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MARKETS: More upbeat earnings, market rotation, and tech woes

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Last year’s best stock performers continue to get hammered as the rotation out of tech stocks continues. Of course, investment folk always feel the need to wrap these declines into a digestible narrative, so the violent market moves are easier to comprehend.

This time around, the majority of the blame has been attributed to a growing fear of higher inflation and rising interest rates. In reality, these growth tech names simply couldn’t maintain a perpetual state of hyper-growth. As I mentioned last week, a pullback was always on the horizon.

Market participants continued to favour value and cyclical stocks despite a strong earnings season for many tech names. Inflation fears were dampened by a less than impressive jobs report, driving interest rates lower.

Commodities


Supply bottlenecks and post-pandemic demand have sent commodity prices soaring to their highest levels in almost a decade.

Metals, food, and energy are at the fulcrum of any growing global economy. Throw some supply-side problems into the mix, and you have a perfect storm.

Lumber has more than tripled in price since last year. Copper has jumped almost 40% since the start of the year and is now up over one hundred percent from its pandemic low point. While the supply-side contraction will likely be short-lived, this high demand, low supply environment looks set to keep commodity prices elevated over the near term.

Crypto


Ethereum (Ether), the world’s second-largest Crypto, moved above the $4,300 mark for the first time this week, doubling in price in just over a month. Ether continues to emerge from Bitcoin’s shadow as more and more investors look to other cryptocurrencies for returns.

Apparently, the relatively stable price of Bitcoin over the last week or so is too mundane for the get rich quick, volatility hungry crypto elite.

Market Outlook


With commodities continuing to soar and Washington debating even more stimulus, inflation is still the market buzzword of choice.

The Fed is insistent that the recent spike in commodity prices and wage pressure will be short-lived. They also have continued to highlight their willingness to let inflation run above target for a period as the economy revives.

Despite the leading indicators signalling a pick-up in inflation, many market participants are now making a case for a more benign inflation outlook. Traders have trimmed bets on rate hikes, while Goldman and Pimco have both softened their inflation outlook.

While fiscal stimulus, an even more supportive Fed policy, supply-side contractions and pent-up demand will likely bring near term inflation. Secular trends such as technological innovation and demographics will ensure these inflation figures level out over the medium/long term.

In short, inflation is likely to rise above the anemic levels it has been anchored to over the past decade, but this inflation jump won’t bring us back to the ‘out of control’ numbers experienced during the 1970s, despite what some doomsday economist would lead you to believe.

The past two weeks have probably been traumatic for anyone playing it fast and loose with the big winners of last year. While these losses can be painful, it highlights the need to stay focused on the core principles of long-term investing.

Don’t get caught up on short-term moves. Focus on your long-term time horizon
Make sure you have adequate diversification
Be patient: There will be periods where markets fall over 10%, that is a guarantee
Stay committed to the companies you believe in
Be an opportunist: Use market corrections to build out positions in your favourite stocks.

Property & Finance

Guidance for reopening your business

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By John Healy of Healy Insurances

It is heartening to see so many businesses reopen in recent weeks. I hope that the progress can continue so that we see the remaining hospitality businesses back in action shortly.

While there is a raft of information from Government and HSE sources, this week I will briefly outline some items to remember from an insurance perspective.

Contact your insurance advisor before you reopen: You may have reduced cover on your property or liability cover over the closure period and it is important to update this prior to opening your doors. Remember you may have staff on site in advance of reopening so it is vital that your policy covers them.
Review your Health and Safety Statement. This should be a living document and be available to review as needs be. Your COVID-19 safety measures should be included and all employees should sign that they have read and understand the statement.

Obtain Return to Work forms: Before any of the team return to work they will need to complete a return to work form and partake in any necessary training. These documents can be found at www.hse.ie.

Outdoor seating: If you are planning outdoor seating on public owned areas you will need to obtain a permit from Kerry County Council and your insurance policy will need to issue a specific indemnity to the Council. The Council will also require a minimum limit of indemnity of €6.5 million, which is standard practice for all State bodies. If this is your first time undertaking outdoor hospitality then you should include this in your Health and Safety Statement and do a full risk assessment.

Water systems: Put in place control measures to avoid the potential for legionnaire’s disease before your premises reopens.

Inspect plant and equipment: This includes lifts, ventilation and kitchen duct systems and generators. Ensure that your inspection certificates are up to date for any lifting plant including passenger and goods lifts.
Identify and display appropriate warning and safety signage for your premises.

