Solitude Is A Competitive Advantage

Good Morning,
 

The tech-heavy Nasdaq composite rose to a record high last Friday as Wall Street cheered the blowout quarterly reports from three of the world's biggest tech companies.            

The index rose 2.2 percent to 6,701.26 and notched its biggest one-day gain since November 2016.                        

The PowerShares QQQ Trust exchange-traded fund, which tracks the Nasdaq 100, rose 2.9 percent.         

Leading the ETF higher were shares of Amazon, Microsoft and Google-parentAlphabet; their stocks rose 13.2 percent, 6.4 percent and 4.3 percent, respectively.

The S&P 500 Index also hit a new high, after the U.S. saw its strongest consecutive quarters of growth in gross domestic product in three years.

The first reading on third-quarter GDP showed the U.S. economy grew by 3 percent, above an estimate of 2.5 percent indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday. In addition, U.S. consumer sentiment rose to its highest level since 2004.

Our Take
 

These tech giants reported excellent numbers.  Amazon's third-quarter earnings stole the show with accelerating revenues, a growing customer base, 42 percent sales growth in Amazon Web Services and a busy Prime Day.

Alphabet's earnings report impressed thanks to its 70 percent growth in YouTube, which now delivers 100 million hours of content per day to its users.

Microsoft blew away Wall Street's earnings estimates by delivering 42 percent growth in subscription revenue from its Office 365 offering and 90 percent revenue growth from Azure, its cloud platform.

This tech strength is closely tied to the growing importance of data. More specifically, the explosion of data via the cloud. Amazon, Alphabet and Microsoft are the big three of web services, the backbone of the cloud. Expect the strength to continue as these giants continue to shore up their dominant positions in the space.

For Q3 2017, with 55% of the companies in the S&P 500 reporting actual results for the quarter, 76% of S&P 500 companies have reported positive EPS surprises and 67% have reported positive sales surprises.

For Q3 2017, the blended earnings growth rate for the S&P 500 is 4.7%. Six sectors are reporting earnings growth for the quarter, led by the Energy sector. On Sept. 30, the estimated earnings growth rate for Q3 2017 was 3%. 

These are excellent numbers supporting the suggestion that this is a rally based on earnings growth.

A very strong bull market indeed, also supported by a global economy that continues to surprise to the upside. 

Even Caterpillar earnings which showed increased profits and and improved outlook which tends to evidence that global growth is picking up in a synchronized fashion.

Valuations continue to look frothy but fundamentals are keeping pace.

As we have previously stated, caution is warranted in this environment yet caution should also be exercised when faced with arguments that both the economic cycle and the stock market has run its course and it is time to lighten up, raise cash and wait for an imminent crash.

The veracity of these types of arguments now seems obvious. The danger is believing that what seems obvious, must take place. This is simply untrue. Instead, such beliefs evidence the primacy of emotion over reason. A lazy reliance on heuristic shortcuts rather than thoughtful analysis.

The skeptics have and continue to beat their drums yet the place to be remains equities. The brightest opportunity for returns over the long-term remains the ownership of high quality businesses.

Musings
 

Thought-provoking piece in HBR I came across this week which suggests that in a distracted world, solitude is now a competitive advantage. “Always remember: Your focus determines your reality.” Jedi Master Qui-Gon Jinn shares this advice with Anakin Skywalker in Star Wars, but in our hyper-distracted work world, it’s advice that we all need to hear. 

Research by the University of London reveals that our IQ drops by five to 15 points when we are multitasking. In his book, Your Brain at Work, David Rock explains that performance can decrease by up to 50% when a person focuses on two mental tasks at once.

Our world is becoming increasingly complex which is having a major impact on our lives especially when it comes to problem solving. Pushed and pulled by X,Y and Z stimulus at any given time it is unclear how we can solve the challenges of our age. The answer may lie in cultivating solitude.

Having the discipline to step back from the noise of the world is essential to staying focused and thus to staying effective.

How can we cultivate solitude? How can we build this skill?

