Yield Curve Inversions, Warren Buffett and The "Phony Patriots" of Silicon Valley

What a volatile week in the markets! Much ado was made this week about a section of the yield curve (2’s/10’s) inverting, which has historically preceded recessions. The calls for recession are worth paying attention to but may turn out to be premature. We wrote a Global Glimpse in April about inverted yield curves and how to think about them.

Without rehashing the piece too much, here are the important takeaways:

  • Inverted yield curves are an effect of a slowing economy, not the cause of it.

  • Recessions tend to lag yield curve inversions by at least a year or two.

  • Stock markets have historically done well AFTER 2’s/10’s yield curve inversions.

  • Following the last 5 inversions of the 2’s/10’s in the past 40 years, stocks were positive every time after one year and 80% of the time after two years.

This MarketWatch article has some additional data on yield curve inversions…

Cheaper Cable, Hot Spots and Uber's Largest Quarterly Loss

We get started with an illustrative article from Bloomberg entitled “The Days of Getting a Cheaper Cable Bill by Threatening to Leave May Be Over” which adroitly explains why “Big Cable” companies are thriving even in the era of cord-cutting.

Most people would probably agree that high speed internet connectivity has become a necessary utility product like water and electricity. Unfortunately, most people also only have one (or at most two) high speed internet providers available to them. High speed broadband providers like Charter, Comcast and Cox (privately owned) are de facto monopoly utility providers in most markets they serve…

Pricey Utilities, Shrinking Stock Markets, & Why Stocks Beat Gold and Bonds

We start this week with a follow-up chart to a previous Beach Reading. We recently discussed how utility stocks as a sector are trading at a premium to the market rather than at their historical discount to the market. Blackrock’s Russ Koesterich recently published this chart displaying the historical premium/discount of utilities to the broader market which provides context for today's relative valuations. You can see utility multiples in relation to the broader market are close to their all-time highs. This doesn't mean that utilities are at all-time highs (though they're close), but rather that the P/E multiple of the utility sector almost never trades at such a premium to the P/E of the broader stock market. In other words, defensive stocks are expensive.