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Inside Edge is dedicated to providing a collection of investment-related charts, articles and musings that have hit our desks or inboxes. Once in a while we will post materials we’ve created and glimpses of EdgePointers’ lives.

Americans have really been embracing the can since the start of the quarantine 

And the 1 week Y/Y data is still strong indicating that this is not just a pantry loading phenomenon.

Vehicle miles driven (VMT) by destination
The pace of onshoring is picking up

A group of economists at Harvard have built a real-time, publicly available economic tracker. There are many good interactive charts here but below are a few interesting ones.

Consumer spending in the US is down 11.3% since January, but spending cuts by people in the top quartile account for more than half of the total aggregate decline in dollars. As of June 9th, spending by the top quartile was still down 16.8%, whereas spending by the bottom income quartile was only ~3% below where it was in January. 

Stimulus payments increased spending by low-income consumers, but didn't undo the initial most revenue:

By industry, in-person services were obviously the hardest hit, but the idea of the 'Roomba effect' was interesting. In a normal recession, households typically respond by cutting purchases of durable goods like cars, washing machines etc, and the policy response tries to counteract that (cash-for-clunkers, VAT cuts). In this recession, it's the opposite - people are substituting services for durable goods -buying a roomba instead of hiring a cleaning lady, which they think might have permanent implications for the economy because people are going for a capital solution instead of a labour solution.

Who actually likes uncertainty? For most people, it's pretty bothersome really, particularly when it concerns someone's hard-earned savings and investments. It's difficult for investors to understand how uncertainty could be a very good thing for their investments. Geoff MacDonald explains why investors need uncertainty in this excerpt from our 2020 Cymbria Investor Day Q&A session.

Nearly a third of investors ages 65 and up-sold all of their stocks at some point between February and May, compared with 18% of investors across all age groups.

U.S. stocks have managed a remarkable advance in the past several weeks as optimism outweighed concerns about the economic recovery and worsening COVID-19 cases. Has this been appropriate or irrational? Howard Marks thinks investors should ponder the following questions:
  • Are investors weighing both the positives and the negatives dispassionately?
  • What's the probability the positive factors driving the market will prove valid (or that the negatives will gain in strength instead)?
  • Are the positives fundamental (value-based) or largely technical, relating to inflows of liquidity (i.e., cash-driven)? If the latter, is their salutary influence likely to prove temporary or permanent?
  • Is the market being lifted by rampant optimism?
  • Is that optimism causing investors to ignore valid counter-arguments?
  • How do valuations based on things like earnings, sales and asset values stack up against historical norms?

Latest Charts

Technology stock valuations
Investors have come to believe in the sustainability of free cash flow, bringing down yields.

Shares of companies popular with individual investors have outperformed.

While it's not clear how much of the recent rally was driven by retail investors/traders, their increased presence in the market has been signaling a spike in speculative behavior.

Grocers charged into delivery to meet a surge in demand sparked by the coronavirus crisis, though many haven't figured out how to get food to customers' homes profitably and some wonder if they ever will. Retailers have modified their operations to manage the jump in delivery demand, hiring thousands of additional workers and devoting some stores to fulfilling online orders. That work is pushing up costs that eat into the margins on delivery sales.

What's your vintage year?

When did you become an EdgePoint partner? Let's take a walk down memory lane as we recall the major events and fun facts from your vintage year.

A few winners have generated big gains, fueling the misperception that losses have been minimal. The result is a market that isn't as irrationally exuberant as it might appear.

Year to date, Zoom Video is up 209%, Regeneron Pharmaceuticals Inc. 59% and Amazon.com is up 33%. But entire industries have been flattened. At the beginning of this last week, airlines were down an average of 52%; banks were down 33%; energy 32%; and autos was down 30%. It isn't unusual for the stock market to split into a few extreme winners and lots of losers. In 1973, a few darlings rose to near-record valuations while most stocks fell miserably. In 1999, technology shares shot up more than 80% even as many companies in the broader market languished and Warren Buffett's Berkshire Hathaway Inc. fell 20%.  Seldom, however, has the gap between the haves and the have-nots been as wide as it is now.

Charts and stats 

Unemployment hits lower-wage earners

According to the National Employment Law Project, higher-wage industries constituted 41% of job losses during GFC, whereas lower-wage industries constituted 22% of the job losses. On the other hand, according to the Federal Reserve, 39% of people under US$40,000 household incomes lost a job in March this year, compared with 19% of those earning US$40,000 to US$100,000 and 13% for those earning above US$100,000. 

