Less Is More

sarah-dorweiler-357959-unsplash.jpg

Good Morning,


As a special note, this month marks our 4 year anniversary at Logos LP. We appreciate your support and will continue to bring you thought provoking ideas from around the web. 


As for equities, after posting the worst start to April since the Great Depression, U.S. stocks dropped on Friday as several banks weighed down the major indexes on the final day of an otherwise strong week for equities. 


Citigroup, Wells Fargo and J.P. Morgan Chase all reported quarterly earnings and revenue that surpassed analyst expectations. Bank shares initially traded higher before falling, as the strong results were already priced in and guidance was lacklustre. 


This will likely be the case for many other sectors as expectations for this earnings season are sky high with earnings data registering higher growth than ever this late in the cycle. According to FactSet, S&P 500 earnings are forecast to have grown by 17.1 percent last quarter. Financials, meanwhile, are expected to see earnings increase by 24 percent..


2018 has so far been a roller coaster not for the faint of heart with even veterans such as Jack Bogle stating that: "I have never seen a market this volatile to this extent in my career."

 


 

Our Take


What should be made of this volatility? 

Although many are quick to point the finger at Trump’s itchy “Twitter Finger” which has lobbed challenges at Russia, China, Syria, Amazon, Robert Mueller etc. there are at least several other matters contributing to the volatility. David Rosenberg has suggested some plausible factors:
 

  1. "A new, untested and less dovish Fed" led by Chairman Jerome Powell, who may have a less intense focus on stock market values than some of his predecessors.

  2. Budget problems caused by big tax cuts that the Congressional Budget Office projects will lead to a $2 trillion deficit.

  3. A possible trade war that will push up interest rates until the next recession hits.

  4. An isolationist administration when it comes to trade, which will lead to "disrupted supply chains."

  5. The boost markets got last year from tax cuts and a general air of fiscal stimulus has been priced in. Meanwhile, President Donald Trump's attacks on "Big Tech," and Amazon in particular, are leading to policy uncertainty.

  6. "Cracks" in the synchronized global growth narrative. Belief that the world was growing together helped fuel the 2017 rally, but Rosenberg sees multiple big economies slowing down.

  7. A possible peak in corporate profits that is raising the bar for expectations, meaning it will be tougher for earnings season to impress. Earnings perfection or bust? Both business and consumer optimism has certainly hit rarefied air and thus nothing short of perfection will move the needle or at minimum keep it where it is...

  8. Related earnings woes, particularly from a U.S. dollar that may have found a bottom after plunging during the first year of Trump's presidency. Trump has advocated for a weaker greenback as it helps make U.S. multinationals more competitive on the global stage.

  9. The wild intraday stock moves. The S&P 500 is on track for 100 days of plus-or-minus 1 percent moves, a trend that Rosenberg says typically happens during bear markets (1974, 2001, 2002, 2008 and 2009 are other years when this occurred).

  10. Circling back to the Fed, Rosenberg does not believe the central bank will come to the rescue if the markets correct. Moreover, the Fed is reducing the size of its bond portfolio just as the U.S. will be flooding the market with bonds to fund the burgeoning fiscal deficits.

 

Another issue we’ve been monitoring lately is a widening of Libor-OIS which is typically associated with heightened credit concerns. This is a metric that measures the difference between Libor (the London interbank borrowing rate where banks lend to each other unsecured) and the overnight interest rate swap (the rate tracking the interest rate set by the central bank) which has shot up to more than 50 basis points. Known as the Libor-OIS, it's now at the widest it has been since the euro zone sovereign debt crisis of 2012. It widened more than 15 basis points in the February alone.


A widening of Libor-OIS is generally associated with heightened credit concerns, however this time analysts are pointing to several structural shifts in money markets (markets that trade in securities with short-dated maturities) rather than banking concerns — as banks are now flooded with liquidity and are generally performing better.


Taken together these factors suggest a concerning picture. A significant wall of worry.


As always we suggest that for the long-term investor it is a fool’s game to try to time markets, yet whether we are in the 6th inning or the 9th, there are an increasing number of signs and signals that the economy may be entering the late stages of economic recovery.


This doesn’t mean a recession is imminent, but some early warning signs are emerging that should encourage us to make preparations for a rainy day. The expansion will likely extend through its ninth year, but is unlikely to accelerate and looks set to slow from here. Are our minds prepared for less? Are we ready and willing to do more with less? To make the most of less?



Musings


Like so many other important principles regarding successful long-term investing, the merits of training oneself to do more with less can be found when considering other disciplines. 



This past month I found some interesting research which suggests that when people severely cut calories, they can slow their metabolism and possibly the aging process.


Clinical physiologist Leanne Redman, who headed the study at Pennington Biomedical Research Center in Baton Rouge used participants that were not overweight and cut their typical plate for breakfast, lunch and dinner by up to 25 percent.

 

53 healthy volunteers were recruited and one-third ate their regular meals. The rest were on the severe calorie reduction plan for two years.


Redman noticed that for those on the restricted diet, their metabolism slowed and became more efficient.

 

"Basically it just means that cells are needing less oxygen in order to generate the energy the body needs to survive; and so the body and the cells are becoming more energy efficient," Redman explains. And if less oxygen is needed to burn energy, then dangerous byproducts of that burning — free radicals — can be reduced.

 

"Oxygen can actually be damaging to tissues and cells, and so if the cells have become more efficient, then they've got less oxygen left over that can cause this damage," she says. And that damage can accelerate aging.


Now, these findings don't directly prove that drastic calorie-cutting will actually help people live longer. People would have to be followed for their lifetimes to prove that. But the study did find that blood pressure, cholesterol and triglycerides were lower in the group on severe calorie restriction. When those numbers are high, they can lead to life-shortening diseases.

 

What can this research teach us when it comes to investing? 


