Merck Pill Helps Market Rebound As Interest Rates Move Higher!
Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. George Soros
Las Vegas is well known for being the center of the gambling universe. Wall Street is famous for finance and investment. Gambling and investment are linked by the concept of risk and reward. A distinct difference between betting and investing is betting is a zero sum game. Every Sunday, football fans line up at sports book to place bets on games. Interestingly, nowadays, 90% of it is done on the phone. On a single game, the betting odds are usually 110 to win 100, or 11-10. If you make the bet and win, you would win 110 dollars if you bet 100. If you lose the bet, you lose all 100 dollars, hence the term, zero sum.
With investing, odds are part of the equation as well, but finance is centered around probabilities. In our previous example, the ratio of what you win versus what you put up is 1.1-1. Investing is about finding situations where the reward ratio is highly skewed to the upside, the more the better. You should be thinking in terms of 10, 20, 30, 50, and 100 or more to 1. Of course, in finance, you have to consider the probabilities of your outcomes to reach your expected result. It is why many investment firms run a variety of scenarios before plunking down a great deal of money. If the probability is poor, no money is allocated. If there is a high probability, calculated prior to the position, and the reward potential is extreme, hmm, we may have something going here. Why is the link between gambling and investment pertinent?
The reason why I mention it is because the current investment climate around Wall Street is centered around a simple question: Are we in an inflationary or deflationary environment? How a firm answers the question determines the way they are positioned for the next few years. If you believe inflation is transitory, think Cathy Woods of ARK Investments, high growth companies and technology leaders are where you are putting your money. If you are on the side of inflation being long lasting, higher interest rates are part of your thesis. There are many on Wall Street who are positioned for this outcome. Banks, industrial’s, and energy are where they are placing their capital. It is possible both will be correct, or neither side. Investment lore is based on a premise the market will inflict the most pain to the most number of parties it can. Place your bets accordingly.
In the market this week, it was light on earnings reports. Micron and Bed Bath and Beyond missed estimates. The latter blamed a slowdown in August on the Delta variant and supply chain bottlenecks. On the positive side, Paychex and Jeffries both exceeded expectations. Paychex offers large exposure to the small business sector so it is a good sign the firm is holding up well. Merck helped the mood tremendously by announcing good results on a Covid therapeutic in pill form. Early in the week, long time bank critic Elizabeth Warren decided to publicly oppose Fed Chairman Jay Powell for a second term. Thanks Liz, as if we expected otherwise. Let’s take a look at other events on Capital Hill, shall we?
Simply put, the Democrats decision to link a profligate infrastructure bill to passage of the ultimate spending abomination, a 3.5 Trillion dollar monstrosity based on reconciliation, appears to be foolish. With no leverage to make Senator Manchin or Sinema change their views on either substance or order of passage, the progressive plank of the Democratic party announced they won’t cooperate on the infrastructure piece. President Biden, locked away in the den somewhere, made an attempt to salvage both but, come on man, wasn’t able to make it happen. Shock. If I were a betting man, or more precisely, looking at probabilities, the best chance to get anything done is on infrastructure. Of course, I am biased, but just my two cents. Looking towards next week, Pepsi reports early while the September jobs report comes in on Friday (expect around 500k jobs created).
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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 CFA designation does not mean Y H & C Investments will outperform broad market indexes.