Topley’s Top 10 – August 15, 2017

1.Up to now the number of days with market declines of 1% or more was at record lows.

Will the trend change going forward?

Source: @JohnKicklighter

2.Lower Credit Rated Stocks Get Hit.

From Dave Lutz at Jones

A breakdown in high-yield bonds that began a week ago showed up in equities as stocks with the worst credit ratings led losses and balance sheet health separated the winners from losers. Exchange-traded funds tracking large-cap equities and speculative debt fell by nearly identical amounts in the week.

3.Could Libor’s Demise End U.S. Adjustable Mortgages?

The London interbank offered rate, a.k.a. LIBOR, is about to be phased out over the coming five years. For U.S. consumers, that could actually mean the end of one of the least favored loan products available, the adjustable rate mortgage, or ARM.

How? According to a Monday report from Dow Jones Newswires, ARMs are often closely tied to LIBOR. And if LIBOR goes away, which U.K. officials have recently stated it will, there would not be much for ARMs to gauge their rates on. Then again, the reason U.K. bankers are phasing LIBOR out is because of rampant allegations of manipulating the index‒‒something which, Dow reported, “could prove troublesome for borrowers, lenders, and investors in mortgage securities.”

That’s hardly a psychic prediction, given that ARMs have been blamed (heavily) for the collapse of the mortgage market in 2008. But while consumers, who are far less hot on the idea of an adjustable rate that could adjust past their ability to pay it, might not miss “no one is going to know how to compute what the next payment is going to be,” Lou Barnes, a capital markets analyst with Premier Mortgage Group in Boulder, Colo., told Dow. “That’s why it’s important.”

ARMs still account for a hefty share of U.S. mortgages, however. Roughly $1.33 trillion of mortgages outstanding are ARMs, according to Inc. That’s almost14 percent of the overall market, and, according to Dow, lenders had been expecting that share to grow as the Federal Reserve continues to raise interest rates.

“Banks,” Dow reported, “also favor ARMs for jumbo mortgages, high-dollar amount loans they view as a source of revenue growth.”

The problem is that a in a typical ARM, borrowers pay a fixed rate for five, seven or 10 years. Once that fixed-rate period ends, borrowers pay a rate based on LIBOR. So id LIBOR won’t be around in seven or 10 years, is there a point to writing ARMs?  calculated as

Lenders asking themselves that question appear to be answering with a simple no. As Dow reported, “lenders have a vague blueprint for what to do when LIBOR disappears. Most ARM contracts specify that if the underlying index is no longer available, the lender or investor will pick a new ‘comparable’ index.”

What qualifies as “comparable,” however, isn’t clear, but banks are already studying alternatives, Dow reported. Banks that plan to keep ARMs could simply set the ARMs to another index, likely ones conforming to guidelines set by Fannie Mae and Freddie Mac. Both GSEs, according to Dow, say they are watching the LIBOR situation closely and will see how it plays out before determining exactly what they can do about it.

Also, Dow wrote, the Alternative Reference Rates Committee, a group of banks that looked at LIBOR alternatives after the scandals broke, has proposed switching to a benchmark based on short-term loans known as repurchase agreements, or “repo” trades, backed by Treasury securities.

And, of course, there is tying ARMs to the U.S. Treasury, though given that Treasury rates are usually lower than LIBOR, the loss of money by following Treasury could put bankers off.

ARMS rates started increasing in 2016

4.Follow up to my Weakening Dollar and Earnings Comments Yesterday.

Corporate America Is Having Its Best Earnings Season in 13 Years

Overseas demand is driving the best earnings season for U.S. companies in 13 years, with top executives from Dow Chemical Co. to Morgan Stanley citing rising foreign sales, a dynamic that should help propel gains in the second half.

With nearly every global economy showing growth, corporate profits in the second quarter have beaten estimates at more than three-quarters of the Standard & Poor’s 500 member companies. In every sector, at least half of the companies have surpassed or met expectations, with many also getting a boost from a sinking U.S. dollar.

“Growth was particularly strong in key regions of North America and Europe, where we grew sales greater than twice GDP, as well as throughout Asia-Pacific,” Dow Chief Executive Officer Andrew Liveris said on a conference call to discuss quarterly profit of $1.3 billion, which surpassed analysts’ expectations.

5.Interesting P/E Ratios Peaked as Market Continues Higher.