For the last 5 years or so, returns have been for the most part high, low hanging investment fruit plentiful, central banks accommodative and volatility low.


Calorie intake (as represented by stock returns) has been high. Breakfasts, lunches and dinners have been large and our “investor metabolisms” have slowed, their efficiency impaired. We’ve been lulled into ease by excess. Our expectations inflated. 


Instead, as storm clouds gather on the horizon, we should proactively prepare for less by re-setting expectations. This "mental" cutting of calories can lead to improvements in the efficiency of our investor metabolisms. Ultimately our ability to prepare for less will enable us to do more with less. As our physiology suggests, doing more with less may not only determine our long-term success as investors, but also our longevity as humans. 

 

Logos LP March 2018 Performance



March 2018 Return: 2.34%


2018 YTD (March) Return: 0.05%


Trailing Twelve Month Return: +17.80%


CAGR since inception March 26, 2014: +19.95%


 

Thought of the Month


 

"Without frugality none can be rich, and with it very few would be poor. -Samuel Johnson




Articles and Ideas of Interest

 

  • Most people have a really tough time understanding compound interest. It isn’t intuitive so its systematically overlooked and underappreciated. More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest factBuffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. $80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday. Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s. Start early. Be invested. Repeat.

           

  • Lessons on Bubbles From Bitcoin. Until there is a way to bet against an asset, its price will be set by the most upbeat buyer. This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles. Whenever a new asset is created or a bunch of new investors enters the market, allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs. That won’t totally prevent all bubbles -- the late 1990s technology stock bubble, for instance, happened in spite of the existence of stock futures markets. But it would certainly help. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.

 

  • At this rate, it’s going to take us nearly 400 years to transform the energy system. Here are the real reasons we’re not building clean energy anywhere fast enough. Beyond the vexing combination of economic, political, and technical challenges is the basic problem of overwhelming scale. There is a massive amount that needs to be built, which will suck up an immense quantity of manpower, money, and materials. There’s simply little financial incentive for the energy industry to build at that scale and speed while it has tens of trillions of dollars of sunk costs in the existing system. Should we just give up? MIT digs in.

 

  • Why is it so hard to invest with a social conscience? For those so inclined, the good news is this: There are more opportunities than ever to invest with a conscience. One firm, Wealthfront, will even let you strip individual American companies that rub you the wrong way from one of the index-fund-like portfolios it creates for you. But with all these choices comes a fair bit of confusion. To land the biggest blow with whatever investing dollars you have, you’ll first need to confront at least seven challenges.

 

  • There is a lot of hype surrounding blockchain. Could it be crappy technology and also a bad vision for the future? Anti Futurist Kai Stinchcombe goes so far as to say that “Eight hundred years ago in Europe — with weak governments unable to enforce laws and trusted counterparties few, fragile and far between — theft was rampant, safe banking was a fantasy, and personal security was at the point of the sword. This is what Somalia looks like now, and also, what it looks like to transact on the blockchain in the ideal scenario.”

 

  • The Richest 1% are on target to own 2/3rds of all wealth by 2030. Will anger over inequality ever reach a tipping point?

 

  • The end of scale. New technology driven business models are undercutting the traditional advantages of economies of scale. But large companies have strengths to exploit if they move quickly. Is big business really that bad? The Atlantic argues that large corporations are vilified in a way that obscures the innovation they spur and the steady jobs they produce. After all, entrepreneurship isn't for everyone. 

 

  • The grim conclusions of the largest ever study of fake news. Falsehoods always beat out the truth on Twitter, penetrating further, faster and deeper into the social network than accurate information. Extremism pays. That’s why Silicon Valley isn’t shutting it downThe tech giants’ need for ‘engagement’ to keep revenues flowing means they are loath to stop driving viewers to ever-more unsavoury content. The show must go on! Unless Facebook’s Cambridge Analytica problems are nothing compared to what's coming for all of online publishing.

 

  • Private Equity: Overvalued and Overrated? America is in the grips of a speculative frenzy. Investment bankers, private investment firms, and even a few dozen recently graduated MBAs labelling themselves “searchers” are calling, emailing, wining, and dining small business owners. Their goal is to translate prosaic small businesses into the poetry of private equity. This consensus has led institutional investors to flood private markets with capital, about $200 billion per year of new commitments. The result is soaring prices for private companies of all shapes and sizes. Just before the financial crisis, in 2007, the average purchase price for a PE deal was 8.9x ebitda (earnings before interest, taxes, depreciation, and amortization—a commonly used measure of cash profitability). Deal prices reached 8.9x again in 2013 and are now up to nearly 11x ebitda. But asset prices are going up everywhere. What makes private equity dangerous is the use of debt—and the use of phony accounting to conceal the riskiness of these leveraged bets. Great piece suggesting that all the glitter is not gold.

 

Our best wishes for a fulfilling month, 

Logos LP

Everything Has Been Done Before

max-mckinnon-592439-unsplash.jpg

Good Morning,
 

U.S. stocks rocketed higher on Friday, seeing the Nasdaq composite hit a new record, after February jobs growth far exceeded expectations.

 

The Dow Jones industrial average rose 440.53 points to close at 25,335.74, with Goldman Sachs among the biggest contributors of gains to the index. The 30-stock index also closed above its 50-day moving average, a key technical level.

 

The S&P 500 gained 1.7 percent to end at 2,786.57, with financials as the best-performing sector. It also closed above its 50-day moving average.

 

The jobs report which came out Friday was nothing short of extraordinary. The U.S. economy added 313,000 jobs in February, according to the Bureau of Labor Statistics. Economists polled by Reuters expected a gain of 200,000.

 

Wages, meanwhile, grew less than expected, rising 2.6 percent on an annualized basis. Stronger-than-expected wage growth helped spark a market correction in the previous month.


