This week's interesting finds

Americans have really been embracing the can since the start of the quarantine 

And the 1 week Y/Y data is still strong indicating that this is not just a pantry loading phenomenon.

Vehicle miles driven (VMT) by destination

The pace of onshoring is picking up

Open Table bookings

Tracktherecovery.org

A group of economists at Harvard have built a real-time, publicly available economic tracker. There are many good interactive charts here but below are a few interesting ones.

Consumer spending in the US is down 11.3% since January, but spending cuts by people in the top quartile account for more than half of the total aggregate decline in dollars. As of June 9th, spending by the top quartile was still down 16.8%, whereas spending by the bottom income quartile was only ~3% below where it was in January. 

Stimulus payments increased spending by low-income consumers, but didn’t undo the initial most revenue:

By industry, in-person services were obviously the hardest hit, but the idea of the ‘Roomba effect’ was interesting. In a normal recession, households typically respond by cutting purchases of durable goods like cars, washing machines etc, and the policy response tries to counteract that (cash-for-clunkers, VAT cuts). In this recession, it’s the opposite - people are substituting services for durable goods –buying a roomba instead of hiring a cleaning lady, which they think might have permanent implications for the economy because people are going for a capital solution instead of a labour solution.

This week's interesting finds

Why you need uncertainty

Who actually likes uncertainty? For most people, it’s pretty bothersome really, particularly when it concerns someone’s hard-earned savings and investments. It’s difficult for investors to understand how uncertainty could be a very good thing for their investments. Geoff MacDonald explains why investors need uncertainty in this excerpt from our 2020 Cymbria Investor Day Q&A session.

Investors approaching retirement face painful decisions

Nearly a third of investors ages 65 and up-sold all of their stocks at some point between February and May, compared with 18% of investors across all age groups.

Howard Marks: The Anatomy of a Rally

U.S. stocks have managed a remarkable advance in the past several weeks as optimism outweighed concerns about the economic recovery and worsening COVID-19 cases. Has this been appropriate or irrational? Howard Marks thinks investors should ponder the following questions:

• Are investors weighing both the positives and the negatives dispassionately?
• What’s the probability the positive factors driving the market will prove valid (or that the negatives will gain in strength instead)?
• Are the positives fundamental (value-based) or largely technical, relating to inflows of liquidity (i.e., cash-driven)? If the latter, is their salutary influence likely to prove temporary or permanent?
• Is the market being lifted by rampant optimism?
• Is that optimism causing investors to ignore valid counter-arguments?
• How do valuations based on things like earnings, sales and asset values stack up against historical norms?

Latest Charts

Technology stock valuations

Investors have come to believe in the sustainability of free cash flow, bringing down yields.

Shares of companies popular with individual investors have outperformed.

While it's not clear how much of the recent rally was driven by retail investors/traders, their increased presence in the market has been signaling a spike in speculative behavior.

Online grocery sales

Grocers charged into delivery to meet a surge in demand sparked by the coronavirus crisis, though many haven’t figured out how to get food to customers’ homes profitably and some wonder if they ever will. Retailers have modified their operations to manage the jump in delivery demand, hiring thousands of additional workers and devoting some stores to fulfilling online orders. That work is pushing up costs that eat into the margins on delivery sales.

Some comic relief

This week's interesting finds

Stats on re-opening
Only a handful of states have reopened bars and restaurants, and of those, most were in the past week. Montana was one of the earliest to reopen. The stay at home order in Montana was lifted on April 27th and bars and dine in restaurants reopened on May 4th at half capacity with social distancing measures. They move to 75% capacity tomorrow. Gyms reopened May 15th.

Buffett and Charlie Brown are due some relief
A resurgence of value implies an optimistic outlook for the economy. If growth returns, then cheap value stocks won’t look so risky (because even their boats have been raised). Value tends to do well at the beginning of recovery — although note that the last great period of value outperformance, in the early ’00s, came amid the onset of a recession and a bear market. As value stocks still include a lot of banks, a strong period for value also implies a steepening yield curve. This could be a dangerous bet to make when the Federal Reserve is discussing deliberately controlling the yield curve. And a second viral wave could change everything.

