- Capital Contrarian
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- Split or Swallow?
Estimated read time: 3 minutes and 32 seconds
In this week’s market recap email
Market recap
Skills/methods I used this week
What's in and what's out of my portfolio
What Happened This Week
One month returns:
S&P 500: Negative
Nasdaq: Negative
Russell 2000: Negative
Top holding position US Dollar: Positive
Yes, even after a "rally" in stocks to end the week the above still holds true. All hail the US Dollar - and when the Dollar stays strong, what happens to global currency?
Ladies and gentleman...the weak Yen:
I saw that on Twitter and had to share...in addition, the Euro to US Dollar currently sits at 1.0, slashing through the number we saw 5 years ago and testing the levels of the early 2000s.
Will we see a run at all-time-lows from the '80s at ~0.70? With an economy that will continue to see sequential slowing that's only more bullish for the US Dollar. That cheap Italian wine has never tasted so good! Book your flights today!
Moving on, here's a fun chart to look at and totally not overthink what's next for the economy!
Current VIX levels (white line) compared to VIX levels from July 2006 - August 2009 (blue line), a time period where the S&P 500 return was -20%
No, I'm not saying that we should expect the timing of a market crash to coincide with Q1 of next year if/when the VIX goes parabolic (VIX > 30 is when virtually nothing in stock land produces positive returns)
But the timing of the chart certainly compliments the theory we've been sticking with of an economy that will continue to slow well into next year.
Teaching Moment
"Amazon announces 30:1 stock split, shares now trade at $125 vs. $2,500 per share"
O M G - it's finally affordable! The common man can buy Amazon because it's cheap! Back to $2,500 we go!
Board of Directors: "Ok we can either split our stock or swallow our deteriorating balance sheet" - Split or Swallow (get it??)
For those who are unaware, stock splits are simply increasing the number of shares outstanding while simultaneously decreasing the price (there is such thing called a reverse stock split that's the exact opposite, but less common).
Net change to the company's market cap or value of your shares are zero.
Example (simplistic version): Apple has 200 shares outstanding in the market and trades at $100 ($20k market cap; 200 shares x $100/share).
They perform a 2:1 stock split - the number of shares outstanding is now 400 and each share is reduced to $50. The market cap remains the same at 20k (400 shares x $50/share).
By now you're probably realizing that NOTHING has changed because of a stock split. Both your valuation and the company's valuation remain unchanged. So why do company's do this?
Put simply, it's a way of marketing the price of a stock to seem more "attractive". If your broker limits you to buying shares in whole denominations, why would you put $2,500 into a single stock of Amazon when you can just buy it at $125?
By all means, buy it at $125 - just know you're getting 1/20th of the value after the split!
And just for reference, here's the return of the most recent stock splits. Yeah, great buying opportunity for those "cheaper" stocks...
That bear market rally on Friday really helped make some of these returns less painful....
In The Account | my top holdings
$UUP - US Dollar
Selling some last week only to buy it back on sale this week. As Coach Brooks of the US Men's National Hockey team would say...AGAIN!
Utilities
If (or really when) rates start to suppress this position is only going to make even more sense to own. $XLU is a core holding at the top of the portfolio.
On The Radar | positions I want to build / sizing up
Gold - $GLD
Another rate-sensitive play that is having trouble with the 10yr still ramping, unlike Utilities. I will add back to this one once I see the 10yr, and also MOVE index (bond volatility) trend lower
Off The Grid | removed positions / short selling opportunities
TECH
$META and $NFLX were two shorts that I was adding to on the bounce this week
RETAIL
With bear market bounces come large swings in (crap) retail names. We're talking the GME and AMC's of the world
You can short/buy puts in the ETF $XRT or take a stab at some of my favorite overbought names: $RVLV, $GOOS, $BBY, $POSH
EUROPE
This one is getting ugly and more importantly the mainstream media is catching on! Only a few months late!
$EPOL, $EWI, $EWG
Until next week....
-BW
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.