 

Our Take
 

The jobs report was impressive. For all that can be said about Trump’s unconventional decision making (his big deficits may actually make sense by spurring productivity and his “tariffs” may in fact be good for free trade) this report confirmed the underlying strength of the economy, and also diminished some of those inflationary concerns and the potential that there could be more than three rate hikes this year.

 

Many question how you can create this many jobs and not have wages go up more but we maintain that this phenomenon is due to a unique interplay of several factors: demographics, labour force participation and technology.

 

The basic formula is as follows: as labor becomes more scarce based on demographics, it constrains supply, triggering inflation. But labor scarcity, in turn, should speed the adoption of automation and trigger an investment boom. Automation investments are likely to generate supply growth just as demographics and investment both spur demand growth, creating a reasonable balance (despite rising inequality). Once the investment boom ends, however, the negative effects of automation will become more visible—namely, high levels of unemployment, wage suppression and slowing demand.
 

We may have progressed further along this matrix than some may think. Regardless, we are a long ways from the sort of wage inflation of the 1990s . . .

Screen Shot 2018-03-09 at 8.11.25 PM.png

Musings


I shared an interesting chart in the Economist with some friends this week which sparked a spirited discussion:

Screen Shot 2018-03-09 at 9.56.43 PM.png

The debate focused on whether or not such historical data offers the investor anything of value. Certain friends suggested that the world in 1900 was vastly different than the world today and thus such data was of limited use.

 

What struck me most about the discussion wasn’t the comparison between what the world looks like today vs. what it looked like over 100 years ago, it was the ease with which we are able to overlook history in an effort to justify the perceived novelty and uniqueness of whatever appears to be relevant in the moment.

 

Think cannabis, blockchain, bitcoin, AI, cryptocurrency and whatever else is hot right now. This isn’t to say that these “new” things aren’t relevant.

 

But it is to say that broadly speaking everything has been done before as human nature hasn’t changed all that much. As Morgan Housel reminds us: The scenes change but the behaviours and outcomes don’t.

 

"Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.”

 

The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean.

 

They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive.

 

Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.”


 

Logos LP February 2018 Performance



February 2018 Return: -3.75%

2018 YTD (February) Return: -2.24%

Trailing Twelve Month Return: +21.02%

CAGR since inception March 26, 2014: +19.72%


 

Thought of the Month


 

"The way to outperform over the long haul typically isn’t done by being the top performer in your category every single year. That’s an unrealistic goal. A better approach is to simply avoid making any huge errors and trying to be more consistent. The top performers garner the headlines in the short-term but those headlines work both ways. The top performers over the long-term understand that’s not how you stay in the game over the long haul.” -Ben Carlson




Articles and Ideas of Interest
 

  • When value goes global. Interesting piece in Research Affiliates magazine suggesting that the value premium that is traditionally associated with stock selection and market timing works just as well when applied globally across major asset classes. The alternative value portfolios studied are typically uncorrelated with their underlying asset classes, traditional value approaches, and each other, thereby offering meaningful diversification benefits alongside attractive excess return potential. The success of global value portfolios hinges on their design, which allows investors to gain better exposure to desired risk premia not easily available when investing in a single market.

           

  • Rational Irrational Exuberance. We tend to be uncomfortable with the notion that an economy’s fundamentals do not determine its asset prices, so we look for causal links between the two. But needing or wanting those links does not make them valid or true.

 

  • If you’re so smart, why aren’t you rich? Turns out it’s just chance. The most successful people are not the most talented, just the luckiest, a new computer model of wealth creation confirms. Taking that into account can maximize return on many kinds of investment.

 

  • Why doesn’t more money make us happy? Dan Gilbert, social psychologist and author of Stumbling on Happiness showed that people who recently became paraplegics are just as happy one year later as people who won the lottery. Relative to where we thought our happiness would be after winning the lottery, we adjust downward, and relative to where we thought our happiness would be after losing our legs, we adjust upward….Interesting piece from Michael Batnick that suggests that this concept makes sense in theory, but not in practice. Like many things in life, it’s an idea that is hard to truly believe until we experience it for ourselves.

 

  • The town that has found a potent cure for illness- community. What a new study appears to show is that when isolated people who have health problems are supported by community groups and volunteers, the number of emergency admissions to hospital falls spectacularly. While across the whole of Somerset emergency hospital admissions rose by 29% during the three years of the study, in Frome they fell by 17%. Julian Abel, a consultant physician in palliative care and lead author of the draft paper, remarks: “No other interventions on record have reduced emergency admissions across a population.” No wonder what causes depression most of all is a lack of what we need to be happy, including the need to belong in a group, the need to be valued by other people, the need to feel like we’re good at something, and the need to feel like our future is secure.

 

  • Could capitalism without growth build a more stable economy?New research that suggests – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.

 

  • Is it time to say it? That retirement is dead? What will take its place? The numbers are startling: Thirty-four percent of workers have no savings whatsoever; another 35 percent have less than $1,000; of the remaining 31 percent, less than half have more than $10,000. Among older workers between 50 and 55, the median savings is $8,000. And this is total savings, including retirement accounts. Contrast that with the fact that experts say you should have eight times your preretirement annual salary saved in order to retire by 65 and continue a reasonable quality of life, commensurate with what you have become accustomed to.  

 

  • Blockchain is meaningless. People keep saying that word but does it really mean?

 

Our best wishes for a fulfilling month, 

Logos LP

Market Meltdown: Correction or Destruction

jessica-arends-554198.jpg

Good Morning,
 

Oh how fast things can change. After a big January, U.S. equities ended their worst week in two years as rate-hike fears pushed markets into a correction.