For now, the recovery of value would help to confirm that investor confidence, justified or otherwise, is really back.

There are many reasons to doubt that optimistic scenario. But the mere fact that advocating for value makes me feel like I might turn into Charlie Brown is perhaps the strongest reason for believing there is an opportunity here. One behavioral investor once told me that he adopted a “sharp intake of breath” test for potential investments. If a name provoked that reaction, the chances were that sentiment had moved too far and it was now too cheap. It is at this point that value investors can make a killing. Put differently, to quote Oaktree Capital Group’s Howard Marks from an interview with me earlier this month, “every great investment begins in discomfort.”

The week in charts 

Bubble behavior during a depression
The dot-com bubble made the stock market too tempting to pass up for aspiring day traders. This type of behavior makes sense during a mania. But what about during a depression?

This is one of the strangest economic crises in history. Stocks continue to surge higher in the face of the worst economic data of our lifetime. Housing demand has already surpassed pre-crisis levels. And even though the first quarter was the most volatile period since the Great Depression, people opened new brokerage accounts at a record pace. Major brokerages — Robinhood, Charles Schwab, TD Ameritrade, and Etrade — saw new accounts grow as much as 170% during the first quarter. 

This week's interesting finds

Don’t get caught in a wheel of missed fortunes
Before making decisions about your financial future, check whether what you expect matches reality.

US suburban house prices
For the first time since 2007, the survey shows stronger price gains in suburban regions than in rural or urban ones.

The world of rice

Source: Food and Agricultural Organization of the United Nations

Closing tax loopholes may come first, especially in a post-COVID world

Valuation
The book-to-price dispersion among the largest 1,000 US stocks is at record levels. If we use price-to-book multiples, the gap between the cheapest and most expensive has touched even greater heights than during the dotcom boom:

CFA Institute Virtual Conference: Annie Duke and Morgan Housel
Annie Duke and Morgan Housel talk about demanding certainty in times of uncertainty: 
 - Rather than demanding certainty, take the broadest view of possibilities and their probabilities
- Doing well over the long term is not about being right all the time and finding the right answer, but about being able to survive amongst the broadest range of outcomes
- Humility about what you don’t know and can’t predict is important for doing well as an investor in the long term
- People tend to think in binary terms: a decision is either right or wrong. But you can also make great decisions and have a bad outcome and make great decisions and have bad outcomes.

This week's interesting finds

EdgePoint Video: Bumpy road to long term outperformance
Everyone wants to outperform in the long term, but you can't do that if you invest like everyone else. In our newest video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time.

Valuation 
Valuations of S&P 500 companies in the 4th quintile look especially cheap.

An expansion of valuation multiples has driven the rally across global equities, even as earnings expectations contracted across the board, according to BlackRock.

How consumers are spending differently during COVID-19

The onset of changing consumer behavior can be observed from February 25, 2020, when compared to year-over-year (YoY).

As of May 12, 2020, combined spending in all categories dropped by almost 30% YoY. Here’s how that shakes out across the different categories, across two months.

General Merchandise & Grocery

Restaurant

Retail

Travel

The Song Remains the Same
Rapid technological change can trick us into thinking that the fundamental nature of human beings has changed commensurately, but nothing could be further from the truth. In terms of biological evolution, we are not very different from human beings who lived thousands of years ago in hunter-gatherer cultures that bear no resemblance to our current world. We have inherited the psychology of our ancestors and must work within the constructs of that psychology.

Today’s investors are not that different from those who lived nearly a century ago. The “passion for prophecy”, the desire to “get rich fast”, and buying what is “in trend”  have tempted investors for generations.

The trouble with buying what is in trend is that people are buying not necessarily the “best” securities but merely those that are most popular at a given point in time. And that popularity itself accounts for prices that often are out of proportion to business prospects. 

The crucial distinction between future prospects for a business enterprise and prospects for its securities is one that generation after generation of investors fail to make. A business with compelling future prospects can make for a lousy investment if its securities are so popular that its bright future is more than fully reflected in the price one must pay to participate.

