Making Sense Of Thursday’s Market Rout


Ouch. We haven’t seen a drubbing like this since June 11th, when the market sank 5.9%. That 5.9% drop was the 20th worst day in 70 years. How does today’s drop stack up?

Today’s 3.5% drop was a big deal. It was the 71st worst out of 17,783 trading days since 1950. That puts it at the 0.4% percentile rank of bad market days. How do we make sense of it?

First, look at the table below, which shows the worst market days since 1950.

Popular explanations from the financial media

  • The employment situation was looking a bit shaky.
  • Valuations were too high.
  • Fed Chair Powell warned about a slower economic recovery.
  • There was an uptick in COVID-19 cases in some states.
  • The market was priced for perfection.
  • Investor bullishness had become too extreme.
  • Volatility had become too quiet.
  • Investors had become complacent.
  • The market was overdue for a correction.
  • Some of the big tech leaders were recently starting to sputter.
  • The rate on the 10-year Treasury Bond was starting to tick higher.

All of the above are true, or at least have a ring of truth to them. Taken together, they make a lot of sense, but they leave me unsatisfied. Most of them were already known, to some extent, by investors as they drove the market higher and higher until today. That’s when the tide turned.

So, what is the explanation for today’s unexpected drop that will satisfy me? That’s next.

Over-reliance on the market’s ability to see the future

The market has a decent record of looking past bad news and moving higher in anticipation of good news. But in this case, I think the market jumped the gun. The chasm we are facing with the economy, the course of the pandemic, and the recovery of corporate revenue and earnings is far deeper and wider than many investors assumed it would be.

We’ll get past this chasm eventually, and the market will probably be the first to arrive, but not until it gives back a sizable portion of its gains. There are just too many risks and too many unknowns for the market to continue on its recent upward path.

Will the intrepid dip-buyers return to save the day?

The chart below shows that the intrepid dip-buyers have only allowed two declines of 5% or greater since the recent bottom in March 2020. Will they show up once again?

The odds are that they will, but in an environment packed with uncertainty, anything can happen.

Probabilities for what comes next

I do a lot of work with probabilities. Here are a few observations I’ve made, based on today’s decline and the historical record of what has happened after similar events. There is…

  • A 79% chance tomorrow will be an up day.
  • An 87% chance the market will be 10% lower than where it closed today, sometime in the next 3 months.
  • A 73% chance it will be 15% lower within the next 6 months.
  • A 32% chance it will be 15% higher than today at the end of the next 12 months.

As Benjamin Graham said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Since the recent bottom on March 23rd, investors have been voting for a speedy recovery and a return to normal. Today’s action marks the beginning of the weighing machine market.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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Laying off these key workers is one of the worst decisions companies are making to cope with coronavirus recession



Every business is at risk of losing those who drive innovation.

When employees shifted to working remotely five months ago, few thought it would last this long. Now, an estimated 30 million Americans are unemployed, with one in five workers collecting unemployment benefits. The U.S. recession is deepening, and while at first this affected mostly service-industry and blue-collar workers, it’s now hitting all rungs on the corporate ladder, with white-collar jobs on the chopping block as companies tightening their belts to rein in costs. 

The short-term savings of cutting high-cost white collar jobs may be enticing, but companies risk their future by letting their best and brightest go. In early 2020, U.S. business was just entering an unprecedented phase of digital business model disruption and transformation, but now much of that revolutionary work has come to a halt.

What might this do to the U.S. economy? Right now, it’s helping float a temporary stock market complacency that does not reflect the state of the economy at large. From tech firms to the financial sector to bioscience and manufacturing, every business is at risk of losing those who drive innovation and the next generation of talent who will fill leadership positions. The effect will be both micro- and macro at scale, harming the U.S. economic recovery and even jeopardizing the country’s standing as a global leader in commerce, innovation and business. 