 

The recent turmoil in equities began last Friday, when the Dow fell 666 points after a better-than-expected jobs report ignited inflation fears. That fall was exacerbated Monday after the yield on the benchmark 10-year Treasury note hit a 4-year high, sending the Dow tumbling another 1,175 points as investors grew more nervous about an overheating economy.

 

Trouble with securities called exchange-traded notes that decline in value when volatility increases likely helped create more turmoil in the markets this week. The Cboe Volatility index (VIX) — the market's best fear gauge — shot above 40 again Friday after jumping as high as 50 earlier in the week. At the end of January, the VIX was below 14.

 

Traders are now focusing on next week’s U.S. consumer-price data after a week in which the 10-year yield pushed as high as 2.88 percent. Equity investors took the signal to mean interest rates will rise as inflation gathers pace, denting earnings and consumers’ spending power.

 

In only a week the S&P 500 has tumbled 5.2 percent, its steepest slide since January 2016. At one point yesterday before a furious rally, stocks had fallen as low as 12 percent from their latest highs. The volatility Friday was impressive: the Dow jumped 349 points in morning trading, fell 500 points later in the session, before closing 330 points higher.

 

Still, the selloff has wiped out gains for the year and signs have mounted which suggest that  jitters have spread to other assets, with measures of market unrest pushing higher in junk bonds, emerging-market equities and Treasuries.
 

Our Take
 

Hindsight being 20/20 it was easy to see this coming: record high valuations, record high returns (the S&P’s risk adjusted return was close to the world’s best in 2017), a strengthening economy, synchronized global growth, signs that inflation is picking up, risk-on behaviour gaining ground, massive equity inflows, monetary policy normalization, the shift from a monetary driven economy to a fiscal driven economy...the list goes on.

 

U.S. stocks have enjoyed a nearly uninterrupted bull market since late 2009. Two factors have helped create a Goldilocks scenario driving this surge. First, the shock administered by the 2008-2009 financial crisis left stocks significantly undervalued, creating plenty of room for equity prices to recover. Second, U.S. inflation has consistently held below the Federal Reserve’s 2 percent target, leaving the central bank with little reason to tighten monetary policy.

 

Finally conditions are now changing.

 

Stocks are richly valued and at the same time, inflation looks set to overshoot the Fed's target in the medium term. The overshoot won't be large, but it could ultimately trigger faster rate hikes than presently are being priced by the market. That could cause the bond market's yield curve to invert, as short-term rates rise above those for longer-term maturities. Fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy.

 

This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. As Ray Dalio has pointed out, this is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

 

A yield curve inversion is normally a clear signal the economy is heading for a recession. We're not there yet, but the risks are rising.

 

Caution is warranted and longer term return expectations should be lower. Nevertheless, what so far looks like a purge of sorts, will likely be long-term positive; flushing out the excess and re-calibrating investor psychology. For now we see this pullback a potential opportunity to dollar cost down in existing positions as well as to initiate new positions at more attractive multiples. Nevertheless, a watchful eye should be set on volatility as measured by the VIX. For if the VIX continues to rise sustainably as the stock market rallies and retests its lows, more meaningful trouble may lie ahead.

 

Some things to consider:

 

The S&P 500 would have to fall an additional 52 percent to reach its long-term average valuation. Bulls have nothing to panic about yet, and bears have not been vindicated.

Screen Shot 2018-02-09 at 9.14.52 PM.png

The return of major volatility is unpleasant for many, but does give some much-needed negotiating power to investors in IPOs and stock sales. As stock volatility jumps -- as in recent days -- so the risk of loss rises and discounts should widen. The problem is that US startups don’t want to go public anymore and that's bad news for investors.

Screen Shot 2018-02-09 at 9.15.06 PM.png

The current market rout -- which is occurring smack dab in the middle of a nice earnings season -- may put a damper on the recent trend towards record-high takeover valuation.

Screen Shot 2018-02-09 at 9.15.18 PM.png

Musings


After a year of abnormally low volatility, this past week has been particularly gut wrenching. But these types of selloffs should be expected in the stock market from time to time. Let's remember that although the raging bull of the 1980s and 1990s which is likely the greatest of all time in U.S. stocks, investors were forced to deal with the 1987 crash, when stocks fell more than 33 percent in the span of a week. In addition, most investors forget there was an emerging-markets crisis in 1997 and 1998 that caused the S&P 500 to fall just shy of 20 percent. Stocks still charged afterward, reaching highs in 1999 and early 2000 before crashing after the tech bubble popped.

 

The stock market should not be mistaken for the economy. Fundamentals are still solid and while double-digit losses should be expected when investing in equities, investors must also realize that human beings tend to panic more often when money evaporates before their eyes. In the short-term, emotion rules. In the long-term, fundamentals prevail.

 

Bull markets end when economies go into recession, not because of high valuations or old-age. At present, there appears to be little on the horizon to suggest the economy is on anything but stable ground as the best-known recession triggers -- asset bubbles, oil-price spikes and interest-rate hikes -- all look reasonably unlikely.

 

Continue to buy and hold quality at a discount, shut off the screens, get some air and be grateful.


 

Logos LP January 2018 Performance



January 2018 Return: 1.57%

2018 YTD (January) Return: +1.57%

Trailing Twelve Month Return: +39.19%

CAGR since inception March 26, 2014: +21.33%

 

Thought of the Month


 

"Then the flood came upon the earth for forty days, and the water increased and lifted up the ark, so that it rose above the earth.” -Genesis 7:17-20




Articles and Ideas of Interest

 

  • Investors may want to calm down since history shows rising rates have been good for stocks. Using Kensho, a hedge fund analytics tool, CNBC looked at what happens during major periods of rising interest rates. The findings show there were six periods with major rises in interest rates in the last three decades. The market rose big during five of those instances and only fell slightly during the one lagging period.

          

  • 35 steps to a market bottom by Michael Batnick. Where are we and where are you?

