Motley Fool Hidden Gems Investing - The Carry Trade, Nikkei, and Your Portfolio

Episode Date: August 5, 2024

There was a lot of red across the market today, and very little of it had to do with the performance of companies sitting in investor brokerage accounts.  (00:21) Jason Moser and Dylan Lewis discuss: - The carry trade with the Japanese yen, and how its affecting stocks in the Nikkei and around the world. - Whether investors should be paying attention to Warren Buffett’s cash position - Some keep calm and carry on advice for weathering whatever the market has in store for us. (16:04) Can the Olympics get Nike back on track? Motley Fool contributor Lou Whiteman joins Mary Long to discuss why investors have soured on Nike and whether the company can regain its step. Motley Fool premium members can catch Bill Mann's breakdown of the Japanese market and carry trade here. Companies discussed: AMZN, NVDA, AAPL, BRK.A, BRK.B Host: Dylan Lewis Guests: Jason Moser, Mary Long, Lou Whiteman Producer: Ricky Mulvey Engineers: Austin Morgan, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis Markets are down, and we're here with a dose of keep calm and carry on. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jason Moser. Jason, thanks for joining me on what I imagine is a bit of a busy day for you. Well, it's been a busy day for all of us, but yeah, thanks for having me, Dylan. A bit of red to start the week for investors, kind of carrying forward some concerns we saw late last week. We're going to talk about what's going on in the market. We're also going to be

talking about how our investors are looking at the state of things. Jason, why don't we kick off, though, talking about some of the moving parts here and what took from some concerns late last week to some real large market moves as the market opened on Monday morning. What exactly is going on here? Yeah, it's been a fascinating day to this point. The pre-market and the market open, things look like the world may be coming to an end. Thankfully, it's gotten a little bit better since then. But this all started on Friday. We've got some economic numbers that are offering a little bit of concern here in the U.S. But then today, I think, really, things snowballed. I'm going to go

through this. It's going to be with an excellent assist from our colleague, Bill Mann, who really does keep a keen eye on these types of things when it comes to international investing and whatnot. He wrote an excellent piece today for our premium members. If you're able to check that out. I strongly encourage it. But this really all centers around today's crisis du jour. It all centers around what we've heard, this yen carry trade. I'm going to try to simplify this and make it easy for folks to understand, because there are a lot of moving parts here. But if you go back to the beginning of 2023, we've seen our Federal Reserve has raised interest rates pretty much nonstop. On the flip side, the Bank of Japan has kept its rates near zero.

What this ultimately meant was that investors could borrow cheaply in yen and then make higher yielding investments in other currencies, like the dollar and the euro. As the popularity of this carry trade grew, what it ultimately did, it forced the yen even lower, which ultimately helped amplify or grow or make larger the earnings of Japan's corporate sector, as the earnings that were generated from exports became more valuable on a yen basis. And so now, what we're seeing today, and what we're seeing, I think, going forward, is this yen carry trade is starting to unwind as the Bank of Japan has noted that they are going to start tightening their monetary policy a little bit, raising their rates.

I think they raised their benchmark rate from 0.1% to 0.25%. Ultimately, when you think about that, that's compared to what appears to be an environment here domestically, where rates are likely going to start coming back down sooner rather than later. And so, that unwinding results in a lot of selling, which results in a lot of uncertainty, and it all kind of snowballs. I think that was a lot of the psychology in what we saw in the open today. I'm going to do my best to summarize that in a sentence for listeners, Jason. We had currency speculation in Japan, and maybe some leverage as part of that trade,

and a lot of cash tied up in trying to exit a similar strategy at the same time because of the macro factors. I think that's a very good way to put it. A lot of people trying to do the same thing at the same time. And a lot of it was based on speculation. As for what that actually means in the market as we look out, as we tape, Nasdaq technically in correction territory, but it is up 11% year to date. S&P 500 down about 5% the past week, still up about 10% year to date. A lot of damage when you look out at the major Japanese index, the Nikkei.