Build periods of solitude into your schedule

Analyze where your time is best spent

Starve your distractions

Don’t be too busy to learn how to be less busy

Create a “stop doing” list

 

Logos LP September Performance

 

September 2017 Return: 2.03%

2017 YTD (September) Return: +15.57%

Trailing Twelve Month Return: +18.71%

CAGR since inception March 26, 2014: +18.06%
 

Thought of the Week

"I’m a “dumb shit” who doesn’t know much relative to what I need to know. Whatever success I’ve had in life has had more to do with my knowing how to deal with my not knowing than anything I know.” - Ray Dalio

Articles and Ideas of Interest
 

• These are the businesses still immune to Amazon. In order of least likely:1) Dollar Stores 2) Auto parts 3) Home improvement 4) Home Furnishing

• Our biggest economic, social and political issue The Two Economies: The Top 40% and the Bottom 60%. Very interesting piece from Ray Dalio suggesting that Average statistics camouflage what is happening in the US economy, which could lead to dangerous miscalculations, most importantly by policy makers. For example, looking at average statistics could lead the Federal Reserve to judge the economy for the average man to be healthier than it really is and to misgauge the most important things that are going on with the economy, labor markets, inflation, capital formation, and productivity, rather than if the Fed were to use more granular statistics.

• Tim O’Reilly: ‘Generosity is the thing that is at the beginning of prosperity’. Tech pioneer and CEO Tim O’Reilly suggests that his industry will fail unless the web giants start putting consumers ahead of shareholders. When questioned about the notion that technology is going to eliminate jobs, Tim counters by suggesting that this will happen only if that’s what we tell it to do. And it is what we’re telling it to do. But on the other hand Marc Bain suggests that now corporations kneel down to us. We’re in the midst of a profound shift in consumer culture, he writes. Corporations were once king, but “influencers” and viral videos—like the one of the United Airlines passenger-dragging incident that shaved $1 billion off the company’s valuation—have shifted the balance of power. A new report examines how US buying behavior will change as a result. Nobel Prize winner Joseph E. Stiglitz writes that America has a huge monopoly problem.

• Robots are eating money managers’ lunch. Rishi Ganti on why obscure assets may be the human investor’s last refuge. Like what? Like scooping up receivables and other claims owed to those in need of immediate cash—a refugee facility waiting for payment on a contract from a charity, for example. Luckily robots still have a lot to learn about being a human trader. 
  
   

• How social media endangers knowledge. The very idea of knowledge itself is in danger. The idea behind Wikipedia—like all encyclopedias before it—has been to collect the entirety of human knowledge. It’s a goal that extends back to the Islamic Golden Age, when numerous scholars—inspired by Muhammad's famous verdict of ‘Seek knowledge, even from China’—set themselves to collecting and documenting all existing information on a wide variety of topics, including translations from Greek, Persian, Syrian, and Indian into Arabic. Social networks, though, have since colonized the web for television’s values. From Facebook to Instagram, the medium refocuses our attention on videos and images, rewarding emotional appeals—‘like’ buttons—over rational ones. Instead of a quest for knowledge, it engages us in an endless zest for instant approval from an audience, for which we are constantly but unconsciously performing.

• Why is everyone so busy? Time poverty is a problem of perception and partly of distribution. The Economist looks into the fact that everybody, everywhere seems to be busy. In the corporate world, a “perennial time-scarcity problem” afflicts executives all over the globe, and the matter has only grown more acute in recent years, say analysts at McKinsey, a consultancy firm. These feelings are especially profound among working parents. As for all those time-saving gizmos, many people grumble that these bits of wizardry chew up far too much of their days, whether they are mouldering in traffic, navigating robotic voice-messaging systems or scything away at e-mail—sometimes all at once.

• Will Canadians survive higher rates? A new poll from Canada’s largest insolvency firm, MNP LTD, shows that 1 in 3 Canadians say that they already feeling the effects of increasing interest rates. Don’t think this is surprising considering well known debt issues. But that 63% of Canadians are either worried about bankruptcy or already feeling the effects of 50bps (to 1%)…feels like something that should be concerning.

Our best wishes for a fulfilling week,  

Logos LP

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Can Sci-Fi Help Us Become Better Investors?

Good Morning,
 

U.S. equities fell along with the dollar (which has dropped to an 11-month low as measured by the Bloomberg Dollar Spot Index) on Friday as investors assessed an investigation into U.S. President Donald Trump that may stall his economic agenda. Nevertheless, the three major indexes notched record highs this week as quarterly earnings from S&P 500 companies largely outperform expectations. Microsoft, Honeywell and Morgan Stanley are just a few of the companies that reported earlier this week.

