Market Musings Blog

Smart Ways to Save Money

No matter how wealthy you are, it’s worth a little effort to save money on everyday items. Here’s a few ideas to try:

  • If you carry credit card balances, look for a card that offers 0% APR for balance transfers for as long as possible. Capital One and Discover, who won’t let you borrow much by the way, frequently have offers that extend for longer than one year. Mind the fact that these all charge a ‘balance transfer fee’, usually about 3%. Still, if you are paying more than that to carry a balance, 3% sounds pretty good. When you make the transfer, do not use the card for anything else: usually, if you do, you subject the entire balance to a higher charge. With 0% APR, all of your payment goes to reducing your debt, so make your payments as high as possible.
  • Audit your phone bill and your cable bill regularly. Frequently, services ‘show up’ without your explicit permission; even if that’s not the case, you may find that you’re paying for something you never use. Also, call these companies, to ask about a better deal. My internet provider dropped its requirement that I purchase a data line months before I noticed it; this shaved over $20 a month off its cost, and the company was kind enough to back date my bill! Ditto with cable. Here, you may have to play hardball. I’ve found that when I mention that if I can’t get a better deal, I’ll switch to Sling TV, I am transferred to the ‘customer loyalty team’ where they’ll bend over backwards to get me a better deal. Or, you could just switch to Sling anyway.
  • Ask about bundling your home, auto and other insurance if you don’t already. If you do, shop around for a better deal anyway. (Use a broker if this drives you nuts.) Insurance companies hike your rates slowly over time, and it’s possible that your rate has become higher than if you had a new policy from a different provider who is hungrier for your business.
  • When you want to buy something, enforce a 10 day rule: wait 10 days to see if you still really want the item. Often, purchases are impulses, and 10 days on ice is enough to discourage the purchase altogether.
  • Particularly now that short term interest rates have risen, quit keeping excess money in a checking account and look around for a certificate of deposit or at least a money market fund. Talk to your bank to see what they are willing to offer.

For more ideas, simply run an internet search on ‘ways to save money’ and look for something that resonates. In one case, I saw that a couple ditched their Starbucks habit in lieu of buying an expensive but fun coffee machine, and investing in really good coffee. In a short while, making exotic coffee drinks at home paid for itself.

When Will We Know When Stocks Are Done Going Down?

The tough part about predicting the stock market is that it’s not only reacting to what’s happening today, it’s looking forward to tomorrow. And sometimes it’s not exactly tomorrow, it could be six months from now, or twelve months from now. The other tough issue is that the market is going to dish out several good days on the way to completing its bear phase. Those head fakes will tempt some investors to put cash to work.

It’s not a bad thing to miss the first part of an improving trend to make certain that the trend is actually in place. In other words, let’s say you are interested in Apple stock, but it’s been falling every day. One day, it turns around and rises 5 points. Rather than buying right at that moment, it might pay to wait until you can associate the rise with some positive news.

Speaking of news, one sure sign that the market is ready to turn around is that instead of the market reacting as if all news is bad, it starts to rally on bad news. So to take Apple again, let’s say the expectation is that next quarter’s earnings will be down by a dollar, and instead earnings are down only seventy five cents. On the face of it, it’s bad that Apple’s earnings are down. But the market is going to read that as, ‘it’s not as bad as we thought! Buy!’

As far as market action these days, we’ve got small tailwinds going for the economy in lower oil prices and a declining yield on the long bond. Even the ten year yield – which is important for mortgage pricing – is down in yield. But stocks are not going to give us a turn until we see a few earnings reports that show that companies are able to handle higher materials and labor costs and possibly slowing growth. Some relief on the macroeconomic front might help temporarily, but that has to flow through to earnings at some point before investors will pay more for stocks.

Bonds and the Stock Market:

How Do They Talk to Each Other?

It’s no secret that the stock market is unhappy about something – and that there are many things to be unhappy about. However, one item is dominant in our minds, though much less intuitive than trade problems, earnings issues, and the latest tweets. We’ve mentioned interest rates and their impact on stock market valuations many times in the past, but here we will give you a round up of what the bond market is trying to say and how that relates to stocks.

