Big Data Factoid

As we know, the amount of data we are creating is growing exponentially.  It is estimated that as much data has been created in the past two years than in the entire history of mankind before that.  What you probably did not know, is that only 10% of that information is publicly accessible.  According to IBM, 90% of data resides behind firewalls, just waiting to be accessed and analyzed by advanced technologies to create new insights.  MORE:  IBM Wants to Bring Machine Learning to the Mainframe

 

Jaguar and Shell Join the IoT Party

If I had told you a few years ago that Jaguar, Apple, Royal Dutch Shell, PayPal and a host of other behind-the-scenes technology companies teamed up to create a new product, you would not have believed me.  The line between industries and sectors is becoming more and more blurred, as evidenced by an announcement yesterday that consumers will now be able to buy fuel from the dashboards of their cars via their Apple Pay or PayPal accounts.  This is the latest in a countless number of new Internet of Things offerings that are changing the world we live in.   Read More: Jaguar Launches In-Car Payments at Shell Stations.

 

 Survey Results

The anxiously awaited results of the 2017 stock market survey are in!  The good news is that the blog readers appear to be equally as smart as the leading Wall Street strategists, who are rewarded with seven or eight figure salaries.  The bad news is that the blog readers are stuck with the same guess as the strategists, who are very frequently wrong.  The median guess of my readers was 2401 -- the most common guess of the ten superstar Wall Street Analysts was 2400, so we hit that right on the mark.  Below, is a histogram of the guesses.  As you can see, there were very few “flat” responses, lots of “up a little” responses, and a smattering of “down” guesses.  In the table below, looking at history, it becomes evident that market returns do not occur in a normal distribution, although the guesses would suggest people think that they do.  In fact, the seemingly safe bet of “up 0% to 10%” only has occurred about 1/4^th of the time over the past 50 years, but almost half of the respondents (and Wall Street) guessed in this range.  Historically speaking, “down” and “up 20%+” are just as common as “up 0-10%”.  Given those two options, which would you choose?

 

Stock Market Contest

Now is the time of year where people like to make predictions about the coming year, so please make your guess for the 2017 (12/31/2017 closing price on S&P 500) stock market contest by responding to this email or clicking here. You must respond before the next blog, which will likely be next week.  I hope many of you answer so we can have some “big data” on this subject matter.  Here is a five-year chart of the S&P 500 to help frame your guess:

S&P 500 (Five Years)

Congratulations to Todd Maugans, the 2016 winner who guessed 2240 – the S&P 500 ended up at 2238.83, so he was very close.  Interestingly, last year, the blog readers were somewhat bearish, guessing only a two percent rise in the market.  It turns out that the market beat 97% of your guesses (see chart below).  Last year’s guesses were split into two distinct groups, although even the bullish group mostly underestimated the end result.  I have some theories on how this year’s guesses will turn out, but I will keep those to myself so I do not bias you.  

 

Have a Great Holiday!

This will likely be the last holiday of the year.  I wish all the blog readers and their families a Happy Holiday!  Since some of you probably already tuned out, I will make today’s blog light and visual. 

 Rental Market

We all know that urban rental markets across the country have been very strong, and Cleveland is no exception.  I have been told that about 2,000 people are on waiting lists in downtown Cleveland alone.  As anyone who knows me is aware, my son and I like to tour old buildings, so last week we were thrilled to go on a tour of several new housing/office projects taking place in Cleveland.  It is amazing how much residential space has come online in the last few years and even more remarkable how much is planned and under construction.  RELATED:  Cleveland Apartments Rising at Insane Rate

On our tour, we had a behind-the-scenes look at four new projects, only one of which was finished.  The unit we toured in the finished project was being rented out as an AirBnb.  The second project was a relatively small apartment building; the owners were a group of basketball players from a different city who had invested in this building and were rehabbing it.  The third project was a repurposing of a large warehouse space into residential.  The owner told me that this project had never been viable until now and that this was the first project of this kind that they had done.  The last project was a huge 21-story former office building built in 1925.  Again the owner of this building told me that they usually do commercial work and that this was their first venture into residential.

My observation here is that all of these buildings are being done by new entrants into the market.  As excited as I am to see all this new construction and to see my city grow, I cannot help but wonder if we are starting to get into “bubble” territory.  It is often a sign of a bubble when there are new unexperienced speculators entering the market.  Apparently, Cleveland is still near 100% occupancy, but with multiple huge projects coming online in the next couple of years, it will be interesting to see if we can sustain this growth.   WATCH:  Rental Prices Showing Signs of Decline 

Interest Rates and Stocks are Positively Correlated

Contrary to the theory we all learned in ECON 101 about the relationship between interest rates and stock prices, (watch this video for a simple overview of the theory), the longer-term correlation between stocks and interest rates has been POSITIVE for almost 20 years.  Take a look at the chart I created below.  In this chart, the top shows the S&P 500 against 10-year U.S. Treasury rates, the bottom shows the trailing 20-quarter correlation between the two.  Interestingly, there was a clear change in 1998, when stocks and interest-rates began to move more in tandem.  I would love to hear theories from the readers as to why this change occurred.   Here are a few related thoughts and observations:

 

Island in the Sun

One of the visions of Tesla CEO, Elon Musk, is to develop affordable and efficient technology that will enable people to live without the electric power grid.  To do this, he is using solar panels (Solar City) to generate the energy and Tesla lithium-ion battery packs to store the energy.  It seems far-fetched to many, but Tesla/Solar City is already powering an entire island, albeit a small one, in American Samoa that formerly used diesel generators -- Check out this Video 

 Muni Mayhem

 Since Donald Trump won the election last week, there have been measurable moves in several sectors and investment themes.  One of the most pronounced has been the move in the municipal bond space.  As the chart below illuminates, the amount of municipal debt for sale has spiked to an all-time high.  Not surprisingly, municipal debt funds have dropped notably in accord with this new influx of supply.   So, why is this happening?  For starters, it is worth considering who is invested in municipal bonds.  With the advent of ETFs and the proliferation of mutual funds, access to this space is easier than ever, so there is a new constituency of shorter-term investors in municipal bonds who are there as a result of yield chasing– similar to what I have written about related to consumer staples stocks.  Additionally, with a new expectation (and tangible evidence) of higher rates going forward, municipal bonds have become less attractive to many investors.  As such, investors and traders are rotating out of municipals and into areas that will benefit (or at least not get punished) by a higher rate environment.  As if these two pressures were not enough, there is a third dynamic taking place.  One of the things that makes municipal bonds attractive to many investors is their tax-exempt status.  Investors believe that the new president will lower tax rates.  If tax rates are lower, tax-free investments become less attractive.  RELATED:  Can the U.S. Bond Market See a Decade of Flat to Negative Returns?

 There are countless articles about the election, how it happened, why the pollsters were wrong and many other election related issues.  As I always try to do, I will remain apolitical and will try not to regurgitate the same things you can read in the paper (paper is now a figurative term since so few people actually read the newspaper these days) and will offer my observations on the stock market on this crazy and perhaps confusing day.