Spike in savings
Big Growers trade at stratospheric valuations
The Big Growers* were turbo-charged through the pandemic and continue to trade at stratospheric valuations. 
*Big Growers are the top-half of the group based on trailing P/E ratio. Cheap P/E stocks are the lowest quintile of stocks from the entire large-cap universe based on trailing P/E ratio. Trailing P/E ratio is current price divided by trailing 12-month earnings.

Rush to safety

The market rushed towards safety in the pandemic and the slow growth, low beta stocks continue to trade at a huge relative premium.

Utilities valuations
Utilities are now trading at the highest ever historical premium relative to Financials.

Energy valuations

There are several industries with deep value characteristics that will benefit as the valuation spread compresses, but Energy stands out.

Online brokers are being flooded with new customers.

Dayanis Valdivieso is tapping an unlikely source of money for her first foray into stocks: the government's $1,200 stimulus check. Ms. Valdivieso, a 22-year-old in Louisville, Ky., used a portion of her check to trade stocks, using a Robinhood account. "It was basically free money, so, you know, I decided to play around with it," she said. "You might lose some, you might win some. It's like a gambling game."

That kind of enthusiasm has some market observers worried. In the late 1990s, small investors chased flimsy companies with .com attached to their names, buying that came after the Fed slashed interest rates in 1998 amid a financial crisis. In the spring of 2000, the Nasdaq market collapsed.

"The key parallel between 2000 and today is that retail investors are seeing the stock market as a can't-miss opportunity,".

Stats on re-opening
Only a handful of states have reopened bars and restaurants, and of those, most were in the past week. Montana was one of the earliest to reopen. The stay at home order in Montana was lifted on April 27th and bars and dine in restaurants reopened on May 4th at half capacity with social distancing measures. They move to 75% capacity tomorrow. Gyms reopened May 15th.

Buffett and Charlie Brown are due some relief
A resurgence of value implies an optimistic outlook for the economy. If growth returns, then cheap value stocks won't look so risky (because even their boats have been raised). Value tends to do well at the beginning of recovery - although note that the last great period of value outperformance, in the early '00s, came amid the onset of a recession and a bear market. As value stocks still include a lot of banks, a strong period for value also implies a steepening yield curve. This could be a dangerous bet to make when the Federal Reserve is discussing deliberately controlling the yield curve. And a second viral wave could change everything.

For now, the recovery of value would help to confirm that investor confidence, justified or otherwise, is really back.

There are many reasons to doubt that optimistic scenario. But the mere fact that advocating for value makes me feel like I might turn into Charlie Brown is perhaps the strongest reason for believing there is an opportunity here. One behavioral investor once told me that he adopted a "sharp intake of breath" test for potential investments. If a name provoked that reaction, the chances were that sentiment had moved too far and it was now too cheap. It is at this point that value investors can make a killing. Put differently, to quote Oaktree Capital Group's Howard Marks from an interview with me earlier this month, "every great investment begins in discomfort."

The week in charts 
Bubble behavior during a depression
The dot-com bubble made the stock market too tempting to pass up for aspiring day traders. This type of behavior makes sense during a mania. But what about during a depression?

This is one of the strangest economic crises in history. Stocks continue to surge higher in the face of the worst economic data of our lifetime. Housing demand has already surpassed pre-crisis levels. And even though the first quarter was the most volatile period since the Great Depression, people opened new brokerage accounts at a record pace. Major brokerages - Robinhood, Charles Schwab, TD Ameritrade, and Etrade - saw new accounts grow as much as 170% during the first quarter. 

Don't get caught in a wheel of missed fortunes
Before making decisions about your financial future, check whether what you expect matches reality.

US suburban house prices
For the first time since 2007, the survey shows stronger price gains in suburban regions than in rural or urban ones.

The world of rice
Source: Food and Agricultural Organization of the United Nations

Closing tax loopholes may come first, especially in a post-COVID world

The book-to-price dispersion among the largest 1,000 US stocks is at record levels. If we use price-to-book multiples, the gap between the cheapest and most expensive has touched even greater heights than during the dotcom boom:

CFA Institute Virtual Conference: Annie Duke and Morgan Housel
Annie Duke and Morgan Housel talk about demanding certainty in times of uncertainty: 
 - Rather than demanding certainty, take the broadest view of possibilities and their probabilities
- Doing well over the long term is not about being right all the time and finding the right answer, but about being able to survive amongst the broadest range of outcomes
- Humility about what you don't know and can't predict is important for doing well as an investor in the long term
- People tend to think in binary terms: a decision is either right or wrong. But you can also make great decisions and have a bad outcome and make great decisions and have bad outcomes.

