Political Risk and "Expert" Bearishness

Good Morning,

Significant movement for U.S. stocks last Friday closing mixed due to pressure from this year's best-performing sector: technology.


The Nasdaq composite hit a record high at the open before closing 1.8 percent lower. Shares of Apple, Facebook, Amazon, Netflix and Google-parent Alphabet all fell more than 3 percent.

The tech-heavy index also posted its worst weekly performance of the year. The S&P 500 closed 0.1 percent lower, erasing earlier gains, with information technology dropping more than 2.5 percent. Big tech was slammed as investors took profits from the group, which some fear has become a massive market bubble.


These concerns were bolstered by a report released by Goldman Sachs on the top five outperforming mega-cap names in tech with some warnings on valuations and concerns that their volatility has become extraordinarily low. In fact, the stocks had become closely correlated to safe haven plays, like bonds and utilities.


Meanwhile, the Dow Jones industrial average rose about 90 points, notching a record close as out of favor financials and industrials led.


Also this week we saw another unfortunate chapter of Donald Trump’s Presidency unfold. Hiding in plain sight in former FBI Director James Comey’s testimony Thursday before the Senate Intelligence Committee was a potentially major new avenue for special counsel Robert Mueller’s investigation of Russia-related crimes: the possibility that President Donald Trump committed a federal crime by lying to Comey about his connections to Russia and activities on his 2013 visit there.

Our Take

“Big tech” could be vulnerable in the near term as investors rotate into other groups that have lagged such as financials and energy yet the long-term earnings growth story remains intact. If anything this rotation is evidence of a healthy market alive to the issue of valuations supported by sound fundamentals (almost 40 percent of fund managers think that global equity markets are overvalued, the highest level since January of 2000. And 80 percent see U.S. markets as the most overvalued in the world).

Interestingly, looking back at the year 2000, all five companies have eight times more cash than the big tech stocks had in the bubble.


As for the Trump show, this week what became more clear is that the self-inflicted wounds of what appears to be an undisciplined presidency are increasingly likely to blow its chances of passing any of the anticipated economic stimulus measures. The trifecta of tax reform, repatriation and infrastructure investment could put the U.S. on very strong footing for the next several decades but this opportunity seems to be slipping away.


Barry Ritholtz in an interesting piece for Bloomberg, suggests that the president is becoming radioactive. He is having problems hiring outside counsel: four top law firms have reportedly turned him down. Resignations are mounting. Diplomats are revolting. Hundreds of key positions have gone unfilled as people increasingly perceive working for Trump as a career killer.


What now appears increasingly likely is not a dismantling of the Trump administration from the outside. But an implosion from within. Furthermore, although there may be no serious collusion with the Russians, there is now certain to be a wide-ranging independent investigation into all things Trump. This investigation will likely make governing even more difficult than it already is...


But, some may say, stocks are up, so how bad can it be? It’s true that while Wall Street has lost some of its initial excitement about Trumponomics the market is still sitting close to all time record highs as investors and businesses don’t seem to be pricing in the risk of disastrous policy.


Or aren’t they? Interestingly, in a recent research note put out by FactSet the initial excitement does not appear to be translating into stronger performance for most measures of the real economy so far in the first half of 2017. Even the initial surveys suggesting optimism have retreated somewhat as the equity markets have flattened out as progress on reforms has stalled in Washington D.C.


Business and consumer surveys initially reflected optimism, but we have seen small retreats in sentiment measures for both in the second quarter. *Note that the sentiment indicators may have pulled back recently, but they still remain elevated and near longer-term highs.


Perhaps the big money, which classically tends to equate wealth with virtue, is beginning to consider (even Ray Dalio is starting to break a sweat as Trump consistently chooses conflict over cooperation) the potential risks posed by this increasingly self-destructive Presidency….



On a not so unrelated topic, I came across two notable bearish "expert" perspectives on the American economy this week. Good old gurus Bill Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, and Paul Singer, founder of hedge fund Elliott Management Corp. Speaking last week at the Bloomberg Invest New York summit on Wednesday.


They’re message: a crash is coming. Their argument: The Federal Reserve flooded the U.S. economy with cheap money after the 2008 financial crisis by holding interest rates near zero and beefing up its balance sheet. Corporations and individuals responded by bingeing on debt and risk assets -- as the Fed encouraged them to do so.


Now we’ve heard this argument many times before. In fact we’ve basically heard it every year since 2013. Should we be worried as these two investors are considered by many to be two of the greats having both superbly navigated the 2008 financial crisis?


There is no doubt that debt levels should be watched closely yet what is the data telling us?

As shown in the chart above, after over eight years, the nominal outstanding amount of U.S. consumer debt which includes mortgages eclipsed its $12.6 trillion peak from Q4 2008. While the $12.7 trillion current outstanding amount of consumer debt has made a new high, consumer debt has seen zero growth in the last nine years compared to a near doubling of debt in the five or so years that preceded the prior peak.


The consumer loan delinquency rate is at a 30 year low.

And this chart paints a positive picture of where the consumer stands regarding paying off their loans:

Nir Kaissar for Bloomberg reminds us that Gross's and Singer’s investment realms -- high-grade bonds and multistrategy hedge funds, respectively -- have been two the biggest laggards since the financial crisis. The S&P 500 has returned 18 percent annually from March 2009 through May, including dividends. By contrast, the HFRI Fund Weighted Composite Index -- a collection of various hedge fund strategies -- has returned 6.2 percent annually, and the Bloomberg Barclays U.S. Aggregate Bond Index has returned 4.2 percent annually.