According to a report in The Daily Mail, 15% of working millionaires have been let go and the U.S. has lost more than 500,000 millionaires since the pandemic began. Unlike at the beginning of the pandemic, when workers thought normalcy would return in a few weeks once the virus was under control, these layoffs are permanent. When white-collar jobs are lost, they do not return quickly. Economist Yelena Shulyatyeva predicts that it could take close to three years for white-collar U.S. employment to reach pre-pandemic levels. 

By that time, many white-collar individuals will have moved on to other jobs and careers out of necessity, while those close to retirement will have been forced to end their career early. Those in middle management who are able to ride out the storm will lose out on key learning years from mentors and role models. This will make the loss of new intellectual capital permanent for many companies, resulting in lost opportunity, lower profits and slower growth for decades to come. 

In addition to the direct toll on firms both large and small, American business could wind up taking a back seat to firms based in China and Europe, whose economies have not taken as big a hit as the U.S. from the pandemic. This would be an unprecedented shift of power away from business epicenters such as New York and San Francisco toward Beijing, London and Berlin. This is an opportunity an adversary such as China will not miss. Digital business model disruption continues to progress rapidly in China. The weakening and contracting of the U.S. economy means more opportunity for Chinese firms to fill the gaps left by American companies, now and over the long term. 


High-preforming job seekers around the world who once looked to America as a beacon of economic opportunity will look elsewhere, strengthening America’s competitors.

Furthermore, a decrease in attractive white-collar jobs will weaken the quality of the talent pool looking to work in the U.S. The boom of business in the U.S. is often fueled by eager workers leaving stagnant job markets in other countries in search of promising new opportunities. Many of the titans of U.S. business and innovation are themselves immigrants or children of immigrants. With millions of Americans being laid off and the uncertainty of those jobs returning, in combination with ever tightening restrictions on immigration, high-preforming job seekers around the world who once looked to America as a beacon of economic opportunity will look elsewhere, strengthening America’s competitors, stifling American innovation and further weakening an already crippled U.S. economy.

U.S. business leaders have a responsibility to evaluate how their mass layoffs and furloughs will affect their company’s long-term stability and growth, as well as the standing of America’s economy in which they operate — and not just focus on their company’s current stock price. While these cuts may be a measure to address short-term economic issues, the long-term drain will greatly hamper their company’s future viability and America’s ability to recover from this pandemic and grow an economy that continues unmatched worldwide. 

We do not often associate white-collar workers with struggle, but in the U.S. they are now facing an unprecedented crisis that will reverberate across the global economy. If companies do not act to address the challenges these workers are facing, we risk catastrophic job loss and irreparable economic harm and diminished world standing. Corporate leaders must balance the short-term gain of job cuts with the long-term risk — or face the consequences of a post-COVID world where America is no longer in the driver’s seat.

Keith Wright is a professor of accounting and management information systems at the Villanova School of Business.

Read: Life will never be the same for people over 60 — even with a COVID-19 vaccine

Plus: Older workers aren’t doomed to low-skill, low-pay jobs



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Reality Check: Making Back Losses Is Not The Same As Making Gains


Investment sales folks and Perma bulls who lost heavily in the first quarter are celebrating the rapid bounce back in market prices since March. Many cashed out with losses near the lows but have panicked and bought back higher in recent weeks. Others who held through the heart-pounding drop are relieved at the rebound, but not yet whole, and understandably nervous about what happens next. Prospects for their progress from here aren’t good. See Stock market at record highs is forcing everyone to become a believer:

Fund managers who went to cash when the pandemic broke out have been forced back in to stocks, pushing measures of positioning toward historical highs. Wall Street forecasters, some of whom threw up their hands in surrender four months ago, are pushing up targets each day.

..While testament to the career pressure missing a $12 trillion rally creates, the unanimity has become one of the biggest risk factors in markets right now, with positions getting crowded as everyone is forced to buy. A custom gauge of sentiment compiled by Citigroup Inc. showed “euphoria” just hit the highest level since the dot-com era.

…So much faith is put in the Federal Reserve that investors are willing to pay up for earnings that’s estimated to drop 20% this year. At 26 times forecast profits, the S&P 500 was traded at the most expensive level in two decades.”

