Global Exchanges & Indexes
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S&P 500
Rebalancing 05 Sep 2023 |
Rebalancing season: Airbnb and Blackstone added to the S&P 500
Both travel services company Airbnb (ABNB $140) and alternative asset manager Blackstone (BX $108) rallied at the start of the week on news that they would be replacing Newell Brands (NWL $11) and Lincoln National (LNC $26) in the S&P 500 index. Meanwhile, troubled pharmacy retailer Walgreens (WBA $23), which just fired CEO Rosalind Brewer, will be replaced in the S&P 100 by ag equipment maker Deere (DE $417). The benchmark put it politely when it said the changes were taking place to “better represent its market cap range,” which simply means the deletions had lost too much of their size to remain viable members. Moving down in cap size, Morningstar (MORN $246), Ally Financial (ALLY $29), Vail Resorts (MTN $243), and Weatherford International (WFRD $94) are some of the names we like which will be entering the S&P MidCap 400, replacing such companies as Energizer (ENR $36), Xerox (XRX $17), JetBlue Airways (JBLU $6), and Foot Locker (FL $19)—four names struggling for quite different reasons. JetBlue, for example, has been in a fierce battle with the Department of Justice and FTC over its planned acquisition of Spirit Airlines (SAVE $16). It didn’t help when court documents revealed that JetBlue might raise airfares on certain Spirit routes by as much as 40%. At $2 billion in size, the airline was knocked down to the S&P SmallCap 600. All of this reshuffling will be concluded by market open on Monday the 18th of September. We recently took profits on our Airbnb position at a level higher than where it is currently trading (though we may revisit a purchase if it falls below $120/share). Despite the removal of their CEO, who oversaw a 58% decline in the company’s size, we aren’t ready to touch Walgreens—mainly because a successor hasn’t been chosen yet, and CVS looks like a much better value. Vail Resorts is a name we have owned in the past, and it is still trading some 55% off of its high. The company also has a nice 3.62% dividend yield. From a cap size, we strongly favor the beaten-down small caps for the remainder of the year, as represented by our position in the Value Line Small Cap Opportunities Fund (VLEIX $51) and the Invesco S&P SmallCap 600 Revenue ETF (RWJ $39). |
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Shanghai
Stock Exchange |
The high risks associated with investing in Chinese tech companies
(29 Jul 2021) There have always been outsized risks associated with investing in Internet companies; when those companies happen to be based out of Communist China, those risks are compounded. For evidence, consider the popular KraneShares CSI China Internet ETF (KWEB $52). This fund holds fifty of the largest Chinese Internet companies listed on exchanges outside of Mainland China (presumably to mitigate risk). Alibaba and Tencent Holdings are the two largest positions within the fund. On 17 February, shares of KWEB hit $104.94; now, just five months later, they have been sliced precisely in half. Put another way, a $10,000 investment in the fund five months ago would now be worth $5,000. China's general crackdown on publicly-traded companies and the more recent rules handed down to rein in for-profit education companies—such as the $4 billion New Oriental Education & Technology Group (EDU $2)—have been the major catalyst for the plummet. EDU has been a popular bet for investors looking to ring up profits in Chinese companies, with the shares jumping from $5 in 2019 to a peak of $20 this past February, before settling back down to their current $2 range. Why would China, which is bent on becoming the world's largest economy in short order, create a host of new rules designed to stifle the growth of their own companies? Note that KWEB focuses on shares of companies listed outside of the country; China wants to promote those listing on domestic exchanges—the largest being the Shanghai Stock Exchange. These rules are a shot across the bow to home-grown companies daring to list outside of the country. As has always been the case, investors are at the mercy of the all-powerful Chinese Communist Party. There are so many wonderful opportunities right now across the globe, both in frontier/emerging and developed markets, that we urge investors to focus on areas which promote democratic values and offer citizens a high level of personal freedom. We don't believe it is worth the risk to have direct exposure to individual Chinese companies. The KWEB example shows how much risk is involved even in owning a basket of the largest publicly-traded companies based out of Mainland China. |
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DJIA
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The Dow's latest moves won't make the outdated index more relevant
(25 Aug 2020) It always amazes us how much attention is given to the level of the Dow Jones Industrial Average on any trading day as opposed to the much more reflective S&P 500. After all, out of roughly 2,500 listed companies on the New York Stock Exchange and another 3,300 on the Nasdaq, only 30 select entrants make up the DJIA. And these holdings are price-weighted, meaning companies are weighted in proportion to their share price, not market cap. In other words, another great day for Apple (AAPL $500)—and there have been plenty of those recently—probably means a strong day for the Dow. Compare this to the cap-weighted S&P 500 Index, which means the bigger a company, the more impact it can have on the S&P's return. No matter how big a company, it is still weighted against 499 others. Let's stick with the Apple example, since the tech giant is about to undergo a four-for-one stock split. Right now, despite its $2 trillion size, Apple still makes up a little over 7% of the S&P 500 Index. After the split, nothing will change (its market cap won't change just because it split). In the Dow, however, where Apple also finds a home, it will suddenly become one-quarter as relevant to the daily returns. That's crazy. Or how about leaving entire industries virtually unrepresented, such as utilities! Also crazy. We delve into this subject because the Dow is about to jettison three stocks and add three others in their place. Salesforce (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon Technologies (RTX). The last two swaps are real head-scratchers. Even the first: Is Salesforce the most relevant tech company to infuse new blood into the Dow? What about Facebook (FB)? Perhaps the Dow is still the financial press' favorite benchmark because it sounds more sensational to say, "DOW LOSES 1,000 POINTS" than it does to say, "S&P OFF 100." Irrespective, back during the bloodbath that was March, when the S&P 500 had plunged to below 2,500, we made our year-end prediction: "The index will rise to 3,500 by December 31st." It sits at 3,436 right now. We didn't bother making a prediction for the Dow. |
