August 24, 2018

Update - What Now

“Overconfidence is fed by the illusory certainty of hindsight”   - Daniel Kahneman

As we enter into the month of September and the transformation from lazy summer, it’s the back to school and vocational enthusiasms that seem to show up everywhere. Unfortunately it all tends to be temporary and by the time October rolls around the draw of the holiday season collides with the increasingly colder days of fall. And this fall tends to be an interesting one, for a number of reasons, as I’m sure you are aware.

The Markets
Whenever October rolls around the talk of historical collapses in market valuation increase in volume because October is the month when the market declines seem to take place. However in keeping with the above quote I prefer to see the preparative behaver of the pundits, widely dispersed in the internet age as a better indication of what won’t occur. Namely, markets don’t go down because we think they will, and are more than likely to go up when we think they won’t. My current opinion is that the broad markets will likely continue to churn, not charge, higher until the end of the 3rd Quarter, which ends on September 30th. Between now and then it’s what will begin to enter the narrative, separate from the above behavioral wedge, which begins with what I call the Brexit Effect.

The Brexit Effect
In the past few years much has been made of rapidly changing political and economic dialogues gripping academia and politics. Beginning with Brexit, the vote in favor of the UK leaving the EU and following the 2016 US election and the numerus similar conditions around the world there is much to suggest that no country has a lock on the craziness. Luckily though the markets do seem to be content to ignore the dissonance which should be remembered is not the same being oblivious. This is important because each of the aforementioned cultural shocks that I prefer to call Black Swans* was proceeded by an increase in volatility as measured by the VIX Volatility Index**, and used to justify impending doom. But just as the 2016 presidential election experienced its own battle with increased volatility the follow up in each case was a return to the direction leading up to the distraction. I bring this up, because after the end of the 3rd Quarter, from October 1st until Election Day on November 6th I would not be surprised if volatility returned to the capital markets as a tidy backdrop of what is sure to be visceral coverage in the media.

The Fed
It is my opinion that the impending meeting by the Federal Reserve Board toward the end of September is another activity that is worth mentioning particularly in that it might very well be it’s last of the year. With recent consumer confidence steady and inflationary trends subsiding a bit, in domestic areas of strength such as manufacturing and housing in particular, one can point to increasing debt costs, and the influence of recent trade issues. And since those industries gained the most from the recent tax legislation convincing signs of deceleration has been a slowdown in CAPEX expenditures (what companies spend on themselves).  In my opinion I have to consider these as potential influences on the continuing goal of the Fed to raise rates one more time before year end. That said, it doesn’t mean the economy will follow suit, only that the Fed will lean to desiring more time before continuing on their current path.

Markets and politics are not the same thing, they don’t even rhyme. And as the fall season progresses, with all that comes with it, the goal for accounts will be to adjust positions to reflect the upcoming start of the New Year. With my opinion leaning toward the global markets ending the year constructively, the rest of the year is probably going to be reflective of the outcome of the election. And while I’m confident that it won’t likely have much impact on the economy I’m uncertain on the impact of the distraction and potential for a stop to any meaningful legislation. But for right now the need for discipline and patience are the tools of choice, to remain active, but respectful of the volatile times ahead.

August 10, 2018

The Art of Fear Mongering

Human history has long endeavored to introduce civility into daily life. Everything from the threat of divine intervention to the post age of reason introduction of what has in many cultures been introduced as manners, the need to use fear to keep society from breaking laws and violating social norms has never been more tested than in today’s world of cascading fear mongering. I bring this up because I can’t help being both frustrated and amused at the constant view that any sign of trouble in the world of finance is discreetly signaling the end of the markets as we know them. Well, I’ll admit that scenario is compelling, but the disseminating power of the internet also leaves me a bit skeptical. Here are some of the stories that have generated the most questions.

This week Tesla (TSLA) saw its stock rally and decline in multiples of 5 % moves. First the stock was lower as a result of the recent battle waged by founder and visionary Elon Musk against the annoying practice of the financial industries self-appointed overseers disguised as analysts. Once having traded down there was some relief at the recent release of quarterly earnings. And while each move higher in the stock was usually met with aggressive short trading activity the battle was on as to who would win. Then, as everyone in the world now knows, Musk tweeted that he had secured financing to take the company private, and the stock sharply rallied. Also included in his running commentary was the proposal to create a "special purpose fund” that would enable “anyone to stay with Tesla." So there you have it, the potential of a buyout roughly 20% from today’s price or Musk spoke without genuine facts. I’ll go with the former and consider the unique outcomes being floated are a good reason to risk some of the profit to discover more. I’ll also say to folks who think they should buy the stock, I say you should already own it. And if you already own it and are considering to sell it, I’ll say if it becomes a distraction, then yes, there’s always good opportunities in the stock market.

