Some things I read this week: 12/8/18

Similarities of Stock Market Winners of 2008

  • A small number of S&P 500 companies saw double-digit growth in their share prices in 2008, amidst a 40% fall in the overall market. These companies (Hasbro, Walmart, AutoZone, Gilead, Celgene and Amgen) each generated relatively high ROICs compared to other companies, even in similarly “defensive” economic sectors.

Cliff Asness’ Take on Repurchases

  • Myth: Buybacks come at the expense of investment
    • AQR finds that most recent buybacks have come from new borrowing (a.k.a. leveraged buybacks, which can increase EPS, ROE, P/B ratio, and reduce their dividend obligations)

The Future of Computing is at the Edge

  • Data-crunching will increasingly be pushed towards the network “edge”: the computing devices that intersect with the real world, such as autonomous cars, internet-connected cameras, and smartwatches (IoT devices)
  • Falling computing costs and rising processing power may enable these devices to leapfrog the latency associated with distant data transfers and further data processing decentralization in the coming years

Stocks & The Economic Cycle: What Performs Well and When

  • Stocks generally move in advance of the overall economy, and specific sectors tend to relatively out- or under-perform at different stages of the economic cycle.
  • In a recession, the sectors that tend to fare the best are defensive stocks, including consumer staples and utilities, which offer goods and services that tend to be purchased at the same levels throughout the economic cycle. Examples are food, drugs, cosmetics, tobacco, liquor, electricity, gas and water.
  • In an expansion, cyclical businesses do well. Early stage expansion favors consumer credit (regional banks, savings & loans), energy (oil, coal), and consumer cyclicals (auto, apparel, retailers, etc.). Mid stage expansion is good for basic materials and technology (chemicals, wood, plastics, metals, semiconductors, hardware & software, communications, etc.). Late stage expansion is best for capital goods (equipment and machinery), financials (corporate and institutional banks), and transportation (airlines, trucking, railroads). Growth companies, like biotechs, which expand quickly and find themselves in the early stage of the life cycle, tend to be less correlated with the economic cycle. (Table 1 in the paper shows this breakdown well).

Corporate Tax Cuts Increase Income Inequality – HBS

  • Benefits to owners are front-loaded: they can immediately allocate tax cuts to additional investments and capital income
  • Benefits to workers are back-loaded: they must wait to see wage growth that should follow competitive forces drive down after tax-profits
  • Study suggests local level government spending or low-income tax cuts as economic stimulation strategies without increasing inequality

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