Morning News: September 22, 2023
Posted by Eddy Elfenbein on September 22nd, 2023 at 7:03 am

Higher Rates Are Supercharging Japan’s Banks

Real Estate Crisis Triggers New Alarms Over China’s Shadow Banks

China’s Ultra-Rich Gen Zs Flock Home as Global Tensions Rise

Shein Shifts Shipping Strategy to Bring China-Made Goods Closer to US Shoppers

To Beat Starbucks in China, Homegrown Chains Open a New Cafe Every Hour

The Hidden Threat to US Energy Security

Supply Chain Hurdles Complicate Food Companies’ Climate Pledges

UAW Expected to Announce More Auto-Plant Strikes on Friday

Auto Industry Finance Chiefs Watch for Ripple Effects From UAW Strike

Did Poverty Soar Last Year? It Depends How You Measure It

When Rates Drop, They Usually Plunge. The Fed Thinks Different

Fed Is Cutting Staff After More than a Decade of Payroll Growth

Wall Street Strategists Turn Ever Bullish Just as Stocks Slump

What C.E.O.s Mean When They Talk About ‘Moats’

Apple’s iPhone 15 Goes on Sale in Test of Holiday Resurgence

Microsoft’s Activision Deal Set to Clear Final UK Hurdle

Once Silicon Valley’s Star, Cisco Looks to Splunk for Fresh Mojo

Lachlan Murdoch Inherits Media Empire and Daunting Task as Rupert Retires

Amazon Prime Video Content to Include Ads Starting Next Year

Holy Fish and Chips, Batman! DC Studios Moves Hub to England

Deion Sanders Is Writing College Football’s New Playbook

Be sure to follow me on Twitter.

Morning News: September 21, 2023
Posted by Eddy Elfenbein on September 21st, 2023 at 7:04 am

Russia Temporarily Limits Diesel and Gasoline Exports

Trudeau’s Mega Pipeline Promises to Redraw Global Oil Flows

Chevron Agrees to Regulator’s Plan to End Australia LNG Strikes

Hong Kong Says It Calls the Shots, Not Beijing. Investors Are Wary

Naira Plunges Toward 1,000 on Street Amid ‘Stampede’ for Dollars

Pound Slides to Six Month Low as BOE Rate Hikes Grind to Halt

Sweden’s Central Bank Raises Rates to 4%, In Line with Expectations

Higher Interest Rates Not Just for Longer, but Maybe Forever

Fed Signals Higher-for-Longer Rates With Hikes Almost Finished

What Fed Rate Moves Mean for Mortgages, Credit Cards and More

Klaviyo Shares Soar in Debut, Pointing to IPO Resurgence

Ex-Goldman Bankers Make a Fortune With Controversial Bet on Coal

BlackRock, State Street Among Money Managers Closing ESG Funds

Corporate America Brings Its New Skinny Look to Stock Market

Defense Department Awards Chip Funding to Fuel Domestic Research

GPUs Transformed AI. Now They’re Here for Quantum

Cisco to Buy Splunk for $157-a-Share in $28 Billion Deal

Toshiba Shareholders Approve $13.5 Billion Deal to Take Company Private

FedEx Earnings Rise Despite Weakened Demand

The United Auto Workers Is Overplaying Its Hand, Risking Our Economy and the Election

The Newest Addition to the Office Wardrobe? Serious Athletic Sneakers

The Lawyers Sam Bankman-Fried Once Trusted Are Drawing Criticism

Be sure to follow me on Twitter.

