Are geopolitical risks beginning to impact stocks? While 2017 was marked by low volatility and little consideration for risk in general, the first quarter of 2018 feels different.
Imagine you have some great recipes for butterscotch cookies, and you want to start a cookie business. Yet, there are some issues. First, the price people are willing to pay for cookies is going down due to intense competition as well as scrutiny from regulators after a few greedy companies ("cookie monsters," if you will) charged exorbitantly high prices. Second, because of the competition, you'll have to spend more on research to keep your cookie line fresh (pun intended). Finally, building a cookie factory is expensive, takes years to build, and requires following many stringent regulatory standards. The thing is, cookies are still in demand and could even get more popular as better cookie recipes are developed! So what do you do?
One of the more interesting developments in the oil markets is the fact that oil inventories have not had their seasonal build. We don’t blame you for not noticing. This news was likely drowned out by all the macro “noise” around trade wars, flattening of yield curves, rise in inflation, tax reform, new Fed Chair (hawkish or dovish?), spike in VIX, and volatility in FANG stocks. Admittedly, there is a lot of macro news to digest.
Continuing with our explorations of cryptocurrencies and blockchain technologies, we highlight a fascinating risk of supporting a cryptocurrency.
Topics: From the Desk of Harry Polishook
Are the benefits of international equity diversification finally returning? From a performance and correlation perspective, it sure seems like a possibility.
Topics: International Equity
On March 16th, Johnson & Johnson ("JNJ") received a $2.1b offer for its glucose monitoring business ("LifeScan") from private equity firm Platinum Equity. This isn't too surprising since JNJ announced last year it was thinking about selling the business in order to focus on its core segments. The $2.1b enterprise value for LifeScan reflects a 1.4x multiple on trailing 12-months revenue, which compares to the 1.1x multiple that Panasonic paid for Bayer Diabetes, another diabetes diagnostics business. At face value, this seems to suggest the appetite for medical devices continues to recover. Global M&A activity in healthcare products has stabilized and increased steadily since the financial crisis by all measures -- dollar volume, deal count, and average premium paid per target. See the charts below which show annual data; most recent data dips because those represent YTD figures through March 18, 2018.
After equity markets hit all-time highs earlier this year, market pundits have been eager to “call the top.” We have one of the largest hedge funds in the world taking on significant short positions in the European market, an equity strategist at a bulge bracket firm calling for a potential 40% market correction “at some point” and a recent article claiming that high cross-asset correlation is a sign of an impending sharp correction. These headlines have analysts all asking the same question: should we brace for a big sell-off?
Are you frustrated with your globally diversified equity exposure? Are you considering reducing your international equity allocation in favor of a more U.S.-centric portfolio? If so, we are here to say hold on! We totally get it, but please consider the following before hitting that sell button:
1. Returns have begun to favor international equity over U.S. equity.
2. Low correlations actually signal that now is time to maximize the diversification benefits of international equities.
Topics: International Equity
The bond markets are seeing a sell-off. Yields on 10-year U.S. Treasuries rose as high as 2.90% in mid-February, compared to the September 2017 low of 2.04%.
Today, we want to talk a bit about security and technology. The “Internet of Things (IOT)” is a favored buzz word right now in technology and technology investing. This term describes the now nearly ubiquitous internet connected devices, often GPS-enabled. Smart and connected devices today are cheap and readily available, but do people really think about the security implications inherent to them?