It suffered its largest single-day drop since Black Monday in October of 1987, down about 20% in the past week, essentially erasing the past year of gains. Down about 20% in the last week, erasing basically the past year of gains, Jason. And so, I feel like for investors, I mentioned those year-to-date returns from the NASDAQ for the S&P 500, this feels like a pinch domestically. It feels like much more damage when you look out more broadly at some of the other global markets. I think that's fair to say. Generally speaking here at The Fool, we're focused mostly on domestic investments.

It's not something where we go too far out of our circle of competence, so to speak, into these esoteric international type of investments. To me, I encourage investors, with stuff like this, look at your portfolio and ask yourself, the businesses that I own, are these businesses that are fundamentally impacted by this type of macroeconomic event? Chances are, the business itself, the answers likely no. It's possible. There are situations where you may be a little bit more exposed to something like this. But for the most part, I think times like these are just great reminders in the value of diversification and making sure that you have your portfolio diversified across not

only markets, but also market caps, large companies, small companies, everything in between. It can really make a big difference in helping investors cope through times like these. I feel like one of the reasons we're probably seeing the sharp reaction that we are in some ways to the United States markets is, you look at the big tech companies, Amazon down nearly about 20% over the last week or so, Nvidia down over 5% today, continuing a slide of about 25% from the past month. Those were the companies that were putting up so much of the returns for the S&P 500 for the year. Both still up year to date. We need to take that step back and remind ourselves. But I think part of what we're seeing is, we didn't

have a particularly diversified market to start out with. So, when we start seeing some concerns with some of these big tech companies related to capex spend, related to some of the macro picture going forward, there's going to be a little bit more skittishness for investors because the market and the returns in the market have been so concentrated, Jason. I think that's a great point. The returns absolutely have been concentrated. I think when you talk about that carry trade, and regardless of the yen carry trade or whatever it may be, typically when the obvious investment ideas are front and center, and folks are starting to borrow in order to be able to make those investments, at some point or another,

you start to see that pullback. I think it was the top 10 companies in the S&P were responsible for something close to 40%, 37% to 40% of the overall returns here over the last 12 months. That's a big deal. That just shows you that everybody is piling in. At some point, that does start to unwind. People start to head for the exits. What goes up must come down. The good news is, I think that at some point, we'll start to see a little interest in some some other ideas, some other sectors. Maybe we start to see small caps actually lob up a sustainable recovery. I think that'll be very encouraging. But yeah, this has always been one of the dangers with having so much of the returns concentrated in so few companies.

That can only go so far before profit-taking begins and interest starts to move elsewhere. I'm going to step into our listeners' shoes here and anticipate a question just based on some of the other news pieces that we are seeing out there. We have the current red in the market. We also have an update on Warren Buffett's holdings and what he's doing with his portfolio over at Berkshire. Got some articles over the weekend and late last week indicating Berkshire has reduced its Apple position by half.

And I think maybe even more importantly, Buffett is currently sitting on record levels of cash. It is not out of the realm of possibility that someone might connect those dots, Jason, and wonder, hey, the most followed investor out there in the market sitting on quite a cash hoard, is this something I should be paying attention to? I think it's noteworthy from the cash hoard perspective. I don't know that I would necessarily worry so much from the Apple perspective, given the fact that Apple grew so big that it basically took up half of Berkshire's equity portfolio. But definitely, the record cash levels are eye-catching. That does make you ask the question,

does Buffett and team feel like maybe the market's overvalued? Are they looking for something? Do they have their eyes on something? Obviously, we don't know that. But I think it does make sense to pare down the Apple position just because it grew to be so much a part of their portfolio. That's just wise portfolio management. I think most of us would be doing that even on an individual level as well. I don't think it's a strike against Apple as far as the business goes. I think they still love Apple as a business and an investment opportunity. I think they just realized, listen, we have to make sure we don't put all of our eggs in one basket. Given the size of the position, this makes sense. Now, building that cash

position up to this point does start to make you ask, what are they going to be doing with all that cash? It's a lot. I know investors are often looking for an action to take when things are not going well. We talk about this often. Very often, the best thing to do is to do nothing, but it can be very hard to sit there and do nothing. I think to the extent that people are looking for a checklist or looking for something to channel the nervous energy into looking at their portfolio, looking at their own cash position, may be a helpful place for them to do that and to introspect a little bit on what their portfolio is and how comfortable they are with it. This is the simulation that we

