Good Morning,

U.S. equities rose in choppy trade Friday following a strong jobs report, while investors were already looking ahead to a Federal Reserve meeting next week.

Signs of strong growth in the economy weren’t enough to propel stocks higher this week as investors weighed the impact of a potential interest-rate increase by the Federal Reserve next Wednesday. Futures traders now see a hike as a sure thing. According to the CME Group's FedWatch tool, market expectations for a March rate hike stood at 93 percent.

With the first-quarter earnings season almost over, stocks lost the boost provided by profits that on average beat Wall Street expectations.

In U.S. economic news, 235,000 jobs were added in February, the Bureau of Labor Statistics said, adding the unemployment rate ticked lower to 4.7 percent.

In Canadian economic news, Canada’s labour market continued its rally into February, bringing the unemployment rate to the lowest in more than two years, but with continued signs of sluggish wage increases.

Canada added 15,300 jobs in February, and employment has increased by 288,100 over the past 12 months, Statistics Canada reported today in Ottawa.

The quality of the job picture was also better than what was thought only a month ago, with an improved mix of full-time and part-time jobs. The full-time gain in February was the biggest since May 2006.

Our Take

The US Jobs report was solid and the labor force participation rate finally ticked up. If the fed was looking for further confirmation from the labor market it got it. Yet interestingly U.S. Treasury yields and the dollar turned lower after the report came out, with some investors disappointed with the hourly wage growth last month. Hourly wages rose at an annualized rate of 2.8 percent, the BLS said.

Also the average hourly earnings were a bit disappointing yet as we have said before expectations are sky high and any choke is immediately reflected in markets. What will come next as a major test for market strength is the break-down in crude oil prices. For most of this year, we’ve managed to ignore rising inventories for crude and refined products while speculators were record long.

Oil posted its worst weekly decline since November as a Bloomberg Commodity Index dropped 3.4 percent for its fourth straight weekly loss. Energy companies slid 2.6 percent as nine of the 11 main industry groups in the S&P 500 retreated.

On the Canadian side, this was also a good jobs report which takes the likelihood of a Bank of Canada interest rate cut off the table yet we believe the central bank is also unlikely to raise rates anytime soon as the economy still has a ways to go given its dependency upon real estate and its weak business investment.

Non-residential business investment has fallen in eight of the past nine quarters, and is down 19 percent over that time.

The two-year decline is the biggest since at least 1981, when the current GDP data set begins. Older data sets aren’t comparable, but can be indicative, and they show the drop may be the biggest since the 1950s.

Investment in machinery and equipment now represents 3.7 percent of GDP. That’s the lowest share of the economy since at least 1981, possibly in the post-World War II era.

Musings

I keep hearing from people that they sold their stocks because “the market is getting expensive” or “there just has to be a crash coming” or “things are getting frothy” or “this run has only been because of monetary policies put in place by the Federal Reserve.” They ask me whether we are trimming winners or at least getting more defensive.

I’ve grown tired of explaining the same thing over and over again Read About Businesses, Not Stock Market Predictions!

Yet I came across something presented by Jim Cramer from CNBC this week that I found quite relevant to this discussion and which goes quite far to illustrate this point.

Cramer also suffers from the same malaise and thus took a look at the top 9 performing stocks since the bottom of the market on March 10, 2009 to signal the end of the market's free-fall and challenged anyone to argue that these companies need the Fed to fuel their stock rallies:

No. 1 Incyte Corporation: This is a biopharma company with a pioneering immunotherapy play that is up a staggering 6,543%

No. 2 United Rentals: Up 4,002% in the last eight years.

No. 3 Regeneron: This biotech company created a drug called Eylea to treat age-related macular degeneration with a once-a-month injection in the eye that was much better than the alternative of once a week. The stock has now rallied 2,975% since the market's bottom.

No. 4 Alaska Air Group: Known as a niche company that knows its market well. A 2,631% gain.

No. 5 Wyndham Worldwide: The stock had 178 million shares at the Haines bottom and now has 108 million. Talk about a buyback!

No. 6 Netflix: Janet Yellen Not a bad at a 2,451% gain.

No. 7 American Airlines: This company managed to come out of bankruptcy and become a top performer. Cramer gave some of the credit to the government for its 2,133% rally because regulators did allow major airlines to merge.

No. 8 Priceline: You won't find anything in the Fed minutes about creating Priceline. The success of its business model was pure innovation, and what travelers were looking for. The stock is up 2,125%.

No. 9 CBS: Cramer attributed the terrific job of CEO Les Moonves for excellent programming and disciplined cash management for the stocks 2,101%.