    -1% Mock the permabears

    -2% Meh

    -3% Yawn

    -4% Off the highs

    -5% Pullback

    -6% Healthy correction

    -7% Buying opportunity

    -8% Stay the course

    -9% This too shall pass

    -10% Correction territory

    -11% I’m a long-term investor

    -12% Stocks always come back

    -13% Don’t panic

    -14% Draw lines on a chart

    -15% Look for attractive valuations

    -16% I knew this was coming

    -17% Blame Cramer

    -18% This sucks

    -19% I should buy some downside protection

    -20% Bear market

    -21% I should have listened to my gut

    -22% Buy when there’s blood in the streets

    -23% I was early

    -24% Is this the bottom?

    -25% This sucks

    -26% Uggggh

    -27% I can’t take this much longer

    -28% I sold my stocks

    -29% I’m never buying stocks again

    -30% Good thing I sold

    -31% I should buy gold

    -32% And silver

    -33% I don’t even care anymore

    -34% Glad I stopped looking

    -35% Bottom


     
  • President Trump’s first year in 14 metrics. A year ago, we chose benchmarks for his administration's progress. The results are in.

 

  • Gene editing - and what it really means to rewrite the code of life. We now have a precise way to correct, replace or even delete faulty DNA. Ian Sample explains the science, the risks and what the future may hold.

 

  • Post-work: the radical idea of a world without jobs. Work has ruled our lives for centuries, and it does so today more than ever. But a new generation of thinkers insists there is an alternative.

 

  • It’s the (democracy-poisoning) golden age of free speech. Here’s how this golden age of speech actually works: In the 21st century, the capacity to spread ideas and reach an audience is no longer limited by access to expensive, centralized broadcasting infrastructure. It’s limited instead by one’s ability to garner and distribute attention. And right now, the flow of the world’s attention is structured, to a vast and overwhelming degree, by just a few digital platforms: Facebook, Google (which owns YouTube), and, to a lesser extent, Twitter. Yes, mass discourse has become far easier for everyone to participate in—but it has simultaneously become a set of private conversations happening behind your back. Behind everyone’s backs. Not to put too fine a point on it, but all of this invalidates much of what we think about free speech—conceptually, legally, and ethically. The most effective forms of censorship today involve meddling with trust and attention, not muzzling speech itself. As a result, they don’t look much like the old forms of censorship at all. No wonder our political future is hackable.

 

  • Most unhappy people are unhappy for the exact same reason. In other words, every activity that didn’t involve a screen was linked to more happiness, and every activity that involved a screen was linked to less happiness. Perhaps the formula for phone addiction might double as a cure. Happiness is a skill you can build with consistent practice.

 

  • The driverless revolution isn’t coming anytime soon. Self-driving cars have come a long way, but still have a long way to go. We’ve all heard the story at some point in the past few years. The tech and auto industries are on the cusp of rolling out vehicles that can drive themselves and will forever transform the way we move. We’ll be able to summon driverless pods that will whisk us to our destinations, making personal vehicles unnecessary and freeing up all the space wasted on parking to be used for parks and public gathering spaces — or so they tell us.

 

Our best wishes for a fulfilling month, 

Logos LP

2017 Performance and 2018 Outlook

will-swann-527275.jpg

Good Morning,
 

Happy New Year and welcome to 2018! We hope that you all had a nice Holiday and were able to make some time to relax and refocus.
 

This week U.S. stocks rose to records as retail sales sparked optimism in the economy and JPMorgan Chase & Co. signaled tax cuts will bolster profits. The S&P 500 is enjoying its best 10-day start to a year since 2003. In that time period, it has rallied 4.2 percent. In the first 10 days of 2003 it gained 5.9 percent.
 

So far stocks have carried over the momentum from 2017  as the S&P 500 and Nasdaq have closed lower only once this year, while the Dow has fallen just twice. Heading into the end of the week treasuries pared losses that sent the two-year yield over 2 percent for the first time since 2008 as investors assessed an unexpected acceleration in core inflation that likely boosts the Federal Reserve’s case for higher rates.
  

The underlying pace of U.S. inflation unexpectedly accelerated in December amid increased housing costs, reinforcing the outlook for the Fed to raise interest rates several times in 2018.

 

Our Take
 

The markets are off to a blistering start in 2018 and we can’t say we are surprised. Pessimism has been high for years now and the clouds have begun to lift. Furthermore, in the year since President Donald Trump has been in office, the economy has done something it has been unable to do since 2005 — maintain 3 percent growth for three quarters in a row.
 

While the final numbers aren't in, economists Friday were ratcheting up growth projections to 3 percent or better for the fourth quarter, after December's strong retail sales and revisions to prior months. Perhaps a suggestion we made back in January 2017 with regards to Trump’s Braggadocio is in fact playing out: “Perhaps if businesses and consumers truly believe that Trump will “make America great again” the rhetoric will become reality as wallets open and corporate war chests are put to work. Sentiment is powerful and often precedes outcome.” 
 

An excerpt from our 2017 annual letter to our investors:        
                           

“Taken together, absent a black swan event (flashpoints include the nuclear programmes of Iran and North Korea, disputes between China and its neighbors, a slowdown or crash in China, strife in the Middle East and the politics of populism threatening the EU) we view 2018 to play out similarly to 2017. With the recent enactment of the Tax Cut and Jobs Act, even more money will flow into circulation and inflation will likely not tick up in any meaningful way as excess liquidity will likely continue to stream into financial markets (think buybacks and dividends) rather than be used to expand plants or buy equipment or other goods or services. As such, it is likely that staying long high quality stocks in 2018 will remain the best game in town.

                   

The good times are rolling and as we enter the new year we do so cautiously as it is during these periods that investors are most susceptible to folley. The classic law of nature bears re- iteration: If nothing bad is happening now, wait a bit and it will.

