| Home | About | Archives | RSS Feed |
The Retired Investor: Japan Is Worth a Look
 |
It has been 30 years since the Nikkei 225 last touched the 30,000 level. However, many investors look beyond this island nation and focus instead on its Chinese neighbor. That may prove to be a mistake.
To some investors, it is the epitome of value investing. Warren Buffet's Berkshire Hathaway made some sizable bets on several Japanese trading companies last year. Japan's stock market is cheap compared to many other markets. But deservedly so, say the bears, since investors have had to put up with years of sluggish growth and perennial deflation.
Japan is home to many well-known companies, (think Sony and Toyota) that have balance sheets flush with cash. More than half of Japanese companies have net cash positions on their books, compared to just 10-20 percent of most companies in the Western developed world.
Over the past few years, an increasing number of activist's equity funds and private equity firms have lobbied these cash-rich firms to begin to share the wealth with shareholders. Japanese corporations are listening. As a result, dividend income is increasing. The dividend yield now tops that of the U.S. stock market. The average Japanese company is still paying out only a third of profits as dividends. there is a lot of room for growth in the years ahead.
Those trends tend to fall on deaf ears, however. That is understandable given the nation's aging population, insular business culture, and overwhelming national debt.
Japan is the developed world's most indebted nation with a debt to GDP ratio this year of 256.49 percent. It has been so for decades. What most investors fail to understand is that Japan, unlike many other nations, has little to no risk of ever going bankrupt. That is because it also happens to be the greatest creditor ration in the world. The Japanese are among the world's best savers. Their savings rate is about 20 percent, compared to just 5 percent in the U.S.
The fact is that its debt is entirely denominated in Japan's own currency, the yen. And about half that debt is owned by the Japanese Central Bank. In other words, the government is lending money to itself. It has no fear of default as a result. Of course, by creating too much money, the nation runs the risk of generating inflation. That would be ideal in the case of Japan. since inflation is currently stuck around zero. For years, Japan has been battling deflation, noy inflation.
Like all nations, the Japanese have been wrestling with the COVID-19 pandemic with varying success. After postponing the 2020 Tokyo Olympics, Prime Minister Yoshihide Suga, of the Liberal Democratic Party (LDP), despite opinion polls to the contrary, decided to risk holding the games in July 2021. At the same time, the Delta variant pushed COVID cases to a record high. On the economic front, massive fiscal and monetary spending has had only a modest impact on growth. Japan's economy is expected to grow by 2.8 percent in 2021. Public support for the ruling, market-friendly, Liberal Democratic Party has been waning as a result.
In response, Prime Minster Suga abruptly announced last week that he would not be seeking reelection after only a one-year tenure. His resignation likely improves the chances that the next leader will come from the LDP, which removes a major concern for equity investors. The clear winner of Suga's announcement has been the Japanese stock market. It has risen by more than 4 percent since the announcement.
There is a short list of prospective candidates from the LDP, but investors are expecting that whoever wins, improving the rate of vaccinations, and additional fiscal spending program of "tens of trillions of yen" will be in the cards. If so, investors should keep their eyes peeled for any downside in the Japanese stock market in September 2021and October 2021. It would be an ideal time to commit some capital to Japan.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Non-Fungible Tokens Come of Age
 |
Non-fungible tokens (NFTs) have been around since 2014, but I'll bet you haven't heard of them until this year. As part of the crypto craze, these NFTs are commanding millions of dollars in spending and expanding into everything from original art to tacos.
NFTs are digital assets. For those like me, who are old enough to be grandparents, and may still read the newspapers, the concept of a digital asset may not be all that intuitive. "Non-fungible" means that it is a unique asset that can't be replaced with something else.
NFTs are bought and sold online (usually with a cryptocurrency), and stored and encoded in the same way. The difference is that cryptocurrencies, such as Bitcoin, are fungible and can be traded, or replaced, with another bitcoin. These digital assets can include everything from original art, videos, and music, as well as collectables like electronic sports cards, in-game articles, and whatever else sellers believe will have value to the spending public.
Most NFTs are bought, sold and supported by the Ethereum blockchain. Ethereum, for those who don't know, is both a cryptocurrency, like Bitcoin or Dogecoin, but also offers a sophisticated, state-of-the-art blockchain that stores extra information needed for all sorts of digital transactions including the processing and handling of NFTs.