Thus, a market meltdown would perhaps be the best thing that could happen to Gross and Singer. Should we therefore brush off such warnings?  


The answer is no. Although the consumer’s balance sheet appears to be healthy, vigilance is necessary as signs are now emerging in the credit markets that leverage is on the rise with a surge in corporate debt issuance that has steadily pushed investment-grade corporate leverage to a new peak for this cycle, as measured by debt-to-equity ratios. The ratio for companies in investment-grade indexes is around 2.8 times and 4.2 times for those on high-yield indexes.

Even though the ratios are near historic highs, market volatility as measured by the VIX is near a record low. Yes, the VIX is often criticized as a good measure of stock market volatility, but the divergence between leverage and VIX isn’t sustainable. We may be looking at a reversion to the mean as volatility is bound to pick up as investors and markets come to realize that low volatility and rising leverage may no longer be a suitable marriage.


Nevertheless, none of this suggests a 2008 style meltdown. What is likely is simply for the market to hang around its current level for years, waiting for earnings to catch up with stock prices as there are compelling reasons that companies will remain incredibly profitable for the foreseeable future. Thus, what vigilance in the face of such warnings should mean is what it has always meant to the prudent long term investor: buy right and hold on. You’re never going to get a perfect all-clear or get-out-now signal from the markets and this time is no different.

Logos LP Updates

May 2017 Return: 3.68%

2017 YTD (May) Return: 23.36%

Trailing Twelve Month Return: 31.01%

Annualized Returns Since Inception March 26, 2014: 28.471%

Cumulative Return Since Inception March 26, 2014: 92.53%

*All returns are reported unlevered

Thought of the Week


"Simplicity is not the goal. It is the by-product of a good idea and modest expectations.” -Paul Rand

Articles and Ideas of Interest

  • 6 Long-Term Economic and Investment Themes. Good list from Gary Shilling. 1) Huge fiscal stimulus, primarily infrastructure and military related 2) Globalization that shifted manufacturing from West to Asia is largely completed 3) Worldwide aging of populations 4) The long-promised Asian Century of global leadership is unlikely to come to pass due to the completion of globalization, the slow shift from export led domestic spending driven economies, government and cultural restraints, aging and falling populations 5) Disinflation with chronic deflation likely, especially as services follow goods in price retreats 6) The bond rally of a lifetime continues


  • Stop being positive and just cultivate neutrality for existential cool. Do we believe in the superiority of optimism? Culturally, we’re obsessed with positivity—our corporations measure worker glee, nations create happiness indices, and the media daily touts the health and social benefits of optimism. Thus, the good answer is to see the glass half full. Otherwise, you risk revealing a bad attitude. But are things so mutually exclusive? Is the glass not in a state of perpetual change? Can neutrality set us free? Can it help us see something more like the truth, what’s happening, instead of experiencing circumstances in relation to expectations and desires? The pressure to succeed—or to define success conventionally—can be subverted with neutrality. Things can go just so or totally awry once you understand that all things are fine, their upsides and downsides to be determined.


  • Mary Meeker’s 2017 internet trends report. In the most anticipated slide deck of the year Kleiner Perkins Caufield & Byers partner Mary Meeker looks at trends in digital and beyond. Of great interest is her coverage of interactive games as the motherlode of tech product innovation + modern learning (slides 113-150). Interesting concepts as we debate whether machines will replace most roles performed by humans. Such research supports that rising engagement in digital games is preparing us for the merger of man with machine.


  • Leverage: Gaining disproportionate strength. Wonderful explanation of the concept of leverage. Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.


  • Passive investing is worse than...the misuse of antibiotics. The FT argues that the passive investment industry has become an oligopoly, with three large managers “drawing on seemingly limitless economies of scale” and amassing assets “simply by slashing costs” — both things, surely, that a blue-blooded capitalist would think is a sign of progress. Passive investing erodes competitive forces, because companies in the same sector end up with the same investor base and thus could pricing mechanisms break down?


  • Is the Canadian economy finally smooth sailing? Canada’s labor market continued surprising in May, with a greater-than-expected 54,500 jobs gain that also finally came with signs of a pick-up in wages. The employment gain -- the third biggest one-month increase in the past five years -- was driven by the addition of 77,000 new full-time jobs, which offset falling part-time employment. Economists had forecast a 15,000 increase in employment. The employment gains bode well for the continuation of the country’s expansion, which is the fastest among the Group of Seven, as Canada emerges from the oil price collapse and benefits from a soaring real estate market. It also could raise pressure on the Bank of Canada, which has been citing worries about slack in the economy for being cautious, to increase rates sooner. Certain funds are even becoming bullish on Canadian stocks seeing oil prices recovering. Nevertheless, it is doubtful that the bank of Canada will raise interest rates any time soon. Vulnerabilities remain. What should be watched closely is the impressive growth of Home Equity Lines Of Credit (HELOCs). A recent report from the Financial Consumer Agency of Canada explored this growth and found that “HELOCs offer relatively low interest rates and convenient access to large amounts of revolving credit, which may encourage some consumers to use their home equity to fund a lifestyle they cannot afford.” Keep an eye on the temperature of the market...


