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Picture1 1December 15, 2021

I start this episode with a heavy heart: our beloved Mooshoo has crossed the rainbow bridge. He came to us from the Bullpen Rescue of Georgia 38 months ago. He was blind, underweight, and suffering from diabetes insipidus. I promise you he spent his last 38 months living his best life! He came to work every day with no complaints, although he demanded that he take the staff with him on his daily walks. He will be missed but never forgotten. He did have one last big request from me: if I could be a little more political on my bi-monthly newsletters. So here goes:

As Janet Yellen was testifying that the U.S. debt ceiling was about to be breached, I realized I did not have a conversation with anyone about fears regarding the debt ceiling being in jeopardy. I feel like I am in the middle of a Rod Serling episode of Twilight Zone. The Twilight Zone is the mental state between reality and fantasy. According to Rod, there is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. Have we lost our minds? The market didn’t even react to the possibility that the U.S. would potentially default on their debt. We know that elections have consequences, and this is what our politicians always do- nothing! Remember, Republicans will be next in line to do the same thing and then blame the Democrats. We just continue to kick the can down the road. Term limits for everyone!

This brings me to Senator Karen and the Squad. Senator, you don’t look very good in green. Elon Musk is not the problem in Washington. You have had a hundred years to change the tax code. Quit complaining and placing blame, and actually do something about it. The Squad wants to now cancel student loan debt after already postponing payments for the last couple of years- over my dead body! I paid back my loans that I willfully borrowed, and I’m not about to pay yours. Additionally, in New York City you now don’t have to be a citizen to vote in local elections; I was always told that membership has privileges. It seems I have answered my own question- we have lost our minds.

As a good Catholic boy, I went to confession last night. I’ll probably have to go again next week, but I leave you with this: what’s the difference between the Titanic and CNN? The Titanic had all of its anchors on board when it went down! Farewell, Mooshoo- my best friend. Merry Christmas to all.

Moosh 1 Moosh 2 Moosh 3

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Yesterday it was announced that the U.S. Producer Price Index, a measure of cost changes from the seller’s perspective, rose 9.62% year-over-year in November, the highest number on record. It will be interesting to see if today’s Federal Reserve meeting takes a dovish stance to ease recent market fears or a hawkish stance to calm fears about new inflation data.

The S&P 500’s 50-day moving average once again served as support earlier this month, following a pattern we have seen throughout this year outside of September’s drawdown.

The most recent AAII Investor Sentiment Survey found that roughly 40% of investors felt neutral about market returns six months from now. A neutral majority has historically led to the strongest returns over the next six months when compared to bullish or bearish sentiment.

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Sector Rotation

sect perf 121721“You can’t beat the market.” Time and time again, this phrase is repeated in social circles. While the majority of those in the investing world continue to utilize strategies from the 1950s like Modern Portfolio Theory that encourage owning everything, Chairvolotti Financial believes that owning everything has plenty of drawbacks.

The funds in your 401(k)’s lineup rotate in and out of favor like produce in a grocery store; while they all may be objectively good investment options; it does not mean that every fund is in favor at all times. Chairvolotti Financial finds it counterintuitive to own these “out of favor” sectors as a hedge against downturns in the “favored” sectors. A prime example of this occurred last year: the technology sector saw a return of over 42%, while the energy sector saw a decline of roughly -37%. If you had owned both to hedge your bets, you would have had an average return of around 2.4%. However, if you simply avoided investing in the weakest areas of the market (like energy last year), you would have seen substantial improvement in your portfolio’s performance.

In order to find these “favored” sectors, Chairvolotti Financial utilizes modern investment technology to view which asset classes and sectors exhibiting relative strength. Relative strength simply refers to specific sectors or asset classes that have stronger performance than a broad market index, like the S&P 500. The objective of this strategy is to invest in sectors of the market with relative strength, and to avoid sectors with weak relative strength. One of the easiest ways to envision this strategy is to think of it as a relay race; as soon as a sector loses steam, we pass the baton to a sector that is just beginning to take off. This investment strategy is known as Sector Rotation.

In short, while everyone continues to invest the same way they have for decades, Chairvolotti Financial believes there is a better and smarter way to invest for your retirement. By diversifying amongst “favored” funds in your lineup and avoiding the “out of favor” funds, it is possible to outperform while still being diligent about your retirement allocation. While it may be difficult at times for leadership to appear in the short-term, long-term investors will be able to see these rotations play out amongst the sectors. Paired with modern investment technology, Sector Rotation sheds light on a commonly overlooked fact about investing: it’s not about what you own, it’s about what you don’t own.

Market Indices

Year-to-date returns

Large Cap Indices

S&P 500:                                           23.38%

Dow Jones Industrial Average:    16.13%

Nasdaq-100:                                    23.48%

Mid and Small Cap Indices

S&P 400 (Mid Cap):                       18.70%

S&P 600: (Small Cap):                   20.30%

Russell 2000:                                     9.36%

International Indices

MSCI EAFE Developed Index:         5.36%

MSCI Emerging Markets:               -5.36%

MSCI ACWI ex-US:                            2.79%

Economic Sector Indicesindicator 121721

Basic Materials:                              20.37%

Communication Services:            18.49%

Consumer Discretionary:             20.21%

Consumer Staples:                         12.02%

Energy:                                              45.76%

Financials:                                         31.40%

Healthcare:                                      18.75%

Industrials:                                       16.17%

Real Estate:                                      34.62%

Technology:                                     29.60%

Utilities:                                             10.10%

 

The January Effect

jan eff 12172021Building off of the Santa Claus Rally from last newsletter, there is another winter phenomenon in the stock market that deserves review: the January Effect. Like the name suggests, the January Effect simply refers to January’s ability to imply how the year will go for stocks. Does a strong January mean a year of robust returns? Does a weak January signal doom and gloom for the next 12 months? Let’s find out.

For our analysis, we looked back from 1950 to 2020 to observe how each January and year performed over that timeframe. Since 1950, the S&P 500 has had a positive January roughly 60% of the time. In these years in which January has had

Source: Ycharts

a positive gain, the S&P 500 ended the year with an average return of 16.60%, notably higher than the stock market’s historic average. Likewise, years with a positive January ended the year with a positive return over 88% of the time, indicating a significant likelihood of ending the year with a positive return.

Conversely, negative Januarys have been a mixed bag. Since 1950, years with a negative January have finished with an average return of -2.14%, significantly lower than years with a positive January. Also, years with a negative January have ended with a positive return only 50% of the time, making negative January years a virtual coin flip regarding how the year will finish.

There have been many theories as to why the January Effect exists. Some investors believe that the January Effect is due to investors selling winners in December and employing this cash into new investments at the start of the new year. Likewise, it is also proposed that some investors may put their year-end bonus money into the market. Other investors believe the explanation is simply due to psychology, as investors may see the start of a new year as a fresh start and a time to implement a new investment strategy or idea.

Regardless of the root cause, the January Effect has been a consistent phenomenon in stock market history. While a negative January doesn’t necessarily mean the rest of the year will be pessimistic, a positive January has historically provided a reliable indication of a strong year of market returns.

 

401karat rabbit

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

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Picture1 1November 30, 2021

As we round out 2021, we have now entered my favorite time of the year: the silly season of Congress, College, and Professional Sports- and you thought I was going to be talking about Christmas!

Have you read the article recently published by the Penn Wharton Budget Model (PWBM) Staff? PWBM estimates that the Build Back Better Act (H.R. 5376) would increase spending by $2.1 trillion over the 10-year budget window while increasing revenue by $1.8 trillion, for a 10-year total deficit of $274 billion. By 2050, the proposal would decrease GDP by 0.2 percent, relative to current law. In an alternative, illustrative scenario in which all temporary provisions in the bill are made permanent, spending would total $4.6 trillion over the 10-year budget window. In this scenario, by 2050 the federal debt would increase by 24.4 percent and GDP would fall by 2.9 percent relative to current law. So, where did I hear this bill is free and won’t raise taxes? The rich will be getting a tax break when we bring back the State and Local Tax (SALT) write offs. This of course isn’t going to put any more pressure on inflation, is it? (sarcasm, if you can’t tell) Come on, man!

Continuing with inflation, did you see that Dollar Tree has officially announced that they have raised prices to $1.25? Well, that kind of seemed inevitable, but they say they can bring in better merchandise. We will see! I’m curious to see what the difference is between $1 merchandise and $1.25 merchandise- that seems kind of silly, huh?

Speaking of silly costs, did you see how much they pay college coaches just to go away, and the new contracts thrown around in the Coaching Carousel? USC is paying their new coach $100 million, while LSU is paying theirs $95 million. All this does is give the Alabama coach another automatic raise- who ever said playing a game doesn’t pay!

These colleges throw around millions of dollars as if we have an unlimited supply. I’m sure these are all wonderful people, getting paid a ridiculous amount for not even winning. Does it make sense that none of these people have cured cancer or heart disease? When are we as a country going to get our values and priorities straight? I will never understand how we can pay millions of dollars to coaches, athletes, Hollywood, and musicians and get so little in return other than higher inflated ticket prices. There are way more deserving workers in our country, such as first responders and teachers, that have done more for society than these people ever will. Stay safe, and see you soon.

 

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Source: Ycharts

Here is a breakdown of where each market driver currently sits:

It remains to be seen whether the Omicron variant will have a tangible effect on economic fundamentals, but the Federal Reserve meeting in mid-December should shed light on whether the variant will effect the Fed’s tapering timeline.

The RSI, or Relative Strength Index, measures recent price changes to determine undersold and oversold conditions. While the major market indices have seen their RSIs remain at healthy levels, many high-growth areas of the market have already reached oversold conditions.

Friday’s CBOE Equity Put/Call Ratio reached its highest level since October 4, the bottom of the previous 5% pullback in the major indices. This reading may indicate that investors are beginning to become less complacent in conjunction with the Omicron variant announcement.

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Tapering: Right or Wrong

 

ychrtssssssssssssWith inflation and a historically expensive market in the news, there has been constant debate in financial news around two familiar concepts: quantitative easing and tapering. Also, with the Federal Reserve’s December meeting coming up, these concepts are front and center once again. However, even though these phrases first rose to prominence back in 2008, many still do not understand what they actually mean.

Source: Ycharts

We would like to breakdown what these financial terms mean, and what kind of impact they have on the economy and stock market.