often talk about. When things don't go well, how will you react? This is the opportunity to, in real-time, process that and check whether your expectations of yourself are in line with the reality of how you handle a situation. Oftentimes, investors probably overestimate their risk tolerance. They think they're more risk-tolerant than they really are. Then situations like these arise, and they say, oh, Lord, I have to head for the doors. So it does give you a chance to at least reassess and say, OK, where am I in regard to my portfolio? is this where I really want to be? What stage of life am I in? We hear it from Robert Brokamp, I think, our own bro. He says it all the time. Assess whether you're in that grow your wealth

stage of your life or your protect your wealth stage of your life. Those are two very different investing mindsets. When you're younger and you've got a lot of time ahead of you, you can focus more on the grow your wealth side of the equation. But as you get older, as you get closer to retirement or maybe you're in retirement, you need to start focusing on protecting your wealth. And those are two very different investing mentalities. And for those of us who are kind of right in that twilight zone of, I'm not growing my wealth, but I'm kind of getting closer to that protect my wealth, I start to look at my portfolio and think, for every higher risk, quote unquote, idea that I have in my portfolio, I'd love to have a stable and more reliable idea in there as well to help

offset that risk. It helps me sleep at night so that when times like these come up, I'm not too terribly worried because I've still got plenty of time for these higher risk growth ideas to play out. But I definitely don't want to sit there staying up at night wondering if these things are going to work, because all of my money is allocated into these ideas. It definitely is worth always remembering what stage of your investing life you're in, and then making sure that your portfolio, making sure that your allocation strategy reflects that. I think, as we're talking through things that people can put on their to-do list,

or things that people can remind themselves of in this environment, being mentally prepared for more of the same is probably on the list, at least for me. Typically, we see volatility can beget more volatility, to the upside or to the downside. As we noted earlier in the show, Jason, this was really triggered by a lot of macro factors that were not even necessarily on a lot of U.S. investor radar. There are plenty of macro factors in the United States that may affect companies. I think just knowing that this is a big adjustment day in some ways, but also, there are plenty more to follow, and maybe perhaps some that wind up reversing some of the losses that a lot of people experience today.

Yeah, it's just a great reminder that, in investing and in life, there are just a lot of things that are out of our control. We had a show several weeks back, or a few weeks back, we kept on mentioning the word exogenous. Those factors that are just out of our control. There's a lot of things that are just out of our control, but the things that are in our control are the things we need to focus on. And I think that's really important for investors to remember. The things that are in our control, things like emotions. It's a lot easier to control your emotions when you have your portfolio diversified in such a way that helps you sleep at night. Being well diversified, I think, is a way

to help keep your emotions in control and to get through times like these. And I will say, for folks, if you're investing in a retirement account via your employer, something like where a percentage of your paycheck is going into your 401 every two weeks or twice a month, keep doing it. This shouldn't change anything that you're doing. Investing is rarely a benign exercise. The headlines day in, day out are always changing. The markets are moving on news that may or may not have anything to do with really anything at all. But if you are investing with a long-term goal in mind, dollar cost averaging into a broad market index on a regular basis, that's just a surefire way to keep it simple and effective

that helps you really achieve your long-term goals. So, I think that's something certainly worth keeping in mind. Jason Moser, appreciate you being here today. and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better.

Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. The long term. Thanks for joining me. Thank you. coming up on the show can the olympics get nike back on track

motley fool contributor lou whiteman joined my colleague mary long to discuss why investors have soured on the apparel giant and how nike could regain its step lou by the time this conversation airs will be nearly a week into the olympics so figured it was as good a time as any to kind of check in on the state of Nike. Because honestly, I look around and I feel like past couple months, I've seen a lot of headlines hating on the company. I'll just like, I googled Nike stock and I see business of fashion. Where does Nike go from here? Financial times. Nike's new chief runs into trouble as turnaround efforts falter. Forbes, Nike stock tanks 20% to four-year low. Why the sneaker giant's struggling? The Wall Street Journal had an article

about a month ago about how Nike missed the boom in running culture, all this stuff. You might forget that Nike is the world's largest athletic apparel brand, but there's this negativity because it's posted unimpressive sales numbers the past couple of quarters. So maybe walk us through what's going on here. What do these sales numbers really look like in context and how big of a deal are they for Nike? Yeah, no, that's it exactly. Sales have flatlined over the last few years. They're not falling off a cliff, but they are just not growing the way we've come to expect with Nike. Not to oversimplify, but a lot of it is apparel is a fickle industry. At a very high level, that's what's going on. The world has changed, and those changes right now at least

are working against Nike. Social media has made it so much easier for emerging brands to break through and gain a following, especially with younger generations. What it has done, it's negated at least part of Nike's incumbent advantage, the advantage of being the big dog spread sales among a pretty big group of smaller companies that are able to chip away at Nike's core audiences, like, as you say, running. Just because olds like me associate Nike with something, that doesn't mean the younger generations do. Especially on the athleisure side, the style side, other brands have just done a really good job breaking through and resonating with consumers. On the latest earnings call in June, Nike CEO John Donahoe said that,

quote, fiscal 2025 will be a transition year for our business, end quote. We already talked about declining sales numbers, flatlining sales numbers. So to look ahead to the next year and say, hey, the transition is still going to go on that year. What is Nike transitioning away from and what are they trying to transition to? So they have to walk back right now a lot of what they thought was their future a few years ago. In the last few years, a huge emphasis has been what they call Nike Direct. That's their effort to sell products directly to consumers via their stores and via online. Part of it was forced because big names in retail have struggled and a lot of their partners were in trouble. But part of it was this idea of building out your customer

relationship, owning the customer data and all that. The sense now is they went too far focusing on Direct, and they've alienated their partners, the retailers that were helping them before, especially if you're a Nike and you want to be this ubiquitous brand, the brand that's everywhere. So, Nike Direct isn't going to disappear. They need now to rebuild, if they burnt bridges or at least allowed bridges to crumble with the wholesalers, they need to restore that. The other part of the transition is just the number of products that they make. It's become unmanageable. When I was in high school, it was basically, you got your white Nikes, and the choices, what color the swoosh was. Now it feels like there's a sub-brand for every foot on the

planet. From a product design perspective, from a marketing perspective, it's hard. And Nike is trying to focus itself and apply more muscle to a smaller number of options instead of just having everything for everyone out there. Let's talk about those potentially damaged wholesaler relationships for a minute, because on the one hand, I can understand how, okay, companies burn bridges, right? But on the other hand, again, Nike is the world's largest athletic apparel brand. So is a retailer really going to say, actually, no, you hurt us now, or you hurt us then, we're not going to sell Nikes anymore? They're probably not going to, but product placement, product emphasis, just little things

like just where you are in ads. There's a lot that just, it's not even, I don't think spiteful. No one is going to say we are going to spite Nike because they have their own websites. Everybody has their website. But you do partner with these brands or you don't partner with them. And I do think that there has been an erosion as your huge supplier has become your competitor. I do think that there's less incentive to prop up that supplier at the same time. Speaking of websites, you go on Nike's investor relations website and right there on the homepage, it reads, Nike Inc. is a growth company. Well, the sales numbers that we were discussing at the top of this segment might suggest otherwise. But if you're Nike, what is the growth story that you're

selling to investors? Yeah. So, what they want to sell you is, A, they're going to rebuild these relationships. They're going to get their products in order. But they also, back to what we said at the top, they have to return to the roots of this company as a science-based design company. If you break down, if you really look at the numbers, last quarter, apparel sales were actually up 3%. It was footwear that took the beating, much more so in North America, where you saw those trends with exclamation points. That could be read as the brand still has appeal, but the actual shoes just aren't taking the market share they once did. The goal here, I guess, in corporate talk would be to rebuild that innovation machine or

