Your Financial News Roundup
May 24, 2023
1. Economy: A potential U.S. debt ceiling default puts the global economy at risk; while a bill for paid family and medical leave (FMLA) has bipartisan support.
2. Tech: The Supreme Court declines to strike down tech industry protections; meanwhile, an international set of rules for digital assets will come out later this year.
3. World: Syria’s leader Bashar al-Assad rejoined the Arab League; and CA, NV, and AZ agreed to water usage cuts to preserve the Colorado River.
Personal Finance Concept [Part 4/8]: Value Investing
📉 Default Worries: If the U.S. defaults on its debt and the crisis isn’t resolved quickly, “no corner of the global economy will be spared,” according to Mark Zandi, chief economist at Moody’s Analytics. Based on his predictions, if the debt limit were breached for a week, 1.5 million American jobs would get wiped out. If a government default goes into the summer, 7.8 million jobs would disappear, pushing unemployment rates up to 8% and erasing $10T in household wealth. (CBC)
Our Take: The U.S. has an outsized role in the global financial system, with many countries relying on the dollar for payment. The risk of a default, compounded by partisan divides in Congress, rising inflation and interest rates, and the ongoing Russia-Ukraine War, puts the global economy in a delicate position.
🏖️ Paid Leave?!: Democrats plan to revise the Family and Medical Insurance Leave, or FAMILY, Act by giving workers up to 12 weeks of partial wages for health emergencies or the birth or adoption of a child. The update would also redefine the modern family to include more types of caregiving relationships and get funded by a 0.4% payroll tax. While both parties agree on implementing paid leave, they disagree on how to fund the plans. To date, the U.S. is the only developed country with no paid leave program as FMLA only provides 12 weeks of unpaid leave. (CNBC)
Our Take: The lack of paid leave policies deters people from having kids or tending to their health. Research has shown that paid leave provides a host of benefits for society, hence the greater push to make paid leave a national standard.
🛡️ The Shield Remains Up: The Supreme Court sent the case of Gonzalez v. Google back to a lower court, declining to rule on Section 230 of the Communications Decency Act. Section 230 is tech’s liability shield, protecting platforms like Twitter and YouTube from the impact of their users’ content and giving them the right to moderate or remove content. The Court felt that the case had a weak legal basis, giving a big win to the tech giants. While many lawmakers see Section 230 as an unnecessary protection for the tech industry, they are divided on a potential replacement. (CNBC)
Our Take: Passed in the 90’s, Section 230 protected the young tech industry, helping it grow into today’s behemoth. Now, that legal protection is seen as unfair as tech firms engage in controversial moderation practices.
🌍 One World, One Law: IOSCO, an international securities agency, released a global set of 18 measures for crypto and digital markets. Prompted by the FTX collapse, IOSCO’s approach covers conflicts of interest, cross-border regulatory cooperation, market manipulation, asset custody, and more. The standards reflect safeguards from traditional markets and are expected to get finalized by year’s end. IOSCO expects its 130 members, including the U.S. Securities and Exchange Commission and Japan’s Financial Services Agency, to cooperate together to protect consumers. (Reuters)
Our Take: The crypto industry’s surge in popularity led to the widespread adoption of digital assets and the explosive growth of crypto conglomerates like FTX. However, at the same time, the lack of consumer protections proved extremely detrimental to everyday investors.
🇸🇾 Assad’s Comeback: Syrian President Bashar al-Assad traveled to Jeddah for the Arab League summit, where he was warmly greeted by the Saudi Crown Prince Mohammed bin Salman. Arab League members want to recognize Syria to engage in diplomacy and combat the spread of Captagon, a deadly narcotic. Assad’s war against his people stabilized his power but destroyed his country, as refugees fled all over the region. Nearby Lebanon took in 1M+ refugees and now make up 25% of its population. For Assad, his attendance among leaders who once funded the rebels opposing him shows he’s outlasted them. (BBC)
Our Take: Assad is just one leader of many in the Arab League that detain their opposers and limit free speech. Major Arab powers want to remake the Middle East economy to wean it off of oil, which means bringing an end to the 12-year long Syrian rebellion.
🚰 Water-Sharing Deal: The Colorado River states, made up of California, Arizona, and Nevada, reached a short-term deal to voluntarily reduce their water usage to prevents further risk to the West’s water and power supplies. The Colorado River has shrunk in size significantly from years of drought and overuse. The 3 states agreed to reduce their use by 1/3rd in exchange for $1.2B in compensation from the federal government. Steeper cuts are needed in 2026 when the pact ends. (NPR)
Our Take: Water scarcity is a critical but underreported issue for the West. Solutions to further reduce the drought include raising prices on water, building desalination plants, and capturing rainwater.