Ethereum is not the only game in town, however. There is a growing list of competitors that have also entered the market. They function as a marketplace where NFTs can be stored, displayed, traded, and in some cases, created. These marketplaces are to NFTs what Amazon or eBay are to goods. So how do you access them?
You need to have a crypto wallet. If you already buy or sell cryptocurrencies, you probably already have one. But it must be compatible (and prefunded) with a blockchain that supports the NFT you want to buy. NFTs are usually purchased for a fixed price, or through an auction like on eBay.
The purchase includes a built-in authentication, which serves as proof of ownership. Each original object has its own digital signature that makes it impossible to be traded or exchanged for something that may look similar, but isn't. Therefore, the buyer can never be stuck with a fake copy of something like a digital Mona Lisa.
Today, although there are many types of marketplaces, universal and art-oriented platforms are the most popular. There are also nice niche players that specialize in things like collectible cards, virtual real estate, and in-game articles.
Some items have sold for substantial sums like a tweet from Jack Dorsey, the founder of Twitter, that sold for almost $3 million. Big business is also starting to dabble in this market. A number of Fortune 500 companies are jumping into NFTs as part of their marketing strategies. Visa, for example, paid $150,000 for "CryptoPunk," which is just one of thousands of NFT digital avatars up for sale. Nike has patented a method to verify sneakers' authenticity using an NFT system called CryptoKicks. Marvel, the home of so many superheroes, launched its own NFTs, as did Wayne Gretsky.
Then there is "Beeple," a digital artist, whose real name is Mike Winkleman, who rocketed to fame when Christie's, the art auction house, announced it was selling a digital work by him. The auction attracted 125 bidders and sold for $69 million. That was $15 million more than Monet's painting "Nympheas," which sold for $14 million in 2014. A video by the same artist brought in $6.6 million.
The clip art of a rock just sold for 400 ether, that's about $1.3 million. The transaction marks the latest sale of EtherRock, a brand of crypto collectables. EtherRock is a JPEG of a cartoon rock, built and sold on the Ethereum blockchain. There are only a hundred available, which I'm guessing is part of the attraction.
What makes a cartoon rock (not even a real rock) valuable? Its scarcity value. In a world where there is an infinite supply of most digital creations, NFTs stand out because they are generally, one-of-a-kind, original artwork. Of course, like any product there is an implied assumption that there is a demand for the object on sale.
Owners of NFTs are taking the chance that no matter how many times you might be able to download a copy of their original, it isn't the same as owning the Real McCoy. Frankly, you won't see me lining up to buy a virtual rock anytime soon. To me, it serves no purpose I can see beyond its ability to be bought and sold. I guess it could give you a sense of pride and maybe bragging rights in being the owner of one of only 100 such rocks, although I doubt I would want to brag about that.
Don't be too quick to dismiss NFTs as just another craze, however. For the starving artist, for example, it is an avenue (without middlemen) where they can sell their works direct to the public and make a living. I believe that in the years ahead, crypto and other electronic currencies, blockchains and the like will replace existing exchange systems as well as transaction settlements.
As the world continues its journey into a digital reality, NFTs could grow and become an accepted part of that brave new world. As we have replaced the ubiquitous oversized travel photo books on our coffee tables, the slide show of our vacations, and even our family photo albums with digital memories, is it so hard to believe that there will be a market for NFTs?
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Corporate Activism Comes of Age
 |
For decades, corporations stuck to their knitting, while letting Washington and the voters decide how to deal with social and political issues. But times are changing as companies become bigger and more powerful.
Corporations are speaking out on issues from LGBTQ rights to gun control. To some politicians, managements and their boards are throwing their weight around in ways that make elected officials uncomfortable. At first, I dismissed much of their actions as simply rhetoric, or just good public relations, but more companies are speaking out frequently on many issues.
Take the gun control issue. U.S. politicians on both sides of the aisle have failed to pass legislation that would reign in the slaughter of our citizens (especially our children) for decades. In response, some companies such as Salesforce, Shopify, Amazon, Walmart, and eBay, have taken matters into their own hands. Several companies have simply banned sales of firearms on their platforms, or have refused to supply e-commerce software to gun sellers. Their actions have all but stopped online sales of firearms in the U.S.