From BI Story

This is the peculiar situation of today: On average, these companies have stagnating earnings per share propped up by “adjusting” these earnings and by financial engineering. The price-earnings multiple (P/E ratio) for stagnating companies should be low. In January 2012, the P/E ratio for the companies in the S&P 500 index was 14.9. And that was high. As of Friday, the aggregate P/E ratio is 24.3:

Wolf Street

But look what happened. The P/E ratio peaked in March at 26.6. Since then, the S&P 500 has ticked up 3% and earnings have risen to this glorious level Wall Street has been hyping and the P/E ratio has come down a wee tiny bit…. back to where it had been in the fall of 2016.

In the five-year picture, earnings per share – however doctored they’d been – expanded just 12%. But share prices skyrocketed 73%. And thus the P/E ratio soared. These phases of “multiple expansion” are part of the stock market’s boom and bust cycle. They’re invariably followed by periods of multiple contraction.

6.Financials One of 3 Sectors to Grow Earnings at Double Digits (tech, utes)…Big Banks Also Buying Back Stock

Most notably, the firm said that Bank of America Corp. BAC, +2.35% Citigroup Inc.C, +1.63% Goldman Sachs Group Inc. GS, +1.43% J.P. Morgan Chase & Co.JPM, +1.17% Morgan Stanley MS, +1.88% and Wells Fargo & Co. WFC, +1.73% have accounted for a combined 20% of stock buyback volume this year.

Bank spending on share repurchases (Source: FactSet)

Company Buybacks 1H2017 Buybacks 1H2016 Change 12-month stock price performance
Bank of America $4.97 billion $2.83 billion 76% 64%
Citigroup $3.64 billion $2.63 billion 38% 49%
Goldman Sachs $3.03 billion $3.93 billion (23%) 40%
J.P. Morgan Chase $5.84 billion $4.54 billion 29% 42%
Morgan Stanley $1.71 billion $1.63 billion 5% 60%
Wells Fargo $4.47 billion $4.24 billion 5% 11%

XLF Financial Sector ETF.



7.Tough Year for Small Cap Value…S&P +10% vs. IWN Small Cap Value -3%

8. The Biggest Common Investment Errors

Posted August 10, 2017 by Ben Carlson

Not paying attention to asset allocation. Security selection is sexier but asset allocation is far more important for 99% of investors.

Fighting the last war. Chasing past performance and investing as you wish you would have invested after seeing what just happened is a time honored tradition in the markets. It’s also a losing strategy since most investors end up following momentum but at a value investor’s time horizon, a losing combination.

Setting unrealistic expectations. The difference between reasonable return expectations and the returns investors assume they deserve is the cause of a lot of heartache and crippling errors in the markets.

Having no plan in place. Even a suboptimal plan is better than no plan at all. Creating a document (or investment policy statement in industry-speak) that lists how you plan to invest, save, your goals, constraints, etc. is something I’m guessing 90-95% of investors don’t do or never use.

Confusing your time horizon with other investor’s time horizons. Depending on the market environment traders tend to become investors and investors tend to become traders and everyone wants to be a macro investor at some point. Ignoring how others invest is the path to investment enlightenment.

Overconfidence. Intelligent investors all seem to possess just the right amount of self-doubt in their process and abilities. Falling in love with yourself is a sure way to blow yourself up in the markets.

A misunderstanding of risk. There are plenty of different ways to define risk both personally and in the markets but investors are constantly worried about risks that either don’t impact them or that they have no control over in the first place.

Using the wrong benchmark. The only true benchmark that should matter to any investor is whether you’re able to achieve your financial goals. Getting in a goals-based mindset is hard when everyone else around you is worried about beating the S&P 500 or finding the next fad investment but your financial goals are what you’re investing for in the first place.

Read full story at Ben Carlson Blog.


9. Seeking Greater Global Power, China Looks to Robots and Microchips

China takes conflicting positions on intellectual property, ignoring it in some cases while upholding it in others. Underlying those contradictions is a long-held view of intellectual property not as a rigid legal principle but as a tool to meet the country’s goals.

Those goals are getting more ambitious. China is now gathering know-how in industries of the future like microchips and electric cars, often by pushing foreign companies attracted by the country’s vast market into sharing their technology. It is also toughening enforcement of patents and trademarks for a day when it can become a leader in those technologies — and use intellectual property protections to defend its position against rival economies.

