EQ vs IQ

Ask yourself – Am I intelligent? Yes. No. When I get enough sleep. All of these? Ask yourself again, am I emotionally intelligent? In general people respond in the positive to both of these questions – ‘of course I am intelligent’ (think about overconfidence). While basic intelligence may be more measurable, emotional intelligence is more imprecise. After all what does it mean to be emotionally intelligent?

On July 30th, CFA Society Chicago’s Professional Development Advisory Group invited Lee H. Eisenstaedt of the Leading With Courage® Academy to guide a sold out audience through what emotional intelligence is, how to improve it, and how to apply emotional intelligence to be a better leader.

Eisenstaedt focuses on helping individuals and teams realize peace of mind and confidence from being more effective leaders who are able to make a bigger impact and create higher-performing organizations. He uses workshops, assessments, and executive coaching offered through the Leading with Courage® Academy which is based on his Amazon best-seller Being A Leader With Courage:  How To Succeed In Your C-Level Position In 18 Months Or Less. He is also the co-author of the book Wallet Share: Grow Your Practice Without Adding Clients, and is a frequent speaker at national and regional conferences on the topics of leadership and client loyalty.

Eisenstaedt began by providing three takeaways of the presentation. They were:

  • Authority, position and title do not equal leadership
    • Leadership is about what you do, not where you’re seated
    • Authority can compel others to take action, but it does little to inspire belief
  • Leadership is about relationships and influence
    • Leadership happens when your influence causes people to work towards a shared vision
    • Influence and significance come from caring about and growing others
    • Leadership is about inspiring / motivating ourselves and others to create high-performing teams and engaged organizations
  • Being self-aware is a never-ending journey
    • Have the courage to seek feedback
    • Self-awareness keeps you relevant

Eisenstaedt explained that emotional intelligence is the ability to, Perceive, Understand, Express, Reason with, and Manage emotions within oneself and others. In a work setting, emotional intelligence is about how intelligently you use emotions to get positive results. Good to know but how is emotional intelligence important in the workplace? Eisenstaedt provided the following data:

  • 90% of what moves people up the ladder when IQ and technical skills are similar is emotional intelligence – Harvard Business Review
  • The World Economic Forum predicts emotional intelligence will be one of the top 10 employment skills of the immediate future
  • Skills like persuasion, social understanding, and empathy are going to become differentiators as artificial intelligence and machine learning take over other tasks – Harvard Business Review
  • TalentSmart found that 90% of top performers are high in emotional intelligence while just 20% of the bottom performers are high in it.

Eisenstaedt asked the audience to participate in an interactive phone app-based exercise. The audience was instructed to think about the best and worst boss they had worked for, rate them based on how those bosses made you feel, along with three words describing them. Once completed, Eisenstaedt put the results into a real-time word-cloud. Popular words describing best bosses included supportive, inclusive, and listener, while the adjectives describing the worst bosses were distant, self-serving and aloof.

Eisenstaedt provided a model of emotional intelligence applied to leadership qualities. There are six competencies that emotionally intelligent leaders exhibit.

  • Inspiring Performance: Facilitating high performance in others through problem solving, promoting, recognizing and supporting others’ work. Leaders that exhibit a more inspiring style often empower others to perform above and beyond what is expected of them.
  • Self-Management: Managing one’s own mood, emotions, time and behavior, and continuously improving oneself. Leaders high in self-management are often described as resilient rather than it’s opposite of being temperamental. Self-Management is important in leadership because a leader’s mood can be infectious and can therefore be a powerful force in the workplace.
  • Emotional Reasoning: Using emotional information from yourself and others and combining it with other facts and information when decision-making. Leaders high in this skill make expansive decisions whereas leaders low in the skill make more limited decisions based on facts and technical data only. Emotional reasoning is important in leadership because feelings and emotions contain important information.
  • Authenticity: Openly and effectively expressing oneself, honouring commitments and encouraging this behavior in others. Leaders low in this skill might be described as untrustworthy. Authenticity is important in leadership because it helps leaders create understanding, openness and feelings of trust in others.
  • Awareness of Others: Noticing and acknowledging others, ensuring others feel valued and adjusting your leadership style to best fit with others. Leaders high in this skill are said to be empathetic rather than insensitive. Awareness of others is important because leadership is fundamentally about facilitating performance and the way others feel is directly linked to the way they perform.
  • Present/Self-aware: Being aware of the behavior you demonstrate, your strengths and limitations, and the impact you have on others. This trait is important because a leader’s behavior can positively or negatively impact the performance and engagement of others. The opposite of self-awareness is to be disconnected.

