Topley’s Top Ten – September 16, 2019

Author

Matt Topley
September 16, 2019

1.Long-Term Treasury ETF (TLT) Has 2nd Biggest Weekly Drop Ever

Outside of equities, we saw amassive move higher in Treasury yields this week and a massive drop in Treasurybond prices.  For the 20+ year Treasury ETF (TLT),this week’s 6.34% drop was its second worst week on record since it begantrading back in 2002.Below is a look at TLT’s historical weeklypercentage change, and we also show how TLT has performed in the weeks andmonths following one-week drops of more than 5% like we saw this week.  Asshown in the table, TLT has normally continued lower for a while following bigdown weeks.  Start a two-weekfree trial to one of our three membership levels toreceive Bespoke’s most actionable ideas.

2.History of Speculative-Grade Default Rates…Hitting New Lows

Founderand CEO at Agecroft Partners

3.80% Of IPOs Losing Money in 2019

  • -More than 60 percent of more than 7,000 IPOs from 1975 to 2011had negative absolute returns after five years in the secondary market,according to a UBS analysis using data from University of Florida professor JayRitter.

  • -“First-day returns aren’t predictive for subsequent returns,”says UBS’ head of asset allocation Jason Draho. “IPOs can be attractiveinvestments if you can get an allocation, but much less so if you’re buying inthe secondary market.”

  • -From 1980 to 2016, the average six-month return for IPOs isabout 6 percent or 2 percent excess return, versus the over 18 percent averagegain on the first day over the past 40 years, according to the data.

  • -More recently from 2000 to 2016, the six-month absolute andexcess return has been both negative.

Don’t be fooled by the ‘unicorn’hype this year, most IPOs lose money for investors after 5 years–YUN LI

4.Wal-MartOpens First Walmart Health Center.

  • -Walmart on Friday opened up its first Walmart Health center inDallas, Georgia.

  • -The location is located next to a Walmart Supercenter, with aseparate door for those looking to use the health services.

  • -The new clinic is the start ofWalmart’s ambitions to get more embedded in the healthcare industry, withplans to open another center in Calhoun, Georgia.

  • -The new centers come equipped with primarycare, counseling, home care, eye and hearing exams, and dentistry.

Take a look inside Walmart’snewest health clinic that’s just the start of its push into healthcare LydiaRamseyLydia Ramsey

Walmart All-Time Highs.

5.One-Year Chart Walmart +24% vs. Amazon -4%

6.Summary of Attack on Aramco Oil Field…How Will Saudi’s Respond?

NY TIMES–DealBook Briefing: The World Reckons With a New Oil Order

Smoke from a fire at a SaudiAramco facility.CreditCreditHamad I Mohammed/Reuters

Sept. 16, 2019

Good Monday morning. Updates from the Saudi government on the Aramco plants that were attacked could help determine whether the country will move forward with an I.P.O. for the state-owned oil giant. (Was this email forwarded to you? Sign up here.)

Oil is soaring after the attacks on Aramco

Crudeoil prices posted their largest-ever jump in a single day, as Saudi Arabiacontinues to tally the damage caused by drone strikesonits state-owned petroleum giant, Saudi Aramco.

Theprice of Brent oil futures shot up as much as 20 percent, its biggest jump sincethe benchmark was created 30 years ago. It has since retreated a little bit toa 9 percent increase.

Shares in European airlines were down at least 3 percent in morning trading,while those in oil companies were up by about the same amount.

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Whythe attack is so notable: The Aramco plants that were targeted are crucial to the company’s operations.If they are offline, for even a short while, it could drastically reduce theoutput of Saudi Arabia, the world’s biggest oil exporter.

Amongthe questions on the minds of companies,politicians and investors around the world:

•When will Saudi oil production return to its level before the attack? Thecountry aims to restore part of its output today,but when things will return to normal remains unclear.

•How will the Saudis respond to the attack,for which Iranian-backed Houthi rebels in neighboring Yemen claimedresponsibility?

•How will the U.S. respond? Secretary of State Mike Pompeo quickly blamed Iran,though President Trump so far has not. Mr.Trump did say the U.S. was “locked and loaded,” but some commentators thinkthat America doesn’t have many moves left toplay to punish Tehran.