Apple is a perfect example of a long running good opportunity. This week it was widely reported that the company had become the first one to reach a trillion dollars in market cap. With the help of Warren Buffet and a number of other large investors the company has gotten to that point pretty smoothly. I especially liked Buffet’s descriptive remark that Apple is the biggest company in the world whose every product fits on your dining room table. Well, so not to put any damper on the party, but I think reaching a trillion dollars is not that big of a deal. First off Apple products are comparatively expensive while costs from production to loyalty point to an outcome is far disproportionate in both market share of the actual ownership and market share of the operating system (ios). What does this mean? I like to use the word slack. Slack in the clear picture of the company’s strategy and slack in the potential of new product all translates into a favorable risk reward, and if Tesla is distracting you can always move to Apple.

I’ve been asked a few times whether I’m ready to backpedal on my original comments on the trade battle being waged with China by the current administration. First of all it’s not simply a battle of industry, it remains mostly a battle of rhetoric. And there is reason to conclude that as the verbal conflict heats up the actual results of tariffs loses steam. This is because there is wide agreement that China has been engaging in unfair trade practices since its more humble  beginning with the biggest pass coming from the US and Europe. Now, the idea that the country is still referred to as “emerging” is absurd and the weight of its massive economy has diminished the leverage the west believed it had. So I’ve recommend ignoring the fear mongering and keeping China exposure, directly and indirectly, in the portfolios to managed levels. This is a worthwhile strategy given in my opinion that with so many billions of dollars at stake there is little justification not to come to an agreement.

Like the shot heard around the world (who was that again?) suddenly Turkey is going to be the trigger that takes the global markets down. Most of this points to the gigantic changes that the country has gone through over the last decade, but at closer inspection much of my research suggests only relative impact on its own economic health, not particularly world economic health. But that story seems to come from the impact of its slumping currency on the euro, and since Turkey is a member of the EU, where there’s smoke there’s fire. Now, it is widely known that when a country with a self-perpetuating economy finds itself in economic trouble there is a direct impact on the banking systems that have outstanding loans with the country’s businesses and its citizens. Business deals can generally continue, but financial agreements are generally the first to be ignored in favor of those activities that bring in new capital. Couple that with the impact on Turkey’s commodity industry of which it is a big exporter faced with recent tariffs imposed by the the US. So while the scenario doesn’t look so good, Turkey has a history of a strong central bank, active business community and generally sound trading practices. And even over the years as the government has fallen into conspiratorial panic over its perceived enemies, this is the reason fear mongering has taken over. I return to the importance of not conflating political or media generated economic problems when there is currently definite slack in the EU countries, especially when compared to the US. In this regard another cheap opportunity to remain invested in Europe with some emerging exposure, for now is favorable risk.

US Market
The US markets have reached new highs more than few times this year and while there is much economically to point to there is plenty of reason from a technical perspective  to expect some sort of correction. Whether this is beginning to happen now I’m not convinced of that, but with interest rates spending more time at the year’s highs and the Federal Reserve ready to raise them again at the next meeting in September a correction before entering into the fourth quarter would be a welcome sign of market efficiency. Even so, in the recent months the portfolios have seen increase in income and moves to a modestly more defensive position. Modest because I am counting on opportunities presenting themselves well before the fourth quarter and because in the meantime I’m not convinced that tech won’t continue to lead the way and for this reason keep a fair amount of risk in the market, presenting opportunities almost everywhere else.

June 29, 2018

Amazon the Terminator

I’m pretty sure I’m an introvert, but after a glass of wine or two I can play a convincing extrovert. I’m generally referred to as being left handed since that’s the hand I write with, but nearly every other active effort I engage in is decidedly right handed. So which is it, right brain, left brain, does it matter? What matters to me is it has invited into my thinking a distinct skepticism of self-generated ideas, extending beyond what a financial model does and exploring why it does it. Simply put if the media suggests a financial crisis is on the way, who am I to doubt their belief in what they’re saying. The what, is they sell a narrative to consumers, but the why tells the other story that marries the event with the narrative, and in my opinion, a better snapshot to analyze. Amazon is a good example.