Next week will be the busiest one this earnings season, with about 170 S&P 500 components scheduled to report.This remains an earnings-driven market and there have not been any major surprises yet. If earnings continue to grow, stocks should keep going higher.

Calendar second-quarter earnings have mostly exceeded expectations this far. With 20 percent of S&P 500 companies having reported, 73 percent have beaten expectations and 77 percent have beaten on sales, according to John Butters, senior equity analyst at FactSet.

Our Take
 

Interestingly, for all the fear associated with the gridlock and incompetence in Washington research actually suggests that stocks may like government gridlock as much as they like potential tax reform. Investment research firm Ned Davis Research found that when the Philadelphia Federal Reserve's Partisan Conflict Index — a measure of political disagreement in the United States — rises above 100, the S&P 500 has risen at a 11.7 percent annual rate. In contrast, the S&P rises just 5.8 percent when the index is below 100, according to analysis published on June 27.

On Wednesday, the Philly Fed said the index reached 201.15 in June, one of only seven times it has been above 200, and close to March's record of 271.29. In this case, traders may actually like the Trump-Russia headlines causing D.C. gridlock because they don't want politicians to mess up a good thing. Earnings are growing at a record pace, and economic growth is steady — two things markets like. New legislation could force businesses to change, potentially hurting their growth...

Last week the Bank of Canada embarked on what may be the slowest cycle of interest rate increases in more than three decades as it awaits evidence that consumer prices are picking up.

Surprisingly the median forecast of 16 economists in a Bloomberg survey suggest that the central bank will raise borrowing costs in October, and then twice in 2018 to bring its benchmark interest rate to 1.5 percent.

Governor Stephen Poloz flagged the risk of higher inflation as one reason the central bank hiked for the first time in seven years last week. Yet rapid inflation is among the least of Poloz’s concerns, according to the survey. Asked to rank five risks to monetary policy in order of importance, economists put “inflation overshoots” last.

Instead the biggest risk is the opposite one, they said: that inflation remains below target. They flagged a housing correction and U.S. policies that hurt Canada’s economic growth as the second-biggest. Despite these concerns, this Friday Canada’s core consumer prices and retail sales came in higher than expected, signaling that overall inflation may turn around to clear the way for another rate increase this year...

Nevertheless, this fear is and should be shared by monetary policy watchers worldwide. As we have mentioned before, global inflation is far from target and in fact appears to be decreasing rather than increasing as expected/modeled…

Just this week The Bank of Japan kept monetary policy steady, but pushed back the timing for achieving its 2% inflation target to 2020. "Risks to the economy and price outlook are skewed to the downside," the BOJ said in a statement. Inflation targets have been pushed back six times since the central bank launched its massive stimulus program in 2013. Foreshadowing what comes next for the rest of the developed world or isolated case?
 

Musings
 

Read an interesting piece this week in Harvard Business Review which suggested that business leaders should read more science fiction. Typically the genre is associated with spaceships, aliens and distant worlds, but it offers far more than escapism. By presenting plausible alternatively realities, science fiction encourages us to confront what we think but also how we think and why we think it. Science fiction tales reveal how fragile the status quo is and how malleable the future can be.

As Eliot Peper points out, William Gibson famously coined the term “cyberspace” in his 1984 masterpiece Neuromancer. Neal Stephenson’s The Diamond Age inspired Jeff Bezos to create the Kindle; Sergey Brin mines Stephenson’s even more famous Snow Crash for insights into virtual reality and the Star Trek communicator spurred the invention of the cell phone. Just last week researchers in China successfully teleported the first object from earth into orbit...

Nevertheless, to understand the real value of science fiction it is best to view it as useful not because it may be predictive, but rather because it reframes our perspective of the world.

We can think of “science fiction” as a “mental model” in the sense used by Charlie Munger on the path to building what he terms “worldly wisdom”. Worldly wisdom is an approach to business, investing and life which is based upon using a range of different models from a range of different disciplines to produce something that has more value than the sum of its parts.

As Robert Hagstrom wrote in his book on worldly wisdom entitled Investing: The Last Liberal Art: “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine and produce a cohesive understanding.”

Although it may be a stretch to call science fiction a “discipline” it is useful to consider it a mental model which helps us to question our assumptions.