First off, an interest rate is just the price of money. If your bank charges you 5% for a mortgage, that is the price at which they are willing to lend. So with that in mind, what does the price of money have to do with stocks?

Trade issues and tweets have been on the table for months with nary a hiccup in stocks. However, the one incident that can be directly  and immediately tied to the stock market decline is the jump in long term interest rates that began on August 24th. While the long bond shifted up in yield for a week or two in somewhat desultory fashion starting then, it really got going on September 12th, when it broke to the upside and raced to 3.45% from under 3%. This move is both fast and far.

The long bond yield figures large in the valuation of stocks. The higher bond rates are, the lower stocks are valued. On the other hand, higher rates was a positive judgment on the economy, the same as the Fed is broadcasting, which is: things are strong. Competition for money is considerable, and so the market can charge more for those funds.

In some ways, this was comforting. We had the Fed saying, essentially, ‘the economy is still growing and we just want to feather the brakes a bit to avoid a crash so we’ll give you a few rate hikes’, and we had the long bond saying, ‘strength is in the cards, money should be more expensive because demand is strong’. Stocks should like that, but what investors didn’t like was the rapid change. From under 4%, mortgage rates jumped to 5%, and financing for all sorts of transactions shot up, all in about a month.

And then, a funny thing happened on the way to more rate hikes. A few soft economic statistics emerged, showing that housing had cooled considerably, some layoffs were announced, several earnings conference calls contained warnings about next year’s results. These warnings were not relegated to companies that must buy tariff-ridden steel, either. Bank managements, for instance, mentioned housing and the fact that middle market customers have slacked off borrowing again.

In reaction, the trend in the long bond reversed, and its yield began to fall. Rates in the middle of the interest rate curve, from two year to five years, inverted, so that the shorter maturities yield more than the longer maturities.

All of a sudden, the narrative switched from ‘too strong’ to ‘hey wait a second, maybe things are weak! Weaker than we thought!’ And that, right there, was enough to give stocks another leg down.

It’s hard to blame investors for reacting first to the surge in interest rates, and then to their sudden sinking and the inversion of a big hunk of the yield curve. This kind of action in bonds is like a normally soft spoken person suddenly starting to swear and shout. It’s alarming, and now you feel like you no longer know what that person will do next. Consequently, we think it will take some time for volatility in stocks to ease. It will also take a few weeks to determine if the downward direction is a new trend, or just an interruption in the old upward trend. We suspect the answer is the latter, and that we will look back on this time frame as marking the change to a slower growth trajectory, but no disaster.

October Proves a Fright

Not unusually for an October, the market is giving investors fits. Talk of recession and bear markets is burgeoning. However, market corrections within calendar years are completely normal. We’ve forgotten that these past few years, as stocks have been remarkably stable. Here are some stats:

  • In the last 40 years, declines of -5% to -30% have happened in 32 years – by far the majority of the time
  • Since WW II, the average number of years between bad bear markets is about 4.8
  • “Corrections” of 10% or more come around every 3 years
  • Smaller declines of 5%- 10% arrive virtually every calendar year
  • Recovery time from declines of 10%-20% has been as short as a month and as long as 10 months.

Corrections offer the opportunity to engage in tax loss selling (important this year since much of the year was spent at higher prices), improve a portfolio from marginal names to higher quality issues, even increase income flows.

Will Tariffs Sink the US Economy?

Aside from the Kavanaugh nomination and Hurricane Florence, the news lately has been dominated by ‘tit for tat’ on the trade front. Meanwhile, the stock market powers ahead. What gives? Isn’t it important to our economy if traded goods are more expensive and supply chains are disrupted? Won’t stocks eventually ‘wake up’ and fall because of trade policies?

