The Truth About U.S. Stock Investment is Told by Shigenobu Kawada's "U.S. Stock Course Trained by the Media" [Vol.7] Distributed on July 19, 2021
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Delivering the Truth about US Stock Investing
Shigenobu Kawata's "Stock Market Course Trained by the Media"
［Vol.7］Distributed July 19, 2021
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*** Table of Contents ***
Market Review
This Week's Shot! (Spotlight)
This Week's Picked Articles
Investment Tips
Kawata's Walk
Activity Information
Q&A Corner
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1. Market Review (July 12–July 16)
Major Indices
• Dow Jones -0.5%
• S&P 500 Index -1.0%
• Nasdaq Composite -1.9%
＝ Quick Version ＝
For the week, a fourth consecutive decline. Profit-taking led as earnings did not greatly exceed expectations. Inflation CPI exceeded market expectations, but the view that it would not lead to policy tightening kept long-term rates down, helping the market.
＝ A Bit More Detail ＝
The week began with momentum from the previous Friday, and Monday saw all three major indices reach new highs. However, Tuesday's June CPI came in higher than expected, pressuring stocks with profit-taking. Earnings season began; while many banks posted strong profits, many stocks did not advance as expected. The market movement is likely due to thin trading and low market energy. When participation is low, supply-demand imbalances can cause bigger price swings. The resurgence of concerns about the coronavirus variant as the week ended also contributed to the four-week decline and a sharp drop in small-cap indices (Russell 2000 fell 5.1%).
Past 1 Year of the S&P 500
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2. This Week's Spotlight
A segment delivering information you should know.
The US stock market fell for the fourth consecutive week on a weekly basis. After hitting record highs on Monday, it felt like there was a supply shortage. Long-term rates temporarily rose, but inflation ran higher than expected yet unexpectedly retraced. Even with the rate decline, growth stocks did not rally; semiconductor and other growth stocks fell. Earnings season has begun, and many stocks—despite strong results from major banks—did not rise in price.
This market movement is likely due to thin liquidity and low market energy—if participation is low, demand-supply can swing prices sharply. The renewed concern about a surge in coronavirus infections is also cited as a factor. While major indices hover near all-time highs, some believe only a few large-cap names are lifting the market. This is supported by the notable drop in small caps last week (Russell 2000 down 5.1%).
Written this way, it might sound bearish, but when market participants are wary of a high, a major crash is unlikely. Concerns such as inflation (rising interest rates), peaking corporate earnings, and renewed infections are partly priced in, so they are unlikely to trigger a big collapse.
Therefore, long-term investors are not selling, and those with spare capital should not feel rushed to buy. Trading aggressively in a market with weakened energy can leave you stranded, especially with mid- and small-cap stocks. While there are recommendations for value stocks rather than growth stocks, except for institutions that must own stocks, individual investors should not force themselves into positions.
This week continues earnings season. For tech: Netflix on Tuesday, ASML Holding and Texas Instruments on Wednesday, Intel and Twitter on Thursday are notable. Other highlights include IBM on Monday, Coca-Cola on Wednesday, and American Express on Friday. Economic indicators include housing-related data, but their impact is expected to be limited.
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3. This Week's Picked Articles
A column that selects and ranks information useful for asset formation from what I have found, and comments with a very personal viewpoint.
【1】 Nikkei Newspaper The Dilemma of Digital (1) Income Disrupted, $50 Billion Disappeared: Riches of U.S. Tech Giants Not Reaching Workers, Imbalances for the Next Generation7/13
The headwinds against the digital economy based on IT (information technology) are intensifying. The reason why regulatory talk is spreading worldwide is that its expansion could create wealth concentration and social rifts, potentially shaking democracy itself.
The article highlights the following points.
① The share of nominal GDP (Gross Domestic Product) from autos in the U.S. was around 2% up to the 1970s; IT services accounted for only about 1.2% of the total as of 2019.
② The "labor share"—the proportion of value added paid out as wages—peaked above 70% for autos in the 1970s. For IT services, as of 2019 it was about 33%, roughly 21 percentage points below the industry average. If it were on par with other industries, workers would have received about $57 billion (about 6.3 trillion yen) more in distributions annually.