President Xi Jinping is in the midst of an effort to strengthen laws on patents, copyrights and trademarks, giving fledgling firms in China new sources of revenue and prestige. The country is also pursuing an ambitious plan, called Made in China 2025, to become a global leader in areas like robotics and medical technology and kick off the next phase of China’s development. The efforts reflect the view of Chinese officials that controlling global technologies and standards is on par with building military muscle.

Zhang Ping, a scholar of trade law at Peking University in Beijing, said the West had long used intellectual property laws as a “spear and shield” against Chinese companies, hurting their profits at home and blocking access to foreign markets. Now, she said, it is time for China to fight back.

“If you want to enter our market to cooperate, it’s fine,” Ms. Zhang said, “but you can’t grab us by the neck and not let us grow.”

Trademarks and patents protect companies and inventors, compensating them for their time, ideas and investment. While poorer countries have throughout history worked to obtain inventions from wealthier nations, sometimes running afoul of intellectual property laws, China has rewritten the playbook for acquiring advanced technology.

Since Deng Xiaoping, as leader, opened the Chinese economy to the outside world nearly four decades ago, the country has made it a priority to obtain ideas and inspiration from overseas.

Sometimes it has reverse-engineered what it wants. United States officials say that Chinese companies have also carried out extensive economic espionage through cyberattacks and other means. (Chinese officials have denied those charges.) More recently, China has used its growing wealth to buy into cutting-edge technologies, like genetically modified crops and the latest innovations from American start-ups, and to attract promising talent.

But since those early days, China has relied heavily on one tried-and-true method: forming joint ventures with foreign partners. Big-name companies like I.B.M. and Qualcomm are required to share advanced technology and research with domestic firms in order to set up shop in China. And to entice partners, the country offers access to its enormous market and hundreds of millions of consumers.

10.3 types of people everyone should meet on their way to the top

Your network can give you a boost. Quinn Rooney/Getty Images

When you align yourself with thinkers and doers who have already achieved what you dream of achieving or who simply ride shotgun alongside you, you’ll be pushed to take the right actions and be inspired to move in the right direction towards your goals.

This group of superpowers will build your success, boost your positive mojo and keep you in a place of constant growth.

Spend time with ‘cup half empty’ thinkers and you’ll feel low and de-energized. Spend time with individuals who dream big and see the cup not just as half full but as overflowing, and you’ll believe anything is possible.

ownership of your network

You have to take ownership of your own network. Move away from how many people you know to discovering who are the people you need to know. Building a more valuable network means taking back control and approaching your actions and connections with strategic deliberation. Of course we know this and yet something about how we are networking right now just isn’t working.

Most of our connections are superficial and transactional. Conversations have become brief and fleeting. You may be part of a network group or two, have a list of contacts and a stack of connections across various social media platforms but how many of your contacts do you really know? How many truly know you? How many of your contacts honestly care about you and your success? Are you doing things to help each other achieve your goals?

In ‘Building an Innovation Factory’ (HBR, May 2000), Andrew Hardon and Robert I Sutton discuss how to broker and capture good ideas for true and long-lasting effect. One of the companies studied is IDEO, an international design and consulting firm founded in Palo Alto, California.

The most respected people at IDEO are:

  • Part pack rat: They have great private collections of stuff
  • Part librarian: They know who knows what
  • Part Good Samaritan: They go out of their way to share what they know and to help others.

Approach your network in a similar way. You need a personal:

  1. Board of advisers that bring out the best in you.We invest in personal trainers for our fitness goals, financial advisers for our investment goals, even meditation teachers for our work–life goals.It is just as important to invest in a personal board of advisers as a sounding board and safety net to explore your ideas and plan your next career steps. Your boardroom provides encouragement, support and inspiration.
  2. Intelligence bank that sustains you over the long term.Think of building your network as creating a personal ‘intelligence bank’. Invest in it the same way a child makes regular coin deposits into their piggy bank. The heavier the piggy bank becomes, the more they have saved to purchase something important to them later. Invest in the right people with the right skills and it will pay dividends over the long term.
  3. Marketing machine that champions you and your cause.Without a marketing machine around you, your ability to create change and build engagement and influence is limited. To really drive your net worth and influence, you have to tap into what’s around you.

Your strategic network will keep your focus laser sharp. Moreover, it can help guide you towards the decisions you need to make to move forwards. As American sociologist Roald Burt put it, “Instead of better glasses, your network gives you better eyes.”

Read the original article on The CEO Magazine. Copyright 2017.