For the last fifteen years, both fall and spring semester, at the Seton Hall Stillman School of Business, I have taught a class titled: Securities Trading and Financial News. The course description per the university catalogue is:
Analysis of the impact of financial news and events on the prices of securities, including technical analysis, fundamental analysis, and trading strategies.
What one must understand is that news is the means by which information is delivered. It is such information and the analysis thereof that drives markets. News alone, without thoughtful and patient analysis, results in emotional and knee jerk reaction. Information is the engine that drives financial valuation.
Let me provide some recent examples:
- Washington Post headline: “Chinese economy slows to lowest growth rate in 28 years.” That sounds like a big deal, but you need to dig further into the story, perform some analysis and understand context. Per the article, “Growth in the world’s second largest economy decelerated from 6.8 percent in 2017 to 6.6 percent last year, according to the National Bureau of Statistics.” That sounds as if we are on the verge an an economic crisis. Governments in the United States, UK, Japan or any other developed economy would give a kidney for economic growth of 6.6%. In fact, if the US grew at a rate of 6.6%, the Federal Reserve would be choking off the economy with rapid interest rate tightening, likely creating another financial crisis. Turn back the clock 28 years ago to 1991. China was a pre-emerging economy. Hong Kong had yet to be turned over to China from the UK (it took place in 1997). Japan still exerted global economic influence; though its fall from grace began in 1989/90. Since 1991, China began a fantastic journey from an emerging to a developed economy; along the way experiencing double digit growth rates for many years. Those growth rates are no longer sustainable, from a practical and empirical point of view. So, expect China’s economy to continue to grow, albeit at lesser rates as its economy matures.
- Headline from Bloomberg: “The Government Shutdown Trims 0.1% Every Two Weeks, White House Says.” Bloomberg correctly reported the story. Unfortunately, once you dig beyond the headline, you realize that: i) this is pure speculation on the part of the White House official, and according to the article, just a “rule of thumb” and ii) any economic impact is likely temporary and reversed once the government is reopened. I speak to people all around the country. Outside of the DC Beltway, which is its own version of Alice’s Wonderland, the government shutdown is barely noticeable. Perhaps the biggest impact is the inability to obtain new Employer Identification Numbers from the IRS and garbage not being picked up at national parks. Maybe there are many people at national parks trying to obtain EIN over their smartphones that I am unaware of. Flights are leaving on time. There are no huge delays at TSA lines. Certainly, the lives of some and I emphasize some of the 800,000 unpaid workers might have some short-term impact, at least those that don’t have the discipline to keep one month of cash ready for those ever-recurring shutdowns. We know they will all get paid. In full. You cannot say the same for employees at General Motors (GM) or US Steel (X) when their company temporarily shuts down a plant. When that occurs, employees are furloughed and get, beginning a few weeks later, some fraction of their old paycheck in the form of unemployment benefits. I will tell you this. Since the shutdown, all my Amazon (AMZN) and other deliveries from UPS (UPS), FedEx (FDX) or the USPS are arriving on time. I procure fresh food for the home. My local gasoline stations have plenty of gasoline for my automobiles. Electricity flowed to my homes. CVS (CVS) has no problem filling my prescriptions. Face-off for the Vegas Golden Knights takes place as scheduled. My daughter flew round trip (without problem) to Las Vegas for the Consumer Electronics show; which was at capacity. NFL referees still blow important calls. In other words, life in the USA goes on as normal; except for about 1/2% of all non-farm related working people in the nation who are getting a paid vacation. Plus, since the Federal government shutdown on December 22, 2018, the S&P 500 (SPX) rose roughly 10.5%. The winter storm in the northern and north eastern states is a greater risk to GDP than the government shutdown.
- Since Steve Jobs passed away on October 5, 2011, the price of Apple (AAPL) stock rose 174.25%. While initially, the knee-jerk reaction to Job’s passing sent the stock down just over 9%; any true analysis of the company’s financial condition, knowledge of Tim Cook and understanding of its product superiority, did not warrant a selling of the stock.
Don’t even get me started with the non-financial lesson to be learned in discerning news versus factual information as witnessed just this last week with Buzzfeed and the Covington Catholic Boys stories. That turned out to be a stupid-fest.
Whether financial or otherwise, check your sources and don’t rely on social media. Also, never react to news headlines. Unless you follow my advice, you are doomed to lose money.
We are now entering earnings season for the 4th quarter of 2018. There will be plenty of knee-jerk reactions on news announcements and headlines. However, do not react to the news; analyze the earnings announcements in detail and factor in information gleaned from corporate conference calls. Sometimes, you need to be contrarian and take advantage of the mistakes of the lazy. By the way, today’s lecture at Seton Hall is on earnings releases and conference calls.
After a month-long run in the stock market, I would not be surprised if we get a little backing and filling in the equity markets this week. So, use the opportunity to clean up some trading positions and get ready to add to long term positions. On Friday, I flipped some index trading positions from long to short but kept index investment positions.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, AMZN, SH, SPY, SSO, SPXL & UPS; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage, and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
– You can email Scott at scott.rothbort.lakeview@gmail.com
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Scott,
Thank you for writing and posting this article. I appreciate your writings as they are very persuasive in the points you offer. Your article “My Gut Feeling for 2019” went a long way to settle my wife’s nerves about the economy. Please keep writing!
Steve Davison
Steve – thank you very much and keep reading My Gut Feeling – if I can be of any other help to you and your wife, please don’t hesitate to contact me – Scott