Our best wishes for a fulfilling week, 

Logos LP

How To Make Better Decisions

Good Morning,

U.S. stocks limped into the weekend on a sluggish final day of trading, while the dollar fluctuated with oil as investors assessed data showing the U.S. economy on solid footing.


The S&P 500 Index moved between gains and losses before closing higher by less than a point -- good enough for a seventh straight gain and fresh record in trading 25 percent below the 30-day average.


The U.S. economy’s first quarter GDP came in this Friday and it wasn’t so miserable after all, as consumption contributed more to growth and business investment was even stronger than thought.

Our Take

The S&P 500 and Nasdaq indexes both hit record highs this week, and the Dow flirted with its own all-time high. Investors seem to be signalling that everything is honky-dory even as the political headlines remain concerning. Tax and healthcare reform appear to be even further out of reach as the investigations into the Trump administration (now Jared Kushner under scrutiny) deepen.


But are these headlines so concerning? In the short-term political events can trigger short term buying opportunities but research has shown that political crises rarely have a lasting impact on markets. There is an abundance of liquidity in this market with a lot of cheap money chasing a returns. This is no doubt one factor contributing to the rally, but more importantly investors are focusing on the strengthening economy, signs from the central bank that interest rates will continue to rise, and the best quarter of corporate-earnings growth in five years.


Furthermore, there still exists a record amount of bearishness. The S&P 500 Index has climbed 7.9 percent since January, including its biggest gain since April in the just-completed week. At the same time, short interest as a proportion of total shares outstanding has also expanded, rising by 0.3 percentage point to 3.9 percent. Never before has an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg that goes back to 2008.

There is no euphoria!


Bloomberg this week reported that investors are pulling money out of stocks after the initial rush to buy faded along with the optimism over Trump’s pro-growth policy. They have withdrawn $20 billion from exchange-traded funds and mutual funds this quarter, reversing about one third of the inflows seen between November and March, according to data compiled by Bloomberg and Investment Company Institute.  


Bullish bets are also shrinking in the futures market. Net long positions in S&P 500 contracts held by large speculators fell in seven of the last eight weeks and were closer to turning net short than any time since December, data compiled by Commodity Futures Trading Commission show.


The challenge for short sellers is how long they can stay solvent before being forced to buy back the shares that they have borrowed and sold. And the pressure to cover is building. The potential for a swift melt up is increasing…..



Last weekend I was on vacation and had the opportunity to read a wonderful book “Charlie Munger: The Complete Investor” by Tren Griffin. Munger is one of the world’s most successful investors better known as Warren Buffett’s partner at Berkshire Hathaway.


What is most interesting about Munger is not his success as an investor but the way he thinks and keeps his emotions under control.


The book offers a great overview of Munger’s ideas and methods which can help us make better decisions, be happier and live a more fulfilling life. Why? Because investing, like life is about decision making. Everyday we are faced with a spectrum of possible decisions which will set us along one path or another.


As such, misjudgement can wreak havoc upon the outcomes of our lives.


What is the psychology of human misjudgement?


Humans have developed simple rules of thumb called heuristics, which enable them to efficiently make decisions. Heuristics are essential as without them humans would be unable to process the vast amount of information they face on a daily basis.


The problem is that these shortcuts can sometimes result in tendencies to do certain things that are dysfunctional.


The upside is that we can learn to identify these dysfunctional tendencies and overcome them. This is the key to better decision making. What are some of the most common of these tendencies? There are over 20 explained in the book but these are those that stood out most:


  1. Liking/Loving Tendency

    1. People tend to ignore or deny the faults of people they love and also tend to distort the facts to facilitate love.

  2. Inconsistency-Avoidance Tendency

    1. People are reluctant to change even when they have been given new information that conflicts with what they already believe. The desire to resist any change in a given conclusion or belief is particularly strong if a person has invested a lot of effort in reaching that conclusion or belief.

  3. Kantian Fairness Tendency

    1. Humans will often act irrationally to punish people who are not fair. In other words they may act irrationally when presented with a situation that they feel is unfair. Some would rather lose money in an investment than see another person benefit from “perceived” unfairness.

  4. Envy/Jealousy Tendency

    1. Very primal emotions are triggered when humans see someone with something they don’t have often causing dysfunctional thoughts and actions. In this world of abundance there is nothing but unhappiness to be gained from envy.

  5. Reciprocation Tendency

    1. The urge to reciprocate favors and disfavors is so strong that people will feel uncomfortable until they can extinguish the debt.

  6. Simple, Pain-Avoiding Denial

    1. People hate to hear bad news or anything inconsistent with their existing opinions and conclusions. If something is painful people will work to even deny the reality.

  7. Excessive Self-Regard Tendency

    1. People tend to vastly overestimate their own capabilities. The most effective way to reduce risk in any situation is to genuinely know what you are doing.

  8. Deprival Super-Reaction Tendency

    1. Loss aversion- we irrationally avoid risk when we face the potential for gain, but irrationally seek risk when there is a potential for loss.

  9. Social Proof Tendency

    1. Humans have a natural tendency to follow a herd of other humans. We view a behaviour as more correct to the degree we see others performing it. This is how bubbles form. The herd is rarely correct.

  10. Authority-Misinfluence Tendency

    1. People tend to follow people who they believe are authorities or have the right credentials. Especially when they face risk, uncertainty or ignorance.


Think independently!

