June 2024 Investing Newsletter

By: Robert Silaghi


Consumer Retail Sector Outlook:

Overall, I believe that the consumer retail sector is due for significant change in the coming years, and companies that will be able to adapt to this uncertainty will be the ones to gain significant market share.

In recent times, margins have become more and more tight for consumer retail companies, especially e-commerce businesses. This comes from a growing demand for fast shipment services. According to a survey, “retailers expect that in the next five years, two-thirds of deliveries will be expected to be fulfilled either same-day or next-day”. This will place incredible pressure on supply chains. Therefore, I believe that the driving factor to change will be technology because of its ability to create efficiencies throughout the market. In order to be able to obtain efficiency and gain market share, retailers will likely need to increase productivity by finding alternative uses from their products and processes. They will be likely able to harness this through customer data using generative AI.

Other factors that these companies will have to focus on are prices and sustainability. Studies have shown that in recent years, new consumers have placed increasing attention on promotional deals. For example, existing customers are 50% more likely to spend 31% more than new customers. Recognizing this trend, I believe that the use of loyalty programs will be something to look out for when investing in growing companies with less brand recognition. On the other hand, sustainability has also been surveyed to be an exponentially growing preference for consumers both in the United States and especially in Europe, with over 60% of consumers expecting brands to have sustainability practices in place. Individuals will be looking out for commitments and tangible goals to become more environmentally conscious. This could create a good investment opportunity in companies selling carbon credits.

Lastly, in a fundamental analysis I recently performed on TJX Companies, I found how the placement of retail companies in strip malls protected them from the adverse effects that technology has on in-person shopping foot traffic. This will definitely be something to continue watching as the Generative AI landscape evolves.

Therefore, overall I see growth potential in the consumer retail space, especially for companies that will be able to adapt to growing consumer preferences in price and sustainability while harnessing the benefits of Generative AI to create additional sources of revenue and margin improvements through efficiencies.

Macroeconomic Analysis

The big factor that everyone is keeping an eye on is inflation. Despite some pressures, such as low levels of unemployment, indicators continue to show that a soft landing is most likely. For example, the PCE report was 0.1% lower than expectations. Historically this has been a good predictor of CPI coming out in the next few weeks. Additionally, home sales, which make up a major part of CPI, declined by 11.3% month over month.

Disclaimer: This newsletter is for informational purposes only and should not be taken as investment advice. Consult a financial advisor before making any investment decisions.

May 2024 Investing Newsletter

By: Robert Silaghi


Analyzing JPMorgan Equity Premium Income ETF (JEPI):

JEPI is a high-yield ETF that seeks to provide investors with a regular monthly-paying dividend from out-the-money option premiums by investing in high-quality, large-capitalization U.S. stocks. Through its strategy, the fund targets lower volatility investments compared to the broader market. Ultimately, JEPI combines equity investments with an options strategy through covered calls. Instead of selling these contracts individually, the fund uses equity-linked notes to mimic profits. The fund selects stocks based on various characteristics, like dividend yield, earnings growth, and relative valuation.

Here are some of the pros and cons of investing in JEPI.

Pros of JEPI:

1. Income Generation: JEPI is designed to deliver a consistent and attractive income stream from option premiums and stock dividends. It has historically been higher than other dividend-paying ETFs, last year contributing over 7% and the year before over 10%.

2. Accessible Investment: As an ETF, JEPI makes it possible for everyday investors to engage in a complex options strategy that might be difficult to replicate individually.

3. Diversification: JEPI offers diversification benefits within a portfolio, spreading risks across multiple high-quality stocks and the options market.

Cons of JEPI:

1. Capped Upside Potential: The covered call strategy can limit the upside potential of the ETF, as the assets might be called away in a significant market rally.

2. Taxes: The income from covered calls is typically taxed as short-term capital gains.

3. Market Risks: Like all equity investments, JEPI is subject to market risk, and while volatility is potentially reduced, the fund can still lose value.

The JPMorgan Equity Premium Income ETF presents an investment option for those focusing on income generation with lower volatility. It could be a great way to hedge against turbulent macroeconomic conditions, securing a dividend payment that historically has been greater when the ETF’s price-action underperforms.