Before getting sucked into the frenzy, it is vital to understand that buying high and selling lower is the most common pattern for would-be investors and the behaviour magnifies capital risk for everyone trying to own assets alongside them.

As I have explained many times, investment theory sells the promise of positive compound returns over time, but in reality, the long-term smoothed out averages widely quoted presume zero withdrawals or fees and that every dollar of income is perpetually reinvested into more units of securities upon receipt. This is not real life.

As I pointed out in Hold and hope at extreme valuations suggests compound losses:

Even if we suspend reality and fantasize that an investor-does not pay any fees or taxes, nor make withdrawals at any time, nor amass the bulk of their life saving late in life, nor add lump sums to expensive securities near cycle highs nor sell after cyclical drops-even if we assume all of this-and that a person added the same amount of savings to buy stocks every year, never more never less, and automatically reinvested every single dividend 100% back into more shares-that theoretical person still has spent 10+ years trying to grow their capital back to even after each manic secular peak in equity and corporate debt valuations since 1920.

Spending 10-15 years to try and grow back losses with no net gains is not a reasonable or efficient plan for real-life people with finite time horizons. In the meantime, emotional, family and physical lives are negatively impacted, and plans thwarted.

Think about it: if price-indiscriminate asset buying and speculation encouraged by risk-sellers and central bank largesse actually worked in creating wealth for savers, then the last 20 epic years would have produced high financial stability and net equity for households, businesses and the economy, not our present fragile opposite.

Concentrating diligently on an area of expertise to earn our money, saving, and controlling our spending and capital risk, while ignoring the FOMO (fear of missing out) pitch of investment sales offers the highest probability of achieving our financial goals. Yes, we can.

Disclosure: No positions.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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Huawei to stop making flagship chipsets as U.S. pressure bites, Chinese media say By Reuters


© Reuters.

SHANGHAI/SHENZHEN, China (Reuters) – Huawei Technologies Co [HWT.UL] will stop making its flagship Kirin chipsets next month, financial magazine Caixin said on Saturday, as the impact of U.S. pressure on the Chinese tech giant grows.

U.S. pressure on Huawei’s suppliers has made it impossible for the company’s HiSilicon chip division to keep making the chipsets, key components for mobile phone, Richard Yu, CEO of Huawei’s Consumer Business Unit was quoted as saying at the launch of the company’s new Mate 40 handset.

With U.S.-China relations at their worst in decades, Washington is pressing governments around to world to squeeze Huawei out, arguing it would hand over data to the Chinese government for spying. Huawei denies it spies for China.

The United States is also seeking the extradition from Canada of Huawei’s chief financial officer, Meng Wanzhou, on charges of bank fraud.

In May the U.S. Commerce Department issued orders that required suppliers of software and manufacturing equipment to refrain from doing business with Huawei without first obtaining a license.

“From Sept. 15 onward, our flagship Kirin processors cannot be produced,” Yu said, according to Caixin. “Our AI-powered chips also cannot be processed. This is a huge loss for us.”

Huawei’s HiSilicon division relies on software from U.S. companies such as Cadence Design (NASDAQ:) Systems Inc or Synopsys (NASDAQ:) Inc to design its chips and it outsources the production to Taiwan Semiconductor Manufacturing Co (TSMC), which uses equipment from U.S. companies.

Huawei declined comment on the Caixin report. TSMC, Cadence and Synopsys did not immediately respond to email requests for comment.

HiSilicon produces a wide range of chips including its line of Kirin processors, which power only Huawei smartphones and are the only Chinese processors that can rival those from Qualcomm (NASDAQ:) in quality.

“Huawei began exploring the chip sector over 10 years ago, starting from hugely lagging behind, to slightly lagging behind, to catching up, and then to a leader,” Yu was quoted as saying. “We invested massive resources for R&D, and went through a difficult process.”

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Microsoft’s Nadella is making a smart bet with TikTok — there’s more to gain than some realize


This summer has been eventful for ByteDance, the owner of the rapidly growing social network TikTok.

