Wednesday, July 6, 2016

Fantasy In Reality Is Fantasy

As we get closer to football season, I began to examine the top 200 players for my fantasy league. Since the first game is still two months away, my focus isn't concentrated. A new idea entered into my thinking. There is a close analogy where one could argue the similar thinking into fantasy football and the stock market.
Top Pick
in mock drafts is Antonio Brown, WR for the Steelers. This makes absolute sense. The game has gone to passing as defensive backs can no longer "hand check." No name QBs can pass for 4,000 yards, so almost all QBs will have the same stats. WR's on the other hand are a different breed. Coaches don't live in reality. They see someone who is 6'5" and they picture an offensive advantage except the player has hands of stone, is slow on the break and fails miserably. Brown is relentless to get open, excellent hands and he can do the pass/option as well as all kick returns. No brainer. In PPR leagues he is a gold mine as he always grabs at least 5 passes and he is a top option near the goal line. If you don't have the top pick, get a player with similar attributes.
Apply this thinking to the stock market. We are no longer a manufacturing nation. Now, we are a service orientated, consumer society and the service economy rules with over two-thirds of the entire economy.
Service Top Picks
At this point you can begin to breakdown the various components that benefit in this model. In transportation you could go FedEx or UPS, but since gasoline can disrupt profits, I'll pass. You could go retail, but since online giants like Amazon are hurting business, again I'll pass on this pick. In addition, the social mood for higher wages will hurt all retail as well as the restaurant field. I mentioned online services, but the growing danger of internet hacking could be a big headwind in the future. As I continued into my thinking, I remembered something about American history.
Shovels and Picks
During the California gold rush, the real winners were the suppliers of shovels, picks and mules. How would that translate today?
"Only $99 down and $99 per month..." You see and hear it every night on TV before you go to sleep. Our service economy has developed credit to go along and help you make that purchase. The companies in this sector also offer purchase protection. This limits the danger of hackers and theft. Now, I have a target. Who is the leader in this field? Synchrony(SYF). The word almost makes me think of music as in symphony. I investigated.
SYF is the largest credit card issuer. I had my no brainer.
Not So Fast, Kimosabe
Brian Double, CFO of SYF just released a statement. In it he expresses a caution about future earnings. He says the company will need to build its reserves due to "charge-offs." What the hell is that? I research. It is financial code for default. Consumers are falling behind on payments. This is like the Steelers facing a blitz team with strong pass rushers. If the QB can't get the ball to Brown, you got nada! Double goes on to say that charge-offs could spike to 4.8% in the next quarter. Not good. I study. I find that the overall default rate rose in 2016 from 2015. This is the first year whereby the default rate has risen YOY since 2010. I continue. I find that similar companies are feeling the same results. Capital One(COF) is down 6.6%. Ally Financial(ALLY) is down 5.6%. American Express(AXP) is down 23% and Discover Financial Services(DFS) is down 10%. What about my no brainer? SYF is down 14% after the report. It seems my fantasy in reality is a fantasy, but undaunted I continue. After all, the market is at highs, something must be the reason or it is smoke and mirrors. Is it all a fantasy?
I found that large banks, especially in Europe are losing value at depression levels. Deutsche Bank(DB) failed the stress test and in addition, it is down 58% and earnings declined by 58%, too. Think that is bad? The IMF said. "DB is the riskiest bank in the world!" That is serious do-do.. Credit Suisse(CS) is down 62% and earnings declined by 64%. The Euro Stoxx Bank index is off 48%. The Spanish giant, BBVA saw its profits fall 54% in the last quarter. The Royal Bank of Scotland is down 59%. The Italian Banking index is down 30%. The litany goes on and on and around the world. Rumors are surfacing that Chinese banks need a bailout. Mitsubishi, Japan's largest, is down 39%. All these institutions are in deep bear territory.
In the US, the XLF, the financial index of 94 firms, fell 11%.
All of the above companies have seen a "dead cat" bounce recently, but I see another leg down to test the February lows. One reason that I feel this way is because I got a second opinion.
Mathew Mish, credit strategist at UBS expects a rise in default rates and not just in the energy sector. He believes a spike in default rates from non-energy companies from 1.5% in 2015 to 3.5% in 2016.
Another reason and always all things point back to it, is the
They have lowered interest rates whereby the total outstanding debt on credit cards is approaching $1 trillion. The last time consumer debt hit that level was in 2007 and we all know that outcome. The Fed will argue that the overall debt is now under a lower interest, thanks to their policy. They don't see the bubble because they are in it. You know, the tree/forest analogy?
Other Tidbits
Sub-prime credit card users are up 25%, according to Equifax and the Puerto Rican debt crisis will set off over $800 million in derivatives. For those of you who heard that Congress came up with a solution, that is not totally true. They bailed out a partial amount and the above figure is still in default and the trigger on the derivative market has been pulled. That should scare the hell out of everyone!
Together, this makes me realize that my no brainer pick in the stock market is really a fantasy and the results could cost me dearly, financially speaking. Whereas, in fantasy football, if there is a setback, the only pain is to my emotions and my brain knows that there will always be next year and I can afford to cry in my beer. However, SYF and the stock market will take all my money and just leave the tears. Which fantasy do you want and which reality?