EdgePoint Video: Bumpy road to long term outperformance
Everyone wants to outperform in the long term, but you can't do that if you invest like everyone else. In our newest video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time.

Valuations of S&P 500 companies in the 4th quintile look especially cheap.

An expansion of valuation multiples has driven the rally across global equities, even as earnings expectations contracted across the board, according to BlackRock.

How consumers are spending differently during COVID-19

The onset of changing consumer behavior can be observed from February 25, 2020, when compared to year-over-year (YoY).

As of May 12, 2020, combined spending in all categories dropped by almost 30% YoY. Here's how that shakes out across the different categories, across two months.

General Merchandise & Grocery


The Song Remains the Same
Rapid technological change can trick us into thinking that the fundamental nature of human beings has changed commensurately, but nothing could be further from the truth. In terms of biological evolution, we are not very different from human beings who lived thousands of years ago in hunter-gatherer cultures that bear no resemblance to our current world. We have inherited the psychology of our ancestors and must work within the constructs of that psychology.

Today's investors are not that different from those who lived nearly a century ago. The "passion for prophecy", the desire to "get rich fast", and buying what is "in trend"  have tempted investors for generations.

The trouble with buying what is in trend is that people are buying not necessarily the "best" securities but merely those that are most popular at a given point in time. And that popularity itself accounts for prices that often are out of proportion to business prospects. 

The crucial distinction between future prospects for a business enterprise and prospects for its securities is one that generation after generation of investors fail to make. A business with compelling future prospects can make for a lousy investment if its securities are so popular that its bright future is more than fully reflected in the price one must pay to participate.

As of May 2020, the top five companies in the Standard & Poor's 500 comprise over 21 percent of the index:

Microsoft, Apple, Amazon, Facebook, and Alphabet are indisputable leaders of our modern economy. Their stocks are also popular not only with active investors but with index funds that automatically purchase these stocks when they receive new inflows of investor funds. Without commenting on the valuation of these companies, we can note that they are undoubtedly popular stocks in 2020. Their popularity might be justified by the underlying business fundamentals or investors may be repeating the "universal habit" of buying what is popular and suffering poor results over time. At the very least, buying popular stocks should always be done with great caution.

Investment resources
Collection of investment articles, books, speeches, videos including some all-time classics.

Cymbria's 12th annual investor day: Discussing the value of non-obvious survivors
At our 12th annual investor day, we looked at how finding non-obvious survivors helps investors more in the long term than feeling comfortable in the short term does. Watch the full recording from Wednesday's presentation here.

This week in charts
Infotech, communication services, and health care sectors now account for 52% of the S&P 500 market capitalization.

Energy vs. S&P 500, Relative Price Performance
The relative price performance of the energy sector to the S&P 500 is now at the level of the Great Depression.

Howard Marks memo: Uncertainty
In investing, uncertainty is a given - how we deal with it will be critical. In Howard Mark's latest memo he discusses the value of understanding the limitations of our foresight and "investing scared." Below are some of his closing remarks. 
  • The world is an uncertain place.
  • It's more uncertain today than at any other time in our lifetimes.
  • Few people know what the future holds much better than others.
  • And yet investing deals entirely with the future, meaning investors can't avoid making decisions about it.
  • Confidence is indispensable in investing, but too much of it can be lethal.
  • The bigger the topic (world, economy, markets, currencies, and rates) the less possible it is to achieve superior knowledge.
  • Even our decisions about smaller things (companies, industries, and securities) have to be conditioned on assumptions regarding the bigger things, so they, too, are uncertain.
  • The ability to deal intelligently with uncertainty is one of the most important skills.
  • In doing so, we should understand the limitations of our foresight and whether a given forecast is more or less dependable than most.
  • Anyone who fails to do so is probably riding for a fall.

Thoughts on the current market environment from Stanley Druckenmiller at The Economic Club of New York

Berkshire Hathaway Annual Shareholders Meeting 2020 
As most of you might know, Berkshire Hathaway had their annual shareholders' meeting this past weekend, with the highlight being Warren Buffett speaking and answering questions for more than 3 hours on topics ranging from his views of the post-COVID-19 market, economic trends, and his current investment strategy. Here are links to the full video and meeting transcripts.

Personal Saving Rate and U.S. Household
Savings rate hits its highest level in 40 years, as Americans are accumulating cash.

When You Have No Idea, What Happens Next
Do we know more about what's going to happen in the next 12 months today than we did in January? We now know there's a pandemic that shut the economy down. We didn't know that in January.

