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:

"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.
Budget problems caused by big tax cuts that the Congressional Budget Office projects will lead to a $2 trillion deficit.
A possible trade war that will push up interest rates until the next recession hits.
An isolationist administration when it comes to trade, which will lead to "disrupted supply chains."
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.
"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.
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...
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.
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).
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 fact: Buffett’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 down. The 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