Thought of the Week

"The best thing a human being can do is help another human being know more.” - Charlie Munger

Articles and Ideas of Interest


  • The meaning of life in a world without work. As technology renders jobs obsolete, what will keep us busy? Sapiens author Yuval Noah Harari examines ‘the useless class’ and a new quest for purpose. Could playing virtual reality games be the answer? But what about truth? What about reality? Do we really want to live in a world in which billions of people are immersed in fantasies, pursuing make-believe goals and obeying imaginary laws? Well, like it or not, Harari suggests that may be the world we have been living in for thousands of years already...


  • Why you should learn to say no more often. The NYT suggests that humans are social animals who thrive on reciprocity. It’s in our nature to be socially obliging, and the word no feels like a confrontation that threatens a potential bond. But when we dole out an easy yes instead of a difficult no we tend to overcommit our time, energy and finances. Do you have the ability to communicate ‘no’ and reflect that you are actually in the driver’s seat of your own life?


  • The cryptocurrency mania may just be starting. Practically this entire week on CNBC the top 5 most popular articles were bitcoin related with bitcoin more than doubling in price this year alone and its closest rival Ether up over 2,300 percent! Yes 2,300 percent. There are a few theories for why the currencies have been rallying so much the most convincing being that bitcoin has been getting support from certain governments and investors and that the ethereum blockchain has been getting serious backing by major corporations wishing to use the technology for smart contract applications. I have no interest in trading currency or speculating on its price action but what worries me about products like Ether is that they can be cloned. The people buying Ether are buying a specific blockchain while the technology underlying it is what is most valuable. Cryptocurrencies are proliferating with new currencies being launched at record speeds. Canada-based Kik's cryptocurrency, Kin just launched this week which is also based on the ethereum blockchain. If I were to invest in a crypto currency I would look at bitcoin and take 1% or less of what I own, buy bitcoin with it, and then forget about it for at least the next five years; ideally the next decade. The way I see it you will either lose 1% of your net worth or make incredibly large sums. You can find the ways to buy it here.


  • Toronto homeowners are suddenly in a rush to sell. Toronto’s hot housing market has entered a new phase: jittery. After a double whammy of government intervention and the near-collapse of Home Capital Group Inc., sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren’t attracting the bidding wars their neighbors saw just a few weeks ago in Canada’s largest city. Interestingly, a Canadian regulator this week said it disciplined two mortgage brokers who funneled business to Home Capital Group Inc., marking the first disclosure of action taken against dealers who submitted fraudulent loan applications to the embattled mortgage lender. The Financial Services Commission of Ontario conducted its own review into Home Capital in relation to the company severing ties in 2015 with 45 brokers who used falsified client income on applications. This is a big deal….this means that many Canadians may be delinquent or be under real stress in affording their home since who knows what they put down as income. According to Equifax, mortgage fraud jumped 52 percent last year from 2011, showing the issue may only be growing. House of cards? No wonder a recent Manulife study indicated that a mere 10% hike to mortgage payments would sink almost ¾ of Canadian homeowners. Robert Shiller for the NYT reminds us how tales of “flippers” led to the last housing bubble.


  • The phrase “late capitalism” is suddenly everywhere. The Atlantic suggests that “Late capitalism,” in its current usage, is a catchall phrase for the indignities and absurdities of our contemporary economy, with its yawning inequality (new research suggests that your financial fate is sealed by the time you turn 25) and super-powered corporations (new research also suggests that employers often implicitly, and sometimes explicitly, act to prevent the forces of competition from enabling workers to earn what a competitive market would dictate, and from working where they would prefer to work) and shrinking middle class. Interesting read chronicling the perverse ways our “developed” economy is progressing. What do growth and productivity even mean in an economy that has moved from manufacturing (whose products can be counted) to services (which can't be)? Do economies driven by information and software need new metrics for progress? And what, if anything, can an economy at the technological frontier do to make living standards rise faster?


Our best wishes for a fulfilling week, 

Logos LP

The Most Precious Resource Of Our Era: Data

Good Morning,

U.S. equities closed mostly lower on Friday as investors digested a tough week for retailers as well as mixed economic data.


Several retailers, including Macy's and Nordstrom, saw their stocks tank this week after reporting weaker-than-expected quarterly results, putting the sector under pressure.

The dollar fell while Treasuries rallied after tepid data on retail sales and inflation in the U.S. economy rekindled concern that growth won’t accelerate to levels economists project.


Consumer prices rebounded last month, though at a slower pace than expected, while retail sales advanced after an unexpected drop in March. That was enough to support the case for Federal Reserve tightening in June, though not enough to push stocks higher or dislocate bonds. Investors cast a wary eye on Washington, where President Donald Trump escalated his war with fired FBI director James Comey at the same time his cabinet attempted to move forward on trade and regulatory reforms.

While that was a slowdown from March's 2.4 percent increase, the year-on-year gain in the CPI was still larger than the 1.7 percent average annual increase over the past 10 years.


Overall markets were pretty quiet this week as the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 10 earlier this week, raising concerns about complacency in the market.


In addition, with valuations at record levels many investors and commentators are still actively seeking to identify the next “boogeyman” that will tank markets.


Our Take

In light of fears surrounding the low VIX reading in addition to bearish sentiment I want to highlight two things:


  1. Since September 2001, the S&P has secured 311% of its gains when volatility is as low as it is now.

  2. The first step of a corporate earnings rebound is now in the books with a 13%+ increase in year over year profits being reported in Q1.