 

*To view our entire 2017 annual letter to our investors please click here.

 

Musings
 

One housekeeping issue: we will no longer be publishing this newsletter bi-weekly. It will now be published only once a month. Why?
 

Over the last few years we’ve learned that the frequency of writing is not always synonymous with its thoughtfulness. Most mutual funds, newsletters, and hedge funds discuss their ideas and holdings at length with their investors and followers with relative frequency whereas value investors such as Buffett, Pabrai and Spier write rarely let alone disclose their public equity portfolio positions. We have decided to follow suit, as we agree with Warren Buffett’s conclusion that investing is not a spectator sport as too frequent public discussion of current or potential investments may compromise independence of thought.
 

“Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.” -Warren Buffett
 

Having said that, we invite you to have a read of our 2017 annual letter to our investors linked above. We will also review our past 2017 MoneyShow investment ideas below. As well as those for 2018.

 

2017 MoneyShow Investment Ideas Reviewed
 

Peter Mantas

 

Huntington Ingalls Industries (NYSE:HII) : 2017 return: +29.13

-This remains a position in Logos LP.

 

Cemex SAB de CV (ADR) (NYSE:CX) : 2017 return: -6.6

-This was a short term peripheral opportunity we exited in 2017.

 

Matthew Castel

 

Syntel, Inc. (NASDAQ:SYNT) : 2017 return: +16.17

-This was a short term peripheral opportunity we exited in 2017.

 

AAON, Inc. (NASDAQ:AAON) : 2017 return: +11.75

-This remains a position in Logos LP.



2018 MoneyShow Investment Ideas

 

To download full report and analysis click here.

 

Peter Mantas

 

Luxoft Holding Inc. (NYSE:LXFT)

-This remains a position in Logos LP.

 

Del Taco Restaurants Inc. (NASDAQ:TACO)

-This is a new position in Logos LP.

 

Matthew Castel

 

Morguard Corporation (TSE:MRC)

-This is a new position in Logos LP.

 

Grupo Aeroportuario dl Srst SAB CV (ADR) (NYSE:ASR)

-This remains a position in Logos LP.



Logos LP December 2017 Performance


 

December 2017 Return: +3.89%

 

2017 YTD (December) Return: +33.84%

 

Trailing Twelve Month Return: +33.84%

 

CAGR since inception March 26, 2014: +21.36%

 

Thought of the Month

 

"The problem is to distinguish between being contrary to a misguided consensus and merely being stubborn.” - Robert Arnott and Robert Lovell Jr.



Articles and Ideas of Interest
 

  • Stock investors will benefit most from corporate tax overhaulOne of the worries about the large tax cuts for corporations is that stock-market investors will benefit more than working-class wages. There is a growing concern that much of the savings will be used for dividends or share repurchases, which would potentially boost the returns for those invested in the stock market. This is likely to accelerate U.S. inequalitybecause the wealthy are now by far the largest owners of equities. Almost half of all American households own some stock through direct purchases, mutual funds, ETFs or pensions, but the top decile controls the bulk of those assets. According to research from the New York University economist Edward Wolffthe top 10 percent of American households now own 84 percent of all stocks. That’s up from 77 percent ownership in 2001. Sadly the rest of US households may rue their binge of 2017. The latest data on the saving rate, which broke under 3 percent to 2.9 percent in November, the lowest since 2007, suggest that an encore to the ebullient buying over the holidays will not happen in the new year.

          

  • The end of globalisation as we know it? The period of hyperglobalisation that began in the early 1990s may be drawing to a close. Should deglobalisation come to pass, it could have far-reaching consequences for countries, corporations, and investors. Barclays puts together a nice overview of the issues in this report.

 

  • The next financial crisis is probably around the corner-we just don’t know from whereFinancial crises are happening more frequently, becoming almost a fixture of modern life, according to research by Deutsche Bank. While meltdowns remain difficult to see in advance, the next panic is almost certainly brewing, and it may well be provoked by the world’s major central banks. Deutsche Bank argues that crises have been increasingly frequent since the breakdown of the Bretton Woods system, which, after World War II, fixed exchange-rates and essentially linked them to the price of gold. That coordination ended in the 1970s when the US broke the dollar’s peg to the yellow metal. The link to a finite commodity helped limit the amount of debt that could be created. As strategists at the Frankfurt-based lender see it, the resulting fiat money system has encouraged rising budget deficits, higher debts, global imbalances, and more unstable markets. At the same time, banking regulations have been loosened. In the US, the industry may soon have fewer restrictions and less oversight, a mere 10 years since the last worldwide crisis.

 

  • Technology is destroying the most important asset in your life. Most of us come to realize at some point that money is a means, not an end. It affords opportunities, but as research has shown, there are diminishing returns to what it can do for you. In fact, the strongest link between money and well-being comes from its ability to buy you time through conveniences. Our time is limited, and the prevailing wisdom is that the more we have of it, the more opportunities there are for us to experience joy and fulfillment. But is that the whole story? Is time really what adds more to life? Quartz argues convincingly otherwise. The most important asset in your life isn’t time, but attention. The quality of the experiences in your life doesn’t depend on how many hours there are in the day, but in how the hours you have are used. You can spend 80 years of a life with as much free time as you want and still not get out of it as much as someone who only lived for 40 years but managed to appropriately direct attention to the things that mattered to them.
     

  • 2018: The year of the cryptocurrency craze. Every successful new technology undergoes a Cambrian Era-style explosion of growth in which we try to use it for everything. Email, search, social networking—each passed through its “this will solve all our problems!” phasebefore we figured out what its best applications and limitations were. With the Bitcoin bubble testing astronomical prices every day, cryptocurrencies and the blockchain technology that drives them are now taking their turn in this one-tech-fits-all role. What's next? Wired magazine puts together a sober overview of past present and future. For the fascinating and contrarian case that in 10 years nobody has come up with a real use for blockchain see here.