Morning News: September 20, 2023
Posted by Eddy Elfenbein on September 20th, 2023 at 7:05 am

German Industry Defies Rising Pressure to Limit China Exposure

U.K. Inflation Rate Slips Lower for Third Straight Month

Naira Crashes to Record Low on Street as Dollar Supply Dries Up

Dollar Rally Is Crushing One of the Most Popular Trades of 2023

Fed Set to Pause Rate Hikes, But Don’t Count Out Another Increase

Gas Prices Have Crept Higher This Summer, a Challenge for the Fed

How $100 Oil Could Scramble the Fed’s Fight Against Inflation

Instacart Rally Set to Fade on Second Day After $660 Million IPO

Instacart Founder Exits With $1.1 Billion Fortune After IPO

JIP Says $14 Billion Tender Offer for Toshiba Set to Succeed

FedEx Wins Over Wall Street With $6 Billion Cuts, Gains on UPS

California’s Zero-Emissions Rule Triggers a Run on Diesel Rigs

Unions Fight in the States to Make Biden’s Climate Agenda Work for Workers

UAW Eyes Next Strike Targets as Parts Shortages Begin to Hit

Ford Averts Second Strike, Secures New Labor Contract in Canada

American Labor’s Real Problem: It Isn’t Productive Enough

Why US Hotels Are Missing More Than 238,000 Employees

Nearly Half of All Young Adults Live With Mom and Dad — and They Like It

Weekly Mortgage Demand Increases, Driven by a Strange Surge in Refinancing

Fed-Up Consumers Are Increasingly Going After Food Companies for Misleading Claims

Marlboro Maker Hits Reset on $2 Billion Bet on Medicine

‘Million Dollar Listing’ Star Co-Founds Media Business About Real Estate

Be sure to follow me on Twitter.

CWS Market Review – September 19, 2023
Posted by Eddy Elfenbein on September 19th, 2023 at 10:19 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

Expect the Fed to Pause

The Federal Reserve began its two-day meeting today. The policy statement will be out tomorrow afternoon at 2 p.m. ET. Don’t expect any hikes from the Fed tomorrow. They’ll almost certainly keep their target range for interest rates at 5.25% to 5.50%.

For November, I suspect that the Fed is leaning towards another pause, but that’s far from certain. There’s a lot of data due out between now and then. The financial world will be paying close attention to what Jerome Powell says tomorrow.

The Fed will also update its Summary of Economic Projections (SEP). In the last batch, a majority of the Fed saw the need for a rate hike before the end of the year, but futures traders aren’t so sure. In fact, the futures market doesn’t see the Fed making any moves for the next 10 months. There’s a very real chance that this is the highest the Fed will go.

While there’s been encouraging news on inflation, there are still some trouble spots. In particular, energy prices have been rising rapidly in recent weeks. Later on, I’ll discuss the dizzying rally in orange juice.

The bond market is sensing some pressure. Earlier today, the yield on the two-year Treasury reached its highest close in 17 years. The 10-year touched its highest close in 16 years.

There’s some talk on Wall Street that tomorrow, the Fed will offer a “hawkish hold,” meaning that the Fed will try to sound tough even though its actions may not back that up.

At one point today, the S&P 500 dropped as low as 4,416. That was the index’s lowest intra-day level since August 28. For the third day in a row, the S&P 500 closed below its 50-day moving average.

Instacart Goes Public

Shares of Instacart (CART) went public today. Today’s offering has received a lot of attention on Wall Street. The ticker symbol is CART.

For the first time in two years, there’s some buzz in the IPO market. The target range for CART was originally $26 to $28 per share. The underwriters then raised it to $28 to $30 per share. Last night, the shares were priced at $30, and the stock started trading today at $42 per share.

Investors are finally interested again in new issues. I’m not surprised that it’s taken some time. Many of the companies that went to the market two or three years ago were complete duds. There are few things as scary as a market hungry for anything new. To give you an example, in 2021, there was even talk of Instacart being worth $40 billion. At its height, DoorDash was worth $72 billion. (!!!)

Instacart’s underwriters sold 22 million shares for $30 a pop. That raised $660 million for Instacart. Instacart now has a market value of $10 billion.

You might think that’s a lot of money for a company that delivers groceries, and I would agree. The issue, however, is that Instacart isn’t in the business of delivering groceries.

Instead, it’s in the data business, and there are a lot of numbers to be gleaned from tracking how CART’s customers shop.

So technically, yes, Instacart will deliver groceries, but that’s merely a front for getting data which is hugely important to advertisers.