Assumptions which lead us to follow the herd. Assumptions which lead us to make decisions which are merely average and at times assumptions which can cause disaster.

As such, “science fiction” can increase the power of a latticework of such mental models which extends far beyond narrow questions. Such a latticework can lead to rich and unique understanding of the full range of market forces- new business opportunities and trends, emerging markets, the flow of money, international shifts, the economy in general and the actions/behaviour of humans in society and markets.

Assumptions can be useful as they help us with the cognitive shortcuts we need for navigating an increasingly complex and noisy world.  Nevertheless, they can also be detrimental as they fail to update as the world changes and condition us to be trend followers.

Superior decision makers, businesess people and investors train themselves to do the exact opposite. They train themselves to think in a way that is different than others, more complex and more insightful. By definition, most of the crowd can’t share such a way of thinking.

Thus, the judgements, ideas and assumptions of the crowd can’t hold the keys to success. Instead to free your mind from its false constraints and assumptions and connect with the intellectual explorer within, consider some science fiction this summer and your investment returns may just improve...

I recommend The Dispossessed by Ursula K. Le Guin and for a list of the top 25 works click here.

Let the mind bending begin...

Thought of the Week

"The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” - Warren Buffett

Articles and Ideas of Interest
 

• Americans agree on the best way to invest their money - but they’re wrong. A new survey by Bankrate.com through Princeton Survey Research Associates International asked more than 1,000 Americans what they consider the best way to invest money they won't need for 10 or more years. The most popular answer, chosen by 28 percent of respondents, is to use it to buy real estate. Zero-risk cash investments, such as high-yield savings accounts, came in second with 23 percent of respondents, while the stock market took third place, with 17 percent of respondents. Yikes….does this support the thesis that US stocks find themselves in a bubble? (full article in CNBC here).

• Just because something is popular doesn't mean it's wise. Bankrate cites a study from London Business School and Credit Suisse, which found that after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011, while stocks performed more than four times better. If you believe the story that everyone else believes you will get what everyone else always got. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t...The ultimately most profitable investment actions are by definition contrarian: you’re buying what everyone else is selling (and thus the price is low) or you’re selling when everyone else is buying (and the price is high). These actions are lonely and uncomfortable because most people don’t believe them or do them...Next time you look at your “investments” consider how comfortable you are…

• A leading “happiness” researcher says we’re giving our kids bad advice about how to succeed in life. Habits are built at an early age yet these principles appear to be timeless and thus valuable at any age. Emma Seppala Science Director of Stanford University’s Center for Compassion and Altruism Research and Education suggests that many widely held theories about what it takes to be successful are proving counterproductive. Surprise surprise conventional wisdom/assumptions appear to be flawed. The problems and solutions are as follows:

• Focus on the future. Keep your eyes on the prize
• What we should be saying: Live (or work) in the moment   

• Stress is inevitable - keep pushing yourself
• What we should say: Learn to chill out

• Stay Busy
• What we should say: Have fun doing nothing

• Play to your strengths
• What we should say: Make mistakes and learn to fail

• Know your weaknesses, and don’t be soft
• What we should say: Treat yourself well

• It’s a dog eat dog world
• What we should say: show compassion to others

• Why Canada is able to do things better. Interesting perspective in the Atlantic suggesting that most Canadians understand that when it comes to government, you pay for what you get. Since the election of Donald Trump, there’s been no shortage of theories as to why America’s social contract no longer seems to work—why the United States feels so divided and dysfunctional. Hyper-partisanship, racist tendencies, secular politics of race and nationalism? The author suggests something more mundane: “The United States is falling apart because—unlike Canada and other wealthy countries—the American public sector simply doesn’t have the funds required to keep the nation stitched together. A country where impoverished citizens rely on crowdfunding to finance medical operations isn’t a country that can protect the health of its citizens. A country that can’t ensure the daily operation of Penn Station isn’t a country that can prevent transportation gridlock. A country that contracts out the operations of prisons to the lowest private bidder isn’t a country that can rehabilitate its criminals.”

• Earth’s sixth mass extinction event is underway. Researchers talk of “biological annihilation” as this new study reveals billions of populations of animals have been lost in recent decades. There hasn’t been much talk of the effects of climate change of late but this piece does a great job of highlighting new research which analysed both common and rare species and found billions of regional or local populations have been lost. The researches blame human overpopulation and overconsumption for the crisis and warn that it threatens the survival of human civilisation, with just a short window of time in which to act.                    