Before we can tackle the Fed’s current situation regarding tapering, we have to explain what quantitative easing actually entails. In layman’s terms, quantitative easing, or QE, is a program in which the Fed purchases financial assets, like bonds or stock, to inject money into the economy. This increase in money circulating in the economy typically helps to lower longer-term interest rates. These lower borrowing

 

costs are then expected encourage economic growth, which would then speed up an economic recovery. While QE was used both in 2008 and in 2020, there is not a consistent consensus amongst economists on the success of the program, or whether the program has negative or positive economic consequences.

One of the greatest fears associate with QE is hyperinflation, or out-of-control price increases throughout the economy. However, after 2008, the U.S. economy never experienced this anticipated hyperinflation, as most of the money injected into the economy was retained by banks to improve their balance sheets. However, with 2020’s crisis less contained to specific sectors of the economy, there is fear that there may not be the same outcome this time, with some inflation measures reaching 30-year highs as of late. Due to the unknown consequences of QE, discussions after the program have centered around another financial phrase in the news: tapering.

In short, tapering is the reversal of QE, including the slowdown and eventual reversal of the Fed’s financial asset purchases. Tapering is typically reserved for the point in which the Fed is confident that the economy is able to be self-sustained again; think of tapering like taking the training wheels (QE) off of the U.S. economy. While tapering is viewed as a necessary step to stabilize the economy after QE, there is not a significant track record of how the markets will react. A recent example in history is 2013, in which the U.S. announced plans to begin tapering following the Great Financial Crisis. As a result, the bond market droves yields higher, fearing that tapering would cause the economic collapse that QE was meant to prevent. However, after a few months, bond yields began to normalize as economic data began to be increasingly positive. Conversely, when the Fed began to actually reverse QE and raise rates, markets did not like the idea, as this was a contributing factor to the nearly 20% correction in the S&P 500 at the end of 2018. As a result, the Fed reversed course and ended its tapering prior to 2020.

Today, the Fed finds itself in a similar situation as 2013. While many economic indicators have yet to fully recover, many are improving, and the high consumer demand that has been highlighted by the supply chain bottlenecks indicates an economy primed to takeoff once it is in the clear. However, news of the Omicron variant may alter the Fed’s original tapering timeline, as they may anticipate further economic shocks from continued variant emergence. Either way, the stock market may find itself once again at odds with the Fed regarding the timeframe for tapering. Will the bond and stock market have strong volatility like it did following 2013’s announcement? Will QE once again have little to no impact on inflation, or will the money injected into the system circulate through the economy more freely this time? It’s hard to say, but it is worth paying attention to as more information comes out regarding inflation and future variants.

 

Market indices

Year-to-date returns

Large Cap indices

S&P 500:                                           23.94%

Dow Jones Industrial Average:    14.80%

Nasdaq-100:                                    27.24%

Mid and Small Cap indices

S&P 400 (Mid Cap):                       20.60%

S&P 600: (Small Cap):                   22.66%

Russell 2000:                                   13.53%

International indices

MSCI EAFE Developed Index:         4.64%

MSCI Emerging Markets:               -5.60%

MSCI ACWI ex-US:                            2.46%

Economic sector indicesindicator 11302021

Basic Materials:                              19.42%

Communication Services:            21.20%

Consumer Discretionary:             25.84%

Consumer Staples:                           8.04%

Energy:                                              47.21%

Financials:                                         31.71%

Healthcare:                                      16.32%

Industrials:                                       16.45%

Real Estate:                                      32.66%

Technology:                                     30.29%

Utilities:                                               7.37%

 

Santa Claus Rally: Does it Exist?

ycharts 111Every December, you may hear financial news outlets beginning to sound awfully similar to a Hallmark movie, consistently using the phrase “Santa Claus Rally.” Today we’d like to observe not only what the Santa Claus Rally is, but also whether there is any insight we can take away

Source: Ycharts

from their performance.

The Santa Claus Rally refers to a phenomena in the market in which the period consisting of the final five trading days of the year and the first two trading days of the new year historically exhibits robust returns. In fact, the Santa Claus Rally has averaged a return of 1.28% over the past 50 years. Which this seasonal phenomena has been a regular occurrence in market history, there is no specific reason that has been pinpointed for its existence. Some have theorized that the strong market is due to investors piling into the market at the end of the year in anticipation of a strong January and new year, while others have

suggested that the light trading volume during the holidays makes it easier for the market to ascend. Whatever the true cause of the Santa Claus Rally may be, its historic track record speaks for itself, as the Santa Claus Rally has had a positive return over 75% of the time since 1970.

Now, the question regarding the Santa Claus Rally is whether there is any insight to be gained from its performance. In the chart above, we looked at years in which the market had a positive Santa Claus Rally and years in which the market had a negative Santa Claus Rally. From this distinction, we then decided to look at two timeframes: how did the following January perform, and how did the following year in the stock market perform?

In the years with a positive Santa Claus Rally, the following Januarys were overwhelming positive, with nearly two-thirds of Januarys posting a positive gain. In the following year, the chance of a positive return was even greater, with years following a positive Santa Claus Rally having a positive return nearly 80% of the time. On the flip side, negative Santa Claus Rallies tended to have a negative effect on the following January, with only 42% of Januarys being positive following a negative rally. On the flip side, while negative Santa Claus Rallies didn’t lead to an 80% chance of a positive return the following year, they still had a significant chance of positive returns, with roughly two-thirds of years following a negative Santa Claus Rally still posting a positive gain.

In short, while a negative Santa Claus Rally may not lead to a strong January, the following year still has a solid chance of being positive. On the flip side, a positive Santa Claus Rally has overwhelmingly led to strong Januarys and strong years following the rally. While the Santa Claus Rally is just another one of the many inexplicable phenomena in the stock market, it’s worth tracking if history is to be our guide.

 

401karat rabbit

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

 

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Picture1 1November 15, 2021

My favorite holiday is coming up next week, and that’s Thanksgiving. Wow! This year has flown by and as I like to say, “the days are long, and the years are short.” What I love most about Thanksgiving is that it’s a time for family, food, and fellowship. Thanksgiving gives us a chance to reflect on how great we have it here in the United States, and a time to be grateful for all of the blessings bestowed on us as individuals and as a country. With that being said, I have a bone to pick, and I’m not talking about a turkey bone.

I have a silly question: why don’t we just stay with Daylight Savings Time vs Eastern Standard Time? I would rather have more daylight in the evening than in the morning. What this nonsensical time change instruction brings up every year is why can’t we build products and create instructions that a normal human being can understand? I have a master’s degree, but I doubt highly that even a Rocket Scientist with a PHD can figure out how to change the clock on my mother’s wall oven. For my questions, I actually know this answer- it’s that we don’t build these products here in the U.S. and the instructions, or what I like to call “destructions”, are more than likely written by someone who is not a native English speaker. When people create instruction manuals, why don’t they just use pictures like IKEA?

Moving forward, what scares me more than inflation today is the Great Resignation. The Great Resignation is an informal name for the widespread trend of a significant number of workers leaving their jobs during the COVID-19 pandemic; it’s also called the Big Quit. The Great Resignation is typically discussed in relation to the U.S. workforce, but the phenomenon is international.  We had 4.3 million Americans quit their jobs in September, and an additional 4.4 million in October. Millions of workers voted with their feet and walked out of their jobs—many without having another position already lined up.

All of that said, I hope that everyone takes some time during this Thanksgiving season to be thankful for our many blessings in the United States. Have fun, stay safe, and we’ll talk soon.

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The U.S. inflation rate came in at 6.22% for October, the highest level since November 1990. While the year-over-year data comparisons are still reflecting a pre-vaccine world, it remains to be seen if the Federal Reserve will eventually be correct in their assessment that the majority of this inflation is transitory.

The RSI, or Relative Strength Index, measures recent price changes to determine undersold and oversold conditions. Unsurprisingly, the S&P 500 and Nasdaq-100 both pulled back slightly after reaching RSI levels greater than 70, implying an overheated market.

The University of Michigan’s Consumer Sentiment survey registered a reading of 66.80 for November, the lowest level in the past 10 years. While put/call ratios show investors incredibly confident in the stock market, consumers seem much less enthused about our current economic conditions as a whole.

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Inflation and The Stock Market

 

inflation rate nl

If you have been to a gas station or grocery store lately, you may have noticed some intimidating price increases. These price increases throughout the sectors of the economy are known as inflation. Last Wednesday, it was announced that inflation in October had registered a reading of 6.22%, which is the highest level in over 30 years. Despite this, many in the Federal Reserve continue to claim that this current spike in inflation is “transitory,” or temporary. While these increases in inflation are never fun for consumers’ wallets, the main question on investors’ minds is how inflation historically has impacted the stock market.

As we mentioned in a previous newsletter, interest rate changes are used as a response to inflation- when inflation is increasing, interest rates tend to rise, and vice-versa. However, when inflation remains in check and relatively low, there is little incentive to increase interest rates, which is the type of environment the U.S. economy has been in ever since the 2008 Financial Crisis. This low interest rate economic environment is why we saw growth stocks outperform value stocks significantly over the past decade-plus, as growth stock valuations are heavily weighted towards future potential earnings that are discounted at these current interest rates. In contrast, when interest rates and inflation rise, these future earnings projections are reduced, hurting growth stock valuations and making present-day earnings much more valuable. As such, this emphasis on present-day earnings is why value stocks tend to outperform growth stocks in rising rate environments, as they did between the Dot-Com Bubble and the 2008 Financial Crisis.

While there is a relationship between inflation and stock styles, there is also a relationship between inflation and economic sectors. Four sectors that have historically outperformed during periods of inflation are energy, financials, industrials, and materials. Energy prices, such as the prices of oil and gas, are a common part of inflation indices, so the positive correlation between the energy sector and inflation should be obvious. Financial stocks, such as banks and insurance companies, see their profit margins benefit greatly from rising interest rates that result from inflation. Finally, inflation tends to imply that an economy is heating up, meaning that there is greater demand for production in both the industrial and material industries.

While the stock market typically has positive returns during both inflationary and deflationary environments, there are notable historic advantages for certain stock styles and economic sectors during inflationary periods. However, the Federal Reserve’s hesitancy to raise rates has caused sectors of the economy that have historically reacted negatively to rising rates to continue to outperform, as the market has interpreted the Federal Reserve’s hesitancy as a green light. Now, if the Federal Reserve changes its tune regarding raising rates, that may be the catalyst for a shift in the economic sectors and their performance. In the meantime, however, investors should remain vigilant and follow the words of The Great One, Wayne Gretzky: “skate to where the puck is going, not to where it has been.”