Advertising now makes up 30% of Instacart’s revenue. The company had sales of $740 million that didn’t come from shopping.

Making a service that’s a front for advertiser dollars isn’t something new. That’s largely the idea behind companies like Google and Facebook (sorry, Alphabet and Meta). Another company that’s worked to profit off data is our very own Intercontinental Exchange. The company has expanded into mortgage analytics, which is a field ripe for disruption. They want to own all the numbers.

Instacart was a big hit during the pandemic, but I’m not sure how long-lasting its success will be. According to the company, online shopping only makes up about one-eighth of grocery sales. The industry still has some problems it needs to work out.

Instacart had wanted to IPO several months ago, but a soggy IPO market and an active Fed helped put that on hold.

In its filings, Instacart said its revenues were up 31% to $1.5 billion during the first half of this year. CART had a new profit of $242 million compared with a net loss of $74 million last year. In my opinion, CART’s valuation is pricey but not outrageous.

Buying groceries online may prove to be different from shopping via Amazon. I suspect that there’s something people simply prefer about going to a store and seeing the items on display, especially something they’re going to eat.

There are more IPOs on the way. Birkenstock is looking to go public next month. Next year could be a big year for IPOs.

The Great Orange Juice Rally

While the stock market’s been fairly calm lately, the real action is going on in the commodity pits, especially orange juice futures. The price for OJ just hit a new all-time high.

On Wall Street, they trade just about anything, and that includes frozen concentrated orange juice, and in recent months, the price for OJ futures has soared.

Orange is apparently no longer the new black – it’s the new gold.

In the last year, OJ futures are up about 60%. The rally’s been spurred on by a combination of lousy weather and a nasty citrus disease. I hate to use the cliché “a perfect storm,” but that’s what’s happening. There’s simply not enough supply to go around.

Florida is the heartland of America’s citrus crop, and the Sunshine State was hit hard last year by Hurricanes Ian and Nicole. The Department of Agriculture said that Florida has its smallest orange harvest in over 100 years. Some farmers are selling their land, believing that they can get more for it than by growing oranges.

Originally, the USDA said that Florida was expected to produce 20 million boxes of oranges. That’s less than half the amount of the year before. Now they say it will be closer to 16 million boxes. Twenty years ago, they did 240 million boxes.

To meet demand, America has been turning to oranges from Brazil and Mexico, but the orange crops in those countries have been suffering as well. The free market has a nice little tool that it uses when supply forecasts fall short of demands — prices rise.

Shoppers are already seeing the effect in the supermarket. This could lead to long-term lower demand for OJ especially since consumers have been sensitive to higher prices thanks to the recent bout of inflation.

The orange juice rally is interesting to me because that’s the backdrop of Trading Places, which is probably the best movie about trading and financial markets.

In the film, the Duke brothers crookedly get early access to the government’s crop report. That leads them to corner the market for orange juice. Instead, Louis Winthorpe (Dan Aykroyd) and Reggie Valentine (Eddie Murphy) have switched the report with a phony version.

During the famous trading scene, once the market opens, the Dukes frantically buy orange juice. Other brokers see what’s happening and they start buying. The price for OJ skyrockets.

As the price soars, Winthorpe and Valentine start massively shorting. The trading floor becomes a frenzy. Then trading comes to a halt as the crop report is read on the air. The report says that the year’s crop will be normal. The Dukes realize they’ve been double-crossed.

The frantic selling continues and the price for orange juice plunges. In one trading day, the Duke brothers are wiped out and Winthorpe and Valentine have made a fortune.

The Duke brothers are loosely based on the Hunt brothers. These were two Texas brothers, Herbert and Nelson Bunker Hunt, who tried to corner the market for silver.

When they started their plan, silver was around $6 per ounce. By early 1980, it rose to $50 per ounce. Time Magazine estimated they made between $2 billion and $4 billion in just nine months. At one point, it was estimated that they held one-third of the world’s silver. Tiffany took out a full-page article to denounce them.