• There are two kinds of popularity and we are choosing the wrong one. Which kind of popularity you pursue matters, says Mitch Prinstein, a professor and director of clinical psychology at the University of North Carolina. He recently published Popular: The Power of Likability In A Status-Obsessed World. Prinstein delves into reams of research about what popularity is, and what effects it has on us. He shows that people who seek to be likable tend to end up healthier, in better relationships, with more fulfilling work, and even live longer. Status-seekers, on the other hand, often end up anxious, depressed, and with addiction problems. In the age of Instagram, it’s no surprise that most of us are gravitating to the wrong kind...Getting lost in the pursuit of status will likely come with sacrificing of the only relationships that matter..No wonder we are living in the golden age of “bailing”. David Brooks for the NYT suggests that “There was a time, not long ago, when a social commitment was not regarded as a disposable Post-it note, when people took it as a matter of course that reliability is a core element of treating people well, that how you spend your time is how you spend your life, and that if you don’t flake on people who matter you have a chance to build deeper and better friendships and live in a better and more respectful way. Of course, all that went away with the smartphone.”

• Machines taking over hedge funds despite lack of evidence they outperform humans. Data science is a big part of the comeback story as Credit Suisse’s mid-year survey says 81% of investors likely to put money in hedge funds during the second half of 2017. About 60% of those investors are planning to increase allocations to quantitatively focused strategies over the next 5 years. To be sure, just because a hedge fund has a quantitative strategy does not guarantee returns. A recent Barclays report showed that while investors perceive quant strategies outperform those that are less technology-driven, there's no research that would indicate that is actually the case. In the first half of the year, so-called systematic diversified strategies, or those that have investment processes managed almost entirely by computers and have very little human influence over portfolio management, underperformed other strategies, according to new data by Hedge Fund Research Inc. The HFRI Macro: Systematic Diversified Index declined 2.8 percent during the first half of 2017, while the broader industry gained 3.7 percent. While the headcount, assets and interest appear to be growing, it doesn't appear that the returns are following suit. Interestingly, human brains are able to do useful things that machine brains currently cannot: forget. What does it mean to be human in a world filled with robots anyway? Quartz inquires.

• Lots of talk about bubbles these past few weeks. Justified? Recently for Fox News Greg Ip wrote that: “If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. In other words, it would look a lot like the present.” In another recent piece Scott Galloway convincingly paints a picture of the “full-monty bubble” we are nearing. As evidence, he mentions some hard metrics but focuses on a few interesting soft ones:
   

  -Mediocrity + two years tech experience = six figures

  -Bidding wars for commercial real estate

  -Gross idolatry of youth

  -You can’t get a table at average restaurants

  -There’s an Uber for private jets

  -Jay Z and Jared Leto are considered thoughtful startup investors

  -The food at your company is … good

  -A lot of articles explaining why “this time is different” (here, here, and here)

  -You’re introduced to remarkably uninteresting tech people at Cannes, who people think are “fascinating”

  -Tech CEOs are on the cover of fashion magazines and marrying supermodels

  -Founders of tech firms believe it’s their responsibility to put a man on Mars and cure death because … you know, they’re awesome

  -Billionaires with undergraduate and graduate degrees pay kids to drop out of college#negligent

  -Currencies mined by machines are … currency (I have a better understanding of the chemical underpinnings of a Leonid Meteor Shower than Bitcoin or Ethereum #huh)

  -There are CEOs of two firms at once

   

  This list I must say is convincing but it should be remembered that calling a market top is incredibly difficult as the only thing we can predict is the inevitability of market cycles. Why? Primarily because the future is unknown. Thus, as the calls of a market top multiply (which at present they are) the best response is simple: try to figure out what is going on around you, and try and use that to guide your actions. Is the pendulum oscillating at its peak ready to swing back to the opposite extreme? Or is it just passing its midpoint? Or as Barry Ritholtz teases, you can join the crowded landscape of pundits predicting the next crash by following his guide: 1) pick a bogeyman 2) cite household authority figures 3) always be confident 4) pay attention to non-financial events 5) pick a favoured asset class 6) charts, plenty of charts 7) claim vindication early and often 8) don’t forget the esoteric technical indicators 9) ignore contradictory data 10) don’t manage money...