We've learned this year that the assumptions you have about the future can be destroyed overnight. That's true for the poorest to the most successful, the old dry cleaner to the tech startup. It was true in January, and it'll be true again in the future. 
If that's the lesson, the question is: what do you do about it? 

Read more history and fewer forecasts. Think of all the 2020 market forecasts published in December. Accepting that forecasts have little use doesn't mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which - given how stable behavior is over time - is the next best thing to knowing what will happen next. 

Have more expectations and fewer forecasts. Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what's likely to occur without professing insight into when it will happen. Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won't be that surprised whenever it arrives - which is a huge benefit. But if you assume you know exactly when it will occur you'll be tempted into all kinds of dangerous behavior, leveraged with overconfidence.

COVID-19 internet search trends

Streaming Services Face an Economic Reckoning After Covid-19
The race to attract and retain subscribers - and turn a profit - was challenging enough before the coronavirus shut down entire swathes of our economy. Now, the U.S. is in a recession, and consumers are rethinking how much content they need and what's a worthwhile household expense. When all a country can do is sit home and gorge on movies and TV, a free trial to stream Netflix or any other services is worth its hours of content in gold. (Look no further than Netflix's recent spike in subscriptions.) The question is, will users just ditch once those free trials are up?

Because of Netflix, viewers have become accustomed to not having to sit through ads, and they like it. But that approach probably can't work long-term if consumers want an affordable service with a constant flow of fresh content.

EdgePoint Academy: The big day has arrived
"Am I ready for retirement?" and "How do I get ready?" are questions on the minds of many. Our latest article in the Retirement series discusses four things you need to consider to help answer these questions when planning for retirement with your financial advisor.

Advice for young people from Buffet
The best advice Warren Buffett can offer to young people who want to invest is to learn accounting. Furthermore, he warns investors against obsessing over stock price charts and urges them to focus on buying good businesses instead.

This week in charts
Nasdaq-listed stocks were briefly worth more than the entire developed market ex-USA.

The largest US tech stocks (FANMAG) aggregate market cap trails only the US (ex-FANMAG) and Japan. 
The tech-heavy Nasdaq is now above its outperformance trend versus the S&P 500 (the ISM Composite is a measure of US business activity). 

Investing in "top dog" stocks globally (largest stocks by market cap) returned considerably less than the overall market over the past 50 years.

Cities face 100 million 'new poor' in post-pandemic world
About 100 million people living in cities worldwide will likely fall into poverty due to the coronavirus pandemic. Densely populated cities are poised at the frontline of the contagious outbreak, hard-hit, where people live in poverty with little or no running water, sewage systems, or health care access, said experts at the World Bank. "Our estimate is that there will be possibly upward of a 100 million so-called 'new poor' on account of losses of jobs and income," said Sameh Wahba, global director for the World Bank's urban, disaster risk management, resilience and land global practice. He warned that cities will see a drop of between 15% to 25% in tax revenues next year, making it difficult for authorities to invest in improving slum areas.

Wealthy New Yorkers flee Manhattan for suburbs and beyond
New York's wealthy are moving their money - and often their families - into surrounding suburbs as they look to escape a crowded lifestyle and reduce their risk of contracting coronavirus. "I can't remember the last time we were this busy," said real estate advisor Owen Berkowitz. Eighteen people are waiting to see a home in Greenwich, Connecticut, that is renting for $65,000 a month, another broker said.

EdgePoint: Second-level thinking in periods of market extremes
Portfolio manager Andrew Pastor and analyst Sydney Van Vierzen discuss why using second-level thinking to choose 'non-obvious' survivors is especially important during periods of market extremes. To illustrate, they break down three examples from the EdgePoint Canadian Portfolio.

Charts that caught the eye of the investment team
With everyone crowding into the growth/tech trade the five largest stocks in the S&P 500, Microsoft, Amazon, Apple, Google, and Facebook, now represent more than 20% of the entire index. The last time the top 5 were this concentrated was in 1970!

A tale of two investors
While it can be tempting to sell in the midst of a downturn, investors who hold their investments historically see much greater returns. To see how this plays out, let's rewind to the Global Financial Crisis. Here are two hypothetical investors, Sharon and Barbara, both start out with a $1000 investment at the market peak. After the decline, Sharon reacts emotionally as the market declines. Her $1000 is now worth $432 at the bottom and Sharon sells. She later rebuys once the market rebounds to the previous peak. After 7 years Sharon has $531. Barbara reacts rationally despite the downturn and stays invested.  At the end of 7 years, Barbara has $ 1,232.

This week's dilemma

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