Macroeconomic Analysis

Overall, the macroeconomic condition of the US economy looks strong with only a few negative indicators. Total nonfarm payroll increased by 272,000 jobs in May and the unemployment rate rose to 4%. While this shows that the US economy continues to show promises for a soft landing, it is also a signal that interest rates will likely continue to be delayed. The negative core inflation trend continues to be in effect, matching estimates for the month. This is likely going to be indicative of a summer rally, followed by some consolidation in September before the election, a month historically known for such a performance.

Additionally, a concerning news report recorded poor demand for a treasury yield auction at the end of May. This was driven by a growing concern that the Federal Reserve would continue delaying interest rate cuts, leading to yields ending at four-week highs. Looking forward, the national debt is something that the next president will likely have to address. However, I am not too concerned about the issue because I think that there are many strategies to mitigate this, such as charging royalties for all energy exports.

Disclaimer: This newsletter is for informational purposes only and should not be taken as investment advice. Consult a financial advisor before making any investment decisions.

April 2024 Investing Newsletter

By: Robert Silaghi

Short-Term Trading

The Time Value of Money

I enjoy short-term swing trading for many reasons. First and foremost, I have much more discretion over my decisions because of liquidity. 

Less Research

Swing trading in general is much less fundamental than long-term investing. Week-to-week, the stock market is a voting machine; only on a longer basis will a lot of company fundamentals be appropriately priced and realized by the market.

Emotional Superiority

In fundamental long-term investing, it is often hard to form a thesis that isn’t priced into the market because of how readily available information is nowadays. However, it is easy to have the upper end over the long term in swing trading. This can be done through emotional superiority. Retail investors often sell at low prices or buy at high ones, following a confidence bias. This is why buying on emerging trends or high probability patterns at good entry prices is a successful strategy. By properly managing risk by consistently accounting for open risk units and using stop losses, any investor can expect good returns over time. 

Long-Term Investing

In markets, risk is often rewarded with additional expected returns. The best example that I can think of is bonds: lower-grade bonds provide a larger yield, but also come with a higher probability of defaulting. This same principle can be applied to the equity market. Because stocks are considered riskier than most bonds, investors expect higher annual returns. This relationship between risk and return is very important and is commonly represented through the capital asset pricing model. 

The Capital Asset Pricing Model can be used as the discount rate for a company with no debt

When working with future cash flows for projections, it is important to discount them because of the principle that money loses value over time. $1,000 next year may only be worth $900 today because you could invest in another asset that generates more cash during that time. The Capital Asset Pricing Model is a simple equation:

CAPM = Risk-Free Rate + Beta (Expected Market Return - Risk-Free Rate)

The Risk-Free Rate is commonly referred to as a 10-year Government Treasury bond yield because the stability of the US economy makes this as close to no risk as possible. For those who are statistically inclined, this equation can be viewed as a proxy for the regression of expected market return minus the risk-free rate on the expected return of the stock. Beta is just a measure of volatility when compared to the market. A Beta of 1 means the underlying asset moves in union with the broader market; a Beta of 2 means that the underlying asset moves twice as much in either direction when compared to the market, a risk that investors expect to be compensated for. Lastly, the expected market return is the projected long-term growth rate of all equities, which for simplicity is commonly considered 10%. For a company with no debt, the only risk that investors incur is in equity. The equation starts with the risk-free rate because this is the minimum expected return of investors, or else they will just invest in the risk-free asset. Because stocks are not risk-free, the additional expected return is the equity risk premium, or the beta(expected market return - risk-free rate). Using this equation can lead to a clearer rationale behind investments.

Macroeconomic Conditions

Core PCE inflation over the last 3 months was a 4.4% annual rate. 

This represents highs between any time from January 2009 to March 2021. As discussed in the last newsletter, the expected rate cuts this year were a large part of the surge in stock prices within the last six months. This makes sense because lower interest rates mean that bonds have lower yields and people can borrow money more easily, making stocks more attractive. 

However, such high inflation is making these cuts seem less and less likely this year. Certain Federal Reserve representatives across the country are coming out and claiming that there may not even be any more rate cuts this year. With growing inflation concerns and more than two rate cuts already priced into the market according to Bloomberg, this would cause the equity market to decline. Price action within the past few weeks has shown such a reaction, with high levels of volatility and a decrease of close to 3% in less than a month. This is something that I will keep a close eye on when deciding how to diversify my investments in the coming years.

Disclaimer: This newsletter is for informational purposes only and not financial advice.