Moving to the political front, I’m tired of the attention this man continuously garners, but Donald Trump’s dismissal of FBI Director James Comey on Tuesday merits attention for all the wrong reasons. This is the third time he’s fired someone involved in an investigation of him or his associates.


The bureau has been probing Russian involvement in the U.S. election and possible involvement of Trump associates since the summer. Earlier, former acting U.S. Attorney General Sally Yates was dismissed after she refused to defend Trump’s first travel ban. And former Manhattan U.S. Attorney Preet Bharara was initially asked to stay on in his role before being fired in March.


Bloomberg’s helpful graphic shows how, in each of these cases, the justification for dismissal was inconsistent with prior actions, or immediately followed events related to investigations.


How can we interpret this dismissal? As Timothy L. O’Brien for Bloomberg View opines: self-preservation. There is no point trying to analyze Trump's motives and actions as rational and long-term oriented.  He clearly doesn’t care about policy or process. So searching for "strategy" or "deal-making prowess" in the president is usually a “fool's errand”.


What drives Trump today, and what has always driven him, are twin forces: self-aggrandizement and self-preservation. Most of his public actions can be understood as a reflection of one or both of those needs.


Comey’s firing was a manifestation of the second force: self-preservation. He came for the FBI, what’s next? The rule of law? Nevertheless, while unnerving for world leaders, citizens and investors, at the end of the day the firing is unlikely to lead to previously unforeseen problems in enacting health care and tax reform.


On a more positive note, the election of Emmanuel Macron in France is a clear repudiation of populism as represented by Marine Le Pen. This is a remarkable accomplishment at 39 years old. Macron has managed to triumph over the two parties that have dominated the presidency since 1958 “potentially” heralding in a new era of forward thinking politics.


I say “potentially” as now comes the hard part: turning his political movement into a vehicle capable of winning a majority, or at least garnering enough seats in parliament to govern or form a coalition. We predict that he will win a majority.



More and more buzz is being generated about those who control the most precious resource of our era: data. Like the oil majors of days past when oil was the most precious resource on the planet, the wise are turning their gaze to the giants that deal in data, the oil of the digital era.


And so they should.


These behemoths: Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft- look to be unstoppable. They are (unsurprisingly) the most valuable firms in the world the likes of which even Warren Buffett and Mark Cuban Marvel over. Buffett this week went so far as to say that he was “dumb” not have have recognized their brilliance sooner and Marc Cuban stated that these companies are still undervalued. I would agree.


Few would wish to live without the products/services of any of these companies which underpin both our personal and professional lives. On their face these companies do not appear to transgress antitrust rules yet their control of our data gives them tremendous power.


As data proliferates, those who control it are better able to compete by developing better products, services and experiences thereby creating an even stronger protective moat.


Furthermore as the Economist points out, the possibility of these incumbents being blindsided by a startup in a garage in data age is becoming increasingly slim. They explain that “The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat.”


A current and obvious example is Snapchat. If the business does not collapse under its own unprofitability, Facebook will continue to bleed it out by successfully mirroring its most attractive features.


Interestingly, The Economist suggests that antitrust authorities should move into the 21st century by not considering size as the deciding factor in a merger but rather take into account the size of a firm’s “data assets” when assessing the impact of deals. They also suggest that regulators could loosen the grip that providers of online services have over data and give more control to those who supply them with the data aka: consumers. They prescribe more transparency and more data sharing.


These are novel ideas but highly unlikely to be implemented absent significant public outrage. Will that public outrage be forthcoming? I think not.


Perhaps the most underappreciated fact of internet-age capitalism is that we are all in the inescapable clutch of these companies and we like it that way.


We are already living in a world in which our own human “feelings” are no longer the best algorithms in the world. We are developing superior algorithms which use unprecedented computing power and giant databases. The algorithms of these 5 giants not only know exactly how you feel, they also know a million other things you hardly suspect. When a non-human algorithms knows us better than we know ourselves we are likely to stop listening to our “feelings” and defer decision making to these external algorithms instead. I would argue that this is already happening and we adore it. We are coddled by our conveniences, entertained and comforted by our personal echo chambers of self-importance. 


Be honest, if some anti-tech dictator forced you to drop all five companies, how would you do so? In what order? What would your life look like? Strip each away and take a moment to look at your life and how it would change. Is it one you yearn to return to? I doubt it. 


Power has shifted. As both the volume and speed of data increase, classic institutions like elections, parties and parliaments might simply become obsolete - not because they are corrupt but simply because they don’t process data fast enough.


By the time the cumbersome government bureaucracy makes up its mind about regulating data or the big 5 for that matter (it can’t even pin down immigration, tax, healthcare, and trade reform) the internet/digital world will have morphed ten times. As Yuval Harari states: “The government tortoise cannot keep up with the technological hare.”


Thus, it should come as no surprise that In March, Trump’s Treasury secretary, Steve Mnuchin, said the problem of job displacement by robots is “not even on our radar screen” since it will only come “in 50 to 100 more years.” This is a government completely out of touch. The big 5 will continue their supreme control of today’s most powerful resource: data.