Finance Concept of the Week
The Investor’s Playbook [Part 4/8]: Value Investing
Investment Strategies for Financial Success
Searching for the next Amazon or Apple is not an easy feat. However, with value investing, you may uncover investment opportunities with substantial growth potential that may be overlooked by most investors today, whether due to short-term market fluctuations, investor sentiment, etc.
Investors use value investing to hunt for stocks that are trading well below their intrinsic value. This approach relies on the principle that, over time, the market will correct itself, ultimately bringing stock prices in line with their fair value. At its core, value investing revolves around the concept of buying low and selling high.
- Opportunities For Underappreciated Investments: By building a portfolio of undervalued stocks, you can position yourself to achieve superior returns in the long run. If you are able to recognize opportunities where the market has mispriced a company’s value, you can take advantage of the potential upside when the stock (inevitably) rises.
- Focus on Fundamentals: Value investing places importance on analyzing a company’s fundamental metrics, such as earnings, assets, and cash flow. This emphasis on fundamental analysis helps you understand the underlying strength and potential of a business, leading to more informed investment decisions.
- A Contrarian Approach: Value investing often involves going against the crowd and taking positions that differ from prevailing market sentiment. By seeking out undervalued opportunities, you may capitalize on market inefficiencies that others fail to capture.
- Playing the Long Game: This approach requires discipline, patience, and focus as you would need to correctly identify the underlying companies’ fundamentals and wait for the market to correct itself. This could take months or decades.
- Risk of Catching a Falling Knife: With value investments, you risk the possibility of investing in struggling or failing companies. Sometimes, stocks are trading at low prices for good reasons.
- Limited Growth Potential: Undervalued stocks usually have low share prices and limited growth potential, especially when compared to growth stocks. That means if you invest in value stocks, you may have fewer profits from capital gains than if you invest in growth stocks.
Tips and Tricks
- Key metrics to consider to find undervalued stocks include:
- Price to Earnings (P/E) ratio: The P/E ratio is commonly used to measure a stock’s value. It is calculated by dividing the stock price by earnings per share. A higher P/E ratio indicates a higher stock price relative to the company’s profits, which is often associated with overvaluation or high growth potential. A low P/E ratio could indicate a potential buying opportunity if you believe the company’s future earnings potential is higher than expected.
- Earnings Per Share (EPS): EPS is used to gauge a company’s value and profitability. It’s also used to calculate the E in the P/E ratio. A company’s EPS gets determined by dividing its profit by the number of outstanding common shares, representing how much it earns per share of its stock. Companies with higher EPS are typically considered more valuable, as investors are willing to pay a premium for their shares.
- Debt to Equity (D/E) Ratio: The D/E ratio is used to evaluate how much leverage a company has. It is calculated by dividing a company’s total debt by its total equity and provides insights into its financial health and ability to handle debt obligations. Companies with high D/E ratios may be more vulnerable to financial difficulties and pay higher costs for capital.
- EV/EBITDA Ratio: The Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) ratio is a popular screening method used to compare a company’s value to its cash earnings minus non-cash expenses. The EV portion of the formula calculates a company’s total worth, while EBITDA assesses a company’s financial performance and profitability. Many investors today use the EV/EBITDA ratio to compare companies within the same industry or sector. To calculate a company’s EV/EBITDA Ratio, you can use the formula:
- EV/EBITDA = (Market value of equity + Debt – Cash) / EBITDA
- There are a few approaches you can take to find undervalued stocks.
- You can use a stock screener, such as Google Stock Screener or Yahoo Stock Screener, to set specific criteria for identifying undervalued stocks.
- You can look for oversold stocks, which are stocks that have sold off dramatically but have stable histories and maintain a good S&P rating.
- You can buy stocks during market corrections when everything is down.
- You can identify undervalued sectors or industries and seek out champions within each individual sector. Different industries measure success differently, so start by understanding expectations for one or two.
Value investing is best for investors with a long time horizon. It requires patience, analytical skills, and a detail-oriented mindset. Investors who enjoy delving into the details and analyzing a company’s fundamentals may find value investing appealing. Additionally, investors who are risk-averse and prioritize capital preservation may be drawn to the conservative nature of value investing.
Tip of the Week
💸 To maximize credit card benefits and minimize debt, choose cards with low interest rates and rewards that align with your spending patterns.
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