Other issues such as abortion, LGBTQ, and voting rights have also been taken up by a wide spectrum of corporations. Film studios have boycotted the state of Georgia, for example, over abortion rights, while Bank of America and PayPal forced North Carolina to roll back a bathroom bill that discriminated against transgender people.
Most of the big social media companies such as Facebook, Twitter, and Google, are actively attempting to limit misleading or false information, as well as hate speech, on their platforms. To their credit, the backlash from some politicians and individuals has not deterred them from pursuing those goals — and they are succeeding.
And while the country continues to debate and argue over the need to require vaccinations, corporations are not waiting around for Washington to make up their minds on that either. Proof of vaccinations started with retail shops and restaurants, which are on the frontline of potential contagion from the latest surge of the coronavirus Delta variant cases. Since then, the number of employers who are posting jobs requiring proof of vaccination is steadily increasing. The number of job postings on Indeed.com, an online employment website, for example, requiring vaccinations as a job condition, has increased by 90 percent over the last month. Google, Netflix, Disney, Morgan Stanley and Facebook are just some of the big companies involved in this trend.
You might also remember President Biden's effort to raise the minimum wage to $15 an hour as part of the $1.9 trillion COVID relief package. It was shot down back in February by the Senate parliamentarian, who would not include it as part of the reconciliation budget process. Republicans refused to back it, claiming that it would hamper small businesses in various parts of the country. Fast forward to today. Corporations, both large and small, took matters into their own hands. As of June 2021, almost 80 percent of U.S. workers are now making more than $15 an hour, according to a Washington Post newspaper survey.
Corporations have always had a fair amount of influence and power in this country, but it has usually been exercised in cloakrooms and behind the scenes. Now, however, companies face a groundswell of pressure from a socially aware public (as well as their own employees) to right perceived wrongs.
A big change has occurred within certain elements of our society. The vast majority of millennials, Gen Xers, and baby boomers believe that companies they buy from should be investing and supporting causes they care about. And if not, boycotting a company or brand, they have learned, is far more effective than writing a letter to your congressperson.
National politics are at an impasse with neither party willing to compromise on issues as diverse (or deadly) as climate change, health, or even raising the debt ceiling. Clearly, part of this new corporate direction is meant to fill a power vacuum in Washington. Critics argue that affecting policy changes through unelected corporate leaders is troubling at best.
It is. But at the same time, with public confidence in our leaders and institutions at an all-time low, the consumer (voter) evidently feels more confident in corporations and the brands they identify with to get things done than they do in some politician they rarely if ever see.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Back-to-School Season
 |
It is not an easy decision. On one hand, consumers want to go out and shop for their children's upcoming school year. But at the same time, they are concerned that if they do, they might catch the coronavirus. There is no easy answer.
This 2021-2022 school year was supposed to usher in a new beginning. As such, retailers are still expecting sales of clothes, school supplies, and college dorm décor items to increase by 5.5 percent from last years' depressed COVID-levels. Even so, that still won't match 2019's 6.7 percent increase, but it is getting close, or was until the Delta variant arrived.
I thought that parents have the extra cash to spend, given the rounds of government stimulus checks, enhanced unemployment benefits, and the child-tax credits that have been arriving in the mail over the last few months. The question will be whether those parents go out and splurge during the back-to-school season (mid-July through early September), or hold back.
If they splurge, then apparel will likely lead the list of items most in demand, and understandably so. Last year, during the great shut-in, you could wear the same sweat pants and T-shirts all week long and no one would be the wiser. But today, more families are hoping to go out, impress classmates, or start going back to the office, and if that is the case they want to look good.
Retailers are hoping that the desire to look fresh and fashionable will convince consumers to venture out, and browse the malls and department stores once again. It is those brick-and-mortar stores that suffered the "ground zero" economic impact (along with restaurants) during last year's closing of the economy.
However, weighing against these expectations is the upsurge of the Delta variant Coronavirus mutation. As the number of cases rise, more consumers are beginning to throttle back their plans to visit stores. Shoppers are once again growing wary of dressing rooms, public bathrooms, and the food courts. New shoes, dresses, and denim purchases might not be worth the risk of infection, at least for the time being.