The Hunts were convinced that the Establishment was out to crush them, and they were pretty much right. The exchange changed the margin requirement which forced the brothers to put up much more collateral. One of my first jobs in this industry was making margin calls. That’s not a metaphor. I had to actually call people to tell them they had to sell or put up more money.

On March 27, 1980, the bottom fell out of the silver market. This is now known as “Silver Thursday.” The Hunts had to put up more money, but they couldn’t reach their margin requirement. The government was worried that Wall Street banks were so much in debt to the Hunts that if the Hunts went under, so would the banks. In other words, a silver panic could start a banking panic.

The Hunts had finally been broken, and even today, silver is still less than half its peak from 1980.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Morning News: September 19, 2023
Posted by Eddy Elfenbein on September 19th, 2023 at 7:10 am

Crisis and Bailout: The Tortuous Cycle Stalking Nations in Debt

Global Economy Poised to Slow as Rate Hikes Bite, OECD Says

ECB Done Hiking Rates But Cut Not Expected Until at Least July

Once A Global Ideal, Germany’s Economy Struggles With An Energy Shock That’s Exposing Longtime Flaws

Housing Investors Are Getting Flushed Out as Canada’s Rates Rise

Janet Yellen Is Running Out of Time to Make a Difference on Climate

Companies Stall Climate Action Despite Earlier Promises

Corporations Are Picking Sides in the New Era of Economic Upheaval

U.S. National Debt Tops $33 Trillion for First Time

Fed Creeps Toward Next Phase in Its Fight Against Inflation

The Most Popular Options Trade Turns a $1 Investment Into a $1,000 Stock Bet

UBS CEO: “Momentum Is Pretty Positive”

UAW Strike Collides With Biden’s Manufacturing Agenda

Strike Is a High-Stakes Gamble for Autoworkers and the Labor Movement

UAW Warns It Will Expand Strikes If No Serious Progress Is Made by Friday

Instacart’s IPO Puts Spotlight on Its Evolution Into Ad Seller

Google Adds ChatGPT Rival Bard to Gmail, YouTube, Docs and More

Elon Musk Floats Charging Users for X

Hollywood Strikes Send a Chill Through Britain’s Film Industry

How a Squiggly Line on a Map Got ‘Barbie’ Banned in Vietnam

Be sure to follow me on Twitter.

Morning News: September 18, 2023
Posted by Eddy Elfenbein on September 18th, 2023 at 7:04 am

Chinese Economists Disagree With Xi Jinping. But Xi Is Right

China’s Cash-Squeezed Country Garden Faces Another Dollar Coupon Deadline

Xi’s Security Obsession Turns Ordinary Citizens Into Spy Hunters

This China Trade War Isn’t About Semiconductors

How Long Can The World’s Borrowers Hold on As Higher Rates Bite?

Americans Can Barely Afford Homes — and That’s a Problem for Biden

How Auto Executives Misread the UAW Ahead of Historic Strike

Unions Keep Up Their Hardball Tactics

Why a Soft Landing Could Prove Elusive

Hedge Funds Just Turned Bullish on Dollar Before Key Fed Meeting

Trillion-Dollar Industry Powering Chicago Is at Risk of Leaving

Banks Kick Start $2.9 Billion Bond Sale for Worldpay Buyout

Instacart’s Long-Awaited IPO to Test CEO’s Pivot, Market Rebound

A Key Question in Google’s Trial: How Formidable Is Its Data Advantage?

Disney India Sale Talks Draw Firms Including Reliance

Tesla Factory Wanted in Turkey. Country’s President Calls on Musk

Tesla, Saudi Arabia in Early Talks for EV Factory

Clorox Says Cyberattack Is Hurting Product Availability, Will Weigh on Quarter

Some Businesses Make ‘Woke Free’ a Selling Point

Want to Write a Best-Selling Cookbook? Get on TikTok.

How Prime-Time TV Will Look Different This Fall

The Real-Life Inspiration Behind Bonfire of the Vanities

Be sure to follow me on Twitter.

