Random Thoughts on Trends!

Hope all of you had great Thanksgiving weekend. Visiting one of the Bay Area Mall on Black Friday gave a sense that economy is doing well since malls were packed with people doing bargain hunting. We are almost at end of 2018 and given recent churn in markets, I keep on going back to the year which was very much like 2018. The year of 1998! I could almost cut-n-paste my previous blog on this topic 1998, 2008 and now 2018: History Repeats!
Let's look at current state of various markets:

• "Crude" reality is setting in oil markets with supply increasing due to waivers granted by US for Iran oil imports, OPEC pumping like there is no tomorrow and US shale producers going with mantra of "drill baby drill". At same time, demand is slowing down due to Chinese economy slowing and US GDP growth coming down from 3+ to natural rate of 2%. All of this resulting in crude crashing from $75 to $50 and more pain to come.
• Cryptos are crashing - This was expected since various governments closed the doors of channeling unaccounted money thru cryptos and bubble bursting. 
• Interest rates going up - US Fed is the king of interest rates. Right now it is on path to increase the rates by few times. But given market conditions, it would be wise for Powell to take a pause after increasing it one last time in December
• Trade squabbles - Everyone is looking for President Trump and Xi's meeting on Nov 30 on trade between two biggest economies. While there have been some positive comments made from both sides leading to this summit, markets are expecting some concrete steps to avoid tariffs going to 25% in Jan and long-term resolution to bring the trade to normalcy. This would be biggest market mover in either direction. Given that finally US markets have cratered, President Trump would be more amenable to some kind of deal.
• Landing of high-flying tech stocks - FAANG have collectively lost $1.1 Trillion in market cap. That's bound to have some impact on Bay Area and Seattle housing prices (which may be good in long term to make these areas little bit more affordable). However we had seen this movie before in 2015, 2011, 2008 and of course in 1998 during dot-com era. Stock valuations of tech companies are about growth driven by new technology trends. Mobile, cloud and social were major trends which powered last decade, There are many new trends emerging - AI, ML, Auto-tech, 5G, AR/VR, healthcare tech which would power next decade. However the pace of change will depend on how quickly these trends become mainstream. Cell phone was novelty in 1990s. It took nearly a decade for it to become necessity after smartphone changed the game. Same is going to be repeated in each of these trends, Tesla is novelty right now. Decade or two from now, autonomous cars would be like smartphones to mobile phones!

So if you are in for long-haul, stay put in markets and do average cost investing (invest some amount every month no matter how markets are doing). And stop worrying about daily ups and downs of markets and enjoy your holidays!

/Shyam

Divided Congress = United America!

As predicted, US elections produced split congress with Democrats taking control of House of Representatives and Republicans keeping Senate (with increased margin). Pundits will analyze these results and comment on how nation is divided. I beg to defer! In my opinion,
Divided congress = United America!
People want their politicians (I refrain calling them leaders yet) to work together and implement policies and pass bills which both parties agree on. If divided congress produce complete gridlock, that's ok since at least nothing will happen. It also means no bad policies will be implemented. Time and again this has proven very effective. Some of the best years of 60s, 80s, 90s and recent Obama years had divided congress. Markets seem to agree that divided congress is good and hence all indices are up significantly.
Now that Democrats control house, let's look at 4 "i"s of Democrats:
Infrastructure, Immigration, Investigation and Impeachment.
If Nancy Pelosi and Democrats learn from past history, it would be best for them to focus on first two signature policies - Infrastructure and Immigration and work with President Trump in 2019 before politics of 2020 elections take over and nation gets fixated over last two - Investigation and Impeachment. If President Trump wants to leave legacy in his first term, it would be best for him also to work with Democrats on Infrastructure and Immigration. After all last major immigration bill happened under Republican president (Reagan) in 1986 and people remember him for that. President Trump already has lower taxes, strong economy, lowest unemployment in decades. He can add feather to his cap by working on Infrastructure and Immigration and leave a legacy behind!
Both Pelosi and Trump need to keep their "i" ego aside and focus on "we" to Make America Great Again!
Happy Diwali!
/Shyam

November to Remember: Diwali, Elections and Markets!

It's that time of year when "scary" October gets over with Halloween and November starts with holiday spirit. This time Diwali also happens to be in November (happens once in approx 3 years). So first of all, Happy Diwali to all my readers! This is the biggest and most joyous festival for "festival crazy" Indians. The festival itself goes on for 5 days but if you combine with Vijadashmi, Navratri and multiple weekends of Dandiya, it feels like we are in this for months. It's also called Festival of Lights! With lights, fireworks (where permitted), sweets, parties with family and friends wearing colorful outfits, it's fun! This time I am also looking forward to seeing Aamir/Amithabh's most awaited film "Thugs of Hindostan" which is releasing day after Diwali. it's MUST WATCH film. Go and see in theaters.
November also brings election season every two years These are mid-term elections but due to unique style and substance of our President Trump, it feels like Presidential election where people are going to vote for President Trump or against him. These mid-terms would be one of the most consequential elections in deciding future direction of country. As I have written in past couple of blogs, I am predicting split congress with house going to Democrats and senate staying with Republicans (I have few lunch bets with friends). It would produce gridlock in Washington which is exactly what we need to stop some of the policies and bring back "Art of Politics (aka compromise)" for good of country.
While markets would love to have status-quo (means Republicans winning both house and senate), it will get used to split government and indeed rally after elections as it has happened majority of times. There is also some sector rotation happening in which money made in tech stocks (FANG) is going into less exciting sectors like utilities. With full employment and relatively stable inflation, Fed would continue to raise rates at least two more times before taking a pause.
What a mess company can get into due to lack of vision and leadership. Who would have thought that in all companies GE who is famously known for producing CEOs for other companies would be in such a mess and would need outsider CEO. General Electric (GE) stock is at 9 year low and reached single digit ($9). It reached low of $6.66 in March 2009. So would it go to that level or has it reached bottom? GE has become a binary investment decision (similar to Valeant - now Bausch Health 2 years back). Would it survive or go bankrupt? Given GE's storied history - it was the only stock to remain in DOW for last 125 years before it got kicked out this year - the company would survive after CEO Larry Culp does cleanup. Return on investment in GE stock should beat returns from S&P over next 2 years. But it would need courage to go thru volatility and uncertainty.
After Diwali, Thanksgiving is not too far! So enjoy your sweets and get ready for Thanksgiving!
/Shyam