BEACONS OF THE WEEK
The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.
Lindau Lighthouse, Germany
This lighthouse is the southern most lighthouse in Germany. The tower that features a clock was built in 1856. This is the only lighthouse in Bavaria, and it stands 33 meters tall.
Kermorvan Lighthouse, France
This lighthouse is located at the westernmost point of France. The lighthouse stands at 20 meters tall and was built in 1849. The lighthouse remains active today.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Monday’s declines
The sharp losses markets saw at the end of last week continued on Monday when markets opened. While Canadian markets were closed due to the long weekend, global equity markets plunged on recession fears, and the unwinding effect of the Bank of Japan’s raising rates.
Even though U.S. markets were only down by a minimal amount on Monday (S&P 500 was down 3%), investors and the media were shouting from the heavens for relief from the FED and that Monday was a black Monday 2.0. Markets opened down much more than they closed down on Monday, as the VIX spiked to a multi-year high.
So why did it seem like the sky was falling? We think it’s because the biggest losers were cryptocurrencies, AI stocks, and the Magnificent 7, groups heavily followed by retail investors and the media. The biggest losers were the highest growth areas of the market who trade extremely expensive and are sometimes extremely speculative. If you went on X (formerly Twitter) and read posts, you would assume markets were down 10% in North America over last Friday and Monday’s trading sessions. We even had economists and market participants calling for emergency interest rate cuts from the FED with some even calling for an immediate 75 basis point cut.
Even though equity markets have pulled back, we have by no means seen a huge correction or bust despite what you read online or from your broker. The S&P 500 is only 5.4% off all-time highs, the Nasdaq 11.3% off all-time highs, and the Dow Jones Industrial Average 5% off all-time highs (as of Tuesday, August 6th, 2024) after Tuesday’s rebound.
Globally, markets had more issues. Japanese markets saw the largest declines over the last week. The Nikkei was down 6% on Friday and another 12% on Monday. Friday and Monday’s losses in Japan erased seven months of gains for Japanese equities. Monday’s return was the worst for the Nikkei since 1987. However, Japanese markets bounced back quite substantially on Tuesday setting the benchmark’s best day since 2008.
Japan was not the only market that set records on Monday. The Taiwan stock market saw its largest decline in 57 years, and the South Korean benchmark KOSPI saw its worst day since the 2008 financial crisis declining 8.8%.
So why did this all happen? What is the unwinding effect? And why did this impact Japan the most?
For years, Japanese interest rates were near zero, at some points they were negative, which led to the Yen carry trade. This allowed traders and investors to borrow in Yen at a very low rate and invest in assets that offer a higher return in another currency, like U.S. Dollar stocks, and bonds. The goal for traders and investors was to profit from the difference between the borrowing cost and the return on investment. Recently, the Bank of Japan began hiking rates reversing policy due to a surge in inflation. The Bank of Japan also slowed its bond purchases. The two moves led to the USD/Yen tanking forcing everyone short the Yen to cover. Many traders were forced to dump assets to cover this cost. The unwinding of this phenomenon also came at a time when global markets were fragile due to a horrible jobs report in the U.S., a multi-year high unemployment rate in the U.S. and subpar earning reports from companies over the last month.
Despite the bounce back for markets on Tuesday, JP Morgan warned its clients that the unraveling of the Yen carry trade was only 50% complete and that there could be more pain.
We do not own any Japanese securities and only have a few holdings that we would label as high growth that are more susceptible to a pullback. We are monitoring those positions carefully and feel comfortable where we are today. We think the pullback may have been a bit overdone and markets could roar moving forward. However, we think the move up will see more breath where the Magnificent 7, and AI are not the only areas seeing outsized returns. We are also comfortable with where we are in markets despite many risk factors due to our exposure to portfolio insurance which protects our investors during large market downturns. MacNicol & Associates Asset Management are investors in a fund that provides “fire insurance” to institutional and individual investors across the world. Contact us today to learn more about our portfolio insurance strategy and how you can get exposure to this unique strategy.
Mortgage rates tumble
30-year mortgage rates fell to their lowest level in over a year in the U.S. this week after the Federal Reserve indicated that rate cuts are coming in a press conference last week. This led to mortgage applications across the country jumping according to the Mortgage Bankers Association. A separate report from Fannie May released on Tuesday indicated that refinance applications rose by 21% week over week, and activity jumped to the highest level since September 2022.
The average contract rate for the 30-year mortgage for a home sold for $766,550 or less fell from 6.82% to 6.55% in just a week. The average contract rate for a 30-year mortgage for homes sold over $766,550 dropped from 7.07% to 6.77% over the same period.
The reality is homeowners and consumers who have waited on the sidelines for rates to drop are not interested in buying or selling. Perhaps, those transactions will not occur immediately, but volume should rise across the country. We expect homeowners to shed the so-called locked-in effect as the FED drops rates and tempts those with high rates to refinance their mortgage. Many real estate experts believe we could see extreme refinancing volumes down the road.
