Uncategorized
Predictions Are Pointless. Why You Shouldn’t Listen To Gurus.
“(Market) Predictions Are Difficult…Especially When They Are About The Future” – Niels Bohr
Okay, I took a little poetic license, but the point…
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“(Market) Predictions Are Difficult…Especially When They Are About The Future” – Niels Bohr
Okay, I took a little poetic license, but the point is that while we try, predictions of the future are difficult at best and impossible at worst. If we could accurately predict the future, fortune tellers would win all the lotteries, psychics would be richer than Elon Musk, and portfolio managers would always beat the index.
However, we can analyze what occurred previously, weed through the noise of the present, and discern the possible outcomes of the future. The biggest problem with Wall Street, both today and in the past, is the consistent disregard of the unexpected and random events they inevitability occur.
We have seen plenty, from trade wars to Brexit, to Fed policy and a global pandemic in recent years. Yet, before each of those events caused a market downturn, Wall Street analysts were wildly bullish that wouldn’t happen.
For example, on December 7th, 2021, we wrote an article about the predictions for 2022.
“There is one thing about Goldman Sachs that is always consistent; they are ‘bullish.’ Of course, given that the market is positive more often than negative, it ‘pays’ to be bullish when your company sells products to hungry investors.
It is important to remember that Goldman Sachs was wrong when it was most important, particularly in 2000 and 2008.
However, in keeping with its traditional bullishness, Goldman’s chief equity strategist David Kostin forecasted the S&P 500 will climb by 9% to 5100 at year-end 2022. As he notes, such will “reflect a prospective total return of 10% including dividends.”
The problem, of course, is that the S&P 500 did NOT end the year at 5100.
It isn’t just Goldman Sachs always making bullish and erroneous forecasts but the vast majority of Wall Street analysts. Such errors in predictions are most evident in expectations for forward earnings. Ed Yardeni tracks the historical earnings forecast and changes for each year. Analysts’ expectations are clearly wrong by about 30% on average.
Despite increasing signs of recessionary risk, analysts are once again becoming increasingly optimistic about earnings growth into 2024. Of course, such would require substantially stronger economic growth to generate those earnings.
So, the question becomes how much faith should we have in Wall Street estimates when it comes to our investing?
Predictions Of The Future Have An Expiration
In the late 90s, there was a study on the accuracy of “predictions.” The study took predictions from various professions, including psychics and meteorologists. The study came to two conclusions.
- “Meteorologists” are the MOST accurate predictors of the future, and,
- The predictive ability was accurate to just 3-days.
Most importantly, once predictions stretch beyond 3-days, the accuracy is no better than a coin flip.
A quarter of a century later, the Economist magazine analyzed computer models and their weather-forecasting accuracy. Surprisingly, despite the massive increases in computer analysis capabilities, increased data collection, and improved models, the accuracy has failed to improve. Now, as it was then, the accuracy of weather forecasts is roughly 100% for 3-days into the future. However, at ten days, the accuracy is still no better than a coin flip.
Here is the critical point. When analyzing weather patterns, there is a tremendous amount of observable data. From surface temperatures to high and low-pressure zones, humidity, air quality, and numerous data points. That data, collected by Doppler radar, radiosondes, weather satellites, buoys, and other instruments, is fed into computerized NWS supercomputers where numerical forecast models go to work.
Still, with all that data, the predictions’ accuracy is only good for three to ten days.
Given the markets are affected by a broad spectrum of extremely variable inputs from economics to geopolitics, monetary policy, interest rates, financial events, and most importantly, human psychology, how accurate are predictions 12 months into the future?
As investors, how much weight should give to any prediction that extends for more than a week?
Navigating From Here
In the short term, all that really matters to investors is short-term market psychology. That psychology is easily seen in the technical analysis of market price data. This is why we spend each week discussing with you the technical support and resistance levels and the market’s overall trend – bullish or bearish.
In the long term, meaning over the course of the next decade, it is fundamentals and valuations that will determine the return on your investments.
With that in mind, my job as a portfolio manager is to navigate market risks as we see them. Making a “one-sided” bet on a potential outcome harbors an outsized risk of being wrong. Such would potentially impact client capital and damage financial outcomes.