 

Market Indices

Year-to-date returns

Large Cap indices

S&P 500:                                           24.67%

Dow Jones Industrial Average:    17.95%

Nasdaq-100:                                    25.69%

Mid and Small Cap indices

S&P 400 (Mid Cap):                       25.82%

S&P 600: (Small Cap):                   30.08%

Russell 2000:                                   22.12%

International indices

MSCI EAFE Developed Index:       10.09%

MSCI Emerging Markets:               -0.45%

MSCI ACWI ex-US:                            7.82%

Economic sector indices121521 indicator 1

Basic Materials:                              24.05%

Communication Services:            25.13%

Consumer Discretionary:             23.74%

Consumer Staples:                           8.77%

Energy:                                              51.88%

Financials:                                         35.92%

Healthcare:                                      17.70%

Industrials:                                       20.49%

Real Estate:                                      32.13%

Technology:                                     28.15%

Utilities:                                               5.78%

 

Inside the infrastructure bill

On November 5, the House of Representatives officially passed the long-awaited, $1.2 trillion infrastructure bill that has taken up headlines for over half a year. While the bill includes $550 billion in new spending, we would like to go through the bill and breakdown how the bill will invest in each segment of the economy, as well as any additional costs not included in the aforementioned $1.2 trillion price tag.

The largest portion of the $550 billion in new spending will be going towards the construction and repair of new and current roads and bridges, with $110 billion dedicated to this endeavor. The bill also includes $66 billion for railroad maintenance and improvement, although there is no mention of high-speed rail coming to the U.S. anytime soon. $17 billion is dedicated to the expansion of ports, which is top of mind for many investors today as we experience ongoing supply chain issues. Also, airports are expected to receive $25 billion for major expansions at U.S. airports, as well as upgrades to air traffic control towers and systems. In addition, public transit will receive $39 billion to create additional bus routes and to augment public transit to be more accommodating to disabled Americans and senior citizens.

Outside of transportation, the infrastructure bill also looks to prioritize the expansion and improvement of modern-day utilities. The bill includes $55 billion towards water infrastructure, with the aim being to replace lead pipes to avoid instances like the infamous Flint, Michigan crisis, as well as an additional $8 billion dedicated to water treatment and storage facilities in the west to combat drought conditions. $65 billion is included for the improvement of power lines and cables, as well as $47 billion to prevent damage to the power grid, whether it be cybersecurity attacks or extreme natural disasters. Also, in a time where access to the internet is indistinguishable from participating in modern society, the infrastructure bill includes $65 billion towards expanding broadband in low-income communities and rural areas across the U.S.

On the controversial side, the infrastructure bill also includes highly debated spending on the environment and continued shifts towards clean energy. $21 billion were agreed upon as an environmental budget, aimed at cleaning abandoned mines, former oil wells, and brownfield sites, which are sites that were previously used to industrial purposes but have since been abandoned due to hazardous chemicals. The bill also includes continued expansion for the shift towards electric vehicles, or EVs. $7.5 billion apiece has been dedicated to the continued construction of additional charging stations for EVs across the country, as well as the creation of electric school bus fleets.

While Congress will continue to debate additional spending in the Build Back Better bill, the infrastructure bill looks poised to address the majority of the structural issues facing our nation. However, it is not a perfect bill. With the majority of car manufacturers targeting 2025 for their continued transition to EVs, it remains to be seen if the $7.5 billion for EV charging stations will be enough to support a transition of this magnitude for our society. Likewise, there are provisions within the bill that will allow for renewals of certain parts of the bill, meaning that the actual price tag on this infrastructure bill may be difficult to quantify today. Only time will tell, but it appears that the infrastructure bill will help to bring our infrastructure in line with modern times.

401karat rabbit

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

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Picture1 1October 29, 2021

I got my Happy Halloween present last night.  I want to thank all of my Green Bay Packer friends for saving my football season. See, as a life long Miami Dolphin fan, there has been only one thing to look forward to in the last 20 years, and that’s when the last undefeated team goes down. Last night’s game went down to the final seconds, but Green Bay pulled out the victory against the undefeated Cardinals. Speaking of Trick or Treating, Janet Yellen says the new Build Back Better Spending Bill, which is now only a mere $1.75 trillion, is actually non-inflationary. Is this a trick or a treat? Really? Inflation today just notched a fresh, 30-year high, but somehow adding another honey pot of money is magically not going to impact inflation? The good news is that my friend “Brandon” says that this spending bill is free and already paid for. If that’s the case, why not go big or stay at home? Another freebee that got my attention this week is that the current administration is considering offering $450,000 in reparations for immigrants that were separated while crossing our southern border illegally. Wow, we didn’t even provide that benefit to our family and friends killed in the attacks on 9/11.

Moving on, I don’t know if you saw this week that Tesla has passed $1 trillion in market valuation. It is insane that we offer tax payer-funded credits to Tesla for cars that the average American can’t afford. In addition to this, does dysfunctional Congress understand that you just can’t plug your Tesla into your home outlet at night? Well, actually you can with a converter, but it’s going to take you four full days to charge your car. If you charge your car overnight, you are going to get a full four miles for your next day. Only 63 percent of homes in the US have garages or carports, which means we are going to have to build out infrastructure for the electric vehicle market. What will our apartment and condo dwellers do? Maybe before we put the cart before the horse, we should understand what it’s going to take and cost for electric vehicles to become mainstream. My “treat” for you this Halloween— you might have seen that Facebook changed its company name this week to Meta. This is like an episode of Star Trek the Next Generation. Maybe Mark Zuckerberg should have thought this name through a little bit better— I saw on the “interweb” today that Meta actually stands for Make Everything Trump Again.  Happy Halloween!

 

 Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims once again set a new pandemic low, coming in at 281,000. While this is still historically high, it is the continuation of a declining trend since last summer. However, is it declining because people are gaining employment, or is it declining because people are giving up on searching for work and leaving the labor force? That remains to be seen.

The three major indices all have handily recaptured their 50-day moving average, with all three at least two percent above this indicator. This further confirms the incline following the pullback from September.

The CBOE Equity Put/Call Ratio, a sentiment indicator that compares the number of put options being purchased (bearish) to the number of call options being purchased (bullish), had its lowest reading since mid-June at 0.36, implying strong bullish sentiment amongst investors.

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Market Seasonality

One of the most underappreciated traits of successful investors is the ability to set realistic expectations. Whether it is the frequency of market corrections or historic market performance, having realistic expectations allows investors to avoid the two most dangerous emotions of investing: greed and fear. Today, we will discuss the seasonality of the stock market, and how it tends to affect market returns.

Market seasonality, also known as the “Halloween Effect”, refers to the unique market phenomenon that involves the stock market having a historically “strong” six months and a historically “weak” six months. The strong season refers to the period of November through April, whereas the weak season refers to the period of May through October. Since 1950, the market’s strong season has averaged a return of 7.16%, whereas the weak season has averaged a modest return of 1.67%. Since 2000, the market’s strong season has averaged a return of 5.23%, whereas the weak season once again lagged significantly with an average return of 1.09%.

Surprisingly, there has yet to be a conclusive reason for this consistent occurrence in the market. While there are multiple theories behind this phenomenon, one of the most prominent ideas simply has to do with investor psychology. As the year begins to wind down and we head into the holiday season, investors tend to renew their optimism towards their investments and the new year in general. In the same way that an overly ambitious New Year’s resolution fades after a few months, the reality of the new year tends to set in for investors by the time summer comes around. This reality check coupled with summer vacationing has caused some analysts to suggest that this diminished investor involvement and optimism may be the cause for the lull during the weak season.

Now, you may be asking yourself, “does this mean I should only invest from November to April, and then sell my investments in May?” Well, not exactly. If you were to buy the S&P 500 in May 1950 and only own it during the weak seasons, you would have a gain of 140% as of today. Conversely, if you only owned the S&P 500 during the strong seasons over the same timeframe, you would have seen a return of 9,683%, a significant difference. However, if you were to simply buy and hold the S&P 500 from May 1950 to the present, you would have seen a return of $23,349%!

In short, while the strong season significantly outperforms the weak season, the weak season also produces a positive return on average. With this in mind, you are able to have realistic expectations for your investments whenever a seasonal market lull occurs.

 

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                      22.37%

Dow Jones Industrial Average:    16.47%

Nasdaq-100:                      22.42%

Mid and Small Cap indices

S&P 400 (Mid Cap):                                 21.10%

S&P 600: (Small Cap):                             23.22%

Russell 2000:                                16.36%

International indices

MSCI EAFE Developed Index:         9.64%

MSCI Emerging Markets:               -1.18%

MSCI ACWI ex-US:                                   7.26%

Economic sector indices1105 02

Basic Materials:                              17.86%

Communication Services:            22.95%

Consumer Discretionary:             21.77%

Consumer Staples:                         6.56%

Energy:                                            53.46%

Financials:                                      37.02%

Healthcare:                                     16.67%

Industrials:                                     17.84%

Real Estate:                                    32.71%

Technology:                                    23.28%

Utilities:                                             7.18%

 

 

TESLA: The Future of EV?

To say that Tesla’s stock price is not based on today’s fundamentals is an understatement. In June 2020, Tesla surpassed Toyota as the largest car manufacturer in terms of market cap, which is simply the stock prices multiplied by the number of shares outstanding. Last Friday, Tesla made its most notable move yet, surpassing Facebook as the fifth-largest U.S. company in terms of market cap. For comparison’s sake, Toyota and Facebook had revenue of $248 billion and $86 billion in 2020, respectively, while Tesla had $32 billion in revenue. Also, Toyota sold over 9.5 million vehicles in 2020, while Tesla sold just under 500,000; for perspective, that is a market cap-per-vehicle-sold of roughly $30,000 for Toyota and $2.1 million for Tesla. In short, Tesla’s current stock price is dramatically being influenced by future expectations for the company and its industry as a whole.

Another aspect of Tesla’s to consider is how regulatory credits have affected its profitability. Regulatory credits are credits received from the government to incentivize certain industries- in this case, electric vehicles, or EVs. One way in which Tesla has made money has been by selling these regulatory credits to other car manufacturers who purchase the credits as insurance against future regulatory uncertainties. Prior to the past two quarters, Tesla had not had a profit when disregarding their regulatory credit revenue, meaning that the profits that earned Tesla a spot in the S&P 500 were due to their regulatory credits and not organic growth.

Still, Wall Street and everyday investors alike continue to maintain their best-case scenario valuation for Tesla. However, we believe there may be two causes of reflection for investors: increasing competition amongst the old guard of car manufacturers, and the costs and infrastructure required for EVs to become mainstream.