make better shoes. Part of that, cutting down on the brands and cutting down on the bloated rosters of shoes. But a part of it is to reestablish yourself as the go-to for the elite athlete or also for the weekend wearers like me, just a shoe you can wear and your feet won't hurt. It's hard. It's not a home run from here. But it's worth noting, as far as the stock goes, that three times in Nike's history, 82 to 84, in the early 90s and the late 90s, the stock lost half of its value. Every one of those times, it did recover. Not that history repeats, but there is a history here of them sort of losing focus and then finding it again. The current CEO at Nike is relatively new, and he's the fourth person to hold the spot in Nike's

history. His background is in tech. Before coming to Nike, he was at eBay and ServiceNow. So in 2019, the Wall Street Journal declared that, quote, the sneaker giant is now a data giant. And it kind of hit on this idea that, okay, yes, Nike is innovating when it comes to their shoes, but also trying to innovate in a whole other way as well. How does technology fit into this and into the Nike story when it's apart from the shoe development? I think every company is a tech company, right, Mary? Let's look at two areas. Briefly, we talked about at the top just the success that these young brands are having with marketing and bypassing traditional channels to get a following. Nike in its prime was a cool brand, the one breaking through the corporate

noise. They have a challenge with technology is to adapt social media and not look like the old guy trying to look cool, but to actually resonate with especially young brand-focused consumers. But the big thing here is, you said data. Every company is focused on data. The emphasis on Nike Direct might be easing, but the focus on knowing your customer, that can't be scaled back. I won't name names, but I buy my athletic shoes from the same brand every time I need a pair. I go there, they have a file on me, what my eyeball feet need. They even email me coupons that happen to coincide with the cadence of how often I've bought shoes in the past. That's table stakes for a consumer brand these days. Nike desperately needs a customized relationship to be part of its

business. So even if they do back off Nike Direct, I think you'll see them continue to try to use data, build data, build that tech story and the relationship they have with their customer base so they can better sell them what they want. We're recording this during the Olympics. Another quote from Nike's most recent earnings call was that, I'm quoting now, the Paris Olympics offer us a pinnacle moment to communicate our vision of sport to the world.

This is led by breakthrough innovation and announced by a brand campaign that you won't be able to miss, end quote. There's the innovation you were talking about earlier, Lou. But like, okay, so Nike's gonna shell out a bunch of advertising spend during the Olympics. What does that really do for the company? Do we see a significant sales bump after that spend goes?

It's a great question. And if history is a guide, no, the Olympics will not lead to supercharged sales. You can't really go through their quarter-by-quarter revenue over the years and say, oh, that was an Olympics, was that quarter. They did release a new shoe, a new Nike Air, so maybe there's some boost there, and I think that's what they're trying to lean in on. But I think the Olympics, for a brand like Nike at least, is more about holding serve than it is going on the offensive.

Nike, yeah, they spend $4 billion or so on marketing sponsorships a year. A lot of it is just playing defensive, making sure that you are sucking the oxygen out of your room, making sure other brands from Adidas to Upstarts or whoever, that they aren't the ones that you see on your television, that they aren't the ones gaining focus on. The Olympics are a great chance to reaffirm branding, to remind the consumer that wearing Nike shoes and Nike apparel, it's the path to medals or whatever. They have to be there. They should be there.

but it's going to take a lot of hard work and quarters to come to reestablish Nike two weeks in Paris. That's just not going to solve the problem. No. Yeah, we were slacking a bit about marketing and ad spend here and what that could mean for the company. And it's interesting because again, I enjoy seeing the Nike ads during the Olympics and I would certainly notice if they just suddenly disappeared. But seeing them does not necessarily make me loyal to Nike more so than I am any other brand or convince me to get off my couch and go buy Nike sneakers. Yeah, maybe not, but you never know how susceptible you are to being brainwashed. So, you know, maybe, I don't know. I do think there's value to just knowing, you know,

just Nike is everywhere and, or at least they see value in it. So spend, they will. Spend, they will. And that's a good place to end it. Lou, thanks so much for your time and for walking us through this. Shoe pun, shoe pun. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thank you for listening. We'll be back tomorrow.