Cleaning: Arrange the appropriate cleaning of your buildings and contents. External cleaning contractors should provide you with a method statement, proof of insurance and when finished written confirmation that the cleaning has been completed to the agreed standard.

The above is not exhaustive but there is a wealth of information available on www.hse.ie and www.hsa.ie for reopening. Finally, the very best of luck to all the hospitality businesses getting back to what they do best. All we need now is that heatwave!

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Property & Finance

From November all homes will be revalued

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By Ted Healy of DNG TED HEALY

The property talk over the course of the past week has revolved around the recent announcements relating to property tax.

The Local Property Tax (LPT) is an annual self-assessed tax charged on the market value of all residential properties in Ireland. It came into effect on July 1, 2013 and is collected by the Revenue Commissioners.

Under plans announced at Cabinet this week, homes built after 2013 will now face inclusion in the Local Property Tax.

Up until now the Local Property Tax was levied on property valuations from May 1, 2013. Homes that were built since that date have so far not been liable to the tax as they do not have a valuation dating from then.

This is now about to change which will bring approximately 100,000 homes into the Property Tax net. The new valuation date is to be November of this year with every home in the country liable for the tax by 2022.

It has been reported that 60% of home owners will not be paying any more than they already do, while 10% will see a decrease. It is estimated the change will raise €560 million annually.

Government have advised that from November of this year all homes will be revalued, but it would be done in such a way that it recognises the affordability challenges facing many families. Despite the fact that many properties would have significantly increased in value since 2013, a change in the calculation of band widths will ensure properties do not jump up any more than one value band.

There is also a change to the system that redistributes some of the property tax outside the local authority limits. Currently, 80% of the monies raised are retained in the area, with 20% sent to local authorities. From 2023 it is understood that one hundred percent will be retained in the local authority with central Government making up any shortfall.

There is no need for homeowners to do anything just yet as Revenue have advised they will contact homeowners directly once the changes have been passed into law.

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Property & Finance

Price and value are not the same thing

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By Michael O’Connor

To understand markets, you first have to realise that ‘Price’ and ‘Value’ are not the same thing.

The major indexes continued to trade relatively flat in recent days. The vast majority of Stocks struggled to eke out gains as a lack of clear market catalysts kept institutional investors on the sidelines, while retail traders fuelled the ongoing meme stocks rally. As social media hype pushes the likes of AMC, GameStop and Bed Bath & Beyond ‘to the moon,’ the crypto market continues to trade in the opposite direction, with all major crypto names recording double-digit losses early in the week.

The short squeeze is back

Earlier this year, GameStop saw its share price run from $19 to $483 as the Reddit retail traders banded together to punish the wall street speculators. In recent weeks, the short squeeze is back in fashion. The new king of meme stocks is AMC Entertainment. Recently on the brink of bankruptcy, the movie theatre chain’s stock is up more than 2,000% this year after another roller-coaster week.

While this phenomenon is hard to comprehend at times, in simple terms, the Internet has brought forth the age of virality, and the stock market is not immune.

Younger generations who grew up on the Internet are now having a significant impact on specific companies. Their risk tolerance seems to be much higher than previous generations, and their willingness to band together to support a viral trend knows no bounds.

While these short-term individual stock surges may not significantly impact markets over the longer term, the meme stock craze is here to stay as the gamification of investing becomes a powerful force in an era of social media dominance.

All this speculation raises a lot of questions from investors. Nervous onlookers wonder if markets are broken, worried about how such ‘mindless risk’ can undermine the validity of the market as the ‘meme stock vigilantes’ blatantly disregard traditional valuation metrics.

All this recent ‘mispricing’ has highlighted one of the most common investing misconceptions.

To understand markets, you first have to realise that ‘Price’ and ‘Value’ are not the same thing.

Value is driven by cash flows, growth and risk. Of course, you can disagree about what those cash flows look like or how they are calculated, but the fundamental drivers of value remain the same.

Price, on the other hand, is simple economics 101. Demand vs. Supply. What drives demand and supply is typically mood and momentum. As a result, stock prices do not have to make rational sense at any one moment in time as they are driven by a myriad of human emotions.

Mood and momentum

For me, the current market conditions are reflective of a pricing market being driven by mood and momentum. That isn’t to say that this is necessarily a bad thing. Markets will always reflect human behaviour in some form, and sometimes this behaviour will be more pronounced as price and value push in different directions.

This recent price volatility doesn’t mean you have to change to momentum and memes when selecting your next investment. While the FOMO can be unbearable at times. The truth is, the value factors of cash flows, growth and risk are what ultimately drive markets over the longer term.

For more investing insights visit www.theislandinvestor.com.

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