While Tesla has become the face of EVs and autonomous vehicles, the familiar names in the car manufacturing industry seem poised to throw their hats in the ring. General Motors CEO Mary Barra recently commented that GM can “absolutely” catch Tesla in U.S. EV sales by 2025, in part due to the construction of a $2.4 billion EV facility being built in Tennessee. Also, GM has already announced deals with FedEx and Verizon to provide an electric fleet for both companies, entering the commercial EV business before Tesla has had a chance to enter this space. Additionally, Ford announced earlier this year that they would be releasing an electric F-150 to maintain their market share on pickup trucks as the industry evolves. Speaking of market share, business analytics company IHS Markit projects Tesla’s market share of the EV industry to drop from 79% in 2020 to 56% in 2021, and all the way down to 20% by 2025. In short, Tesla’s virtual EV monopoly seems poised to face plenty of competition in the near future.

Finally, while a transition to EVs as a society would be a step in the right direction, the costs and infrastructure required to make this a reality remains a roadblock for companies like Tesla. Depending on the size of your EV’s battery and the quality of your charging station, the time required to charge an EV today can be anywhere from 30 minutes to 12 hours. If you have a charging station at your home, then the charge requiring a few hours isn’t a big deal. However, this would be a real hassle for anyone who lives in apartments or can’t afford an at-home charging port; if they have to go to a public charging station, what happens if the charge takes a few hours, or if there is a line to use the charger? At this point in time, our infrastructure isn’t prepared to handle that kind of demand. Regarding costs, while charging an EV is notably cheaper than gasoline on average, mounting a personal, at-home charging station can cost anywhere between $1,500 and $4,500. While EV owners today may expect to pay a premium for their vehicle, including the current costs of installation for a personal charging station may price out would-be EV owners.

Despite the increasing competition and infrastructure questions, the market continues to price Tesla for a perfect future. From this valuation, we can assume that the market is viewing Tesla in a different light: instead of being a car manufacturer, perhaps the market is viewing Tesla as a technology company, envisioning a future focused on EV software and EV battery innovation. Whatever the case may be, it will be interesting to see how both the EV industry and Tesla’s valuation evolve over the next few years.

 

 

401karat rabbit

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

 

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October 15, 2021

As a kid, I loved the original Star Trek with William Shatner and Leonard Nimoy. This week, as Captain Kirk rocketed off into space on Blue Origin at the age of 90, I was wondering if this is the Final Frontier? I am wondering if the needs of the few are outweighing the needs of the many. Spock famously said, “logic clearly dictates that the needs of the many outweigh the needs of the few,” but Captain Kirk rebutted with, “or the one.” This back and forth set up a pivotal scene near the end of the film where Spock realized that to save the lives of his shipmates and the ship, he should sacrifice his own life; maybe all of the elites in Washington should sit down and watch the old reruns, or one of the many movies.

Well, it’s silly earnings season again and the stock market just keeps climbing that wall of worry, beginning to rebound after September’s pullback. Goldman Sachs Group just reported blowout earnings– why is it necessary to go through this exercise every 90 days? Speaking of climbing, what about inflation? I just got back from California where gas prices are $4.50 per gallon.  Where I live (in the land of the free), gas prices are up over 57% from a year ago, but California’s gas prices are still 42% higher than ours.

I’m back to traveling these days, and I just went through five airports and two hotels over the last week. I found out that some things have not changed since the pandemic, like Starbucks. Where do you pick up a “How to Order Starbucks Coffee” manual? The barista looked at me like I had three heads when I ordered a large coffee.  First of all, I don’t even like Starbucks Coffee, but as a novice they must see me coming a mile away. I can’t believe how many people I see standing in line waiting for an overpriced cup of burnt joe and an unfriendly atmosphere.  Anyway, see you soon, and as Spock would say, “Live Long and Prosper.”

 

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims this week came in at 293,000, the lowest level since the pandemic began. However, the September jobs report found that employers only filled 194,000 jobs compared to the expected 500,000.

The three major indices all remain just above or below their 50-day moving average, indicating that the market is at a decision point: continue its current pullback, or begin its ascent.

The AAII Investor Sentiment Survey experienced a complete inverse of our last newsletter, with over 38% of investors feeling bullish about the next six months in the market and bearish sentiment falling to just below 32%.

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The Care of Dollar-Cost Averaging

Picture3 1018In this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people gambled on “meme” stocks like GameStop and AMC Entertainment earlier this year, and are now focusing on non-fungible tokens, or NFTs. Those who got lucky experienced a dramatic gain, while others may be too late to the “party.”

Unfortunately for many of these modern investors, there simply isn’t an immediate reward for saving for retirement. While a new TV or car can be enjoyed immediately, it can take decades for you to realize any semblance of a reward for your diligent 401(k) contributions. Maybe you don’t view retirement as a purchase in the same lens that you would view a new TV or car. Yet that is exactly what you do when you participate in a 401(k) plan; you are investing money today to use as retirement income tomorrow. Thanks to dollar-cost averaging, you can strive to retire on your own terms by simply investing a little bit all the time.

Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period.  You may not realize it, but your 401(k) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price.  When shares are most expensive, you will buy fewer shares. In contrast, when the shares have decreased in price, you will buy more of them.

Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down, investors become fearful and sell their investments while they are cheap. On the flip side, when the stock market is soaring, investors become greedy and rush in to purchase investments at or near their peak price. When you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns, like the one we are currently experiencing.

We have included a table that helps to illustrate dollar-cost averaging in action. Note that in this example, even though the stock’s price was lower in December than it was in January, the account still had a positive return for the year due to dollar-cost averaging.

While investors can treat the market like Vegas and gamble away, investing a specific amount of money on a consistent basis into the stocks of quality companies or quality investment options in your 401(k) tends to be a more reliable strategy in the long run. The savings process can take decades, and a small deferral amount today may seem trivial, but dollar-cost averaging mixed with compound interest can help turn decades of small-but-consistent contributions into a significant nest egg at retirement.

 

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                      18.16%

Dow Jones Industrial Average:    14.07%

Nasdaq-100:                     16.79%

Mid and Small Cap indices

S&P 400 (Mid Cap):                                 19.07%

S&P 600: (Small Cap):                             22.46%

Russell 2000:                                15.16%

International indices

MSCI EAFE Developed Index:         7.14%

MSCI Emerging Markets:               -1.90%

MSCI ACWI ex-US:                                   5.31%

Economic sector indicesPicture6

Basic Materials:                            15.60%

Communication Services:            22.38%

Consumer Discretionary:             13.38%

Consumer Staples:                          5.72%

Energy:                                         51.13%

Financials:                                     31.95%

Healthcare:                        12.10%

Industrials:                        14.95%

Real Estate:                       26.62%

Technology:                      18.56%

Utilities:                                          4.86%

 

Supply Chain Woes

No matter what store you enter today, you’re bound to find certain departments looking like a ghost town due to a lack of supply. Whether it be groceries or retail clothing, the U.S. is still in the middle of a supply chain crisis. Add onto this the recent stories about the cargo ships sitting outside the ports of Los Angeles and Long Beach, and it can feel difficult to understand why our supply chain is still experiencing significant strain while our country continues to reopen. Today, we want to discuss what a supply chain bottleneck entails, and how the current one can be addressed.

Like the word implies, a bottleneck in a supply chain refers to a congested point in the supply chain where inefficiencies (such as delays or costs) emerge. Today, a major supply chain bottleneck is the ports, specifically the previously mentioned ports. The ports of Los Angeles and Long Beach account for roughly 40% of all the shipping containers that enter the U.S. In short, these ports are integral to the flow of the nation’s supply chain. However, as you may have heard, many of these cargo ships carrying these containers are unable to unload in the ports, with as many as 64 ships anchored outside the port as of yesterday. What is causing this pile up, and why wasn’t this an issue prior to COVID-19? Well, part of the issue lies with trucking.

When it comes to unloading these cargo ships, trucks are an irreplaceable part of the process. The majority of goods from these cargo ships are shipped to their destinations by trucking, which means that a lack of trucking causes these cargo containers to pile up at the ports while waiting to be trucked. There are a few possible factors contributing to this lack of available truck drivers. First, there was the possibility that the higher federal unemployment benefits may have incentivized drivers to stay home; these benefits expired back in September. Another reason is that the DMV has had delays in getting aspiring drivers licensed for these types of vehicles, on top of the other requirements for licensing like a Department of Transportation physical and drug screening. Also, we are currently witnessing a standoff between workers and employers regarding pay in all industries, and trucking is no different.

The supply chain bottleneck has gotten to the point that the White House felt the need to intervene. The International Longshore and Warehouse Union, the international union representing dock workers, regulates the hours that dock workers were able to work; for example, the ports are typically closed on Sundays. However, the union recently agreed to allow 24/7 operations at the ports of Los Angeles and Long Beach, with Long Beach already a month into this operation.

While the extra hours are a move in the right direction, there are still other issues to address. For starters, Long Beach has found that there is still a notable shortage of available truck drivers, even after expanding to 24 hours. Also, truckers at the Long Beach port have claimed that they face restrictions on picking up containers, whether it be regulatory or due to a lack of loading equipment available. The extra hours will help the ports, but this supply chain has multiple wrinkles that it needs to iron out before we will be able to see the two things that we all want: full shelves in our stores, and cheaper price tags.

 

 

401karat rabbit

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

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Picture1 1September 29, 2021

As the 3rd Quarter of 2021 comes to a close today, we have a ton to unpack this week. First, it’s an end of an era as Dollar Tree now has to raise prices meaning, the items on their shelves are no longer a dollar. If this doesn’t show you how bad inflation is getting, just wait until next year. My fear is that the resignations of the Boston and Dallas Federal Reserve Presidents are deeper than their portfolio holdings, and most likely means that the Federal Reserve is way behind the inflation curve.

Speaking of way behind the curve or way out to sea, how can we have 66 cargo ships waiting off the coast of California to get a slot in a port to offload? You mean to tell me that these ships set sail, and nobody knew they were on their way? Well, the unions don’t work on Sundays, which, as a religious man, I completely understand. If the port had a slot open to unload the cargo, then they probably don’t have enough dock workers or drivers for trucks to move the cargo, regardless. This supply chain issue is just plain ludicrous. I know of a number of logistics companies, even one I worked for during my college years which begins with “U” and ends with “S”- I can promise you that they would be able to find a solution.

