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.
Tesla
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
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.
Trade
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.
Turkey
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.
