Good Morning,

U.S. stocks closed higher on Friday as Wall Street assessed the likelihood of tighter monetary policy following a weaker-than-expected jobs report.

The Dow Jones industrial average rose 39.46 points, to close at 21,987.56. The index also rose above 22,000 earlier in the session for the first time since mid-August.

The S&P 500 gained 0.17 percent to end at 2,475.77, with energy leading seven sectors higher. The Nasdaq composite rose 0.1 percent to 6,435.33, a record close.

The U.S. economy added 156,000 jobs in August, according to the Bureau of Labor Statistics. Economists polled by Reuters expected 180,000 jobs to have been added last month.

The BLS also said, however, that wages grew at an annualized rate of 2.5 percent, less than expected.

On the Canadian side, the economy unexpectedly accelerated at a 4.5 percent pace in the second quarter -- tops among Group of Seven countries -- led by the biggest binge in household spending since before the 2008-2009 global recession.

Annualized growth was the fastest in six years and topped the 3.7 percent average forecast from economists. This isn't just a win for Canada. This print is further evidence of a strong global recovery.

Our Take

August's nonfarm data in the US was disappointing but should be viewed the context of solid U.S. and global economic growth, strong earnings, low inflation and still-ample global liquidity which will likely allow the US rally to continue.

The disconnect between modest economic growth and low inflation continues to support equities here. Not to hot. Not to cold. Perhaps central banks search for inflation has turned Sisyphean and should be abandoned...

A good way to think about the present equity market is as follows:

Valuation compared to alternatives – positive
Valuation compared to inflation – positive
Risk of recession – extremely low
Financial stress – extremely low
Market skepticism – high

Musings

This week, throughout my conversations and observations about the market I couldn’t help but notice a common theme: boredom. The last 2 weeks have been relatively quiet in the markets as investors return from vacation while others gear up for the long weekend.

Nevertheless, the punditry and financial media have soldiered on doing their best to whip up stories suggesting that danger is lurking around every corner: The Fed, North Korea, Trump, China’s CDS market etc.

What these times of “boredom” acutely remind me of is a principle eloquently presented by Christoper Mayer: “Boredom can explain a lot. It can explain all kinds financial behavior. And there is definitely a “boredom arbitrage” to take advantage of in the markets.”

People get bored. Most of life for most people is “boring”. Most jobs require just enough concentration to prevent one from drifting off into a dream but not enough to really occupy the mind. As a result, we have boredom on a massive scale. As such, people will do all kinds of strange things to alleviate that boredom.

They will act like fools. Dress like idiots and make all kinds of decisions to sabotage their lives. Anything to kill the boredom.

The financial markets are still primarily composed of the results of people’s decision making and thus are influenced by boredom. People get bored and just want to make something happen.

In the financial markets, people wind up sabotaging their own portfolios out of sheer boredom.

Why else throw money at fly by night unregulated Initial Coin Offerings (ICOs)? Or put money in “pre-revenue” tech startups with unproven founders? Or chase hyped up tech companies that trade at absurd levels with questionable prospects? Or go to cash or gold because Donald Trump is in the White House or “the market” looks overvalued?

They are bored!

It seems exciting to churn your money in this way. People buy and sell stocks so frequently because they are bored. They feel they have to do something.

This is the fundamental lesson to remind oneself of during these “boring” times. When asked in an interview this week why he hasn’t spoken out about Donald Trump, Warren Buffett reminded us that:

"Forty-five presidents of the United States and I lived under a third of them," he said. "I bought stocks under 14 of the 15. The first one was [President Herbert] Hoover. I was only 2 when he left so I hadn't gotten active at that point. But [ Franklin Delano] Roosevelt was next. And I bought stocks under him, even though my dad thought it was the end of the world when he got elected."

My goodness how boring. Yet how profitable. Furthermore, at a time when most investors are bored with anything that isn’t tech, artificial intelligence, blockchain or Alibaba, Warren Buffett's Berkshire Hathaway has invested more money in financial stocks. Berkshire Hathaway reported a 17.5 million share stake in Synchrony Financial, in its June quarter 13F filing as well as converting warrants into 700 million shares of Bank of America (BAC) common stock.

