Choppy Markets As Oil Fades, Dollar Strengthens!

“The mediocre teacher tells. The good teacher explains. The superior teacher demonstrates. The great teacher inspires.” (William Ward)

As I can speak from personal experience, almost all of the teachers of the world have good hearts and great intentions. I was not a great or good teacher, merely OK at best and uninspired at worst. Still, I got the job done as best as I could. The education business is difficult as administrators get big salaries for putting up with pushy parents and, shall we say, the excitement of the next generation of leaders. Teachers, on the other hand, work with very little support and are dramatically underpaid. Funding is generally based on a variety of factors, but mainly property taxes in the specific jurisdiction, along with student enrollment. Politics is heavily involved with education, as the teachers unions automatically want and get the teachers dues, and the funding from the unions goes to a specific party which supports those unions (imagine that). You can tell I am a bit skeptical of this whole situation. Anyway, as any student or teacher will tell you, how one is graded matters. When you are in college, you typically get a syllabus which outlines the material covered and what your grade is based on, usually a mid term test or two, and a final exam. At primary and upper grade levels, it is important that students are very clear on how they are graded, which makes sense as kids need extreme levels of clarity. So why am I telling you this? It is because the investment world also grades in its own way, in the form of stock prices.

You see, for most publicly traded companies, traditional metrics like revenue growth, net income (growth) , operating income (growth), free cash flow, and balance sheet strength (cash versus debt, maturity length and rate) are pieces of information which give investors criteria to evaluate the financial strength and operating performance of a company. However, the largest companies and the analysts which cover them (a very smart but extremely shifty crew), find ways to change the narrative about how they should be judged. For example, many years ago, cable companies were given a new outlook when John Malone convinced Wall Street to throw out net income as a metric because it could be heavily manipulated, and still can be, by one time charges, write downs, and large depreciation for entities with lots of capital expenditure. Currently, Amazon and Netflix have succeeded in getting Wall Street to evaluate them based on revenue and subscriber growth. With Amazon growing revenues at 30% plus, and Netflix having nearly 120 million subscribers, if analysts buy those evaluation metrics, as they clearly have, then those companies get rewarded with high multiples on their stock price. A one thousand dollar investment in the Netflix IPO is now worth 293 thousand smackers.

With Netflix becoming the most valuable media company in the globe, exceeding even Disney (which has far more revenues and cash flow), clearly how companies are evaluated matters. Now, students are concerned about how they are graded as their final grade is based on it. With companies and stock prices, the value of the asset depends on these sometimes shifting metrics, and with a highly valued stock price, a company then has an asset to use for potential financing currency. Should Disney, Netflix, and other media companies be evaluated using the same metrics? There is no standard formula, unlike a syllabus which clearly states the criteria at the outset of the term. These kinds of issues are part of the investment world where the only teaching one can get, other than a business school education, is cold, hard, experience. Somethings cannot be taught, unfortunately.

In the market this week, the notes from the saltest Federal Reserve meeting were released and it seems a June rate hike is guaranteed, but maybe only one more the rest of the year. The strengthening of the dollar on the global stage has led to some real pain in emerging markets and at least one mature one. Turkey and Argentina have seen their markets and currencies drop dramatically over the past few weeks. Both have large deficits with debt held outside the country and denominated in dollars. Hard to feel sorry for Mr. Erdogan, not so for Mr. Macri, who is working on solving systemic issues left by the prior adminsitration (a bunch similar to the lovely guy in Venezuela, Mr. Mudero). In Italy, the recent elections have led to the same kind of selloff, which brings into question the stability of everyones favorite currency, the Euro. We will see, but continued dollar strength seems a reasonable bet. In the oil market, just when oil bulls were feeling nice and comfortable, concerns about a new production agreement between the Saudis and Russia gave black gold a jolt, as it fell five percent in the last two days of the week. Dollar strength did not help it either. On the regulatory front, President Trump signed a bill to help give smaller community banks relief from Dodd Frank and free up proprietary trading, home mortgages, and small business lending from troublesome restrictions. You know Elizabeth and Bernie just loved that. Internationally, the ‘Trump Truce’ with China regarding tariffs has ebbed back and forth, which is what we will probably see for a good long time.

Finally, here in Las Vegas, one of the really nice stories is playing out in the NHL Playoffs as the hometown Golden Knights are playing the Washington Capitals to see who will win the Stanley Cup. The reason why it is such a great situation, especially for a local Las Vegan, is because the players were all the 9th best members of their previous teams. You know, the scrubs, the guys who the other teams did not want. The GM and head coach were also let go from their prior organizations, in the GM’s case, from the Washington Capitals. For the Capitals, the best player, a toothless wonder from Russia nicknamed the big O (Alexander Ovechkin, in case you wanted his name), is 10 year veteran who is in the finals for the first time. Both teams will give it a fierce effort, and you know where my allegiance lies. On that note, enjoy the memorial day weekend, and stay cool. Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.

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