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."

Musings
 

“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 world. Governments 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 practiced? Nice 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 people. A 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

Spotlight On A Struggling Canadian Economy

Good Morning,

U.S. stocks closed sharply higher Friday, with the S&P and the Nasdaq posting their strongest close ever, after a stronger-than-expected jobs report. This was an impressive report as it assuaged fears of a faltering economy. Things do in fact appear to be picking up in the US. Perhaps not so much in Canada…
 
Spotlight on the Canadian Economy: Great article on Bloomberg explaining how the lethargic Canadian economy can’t shake its reliance on housing. At present, Canada is in slowest expansion outside recession in six decades and real estate is now the country’s biggest industry at 12.4% of GDP. Furthermore, Statistics Canada delivered a double whammy of data on Friday that showed a deteriorating employment picture in July — and a higher jobless rate — along with a widening trade gap a month earlier that produced a record deficit as exports declined.
 
The danger here is that Canada’s economy is now almost completely reliant for growth on bank lending and the hot Vancouver (expose by Bloomberg on the Vancouver boom) and Toronto housing markets.
 
Real estate and financial services now account for 20 percent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record and policy makers scrambling to slow price gains that are making homes unaffordable for all but the wealthiest buyers. How can this possibly continue? With these new numbers it is clear how difficult it is for policy makers and the Bank of Canada to deal with this growth issue. Damned if you do. Damned if you don’t.
 

Thought of the Week

"The three great essentials to achieve anything worth while are: hard work, stick-to-itiveness, and common sense." -Thomas A. Edison

Stories and Ideas of Interest

• Interesting piece from Boston Consulting Group looking at the sustainability of two of the major drivers of global economic progress: globalization and technology. The division between the winners and losers of global integration and technological progress is threatening to derail growth. As more people feel left behind, firms could face an environment of escalating political risk, compromising their ability to invest, to access markets and talent, and to innovate and create wealth. What can corporate leaders can do to shape conditions for continued prosperity?

• Although Hillary is up in the polls The Clinton camp needs to be careful to avoid falling into the same trap as the remain campaign. The complacency that led to the leave vote must not be repeated in the US. Donald Trump and his populism can only be headed off by positive values. The convention message that love beats hate, that the country is stronger together, is simple but powerful. Every statistic, every fact, every endorsement should be couched in terms of these values.

• Valuation Spreads: The Brooklyn Investor has a look at some research out of Pzena Investment Management highlighting the fact the valuation spreads between the cheapest stocks and the most expensive is at record highs. At present the spread is at historically high levels. That's kind of amazing. Why does it matter? This is very, very interesting considering the big boom now in 'passive' strategies.  Does this look like an environment where you would want to invest passively? Of course, the obvious way to play it is to stick with cheap stocks. That is usually a great idea, but it seems like it's a really, really great idea now. 

• The worst ETFs you can own: A Wealthof Common Sense dives into what ETFs are popular, which are poor and what to look for when you buy ETFs.
  
   

• The recovery remains sluggish. Why? The growth of the US economy keeps falling short of expectations. Despite good jobs numbers today, last Friday, we learned that the US economy grew at an inflation-adjusted rate of 1 percent in the first half of 2016. That’s the slowest six-month growth rate since 2012, and it continues the slow growth that has characterized the recovery since 2009. Vox paints an easy to understand picture of the theories that attempt to explain why growth remains elusive:
   
  1) running out of innovations 2) too little spending 3) bad corporate governance is causing companies to under invest 4) the economy is weighed down by debt 5) excessive regulation 6) excessive regulation in big cities 7) the economy is becoming dominated by big incumbent companies 8) a slow growing ageing population
  
   

• Michael Coren on the technology being developed to hack our bodies. Just think synthetic blood substitutes to boost strength and endurance, brain implants to improve concentration and information processing, and gene splicing techniques that hack the human genome with surgical precision. “Upgrades are not just for software anymore. Humans are steadily gaining access to technologies that enhance our brains and bodies. But most Americans see this as yet another way for the haves to get a leg up over the have-nots.” The future begins now. Read more here

All the best for a productive week,

Logos LP

Logos LP Q1 Fund Performance Is In

Good Morning,

U.S. stocks closed mixed Friday, the last trading day of the month, as encouraging earnings from major tech companies offset negative reports from some energy firms and a disappointing GDP report.
 