March 2024 Investing Newsletter

By: Robert Silaghi

There are many different ways to invest, and there are an infinite amount of strategies that can be used. Many people have tried to convince me that there is only one “correct” way to invest: looking at a company’s intrinsic valuation by analyzing its cash flows and making projections. While this is a very viable approach, it is certainly not the only one, and it has its own limitations. An investing strategy is really any set of rules that can be written out to make money over time.

Short-Term Trading

To start, I’ll cover shorter-term trading, which I consider to be any investment held for under a year. Here are some of the key things that I have learned to be important considerations when implementing an investment strategy on this time horizon. 

"In the short term, the only way to really differentiate yourself from other traders is to not let your emotions affect your trades." 

It is important to have a systematic process to leave as few choices to discretion as possible. Many times, shorter-term traders use technical analysis. They will create support and resistance lines. However, these are all arbitrary levels. Therefore, I want to introduce a new way of thinking about the markets. 

"View your portfolio in terms of risk in the scheme of your next 100 trades." 

A written trading plan will help keep you organized. A trading log is also really important because it allows you to reflect on the risk parameters of your investment strategy. Consistently good habits will bring good results, just like with anything else in life. To effectively view trades in terms of risk, you will need to use a few tools. First, you want to have a stop loss on every trade. This level will depend on a lot of factors, but most importantly the average true range of the stock and your self-emotional control. If the price of the underlying stock increases, you want to make sure to adjust your stop loss accordingly. Once your stop loss is at your break-even point, you effectively assume no risk anymore, allowing you to expose yourself to new risk units. If the stock price keeps increasing, keep adjusting this level. Never sell the stock yourself; the stop loss will one day do this for you. 

"There is no way to predict these bullish trends, but by using risk mitigations, you will be able to profit from them." 

Never expose yourself to too many risk units. They are easy to calculate because you already know the maximum amount that you can lose: the difference between your entry price and stop loss multiplied by the number of shares you own. Further breaking up the maximum risk units that you are exposed to into sectors is recommended for diversification purposes. Inherently, investing in bearish trends will bring along more risk; therefore, I always try to place buy orders in established bull trends and short orders in established bear trends. More detailed explanations of risk mitigation will be released in future newsletters.

Long-Term Investing

For longer-term investing (any position over a year) it is much more important to understand the underlying company. However, when analyzing a company, it is important to target organic growth in your investment thesis. This can come from numerous factors, including better operating margins or investment synergies. By using such metrics, your future projections will be a lot less speculative but instead based on high-probability reasoning, making your implied share price a lot more reliable. This should be done through an average weighting of multiple financial models, including comparables, precedents, discounted cash flows, and leveraged buyouts, to ensure greater accuracy. 

Purchase entry price is incredibly important as it will best help you profit off of market inefficiencies. Almost always, the markets are incredibly efficient, but because people are naturally emotional, this will not always be the case in large price fluctuations. Large crashes are the perfect opportunity to begin making long-term investments in growth or value stocks. This reasoning covers just the basics, but for now, it is important to grasp a consistent and logical long-term investing framework to be successful.

Macroeconomic Conditions

The market is incredibly bullish right now, with major indices increasing more than 10% year-to-date. However, it is important to pose the question "Why have markets been going up so much these past few months?" It is because of the three expected rate cuts later this year. Throughout my time investing, this is one of the most publicized rate cuts that I have witnessed. Therefore, because everyone is so aware, the market is baking them into current prices. 

What happens if the FED does not end up cutting rates? Even though I definitely think this isn't too likely, it is still a possibility for several reasons. For one, the election is this year, so the FED may not want to intervene with the results. Additionally, the personal consumption expenditures inflation report that came out recently was worse than expected. Lastly, certain indicators such as credit card delinquencies and the Empire State Manufacturing Index are showing concerning signs. 

Therefore, if macroeconomic concerns cause the FED to not deliver on their promised rate cuts, not only will the market react negatively, but also a lot of the new AI companies will not be able to refinance their debts at lower rates than expected. Because of the large impact that AI has had on the markets, this could very well trigger at least a mild crash. Therefore, macroeconomic conditions will be incredibly important to watch moving forward. While I do think the market will continue to be bullish until the election, a few bad macroeconomic signals could cause considerable negative price fluctuations. 

Disclaimer: This newsletter is for informational purposes only and not financial advice.