Random Musings on Markets V: The Final Frontier in Musings

In this week’s edition, our random selection of small financial and economic stories includes FANG ETFs that exclude the “F”, innovators making clothes from cow manure, a strongly worded yet sparse Fed statement and more. As always, MarketMinder doesn’t recommend individual securities—we just mention some now and then, when they illustrate a broader theme we want to highlight and maybe crack a joke or two about.

Did This FANG ETF Lose a Tooth?

If you have watched CNBC, opened a finance news website or accidentally stumbled upon finance Twitter^[i] within the last two years, you have likely seen the acronym, FANG. You have likely also learned that FANG stands for Facebook, Amazon, Netflix and Google. You may also have seen its cousin, FAANG, which adds Apple. So if you happened across an ETF with the ticker, FNG, that aims to give investors exposure to “the FANG investment theme,” you might expect it to contain, well, Facebook, Amazon, Netflix and Google. As Bloomberg reports, however, you would be wrong. The fund started dumping the social network months ago.

We aren’t here to opine on their strategy or to make cracks about Facebook’s rocky day last Thursday. Rather, we would like everyone to sit up and accept this as the final nail in the “ETFs are passive” coffin. We know the first wave of ETFs was tied largely to index funds, which are nominally passive investments. (Their investors, not so much.) But modern ETFs are anything but. This is how it generally works:

1. Person realizes ETFs are like really popular, decides to make one.
2. Person creates own index based on an investment thesis or quantitative criteria, gives it snappy ticker.
3. Person creates ETF tracking their proprietary index.
4. Person frequently rebalances the index to suit whatever investment thesis/criteria they baked into it.

The fund managers aren’t even trying to pass any of this off as passive. As one of FNG’s managers explained: “The index funds can’t say, ‘Facebook is tanking and it looks bad going forward, so let’s just change the holdings and get rid of Facebook.’ … So those investors are stuck with whatever that index holds.” Which, fine! But a lot of investors are under the false assumption that ETF = passive, despite the fact that the whole point of an exchange-traded fund is that you can, well, trade it. We reckon it is high time that assumption went away and investors saw the lion’s share of new ETFs for what they are: actively managed mutual funds they can trade intraday and ought to judge like any other mutual fund.

Capitalism Saves the World?

Proving we are suckers for clickbait, we couldn’t resist this headline on The Guardian’s business page on Wednesday: “The Startup Making Shirts Out of Cow Poo.” It wasn’t a joke. Dutch visionary and fashion designer Jalila Essaïdi is refining cow manure into fiber, making fabric out of this fiber, and turning it into couture for her brand, Mestic. She and Dutch farmers are working on an “industrial-scale manure refinery” to take her vision to the next level.

Why refine manure? Cow dung is one of environmentalists’ main scourges due to its contributions to water pollution—a function of the runoff from dairy firms and its use as fertilizer. But as long as people can’t get enough delicious steaks, cheeseburgers or chocolate malts, the world’s cow population will only keep rising. Since several nations limit the amount of manure farmers can use in fertilizing, there is a surplus, creating opportunities for clever would-be recyclers. You might call couture (cowture?) made from cow manure an elegant solution. Her colleagues see even bigger potential to recycle cow piles into paper and biodegradable plastics.

This is a perfect snapshot of why we question the many long-term forecasts implying this, that or the other about climate change or other environmental issues have predetermined economic impacts in 30, 50 or 100 years. They ignore creative folks’ and entrepreneurs’ well-documented ability to find innovative (and usually profitable) solutions to environmental problems—sort of like how the automobile fixed the last great manure crisis. More recently, the shale boom enabled cleaner-burning natural gas to get super cheap and put coal-fired power plants on a path to obsolescence. If fashion designers can distill cellulose from manure, cleaning it up and transforming it into a cute outfit, just think how many of the world’s other problems creative capitalists can solve!

Now, maybe customers will prove reticent to don attire derived from dung. Possible! But that is another great thing about capitalism: You never know what is going to work until you try!

Astrological Alpha Meets Psychic Wildcat Taming

We aren’t usually ones for stories from the “News of the Weird” genre. Well, at least not regularly. But in the last 10 days we have seen two news stories, far removed from one another, that we think can add a little bit of perspective on a common investor error.

Last week, in perhaps the most Oregon news story thus far in 2018,^[ii] a woman from the southern Oregon city of Ashland encountered a napping, full-grown cougar^[iii] in her living room. Most people probably would have been terrified, but the reporting from Portland local news makes it seem the homeowner was pretty cool-headed, remembered “cats are extremely psychic” and proceeded to use a combination of telepathy, psychic power and light drumming to give the cat a vision of leaving. The woman claims on the ever-reliable Facebook that this worked.^[iv]

Flash forward to this week, when Bloomberg profiled a money manager who uses astrology to forecast markets. Not astronomy, astrology—as in horoscopes and such. Like, “Jupiter is in the 12^th house, which is really bullish for Indonesian Consumer Discretionary stocks but bad for Japanese Utilities.” (We made that up! Don’t trade on that!) Some claim he has done very, very well. The reporter seems a wee bit unconvinced, documenting the fact he doesn’t speak of his mistakes. And there is the small fact that, “A few years ago he stopped accepting new investors and began managing his own money exclusively.” Which is not a ringing endorsement?