Hasta La Vista, Baby

There are undeniable challenges in the world when it comes to finance and the markets, most of which are poorly understood by many who too easily agree or disagree. With regard to economics there are any number of metrics that can put an idea into perspective. But sometimes that which is unexpected, such as yesterday’s announcement that Amazon (AMZN), through the purchase of an online pharmaceutical distributor has begun the deconstruction of the industry as we know it.  Is the news true? That it’s happened in many industries AMZN has entered is true. And street pharmacy stocks are precipitously declining, with the help of the pundits using the story as click bait? So that’s the what, but where’s the why.

Look at Amazons recent purchase of Wholefoods. Prior to that acquisition the company using its hold on the trucking industry was competing with Fresh Direct and Instacart, under the name Amazon Fresh. Beginning with prepared food delivery, the demand for groceries over the past few years has been no less than overwhelming*. But the structure of these perceived game changing companies is firmly anchored in the 20th century. Trucks (gasoline), Warehouses (utilities) and lots of Workers. Over time one could easily argue that Drones and Robots could replace the former and the latter, but central to the delivery of food, is the food.

So when Amazon entered the fresh delivery business it was, of course, wildly assumed the destruction of the industry was eminent. Asking why, made for an interesting perspective  given the few, including myself,  knowing that Amazon was more familiar with warehousing in general and therefore when they bought Wholefoods, it wasn’t a supermarket they bought, it was a national grocery warehouse chain that fit both the narrative and the event, namely most existing warehouses do business with everyone.

Regarding yesterday’s announcement, the pharmacy industry is in a different space than AMZN. That space, in partnership with the insurance industry, is about health services. That’s the what. The why, has lead me to analyze the recent attention on consumers seeking common heath issuers and showing preference for the cost of Urgent Care centers to the general cost of a visit to a doctor’s office. So in my opinion the impending destruction of any competitor in its way could very well lead Amazon entering the fray, if for no other reason since all the companies currently involved are after the same end. And as that group is currently active in mergers and acquisitions, the current why, could include the potential of one or more events and a reason to look beyond the what.

When you look at your cell phone don’t just concentrate on what it does, maybe not even how does it, but why it does it is a questions one needn’t possess artificial intelligence to answer, but it may require questioning the most rational answer that comes to us first.

I’ll Be Back

April 24, 2018

Three is the Number

Today the US Treasury 10yr Note traded above 3% for the first time in nearly five years. This is a significant move for two reasons. First it’s a sign that the statistical measures of inflation are being taken seriously by the markets and that for the first time in recent memory the combination of stronger economic growth and higher interest rates make welcome the growth as well of some interesting opportunities to invest in bonds. It should also be mentioned that the Fed’s ambition to unwind some of their post crisis stimulus was expected to bring on a negative reception from the interest rate markets. But as usual when markets decline they uncover hidden treats and for now what is happening is not a surprise, at least when considering the following.

The Economy
The economy is growing. It’s not that strong except when compared to the years following the financial crisis when GDP growth stagnated around 1.5%. Now it’s around 3% and when adding in inflation is decidedly a growing economy. However, in light of the confirmation suggested by todays move in interest rates the past few weeks have also seen some slowing down in inflation as suggested by the
-.01% consumer inflation (CPI) data. On other recently strong fronts the slowdown, in spite of an intact positive trend, can be seen in Housing Starts (growing but from unstable sectors) , Manufacturing (growing but in recently depressed mining and industrial production only) Retail Sales (growing but erratic due to weather and seasonal factors) and I think you get the idea. As long as this trend continues the Fed could likely remain attentive, but the markets are a different factor.

The Markets
There are a number of behaviors inherent in the stock and bond markets that can be expected in the search of value and opportunities. First and foremost is that those markets don’t need help to move outside of the investing public. The move above 3% today was the bond markets impatience with waiting for the Fed to stop talking and start raising interest rates and in the meantime stocks will weaken until the bond market figures it all out. The former important because when the Fed does tighten, the only thing for interest rates to do then is, nothing, which is good for stocks. And the latter because broad markets will have given up some value to present some compelling opportunities.