*(The above is inspired from a conference I am giving this weekend at MENSA about the societal effects of AI and emerging technologies. Contact me if you wish to see the slides)


Logos LP April Performance

April 2017 Return: 4.57%

2017 YTD (April) Return: 18.98%

Trailing Twelve Month Return: 38.16%

Annualized Return Since Inception March 26, 2014: 27.06%

Cumulative Return Since Inception March 26, 2014: 85.70%


Thought of the Week

"What will happen to society, politics and daily life when non-conscious but highly intelligent algorithms know us better than we know ourselves?- Yuval Harari


Articles and Ideas of Interest


  • Populism is great for stock returns. If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism. A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.


  • Why you should have (at least) two careers. It’s not uncommon to meet a lawyer who’d like to work in renewable energy, or an app developer who’d like to write a novel, or an editor who fantasizes about becoming a landscape designer. Maybe you also dream about switching to a career that’s drastically different from your current job. But in my experience, it’s rare for such people to actually make the leap. The costs of switching seem too high, and the possibility of success seems too remote. Harvard Business Review suggests that the answer isn’t to plug away in your current job, unfulfilled and slowly burning out. I think the answer is to do both. Two careers are better than one. And by committing to two careers, you will produce benefits for both.


  • There’s no Canadian crisis in sight despite downgrade hitting assets. Moody’s downgrade of Canada’s biggest banks beat down assets in a market already rattled by woes of mortgage lender Home Capital Group Inc. Yet analysts say this isn’t evidence of an impending crisis. We would agree. Sentiment will help to cool an overheated housing market but do not expect any kind of 2007 style housing bust.


  • How homeownership became the engine of American inequality. Interesting piece in the NY Times looking at the perverse effects of the mortgage interest deduction (MID). Important in light of the current real estate situation in Toronto. Poverty and homelessness are political creations. Their amelioration is within American grasp and budget. But those Americans most likely to vote and contribute to political campaigns are least likely to support (MID) reform — either because it wouldn’t affect their lives or because it would, by asking them to take less so that millions of Americans could be given the opportunity to climb out of poverty.


  • A roadmap to investing for the next 100 years. The University of California looks at where we have been and how we can invest for the long-term. What will work: Less is more, risk rules, concentrate, creativity pays, build knowledge, team up,


Our best wishes for a fulfilling week, 

Logos LP

Free Lunches and The Catch 22 of the Canadian Economy

Good Morning,

U.S. stocks finished near all-time highs Friday, Treasuries gained and oil closed in on $50 a barrel even after the world’s biggest economy reported its slowest pace of expansion in three years.

A large portion of those stock gains came this week. Stocks posted sharp rallies on Monday and Tuesday as corporate earnings season continued to reveal strong performances from some of the top companies in the world.

The Nasdaq 100 Stock Index added to its record level as Alphabet Inc. and Amazon.com Inc. rose after reporting strong earnings late Thursday.

Also of note was the Bureau of Labor Statistics employment cost index, which climbed 8 percent in the first quarter, its largest gain since 2007 and a sign that wage growth is accelerating. This builds on data from Europe showing higher than expected price growth in April.


Our Take

Overall, a soft report on U.S. Q1 GDP, but this number fits in with the seasonal pattern that has been common over the past few years, where Q1 has tended to be weak.

Markets continue to digest other concerns as President Donald Trump fights an uncertain legislative battle to make his promises a reality while tackling the North Korea issue. The administration’s tax-cut plan (which some believe the U.S. can afford) and mixed signals on its view of Nafta stirred markets this week leaving investors unsure of his position on either.

 As for the growth slowdown, investors will now question the Federal Reserve’s resolve to raise interest rates two more times this year.

What we are seeing is a market that is taking sides when it comes to the direction of the U.S. economy. In the green corner are stocks. The Standard & Poor’s 500 index is just 0.2 percent away from a record high reached in March on bets that Donald Trump’s administration will push through tax-code changes to spark growth. In the red corner sit U.S. government bonds, where benchmark 10-year Treasury yields have unwound almost half of their post-election increase, suggesting a far more pessimistic view the economy.

We still maintain that this earnings cycle is doing a good job of justifying these valuations despite the fact that economists such as Robert Shiller and other pundits view current valuations as dangerously high.

 Of note is economist Jeremy Siegal’s criticism that Shiller's "valuation statement takes no account of returns elsewhere in the asset markets, it takes no account of where interest rates are, where real estate are, where anything else is; it says there's one right price for equities, and the average from 1871 through, let's say, 2000 should be that average."



“He was going to live forever, or die in the attempt.” -Joseph Heller, Catch 22

The above quote goes a long way to describe the current state of the Canadian economy.

Canada’s economy unexpectedly stalled in February as manufacturing and production in other goods producing sectors shrank during the month. The real estate sector, which expanded 0.5 percent, had its best one-month gain since 2015 as housing in Toronto soared.

Canada’s housing sector, particularly in Toronto, has become both the main driver of growth and one of the biggest sources of uncertainty amid concern the gains aren’t sustainable.

To assuage angry voters struggling with unaffordability, the Federal and provincial governments have taken action to slow down the overheated housing markets around Toronto and Vancouver, but they may want to be careful not to overdo it.

That’s because the housing boom was pretty much the only thing holding up Canada’s economy in February.

Virtually all of the strength in February’s numbers comes from industries related to the housing boom — construction, finance and insurance, and real estate. Had it not been for strength in those areas, the economy would have shrunk in February.