Friday's gross domestic product reading fell below even the low bar predicted by Wall Street. The 1.2 percent growth rate in the second quarter combined with a downward revision to the first three months of the year to produce an average growth rate of just 1 percent.
 
In total, it was far below the Wall Street forecast of 2.6 percent second-quarter growth and didn't lend a lot of credence to a Fed statement earlier this week that sounded more confident on the economy.
 
Our take: In a slow growth environment like this you need to focus on the growth individual stocks can provide. Focus on what you can control and let the rest float on by. In our modern world, the temptation is always to be doing something. Those who aren't constantly in motion seem behind the times. However, there are situations where the best possible action is to sit on your hands, stick to the businesses you understand and wait for favorable opportunities.
 

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

Ideas from Logos LP

Logos LP’s performance for Q1 is in. Since December 31st 2015, Logos LP has returned 13.22% to unitholders (the S&P 500 has provided a total return of -3.02%: S&P 500 benchmark is converted into CAD. Although not a perfect benchmark, it reflects the largest US companies and is a relatively good temperature of the US economy. Performance data is from RBCCM and RBCDI.) and the fund is currently compounding at an annual rate of 19.96% since inception in 2014 (18.65% on a one-year basis).
 
If you would like to discuss these results or view our Quarterly letter please contact us.

Logos LP in the Press

Our Head of Strategy considers why most experts got the result of the Brexit vote wrong and teases out a lesson that can make us better investors especially at times when the market is range bound. The article was written for SeekingAlpha.

Stories and Ideas of Interest

• What if Millennials’ aversion to car-buying isn’t a temporary side effect of the recession, but part of a permanent generational shift in tastes and spending habits?  The Atlantic Magazine does an interesting expose in order to answer the question of why millennials appear to be the cheapest generation ever. The Great Recession is responsible for some of the decline. But it’s highly possible that a perfect storm of economic and demographic factors—from high gas prices, to re-­urbanization, to stagnating wages, to new technologies enabling a different kind of consumption—has fundamentally changed the game for Millennials. In other news….Nine out of 10 Millennials say they eventually want a place they own, according to a recent Fannie Mae survey.

• While we’ve jumped down the millennial rabbit hole, The Atlantic debunks the myth of the millennial entrepreneur as the only age group with rising entrepreneurial activity in the last two decades is people between 55 and 65. But what about the entrepreneurial start-up mentality we’ve all gotten used to hearing about? But apparently Canadian millennials are stuck in their parent’s basement- and things are getting worse with employment to population ration among youths falling.

• FactSet highlights that Brexit hit eurozone sentiment strongly and elevated fears of a domino effect that would result in a eurozone break up in the long term. Sentix’s euro break-up index moved from a 12.27% probability at the end of May to a 27.18% likelihood post-Brexit. Increasing concerns over Grexit, Quitaly, and other movements can be seen in Sentix’s Exit Probability series for individual countries in the chart below:

• Reality isn’t always pretty. But sometimes it is. Barry Ritholtz looks at “soaring crime” and “bad loans” to remind us that we need to protect our portfolios with eternal vigilance against misleading statistics, numbers without context and data massaged in the service of ideology.
   

• Just when it seemed that negative yields could not spread any further, they did. Corporate bonds paying negative interest rates now account for about $512 billion of market value, bringing the world close to a total of nearly $10 trillion in securities with yields below zero. Most are government securities. Yet instead of looking at this phenomenon as an anomaly or as a harbinger of more sinister things to come Tyler Cowen for Bloomberg View suggests that perhaps the most overlooked point is that the supply of negative-yielding securities is not so large relative to total global wealth. Maybe it’s time we started thinking of negative securities as the equivalent of fire or earthquake insurance for that wealth. So negative yields might just be a sign that you should be less scared rather than more.
  
   

• BUY THE DIP! Has this old adage been working in the tough market? Yes: buying the deepest stock dips in 2016 returned three times the S&P 500. In fact a strategy of trading ‘oversold’ shares is up 28 percent YTD…Could the “old school” be en vogue again?

• Silicon Valley banks are handing out no-money-down mortgages. That could spell trouble if the intertwined tech and real estate bubbles burst.

All the best for a productive week,

Logos LP