Eisenstaedt returned to the best boss / worst boss exercise explaining the point of this was to confirm that better bosses exhibited high emotional intelligence, while the poorly rated bosses exhibited low emotional intelligence. Most of the words chosen by the audience could be directly related to the six competencies listed above. Eisenstaedt also pointed out that the way a boss or colleague makes you feel has a tremendous impact on your productivity.

Eisenstaedt shifted to explain basic neuroscience behind emotional intelligence and engaging with others. There is a base reptilian brain – this keeps you alive, controlling breathing, heart beating, saving you from threats. These include social oriented threats (loss of control over situations, lack of certainty in your daily life, etc.). While other parts of the brain control higher functions, the reptilian brain’s main function is to minimize danger or maximize rewards.

There are triggers that our reptilian brain reacts to. Feelings of trust, certainty, approval, sense of belonging, and fairness are rewarded in the brain with Oxytocin (a hormone associated with boosting trust and empathy and reducing anxiety and stress). On the negative side diminished approval or status, fear of being conned or tricked, lack of security, loss of control, unfairness, feelings of danger all cause the brain to release Cortisol (a hormone released by the body in stressful situations). Eisenstaedt gave suggestions on how to avoid triggers that lead to stressful situations. He used the SCARF method to identify and reduce those situations of stress.

  • Status: Represents your importance relative to others. An increase in status generates a larger neural response than money does.
  • Certainty: Humans are certainty seeking machines where any ambiguity triggers a threat response.
  • Autonomy: When we experience stressors the threat response is dramatically higher if we feel we have no control. Work on providing a feeling of choice, of control, of autonomy in every situation – try to offer alternatives and some sense of choice.
  • Relatedness: New or different people can trigger a threat response. Build trust and a sense of what we have in common by bringing people together socially, in teams, with shared goals.
  • Fairness: Unfair interactions or systems generate a threat response. Be more than fair and be generous with all, and in so doing so all must feel they are being treated fairly.

Eisenstaedt wrapped up with a suggestion to evaluate all your relationships (in particular the ones where tension exists). Use SCARF to help identify problem areas. Consider what those problems are in terms of SCARF and seek out ways to address and improve them.

ESG: Growth of Alternative Energy – Investment Opportunities and Returns

On August 8th CFA Society Chicago hosted an ESG event focusing on alternative energy. This event was structured with a featured keynote speaker, followed by a moderated Q&A with a panel of four alternative energy asset investors.

The keynote speaker was journalist Amy Harder of Axios. Based out of Washington, D.C., Harder covers national energy and climate change issues in her regular column, “Harder Line,” as well as reporting on trends and scoops. She is adept at discussing complex energy and climate issues in ways that everyone can understand. She is the inaugural journalism fellow for the University of Chicago’s Energy Policy Institute. Before joining Axios, she covered energy and climate change at the Wall Street Journal, and before that, the National Journal.

Amy Harder with Axios delivers opening remarks at CFA Society Chicago’s ESG: Alternative Energy event on August 8, 2019.

The panel consisted of moderator Martha Goodell and panelists Susan Nickey, Clive Christison, and Ammad Faisal, CFA.

  • Goodell is a co-founder and managing partner at Enigami Partners, LLC in Chicago, which supports institutional clients with all aspects of the investment process supporting private structured finance. Enigami’s clients are investing in energy technologies, projects and infrastructure.
  • Nickey is a managing director at Hannon Armstrong, a leading capital provider for sustainable infrastructure markets that address climate change. She was previously the founder and CEO of Threshold Power.
  • Christison is the senior vice president of pipelines, supply, optimization and specialties for Fuels North America; he is responsible for BP’s commercial, supply and optimization activities in the Americas. He is based in Chicago.
  • Faisal is managing director and co-head of the Chicago office at Marathon Capital. His firm as an investment bank in the energy and power sectors, and he focuses on mergers and acquisitions, debt, equity and tax equity capital raise transactions.

Harder led off the event with some remarks about the state of the energy industry, energy infrastructure and how it relates to regulation on national and international levels. She opened with a note about how the phrase “alternative energy,” as a reference to energy sources that aren’t fossil fuels, marginalizes what are already very viable sources of energy.

In 1987, fossil fuels made up of 81% of energy sources. In 2017, it was still 81%. There was relatively little fluctuation over that 30-year span. In addition, Harder made the point that hydroelectric technology is 150 years old and is the primary clean energy source in the world currently. However, hydro is in decline, while wind and solar are in ascendency. Wind has recently passed hydro as the main source of clean energy in the United States.

Harder explained that it is unlikely that all our power will come from wind or solar by 2050 – or ever. The main reason is the lack of suitable storage technology. Battery technology is not up to the task of storing energy in the amounts that can accommodate consistent and steady power supplies at this point. Wind and solar costs have dropped considerably, but that drop has been matched by a drop in prices for wind and solar power. This has made investment returns on wind and solar developments worse, which has slowed down investment in clean energy projects.

