The Ricks Report – August 14, 2017

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The Ricks Report 

August 14, 2017

Numbers of $ignificance

  • DISCOUNT RATES PRODUCE DRAMATIC INCREASE IN VALUE – The discount rate used to calculate the present value of pension liabilities has historically been benchmarked to high-quality corporate bond yields. Every 1 percentage point drop in the discount rate produces an approximate +12% increase in the present value of pension liabilities (source: Center for Retirement Research at Boston College). 
  •  VAST MAJORITY OF FIRMS FALLING BEHIND – 95% of the companies in the S&P 500 (476 firms) have underfunded pension plans (source: Bloomberg Businessweek).
  •  USA NOT IN TOP TEN – There are 10 countries in the world that currently maintain the top credit rating from each of the 3 major credit rating agencies, including Canada and Germany (source: Trading Economics). 

Winning at Life with Gregory Ricks

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 The Markets

North Korea may be a little country, but it can churn up big trouble.

The possibility that verbal hostilities between the United States and North Korea could trigger geopolitical conflict had investors on the run last week. In the United States, the Standard & Poor’s 500 Index fell by 1.4 percent, the Dow Jones Industrial Average lost 1.1 percent, and the NASDAQ Composite finished 1.5 percent lower.

Financial Times explained:

“The sell-off came as U.S. President Donald Trump escalated the war of words against the North Korean regime’s accelerated [program] of nuclear testing. Mr. Trump tweeted on Friday, “military solutions are now fully in place, locked and loaded, should North Korea act unwisely.”

While major U.S. indices headed south, the CBOE Volatility Index (VIX) – also known as Wall Street’s fear gauge – headed north. The VIX, which has been flirting with historic lows for much of the year, rose 44 percent in a single day, reported CNBC.
Stock markets in Europe and Asia were also affected by the saber rattling. National indices across Europe suffered weekly losses of 2.2 percent (Sweden) to 3.5 percent (Spain), according to Barron’s. In the Asia-Pacific region, India’s Sensex 30 lost 3.4 percent and South Korea’s Kospi was down 3.2 percent for the week.

Geopolitical concerns overshadowed some important economic news in the United States. Inflation, as measured by the U.S. Consumer Price Index, rose very little in July. In fact, consumer prices have been soft for five straight months, reported MarketWatch. Persistently low inflation could affect the Federal Reserve’s plan to raise interest rates this year. The Fed’s goal is 2 percent inflation.

 

Data as of 8/11/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -1.4% 9.0% 11.7% 8.0% 11.7% 5.3%
Dow Jones Global ex-U.S. -1.6 15.1 12.7 0.5 4.9 -0.5
10-year Treasury Note (Yield Only) 2.2 NA 1.6 2.4 1.7 4.8
Gold (per ounce) 2.3 11.0 -5.1 -0.5 -4.5 6.8
Bloomberg Commodity Index 0.5 -4.4 -0.3 -13.1 -10.0 -6.7
DJ Equity All REIT Total Return Index -2.1 3.8 -2.0 8.2 9.6 8.7

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

Are electric engines the tortoise competing with the combustion engine’s hare? In the late 1800s, the Paris-Rouen race for horseless carriages included 102 vehicles fueled by steam, petrol, electricity, compressed air, and hydraulics, reports The Economist. Not a single electric engine made it to the starting blocks. (The internal combustion engine won.)

Oh, how times have changed!

The International Energy Agency’s Global EV Outlook 2017 reported:

“New registrations of electric cars hit a new record in 2016, with over 750 thousand sales worldwide. With a 29 percent market share, Norway has incontestably achieved the most successful deployment of electric cars in terms of market share, globally. It is followed by the Netherlands, with a 6.4 percent electric car market share, and Sweden with 3.4 percent. The People’s Republic of China (hereafter, “China”), France, and the United Kingdom all have electric car market shares close to 1.5 percent. In 2016, China was by far the largest electric car market, accounting for more than 40 percent of the electric cars sold in the world and more than double the amount sold in the United States.”

Financial Times reported the UBS analysis suggests the market may be at an inflection point as the total cost of ownership for electric vehicles may become comparable to that of combustion engine vehicles as early as 2018 in Europe, 2023 in China, and 2025 in the United States.

Even though their popularity is growing, electric cars comprise a small portion of the market today. UBS expects electric cars to account for 14 percent of the global market, and more than one-third of the European auto market, by 2025.

 Weekly Focus – Think About It

“Though most of them sit idle, America’s car and [truck] engines can produce ten times as much energy as its power stations. The internal combustion engine is the mightiest motor in history.”

–The Economist, August 12, 2017

 

Best regards,

Gregory Ricks

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Gregory Ricks & Associates is a Registered Investment Advisor which offers services and charges fees as set forth in Form ADV, a copy of which you should obtain prior to investment. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index

Sources:

https://www.ft.com/content/44ce541e-5e13-365a-8918-2857025b8cb0 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-14-17_FinancialTimes-S_and_P_Clocks_Worst_Week_Since_March_Despite_Fridays_Bounce-Footnote_1.pdf)

https://www.cnbc.com/2017/08/11/all-time-record-options-bets-on-volatility-spook-wall-street-over-leverage-risk.html

https://www.cnbc.com/2017/07/25/heres-what-happened-the-last-time-the-vix-traded-this-low.html

http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html (Click on U.S. & Intl Recaps, “Geopolitical worries deflate stocks”) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-14-17_Barrons-Global_Stock_Market_Recap-Footnote_4.pdf)

http://www.marketwatch.com/story/us-consumer-inflation-remains-soft-in-july-cpi-shows-2017-08-11

https://www.federalreserve.gov/faqs/money_12848.htm

https://www.economist.com/news/leaders/21726071-it-had-good-run-end-sight-machine-changed-world-death?cid1=cust/ednew/n/bl/n/20170810n/owned/n/n/nwl/n/n/NA/54751/n (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-14-17_TheEconomist-The_Death_of_the_Internal_Combustion_Engine-Footnote_7.pdf)

https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf (Page 5)

https://www.ft.com/content/6e475f18-3c85-11e7-ac89-b01cc67cfeec (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-14-17_FinancialTimes-Electric_Car_Costs_Forecast_to_Hit_Parity_with_Petrol_Vehicles-Footnote_9.pdf)

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