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IPOs
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Endeavor yanks its IPO just a day before going public after watching Peloton struggle and others flop. (30 Sep 2019) The ugly opening-day response of investors to companies fresh out of the IPO gate has claimed its first victim: just a day before it was slated to go public, global entertainment (think Hollywood talent agency owner) company Endeavor Group Holdings pulled its listing from the New York Stock Exchange. Goldman Sachs (GS) was the lead underwriter of the firm started by—among others—Rahm Emanuel's brother, Ari, which was to begin trading Friday under the symbol "EDR." As recently as last week, the company hoped to price in the range of $30-$32 per share, but that range abruptly fell to $26-$29 this week. The company was hoping to raise more than $600 million in net proceeds from the offering, but after that was shaved down closer to $350 million, the deal was shelved. While they can certainly give it another go down the road, this is not a good sign for the likes of The We Company (WeWork), which just ditched its CEO in an effort to salvage its own listing. It used to be a given that a company was expected to be turning a profit before it was brought to the public market. How much has that tenet been turned on its head? It is estimated that 80% of all companies brought public over the past twelve months have been firms which had yet to turn a profit.
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Global market rout shows just how correlated other countries' indexes (still) are to US markets
(06 Feb 2018) For all the talk of China's economic ascendency (precisely like it was in the 1980s with respect to Japan), the world markets still take their marching orders from the US. Case in point: global markets plummeted on their first trading day after the big drop in US markets, despite a dearth of any bad economic news in their respective countries. Japan's Nikkei fell 4.7%—it's biggest drop since June of 2016, Hong Kong's Hang Seng fell over 5%, the Shanghai dropped 3.35%, and Europe's FTSE 100 shed 2.64%. All of this was in response to the US markets, which fell for reasons having nothing to do with the global economy. What's the point? Holding international positions is certainly wise for nearly any portfolio, but using these positions as a hedge against a US downturn is a fool's errand.
(06 Feb 2018) For all the talk of China's economic ascendency (precisely like it was in the 1980s with respect to Japan), the world markets still take their marching orders from the US. Case in point: global markets plummeted on their first trading day after the big drop in US markets, despite a dearth of any bad economic news in their respective countries. Japan's Nikkei fell 4.7%—it's biggest drop since June of 2016, Hong Kong's Hang Seng fell over 5%, the Shanghai dropped 3.35%, and Europe's FTSE 100 shed 2.64%. All of this was in response to the US markets, which fell for reasons having nothing to do with the global economy. What's the point? Holding international positions is certainly wise for nearly any portfolio, but using these positions as a hedge against a US downturn is a fool's errand.
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S&P 500
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(01 Aug 17) S&P to ban companies with multiple share classes from joining its benchmark index
What a fantastic move! We've long thought it was bull for companies to issue multiple share classes—one for the company's aristocracy (the shares with the real vote count) and one for the rest of us, the common bourgeois who are just providing all the funding for the company. In our opinion, this rigged system has been a way for companies to say, "we want your money, not your feedback, junior." Now, S&P is doing something about this un-American structure. Beginning immediately, the benchmark S&P 500 Index will not allow companies to become a member if they issue multiple share classes. Bravo! Unfortunately, this won't affect all of the companies currently residing in the Index which offer multiple share classes. |
(20 Jun 2017) Despite concerns, MSCI adds mainland Chinese shares to its benchmark index. The coveted MSCI (originally the Morgan Stanley Capital Index) is the benchmark index for international companies. For four years the organization has considered allowing Chinese mainland shares to be listed on the index, ultimately approving the plan this week. Within a few years, 222 Chinese companies will be added to the emerging markets index; expect to see names like the Bank of China, Tsingtao Brewery, and Spring Airlines on the list. The biggest challenge to getting the shares on the exchange (and threat going forward) has been and will continue to be the lack of transparency of Chinese companies and the total control the communist government can exert over any entity at will. The MSCI tracker we use is EEM, the iShares MSCI Emerging Markets ETF, which rose about 15 basis points on the news.
(29 Mar 2017) Speaking of Brexit...EU throws first hissy-fit. In a clear retribution for the UK's triggering of Article 50, the European Union has formally blocked the merger between the London Stock Exchange and Deutsche Börse AG, operator of the Frankfort Stock Exchange—by far the largest exchange in Germany. The merger would have created the largest stock exchange in Europe, no doubt designed to compete directly with the NYSE. While the merged entity would have been based in London, it would have been led by a Deutsche Börse executive. Key phrase "would have been." Just when you think the US has the most dysfunctional government....