 

  • AI does not have enough experience to handle the next market crash. Artificial intelligence is increasingly used to make decisions in financial markets. Fund managers empower AI to make trading decisions, frequently by identifying patterns in financial data. The more data that AI has, the more it learns. And with the financial world producing data at an ever-increasing rate, AI should be getting better. But what happens if the data the AI encounters isn’t normal or represents an anomaly? Quartz investigates.

 

  • 30 years after Prozac arrived, we still buy that chemical imbalances cause depression. Some 2,000 years ago, the Ancient Greek scholar Hippocrates argued that all ailments, including mental illnesses such as melancholia, could be explained by imbalances in the four bodily fluids, or “humors.” Today, most of us like to think we know better: Depression—our term for melancholia—is caused by an imbalance, sure, but a chemical imbalance, in the brain.This explanation, widely cited as empirical truth, is false. It was once a tentatively-posed hypothesis in the sciences, but no evidence for it has been found, and so it has been discarded by physicians and researchers. Depression is now a global health epidemic, affecting one in four people worldwide. Great piece in Quartz suggesting that treating it as an individual medical disorder, primarily with drugs, and failing to consider the environmental factors that underlie the epidemic—such as isolation and povertybereavement, job loss,long-term unemployment, and sexual abuse—is comparable to asking citizens to live in a smog-ridden city and using medication to treat the diseases that result instead of regulating pollution.

 

Our best wishes for a fulfilling month,  
 

Logos LP

What Is The Purpose Of Tax Reform?

cristina-gottardi-475647.jpg

Good Morning,
 

U.S. stocks climbed to records as the latest jobs report boosted optimism in the world’s largest economy, continuing equity rallies that took hold in Asia and Europe. The dollar posted its best week this year.

 

The S&P 500 Index and Dow Jones Industrial Average closed at all-time highs in light volume after data showed hiring increased by more than forecast in November and the unemployment rate held at a 17-year low of 4.1%. The dollar briefly edged lower as investors assessed tepid wage growth that missed estimates, then resumed its fifth consecutive gain. Average hourly earnings — a closely watched component of the report — rose 0.2 percent for November and 2.5 percent for the year. Economists expected a monthly increase of 0.3 percent or 2.7 percent for the year. Ten-year Treasury yields inched higher.

 

The jobs data added to a run of recent news that has been contributing to investor confidence after the U.S. government averted a shutdown and tax reform negotiations made progress.



Our Take
 

This melt-up may have legs as forecasts for U.S. growth have been too pessimistic. Nevertheless, despite a mostly solid run of job growth, 2017 ends pretty much where it began — with wage growth stuck and inflation subdued.

                                               

This nonfarm payrolls report brought with it news all too familiar to the post-crisis economy. The 228,000 jobs created formed a solid foundation, but the pedestrian 2.5 percent average hourly earnings growth left many scratching their heads wondering how a 4.1 percent unemployment rate, the lowest in 17 years, still wasn't producing fatter paychecks.

 

The lack of wage growth at the aggregate level despite the declines in the unemployment rate and strong job gains remain a mystery.

 

Central bankers can control short-term interest rates but as has become glaringly obvious in the post recessionary world, long-term ones are out of their purview.  

 

Ms. Yellen’s Fed has raised rates twice this year and will likely raise a third time this month. In October the Fed began reversing quantitative easing (QE), purchases of financial assets with newly created money. Despite all this monetary tightening, yields on ten year Treasury bonds have fallen from around 2.5% at the start of 2017 to about 2.3% today. As a result the “yield curve” is flattening. The difference between ten year and two year interest rates is at its lowest since November 2007.

 

The yield curve matters as it has inverted- ie. long-term rates have dipped below short term ones-just before each of the past seven American recessions.

 

The yield curve reflects where markets expect Fed Policy to go and what we are seeing is an expectation that rates are not likely to increase.

 

Why? Falling inflation risk may explain the falling yield curve but as the Economist suggests, what is most likely is that markets are losing confidence in the Fed’s ability to raise rates without inflation sagging. This nonfarm payrolls report will only accelerate this loss of confidence.  

 


Musings
 

So what of Trump’s new tax reform package? Despite Trump’s approval ratings hitting a new low, the market appears to be applauding it. From our perspective, although this tax package will likely stimulative in the short term, in the long term a fiscal stimulus through generalized tax cuts is unnecessary, and destabilizing, in an economy running substantially above its 1.5 percent potential (and non-inflationary) growth on the steam of exceptionally loose monetary policy.

 

Furthermore, deep corporate tax-cuts (which have been tried before by Ronald Reagan) don’t seem to work.

 

The Trump team’s argument goes something like this: Cutting taxes on businesses will free up profits they will invest in new factories, research and development, and new equipment. The resulting investment boom will spur growth, as firms hire and as workers harness new ideas and equipment to produce more than they used to.

 

If we look at the Reagan years, investment fell—that was the weakest period of investment in the postwar period.

 

The same is likely to occur today. Firms aren’t cashed constrained. They aren’t asking for more money then and they certainly aren’t asking for more now. In fact, companies don’t even know what to do with their money. Companies today are sitting on record cash piles (roughly $1.84 trillion).

 

When asking the question of what companies will do with a windfall of after tax-profits,  Quartz points out that the odds that it will flow back into the real economy (investment) aren’t looking good. Many major companies are planning to hand that money to their investors through dividends and share buybacks. In fact, when Gary Cohn, Trump’s economic guru, asked a gathering of corporate leaders who was planning to reinvest their tax cuts, few raised their hands, Bloomberg recently reported. What these cuts will likely do is inflate asset prices even further as the bill directs the largest tax cuts as a share of income to the top 5 percent of taxpayers and by 2027, taxes on the lowest earners would go up.