Additionally, batteries themselves are more difficult to develop because investing in battery technology is tricky. The availability and costs of the metals involved in producing the batteries could make them cost prohibitive. As a result, natural gas will likely be a part of our energy source mix for the foreseeable future.  

In Australia, which has a highly developed clean energy infrastructure, one answer to the storage issue is the use of pumped hydroelectricity. Water is pumped to create electricity on demand, which effectively stores the electricity. There are some issues with pumped hydro, though, including having to dam any river used to create the electricity.

Harder then began to discuss carbon capture. Carbon capture is the process of retrieving greenhouse gases from the atmosphere. This is a technology that is starting to gain real traction in the investment community and has great promise to help slow down global warming.

In response to some of the challenges we face, many large-scale investors, such as the Government Pension Fund of Norway (their sovereign wealth fund) has divested its investments in companies that specialize in oil exploration and production. The belief among many in the energy community is that over time, the oil exploration industry will consolidate like a game of musical chairs. There will be fewer and fewer “chairs” over time as governments begin to enforce higher levels of regulation. This move by the Norway sovereign wealth fund is indicative that this process may have begun. Europe has been the leader in this process so far.

 As for the United States, President Trump’s policies are not as opposed to clean energy as his rhetoric has been. While he has publicly shown strong support for conventional energy sources, there have not been as many policy changes as his rhetoric might indicate. Still, the Green New Deal is extremely unlikely without a Democrat president, Democrat majority Senate and Democrat majority House, and on top of that, some cooperation from Republicans in Congress. Climate change is starting to be more of a political liability for Republicans, according to Harder.

A question from an audience member was for Harder’s opinion on carbon credits as an effective policy. Her answer was that there are really three options for ways to manage carbon emissions – innovation to new technologies, carbon tax, or a cap and trade regime. Cap and trade is politically unpopular because of the “energy tax” label slapped on it during previous debates, but would probably be very effective. Renewable energy mandates would probably not be as useful for businesses, but they are politically popular.

Harder signed off, and the panel was introduced.

L to R: Martha Goodell, Susan Nickey, Clive Christison and Ammad Faisal, CFA

Goodell began by asking each panelist about what specifically they do in the energy field. Nickey’s firm, Hannon Armstrong, invests in different types of projects that either make the energy grid more efficient, such has highly efficient light bulbs, or in projects that actually generate energy. Christison works for BP and actually manages energy projects for BP, including identifying potential projects. Faisal is in the business of finding capital for clean energy projects with Marathon Capital.

Goodell asked Christison how BP and other corporations make decisions about investing in clean energy projects. Christison said it depends on the technology. BP, for example, has a group that evaluates projects that deal in emerging technologies. Most corporations have investment return hurdle rates that must be met; conventional energy projects are certainly subject to these hurdles, but these emerging technology projects don’t usually pass those internal hurdles. This requires a different type of analysis to make an investment decision.

Goodell followed that question with a question about if different renewable technologies might cannibalize each other, making those investment decisions more difficult. Christison replied that it was not as concerning because the focus for BP is on increasing its exposure to technologies and emphasizing a less conventional energy mix. In the transport field, it is likely that the energy mix will still be at 80% conventional by the year 2040, but renewables will increase in other sectors. The number of vehicles in the world is likely to increase rapidly between now and 2040, so there are some time frame challenges that make it a better solution to build out the various technologies rather than trying to pick a winner. All four panelists affirmed that wind and solar technologies are the unquestioned leaders in the clean energy space.

Goodell asked Nickey about the green bond market and its place in her firm’s investment strategy. Nickey replied that the market for green bonds is still very small, at roughly $100M in annual issues versus the global bond market of around $12T. It’s a part of their overall investment purview and a space where there is room to grow.

Goodell asked about the global leaders in renewable technologies. Christison answered that China was the clear leader in electric vehicles. The US is progressive on renewable gas, which is supported by credits. Europe is strongest in social and political awareness of climate change and backs it up with policy. Spain, for example, last year wanted 100% of its electricity from renewable sources but had to default to gas power during times where the wind wasn’t blowing sufficiently. Southeast Asia is the leader in the development of biofuels. Christison gave the example that algae-based biodiesel is an emphasis in Southeast Asia.

Goodell asked Faisal about the level of deal flow now as opposed to previous years. Faisal answered that deal flow is quite a bit stronger, especially in the wind and solar spaces. He also mentioned that European companies have been quick to step into deals outside of Europe, taking advantage of slower movement from other global players. An example was the growing area of leases on existing offshore windfarms, which are quickly being acquired by European companies and investors.