As of May 2020, the top five companies in the Standard & Poor’s 500 comprise over 21 percent of the index:

Microsoft, Apple, Amazon, Facebook, and Alphabet are indisputable leaders of our modern economy. Their stocks are also popular not only with active investors but with index funds that automatically purchase these stocks when they receive new inflows of investor funds. Without commenting on the valuation of these companies, we can note that they are undoubtedly popular stocks in 2020. Their popularity might be justified by the underlying business fundamentals or investors may be repeating the “universal habit” of buying what is popular and suffering poor results over time. At the very least, buying popular stocks should always be done with great caution.

Investment resources
Collection of investment articles, books, speeches, videos including some all-time classics.

The week's interesting finds

Cymbria’s 12th annual investor day: Discussing the value of non-obvious survivors
At our 12th annual investor day, we looked at how finding non-obvious survivors helps investors more in the long term than feeling comfortable in the short term does. Watch the full recording from Wednesday’s presentation here.

This week in charts
Infotech, communication services, and health care sectors now account for 52% of the S&P 500 market capitalization.

Energy vs. S&P 500, Relative Price Performance

The relative price performance of the energy sector to the S&P 500 is now at the level of the Great Depression.

Zoom is Now Worth More Than the World’s 7 Biggest Airlines

Howard Marks memo: Uncertainty

In investing, uncertainty is a given – how we deal with it will be critical. In Howard Mark's latest memo he discusses the value of understanding the limitations of our foresight and “investing scared.” Below are some of his closing remarks. 

• The world is an uncertain place.
• It’s more uncertain today than at any other time in our lifetimes.
• Few people know what the future holds much better than others.
• And yet investing deals entirely with the future, meaning investors can’t avoid making decisions about it.
• Confidence is indispensable in investing, but too much of it can be lethal.
• The bigger the topic (world, economy, markets, currencies, and rates) the less possible it is to achieve superior knowledge.
• Even our decisions about smaller things (companies, industries, and securities) have to be conditioned on assumptions regarding the bigger things, so they, too, are uncertain.
• The ability to deal intelligently with uncertainty is one of the most important skills.
• In doing so, we should understand the limitations of our foresight and whether a given forecast is more or less dependable than most.
• Anyone who fails to do so is probably riding for a fall.

Thoughts on the current market environment from Stanley Druckenmiller at The Economic Club of New York

This week's interesting finds

Berkshire Hathaway Annual Shareholders Meeting 2020 
As most of you might know, Berkshire Hathaway had their annual shareholders’ meeting this past weekend, with the highlight being Warren Buffett speaking and answering questions for more than 3 hours on topics ranging from his views of the post-COVID-19 market, economic trends, and his current investment strategy. Here are links to the full video and meeting transcripts.

Personal Saving Rate and U.S. Household
Savings rate hits its highest level in 40 years, as Americans are accumulating cash.

When You Have No Idea, What Happens Next
Do we know more about what’s going to happen in the next 12 months today than we did in January? We now know there’s a pandemic that shut the economy down. We didn’t know that in January.

We’ve learned this year that the assumptions you have about the future can be destroyed overnight. That’s true for the poorest to the most successful, the old dry cleaner to the tech startup. It was true in January, and it’ll be true again in the future. 
If that’s the lesson, the question is: what do you do about it? 

Read more history and fewer forecasts. Think of all the 2020 market forecasts published in December. Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next. 

Have more expectations and fewer forecasts. Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what’s likely to occur without professing insight into when it will happen. Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won’t be that surprised whenever it arrives – which is a huge benefit. But if you assume you know exactly when it will occur you’ll be tempted into all kinds of dangerous behavior, leveraged with overconfidence.

COVID-19 internet search trends

Streaming Services Face an Economic Reckoning After Covid-19
The race to attract and retain subscribers — and turn a profit — was challenging enough before the coronavirus shut down entire swathes of our economy. Now, the U.S. is in a recession, and consumers are rethinking how much content they need and what’s a worthwhile household expense. When all a country can do is sit home and gorge on movies and TV, a free trial to stream Netflix or any other services is worth its hours of content in gold. (Look no further than Netflix’s recent spike in subscriptions.) The question is, will users just ditch once those free trials are up?

Because of Netflix, viewers have become accustomed to not having to sit through ads, and they like it. But that approach probably can’t work long-term if consumers want an affordable service with a constant flow of fresh content.