Speaking of ludicrous, how can Congress have a proposed $3.5 trillion stimulus package and it cost $0? According to the Wall Street Journal, this package is going to cost over $5 trillion. That’s fuzzy math to me, and I think we should immediately vote all of them out of office- and I mean both sides of the aisle. The gall of these politicians, speaking to the American public as if we are morons. Just like we have for the White House, we need term limits for all politicians. Also, do we really need “Tree Equity” at this time? I’m all for progress, but this package is off the charts.

Today, Congress has passed the bipartisan band-aid to keep the government running through December- that is only two months. What I still don’t understand is how can we have over 2 million continuous jobless claims while having almost 11 million job openings. What scares me most about this irresponsible Congress (and the ones that came before it) is that we are mortgaging our children and grandchildren’s future all in the name of fuzzy math. Things must change. See ya soon

 

Three Market Drivers

Here at Chairvolotti Financial, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between Chairvolotti Financial’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, Chairvolotti Financial tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Initial Jobless Claims this week came in at 362,000, higher than the consensus estimate. This level is the highest le vel since early August and may be related to the pandemic unemployment benefits expiring on Labor Day.

The three major market indices have all crossed below their 50-day moving averages, indicating potential further downside following the September slide.

The AAII Investor Sentiment Survey found over 40% of investors feel bearish about the next six months for the stock market. the 40% level is the highest level since October 1,2020.

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Market indices

Year-to-date returns

 

Large  Cap indices

S&P 500:                                     16.06%

Dow Jones Industrial Average:    12.36%

Nasdaq-100:                                14.47%

Mid and Small Cap indices

S&P 400 (Mid Cap):                     16.27%

S&P 600: (Small Cap):                   21.08%

Russell 2000:                               12.68%

International indices

MSCI EAFE Developed Index:         6.24%

MSCI Emerging Markets:               -3.10%

MSCI ACWI ex-US:                          3.89%

 

Economic sector indicesIndicators

Basic Materials:                           10.74%

Communication Services:            21.29%

Consumer Discretionary:             11.39%

Consumer Staples:                         4.56%

Energy:                                       40.37%

Financials:                                  29.46%

Healthcare:                                 13.54%

Industrials:                                 12.69%

Real Estate:                                 24.00%

Technology:                                15.30%

Utilities:                                       2.57%

 

 

 

GOING PUBLIC: YEAR OF THE IPO

Source: Stock Analysis

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At this point, 2021 may forever be known as the “Year of the IPO.” With 767 IPOs so far this year, 2021 already has 60% more IPOs than the second-highest IPO year since the turn of the century. In light of this IPO craze, eyewear retailer Warby Parker officially went public yesterday on the New York Stock Exchange. However, Warby Parker decided on a less traditional means of going public, declining an initial public offering (IPO) and the headlining craze of special purpose acquisition companies (SPACs) that we discussed in a previous newsletter in favor of a process known as direct listing. While the differences between the three processes may seem unimportant, there are unique benefits to each method of going public.

For an IPO, a company hires someone known as an underwriter to assist not only with the creation of new shares, but also with the setting of the IPO price and distribution of these new shares to investors. Companies and the underwriter present to investors to increase and gauge interest in their company’s stock, which in turn helps the company to set a realistic price for their IPO. In short, while companies pay an underwriter, the underwriter’s assistance in meeting regulatory requirements and drumming up interest in their IPO can be invaluable in certain instances. Notable recent examples of IPOs include AirBnB and DoorDash.

As a reminder, SPACs are publicly-traded firms that have no operations and no assets other than a pile of cash with the sole intent to merge with or acquire another business as a means to take it public. Companies that choose this route tend to do so due to it being a cheaper and faster alternative to an IPO. Investors essentially write blank checks to SPACs, while the SPAC can take up to two years to target and buy another firm. While investors have the chance to get in early on a potentially hot stock, SPACs are also risky. Recent examples of companies that have announced plans to go public through SPACs include 23andMe and SoFi.

Finally, if a company wants to avoid having to pay an underwriter or is worried about diluting their stock by creating new shares like through an IPO, direct listing is a viable alternative. Through a direct listing, existing shares are made available to investors, with current investors and employees having the ability to sell their shares to the public. However, despite its low-cost convenience and avoidance of share dilution, there are drawbacks to a direct listing as well. Without an underwriter, companies receive less promotion behind the scenes to major investors and institutions that could become safe, long-term investors in the stock. Without these stable institutional investors and a true ability to gauge interest behind the scenes, direct listings tend to have greater price volatility, as their initial pricing tends to be less informed than an IPO’s pricing. Other than Warby Parker, other recent direct listings include Coinbase and Spotify.

In short, while a direct listing may be cheaper and better for employees and private investors, there are drawbacks regarding how informed the initial pricing will be, along with potentially elevated price volatility. How long will it take for the market to decide on a true value for Warby Parker’s IPO? How long will we see this IPO craze continue? Only time will tell, but it is telling that many private companies are looking to take advantage of the equity market momentum this year by going public.

 

 

THE DEBT CEILING: WHY IT MATTERS

With the debt ceiling once again being used as a political football by both parties, there have been concerns about whether Congress will be able to raise the debt ceiling prior to the October 18 deadline. What is the debt ceiling, and why does it matter? Today we’ll explore what it actually is, as well as what kind of potential fallout can occur from hitting the debt ceiling.

To put it simply, the debt ceiling is a limit on the amount of federal debt that the government can accrue. The federal debt can be broken down into two categories: debt owned by the public, and debt that the government owes to itself after borrowing from government programs like Social Security and Medicare. The reason the debt ceiling is so important is that, once it is hit, the government quickly runs out of available cash. Without cash-on-hand, the government will default on anything from Social Security payments and salaries for federal civilian employees to veterans’ benefits and salaries for military members. In short, a sizable amount of U.S. citizens will have their livelihood impacted in a significant way if the government is unable to meet these obligations.

Like many things in our government, the debt ceiling only recently became a political decision. Prior to the turn of the century, the debt ceiling was a bipartisan and apolitical decision. In fact, the debt ceiling and its raising have been a natural part of our nation’s governmental procedures for over 100 years. However, both political parties have since used the debt ceiling in recent history as a bargaining chip when they have been out of power. In 2006, Congressional Democrats refused to support a debt ceiling increase as a means of protesting the Bush tax cuts and the Iraq war; in the end, the ceiling was approved. In 2011 and 2013, Congressional Republicans also refused to support a debt ceiling increase, and instead used it as a bargaining chip to force Congressional Democrats to concede on certain spending cuts; once again, the debt ceiling eventually passed.

Today, Congressional Republicans are once again refusing to support a rising of the debt ceiling, in part due to wanting Congressional Democrats’ budget and spending bill to be treated as a separate vote from the debt ceiling vote. While Congress will almost assuredly continue this debate into the October 18 deadline, they have historically found compromise once the true pressure of defaulting on their obligations begins to set in; neither party wants to be responsible for federal civilian employees or military members not receiving their salaries. However, Congress has other methods of avoiding the crisis of default. During previous contentious debt ceiling debates, Congress has passed bills that have acted as a patch for government funding so that the government can continue to meet their obligations.

While the debt ceiling is most likely to be raised in time, the thinktank Committee for a Responsible Federal Budget (CRFB) believes that there is still room for plenty of debate around whether the government should continue to kick the proverbial “debt can” down the road or instead begin addressing our deficit. The CRFB suggests that, in future debt ceiling adjustments, Congress should also use the opportunity to take stock of the nation’s fiscal state and explore ways to reduce spending or increase revenue. While the debt ceiling is integral to how our government functions today and hitting it would have severe consequences, history shows us that Congress will most likely raise the debt ceiling as soon as the pressure of the impending deadline sets in.

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

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Picture1September 15, 2021

Wow, I just got back from my first in person conference in over two years. I attended the National Association of Plan Advisors National Summit in Las Vegas, where I am part of the leadership council. This position is an honor, and I was nominated by my peers where, over the next three years, I will advocate for 401(k) Plan Sponsors and Plan Participants to our legislators in Washington D.C. I will keep you informed of the many changes in the retirement plan industry that are currently being proposed in the U.S. House and Senate. You might not know, but only 50 percent of the businesses in the United States have a 401(k)/403(b) plan. A major part of the retirement crisis in the U.S. is the lack of access for potential participants. Once you break down the demographics, it’s much more difficult for people of color to have access. You can expect that Congress will make a major push for access, and they already have a proposal on the table that potentially could add 62 million participants and $7 trillion in assets to the retirement system over the next 10 years.

On a lighter note, my time in Las Vegas opened my eyes to what can only be described as a football
coma. While living my entire life on the East Coast, I wondered what it would be like to watch foot-
ball on a weekend on the West Coast. The five states that make up the Pacific Time Zone contain 55
million people, or about 14 percent of the U.S. population. This small group starts watching college
football as early as 8am on Saturday, but if they want to watch ESPN’s College Game Day, they have
to be up by 6am. On Sunday, the NFL starts at 10am and ends after 9pm. Even better is Monday
Night Football, which starts at 5:15pm. How does anyone even tailgate? My hotel was across the
street from the new Allegiant Stadium, and it’s the first time the Las Vegas Raiders have played in
their new stadium in front of fans. Also, if you didn’t know, you can bet on almost anything in Vegas
related to football, such has how long it will take to sing The National Anthem. With this crazy
schedule, how does anyone get anything done on a weekend? Maybe this why the September stock
market tends to be weak and how I can place the blame on those on the Left Coast. See ya soon.

Three Market Drivers

Here at Chairvolotti Financial, we focus on three market drivers that lead to notable movements
in the stock market: market economic fundamentals, technical environment, and investor senti-
ment.

Our fundamental indicator follows 19 points economic data points that track the underlying
health of the US economy. From unemployment to home building, changes in these economic
data points tend to confirm recession or recovery after the technical and sentiment indicators
have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the ma-
jor asset classes, sectors, and sizes and styles against each other to discover emerging trends in
the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure
chart to illustrate momentum. The chart at the bottom of this page shows the current leadership
in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy
and the stock market. Between Chairvolotti Financial’s own polling and professional surveys like
the American Association of Individual Investors (AAII) Investment Sentiment Survey and
Citigroup’s Panic/Euphoria Model, Chairvolotti Financial tracks the two most dangerous emotions
for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The Logistics Managers’ Index, or LMI, remains at an elevated level of 73.8 out of 100. Inventory
costs, warehousing costs, and transportation costs all remain at or near the index’s all-time high.

The major market indices have shown increasingly narrow breadth, with nearly half of the stocks
in the S&P 500 at least 10% off their 52-week high, as well as 80% of stocks in the Russell 2000.

