“Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well.”
― Theodore Roosevelt
One of the nice things about being a little up in age is you get the joy of experiencing things for yourself. To the point, when the Dow Jones Industrial Average dropped nearly 700 points yesterday, and nearly 5% for the week, fresh eyed 25 year olds who haven’t been through these kinds of markets might be wondering when things would get back to normal. You see, after a 20+ percent gain last year, along with a nice gain in January, it is kind of understandable that newbies might start feeling the only way forward is higher. Since the market probably has wiped some of that thought away, it is a time to look at the current situation with some, um, shall we say, focus. When bond yields started rising early Monday morning, investors began selling equities. After the jobs report was strong on Friday (+200K versus 180k expected) and inflation fears were stoked further by an annualized hourly earnings increase of 2.9%, the match was lit, er, should I say, the keyboards were greased to click the sell button, or touch if you were on a mobile device (cannot forget mobile, never forget mobile).
Big oil didn’t help either when Exxon and Chevron both missed earnings numbers because of lower than expected production and a touch of weakness in refining, marketing, and petrochemicals. As such, anything energy related took it on the chin in a big way. In technology, Apple disappointed by only selling 77 million phones and offered reduced guidance for the next few quarters. Don’t worry, the big A has nearly 300 billion coming home to buy back that reduced price stock. The other big A, the beast known as Amazon, registered a 60 billion plus quarter and over $200 billion in sales for the year. It might have been the only stock up yesterday. Google, Facebook, and Alibaba all reported nice quarters with only Facebook impressing investors. It seems Google is suffering a bit from security issues at YouTube, although Facebook itself probably has similar concerns, along with a changing platform to provide for higher quality usage (meaning less viewing, but higher ad rates). All in all, there were very few places to hide yesterday if you owned equities. More importantly, how should we think about the future, meaning is the market going to take a dump?
I guess it depends on how you view things, but personally, to expect the market to go up every year by 20% plus is far fetched and probably borders on delusion. The idea it will now fall 20% might be possible, but not probable, either With the economy chugging along at a near three or three percent plus clip, corporations generating billions of cash and able to borrow at very low rates, in the event stocks continue to get hammered, companies are going to buy back those shares by the boatload. Also, with strong economic growth earnings estimates are probably going higher, not lower, unless of course, inflation dramatically raises costs. All of this depends on the sector a business is in. I still think banks and energy are pretty good places to consider in an improving economy with higher interest rates and inflation. You know what they say about opinions though, so keep that in mind.
Elsewhere, here in Vegas the big story is what is taking place at Wynn Resorts. It is a major business story all over the world, and is also related to politics (nothing to be proud of, for sure). Anyway, the problems at Wynn are related to corporate governance and have been there for a long time. If you look at Mr. Wynn’s history, there is a pattern of tremendous value creation, but he was forced out at the MGM after spending too much money on a variety of things, and then at Wynn still has a court case pending with his then Japanese partner, along another one with his ex wife. It also is a good lesson for investors to keep corporate governance in mind when looking at companies to own. Governance is tricky because sometimes great governance leads to poor returns because the companies are too concerned with doing good and not enough with operational excellence or shareholder returns. There are plenty of examples where the governance is poor, you have one person in charge and a compliant board, but the returns are great because the leadership is fabulous and the company is well managed and operationally efficient. However, in those situations there is clearly more risk, as seen with the Wynn, shall we say, predicament. From a strategic perspective, you have to think the fellows in the c suite at MGM Resorts, Las Vegas Sands, Caesars Entertainment, Red Rock Resorts and maybe even Penn Gaming, are all looking at Wynn and licking their chops. I think Steve Wynn is not eager to sell so it is all speculative at this point, but if the problems get worse the big boys in gaming will line up to have a chance to own those assets.
Finally, just thought I would bring up a sector where some readers might have the same experience I have had, and that is in the on line review area. You know, sites like TripAdvisor, Google, and the group I cannot stand, that being Yelp. Clearly, I have had my own experiences here, and have talked with quite a few business owners who have had similar such joys. You see, reviewers post their opinions about businesses and often times say things which are not the most pleasant, to be kind. Sites like AirBnB and others have filters which screen hosts as a way to eliminate potential problems. TripAdvisor now has a disclaimer about the opinions of the reviewer. Essentially, any fly by night person who wants to be a jerk can write whatever they want about a business and it is then in the public’s view. Libel laws are quite difficult to enforce, and who wants to go through the time and energy to deal with lawyers over one persons opinion. Still, the company which takes the grand prize in these kinds of situations is hands down, Yelp. In looking at various reviews in different industries, the ones which are usually the most negative and controversial are Yelp’s. I would imagine, in time, Yelp will earn whatever it is they have coming to them.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at email@example.com
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 guarantees financial returns which exceed those of a market index.
Disclosure: I am/we are long aapl, goog, xom.