Morning News: September 15, 2023
Posted by Eddy Elfenbein on September 15th, 2023 at 7:04 am

China’s Property Market Crisis Is Trouble for the Whole World

China Economy Shows More Signs of Stability on Policy Boost

Russia Struggles to Contain Resurgent Inflation

Russian Central Bank Hikes Rates to 13%, Issues Hawkish Guidance

Ireland’s Latest Fiscal Headache: What to Do With 10 Billion Euros

IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024

Dow Industrials Paying Price for Leaving Out Amazon and Alphabet

Cathie Wood, Boaz Weinstein Among Winners From Bitcoin Fund Bet

Biggest Hedge Funds Have Doubled Footprint in US Stocks Since 2014, Goldman Sachs Says

Billionaire Ray Dalio Pushes for Return to Hedge Fund in Succession Clash

SoftBank Left Millions on the Table to Engineer a Win for Masayoshi Son

Instacart Set to Raise IPO Price Target After Successful Arm Debut

Texas Moved to Protect Its Fragile Grid. Then Prices Skyrocketed

United Auto Workers Go On Strike After Contract Talks Break Down

The High Stakes Behind the U.A.W.’s Strike

The Car Shortage Is Finally Easing. The UAW Strike Could Change That

How Lehman’s Collapse 15 Years Ago Changed the U.S. Mortgage Industry

Flawed US Home-Loan System Neglects the Buyers Who Need It Most

Apple Counts on Wireless Carriers to Avoid an iPhone Slump

Every CEO Talks Like Elon Musk Now

Disney Says It Hasn’t Made a Decision About ABC After Report of Sale Talks

Be sure to follow me on Twitter.

Morning News: Sepember 14, 2023
Posted by Eddy Elfenbein on September 14th, 2023 at 7:05 am

Russian Elite Bring Back $50 Billion of Assets as Havens Dwindle

Copper Rises as China Cuts Reserve Requirements to Boost Economy

EU Opens Door to Revamping Its Landmark ESG Investing Rules

Inside Exxon’s Strategy to Downplay Climate Change

Oil Rally Gathers Pace as US Benchmark WTI Hits $90 a Barrel

Fuel Prices Are Soaring. Who Is Feeling the Pinch?

U.S. Inflation Accelerated in August as Gasoline Prices Jumped

Betting Inflation Will Keep Falling Is Still a Risky Business

Meet the Man Making Big Banks Tremble

The Bond Market Has Never Sounded Recession Alarms for This Long

The Stock Market Hopes for a Hit From the Year’s Biggest Initial Public Offering

Ray Dalio Says He Doesn’t Want to Hold Bonds, Cash ‘Is Good’

Deutsche Bank to Hold Crypto for Institutional Clients

SoftBank’s Arm Set to Debut on Nasdaq After Biggest IPO Since 2021

UAW Prepares to Strike at Detroit Three Automakers, Rejects New Offers

Biden Probably Can’t Stop a Strike Against Big 3 Carmakers

Cable TV Is on Life Support, but a New Bundle Is Coming Alive

Instacart Was All About Grocery Delivery. No Longer

Bernard Arnault Built a Luxury Empire on ‘Desirability.’ Who Will Inherit It?

How Sam Bankman-Fried’s Elite Parents Enabled His Crypto Empire

A Hidden Reason Cities Fall Apart

Be sure to follow me on Twitter.

Morning News: September 13, 2023
Posted by Eddy Elfenbein on September 13th, 2023 at 7:05 am

Modi Wants to Make India a Chip-Making Superpower. Can He?

European Countries Differ Over Windfall Taxes on Banks

Bankers’ 40% Pay Cuts Show the China Dream Fading in Its Richest Cities

EU Escalates China Tensions With Probe to Ward Off Cheap EVs

As OPEC’s Energy Influence Wanes, China’s Minerals Clout Rises

Oil Trader Gunvor Re-Enters Metals in Bet on Energy Transition

Big Oil’s Climate Fix Is Running Out of Time to Prove Itself

BP CEO’s Sudden Fall Puts Oil Major’s Strategy Back in Play

Biden’s Climate Law Is Reshaping Private Investment in the United States

Soft Core Inflation to Bolster Case Against More Fed Tightening

Corporate Defaults Jump, Highest August Monthly Tally Since 2009

A Who’s Who of Silicon Valley Will Convene With Lawmakers on A.I.