To lay the groundwork, understanding how trade affects the US economy is critical. Our economy is actually relatively closed. About 12% of US GDP is associated with exports while imports make up another 15%. (Compare this to Germany, where 40% of GDP is exports; in Japan, it’s 17%.) The net of these two is a component of GDP calculation, and since the 1990s, we’ve run deficits consistently. If the US dollar were not the primary currency of trade, the US would have undergone an economic adjustment long ago to account for these persistent deficits, likely taking the form of a lower currency value, inflation, a difficult job market, or all of the above and then some. However, the station of the US currency is significant in this calculus, so we must think of this issue as the world is, rather than what it might be. As it is, we import capital to accommodate our consumption and we do not experience the kinds of dislocations that smaller less developed countries do.

A substantial portion of our goods and services are made and consumed in the US. The Chinese import US goods only to the tune of about 0.7% of our GDP. Exports from China to the US are about 4.1% of its GDP; when considering the effect of this number in China, remember that it does not capture local benefits from plant utilization in China by American manufacturers, such as employed Chinese workers.

Our two major trading partners are Canada and Mexico. There, NAFTA is in renegotiation. But despite tariffs, trade with Canada increased in the last few months, and Canada’s trade deficit narrowed. Through July, 2018, we were importing more from Mexico than in the last several years for the same period. Thus far, it’s pretty difficult to see any material impact on the economies in North America from trade talks.

At the consumer and industrial level, metals tariffs, much ballyhooed, have resulted in higher aluminum prices in the US for certain, but steel prices have barely budged. Stainless prices are up, but are at 61% of early 2012 values. Nickel alloy is at 82% of 2012 values. Lumber, nearly constantly subject to tariffs, has fallen in price dramatically since January. Soybeans, hit by Chinese tariffs, are down in price, but the other side of that coin is that consumers benefit from lower soy prices. At General Motors, costs of steel are on track to increase by $1 billion this fiscal year. But that’s 0.6% of GM’s latest annual revenue number. Looking at its cost of goods sold quarter over quarter for June, excluding depreciation and amortization, the number was DOWN, not up. The company’s conference call indicated that it was finding places to save even while bearing higher materials costs.

Meanwhile over in China, a decline in the yuan is ameliorating tariff impacts on the consumer. Ditto the Canadian dollar and the Mexican peso. So while taxes in the form of a tariff makes goods coming to the US cost more, the decline in source country currency values can offset that tax.

Tariffs are also happening in the context of a strong US economy where the Fed is still somewhat accommodative. Consequently, consumer demand has only grown stronger this summer. Of course, the threat of higher prices on imported goods may be front-loading demand into this quarter; time will tell. We tend to believe that strong employment bears the larger responsibility for solid demand figures.

Supply chain disruption is another common complaint around tariffs. But supply chains have been building in flexibility for years, in order to deal with wars, natural disasters, and of course, financial disruptions like tariffs. Companies can and do switch suppliers from country to country. It does take time, but it’s not impossible. We think GM, which should be particularly vulnerable to tariffs, is showing the results of supply chain maneuvers that will neutralize the effects of tariffs to a large extent. The much publicized plight of soybean farmers is overdone. There are only two major producers of soybeans in the world, and we are one of them. Our crop will be sold to countries that do not tariff it, and next spring, farmers can once again make a choice to plant grasses or corn instead of the bean.

That said, the latest round of tariffs does pose a threat on one front, and that’s inflation. The first set of goods taxed were business to business items, while this next round is nearly all consumer goods. We’re going to pay more at WalMart, no question about it. The effects of higher prices will probably become evident around the holiday season, but with tariffs so far set at just 10%, it remains to be seen how much of that will pass through.

We have discussed many of the commonly publicized negatives surrounding tariffs. But it’s conceivable that there will be positives. These might include manufacturing moving to the US; better trade agreements that then cause tariffs to be cancelled; or increased sales at US firms that become more competitive with imported goods. The Wall Street Journal wrote a story recently on Allen Edmonds, which makes shoes in the US and always has. Pricey, yes, but they last forever and the company will virtually rebuild your old pairs multiple times at no charge. This kind of service and product is overlooked in the US, but perhaps no more.

Considering all the possible points of pain from tariffs, our conclusion is that given their current extent, the effect on the US economy will be mild, with more extreme well-publicized disruptions here and there. Should the trade war worsen, we’ll have to revisit the subject, but for now, we conclude that the market is right to look past trade talk.