③ The tax burden rate for the four major U.S. IT companies is 15.4%, about 9.7 points below the world average.
④ Ripple effects on related industries are limited. In Japan, when auto demand rises by 1, it induces 1.7 in production in other industries, but for information services it is 0.6.
Regarding the above ③, at the G20 Finance Ministers and Central Bank Governors Meeting that closed on July 10, there was a broad senior-level agreement to revise corporate tax rules to address globalization and digitalization, aiming to start implementing in 2023. There was an implicit understanding among countries to cover large, rapidly growing IT giants.
However, this concerns taxation. How taxes are collected is a technical discussion, so no further debate here, but regarding points ① GDP share, ② labor share, and ④ ripple effects, there are other perspectives. To provocatively anticipate a counterpoint: even if contribution to GDP is small, profits could be large due to efficiency; if distribution to workers is small, but profits go mostly to capital (shareholders), and if those shareholders are individuals (including pensions), society as a whole might not have a problem; if ripple effects are minimal and resources are redirected to use elsewhere or to lead a prosperous life without using those resources, that could be positive for the environment as well.
Of course, there are problems with mega IT, but criticizing it with the old values might undermine the U.S. national power.
【2】 Nikkei Newspaper Foreign Equity Popularity, Hidden Downside of Yen Selling: Individual Money Thick via Investment Trusts7/14
An article in the foreign exchange market notes that individual investors' preference for foreign stocks is beginning to act as a new yen-softening pressure. Long-term money flows into overseas stocks via investment funds and tends to stay as dollar assets.
Cash and deposits account for about 54% of Japan's individual financial assets, versus about 14% in the United States, which is quite high. A prudent investor would naturally be drawn to the U.S. stock market, which offers long-term high performance. In doing so, more investments are made without hedging currency fluctuations. The cost of hedging due to interest rate differentials between Japan and the U.S. may be unfavorable for long-term investing.
If there is no sustained reverse buying of dollars (selling dollars), the energy to buy dollars that pushes the yen weaker would intensify. Some believe that eventually the invested dollars will be sold, so the impact would be neutral, but if reverse trades do not occur for a long period, the dollar-buying pressure could continue for the time being.
Currency issues depend on the investors' time horizon, but I think a super-strong yen around 1 USD = 80 JPY is unlikely now. Long-term investors should invest in U.S. stocks without fearing yen appreciation or dollar depreciation. Of course, the trend described in this article is a positive factor that could encourage hesitant investors to start.
【3】 Nikkei Newspaper Evening Edition "Tech Companies" Urgency in U.S. Banking7/16
An article explaining the competition in personal payments within the U.S. financial industry in the context of major banks' April-June 2021 earnings announcements.
Major banks, at earnings events, uniformly emphasized the importance of digital technology and unwavering investment in digital means. Currently, in consumer payments, rivals extend beyond other banks to giant tech firms, specialized fintechs, and, notably, the world's largest retailer, Walmart, which has entered financial services in collaboration with others.
The number of digital transactions is increasing, and the shift to digital is irreversible. Tech firms are forming coalitions with large and small specialized firms to enhance consumer convenience, but Walmart’s foray into financial services—despite collaboration— is significant and could create positive synergies with physical stores.
The Biden administration in the U.S. is critical of the bank sector's ongoing store closures, but efficiency is unavoidable for corporations, and given the intense competition, this is natural. This competition will strengthen U.S. finance, society, and stock markets.
【4】 Nikkei Newspaper Venarity Learnings from "Longevity" Funds for Asset Management7/18
"According to Mitsubishi Asset Minds, among active Japanese stock funds, those with a track record longer than 20 years as of the end of May are about 140. From there, funds with strong recent returns or assets under management were selected."
This is an article introducing long-standing, well-performing active funds focused on Japanese equities, managed by both foreign and Japanese asset managers.
Long-term performance of over 10% per year for Japanese stocks over 20 years is commendable. However, the assets under management are small; the largest is JPMorgan The Japan with 64.5 billion yen, but others are below 10 billion yen. With such amounts, it might be unprofitable as a business.