The AAII Investor Sentiment Survey found nearly 73% of investors feel the stock market will be
bullish or neutral in the next six months, an elevated level for this contrarian indicator.

A History of Market Corrections

With the market entering the historically weak and uncertain months of September and October,
respectively, we think it is worth revisiting the history of market corrections. In the same way a
car’s engine can overheat, the stock market can overheat after periods of sustained and, more
often than not, rapid growth. At the peak of these growth periods, stocks prices may have even
increased faster than their actual underlying value. In these instances, the stock market typically
enters a market correction. To put it simply, a market correction is a temporary resetting of mar-
ket prices. Market corrections typically involve the market falling at least 10%, but it can even fall
as much as 20%. While no investor wants to see their account down 10%, market corrections
help to ensure our stock market is at a healthy level and valuation.

While certain asset classes and sectors of the economy can go through isolated corrections, a
market correction tends to affect all areas of the market at once. Once the market has seen a
broad pullback amongst the sectors of the economy, stocks will once again continue their growth
at their newfound prices.

Unfortunately, there is no crystal ball for predicting market corrections. However, we can look at
history to create realistic expectations. In the table above, you will find the frequency of pull-
backs in the S&P 500. You will notice that pullbacks in the market are frequent throughout histo-
ry. In fact, the S&P 500 historically has a 10% or worse correction every 8 months on average! For
perspective, the market has not had a correction of at least 10% since the end the crash last year,
meaning that, if history is to be our guide, we have been overdue for a correction.

Finally, the burning question on everyone’s mind: what should I do? Due to the way 401(k) is
structured, participants are uniquely capable of taking advantage of these draw downs. 401(k)
contributions are made through a process called dollar-cost averaging, a phenomenon we cov-
ered last week. To recap, dollar-cost averaging simply means investing a consistent dollar
amount on a scheduled basis. Dollar-cost averaging helps investors to avoid the two dangerous
emotions of investing: greed and fear. Through dollar-cost averaging, 401(k) participants can
consistently buy shares of their investments at the new, cheaper prices set during a correction.
Once these shares increase in value during the correction’s recovery, you will own even more of
these shares, taking advantage of the eventual rebound.

While it is much easier said than done to stay the course during a correction, it is important to
remember that we are long-term investors for retirement. Our best advice is to remain calm,
continue to contribute, and stay informed. While we cannot know for certain what size this pull-
back will be, we know that history shows us that corrections are a natural, healthy, and relatively
frequent occurrence in our markets.

Market Indices Year-to-Date

LARGE CAP INDICES
S&P 500: 18.29%
Dow Jones Industrial Average: 12.97%
Nasdaq-100: 19.36%

MID AND SMALL CAP INDICES
S&P 400 (Mid Cap): 15.89%
S&P 600: (Small Cap): 17.90%
Russell 2000: 11.91%

INTERNATIONAL INDICES
MSCI EAFE Developed Index: 11.30%
MSCI Emerging Markets: 0.38%
MSCI ACWI ex-US: 8.30%

ECONOMIC SECTOR INDICES
Basic Materials: 13.99%
Communication Services: 27.05%
Consumer Discretionary: 12.02%
Consumer Staples: 6.50%
Energy: 26.58%
Financials: 26.71%
Healthcare: 16.16%
Industrials: 13.58%
Real Estate: 28.53%
Technology: 19.74%
Utilities: 7.76%

Breadth: A Market Health Checkup

As a follow-up to the earlier article in this newsletter addressing market corrections, we also want
to address a related financial term you may hear: breadth. While phrases such as “market correc-
tions” typically are referring to a major market index like the S&P 500 or the Dow Jones Industrial
Average, breadth is more concerned with what is actually happening under the hood of these
indices.

When you hear the term “market breadth,” the best way to think about it is to view it as a meas-
ure of the number of stocks actively participating in the index’s performance. For example, when
market breadth is high, this means that many stocks are contributing to the index’s performance;
we would consider this a healthy market environment. On the flip side, a market that is rising but
has fewer and fewer stocks participating in the index’s performance is considered a narrow (or top
heavy) market. When an index is narrow and only a handful of stocks are keeping the index afloat,
this is considered an unhealthy market that has the potential to be vulnerable to additional draw-
downs.

Now, the reason that we bring up market breadth is that we are currently experiencing a narrow
market breadth environment. From a “market correction” standpoint, we are far from the typical
correction benchmark of at least a 10% decline. However, our market’s current breadth tells a
different story. As of yesterday’s close, the S&P 500 currently sits a little over 2% below its 52-
week high. However, roughly 46% of stocks in the S&P 500 are already at least 10% below their 52-
week highs, meaning that roughly half of the stocks inside the index are already experiencing cor-
rections.

From a small cap perspective, the breadth weakness is even more apparent. As of yesterday’s
close, the Russell 2000 index, an index of small cap U.S. stocks, was roughly 6% off its 52-week
high. In contrast, over 80% of the stocks in the Russell 2000 are already in the middle of a correc-
tion, indicating increased weakness in smaller stocks.

Historically, larger blue-chip companies have a tendency to participate in broad market pullbacks
later than smaller companies; one could assume it is because they are viewed as a “safe haven”
compared to the riskier, small cap companies. However, this would not be the first time that we
have seen pockets of the market experience a correction while the broad market indices do not.
For example, earlier this year the Nasdaq-100 experienced a correction in March, with growth
stocks and technology stocks in particular being hit the hardest. The S&P 500, however, was only
down about 4% during the same timeframe.

It’s too early to know whether this underlying weakness in market breadth is the precursor to the
“correction” that has been overdue, and if the mega cap names will eventually join the pullback.
Likewise, as we mentioned in our previous article, corrections are a healthy and vital aspect to
investing in the stock market. While it may be impossible to predict corrections, being aware of the
market’s current breadth is a convenient way to remain informed about the market’s underlying
health.

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July 31, 2021

Here we go again: wash, rinse, repeat. I really thought we would have been at heard immunity already, as it looked like the economy was wide open. Hopefully the scientists are correct, and we will be on the other side of the Delta Variant in the next couple of weeks.

Now that we are in the middle of the Summer Tokyo Olympics, apparently this year will be remembered for two things: the least watched Olympics in years, and the “twisties.” The cute-sounding term, well-known in the gymnastics community, describes a frightening predicament. When gymnasts have the “twisties,” they lose control of their bodies as they spin through the air. In golf, this would be known as the “yips.” The only difference is with the yips, you don’t have the chance of severely hurting yourself. Speaking of the Olympics, I watched the US Women’s team play the Netherlands this morning, and Soccer has a really strange rule called “offsides.” You can’t breakaway from your opponent and try to score if you have to wait or them to catch up! There would be way more scoring and exciting games if they just got rid of that silly rule.

Today, the Federal Reserve’s preferred inflation measure accelerated in June by the largest percentage on an annual basis since July of 1991. Core personal consumption expenditures increased by 3.5%, excluding food and energy. You don’t need me to tell you that, though; we have all seen the prices at the grocery store and gas pump lately. Let’s just hope the Fed doesn’t have the “twisties.”

I want to take the rest of this edition to wish my mom a very happy 92nd birthday. I’ve been so blessed to have a mother who taught me so many things in life, and one lesson in particular is that its Better to Stand for Something than to be Against Something. She was born into the Depression in 1929, and she has shared so much about how great this country is and how many things we have overcome. I hope our younger generations have the good fortunes that we have had from the greatness of our past generations. As mom always likes to say, if we don’t remember history, we are doomed to repeat it.

Mom, I love you so much, and I hope you have a great time during your special day.

Love, Ed.

 

Three Market Drivers

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/ Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The M2 Money Supply increased by its lowest amount since COVID began this past month, with June posting an increase of only $20 billion. Increasing M2 Money Supply tends to be a positive for capital markets, so it is worth keeping an eye on this growth rate moving forward.

On a technical basis, many of the short-term measures of market overbought levels have returned to normalized levels, although most of this return to normal is simply due to lesser participation by smaller stocks in the market as of late.

Even with a strong year in the broad indices, Americans still have nearly double the historic average of assets in risk-free money market funds, indicating that we have dry powder available and have yet to reach a level of euphoria in the market.

 

The Covid Hangover

With Amazon having its worst day in over a year today, we believe it’s time to face a phenomena other companies are experiencing during this earnings season: the COVID hangover. To better explain the COVID hangover, we first need to provide a quick reminder of how earnings season works.

As we mentioned in our previous newsletter, earnings season has two main components that analysts and investors observe: revenue (sales growth) and earnings (EPS, or earnings per share). However, there is another element that investors look at: forward guidance. In short, forward guidance is an estimate that companies give for what analysts and investors can expect in the near future, whether it be the next quarter or the next year. As a general rule of thumb, when you see a company beat analysts’ expectations for revenue and earnings and its stock price still significantly drops the next trading day, pessimistic forward guidance is a likely culprit.

This time last year, companies that benefitted the most from the COVID lockdowns were having the opposite of a COVID hangover. Time and time again, these companies were blowing analysts’ estimates out of the water in spite of the lockdown headwinds the world was facing. Also, these companies provided forward guidance that was, if not optimistic, much less pessimistic than most analysts and investors had anticipated. As such, many of these companies enjoyed generational returns based on these earnings beats and positive guidance.

A year later, many of these companies that benefited dramatically from the lockdowns are now beginning to feel the hangover of these lockdown-inflated numbers. For example, Pinterest reported that its monthly active users, or MAU, had dropped 5% in the second quarter of 2021 and that this drop-off has continued into July. As a result, Pinterest stock was down nearly 20% at one point today, with investors and analysts viewing declining MAU as a red flag. However, this decline in users requires context. Consider that, as the world continues to reopen and make vaccine progress, there are less people staying at home and using social media all day and night. Now, people are beginning to go out at night, shop in traditional retail stores, and other activities that keep them from being on their phone screen all day. In short, it shouldn’t be a surprise to analysts or investors that Pinterest can’t maintain that level of MAU momentum with lockdowns ending.

That last point brings me back to Amazon, who has been hammered today as well. Amazon beat analysts’ estimates for earnings but missed on revenue estimates by 1.7%. An earnings beat and a slight miss on revenue aren’t what caused Amazon to fall so dramatically today; the issue is its forward guidance. Amazon expects revenue in the range of $106 billion to $112 billion in the third quarter, well below analysts’ expectations of $118 billion. It seems nonsensical to penalize these lockdown beneficiaries for being unable to maintain unsustainable, astronomical growth brought on by the COVID lockdowns, but then again, we are living in a nonsensical time.