External Events
This week’s move to smooth out trade tensions is being generally overlooked in favor of more biting news. Today’s decline in the markets driven primarily by steep drops in Google (GOOGL) and Facebook (FB) that will likely be followed up by the recent establishment of a privacy council for the European Union that is predictably going hard after the two companies. Issues with the upcoming meeting between the US and North Korean leaders shouldn’t have too much impact, except putting some weight on defense stocks should a deal be struck. And the only outlier is still China who has stepped up their ambition to serve their country with their own network of companies. Sound familiar? In my opinion I still think a deal will be struck as part of a broad trade deal (maybe even a revamped, more inclusive TPP) to help both China and their largest European partners in addition to the US. Any other issue of a political nature will have as much influence on the markets as they’ve had since they began.

Or should I say Bitcoin. The curious rebound in the prices of an array of crypto currencies just at the time the US and Euro Asian broad markets are correcting is no accident. We’ve written before the potential for a leading cryptocurrencies to replace singular defensive investments such as Gold and Fine Art and it would appear to be playing out in the past week. Appearances can be misleading, so I’ll keep everyone updated.

Down the Road
The challenges of the broad markets are in my opinion the same as they’ve been since last year. The increased level of growth has, I believe, caught the Federal Reserve by surprise and pushed their agenda to include an additional rate hike in this year. Economics, as we analyzed, don’t necessarily suggest the same level of strength coming down the road. That doesn’t mean the economy will sink, or the yield curve will follow by inverting (sometimes considered a precursor to recession) it more likely suggests a period of static change, especially with so much happening on the trade front, and our entering into the spring and summer season. There is notion that it is wise to sell in May and go away for the summer. We’ve already sold a little to slow down and take in the scenery, but believe the opportunity to speed up will be on the horizon.

April 20, 2018

Because of Nothing

“Myths almost always start with a state of extreme disorder” – Rene Girard

Professor Girard introduced us to the primacy of human behaviorism, scapegoating. Today the fixation that humanity has shown in its evolution is alive and well throughout the world and as it relates to the purpose of this letter, to find the basis for the obsession that pundits and their community display with finding a reason the stock market moves on any given day. Trouble is, history, ripe with empirical evidence shows only those events, recently characterized as “Black Swan” events, think 9/11, which have a direct impact on the changes in the global equity indexes on a given day. Everything else moves in far slower motion than we are all often led to believe.

The reason to bring this up is my obsession with demystifying my industry and underscore the importance of aggregate economic, corporate and geopolitical data in the effort, not to predict the future but, to be as close as we can to being in the right place at the right time. I can be content with that posture mostly because the efforts in timing markets through the use of quantitative technical analysis or the more popular algorithmic randomization models have succeeded in convincing investors that predicting the outcome of the stock markets is close at hand. I disagree.

So where has that left me? You’ll never hear me utter the word ‘in reality”, or “the truth of the matter is” for the sole reason is I personally believe that the only thing I can be certain of is that I can’t be certain of anything. Which leaves me to rely on information that is more tangible than a forecast. For example, I talk about risk. What is it? Well, if you have cash, your only risk is spending it too fast. But if you invest that cash into Amazon stock, well, that’s altogether a different kind of risk. Can you still see it diminish, maybe? The point is that to me, risk is measurable, and at the risk of over simplification, if I invested in Apple (AAPL) or Bitcoin you would probably guess correctly which is the riskier investment. When I recently invested in Tesla, I received a few calls asking me to explain the risk. To which I answered that I held a position for clients that was big enough to help drive the sector it was in (along with Amazon (AMZN), Home Depot (HD) and Alibaba (BABA)) but small enough to be less of an impact on the portfolio as a whole, in the event it declined,

In the meantime your alternative to investing is living and working. Mine is knowing that much that is reported in the media is conjecture, in our industry the most recent being that trade war is coming so sell stocks, and is often met with stock market ambivalence. That doesn’t meant the stock market isn’t susceptible to added volatility, or even a continuation of its recent correction. But it would more likely happen because, economic data slows down, unemployment increases or interest rates move up faster than the current rate of inflation would suggest. A lot to absorb, but luckily a lot easier to for me to track as well, both historically and in the present.