Arm Is Set for US IPO Pricing in Test to AI Hype, China Risk

iPhone 15 and 15 Pro First Look: Why a Tiny USB-C Port Is a Huge Deal

Apple’s iPhone Price Bump Is Part of Subtle Revenue-Boosting Strategy

Goodbye, California. Driverless Trucks Are Headed to Texas

Watch Boutiques Blossom in the Digital Age

Birkenstock Files for IPO in Further Boost to US Market

From $1 Billion to Almost Worthless: FaZe Clan Runs Out of Hype

McDonald’s to Eliminate Self-Serve Soda Machines at U.S. Locations

America’s Largest Newspaper Chain Is Hiring a Taylor Swift Reporter

Be sure to follow me on Twitter.

CWS Market Review – September 12, 2023
Posted by Eddy Elfenbein on September 12th, 2023 at 8:52 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

My Appearance on Bloomberg ETF IQ

Yesterday, I was invited on Bloomberg’s ETF show, ETF IQ, to discuss our ETF, the AdvisorShares Focused Equity ETF (CWS). I want to thank Eric Balchunas and the team at Bloomberg for having me on. It was a lot of fun.

Here’s the video. My segment starts at 15 minutes in:

Here’s the transcript:

Sonali Basak: We’re going to drill down into the equities market with Edward Elfenbein of AdvisorShares, up next. This is ETF IQ on Bloomberg.

Matt Miller: This is Bloomberg ETF IQ. I’m Matt Miller alongside Sonali Basak today.

Sonali Basak: And with us is Eric Balchunas from Bloomberg Intelligence. He’s back with today’s Drill Down where we focus on just one ETF. Eric?

Eric Balchunas: Sonali, today we look at CWS. It stands for Crossing Wall Street, which is a stock-picking blog that was converted. It still exists but now there’s an ETF based on it. As you can see, it’s actively managed. It’s a very concentrated portfolio of 25 stocks which tends to look at quality and value. It uses fundamentals so it tilts a little more toward mid-cap or smaller large-caps. It has $73 million in assets which is pretty good for an active fund. It has an expense ratio of 0.75%, but that’s a fulcrum fee. If they outperform, they take a little bonus. If they underperform, you get a little bit less of a fee.

Let’s look at the holdings here. You can see that this isn’t your typical active fund that’s loaded with Amazon and Apple. You can see just by looking at these stocks that you’re going to know some of these names, but as you can see, these are going to be a little less.

So, this has an average market cap that’s much less than the S&P and a slightly lower price/earnings ratio. Let’s look at the performance of this versus the S&P which is the benchmark. I threw in mid-caps because, again, this thing does tilt down a little bit.

You can see that it’s up 123% since its inception. It’s slightly underperforming the S&P but it’s blowing away mid-caps. It’s going to outperform when the Super Seven or these mega-caps take a break.

So, if you see that coming, this ETF is probably is in a good position to have some outperformance which, again, should draw more looks.

Sonali Basak: Thank you, Eric. And joining us to talk about this ETF is Edward Elfenbein. He’s the portfolio manager at AdvisorShares Investments. What are you looking at when you’re thinking about the direction of this market and what can outperform in the world that you’re in?

Edward Elfenbein: Right now, it looks like the Fed is going to pause next week. Maybe – it’s about 50/50 – we’ll get a rate hike coming in November. But I think right now, there’s been a concern that if we’re going to cut rates right now, the Federal Reserve is going to bring us right back to the playbook of 2020/2021.

Back then we saw Zoom and Moderna. Now that’s being replaced by the Super Seven and the Artificial Intelligence-kind of stocks. That’s just going to replace that. We’re going right back to that. I think the market is assuming too much. I’m looking at a lot of these high-quality, low-beta names that I think look very good right now.

