Good Morning,
Happy New Year and welcome to 2018! We hope that you all had a nice Holiday and were able to make some time to relax and refocus.
This week U.S. stocks rose to records as retail sales sparked optimism in the economy and JPMorgan Chase & Co. signaled tax cuts will bolster profits. The S&P 500 is enjoying its best 10-day start to a year since 2003. In that time period, it has rallied 4.2 percent. In the first 10 days of 2003 it gained 5.9 percent.
So far stocks have carried over the momentum from 2017 as the S&P 500 and Nasdaq have closed lower only once this year, while the Dow has fallen just twice. Heading into the end of the week treasuries pared losses that sent the two-year yield over 2 percent for the first time since 2008 as investors assessed an unexpected acceleration in core inflation that likely boosts the Federal Reserve’s case for higher rates.
The underlying pace of U.S. inflation unexpectedly accelerated in December amid increased housing costs, reinforcing the outlook for the Fed to raise interest rates several times in 2018.
Our Take
The markets are off to a blistering start in 2018 and we can’t say we are surprised. Pessimism has been high for years now and the clouds have begun to lift. Furthermore, in the year since President Donald Trump has been in office, the economy has done something it has been unable to do since 2005 — maintain 3 percent growth for three quarters in a row.
While the final numbers aren't in, economists Friday were ratcheting up growth projections to 3 percent or better for the fourth quarter, after December's strong retail sales and revisions to prior months. Perhaps a suggestion we made back in January 2017 with regards to Trump’s Braggadocio is in fact playing out: “Perhaps if businesses and consumers truly believe that Trump will “make America great again” the rhetoric will become reality as wallets open and corporate war chests are put to work. Sentiment is powerful and often precedes outcome.”
An excerpt from our 2017 annual letter to our investors:
“Taken together, absent a black swan event (flashpoints include the nuclear programmes of Iran and North Korea, disputes between China and its neighbors, a slowdown or crash in China, strife in the Middle East and the politics of populism threatening the EU) we view 2018 to play out similarly to 2017. With the recent enactment of the Tax Cut and Jobs Act, even more money will flow into circulation and inflation will likely not tick up in any meaningful way as excess liquidity will likely continue to stream into financial markets (think buybacks and dividends) rather than be used to expand plants or buy equipment or other goods or services. As such, it is likely that staying long high quality stocks in 2018 will remain the best game in town.
The good times are rolling and as we enter the new year we do so cautiously as it is during these periods that investors are most susceptible to folley. The classic law of nature bears re- iteration: If nothing bad is happening now, wait a bit and it will.
*To view our entire 2017 annual letter to our investors please click here.
Musings
One housekeeping issue: we will no longer be publishing this newsletter bi-weekly. It will now be published only once a month. Why?
Over the last few years we’ve learned that the frequency of writing is not always synonymous with its thoughtfulness. Most mutual funds, newsletters, and hedge funds discuss their ideas and holdings at length with their investors and followers with relative frequency whereas value investors such as Buffett, Pabrai and Spier write rarely let alone disclose their public equity portfolio positions. We have decided to follow suit, as we agree with Warren Buffett’s conclusion that investing is not a spectator sport as too frequent public discussion of current or potential investments may compromise independence of thought.
“Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.” -Warren Buffett
Having said that, we invite you to have a read of our 2017 annual letter to our investors linked above. We will also review our past 2017 MoneyShow investment ideas below. As well as those for 2018.
2017 MoneyShow Investment Ideas Reviewed
Peter Mantas
Huntington Ingalls Industries (NYSE:HII) : 2017 return: +29.13
-This remains a position in Logos LP.
Cemex SAB de CV (ADR) (NYSE:CX) : 2017 return: -6.6
-This was a short term peripheral opportunity we exited in 2017.
Matthew Castel
Syntel, Inc. (NASDAQ:SYNT) : 2017 return: +16.17
-This was a short term peripheral opportunity we exited in 2017.
AAON, Inc. (NASDAQ:AAON) : 2017 return: +11.75
-This remains a position in Logos LP.
2018 MoneyShow Investment Ideas
To download full report and analysis click here.
Peter Mantas
Luxoft Holding Inc. (NYSE:LXFT)
-This remains a position in Logos LP.
Del Taco Restaurants Inc. (NASDAQ:TACO)
-This is a new position in Logos LP.
Matthew Castel
Morguard Corporation (TSE:MRC)
-This is a new position in Logos LP.
Grupo Aeroportuario dl Srst SAB CV (ADR) (NYSE:ASR)
-This remains a position in Logos LP.
Logos LP December 2017 Performance
December 2017 Return: +3.89%
2017 YTD (December) Return: +33.84%
Trailing Twelve Month Return: +33.84%
CAGR since inception March 26, 2014: +21.36%
Thought of the Month
"The problem is to distinguish between being contrary to a misguided consensus and merely being stubborn.” - Robert Arnott and Robert Lovell Jr.