That would be a blow to the shopping season. In just one area, industry experts were expecting back-to-school spending for children in grades up to K-12 to reach $32.5 billion, which would average about $612 per student. But the Delta strain of Covid-19 is not the only risk facing retailers.
Labor shortages are a problem throughout the economy. The scarcity of sales clerks and cashiers, for example, could translate into long check-out lines, especially for those who worriy about safe-spacing within confined spaces. To make matters worse, there may also be a lack of popular merchandise due to supply-chain bottlenecks.
The novel coronavirus Delta case surge throughout Asia has caused shipping bottlenecks. COVID-19 cases have created labor shortages in the main export ports, and in the apparel trade. That could be a problem for U.S. retailers. Just a few countries in Asia supply most of the apparel consumed by the U.S. fashion industry. China, Vietnam, India, and Bangladesh account for more than 40 percent of U.S. apparel imports.
It is still too early to predict whether consumers' desire to outfit their kids and themselves will win over the continued presence of the coronavirus. The verdict, like so many outcomes today, will depend on how bad the health issue becomes in the next few weeks.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Buy Now, Pay Later
 |
When does a loan, not feel like a loan? That is the idea behind one of the more exciting new concepts being floated by the financial technology community. It is an idea that is just catching on here in the U.S., but it could challenge traditional credit cards overtime.
Are you really going into debt when you buy something and pay it off in a set number of installments? Technically, yes, but it doesn't feel that way, especially if you are paying 0 percent interest on the installments. That's evidently what Square, a leading financial service, digital payments company believes when it announced this week it was acquiring Afterpay, an Australian-based Buy Now Pay Later (BNPL) company in a $32 billion all-stock deal.
So why all the fuss over BNPL?
E-commerce companies are betting that younger Americans, who do most of their shopping on line, are not as excited as their parents and grandparents were with the benefits of credit cards. They may be unwilling, or unable to open credit card accounts. Instead, many millennials are following the example of Europeans, who have traditionally avoided credit cards and the debt that comes with them.
In Europe, where BNPL accounted for 7.4 percent of e-commerce payment methods last year, consumers are more willing to buy an item online, even though they may not have the full amount of the purchase available in their bank accounts. As long as they honor the terms of the installment agreement, everything turns out roses.
Here in the U.S., the idea is catching on. This holiday season, for example, I purchased a new Apple iPad for a loved one through PayPal Holding Inc. The company was offering a BNPL scheme called "Pay In 4" (installments) with no fees.
After reading the fine print, I realized that like so many of these offerings, if I missed a payment, I would be hit with penalties and fees and possibly damage my credit score. After researching the issue, I found out that nearly 40 percent of U.S. consumers who used BNPL have missed more than one payment, and 72 percent of those saw their credit score decline.
I am one of those people who pay off their credit card debt in full each month. I confess that I was so worried I would forget a payment, and incur a fee, that I ended up paying off the charge in two, rather than four, installments.
More and more retail websites, however, are now offering these services. The leading providers are Affirm Holdings, Inc., which just joined Apple in a BNPL deal in Canada, PayPal Holdings, Inc, Swedish-based Klarna and Afterpay/Twitter. It is estimated that in 2020, BNPL companies facilitated between $20 billion and $25 billion in U.S. transactions, but that only accounts for 1.6 percent of U.S. digital payments. The bet is that BNPL will grow as a result of online shopping and the culture clash around credit cards.
Let's face it, credit card debt in America has a bad reputation. Almost half of all Americans are carrying credit card debt. The average household credit card debt is $5,315. And while the percentage of revolvers (those who carry a debt balance on their cards) declined a bit during the pandemic, it still comprises 40.1 percent of all credit card holders.
But that has not stopped us from accumulating more and more credit card debt. Credit card balances increased by $17 billion in the second quarter 2021 (to $787 billion), according to the New York Federal Reserve's Household Debt and Credit report. While that is still below the $927 billion amassed prior to the onset of the pandemic, it continues to grow.
The optimists argue that younger American millennials don't want to be saddled with this kind of debt and fall in the trap of only paying down monthly charges forever and ever. Yes, BNPL is still debt, but only deferred and not forever, so there is little temptation to roll it over. The critics say that more than 40 percent of those using BNPL can't get access to traditional credit, either because their credit limit is maxed out, or they have poor or non-existent credit history.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