This isn’t new. Many economists have raised the alarm about Canada’s increasing dependence on housing for its economic growth. Global banking consultancy Macquarie found last fall found that Canada’s reliance on real estate investment hit a record high last year — the same thing that happened in the U.S. shortly before its housing bubble burst.

It should not come as a surprise that Fitch, a leading U.S. Ratings agency just came out saying that the province’s 16-point plan to create affordability in the Greater Golden Horseshoe — an area home to nine million people and that wraps around the GTA in the southern end of the province — may derail the market.

This Catch 22 situation is becoming more and more common at the national level in our increasingly complex worldGovernments are expected to deliver all the benefits people want at no cost. In other words the electorate believes in the “free lunch”. The reality is that there is little a country can do in terms of policy actions to improve its situation that a) doesn’t have negative ramifications and b) will enhance the long-run outlook in the absence of fundamental improvement in economic efficiency.

Perhaps Canada and more specifically those who have disproportionately hung their hat on one asset class/one industry (blowups like Home Capital often occur at market peaks) will learn that there is simply no such thing as a “free lunch”


Logos LP 2017 Best Picks Update

Huntington Ingalls Industries (NYSE:HII): 9.07% YTD (ex dividend of 1.09%)

Huntington has only been public since 2012 but the company holds a virtual monopoly on the maintenance of U.S. naval and coast guard ships, giving it very high returns on capital with high growth. With a focus on military spending and a strong moat, we still find HII best in class among the aerospace and defence sector.

Cemex SAB de CV (ADR) (NYSE:CX): 14.82% YTD

This highly cyclical company is entering into a perfect storm of strong growth and a beaten down valuation. With a price to sales of 0.3, PE ratio at around 12 and free cash flow growth north of 87% over the previous year, the company has been growing revenue from high single digits to low double digits over the past 2 years while experiencing strong returns on capital. These returns are no surprise given the increased demand in construction and infrastructure spending. We expect this trend to continue for the next few quarters at least.

AAON (NASDAQ:AAON): 10.89% YTD (ex dividend of 0.64%)

With a 10 year average ROIC near 20% with no debt, Aaon is set to face a record year in addition to the infrastructure and housing tailwinds that are occurring in 2017. The company trades at a premium due to its impressive qualities and can be volatile due to the nature of infrastructure and maintenance for major complexes. With low inflation and steady demand for housing and construction, we expect the company to continue to perform well this year.

Syntel (NASDAQ:SYNT): -11.02% YTD

With tight control by executive management (only a minority float on the exchange) this turnaround story has incurred drastic losses due to repatriation and slowing revenue growth. However, historical ROIC has been at least 22% going back ten previous years and in light of their restructuring in the highly sticky IT outsourcing market, there is an excellent opportunity for a turnaround in a stock trading at very depressed valuations.

Thought of the Week

"The Texan turned out to be good natured, generous, and likeable. In three days no one could stand him.” -Joseph Heller, Catch 22

Articles and Ideas of Interest

  • I’ve worked in foreign aid for 50 years-Trump is right to end it, even if his reasons are wrong. Interesting perspective in Quartz from someone who has worked in foreign aid for over fifty years, in over 60 developing countries in Africa, Latin America, and Asia. Tom asks what if we are not even that sincere about doing good? What if we are in the aid business to make sure our own piece of the pie keeps growing? Should we end the “aid-industrial complex”?


  • What is meditation and how is it practicedNice overview including graphics for those interested in meditation. What are the styles, postures, objects of concentration, common hindrances and effects of practice?


  • The happiness experiment. Quartz launches a project focussed on exploring the concept of happiness and the human obsession with it. How to find it, how to keep it and how to define it. They examine happiness from the perspective of economics, history and evolutionary psychology to understand how our notion of happiness has changed over time.


  • An anatomy of “Modern Love”. Emma Pierson and Alex Albright analyzed every “Modern Love” column from The New York Times for a decade and found that the messy process of dating leads to the best stories. Here’s what else they learned.


  • The benefits of solitude. Our society rewards social behaviour while ignoring the positive effects of time spent alone. What really happens when we turn too often toward society and away from the salt-smacking air of the seaside or our prickling intuition of unseen movements in a darkening forest? Do we really dismantle parts of our better selves? A growing body of research suggests exactly that.


  • America is regressing into a developing nation for most peopleA new book by economist Peter Temin finds that the U.S. is no longer one country, but dividing into two separate economic and political worlds. In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration - check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.


Our best wishes for a fulfilling week,  

Logos LP

Avoiding Mistakes

Good Morning,

U.S. stocks posted their first weekly gain since the end of March as bond yields rose amid gains in industrial and financial companies.

On Friday the Dow briefly turned positive in afternoon trade after President Donald Trump told The Associated Press his administration will unveil a "massive tax cut" in a new reform, though the timing of that package was unclear.

While the “Trump Trade” may not be the force it was in the months after the election, it showed some signs of life as the S&P 500 Index rallied 0.9 percent in its biggest weekly gain in two months. Eight of 11 industry groups climbed, with industrial stocks advancing 2 percent and financials gaining more than 1 percent.


Our Take

Investors are still a bit spooked about the French election. Le Pen will make it to the 2nd round along with centrist Macron. We feel that it is too early to say whether she will win the presidential election. As for the Trump trade, lots of noise. Continue to watch Q1 earnings quality.