Reading the article makes me want to root for them. Yet funds with such small assets under management are not ideal long-term investments when considering efficiency and sustainability. I understand wanting to support Nikkei Veritas funds, but might cause trouble for investors.
【5】 Nikkei Newspaper Inside-Out The Nominal CIO: Hasty DX7/13
This article gave me something to think about. It points out that Japanese companies lack the internal capability to drive essential "Digital Transformation (DX)" for future business development.
In simple terms, the reason is that there are fewer personnel inside the company to push DX compared to Western firms. The factors include:
In the past layoffs left the hands-on team within the company thin
The CIO who should be the commander is not a true expert but only nominal
Departmental silos make cross-company DX promotion difficult
Custom ERP patchwork instead of using packaged software (being dictated by vendors)
Budget constraints and high ratio of external outsourcing compared to overseas peers
etc.
METI (Ministry of Economy, Trade and Industry) also has a sense of crisis, but progress is slow. Not only inside companies but as an industry, top talent tends to gather in consulting firms and foreign user companies. Ordinary Japanese companies also pay IT personnel less than abroad.
The root cause is not only with Japanese companies but also recent government issues (COVID-19, My Number Card, etc.). In short, IT specialists (experts) were not valued enough.
While specialists are the opposite of generalists, in IT fields and beyond, in Japan there is a strong bias that generalists outrank specialists in government and society as a whole.
Sometimes specialists are called "XX shop" (a somewhat teasing term). Terms like "Finance shop," "English shop," "Law shop" exist. For DX, there is likely to be a label like "System shop."
Specialists themselves have also enjoyed certain “privileges,” so some tolerance is understandable, but regardless, unless Japan builds a system to properly evaluate and reward specialists, the country will continue to lag. Especially DX goes beyond what generalists can cover.
Conversely, in Japan there are system integrators that build internal enterprise systems, but I think no company will emerge that produces packaged software soon. This is one reason to invest in overseas growth stocks centered in the United States.
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4. Investment Tips
This column covers not only "investment methods" and "stock picks," but also "notable indicators and statements" and "movements in society and politics."
■ Popular "Theme Funds" among Active Funds
In Japan, active funds occupy the top positions in managed assets, while in the U.S. index-tracking funds and ETFs dominate. This difference strongly affects personal asset formation in Japan and the U.S. It seems Japanese investors are missing large asset growth opportunities by reacting to the fluctuations of active funds.
Among active funds, the ones drawing attention thanks to their investment approach are "theme funds." Currently, globally, this category is growing rapidly. The concept of "themes" is familiar to Japanese investors because it has long been used in stock and fund marketing, which is now gaining worldwide popularity.
Back in 2000, IT-era theme funds boomed. They included a handful of major tech firms and were fashionable, but many vanished after the IT bubble burst. Morningstar notes that of 47 internet-themed funds established in the 1999-2001 period, about 42 halted operations.
■ Popular Ark Funds
The current representative of popular theme funds is Ark's funds and ETFs. In Japan, they gathered substantial investor money under Nikko Asset Management's products. The flagship ETF "ARK Innovation ETF (ARKK)" performed spectacularly up to February this year, rising threefold from February 2020 to February 2021, significantly outperforming the market. It selects disruptive innovation companies; among top holdings are Tesla and Roku.
Besides Ark, many firms have launched theme funds on topics like "Clean Energy" and "DX (Digital Transformation)" across Europe, Japan, and China. Morningstar reports the global assets in theme funds at about 65 trillion yen, 2.5 times higher than at the end of 2019.
■ Are We Missing the Risks?
When a fund states it invests in companies leading innovation and structural economic changes, it can create a sense of excitement.
However, the concentrated nature of theme fund investments means higher risk, as holdings are limited and diversification is reduced. For Ark Innovation ETF, typical holdings number 35-55, but the top 10 holdings can exceed 50% of assets.
Moreover, multiple similar ETFs and funds exist; this can amplify risk as many funds may hold the same securities. For example, Stratasys (SSYS), an Nasdaq-listed 3D printing company, has 50% of its float held by 28 theme funds. If investors simultaneously redeem, selling could be difficult.
If forced to sell, the stock price could fall and other funds holding the same stock would see worsened performance, potentially triggering a cascade of redemptions. Indeed, the stock hit $54 in February last year and recently traded above $20.