 

ROBINHOOD IPO: A BUST?

On Thursday morning, the infamous Robinhood Markets Inc. went public through an initial public offering, or IPO. As a way to promote its image as being a company of “the people”, Robinhood’s IPO had the greatest percentage of shares made available for retail investors compared to its institutional investors since Facebook’s IPO in 2012. Unfortunately for them, Robinhood had the worst IPO debut on record for a company that had at least raised as much cash as Robinhood had, ending the day -8.4% off its debut price of $38. While Robinhood is best known as being the fuel behind the meme stock revolution we saw begin last year, we wanted to breakdown its business model and what investors can expect moving forward.

Known for its commission-free trading, there has always been the question of how Robinhood actually makes money if it doesn’t receive trade commissions. The answer lies behind something known as payment for order flows, or PFOF. When a Robinhood user makes a trade, Robinhood submits this order to groups known as market makers to execute these trades. The largest market makers in the industry are familiar names to the average investor: Morgan Stanley, Deutsche, and more, with Citadel Securities being the largest customer for Robinhood. To put it in simple terms, market makers compete amongst each other by offering rebates to Robinhood and, in turn, the best prices to Robinhood’s users. In Q4 2020, Robinhood earned roughly $0.0023 per share traded on its system, better visualizing how PFOF is a numbers game regarding making money.

As a means to avoid a conflict of interest, Robinhood has a fixed percentage that they receive from any market maker as a rebate, meaning that there is no financial incentive for Robinhood to choose a specific market maker. However, there is another potential conflict of interest that Robin[1]hood has been facing lately: options. Robinhood and other retail brokers make a notably larger amount on rebates for option trades. As such, there is a greater incentive to guide users towards purchasing options, even if they aren’t sophisticated enough of an investor to deal with options.

Now that we have a greater understanding of Robinhood’s business model, the real question is: what will happen with the IPO moving forward? If history is to be our guide, the IPO crystal ball doesn’t seem very optimistic. A study done by UBS analytics on data from Jay Ritter of the University of Florida found that, of the 7,713 IPOs that occurred between 1975 and 2011, over 60% of them had negative returns five years after their IPO. In fact, only a little more than 19% of these companies had five-year returns of greater than 100%, indicating a significant lag in an IPO’s first few years being public.

Between the vitriol Robinhood has faced after it infamously froze trading during the GameStop bubble in January and the lagging that IPOs have historically experienced during their first five years, Robinhood stock may have some headwinds to face moving forward.

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

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August 13,2021

Today is Friday the 13th or Triskaidekaphobia Day. So, why is the number 13 so unlucky? Triskaidekaphobia is the extreme superstition of the number 13. The history states that one of the culprits was from 1907, when businessman and author Thomas Lawson published a novel entitled Friday, the Thirteenth about a rogue broker who chose that date to destroy the stock market. Somehow, Wall Street or Washington D.C. is behind all of these shenanigans.

Speaking of Wall Street, why is BlackRock buying the new inventory of single-family homes? The median price of an American house has increased by 28% over the last two years, as pandemic driven demand and long-term demographic changes sent buyers into crazed bidding wars. The Wall Street Journal reported in April that an investment firm won a bidding war to purchase an entire neighborhood’s worth of single-family homes in Texas. Now, analysts have reassured us that big investors like BlackRock remain insignificant players in the housing market. Doesn’t BlackRock have enough money? Yet now they want to spoil the American Dream for first-time home buyers. Something smells fishy here. Stay tuned for how this turns out– all I know is that it won’t end well.

Summer is coming to an end, as kids went back to school this past week. This makes me both happy and sad at the same time. The happy part is that football season is here, and the nasty thunder[1]storms with thankfully stop. At the very least, MooShoo won’t have to hide in the closet until New Year’s Eve now. The sad part for us is that August and September have been historically two of the weakest months of the year for the stock market. We all know that October is known for large market drawdowns, but historically we have four or more 5% market drawdowns annually. Folks, we are long overdue for a pullback, so don’t be surprised if we see one in the next 60 days.

Finally, next week would have been my dad’s 101st birthday. I lost my father on Christmas Day when I was 11 years old. Just like Field of Dreams, what I wouldn’t give to spend just one more hour with him! So, for anyone that’s lost a parent, just remember how precious life is and, as I like to say, “the days are long, but the years are short.” I sure hope my dad would be proud of me, and at least I can say I haven’t lost any laptops in my life. Be safe and see you in a couple of weeks.

 

 

Three Market Drivers

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed. Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I. Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/ Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

July’s inflation numbers came in at 5.37%, almost identical to last month’s level of 5.39%.

On a technical basis, the market remains top-heavy, with the S&P 500 ranking third out of 135 asset classes on a relative strength basis. However, we have begun to see strength return to the growth areas of the market following their double dip pullback earlier this year.

The University of Michigan’s Consumer Sentiment Survey saw a preliminary August reading of 70.2, a sharp decline from the July reading of 81.2. This month-over-month decline was the sixth[1]largest in the survey’s history. Most respondents to the survey cited fears of the Delta variant delaying the pandemic’s ending as the reason for their decline in sentiment.

Stagflation Fears

Between July reporting the fourth-highest inflation reading since the turn of the century and concern about the Delta variant slowing down our economic reopening, there is newfound fear of stagflation. Stagflation is known as an economic death knell in which inflation rises sharply while economic growth lags or declines. This term is most commonly associated with the 1970s, in which skyrocketing energy prices caused runaway inflation while the country’s economic growth began to slow. While talking heads in the financial media have begun to reiterate these concerns, we wanted to provide some context.

What makes stagnation so dangerous is that, while people are unemployed and already scraping by, prices continue to rise, further weakening their purchasing power as a consumer. One popular way to gauge stagflation is to use a measure known as the Misery Index. In short, the Misery Index simply combines the current inflation rate with the current unemployment rate; if this number is extremely elevated, it implies stagflation. Since 1970, the Misery Index has had an average level of roughly 10%. The stagflation of the 1970s culminated in a peak in the Misery Index of 22% in June of 1980, and the index didn’t return to the historic average of 10% until the beginning of 1985.

Now, how does today compare to the 1970s peak in the Misery Index? So far, the Misery Index during COVID-19 peaked in April 2020 at 15.1%. However, it is worth noting that 14.8% of that number was strictly due to the unemployment rate, as April and May were when inflation cratered. Today, however, the Misery Index finds itself at 10.8%, higher than the 6.9% we experienced in November 2020 but lower than the peak in April 2020. In fact, as we mentioned above, the Misery Index today is only slightly above the historic average of 10%.

The main difference between the 1970s and today is that many of the inflationary pressures on the economy today are assumed to be transitory, or temporary, in nature. Supply chain bottlenecks and shortages of materials have been arguably the greatest catalyst for this transitory pressure, ranging from lumber to semiconductor chips. When these materials and products experience a shortage, prices are increased and passed on to the consumer, causing inflation. Once these shortages are solved, prices are expected to return to a more normalized level.

While we have yet to see the light at the end of the inflation tunnel, continued improvement to these supply chains in the coming months should help to alleviate the majority of the inflationary pressures on the economy. Also, expiring unemployment benefits coupled with companies increasing salaries for open positions should help to chip away at the unemployment rate. With both halves of the Misery Index hopefully beginning to improve in the coming months, it seems that we are much closer to “normal” than to anything resembling the stagflation of the 1970.

The Weak Season

To this point, 2021 has had a strong (if not wild) year in the market so far. Even with the sector oscillation we have seen this year, the S&P 500 has put together an extremely strong year so far, with the S&P 500 already having been up over 10% by the middle of the year. However, these next two months may fare differently.

Historically speaking, August and September have been two of the worst months for the stock market, with September being the worst performer and August being the third-worst month. Since 1950, August has averaged a return of 0.03%, while September has averaged a return of -0.48%. As an example in recent history, remember that the 2018 correction that saw the S&P 500 decline nearly 20% began in September, as well as last year’s pullback of over 9%. While these months historically have shown weakness, this seasonal weakness is even more apparent following an election.

Following a presidential election, August and September show greater weakness, with August averaging a return of -1.43%, while September averages a return of -0.46%. Also, the consistent timeframe of this weakness may be intriguing for investors. Post-election years historically see the market peak on August 3 and bottom on September 24. Despite this, post-election years tend to see the market rally in the fourth quarter following this weakness.

Historically speaking, the S&P 500 has had a 10% or greater correction every eight months on average; we have not experienced a decline of that size in the market since the crash that occurred early last year. This top-heavy market coupled with newfound consumer fears towards the Delta variant and elevated inflation levels may be the catalyst for this overdue decline. However, as we have seen since March 2020, this market has been extremely resilient, particularly towards healthy pullbacks. Only time will tell if this resilience is strong enough to power through this seasonally weak period.

 

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

 

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August 31,2021

Here in Florida we like to refer to our 3 seasons as Summer, Summer and More Summer. Well, as Summer comes to a close, we have a ton to be thankful for. Number one, over the last few days COVID deaths and hospitalizations have declined– hopefully this trend continues. Also, this upcoming weekend is Labor Day. This brings to mind how, this year more than ever, we need to honor our workers, especially our first responders and our military. Labor Day also brings the start of football season, particularly college football. Here in Florida ,that also brings us to the start of our last season of the year, More Summer. This year, we will finally see people back in the stands. However, change may be in the future with the NCAA changing their rules regarding athlete compensation. You may have seen the term NIL, which stands for “name, image, and likeness.”  Rule changes will allow college athletes at every level to monetize their success with the use of their name, image and likeness. While changes are needed, I’m cautious how this will impact the locker room and the team when one player might be paid a million dollars a year while the rest of the team makes nothing! And to boot, some players have mentioned wanting to be paid in cryptocurrency. Stay tuned to see how this works out and more about new risks around the latter in the newsletter.

Honoring our first responders and our military hits home even more this year, as we have just vacated Afghanistan after a 20-year war. On top of this, we are now approaching the 20th anniversary of 9/11. Most of us will never forget that day, and it remains probably the most significant memory of our nation’s history in my personal life. We all have friends or family that were personally involved, and it was profound how we came together as one united country, with is something I think we need today more than ever before. As you are enjoying your Labor Day weekend, take time to reflect on the meaning of Labor Day and specifically the lives lost and the heroism of our first responders, military and our veterans that have sacrificed so much for us for our country’s freedom. There is no way that we can ever pay them back, and we all should know by now that freedom isn’t free. So, take the time to thank first responders and military members for their service. Have a safe and free Labor Day. God bless you, and God Bless America.

