Is Passive Investing Hurting The Efficiency Of The Stock Market? Plus GM Gets Smart

“I am extremely disappointed by the recent Wall Street Journal article full of misrepresentations” — Jessica Alba. The actress and co-founder of The Honest Company, which prides itself on selling non-toxic products, has denied a WSJ report that Honest’s laundry detergent contains…yes, toxic chemicals.

MARKET SNAPSHOT
Big Picture

  • Another week, another rally: U.S. stocks finished with gusto on Friday after logging their fourth straight week in the green (we out here). After a brutal 2016 start, the major averages are now nearly flat on the year
  • European investors ate up Thursday’s news that the European Central Bank would lower interest rates (and inject more of that sweet, sweet stimulus), sending stocks soaring from London (+1.7%) to France (+3.3%) to Germany (+3.5%)

Alternatives to Watch

  • It’s not just stocks on a winning streak—oil rallied on Friday for its fourth straight week of gains, this time buoyed by the International Energy Agency’s speculation that oil prices may have hit their bottom

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CORPORATE PRIMER

Cars These Days

Let’s cut to the chase: yesterday, General Motors acquired Cruise Automation, a self-driving car software company (yes, they have those). Cruise is no joke: this is a Y-Combinator funded startup—aka the most powerful startup incubator out there. Bottom line: GM has turned on the nitro in the race against tech giants Google and Apple. But wait, what’s this? Ford just announced plans to create a new subsidiary called Ford Smart Mobility, completely dedicated to building autonomous cars. New bottom line: things are moving mighty fast out there, and it’s anybody’s game.

Open for Business…Kind Of

For the first time in almost 90 years, a U.S. president is about to visit Cuba, and as America eagerly awaits Obama family beach pics, American companies are making moves. So far, at least three major companies (AT&T, Starwood Hotels and Marriott International) have Cuban deals in the works. Looks like some cigars are in order…or not: while the untapped market appears lucrative at the surface, Capitol Hill gridlock and Cuba’s failure to enact economic reforms continue to bog down diplomatic and business relations (ugh).

Anbang For Your Buck

Yesterday, private equity firm Blackstone agreed to sell Strategic Hotels and Resort Inc. to China’s Anbang Insurance Group—for a hefty $6.5 billion. This is a big deal: it’s poised to be the largest U.S. real estate purchase by a Chinese buyer—since, well, ever. FYI, Chicago-based Strategic Hotels owns 16 properties, including several Ritz-Carltons and a Four Seasons Resort. This was a strategic acquisition for Anbang, and we’re not just talking about the obvious (and irresistible) pun. The hospitality industry in the U.S. is in recovery mode, and demand for luxury hotels by foreign investors remains high. Well played, Anbang—yet another victory in China’s conquest of the world’s real estate.

Friday’s Bad News

Happy Monday. Let’s get it over with: in its annual report released Friday, Deutsche Bank announced that it cut its overall bonus pool by 17% last year. We like to call that a rip-the-bandaid move—at least they did it all at once. But why? CEO John Cryan blames the bank’s net loss of $7.6 billion in 2015, its first full-year loss since 2008 (and a fat one at that), as well as a revamped effort to restructure the firm. And there’s more bad bank news too, from Credit Suisse, which plans to lay off 163 employees in its New York offices by May as part of its cost savings mission to cut 4,000 jobs by 2018—a dark mission, indeed.

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OTHER STORIES

  • Chipotle CEO’s insanely high pay cut in half
  • Haggen agrees to sell remaining core stores to Albertsons
  • Instacart cutting wages for shoppers starting March 14
  • KaloBios gets loans aimed at reducing Shkreli stake

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ECONOMIC CALENDAR

  • Monday: 3D Systems Earnings
  • Tuesday: Oracle Earnings; Fed FOMC Meeting Begins; Retail Sales; Producer Price Index
  • Wednesday: FedEx, Progressive Earnings; Fed FOMC Meeting Ends; Consumer Price Index; Industrial Production; Housing Starts
  • Thursday: Adobe, Aeropostale Earnings; Job Openings and Labor Turnover Survey; Weekly Jobless Claims
  • Friday: Tiffany & Company Earnings; Consumer Sentiment

GET MONEY 101

There are countless ways to invest, but only two key philosophies: active and passive, and they’re pretty much what you’d expect. The argument for passive investing is simple—if you’re not big on risk or picking stocks but still want to invest in the market, simply invest in a fund that tracks an index, such as the S&P 500, get money and repeat as necessary. Seems like a pretty solid approach—but is passive investing hurting the efficiency of the market?

  • First, a quick history lesson: it wasn’t until 1975 that the first indexed mutual fund was introduced. Since then, indexes have only grown in popularity—between 2000 and 2014, money invested in indexes has grown over 500%, and around 20% of today’s stocks are now owned by indexes.
  • Plus, no attention is paid to performance in most index funds, as stocks are typically indexed based on pure market capitalization (i.e. size).
  • Currently, this effect is counteracted by active investors whose investment actions keep stocks fairly valued. But as active investors become passive (hey, it’s tough to beat the market), this might not last long. Say your prayers, investors.

INTERVIEW QUESTION OF THE DAY

An Arab sheikh tells his two sons to race their camels to a distant city to see who will inherit his fortune. The one whose camel is slower wins. After wandering aimlessly for days, the brothers ask a wise man for guidance. Upon receiving the advice, they jump on the camels and race to the city as fast as they can. What did the wise man say to them? (Answer)

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BUSINESS TERM OF THE DAY

Parity Product — A brand of good that has enough similarities with other brands of the same good type that it is considered readily substitutable. A parity product is functionally equivalent to a product offered by a competitor. The existence of parity products means that a monopoly does not exist. Toothpaste or contact lens solution could be considered parity products.

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FOOD FOR THOUGHT

Did you know that homes sold near a Target rose roughly 27% in value over the last year compared to homes rising only 16% when near a Walmart? Something to keep in mind when you’re hunting for a new home.

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