Last year's strong performance has given way to struggles this year. High-flying stocks that surged in February have been sharply sold, and Ark funds and ETFs have not been immune to declines.
■ Theme Funds Are Best as Snacks or Dessert
Theme funds attract investor money when rising, and funds must then buy according to the pre-set theme. When that theme loses popularity, funds experience outflows and managers are forced to sell. In other words, they choke themselves.
I am not against theme funds per se. However, for asset formation, investing in theme funds should be kept modest. For core asset formation, index funds or ETFs tracking the S&P 500 should be the staple, with theme funds as a snack or dessert at best.
Stratasys (SSYS)
ARKK Top Holdings
Below are relative price charts of Ark's major ETFs and the S&P 500 index (light blue) since the beginning of 2021
ARKK's performance over the past five years
ARKK (candlesticks) vs Nasdaq-100 (orange line) over the past five years
ARKK (candlesticks) vs Nasdaq-100 (orange line) since the beginning of 2021
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5. Kawada's Walk
◇◇Recently visited favorite shop◇◇
Two rival meat restaurants
Two women were waiting in line, so I followed and popped into the nearby meat restaurant. The price is a bit high but tasty. I had a steak sandwich. The next day's lunch I had a BLT to take home for a Zoom meeting. I have a habit of trying something twice to see how my palate responds on the second and third tries, to avoid underestimating it the first time.
Meanwhile, the nearby COOK BARN TOKYO (Cook Barn Tokyo) is one I go to more often. It's slightly pricey but the taste justifies the price. However, opening at 11:45 makes it hard to meet a banker who starts lunch at 11:30. The fried rice with "less fat, shredded meat" is for Kawata's taste.
The friendly manager invests in U.S. stocks and trades at Mizuho Securities' storefront price. I advised him to stop due to the ridiculously high trading costs, but he doesn't understand the meaning of the "high spread added to the closing price."
When I sat at the table the other day, we had a chat: "What do you think of that 3D printer thing?" "That thing? Stratasys (SSYS)?" "You know it well," "Of course, it's my job." The breadth of U.S. stock investing is expanding.
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6. Upcoming Activities
◇July 21 (Wed) 11:00 AMStock Voices
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7. Question Corner
Questions (Summary)
I have been investing in U.S. stocks for about half a year. I had a 10% profit from individual stocks, but since two months ago I hesitated, so I switched everything to ETFs. In early June I bought Russell 1000 Growth (VONG). Please explain the differences, merits, and demerits between S&P 500 (SPX) and Russell 1000 (VONE).
Answer
Running everything as ETFs is not a bad choice. It eliminates the stress of stock selection and management for individual securities.
Now, let's compare four ETFs including Russell 1000 (VONE), Russell 1000 Growth (VONG), S&P 500 (SPY), and Russell 1000 Value (VONV).
Regarding performance, there is generally no large difference between the S&P 500 and Russell 1000. Their constituent stocks and weights differ, but choosing large-cap stocks by market cap tends to yield similar performance.
Reference: Russell 1000
An index published by Russell Investments representing the top roughly 1000 large-cap U.S. stocks by market capitalization from the Russell 3000. It accounts for about 92% of the U.S. market by market cap. It reconstitutes annually to reflect the latest growth companies.
https://www.nomura.co.jp/terms/japan/ra/russell1000.html
On the other hand, Russell 1000 Growth and Russell 1000 Value rarely move together. Depending on market conditions, Growth may be favored or Value may be bought, and one index often outperforms the other relative to the S&P 500 or Russell 1000.
Compared historically, Value tended to lead from autumn last year to around February this year, but since then Growth has surged again, returning to the trend of the previous few years and now leading.
Personally, I believe betting on either Value or Growth is a risky move, so buying either the S&P 500 or Russell 1000 ETF would be useful for long-term wealth formation.
Russell 1000 Growth (VONG) candlesticks, S&P 500 index (yellow), Russell 1000 (green), Russell 1000 Value (orange) – past 10 years
Russell 1000 Growth (VONG) candlesticks, S&P 500 index (yellow), Russell 1000 (green), Russell 1000 Value (orange) – past 1 year
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