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Passed Pawn Advisors October 2019
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Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

The world is sleepwalking towards a fresh economic and financial crisis that will have devastating consequences for the democratic market system.”

-- Former Bank of England governor Mervyn King

Economic Highlights

  • The Fed cut interest rates by 0.25% again at the October meeting, but warned that no further cuts are likely

  • Another round of trade talks with China is getting close to “Phase 1” mini-deal

  • Britain’s Brexit deadline has been extended again

  • US economic outlook stabilized, with Q2 final GDP growth at 2%, and consumer spending higher by 4.6%

  • The overall trend in inflation remains tame but inflation continues to edge up, with headline CPI up 1.7% YOY

Market Highlights

  • US Equities continued their “melt-up”, with S&P 500 Index closing up 2.2%

  • Emerging Markets Equities led all asset classes on trade deal optimism, up 4.2%

  • Bonds of all credits and geographies edged up, as global economy gained its footing, led by the riskiest foreign high yield bonds, up 2.5%

  • Commodities also gained 2.0%, including gold, up 2.5%, but oil was virtually unchanged

  • US REITs gained 1.4%, and only USD was down among all major asset classes, by -2.0%

Observations and Expectations

The month of October has a notorious reputation in the investing world, as it has seen the largest number of single-day drops as well as the highest volatility on record. Most of the “black” days on the market happened to be in October, from 1907 to 1929 to 1987 and 2008. So saying that October 2019 went relatively uneventful is music to investors’ ears. Market stats across the asset classes were positive, the economy kept humming, and the trade deal looks promising once again. By the end of the month, major US indices even made fresh all-time highs, while the recent talks about inverted yield curve and certainty of the coming recession have abated.

Yet not all is right in the world. The Q3 earnings so far have been decent compared to lowered expectations, but overall are still lower on the year-over-year basis, rekindling the worry about the so-called earnings recession. The market leaders also can often tell the story. Among the top gainers in S&P 500 large-cap index this year so far are predictably several semiconductor companies. But some others like consumer staple Coty, oil refiner Hess, materials company Arconic, restaurant Chipotle, and retailer Target are mostly big surprises. The recent rotation into utilities and staples, coupled with continued leadership of real estate, speaks volumes about the investor sentiment, which is in fact the lowest of the year.

And while many professional traders continue to play defense and protect their profits before the end of the year, many of them lag the market indices that continue to climb the wall of worry. Looking forward to November, we do not expect any major changes in the market’s mood or direction, barring any major cataclysms. If anything, a number of beaten down technology and biotech names may be bargains once again.

Sector Update

Energy sector has been mired in a significant downshift as oil and gas have both seen plenty of uninterrupted supply. The fracking producers have been hit the hardest. The refiners have been a notable exception as their profits are not correlated to the oil price as much. The alternatives, especially solar, have had a great year so far, which adds fuel to the argument that the traditional oil and gas industry is entering a secular decline.

The Financials, on the other hand, have been experienced a stealth bounce. The group has not participated in the market rally most of the year, due to the expectation of lower rates and threats to global and domestic economy. Another worry has been added lately with the rise of Senator Warren in the Presidential polls. Her campaign rhetoric poses very real and significant threats to the financial sector (as well as healthcare and energy). Yet, as the recession fears abate and the mini-cycle of lower rates appears to be over, the financials are taking off, also boosted by some M&A.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

What is the deal with zero trading commissions and zero-cost ETFs?  Is investing really becoming free?

Answer

Since the dawn of the Internet and the emergence of the discount broker, the trade commissions have been falling. The trade execution has become a commodity business, and it was inevitable that the brokers will race each other to the bottom. That race is now officially over. The app called Robinhood famously announced zero commission trading a few years back. But as of last month, Schwab, Fidelity, Interactive Brokers, E-Trade, TD Ameritrade, and JPMorgan You Invest – all major retail brokers – have announced availability of a zero commission trading plan.

So what does it mean to retail investors? Is trading now free, and does it mean that all major brokers are equal? First, it is obviously a win for retail investors. Small commissions weren’t a major factor for most investment decisions, especially for the long-term, buy-and-hold investors. However, some of the higher dollar value names like Apple or Amazon would not make sense for many investors because of the high commissions relative to the small number of shares they would be targeting.

The main question remains, how is it paid for? First, larger brokers are hoping to cross-sell investors on other products with higher margins. I, for one, can live with that. More importantly, the quality of trade execution suffers. The professional accounts such as the Interactive Brokers Pro will keep the best algorithms that can more than cover the commissions with better execution. Finally, brokers get paid by the exchanges to provide order flow, which was the original business plan behind Robinhood. “If offering free trading encourages clients to trade much more frequently, the client is more likely to perform worse and the brokerage will still be generating revenue through activities like selling order flow,” says Adam Grealish, director of investing at robo-adviser Betterment.

ETF Education

We have recently added a new section to our website designed to provide educational, reference, and news resources to investors in the growing world of ETFs. Product knowledge, understanding cost and tax structure and how ETF trade works can help investors of all stripes find better opportunities for their portfolios and improve its risk management. Knowing the mechanics of volatility ETFs, for example, could have helped $XIV ETF holders avoid huge losses last week.

Featured Motifs

Motif Investing is an innovative broker that allows you to treat a portfolio of equities as a single unit.  We utilize their platform to offer our clients affordable solutions in thematic investing.

Each month we highlight 3 of our motifs that play on current market themes.


Motif Managed Healthcare Plans
Risk Profile Moderate
Time Horizon Mid/Long-Term

The investment thesis for managed healthcare business has several points: the aging baby boomers, the new baby boom and the new focus on testing and prevention. No other healthcare companies are included.


Motif Oil Refiners
Risk Profile Moderate
Time Horizon Long-Term

This motif concentrates on pure-play US oil refiners. When crude prices are high, demand erodes and refining margins ("crack spread") are suppressed.


Motif Legends of the Fall
Risk Profile Conservative
Time Horizon Short-Term

This motif combines businesses that are seasonally strong in the fall.

Investing Hot Reads

Model Portfolio

See how our proprietary algorithm creates a customized portfolio just for you

Our Papers


These thematic investing papers provide insights into specific investment topics.  If you follow the subject, you can easily subscribe to them and receive a daily email update.  It's absolutely FREE.

In The News

  EquityMag: Case Study
  BuzzFeed: Impact Investing
  ABNewsWire: Press Release
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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
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