 

This at a time when we find ourselves in what could be argued is an “everything bubble”. At a time when a cool $1 million which has long been considered the gold standard of retirement savings, has become only a fraction of what you will really need.A time when 44 percent of millennials would prefer to live in a socialist country, compared with 42 percent who want to live under capitalism. A time when 41 million Americans officially live in poverty. A time when  bitcoin is the most popular search on Google as well as the most popular news story on virtually every news outlet….

 

What goes up must come down….In this environment, where the balance of risk is likely to the downside, buying EXTRA thoughtfully is warranted.



Logos LP November Performance


 

November 2017 Return: +7.33%

 

2017 YTD (November) Return: +28.83%

 

Trailing Twelve Month Return: +35.67%


CAGR since inception March 26, 2014: +20.65%


 

Thought of the Week 

 

"Do you wish to rise? Begin by descending. You plan a tower that will pierce the clouds? Lay first the foundation of humility.” -Saint Augustine



Articles and Ideas of Interest
 

  • Collective intelligence can change the world. Combining the minds of humans and machines to avoid confirmation bias. A group with a more autonomous intelligence will fare better than one with less autonomy. It will fall victim less often to the vices of confirmation bias or functional fixedness. It is more likely to see facts for what they are, interpret accurately, create usefully or remember sharply. Knowledge will always be skewed by power and status as well as our pre-existing beliefs. We seek confirmation. But these are matters of degree. We can all try to struggle with our own nature and cultivate this autonomy along with the humility to respond to intelligence. Or we can spend our lives seeking confirmation. Over the Holidays -- give yourself the freedom to explore, think and imagine without constraint.

          

  • There’s an implosion of early-stage VC funding, and no one’s talking about it. Amid record amounts of capital raised by VCs worldwide, and a sharp rise in the number of private “unicorns” valued at $1 billion-plus, therehas been a quiet, barely noticed implosion in early-stage VC activity worldwide. This is now a three-year trend, so cannot be “blamed” on macro or short-term factors. More worryingly, it comes at a time of unprecedented stock market valuations worldwide. Whether the early-stage VC implosion is healthy or disastrous for the tech ecosystem remains to be seen. This is likely healthy over the long run in order to break Silicon Valley’s never-ending startup cycle: Startup employees get rich quick and quit to become venture capitalists.

 

  • Mysterious object confirmed to be from another solar system.Astronomers have named interstellar object ’Oumuamua and its red colour suggests it carries organic molecules that are building blocks of life. Interestingly, NASA has also found another 20 promising planets for humans to colonize.

 

  • Net neutrality: catastrophe or a non-event?  Some suggest that the internet is dying and that repealing net neutrality hastens that deathOthers suggestthat concerns over net neutrality are overblown as public blowback in past cases of service providers blocking sites that are competitive has been fierce, scaring other providers from following suit. Second, blocking competitors to protect your own services is anticompetitive conduct that might well be stopped by antitrust laws without any need for network neutrality regulations.

     

  • Will BlackRock and Vanguard own everything by 2028? Imagine a world in which two asset managers call the shots, in which their wealth exceedscurrent U.S. GDP and where almost every hedge fund, government and retiree is a customer. It’s closer than you think. BlackRock Inc. and Vanguard Group  — already the world’s largest money managers — are less than a decade from managing a total of $20 trillion, according to Bloomberg News calculations. Amassing that sum will likely upend the asset management industry, intensify their ownership of the largest U.S. companies and test the twin pillars of market efficiency and corporate governance.

 

  • Robots aren’t killing jobs fast enough-and we should be worried.Interesting perspective on this. In fact, data show that the US labor market is the calmest it has been in more than 160 years. The problem is there is not enough disruption. If anything, we need more jobs destroyed. That argument, made by Robert Atkinson and John Wu of the Information Technology and Innovation Foundation, a think tank promoting policies that spur innovation, is a novel one. Their belief that we are in an age of stagnation, not disruption, is based on a decade-by-decade analysis of how quickly occupations have been appearing and disappearing since 1850. No wonder Google, Amazon have found that not everyone is ready for AI.

 

  • How high will bitcoin go? Should you buy in? What is next for cryptocurrencies? Well ladies and gents even the most staunch haters arethrowing in the towel with Jamie Dimon recently suggesting a reversal of his position stating that “I'm open-minded to uses of cryptocurrencies if properly controlled and regulated." Make no mistake this is a frenzy much like the dot-com bubble in 1995. Perhaps even larger as bitcoins appear to be at least 4 times as expensive as dot-com stocks were at their height. Interestingly, few are talking about its energy use implications: By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today. Is this sustainable? The cryptocurrency’s price is completely unreal. Then again so is money...The problem is that it is clear that this is not a currency. Most are buying and holding in hopes of future gains. This is an asset class and as seen many times before, when lots of investors buy an illiquid asset, the price can rise exponentially yet at some point the urge to turn all those digital zeros into cars and iPhones will prove too great. Getting out of an illiquid asset can be much harder than getting in. When that rush inevitably happens, people are going to get hurt. Rule number 1: don’t lose money. Rule number 2: don’t forget rule number 1.

 

  • Me, myself and iPhoneFascinating research presented in the Economistsuggesting what we already know (subconsciously): the many hours young people spend staring at their phones is having serious effects. Adolescents who spent more time on new media-using Snapchat, Facebook or Instagram on a smartphone were more likely to agree with remarks such as: “The future often seems hopeless” or “I feel like I can’t do anything right.” Those who used screens less, spending time playing sport, doing homework, or socialising with friends in person, were less likely to report mental troubles.

 

Our best wishes for a fulfilling week,  
 

Logos LP