Selecting stocks that beat the market for long periods of time is very difficult. To pick up where we left off from the last newsletter, where we considered Vilfredo Pareto’s 80/20 rule, the following should not come as a surprise:

For more on underperformance, see the WSJ article published this week lambasting active management. Consistently beating the market is certainly reserved to only a select few yet where is the bulk of stock market wealth being created?

Interesting piece in The Irrelevant Investor outlining research from a new paper suggesting that  the top thirty firms together accounted for 31.2% of the total stock market’s wealth creation from 1926 to present. The 1,000 top performing stocks, less than four percent of the total, account for all of the wealth creation from 1926 to present. (on the 26,000 stocks that have appeared in the CRSP database since 1926) The other ninety six percent of stocks that have appeared on the Centre for Research in Security Prices (CRSP) database collectively generated lifetime dollar returns that only match the one-month Treasury bill. The median stock underperformed the market with an excess lifetime return of -54%.

What should the average investor glean from this beyond the obvious (the odds of beating the market are not in your favor)? Well it appears that to improve stock picking performance perhaps less focus should be placed on identifying “star firms” than simply avoiding the worst…Keep things simple in both investing and in life. In our daily quests to shine we often forget that there is perhaps greater distinction in simply avoiding mistakes…


Logos LP Updates

Our fund performance for March is in: 5.13%

2017 YTD to March: 13.67%

Annualized return since inception March 26, 2014: 25.10%

Thought of the Week

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” -Charlie Munger


Articles and Ideas of Interest


  • Paul Tudor Jones says U.S. stocks should terrify Janet Yellen. The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him. This isn’t really anything new as other hedge fund managers also point out that margin debt -- the money clients borrow from their brokers to purchase shares -- hit a record $528 billion in February, a signal to some that enthusiasm for stocks may be overheating. Yet what is new and somewhat interesting is what Tudor points to as the spark for the next market crash: risk parity funds.


  • The American economy isn’t actually becoming more concentrated. Donald Trump’s election win, many speculated, must be due to geographic inequality and the increasing concentration of economic activity in a handful of big coastal cities. It was tough to escape the woeful tales of small-town and Rust Belt voters in the final months of 2016. But as Jed Kolko, chief economist at Indeed.com, pointed out last September, the economy isn’t actually becoming more concentrated. Something much more insidious is happening. Economic opportunity is becoming more concentrated, but Americans’ ability to move to take advantage of that opportunity is declining. Consequently, the rising average incomes in big coastal cities are being offset by those cities’ declining share of the population.


  • Housing trends will keep U.S. interest rates suppressed. If we’re all downsizing, who’s upsizing? That question should be critical to aging and retiring baby boomers whose main “asset” is the equity in their homes. If current demographic trends remain in place -- and there is not a shred of evidence that they won’t -- then we are facing a generation of subdued home demand even as retirees will be looking to sell. We’re not even considering the impact of what “normalized” interest rates means for mortgage borrowing. This raises broader economic problems, too. Beyond the obvious, which is that retirees will face difficulty selling their biggest asset, household formation will remain sluggish. When new households are formed, they buy a lot of things, because along with houses go new cars, appliances, furniture, maintenance, and toys for the kids. Empty-nesters don’t have those needs, and so they spend less. Less household formation means less consumption overall, which will prove problematic in an economy where consumption stands at a record 69.4 percent of gross domestic product. In other words, upward pressure on interest rates becomes more subdued.


  • Jeff Bezos explains how he makes business decisions. In his (excellent) letter to shareholders Bezos last week explained his approach to decision making. "Most decisions should probably be made with somewhere around 70% of the information you wish you had," "If you wait for 90%, in most cases, you're probably being slow." Business moves fast. This Day 1 mantra allows one to make high-quality, high-velocity decisions while maintaining a certain comfort in the face of uncertainty.


  • Will robots displace humans as motorised vehicles replaced horses? The Economist suggests that as robots encroach on human work, studying the fate of the horse could provide guidance. Horses might have fared better had savings from mechanisation stayed in rural areas. Instead, soaring agricultural productivity led to falling food prices, lining the pockets of urban workers with more appetite for a new suit (or car) than anything four-legged. Similarly, the financial returns to automation flow to profitable firms and their shareholders, who not only usually live apart from the factories being automated but who save at high rates, contributing to weak demand across the economy as a whole. Indeed, roughly half of job losses from robotisation (as from exposure to Chinese imports) are attributable to the knock-on effect from reduced demand rather than direct displacement.


  • 11 charts that show marijuana has truly gone mainstream. Many marijuana users hide their stash in their closets. Most people who use marijuana are parents. There are almost as many marijuana users as there are cigarette smokers in the U.S. Those facts and many more are among the conclusions of new survey from Yahoo News and Marist University, which illustrates how pot has become a part of everyday life for millions of Americans. Here are 11 charts that explain how and why. Big tobacco is sure to makes its move…We like (Altria: MO and remain long Reynolds: RAI)


  • Love in the time of numbness. Great essay in the New Yorker suggesting that today, and especially today, as the threat of desensitization—and the accompanying seductions of detachment, outrage, revulsion, indignation, piety, and narcissism—looms over all our lives, we might need to ask ourselves the following question: What will move me beyond this state of anesthesia? How will I counteract the lassitude that creeps over my soul? Each of us will find individual answers to these questions. There is no formula that describes what your solution might be…..but introspection is where the journey begins.


Our best wishes for a fulfilling week, 

Logos LP