Vault Series: CFRA

On July 17th CFA Society Chicago gathered in the Vault Room at 33 North LaSalle to hear Sam Stovall of CFRA give his assessment of the current equity market and what can be expected for the second half of 2019. Stovall is chief investment strategist of US Equity Strategies of CFRA (Center for Financial Research and Analysis) and chairman of the S&P Investment Policy Committee where he focuses on market history, valuation and industry momentum strategies.  He is the author of the Standard & Poor’s Guide to Sector Investing and The Seven Rules of Wall Street.   

Stovall shared hardcopies of slides to illustrate his presentation titled, “Low Rates, High Hopes” which was produced by the research team at CFRA. This analysis of market momentum described what occurred in the first half of 2019, and what that might portend for the second half of the year, produced some fascinating results. Stovall also spoke to what affect fed rate cuts might have on the equity market going forward.

Stovall began his presentation by pointing out that the first half of 2019 was very good to equity investors. The realized gain in the S&P 500 index in the first half of 2019 was 17.3%, itself a strong signal (80% probability) that the second half will also lead to significant gains.  Several milestones were also achieved by the first half bull market: the DJIA moved past 27,000, and the NASDAQ past 8,000. In the case of the DJIA one could expect a 77% probability of an average 3.6% rise in the index in the 60 days following a 1,000-point milestone.

The bond market rally of 2019 has also lent its support to equities. The dividend yield on equities currently surpasses the yield on the 10-year bond. History shows that an average upward 12-month move by the S&P 500 of 18% can be expected when this occurs. When the 10-year treasury exceeds the dividend yield by only 100 basis points, one can still expect a 12-month upward average move of 11%.

One of the best momentum indicators is the S&P 500 relative strength as indicated by its 200 day moving average. Stovall illustrated that the S&P 500 still has room to run by showing a graph of the moving average beginning in December 2007 (prior to the recession) up to July 2019. The moving average indicated that the end of December 2018 was the best S&P 500 buying opportunity since December of 2008. The S&P 500 index currently trades at less than one standard deviation above its moving average, which indicates to him that the market is still less than fully valued.

Not all the available data point to equity market gains. We are currently in the beginning of an earnings recession. Second and third quarter estimates are now in negative territory. History shows that the probability that the earnings recession could morph into an economic recession is relatively high at 75%. Stovall stated that his team does not expect that this trough in earnings will lead to recession; however, history is not on his side.

Equity market volatility increases in the last half of the year following strong gains in the first half. A quick look at 50-day moving averages of the S&P 1500 Sub-Industries shows an over-bought condition that Stovall states might indicate that opportunities to buy might present themselves later in the year. All major global markets are expected to experience slower growth in real GDP compared to what was experienced in 2018, another factor that may weight on equities. Also, Stovall noted that every Republican President since 1901 has had a recession in his first term.

The attendees were asked if they expected a rate-cut from the Federal Reserve in July. A large majority indicated that they expected the Fed to cut at least 25 basis points. History shows that following Fed rate cuts the average 12-month S&P gain is 14.1%. However, the more recent Fed rate cuts in 2001 and 2007 were followed by large losses. Stovall thinks that the expected Fed rate cut may be premature and produced a graph that superimposed rate cut cycles since 1973 against the differential between the Fed Funds rate and the Core PCE. The current differential between these two indices is usually greater than what we see now before a rate cut cycle is initiated.

Stovall admitted that he was an “emotional” investor. He stated that it was important for emotional investors to have rules-based investment guidelines. He spoke briefly to two strategies he called “Quality” and “Seasonal Rotation”.  Of Seasonal Rotation he spoke of the sell in May and go away strategy. Since World War II the average S&P six-month (May-October) upward price change has been 1.4% (lowest of any 6-month period). He married this with certain sectors that perform well at different times of year. As an example, consumer staples and health care outperform during this six-month period of relatively low returns. With respect to “Quality”, Mr. Stovall illustrated that investment in Dividend Aristocrats lessen risk   A “Dividend Aristocrat” is an S&P 500 stock that has increased its dividend payout for at least 25 consecutive years. This strategy directs investment to these stocks which are lower beta names, limiting risk.

To summarize his presentation Stovall left us with some key points:

  • After a strong first half and achievement of millennium milestones the market remains investable and further gains can be realized
  • Despite the earnings recession, no bear market is on the horizon
  • The second half of 2019 will have more volatility than the first half
  • His S&P 500 price target for year end is 3,100
  • The Federal Reserve is accommodative, but may surprise investors in a negative way in the short term.

It is interesting to note that many pages of Stovall’s presentation contained a disclaimer at the bottom: “Past performance is no guarantee of future results”. Stovall has demonstrated that   market history and momentum can be valuable predictors of market moves in the near future.  However, ignore the disclaimer at your own risk.