Therefore, we approach risk management in the market by choosing to hedge risk and reduce potential liabilities. As such, given the market’s current structure, we have three options currently:
- Do Nothing – If the markets do correct, we destroy capital and time waiting for the portfolio to recover.
- Take Profits – Taking profits, raising cash, and reducing equity exposure before a correction helps mitigate the damage of a decline. However, if wrong, we can repurchase positions, add new ones, or resize portfolio holdings as needed.
- Hedge – We have also opted to hedge by adding a position to the portfolio that is the “inverse” of the market. Such allows us to keep existing positions intact. By “shorting against the portfolio,” we effectively reduce our equity risk (and related capital destruction) during a market correction.
As noted, we continued to use a combination of both #2 and #3 in the past. Doing nothing leaves us overly exposed to an unexpected “volatility shock” in the market or the reversal of bullish psychology.
In our view, we can either manage risk or ignore it.
The only problem with “ignoring risk” is that such has a long history of not working out well.
Investment Guidelines
When it comes to investing, we tend to repeat our mistakes by forgetting the past. Therefore, it is worth repeating investing guidelines to return your focus to what truly matters.
- Investing is not a competition. There are no prizes for winning but severe penalties for losing.
- Emotions have no place in investing. You are generally better off doing the opposite of what you “feel.”
- The ONLY investments that you can “buy and hold” are those providing an income stream and return of principal.
- Market valuations are very poor market timing devices.
- Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading.
- “Market timing” is impossible– managing exposure to risk is both logical and possible.
- Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.
- There is no value in daily media commentary– turn off the television and save yourself the mental capital.
- Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities. The winner is the one who knows when to “fold” and when to go “all in.”
- No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham.
The post Predictions Are Pointless. Why You Shouldn’t Listen To Gurus. appeared first on RIA.
economic growth sp 500 monetary policy fed interest rates
Uncategorized
One city held a mass passport-getting event
A New Orleans congressman organized a way for people to apply for their passports en masse.
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While the number of Americans who do not have a passport has dropped steadily from more than 80% in 1990 to just over 50% now, a lack of knowledge around passport requirements still keeps a significant portion of the population away from international travel.
Over the four years that passed since the start of covid-19, passport offices have also been dealing with significant backlog due to the high numbers of people who were looking to get a passport post-pandemic.
Related: Here is why it is (still) taking forever to get a passport
To deal with these concurrent issues, the U.S. State Department recently held a mass passport-getting event in the city of New Orleans. Called the "Passport Acceptance Event," the gathering was held at a local auditorium and invited residents of Louisiana’s 2nd Congressional District to complete a passport application on-site with the help of staff and government workers.
'Come apply for your passport, no appointment is required'
"Hey #LA02," Rep. Troy A. Carter Sr. (D-LA), whose office co-hosted the event alongside the city of New Orleans, wrote to his followers on Instagram (META) . "My office is providing passport services at our #PassportAcceptance event. Come apply for your passport, no appointment is required."
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The event was held on March 14 from 10 a.m. to 1 p.m. While it was designed for those who are already eligible for U.S. citizenship rather than as a way to help non-citizens with immigration questions, it helped those completing the application for the first time fill out forms and make sure they have the photographs and identity documents they need. The passport offices in New Orleans where one would normally have to bring already-completed forms have also been dealing with lines and would require one to book spots weeks in advance.
These are the countries with the highest-ranking passports in 2024
According to Carter Sr.'s communications team, those who submitted their passport application at the event also received expedited processing of two to three weeks (according to the State Department's website, times for regular processing are currently six to eight weeks).
While Carter Sr.'s office has not released the numbers of people who applied for a passport on March 14, photos from the event show that many took advantage of the opportunity to apply for a passport in a group setting and get expedited processing.
Every couple of months, a new ranking agency puts together a list of the most and least powerful passports in the world based on factors such as visa-free travel and opportunities for cross-border business.
In January, global citizenship and financial advisory firm Arton Capital identified United Arab Emirates as having the most powerful passport in 2024. While the United States topped the list of one such ranking in 2014, worsening relations with a number of countries as well as stricter immigration rules even as other countries have taken strides to create opportunities for investors and digital nomads caused the American passport to slip in recent years.