Matt Miller: So, I guess I could say that Trex Co. is your favorite, but what do I take as your favorite considering all the names that we just saw there?

Edward Elfenbein: I’ll tell you one that you might like, and that’s Miller Industries. This is a wonderful company, and it’s not followed by a single Wall Street analyst. I love this – it’s a tow truck company based in Chattanooga, Tennessee.

Matt Miller: Nice!

Edward Elfenbein: It’s a wonderful little company and they just had a blowout earnings report. I can’t say if it beat expectations or not because no one follows it.

Matt Miller: So, there were no expectations?

Edward Elfenbein: There were no expectations.

Matt Miller: That we know of…

Eric Balchunas: I was looking through your holdings historically just to see what you’re buying and selling, and I did see the move to Industrials. One stock you sold out of – I mean this is like a perfect trade – you had Disney for many years. You crushed it. You sold it exactly two years ago. Since then, it’s down 56%. What alarmed you? What got you to get out of that company at that time?

Edward Elfenbein: I’ve got to tell you – that was a really difficult one because it was a company that I had a strong conviction in. But I really didn’t like the culture that I saw forming at Disney. I don’t like when companies treat their customers, particularly their core customers, like an ATM. And I got that feeling that this is how Disney was behaving with very high prices across the board. Of course, there was a leadership change, so that made me make the decision to pull the plug on Disney.

Matt Miller: That’s the furthest thing from an orphan stock that there is.

Edward Elfenbein: That is true.

Matt Miller: Miller Industries and Disney are like two ends of the spectrum. Everybody on the Street follows Disney and no one follows Miller. Does that matter to you?

Edward Elfenbein: Not at all. I go wherever there is a bargain.

Sonali Basak: Now, if you’re taking a look and you think that there’s either a soft landing or a harder recession, what would you trade out of today that you’re still in if you think that things are going to get worse than the market currently thinks they are?

Edward Elfenbein: The obvious choice is a lot of these Super Seven stocks. They really have run so far. Even if you don’t have to exit your position, it’s a good time to take profits on those. That’s the number one concern I would have.

Eric Balchunas: Just a little bit about positioning this fund in a portfolio, we do a lot of work on how actives should move forward. You’re concentrated, which I think is a viable lane because you can complement cheap beta rather than competing with it.

How do you position this to advisors? Are they looking for performance, mainly, or does that active share – which is 96% in your case – does that matter to them because it can be used as a satellite position?

Edward Elfenbein: I think they really do like the concept of it, the idea that we don’t do any trading. No trades are made during the entire year. We focus on just the high-quality names and we stick with them. We have a 20% turnover each year. Five new ones of the 25 stocks come in, and five go out.

Matt Miller: You have this fulcrum fee that Eric was talking about. I’d never heard of it before now, and I don’t think it’s widely used in the industry. How has that worked out for you and for your investors?

Edward Elfenbein: I think it’s been great, personally, because I’ve been getting a nice bonus. So that’s good. We believe we were the first ones in the ETF space to use that. It does exist in the open-end community. I don’t know of any others that have used it, but I think it’s a great way to say to investors, “we are aligning with your interests; we have skin in the game.” I think it’s a way that Wall Street will be moving toward those sorts of qualities.

Sonali Basak: Double down on that, because on one hand, the ETFs have brought down the fee structure for the investing universe to begin with, but with all of these new actively-managed ETFs, that is getting a little more expensive. Do you think that this fulcrum idea might take more steam with those higher fees that we are starting to see?

Edward Elfenbein: I certainly hope so, because one of the problems is that a lot of these smaller ETF shops, I’m afraid, are getting pushed out. We turn seven years old next week. I don’t know if our kind of fund could launch in this type of atmosphere. Maybe we got in at the right time. But I think that things like the fulcrum fee and the tax-efficiency are going to gain steam and become larger as the years go on.

Matt Miller: All right. Fascinating story. Really glad to get you in here. Eddy, thanks so much for joining us. Eddy Elfenbein of AdvisorShares – his ETF turns seven.