First, the Indian government banned the application from distribution in the country, due to concerns that the Chinese government might access user data. Then a number of U.S. companies warned employees to remove TikTok from their work phones. Most recently, President Trump threatened to ban TikTok in the U.S.

Into this maelstrom has stepped Satya Nadella, the CEO of Microsoft, with an offer to purchase the U.S. business of TikTok. Nadella has earned a reputation as a savvy operator. He has restored Microsoft’s
MSFT,
-0.86%

growth with smart bets on business software, and a strong push to move the users of various applications, including the company’s lucrative Office products, onto the online Office365 version. Nadella has also remade the image of the swaggering giant as a kinder, gentler, more thoughtful company.

Microsoft’s purchase of TikTok would be Nadella’s riskiest bet to date. If the Chinese government does indeed view TikTok as a crucial asset for influencing U.S. political and social discourse, it could attempt to put backdoors into the software and service.

Microsoft would need to work hard to extricate them, and they could result in TikTok’s being shut down anyway. Also, with TikTok, Microsoft would enter the politically fraught world of social-content moderation. Microsoft has assiduously avoided political controversy, but TikTok would inevitably force Nadella to enter that arena in one way or another.

For example, critics have loudly complained that TikTok censored videos of recent Hong Kong protests, citing that as evidence of Chinese government control. One can imagine similar discontent, due to slights real or perceived, arising among any number of causes, particularly at either extreme of the U.S. political spectrum.

TikTok’s price, which may be over $10 billion, has critics warning that Microsoft is about to overpay. That is one of many things that could halt the deal altogether. Valuation; government intervention; and fresh revelations of spying on users are just a few.

Yet the logic of the acquisition is clear. TikTok is under threat of closure by the U.S. federal government; it’s hard to imagine that Microsoft will pay its full valuation price. For ByteDance, this may offer a graceful exit from a business that it realizes will only create more problems.

So Nadella may be making a smart bet — one with less to lose and more to gain than others realize. Microsoft would increase its market presence by simultaneously acquiring both a social medium and an application popular with the younger crowd.

Microsoft has long pined for more of the under-25 group, and TikTok may fulfill that aspiration most clearly and cleanly. Also, TikTok, a kinder, gentler social network than Facebook
FB,
+3.44%

and Twitter
TWTR,
+0.42%
,
aligns culturally with Microsoft’s carefully groomed image. The platform is designed to encourage discovery and consumption but not to fan the flames of extremism.

That does entail algorithmically controlling content more carefully and spreading new content more slowly than Facebook and Twitter care to. To date, however, moderation has been a lesser problem on TikTok than on other platforms and, due to its design and mechanism, is likely to remain so.

With TikTok would come a large and growing pool of user-generated video data for training Microsoft’s artificial-intelligence engines. In theory, if Microsoft can continue to grow TikTok’s user base, its advertising benefits to Microsoft may be enormous. Microsoft’s cash flow would benefit by the added diversity of the advertising revenue and potentially of another rapidly growing source: social advertising. To put this into perspective, Amazon’s fastest growing revenue stream of late has been advertising sales on its powerful e-commerce platform.

The purchase’s major benefit to Microsoft and the U.S. public could be the ability of U.S. consumers to continue to use an innovative platform for free expression and creativity after rescuing it from the quicksand of politics.

Yes, we must remain vigilant in limiting government spying (which — let’s be honest — both sides engage in) and restrictive business practices (in which, yes, China is clearly the worst offender); but ultimately the potential of such a technology as TikTok is to soar above partisanship and divisiveness to let people connect and create.

Certainly social networks have created their fair share of problems for society, and TikTok is not a perfect vessel; people will find ways to abuse its potential. For now, however, Microsoft’s purchase of TikTok would, in a rare win-win in the world, benefit Microsoft, TikTok’s users, and society.

Vivek Wadhwa is a distinguished fellow at Harvard Law School. Alex Salkever is a consultant on product marketing. Their next book, “From Incremental to Exponential: How Large Companies Can See the Future and Rethink Innovation,” will be released in September.



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