• How will this affect Aramco’s I.P.O. plans?Lingering doubts among potential investors could harm the prospects of thestock offering.

The big picture: The world’s energy marketsmay not recover fully. Though oil prices may go down, lingering concerns about the fragility of the world’spetroleum supply may reverberate for a long time. And America’sshale boom may not be enough topick up the slack if there’s a lengthy disruption in Saudi oil production.

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Today’s DealBook Briefing was written byAndrew Ross Sorkin, Michael J. de la Merced, Lindsey Underwood and StephenGrocer.

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7.Oil and Gas Exploration Companies Broke Thru 2016 Lows.

State Street

8.Creations and Redemptions in ETF World for the Week.

IYR REIT ETF 15% Bump in AUM

9.Wages Vs. Rents Since 1960

The affordable housing crisis, explained

Blame policy, demographics, and market forces

By Patrick Sisson, JeffAndrews, and AlexBazeley  May 15, 2019, 1:30pm EDT

Illustration by Janna Morton

10.Immutable Truths and Arguing Fools

Sep12, 2019 by Morgan Housel

Thereare a few things that are so obviously true, and true for everyone, that no oneargues about them. But most stuff isn’t black or white. Most of the stuff weargue about usually have many truths – several “right” answers depending on theperson and situation – and we’re actually arguing over the other person nothaving the same goals, needs, risks, and wants as you do. It’s a mess. And theonly thing worse than thinking everyone who disagrees with you is wrong is theopposite: being persuaded by the advice of those who need or want something youdon’t.

Thisis common in finance. You can count the number of things that are certain onone hand, so the “right” answer to most finance questions is just however muchuncertainty you want to accept, which is not only different for everyone butconstantly changing for everyone. People don’t agree on a lot of big investingpoints becausethey shouldn’t.

Realizingthis pushes you towards the few immutable truths, contextualized by your needs, andaway from foolishly arguing why two completely different people don’t think thesame thing – which is so much of what happens in this industry.

Here’san extreme example of what I’m talking about.

Stayin school. Work hard. Study. Get good grades.

Almosteveryone reading this article agrees with those words. But most reading thisarticle are not grade students in deep poverty. JD Vance was, and writes in hisbook HillbillyElegy:

As a child, I associated accomplishments in school withfemininity. Manliness meant strength, courage, a willingness to fight, and,later, success with girls. Boys who got good grades were “sissies” or “fag**ts.”I don’t know where I got this feeling … But it was there, and studies now showthat working-class boys like me do much worse in school because they viewschoolwork as a feminine endeavor. Can you change this with a new law or program?Probably not. Some scales aren’t that amenable to the proverbial thumb.

Thisis so foreign to the world I know. But so is my world to them. I think they’rewrong, but they’d say the same to me. I’m sure I’m right; so are they. Oftenthe reason debates arise is that you double down on your view after learningthat opposing views exist.

Here’sanother.

Former New York Times columnistDavid Pogue once did a story about harsh working conditions at Foxconn techassembly factories in China. A reader sent him a response:

My aunt worked several years in what Americans call “sweatshops.” It was hard work. Long hours, “small” wage, “poor” working conditions.Do you know what my aunt did before she worked in one of these factories? Shewas a prostitute.

Circumstances of birth are unfortunately random, and shewas born in a very rural region. Most jobs were agricultural and family owned,and most of the jobs were held by men. Women and young girls, because of lackof educational and economic opportunities, had to find other “employment.”

The idea of working in a “sweat shop” compared to that oldlifestyle is an improvement, in my opinion. I know that my aunt would rather be“exploited” by an evil capitalist boss for a couple of dollars than have herbody be exploited by several men for pennies.

That is why I am upset by many Americans’ thinking. We donot have the same opportunities as the West. Our governmental infrastructure isdifferent. The country is different.

Yes, factory is hard labor. Could it be better? Yes, butonly when you compare such to American jobs.