Does this tick-up in the housing sector portray optimism in the U.S. economy or is it more false hope? We think it’s a mix. Regardless of how you feel, consumers are spending less and it’s impacting companies across the world. The real effects of higher prices are still being felt by consumers. Never forget that despite the inflation rate dropping, prices are still elevated and will likely not return to previous levels.
China’s quiet crisis
China has another quiet crisis on its hands. This one does not involve its real estate sector or Chinese banking stocks. It involves people and it is something that is very important and is not being talked about very much.
The problem in China is age. The Chinese population is aging, the one-child policy worked too well in China and now the population is forecasted to shrink and get much, much older. According to the United Nations, China’s median age is 39.5, 10 years ago it was 35.6, 20 years ago it was 31.7, and 30 years ago it was 26.1. So how did this massive increase happen? The one-child policy worked (implemented from 1979 to 2015), and despite the rule reversal, the Chinese continue to have fewer and fewer children.
China’s population even shrunk last year as its birth rate collapsed.
So why are we talking about this? We are talking about this because the world’s second-largest economy could potentially shrink even as GDP per capita increases. The growth that China has seen in recent days could evaporate and one of the world’s largest manufacturers, and consumers could demand much less. We also bring this up in this week’s edition of this publication because the rumors that were swirling were confirmed this week by the Chinese Communist Party and President Xi who will be forced to raise the retirement age in China as a pension crisis looms.
Everyone in China was not happy with this announcement. China for a long time has had young retirement ages. The female blue-collar age was 50, white-collar was 55, and 60 for all males. When comparing those ages with the EU and U.S., there is no comparison as Americans and Europeans need to be 67 to receive full social security type benefits.
Although there were no exact ages announced by the CCP, the CCP announced the retirement age would be increased in the next 5 years. Many believe the age could be as high as 65 for all workers.
The CCP is realizing that as China’s age grows, a small number of young people in the workforce will need to support a disproportionately large group of retirees. Most economists, including those in China, know the math does not make sense for giving upcoming retirees their promised benefits. The Chinese Academy of Social Sciences estimates the pension system will run dry in China over the next decade at current rules.
Beyond this pension crisis that retirees will have to deal with is a real estate crisis that continues to plague middle-class families in China. Most middle-class families in China hold a majority of their wealth in their home’s equity.
Many policymakers around the world believe raising the age of retirement in China will not solve this issue on its own. They have a major fertility issue that nobody has been able to solve.
This will impact the demand of Chinese consumers moving forward. It will also impact the overall Chinese economy. We think over the next decade this stress will begin to impact China’s growth and productivity. This is a major reason along with geopolitical reasons that we are focused and positioned for growth in other emerging markets across the world.
Market sentiment
Here is an update on market sentiment. Despite the small bounce back of markets during the middle of this week. Sentiment remains poor among investors. Investors are very fearful and have been so for the last few trading sessions.
Just last Wednesday, investor sentiment was neutral according to the Fear and Greed index.
Investors continue their irrationality and extreme sensitivity. One good piece of data and investors think markets will never go down, and companies will never miss earnings. One piece of poor data and a few down days and all of a sudden investor sentiment plummets and investors think it’s a major and steep bear market. It is important to block out the noise during these times in the market and focus on the quality of your positions and see if the thesis that you have is still intact, most of the time if you have done your research, it is still intact and the losses were caused by spooked investors. However, if your thesis is not strong on a position or sector, we would recommend re-analyzing the position and comparing it with historical averages, peers, and other areas of the market.
More tech insider selling
This week it was reported that Warren Buffett and Berkshire jumped in on the technology selling during the second quarter as Berkshire trimmed its Apple position in half and is sitting on the largest cash reserve ever.
Back to the insider selling.
Dell insiders have sold billions of stock since March, and most of their sales were at significantly higher prices than what Dell shares are trading at today.
Nvidia Founder and CEO Jensen Huang got in on the selling yet again last week bringing up his Nvidia sales to $530 million in the previous 7 weeks.
This trend across the technology sector is noteworthy as executives are selling after the huge run-up in the tech sector. Many of these tech companies are trading near or at all-time highs in terms of price and valuation. Perhaps even they know that this could be unsustainable even for their high-growth industries.
We will warn our readers that we are not the biggest believer in stock sales being a major indicator as sometimes insider sales are just noise and scheduled but believe this time, it’s a pattern across the industry and could be something to watch.
A great image to end this week’s issue
As our readers know we believe we are risk managers, and that we invest for the long term. We are not traders, speculators, or volatility seekers. We are conservative asset managers who look for upside in a stock and look to mitigate portfolio risk.
After all the noise over the last 5-10 trading days, we want to highlight a photo that encapsulates our thoughts on the markets and how we are monitoring portfolios through this robust period.
We are not panicking or overthinking our positions, and as you know we do not have a fear of missing out as we never chase returns even when certain areas of the market are roaring. We stick with what we know and remain disciplined with our investing approach.
We hope you share the image above that we got from Hedgeye with your friends, families, and advisors.
MacNicol & Associates Asset Management
August 9, 2024
3323 NE 163 Street, PH-704
130 Bloor Street West, Suite 905