That’s CWS, as he said. If you just can’t get enough of ETFs, a reminder that you can listen to Eric with Joel Webber, our editor of BusinessWeek, on Trillions. That’s their bi-weekly podcast that covers the industry and fascinating stories like CWS and Eddy as well.

Also, I recommend following Eddy on Twitter because he says some stuff that just sticks with you for a while. I think about you in bed a lot because you once tweeted that it’s too hot when both legs are under the covers and it’s too cold when both legs are out of the covers and that you need one under and one over in order to be ok. To me, that makes a lot of sense.

Eric Balchunas: That’s insightful!

Matt Miller: That does it for Bloomberg ETF IQ. I’m Matt Miller along with Eric Balchunas and Sonali Basak. This is Bloomberg.

The Golden Rule of Financial Markets

Also this week, I wanted to discuss the Golden Rule of Financial Markets which states that as interest rates go up, investors become more conservative. The corollary to the Golden Rule is that as interest rates fall, investors become open to shouldering more risk.

The Golden Rule makes perfect sense. When interest rates are at 0%, who cares what a P/E Ratio is? That certainly didn’t matter three years ago when the Fed snapped into action to fight the economic effects of the Covid lockdowns. But as interest rates creep higher, suddenly valuations are important.

We saw the Golden Rule in effect in 2021 and 2022 as the Fed started hiking and the market reversed course from the risk-happy Covid rally.

During the Covid rally, it seems that everyone just bought stocks and they didn’t care much what ones they were. I recall shares of ZOOM doing well even though that wasn’t the ticker of the video call service which is ZM.

Lately, however, investors have shied away from conservative stocks, and I think that’s a big mistake. My hunch is that investors think that if the economy hits a rough spot, the Federal Reserve will jump in, quickly lower rates to the floor and we’ll go back to the 2020 playbook. Traders currently think the Fed will start cutting rates by June of next year. Hmmm…I’m not too sure about that.

To gauge the market’s sentiment for risk, I like to track how Low Volatility stocks (meaning the conservative stocks) perform relative to High Beta stocks (riskier stocks). This is a simple, quick way of telling you the market’s mood. Since the start of this year, High Beta (black) has performed considerably better than Low Vol (blue).

If someone told me to guess the market return for a stock like Hershey (HSY), a perfect example of a defensive conservative stock, when the S&P 500 is up in the low teens and the Fed has been hiking rates, I would probably guess HSY would be something like to 10% to 15%. Instead, Hershey is down 10% this year.

No one wants steady and conservative. Instead, the market appears to be obsessed with the Super Seven stocks: Apple, Amazon, Alphabet, Meta, Tesla, Microsoft and Nvidia. What Zoom and Moderna were three years ago, artificial intelligence is today.

Tomorrow’s CPI Report Could Tip the Balance

Tomorrow we’re going to get the inflation report for August. Wall Street expects headline inflation of 0.6% and core inflation of 0.2%. If that’s right, it will bring the 12-month headline rate to 3.6% and the 12-month core rate to 4.3%.

The reason why there’s a big gap between the headline rate and the core rate is due to gasoline prices. Last month, gasoline prices probably rose by 6% to 8%.

Even though gasoline gets a lot of attention, the major focus at the Fed is on core services inflation. In fact, this is what the Fed has said is most important. We’re also running into simple base effects. That simply means that the 12-month may appear high because inflation was cooling off one year ago.

The Fed prefers to look at personal consumption expenditure prices (or PCE). The one advantage of the CPI report is that it’s earlier and tomorrow’s report will be ahead of next week’s Fed meeting.

It’s widely expected that the Fed will pause on any rate hikes next week, but the outlook for the November meeting is still up in the air. If tomorrow’s inflation report comes in high, that could tip the balance to a November hike. I don’t think the market will like that.

At next week’s meeting, the Fed will update its (usually very wrong) economic forecasts. Most Fed members still see another rate hike this year. I suspect that one more hike will still be predicted.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.