Anyway, if this all seems like news of the weird and bizarre stuff you would never do, you are probably right in the specifics. But the next time your gut tells you selling stocks makes sense, we ask you: Is it so different?

Somebody Bring Jerome Powell a Thesaurus

As readers of this we-swear-it-isn’t-a-weekly weekly column may know, we are highly skeptical of the finance industry’s penchant for dissecting fedspeak and trying to draw conclusions about what random, biased human beings might do with monetary policy. This also extends to Wall Street’s eight annual word hunts, when they compare the text of Fed statements to past Fed statements, again to try and divine policy.

None of that, however, precludes us from reading the statements. This month, we were struck by two things: One, the Powell Fed is sparse with words! July’s statement, issued Wednesday, was a mere 308 words long. Janet Yellen’s Fed averaged 604 words per statement. The last statement under Ben Bernanke, the Tolstoy of monetary policy, weighed in at a whopping 830! So to Chairman Powell: We appreciate the word-pinching and plainspeak. But to us, as writers, one critique: The overuse of the word strong. The Fed used a derivation of it 6 times in 308 words Wednesday, which is a lot. “Strong” is, ironically, getting tired. May we suggest some alternatives? Robust, solid, vigorous. Whatever, just mix it up! As an added incentive to do so, consider how crazy swapping synonyms would drive all the Fed word watchers!

The Trillion Dollar Apple

It is now well known that Tech giant Apple’s market cap crossed $1 trillion this week, the first US firm to do so. It is an arbitrary milestone (with a lot of zeros) with little actual meaning for investors. Basically, it is symbolic confirmation that Apple is really, really big, which we are pretty sure no one needed.

In the wake of the milestone, some in the media seem inclined to compare Apple’s market cap to various countries’ GDPs, concluding that Apple is smaller than only 16 nations globally (falling between Indonesia and the Netherlands). If you look solely at the numbers, that is true. But the comparison is faulty. Comparing market cap to GDP makes a mistake econonerds call “a stock/flow mismatch.” You see, GDP is an annual flow of activity. Market cap accumulates over time. It’s much like comparing debt to GDP. Or, more personally, comparing your mortgage balance to your income without taking into account home equity. It is a pretty bizarre practice.

This Week in Local Government

Apple’s shiny new $1 trillion market cap may have generated more headlines, but arguably more significant news for the company came out of the Cupertino City Council chambers, where officials voted to shelve a head tax on big companies’ employees—following in the footsteps of Seattle, which canceled a similar tax (aimed at Amazon) about two seconds after enacting it earlier this year. Instead of enacting the tax this year, the city will continue talking with Apple about ways to fund local transit projects. If they don’t have an agreement by 2020, they will plop the measure on the ballot for voters to decide. Meanwhile, Mountain View is pressing ahead with a similar ballot measure this November, targeting Google (and probably ensnaring Symantec and other large-ish companies with offices in town).

While taxes like this create winners and losers, for the companies in question, they aren’t the hugest deal. Cupertino wrote the Apple tax so that it would have raised about $10 million, which, for a $1 trillion company, is nothing. But that this was even up for debate is perplexing. You see, Cupertino wanted to tax Apple because it has a traffic problem thanks to all the tech workers who commute into the city. They commute because there is a severe shortage of housing. There is a shortage of housing because the city council has blocked many a high-density housing development proposal. They block the proposals because homeowners want to maintain their sleepy bedroom community’s character and avoid crowding local schools—which are actually suffering declining enrollment because families with young children can’t afford to live in the district. As a result, they don’t solve the housing problem, and they starve their own coffers of the revenue these developments would generate—not to mention the buckets of money the developers occasionally offer the city as a sweetener to help fund transit projects and schools. So traffic gets worse, residents get more annoyed, city governments decide the companies are clearly the ones who caused the problems, and then they decide the only solution is taxes and pat themselves on the back for a job well done.

On the bright side, there is a tiny chance this problem could ease by 2020, thanks to a state law limiting local governments’ ability to block housing developments if they haven’t allowed their housing stock to grow at a certain rate—basically including all of Silicon Valley and its satellite towns. A project that would replace Cupertino’s ghost mall—Elisabeth’s beloved Vallco—with 2,400 housing units and other goodies (including a rooftop public park!) might finally get the green light next month as a result. Other long-delayed projects could finally go ahead throughout the area. It isn’t a panacea, but perhaps it is a start toward housing supply in the area finally catching up with job growth. An entirely sociological issue that markets probably don’t care about, but still, this is life, ya know?

Enjoy your weekend!