Bern Factor. Weekly Letters

by Mark Bern, CFA If you watch financial network TV or read what financial gurus have to say on the Internet you can expect to hear a lot about the yield curve in the coming months.  The fact is it will have everyone worried about the possibility of another recession.  Why?  In every instance when the yield curve inverted in modern history (since the Great Depression) when the yield curve inverted it was followed by a recession in the U.S. that began sometime between six and 24 months after the inversion occurred.  What is the yield curve?   It is the spread (or difference) between the 10-year Treasury note and the 2-year Treasury note yields (market interest rates).   When the 2-year note yield is higher than the 10-year note yield the curve is said to be inverted.   The reasoning is simple: investors should expect to be paid a higher yield for holding a security that has a longer term to duration because so much can happen over the longer tim...

by Mark Bern, CFA First, let me reiterate that I expect the remainder of 2018 to be stronger than most financial pundits and economists do.  OECD (Organization for Economic Co-operation and Development), an organization of mostly developed countries, projects that GDP will grow at 2.78% for all of 2018.  After the results of quarters 1 & 2, that would require the third and fourth quarter growth to drop to a dismal average of 2.41%.  The folks at The Kiplinger Letter are projecting 2.9% for the full year; not much better.  The Conference Board , which is much more enthusiastic about our nation’s growth potential, forecasts a 3.3% GDP growth for the second half of the year bringing the full year estimate to about 3.2%.  Forecasts are all over the board but most (that I have seen) expect growth below 3%. While I hope the Conference Board is correct, I am not quite as enthusiastic.   My expectation is for growth to drop down to a still respectable...

by Mark Bern, CFA Stocks are near record highs.   Over the last few weeks stock prices have been almost flat.   Over the same period, companies have been reporting double-digit earnings increases.   The result is that multiples like the P/E ratio have been contracting bringing stock values down from nose bleed levels closer to the long-term average.   Interest rates are still historically low, justifying higher than normal valuations.   Inflation is heating up a little but not getting out of control.   Economic growth in the U.S. remains strong and wages are beginning to rise at a better clip.   These are all good signs. The trade war worries may be overblown, especially when considering the impact on the average U.S. household may eventually rise to around $300 per year.   Even if the President decides to raise the tariff on all goods coming out of China to 25% instead of 10%, the additional cost to the average American household is likel...

by Mark Bern, CFA There are obviously several areas of growth ahead but three stand out in my mind: semiconductor chips and CPUs, cameras and sensors.   In the area of chips and CPUs alone there are also multiple growth areas such as autonomous vehicles, drones, AI (artificial intelligence), AR (augmented reality), cloud computing, and gaming.   There are other areas, of course, but those are where I expect the most potential growth.   The demand for both cameras and sensors is about to explode, in my humble opinion. In 2017, only about 8% of all new smartphones had dual cameras.   That number is projected to increase to 21% in 2018 and to 53% by 2020.   On top of that, camera makers are projecting that as many as eight cameras could be included in future high-end smartphones.   Two cameras will be required for AR functions alone, another for facial recognition and another for iris sensing, and as many as four for improved photo quality (two in fron...

by Mark Bern, CFA We have all heard the many buzz words about the future technologies coming: VR (virtual reality), AR (augmented reality), AI (artificial intelligence) IoT (Internet of things), 3D sensing, drones, autonomous diving cars, and 5G (5 th generation broadband – a form of networked Wi-Fi, or a form of wireless communication).   I will try to explain some of these terms and why we, as investors, need to pay attention to the respective evolution of each in this and the next few weekly letters. VR vs AR It is easy to confuse the two terms as both are ways that tech can change the way you look at the world around you.   VR immerses you in an imaginary or simulated environment, like a computer game.   You can see everything around you in the game and react with other players.   It may seem real or it may be animated, it all depends on the developers of the application.   It may be created by millions of photos of actual places to make you feel...

by Mark Bern, CFA This week I want to attempt to explain what I expect to come, primarily in the relatively short term (6-12 months), from the tariffs implemented this past Friday by the U.S. and China.   Next week I intend to begin a series on how changes in technology will affect much of our lives and lead to disruptions in many industries.   So stayed tuned as it should be more fun to take a look into what the future could bring. Initial Impact The initial impact will probably take a few weeks before we, as consumers, begin to feel much difference.   Retailers will attempt to hold the line on prices as much as possible using some of the new found cash flow and profitability from tax reform to offset the costs of tariffs rather than pass it all on to consumers.   Ours is still a very competitive market, especially in retail, where Amazon is encroaching on the brick and mortar retailers with its purchase of Whole Foods giving it a physical presence in much ...

by Mark Bern, CFA Estimates Rising The range of forecasts for Q2 (quarter 2) GDP growth is huge.   The lowest forecast found by the Wall Street Journal Quarterly Forecasting Survey this June was 2.9% and the highest was 4.2%, with the average at 3.58%.   But forecasts have moved higher recently because of a shrinking trade deficit and higher than expected consumer spending.   As of June 27 th, Macroeconomic Advisors, said to be provide the most detailed forecast on Wall Street, predicted an increase of 5.3%.   GDPNow, provided by the Atlanta FED, is predicting 4.5% and the NY FED’s NowCast is calling for only 2.9% growth.   Q3 and Q4 forecasts range broadly by the averages were about 3.05% and 2.9%, respectively.   These forecasts are likely to be raised as well.   But if those older predictions turn out to be close and the more modest rate of 3.6% for Q2 becomes reality the average for the full year will be about 2.94%, which would be the...