If Americans truly care about Asian welfare, they wouldknow that shutting down “sweat shops” would force many of us to return to ruralregions and return to truly despicable “jobs.” And I fear that forcingfactories to pay higher wages would mean they hire FEWER workers, not more.

Hereagain, a world completely foreign to my own leading to a debate over somethingone side assumed was black and white. I could fiercely debate this reader’sresponse, but I honestly don’t know what to make of it other than it being anexample of when you introduce – to any topic – a little social nuance, a littleeconomic variety, a little tribal identity, you’ll get opposing views.

Nothingwe debate in investing is as important as those two stories. But so much ofwhat we argue about is influenced by nuance and variety that makes two equallysmart people come to different – sometimes opposite – conclusions.

Isthis asset cheap? Idon’t know. It depends how much time you have and what your stomach for risk isand what factors the broader market considers cheap and what factor futuremarkets will want to bid up for and whether you’ve staked your career on cheapbeing a good thing. Ask different people and you’ll get different answersbecause there’s no right answer.

Doesthis strategy work? Idon’t know. It depends what you consider “working” and how quickly yourperformance will be judged by your boss/client/investors/spouse. Again, there’sno right answer.

Shouldyou care about this forecast? I don’t know. Depends how you’realready invested and how it’ll influence your decisions.

Shouldyou save more? Idon’t know. It depends how deeply you want to sleep at night.

Shouldwe cut taxes? Idon’t know. It’ll affect different people in different ways.

Youcan do this for almost every investment topic. The biggest things we argueabout have risks, and risk just means the odds of success are less than 100% –either because something might not work for the intended person, or it’ll neverwork for an unrelated person. That’s why we’re arguing and debating. There areno right answers. I do things with my money that might make you cringe, andvice versa. But if it works for me and what you do works for you, so be it.Life is inconsistent.

Wecould stop there and it’d be enough. But the most important point here isacknowledging the risk that during your research you’ll be persuaded by theanalysis and opinions of people who are different than you.

Maybethey have different timelines, or different needs, incentives, client demands,career/promotion quirks, sales targets, family matters, risk appetites, lifeexperiences, cultural persuasions … on and on. I would never assume a championbodybuilder’s diet and exercise routine would be appropriate for me. But for somereason the same thing doesn’t translate to finance, and college sophomoreswatch CNBC to gain insight into a billionaire hedge fund manager’s latestmoves.

Turnsout it’s hard to put yourself in someone else’s shoes, so the default is tosubconsciously assume everyone wears the same ones you are. A group ofpsychologists recently looked at a bunch of studies measuring the accuracy ofbeing able to predict someone else’s thoughts when going out of your way tounderstand their point of view. It wrote:

Although a large majority of pretest participants believedthat perspective taking would systematically increase accuracy on these tasks,we failed to find any consistent evidence that it actually did so. If anything,perspective taking decreased accuracy overall while occasionally increasingconfidence in judgment. Perspective taking reduced egocentric biases, but theinformation used in its place was not systematically more accurate.

Thisis why I’ll always think the young men who think good grades are for sissiesand the Chinese businessmen offering deplorable working conditions are WRONG,even if they might argue back to me with just as much conviction. You have to live it to believe it.

Sohere’s the advice. And to avoid irony I hope this is broad enough to apply tomost of us:

Thefew immutable truths of finance – the stuff no one arguesabout because there are right answers – are what matter most. But we hearabout them the least, specifically because no one argues about them.

Spendmost of your time contextualizing those truths within your own goals, needs andexperiences,realizing that it’s OK if others disagree with your views and you disagree withtheirs.

Whenyou watch, listen, and read about other people’s views, the mostimportant takeaways are insights into how people deal with risk and uncertainty, because those arethe broad lessons that are likely to apply to the greatest number of people,including yourself.

Learningfrom others is a huge part of investing – every mistake has already been madeand you can add years to your life learning from them vicariously. But mostinvestment debates can and should be replaced by acknowledging that reasonablepeople can disagree because we’re all different and driven by things that arehard to quantify. The fun part of behavioral finance is learning about howflawed other people can be. The hard part is trying to figure out how flawedyou are, and what makes sense to you but would seem crazy to others.