This is a prime example of “boredom arbitrage”. Often what is out of favor is priced as such and thus offers the best prospects for outsized returns over the long-term.

Furthermore, people get bored of holding the same stock for long periods of time. They want action. But consider the classic 100 bagger Monster Beverage.

This company became a 100 bagger in 10 years and yet during that period there were over 10 occasions that the stock fell more than 25%. In three separate months, it lost more than 40% of its value. Yet if you focused on the business and not the stock price, putting $10,000 in, you would have ended up with $1 million at the end of ten years.

Be a reluctant seller. Hold for the long-term. Be boring not bored.

Hundredfold returns are unlikely to induce boredom...

Thought of the Week

"All men’s miseries derive from not being able to sit in a quiet room alone.” -Pascal

Articles and Ideas of Interest

The free economy comes at a cost. Facebook, whose users visit for an average of 50 minutes a day, promises members: “It’s free and always will be.” It certainly sounds like a steal. But it is only one of the bargains that apparently litter the internet: YouTube watchers devour 1bn hours of videos every day, for instance. These free lunches do come at a cost; the problem is calculating how much it is. Because consumers do not pay for many digital services in cash, beyond the cost of an internet connection, economists cannot treat these exchanges like normal transactions. The economics of free are different.

Too much power lies in tech companies’ hands. A libertarian case for caution after the Daily Stormer is booted off the public internet. Libertarians tend to worry about concentrations of power in the hands of the state. There is no consensus about the danger of concentrations of power in private hands. But when the private hands in question control access to the principal media of communication in the world, one has to hesitate when they decide that not everyone should be granted entree. For the power they are exercising is almost state-like.

Silicon Valley isn’t special. Tech has plenty of reasons to believe that it is an industry of upstarts but the facade is crumbling.

Contrarian view of Amazon. Moody’s contrarian view is especially notable because it makes the intriguing argument that Amazon, while it may be an online juggernaut, is actually the weakest of the large U.S. retailers. Although the Seattle-based company does capture about half of all online retail sales, that’s a tiny share of all retail sales; about 90 percent of all sales are made offline.

How the next quant fund crisis will unfold and why quant strategies are underperforming. Almost everyone knows that this month marks the 10th anniversary of the start of the biggest financial crisis since the Great Depression. There was another significant event back then that gets overlooked but was still very significant. I’m referring to the quant equity crash of August 2007. Institutional quant hedge funds have addressed the risk issues that caused 2007 losses, but the newer retail products cannot. Another interesting piece looking at the recent underperformance of quant funds. The space is getting crowded.

Finding the root cause of recessions. Two things bear most of the blame: external shocks and economic volatility.

Robots will not take your job. Wired magazine paints a compelling picture as to why the fear and hype is overblown.

Millennial Americans are moving to the ‘burbs, buying big SUVs. Wait I thought it was the gig economy and consumption was dead? Millennials are finally starting their own baby boom and heading for the suburbs in big sport utility vehicles, much like their parents did. Americans aged about 18 to 34 have become the largest group of homebuyers, and almost half live in the suburbs, according to Zillow Group data. As they shop for bigger homes to accommodate growing families, they’re upsizing their vehicles to match. U.S. industry sales of large SUVs have jumped 11 percent in the first half of the year, Ford Motor Co. estimates, compared with increases of 9 percent for midsize and 4 percent for small SUVs. Guess they just want to be like their parents after all.

To come up with a good idea. First try and come up with the worst idea possible. There are many creative tools a designer uses to think differently, but none is more counter-intuitive than “wrong thinking,” also called reverse thinking. Wrong thinking is when you intentionally think of the worst idea possible — the exact opposite of the accepted or logical solution, ideas that can get you laughed at or even fired — and work back from those to find new ways of solving old problems. Nice piece in HBR looking at innovation and discovery.

The cryptocurrency phenomenon is gaining further traction. The world’s biggest banks aren’t immune from cryptocurrency euphoria, with a range of projects underway to explore how traditional financial firms can benefit from the innovation. Swiss banking giant UBS and 10 other companies say that they plan to use the technical idea behind bitcoin—a distributed ledger called a blockchain—for their own digital currency (paywall). This could show the way for the world’s biggest central banks to do the same.

Our best wishes for a fulfilling week,

Logos LP