Weekend Reads for Investors: The Pessimism Issue

No one likes to read pessimistic stories before heading into the weekend. But, my goodness, what a news-filled three weeks it has been since my last Weekend Reads.

Global equity markets were rocked by two major events: the cracking Chinese economy and the uncertainty about a possible US Federal Reserve interest rate hike. Early in the week, the S&P 500 (GSPC) and FTSE 100 (FTSE) were each down about 5%, and the battered Hang Seng (HSI) had plunged by roughly twice that. But I am guessing that you already have made sense of these downturns. So instead, I want to highlight some other stories that you may have missed. Not all of these, in fairness, are pessimistic, some are just downright interesting.

Fixed-Income Harbingers

I track fixed-income markets closely. In part, this is because the fixed-income markets are so much more diverse than equity markets. You have sovereign debt; local government debt; corporate debt, including investment grade and high yield; structured products; and many with embedded options, too. These markets rarely move in lockstep and are often indicative of dislocations in overall investment markets. As this Financial Times story highlights, issuers and investors have clamored for corporate debt this year to the detriment of investment-grade debt issuance. This massive supply has pushed up the new issue premium — the interest rate needed in order to attract buyers — well in advance of a potential Fed rate hike.

Lack of Innovation

Long have I decried the lack of innovation occurring within publicly traded firms. After the Great Recession, large cash balances have accumulated, and rather than allocating these monies to new, high-growth projects, most have spent them on share buybacks, paying down debt, or have just left them sitting on the balance sheet earning not much at all. Ugh!

It seems that I am not the only one taking notice of this disturbing trend. The Wall Street Journal reports that outside of the Internet, innovation is floundering. This trend does not bode well for the future. My own view is that there is a danger that an entire generation of corporate strategists and finance folks have forgotten that capitalism is about risking capital. One counterargument, also offered up by the Wall Street Journal, is that productivity and capital investment statistics do not fully capture the types of gains facilitated by technology.

Benchmark Criticism

Another long-term concern of mine is the market distortions caused by benchmarks. Yes, it is very important to have a measuring stick for investment returns. However, to publish a popular “must buy this” list amplifies bubbles, in my opinion, and makes the active versus passive debate an apples-to-oranges conversation. Some of these concerns are discussed in this outstanding Financial Times piece. Another problem is that these benchmarks are not truly passive. Human beings, usually in committee, sit around and make decisions about the criteria for inclusion. Proof of this lack of passivity comes (again) from a Financial Times piece about the exceptions made by benchmark committees during the Great Recession. I believe this conversation will only become more important.

End of Quarterly Reports?

From the “Wow!” folder comes the surprising news that the super influential law firm Wachtell, Lipton, Rosen & Katz now advocates for the end of quarterly earnings reports. Why? The firm believes that they distract corporate executives from managing the business for the long-term. I could not concur more. I am not sure what the sweet spot is exactly for corporate reporting. But I can tell you that in all of the years I’ve spent following quarterly earnings results, the number of times that a company made significant progress toward achieving its long-term goals in three months can be counted on one hand.

Now for Something Completely Different

When was the last time you heard a story so preposterous that it must be true? The Japan Times reports that a patent has been awarded to a Canadian firm that wants to build a 20-kilometer elevator into space. Yes, you read that correctly. The idea is to get high enough up into the atmosphere to escape the primary effects of the earth’s gravity. On top of the elevator there will be a large launch platform. Surprisingly, this idea was first proposed in 1895. Me? I would be worried about the increasing stresses the higher the tower went. But I am no engineer.

One of my favorite sources for new technological developments, R&D Magazine, reported that for the first time neuroscientists have revealed new details about how the brain transmits rapid-fire signals among its myriad cells. A possible application for this improved understanding is the development of drugs that better treat brain disorders.

Last up until next time is a discomfiting piece by the BBC showing that carbon credits — a favorite of the ESG community — actually worsen the climate change picture. Mostly this is not a failure of the concept. Instead, it is due to the exclusions granted to polluters in order to get them on board with the idea of carbon credits and carbon offset trading markets in the first place. Nonetheless, it’s not good news.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: iStockphoto.com/JLGutierrez