As comparisons:

A rough estimate of the appreciation of a Toronto home since March 10, 2009 = 150%

The S&P 500 since March 10, 2009 = 247%

Now to be fair these are indexes and I’m sure you could find homes that have appreciated more or less yet the point is that these kind of colossal returns (20x or more on your money in roughly 8 years) are specific to businesses. They are specific to outstanding capital allocation and management not to the Fed or to “THE MARKET”.

Another interesting note regarding the “stocks are expensive time to sell because a crash is surely around the corner” camp comes from John Huber a fellow value investor who conducted a great study looking at roughly 189 years of stock market returns.

What he found was interesting:

The market had 134 positive years and 55 negative years (the market was up 71% of the time)
44% of the time the market finished the year between 0% and +20%
60% of the time the market finished the year between -10% and +20%
Only 14% of the time (26 out of 189 years) did the market finish worse than -10%
Only a mere 4.8% of the time (fewer than 1 in 20 years) did the market finish worse than -20%

So to put it another way (using the 189 years between 1825 and 2013 as our sample space), there is an 86% chance that the market finishes the year better than -10%. There is a 95% chance the market ends higher than -20%. And as I mentioned above, there is a 71% chance that the market ends any given year in positive territory.

One last observation: the market was 5 times more likely to be up 20% or more in a year (50 out of 189) than down 20% or more in a year (9 out of 189)!

Although certain to happen again, crashes are rare. The 2008 type scenarios, are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That’s about once every 63 years. I can’t emphasize this enough to the market timers out there. People tend to overestimate the probability of a market crash when one recently occurred.

The storm clouds of 2008 are in the rear view mirror, but they are still visible, and the effects of the storm still evident so before you pay too much attention to the headlines and sell everything or even sell anything, look at the businesses you own and bear in mind the above statistics...

Thought of the Week

"If you do what everyone else does, you will get what everyone else gets." -Stephen Richards

Stories and Ideas of Interest

Credit Suisse says the $1.5 trillion of cash on large cap company balance sheets is obscuring profitability and distorting valuations by making companies seem more expensive than they really are. It estimates that, ex-cash, stocks are trading near their historical averages. For example, at a current 18.6 forward P/E multiple, the S&P 500 is trading 13% above its 10-year average because of historic cash levels. Interesting point. Important to remember that a high P/E ratio can point to overpriced stocks, but it can be caused by high cash balances and low debt ratios.
A little can go a long way. When thinking about their financial situation, most people spend way more time thinking about investing than they do about spending and saving. Michael Batnick shows that it should be the exact opposite, because saving and spending is something we have complete control over. We can’t know if our portfolio will be up or down next year, but we can decide whether or not to take that $5,000 vacation. Saving to invest in ALMOST ANY VANILLA STOCKS SUCH THOSE IN A LOW COST ETF should be the priority rather than trying to figure out the perfect portfolio or avoid the next crash.

Big tobacco has caught startup fever. Something we have been watching for a bit as big tobacco may be entering into a renaissance of sorts. It’s not smoking. It’s platform-agnostic nicotine delivery solutions. Interesting story in Bloomberg highlighting how big tobacco is entering into an innovation war.

A world without wifi looks possible as unlimited plans rise. The Wi-Fi icon -- a dot with radio waves radiating outward -- glows on nearly every internet-connected device, from the iPhone to thermostats to TVs. But it’s starting to fade from the limelight. With every major U.S. wireless carrier now offering unlimited data plans, consumers don’t need to log on to a Wi-Fi network to avoid costly overage charges anymore. That’s a critical change that threatens to render Wi-Fi obsolete. And with new competitive technologies crowding in, the future looks even dimmer.

Robert Mercer: The big data billionaire waging war on mainstream media. With links to Donald Trump, Steve Bannon and Nigel Farage, the rightwing computer scientist is at the heart of a multi-million dollar propaganda network. This is a must read. Welcome to the future of journalism in the age of platform capitalism. News organisations have to do a better job of creating new financial models. But in the gaps in between, a determined plutocrat and a brilliant media strategist can, and have, found a way to mould journalism to their own ends.

Moral outrage is self-serving, say psychologists. When people publicly rage about perceived injustices that don't affect them personally, we tend to assume this expression is rooted in altruism—a "disinterested and selfless concern for the well-being of others." But new research suggests that professing such third-party concern—what social scientists refer to as "moral outrage"—is often a function of self-interest, wielded to assuage feelings of personal culpability for societal harms or reinforce (to the self and others) one's own status as a Very Good Person.

What do Uber, Volkswagen and Zenefits have in common? They all used hidden code to break the law. Coding is a superpower. With it, you can bend reality to your will. You can make the world a better place. Or you can destroy it.

How to be good at anything according to a world expert on peak performance. There is an important difference between practice and deliberate practice...

All the best for a productive week,

Logos LP