Three Market Indicators

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Second quarter GDP came in at 6.6%, higher than analysts’ expectations.

The S&P 500 remains third out of 135 asset classes in our relative strength rankings. However, niche areas of the market like large and mid caps and growth stocks have shown some improvements in the near-term.

The AAII Investor Sentiment Survey reported over 39% of investors as feeling bullish, a level higher than the historic average and the highest level since the beginning of July.

 

 

Active vs Passive: When to Pay

Before we get into the breakdown, first we need to understand the difference between active and passive funds. An active fund refers to a fund in which there is a manager that chooses the underlying investments inside of it; in short, the manager is handpicking the holdings of the fund based off their own analysis and research. In contrast, a passive fund is an investment that is meant to directly match an index, such as the S&P 500 or the Dow Jones Industrial Average. Passive indices utilize a momentum strategy in their own way, as companies fall out of the index and are replaced by new up-and-coming companies; a recent example of this is when Tesla was added to the S&P 500 at the end of 2020.“You can’t beat the index.” Nowadays, you’ll be lucky to find someone who won’t simply recommend a low-cost index fund as their preferred investment choice, and who can blame them? With investors increasingly more conscientious of fees and managers struggling the keep pace with the S&P 500 as of late, the choice between active and passive management seems simple and decisive. However, we’d like to break down if there are certain areas of the market that require active management, and if so, which areas in particular.

Now that we understand the difference between active and passive management, it’s time to address the elephant in the room: is there ever a justified reason to have active management? At the top of this page, you will see a comparison of two asset classes to their respective indices: small cap growth and large cap value. In the tables, you will notice that the top small cap growth managers regularly and significantly outperform both of their indices even with fees, while the top large cap value managers simply keep pace with their indices. Part of the reason that small cap growth managers outperform is that managers can more easily focus on the top performers, as not every small cap company breaks out and becomes a mid cap or large cap company. In contrast, large value companies are staples of our economy, which makes differentiation more difficult for a manager. In short, specific asset classes historically benefit greatly from active management, notably outpacing their respective indices even with the increased costs.

While we have focused on equities, bonds also benefit from active management. For equities, a cap-weighted index like the S&P 500 rewards larger companies; the larger a company’s market cap, the larger the weight in the index. On the flip side, a bond index gives the companies issuing the most debt the largest weights in the index. With this overweight to the companies with the largest debt leverage, bond indices tend to increase their risk exposure over time. However, an active bond manager can pick and choose the quality of the bonds that they wish to include in their fund in an attempt to reduce any significant exposure risks.

While there are absolutely instances in which it is better to own a low-cost index fund, there are certain asset classes in the market that benefit greatly from active management, including small cap growth and fixed income. Now that we are aware of these instances in which active management more than pays for itself with outperformance or risk mitigation, remember this the next time you base your investment decisions solely off of expense ratios.

 

 

Crypto: At a Regulatory Crossroads

Chances are you’ve had a better week than Coinbase. Yesterday, Coinbase’s security system sent a message to over 125,000 users that their two-factor authentication had changed, only a week after CNBC ran a piece detailing Coinbase’s ineffective responses to users’ accounts being hacked. One couple mentioned in the article shared how they had their Coinbase account of nearly $170,000 in cryptocurrency drained overnight by a hacker. Another user shared how, after having his account hacked, Coinbase replied to his concerned email by saying that, “… Coinbase is unable to reimburse you for your alleged losses.” While crypto enthusiasts tout the unregulated aspects of crypto as a positive, these examples highlight the flip side of that coin: the lack of user protection.
Major broker dealers and other financial institutions carry a federally mandated form of insurance known as SIPC. By being a member of SIPC, these institutions ensure that their customers have their securities and cash insured for up to $500,000. If that previously mentioned couple had been invested in traditional securities and held those funds on an insured platform, they would have been reimbursed for the full $170,000. In contrast, cryptocurrency’s unregulated market means that it is truly a free-for-all regarding account hacking. In fact, the problem has been so pronounced that over 11,000 complaints have been filed by Coinbase users with the Federal Trade Commission and Consumer Financial Protection Bureau.
This lack of protection isn’t limited to Coinbase, however. Robinhood is an SIPC member for its normal investment accounts, no different than other major investment platforms. However, cryptocurrency investments held at Robinhood have no protection, as Robinhood Crypto is not protected by SIPC. In short, this is how all cryptocurrency platforms operate today, as there is no regulation regarding user protection. While Robinhood and Coinbase are publicly traded companies, they are not immune to this inherent risk in having a crypto account. With the hacking becoming more commonplace as crypto continues to become more mainstream, more and more crypto investors are being faced with the harsh reality of investing in a wholly unregulated market. The ironic aspect of this situation is that the poster child of cryptocurrency is Gen Z, a group that generally is skeptical of Wall Street and losing money in the stock market after seeing their parents experience 2008. However, we don’t believe that their trust in crypto and distrust in traditional investments is hypocritical; rather, it is a lack of understanding about the inherent risks of investing in an unregulated market like cryptocurrency.
Now, the big question: what does this risk mean for the future of cryptocurrency? We believe there are two paths forward, with one significantly more likely. The first path is that the unregulated market cannibalizes itself through hacking and shady dealings, becoming what famous investor John Paulson refers to as a “limited supply of nothing.” On the flip side, the most likely scenario is that regulatory oversight is established; while this would defeat one of the initial purposes of cryptocurrency, it would provide some semblance of a safety net for crypto investors. In fact, the new SEC chairman, Gary Gensler, taught a course on cryptocurrency at MIT before accepting this position, meaning that the SEC has new insight into this area of the market. In short, if the hacking of crypto accounts continues to accelerate and users continue to file complaints, regulatory provisions may be enacted sooner than later.

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

Investors making a deal

What is a SPAC?

As one of the hot investment ideas in the current market, you may have heard the acronym SPAC lately. A SPAC, or Special Purpose Acquisition Company, is a back door, formally out of favor investment approach to buying new Initial Public Offerings or IPOs. Basically, SPACs are a publicly traded firm that has no operations, no assets other than a pile of cash, and just one stated business plan— to eventually buy another company.

SPACs are created with the sole intent to merge with or acquire another business as a means to take it public. Companies may pursue this route since it’s a cheaper and faster way to an IPO. Investors essentially write blank checks to SPACs, while the SPAC can take up to two years to target and buy another firm. In simple terms, SPACs offer individual investors the chance to get in on the ground floor of a potential hot stock, but they are also risky.

A lot of individuals would love to get in early on an IPO when a company first launches on the stock exchange. However, institutional investors and pension funds typically get to have the first shot at these stocks before they become available to the retail investor.

Group of investors

SPAC’s Are Becoming More Popular

If a SPAC sounds like a situation where abuse can happen, it’s probably because it once was. A lot of fraud surrounded these blank check companies in the 1980s. However, the SEC has tightened regulations and the procedures for these ventures. SPACs now have to register with the SEC, even if they have assets under $1 Million. Basically, investors have to trust that the management of the SPAC will fulfill their intentions. Also, SPACs tend to start cheap, starting at $10 per share. Today, there are hundreds of SPACs available. Now, individual investors have access to SPACs in many of the hot areas of the current market, including technology, healthcare, and more.

An example of a recent SPAC is 23andMe, a consumer genetics company that is going public via a merger with Richard Branson’s SPAC VG acquisition. This deal is said to be valued at over $3.5 billion. However, as we said before, SPACs are a blank check that relies on management to fulfill their promise to the investor. While it can be a quick way to gain access to up-and-coming companies, investors have to keep these risks in mind. In short, buyers beware.
While most retirement investment strategies exclusively include mutual funds, ETFs have become more common in recent years. Each one of these funds will have pros and cons for investing. They all come with their share of risk as well. If you ever have questions about investing for your retirement, you can always consult a financial advisor to see how you can maximize your returns.

If you don’t know where to start with investing or if you want to kick your savings into high gear, a financial advisor can guide you onto the right path to retirement. At 401karat, we combine expertise with technology to help you make data-driven decisions for your 401(k) to help you maximize your returns. For just $50, you can get started and start saving more, speak to a 401karat advisor today!

 

two men looking at laptop computer together

In this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people recently gambled on “meme” stocks like GameStop and AMC Entertainment. Those who got lucky experienced a dramatic gain, while others have experienced a significant decline in these stocks as the hype has begun to fade.

Investing Money Today to Use as Retirement Income Tomorrow

Unfortunately for many of these modern investors, there simply isn’t an immediate reward for saving for retirement. While a new TV or car can be enjoyed immediately, it can take decades for you to realize any semblance of a reward for your diligent 401(k) or 403(b) contributions. Retirement financial planning takes a lot of patience but is all worth it in the end.
“ Maybe you don’t view retirement as a purchase in the same lens that you would view a new TV or car. Yet that is exactly what you do when you participate in a 401(k) or 403(b) plan; you are investing money today to use as retirement income tomorrow. Thanks to dollar-cost averaging, you can strive to retire on your own terms by simply investing a little bit all the time. ”

The Dollar-Cost Averaging Strategy

Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period. You may not realize it, but your 401(k) or 403(b) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) or 403(b) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price. When shares are most expensive, you will buy fewer shares. In contrast, when the shares have decreased in price, you will buy more of them.

Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down, investors become fearful and sell their investments while they are cheap. On the flip side, when the stock market is soaring, investors become greedy and rush in to purchase investments at or near their peak price. When you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns.

Dollar-Cost Averaging StrategyTable

We have included a table that helps to illustrate dollar-cost averaging in action. Note that in this example, even though the stock’s price was lower in December than it was in January, the account still had a positive return for the year due to dollar-cost averaging.

While investors can treat the market like Vegas and gamble away, investing a specific amount of money on a consistent basis into the stocks of quality companies or quality investment options in your 401(k) or 403(b) tends to be a more reliable strategy in the long run. The savings process can take decades, and a small deferral amount today may seem trivial, but dollar-cost averaging mixed with compound interest can help turn decades of small but consistent contributions into a significant nest egg at retirement.

Expert 401(k) and 403(b) Advisors

Today, the burden of preparing for retirement has been placed on the individual, making saving for it more important than ever. But between balancing all other aspects of their lives, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, our expert 401(k) and 403(b) advisors do the heavy lifting for you, providing quarterly allocation recommendations based on your employer’s 401(k) options. If you’re interested in learning more, schedule a consultation with 401karat today.