Good Wednesday, hope your week has been productive.

Today | 9 items


1. Chart of the day

(Data: money.net, chart: Axios)

2. Investors are pulling out of emerging markets

Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 — withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand so far this year, according to data compiled by Bloomberg.

Why are they pulling money out?

Investing in emerging economies is considered riskier than investing in U.S. stocks.

Since interest rates in the U.S have been near zero since the financial crisis, investors have looked to other countries for better investment returns.

However,

The Fed (federal reserve) has started raising interest rates. In doing so, its attracted money back to the U.S and away from emerging economies.

In addition, investors are worried that trade disputes and tariffs could have a negative effect on Asian economies.

Should you be a buyer?

It depends on your investment objectives. Here are two questions to ask:

• Are emerging markets currently a part of your allocation?

• Emerging markets carry a higher degree of risk. Can you accept the greater potential return for greater volatility?

The CAPE ratio

The CAPE ratio stands for “cyclically adjusted price-to-earnings”.

The ratio was popularized by economists Robert Shiller and John Campbell.

To summarize the CAPE ratio:

  • A high CAPE ratio = Lower expected future returns.
  • A low CAPE ratio =  Higher expected future returns.

It’s not an exact timing tool. The ratio has sparked a fierce debate as to its usefulness.

As with most ratios and valuation measures, it should not be used as a stand-alone metric, but in conjunction with other inputs.

A quick refresher on the price to earnings ratio

To calculate the price to earnings for a company, you take the company’s current price and divide it by their current earnings per share (EPS).

An example,

Go to Yahoo finance and type in “AAPL” in the box; this is what you get ↓

You can pull the P/E ratio straight from the overview (red box).

or,

You can calculate the ratio yourself.

To do so, get the current price (blue box), then divided it by EPS (earnings per share)(orange arrow).

The calculation would be: 186.50 (blue box) ÷ 10.34 (orange arrow) = 18.03.

A country’s P/E ratio is no different. It’s an aggregate ratio of an index such as the S&P 500.

The “CA” of CAPE stands for ‘cyclically adjusted’.

Its purpose is to provide a smoother picture of a company or countries P/E ratio over a longer period; instead of year to year.

A good comparison would be a baseball player’s batting average.

To get a sense of how good a hitter is, it’s better to measure their average over five or ten years instead of one.

Now, back to CAPE

For our purposes, we are going to use CAPE as a general valuation metric. In other words, what is the CAPE ratio of the six Asian economies mentioned in the Bloomberg article?

  • India | 22.4
  • Indonesia | 18
  • Philippines | 19.9
  • South Korea | 15.3
  • Taiwan | 21.4
  • Thailand | 20.3

Let’s compare these six Asian economies to some developed markets.

  • United States | 30.4
  • Canada | 21.6
  • Great Britain | 16.7
  • Germany | 19.9

For more information on CAPE ratios, check out Star Capital’s website.

In an interview with Forbes, Rob Arnott, founder of Research Affiliates, a company who directs $201 billion in assets worldwide said this:

If we’re looking at prices that are 32 times the ten-year average earnings, that’s expensive. Emerging market stocks are at 14 times. Less than half the multiple of the U.S. So that’s a very interesting market.

What’s the best way to invest?

If you have a financial advisor, talk to them; see what they think.

Here are some options if you want to execute these trades yourself.

• India | iShares ETF INDA | Fees-0.64% or 64 basis points. For every $100 invested, you pay 64 cents.

• Indonesia | iShares ETF; Ticker EIDO | Fees-0.58% or 58 basis points.

• Philippines | iShares ETF; Ticker EPHE | Fees-0.58% or 58 basis points.

• South Korea | iShares ETF; Ticker EWY | Fees-0.58% or 58 basis points.

• Taiwan | iShares ETF; Ticker EWT | Fees-0.58% or 58 basis points.

• Thailand | iShares ETF; Ticker THD | Fees-0.58% or 58 basis points.

Note: There are other ETFs by different issuers that were cheaper. The problem was volume. Some of them barely traded, so I only listed the most liquid ETFs I could find.


3. No bullsh*t welcome, just business. A look at NEXTera Energy’s stock

Who is the world’s largest operator of wind and solar farms? It’s also America’s most valuable power company. Still stumped? It’s by design reports the WSJ.

NEXTera Energy(NEE) has grown into the largest power company mostly under the radar.

Let’s see how…

Three important points to their success

• They were focused on business fundamentals and not the Hollywood status that comes with being a champion for green power.

• Only built new sites after it lined up customers. This way, they avoided debt problems that sank rivals such as SunEdison. Instead of debt, they used federal tax credits.

• Has been led by the same executives for 15 years. The CEO, James Robo, came from GE and preaches financial discipline. He avoids hiring the type of workers who join the industry to change the world. 

Read more


4. An incorrect theory

The death or retail has been a theme for the past few years; at least in the media.

But what if it wasn’t true…(see chart above)

My thought bubble

My belief is this-Select retailers will survive and thrive in the age of Amazon if they do three things well:

Offer a differentiated product; preferably a product that you have to physically touch. Humans still like touching things they spend money on…

LULU stock chart

Check out Lululemon(LULU), their stock is near an all-time high as we speak, gaining almost 65% in 2018, outpacing Amazon’s gain of 45%.

How is that possible…

Offer a great in-store experience that makes it easy for customers to browse your products. Most of all, make sure its clean.

Offer world class customer service. Best Buy(BBY), a company that seemed destined for death at the hands of Amazon, has been investing in their employees over the past few years. It’s seemed to pay off; their stock is near an all-time high.


5. Chart art

CAT stock chart

Caterpillar(CAT) is testing support at $140. A break below that level could see price move toward $116, where I would look to be a buyer.


6. Bubbles anyone?

(Source: @reutersjamie)

7. Which states will tariffs impact?

(Source:  @M_McDonough)

8. Life expectations

(Source: @ianbremmer)

9. One funny thing

(Source: @onlmaps)

Thanks for reading and have a great day,

Caleb

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