A UAE passport grants holders visa-free or visa-on-arrival access to 180 of the world’s 198 countries (this calculation includes disputed territories such as Kosovo and Western Sahara) while Americans currently have the same access to 151 countries.
stocks pandemic covid-19 grantsUncategorized
Fast-food chain closes restaurants after Chapter 11 bankruptcy
Several major fast-food chains recently have struggled to keep restaurants open.
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Competition in the fast-food space has been brutal as operators deal with inflation, consumers who are worried about the economy and their jobs and, in recent months, the falling cost of eating at home.
Add in that many fast-food chains took on more debt during the covid pandemic and that labor costs are rising, and you have a perfect storm of problems.
It's a situation where Restaurant Brands International (QSR) has suffered as much as any company.
Related: Wendy's menu drops a fan favorite item, adds something new
Three major Burger King franchise operators filed for bankruptcy in 2023, and the chain saw hundreds of stores close. It also saw multiple Popeyes franchisees move into bankruptcy, with dozens of locations closing.
RBI also stepped in and purchased one of its key franchisees.
"Carrols is the largest Burger King franchisee in the United States today, operating 1,022 Burger King restaurants in 23 states that generated approximately $1.8 billion of system sales during the 12 months ended Sept. 30, 2023," RBI said in a news release. Carrols also owns and operates 60 Popeyes restaurants in six states."
The multichain company made the move after two of its large franchisees, Premier Kings and Meridian, saw multiple locations not purchased when they reached auction after Chapter 11 bankruptcy filings. In that case, RBI bought select locations but allowed others to close.
Image source: Chen Jianli/Xinhua via Getty
Another fast-food chain faces bankruptcy problems
Bojangles may not be as big a name as Burger King or Popeye's, but it's a popular chain with more than 800 restaurants in eight states.
"Bojangles is a Carolina-born restaurant chain specializing in craveable Southern chicken, biscuits and tea made fresh daily from real recipes, and with a friendly smile," the chain says on its website. "Founded in 1977 as a single location in Charlotte, our beloved brand continues to grow nationwide."
Like RBI, Bojangles uses a franchise model, which makes it dependent on the financial health of its operators. The company ultimately saw all its Maryland locations close due to the financial situation of one of its franchisees.
Unlike. RBI, Bojangles is not public — it was taken private by Durational Capital Management LP and Jordan Co. in 2018 — which means the company does not disclose its financial information to the public.
That makes it hard to know whether overall softness for the brand contributed to the chain seeing its five Maryland locations after a Chapter 11 bankruptcy filing.
Bojangles has a messy bankruptcy situation
Even though the locations still appear on the Bojangles website, they have been shuttered since late 2023. The locations were operated by Salim Kakakhail and Yavir Akbar Durranni. The partners operated under a variety of LLCs, including ABS Network, according to local news channel WUSA9.
The station reported that the owners face a state investigation over complaints of wage theft and fraudulent W2s. In November Durranni and ABS Network filed for bankruptcy in New Jersey, WUSA9 reported.
"Not only do former employees say these men owe them money, WUSA9 learned the former owners owe the state, too, and have over $69,000 in back property taxes."
Former employees also say that the restaurant would regularly purchase fried chicken from Popeyes and Safeway when it ran out in their stores, the station reported.
Bojangles sent the station a comment on the situation.
"The franchisee is no longer in the Bojangles system," the company said. "However, it is important to note in your coverage that franchisees are independent business owners who are licensed to operate a brand but have autonomy over many aspects of their business, including hiring employees and payroll responsibilities."
Kakakhail and Durranni did not respond to multiple requests for comment from WUSA9.
bankruptcy pandemicUncategorized
Industrial Production Increased 0.1% in February
From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 p…
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Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 percent. Both gains partly reflected recoveries from weather-related declines in January. The index for utilities fell 7.5 percent in February because of warmer-than-typical temperatures. At 102.3 percent of its 2017 average, total industrial production in February was 0.2 percent below its year-earlier level. Capacity utilization for the industrial sector remained at 78.3 percent in February, a rate that is 1.3 percentage points below its long-run (1972–2023) average.Click on graph for larger image.
emphasis added
This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).
Capacity utilization at 78.3% is 1.3% below the average from 1972 to 2022. This was below consensus expectations.
Note: y-axis doesn't start at zero to better show the change.
The second graph shows industrial production since 1967.Industrial production increased to 102.3. This is above the pre-pandemic level.
Industrial production was above consensus expectations.
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