Articles and Ideas of Interest
- Stock investors will benefit most from corporate tax overhaul. One of the worries about the large tax cuts for corporations is that stock-market investors will benefit more than working-class wages. There is a growing concern that much of the savings will be used for dividends or share repurchases, which would potentially boost the returns for those invested in the stock market. This is likely to accelerate U.S. inequalitybecause the wealthy are now by far the largest owners of equities. Almost half of all American households own some stock through direct purchases, mutual funds, ETFs or pensions, but the top decile controls the bulk of those assets. According to research from the New York University economist Edward Wolff, the top 10 percent of American households now own 84 percent of all stocks. That’s up from 77 percent ownership in 2001. Sadly the rest of US households may rue their binge of 2017. The latest data on the saving rate, which broke under 3 percent to 2.9 percent in November, the lowest since 2007, suggest that an encore to the ebullient buying over the holidays will not happen in the new year.
- The end of globalisation as we know it? The period of hyperglobalisation that began in the early 1990s may be drawing to a close. Should deglobalisation come to pass, it could have far-reaching consequences for countries, corporations, and investors. Barclays puts together a nice overview of the issues in this report.
- The next financial crisis is probably around the corner-we just don’t know from where. Financial crises are happening more frequently, becoming almost a fixture of modern life, according to research by Deutsche Bank. While meltdowns remain difficult to see in advance, the next panic is almost certainly brewing, and it may well be provoked by the world’s major central banks. Deutsche Bank argues that crises have been increasingly frequent since the breakdown of the Bretton Woods system, which, after World War II, fixed exchange-rates and essentially linked them to the price of gold. That coordination ended in the 1970s when the US broke the dollar’s peg to the yellow metal. The link to a finite commodity helped limit the amount of debt that could be created. As strategists at the Frankfurt-based lender see it, the resulting fiat money system has encouraged rising budget deficits, higher debts, global imbalances, and more unstable markets. At the same time, banking regulations have been loosened. In the US, the industry may soon have fewer restrictions and less oversight, a mere 10 years since the last worldwide crisis.
Technology is destroying the most important asset in your life. Most of us come to realize at some point that money is a means, not an end. It affords opportunities, but as research has shown, there are diminishing returns to what it can do for you. In fact, the strongest link between money and well-being comes from its ability to buy you time through conveniences. Our time is limited, and the prevailing wisdom is that the more we have of it, the more opportunities there are for us to experience joy and fulfillment. But is that the whole story? Is time really what adds more to life? Quartz argues convincingly otherwise. The most important asset in your life isn’t time, but attention. The quality of the experiences in your life doesn’t depend on how many hours there are in the day, but in how the hours you have are used. You can spend 80 years of a life with as much free time as you want and still not get out of it as much as someone who only lived for 40 years but managed to appropriately direct attention to the things that mattered to them.
- 2018: The year of the cryptocurrency craze. Every successful new technology undergoes a Cambrian Era-style explosion of growth in which we try to use it for everything. Email, search, social networking—each passed through its “this will solve all our problems!” phasebefore we figured out what its best applications and limitations were. With the Bitcoin bubble testing astronomical prices every day, cryptocurrencies and the blockchain technology that drives them are now taking their turn in this one-tech-fits-all role. What's next? Wired magazine puts together a sober overview of past present and future. For the fascinating and contrarian case that in 10 years nobody has come up with a real use for blockchain see here.
- AI does not have enough experience to handle the next market crash. Artificial intelligence is increasingly used to make decisions in financial markets. Fund managers empower AI to make trading decisions, frequently by identifying patterns in financial data. The more data that AI has, the more it learns. And with the financial world producing data at an ever-increasing rate, AI should be getting better. But what happens if the data the AI encounters isn’t normal or represents an anomaly? Quartz investigates.
- 30 years after Prozac arrived, we still buy that chemical imbalances cause depression. Some 2,000 years ago, the Ancient Greek scholar Hippocrates argued that all ailments, including mental illnesses such as melancholia, could be explained by imbalances in the four bodily fluids, or “humors.” Today, most of us like to think we know better: Depression—our term for melancholia—is caused by an imbalance, sure, but a chemical imbalance, in the brain.This explanation, widely cited as empirical truth, is false. It was once a tentatively-posed hypothesis in the sciences, but no evidence for it has been found, and so it has been discarded by physicians and researchers. Depression is now a global health epidemic, affecting one in four people worldwide. Great piece in Quartz suggesting that treating it as an individual medical disorder, primarily with drugs, and failing to consider the environmental factors that underlie the epidemic—such as isolation and poverty, bereavement, job loss,long-term unemployment, and sexual abuse—is comparable to asking citizens to live in a smog-ridden city and using medication to treat the diseases that result instead of regulating pollution.
Our best wishes for a fulfilling month,
Logos LP
