the House passed comprehensive immigration reform Thurs by a 68-32 vote. The strong support puts added pressure on the House to take up the measure (House GOP leaders have been resistant to the Senate legislation) – Politico http://goo.gl/ssRrO
Investors views finally aligned w/Fed thinking on QE according to Lacker – “Markets got a little bit ahead of us in terms of what they were expecting, by way of how long these purchases would continue, and I think they've gotten into better alignment now with the committee's expectation” – Reuters http://goo.gl/Y6Do0
Environment – Obama to outline ambitious plan to cut greenhouse gases. None of what the president plans to propose will require action by Congress. Some of what the president hopes to accomplish will likely face legal and political challenges. Obama would propose the first limits on carbon pollution from existing power plants and would promise to complete pending rules for new plants. NYT http://goo.gl/MIdz6
ECB/Draghi – Draghi delivered remarks Wed that echoed in large part the ones made Tues morning. Draghi said it would be a while before accommodative policy was withdrawn and praised the OMT but urged politicians to take further measures to bolster financial stability. Draghi said the ECB stood ready to act again when needed but also warned of the limits of monetary policy. "The ECB has done as much as it can to stabilize markets and support the economy," he said. "Now governments and parliaments need to do all they can to raise growth potential….monetary policy cannot create real economic growth….if growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix” – Reuters http://goo.gl/4U7AL
And On A Lighter Note…
Chinese farmer gets 5 days in jail for his story on alien invasion: http://goo.gl/RZwFt
Patsy Nodilo, CEO of Pathlight Investors, explains in this short video how media and other factors contribute to agitated market conditions.
The following is an excerpt from our recent research piece "U.S. Energy Boom: What it Means for the World, the United States & Investors." The full report can be found here: www.pathlightinvestors.com/us-energy-boom-what-it-means-world-united-states-investors
Most people I speak with are aware that the United States is undergoing some sort of energy boom. They seem to have heard that previously inaccessible treasure troves of trapped natural gas can now be accessed through technological feats with few rivals. Most people don’t seem to know however, that it’s not just about natural gas. In fact, the U.S. is now drills more for oil than gas.
How this oil and gas is being extracted is lesser known and the economic opportunities it presents, not just for the energy sector, but for manufacturing, U.S. exports, and job creation are not well understood either. Seemingly better known are the environmental risks which I will stay neutral on, rather only highlight a few issues presented by those on both sides of the argument. Nonetheless, this global energy revolution has the potential to alter our way of life, which is why we at Pathlight wish to provide an elementary education on this exciting topic.
The following is an excerpt from our recent research piece "Housing Boom 2.0 (aka Housing Headwinds)" which can be found here: www.pathlightinvestors.com/housing-boom-20
In most cases, your home is your largest financial asset. In the best of times, it represents shelter, security, equity, and flexibility. In the worst of times, it can become the proverbial albatross and decidedly narrow one’s options. Over the last roughly 15 years, we have experienced both of these feelings in the U.S. We saw great wealth creation stemming from home prices rising fast from the late 1990s through 2005, and we have also lived through the bursting of that housing bubble and subsequent Great Recession.
One of the main reasons why the Great Recession was so severe was that housing was at the epicenter. Housing is directly linked to consumer confidence, and because we are a nation of consumers, housing is also tied to consumer spending and the health of the overall economy. When home prices rise, one feels wealthier and, thus, feels more comfortable spending on other things. Conversely, when home prices fall, consumers pull back and begin to delay purchases, even though the equity in their home is simply on paper and not “real” money. In fact, according to Home Depot management, underwater homeowners spend an average of $1,000/year in their stores, while homeowners that have equity spend on average $3,000/year. At 3-to-1, that’s a very powerful dynamic.
Pathlight Investors President, Adrian Larson, discusses the recently released May Employment Report.
Pathlight Investors’ Top Recommended Reads - June 2013
Ready for more great articles? Here's some of the best we've found around the web during the last month. Enjoy!
US tax reform – Roll Call highlights how the two most important people in Congress when it comes to tax matters, Rep. Camp and Sen. Baucus, have committed to working on the issue. “Where they seem to be heading is a model like the historic 1986 tax overhaul that lowered the top individual rate from 50 percent to (effectively) 33 percent and the corporate rate from 48 percent to 34 percent, closing dozens of loopholes to accomplish the feat” (http://goo.gl/cUvNs). (recall over the weekend the Washington Post wrote about how Republicans were doing to deemphasize entitlements going forward and instead focus on changing the tax code http://goo.gl/pAFdt).
Bonds vs. stocks – is the great rotation finally happening? "We've been waiting for the great rotation out of fixed income… everything we see in fixed income is all risk and no return - people are starting to wake up…. I think they're [investors] coming back to their senses, which is one of the reasons we're seeing that great rotation - these large asset allocations out of fixed income into equities - look for that to continue going into the rest of the year” – CNBC http://goo.gl/3i3NC
Don’t fear tapering – “On Second Thought ... Maybe Fed Tapering Won't Be So Bad” – “The Fed's eventual throttling back on the liquidity injections might indicate a much stronger economy—and that could be good for cyclical stock” – CNBC http://goo.gl/7HVnn
Mortgage rate increase could actually help housing – “Surge in U.S. mortgage rates could force buyers off the fence” – CNBC http://goo.gl/OIx43
Rising economy shifts ’14 election landscape. The backdrop could benefit Democrats and challenge Republicans. Politico http://goo.gl/lgpCS
Debt ceiling debate is likely going to be pushed to Sept or Oct as a result of higher Fannie/Freddie payments – Politico http://goo.gl/Pvpsp
Central banks – big overview article in the NYT looking at the Fed, ECB, BOJ, and BOE. All the world’s central banks have embarked on massive rounds of accommodation but growth so far remains tepid. The article’s tone was dovish, implying that the Fed would be slow to withdraw its easing while other banks, such as the BOE, are looking at doing more. The ECB has been among the most cautious of the big global CBs although it too is looking at ways to help spur growth. The article on the whole doesn’t have a ton of incremental information although it does highlight the limits of central bank power. NYT http://goo.gl/F6vYo
Germany is embracing deficit spending – according to Der Spiegel, Berlin is shifting its tone re austerity and increasingly is looking for ways to drive growth throughout Europe. "If we don't act now, we risk losing an entire generation in Southern Europe," say people close to German Fin Min Schäuble. Merkel and Schäuble are willing to abandon ironclad tenets of their current bailout philosophy. In the future, they intend to provide direct assistance to select crisis-ridden countries instead of waiting for other countries to join in or for the European Commission to take the lead. http://goo.gl/arqCm
Fed issued warnings – a group of bankers that advises the Fed (the “Federal Advisory Council”) has issued warnings over farmland prices and student loan debt balances. “Agricultural land prices are veering further from what makes sense… members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates”. “Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis” – Bloomberg http://goo.gl/KXeRQ
Demographics – positive Barron’s cover story – the Millennial generation could help drive economic growth and higher stock market prices. The Millennials aren’t as hopeless as many fear and over the coming years will be saving more (which will help drive stocks higher) and forming families. The Millennials total ~86MM and are ~7% larger than the Baby Boom generation. http://goo.gl/iyTeT
And On A Lighter Note…
Businessman pays $398,500 for Belgian racing pigeon: http://goo.gl/o5vq