Newsletter

Your Playbook For A Monetary Policy Induced Market Pullback

Good Morning,

The complacency and calm that characterized most of the summer is over! The tranquility that had enveloped global markets for more than two months was upended yesterday as central banks started to question the benefits of further monetary easing (ECB left things unchanged this week and some are suggesting that both Japan and Europe are going to start running out of bonds to buy…Governments may actually have to pick up the baton!), sending government debt, stocks and emerging-market assets to the biggest declines since June. The dollar also jumped and U.S. equities closed sharply lower as concerns the Federal Reserve might raise interest rates this month loomed following comments made by key Fed officials.
 
In addition, one of the most popular equity trades of the year broke down Friday as utility stocks and consumer staples shares tumbled as much as 3 percent while the yield on the 10-year Treasury note jumped. Thirty-day correlation between moves in the bond yield and the S&P 500 Index turned negative this month, meaning equity and Treasury prices are moving in the same direction. Attracted by high dividend payouts, investors have piled money into so-called defensive stocks this year as bond yields plunged.
 
Time to take a hard look at your portfolio?
 
Our take: Firstly, this part of the year historically has 20-to-25 percent more volatility than any other time of the year. Secondly, Fed officials may be boxed into a corner where they have to raise rates in September in order to maintain credibility. They may not in which case markets will rally yet at this point, the balance is to the downside and thus it would be a good time to consider raising cash.
 
What to do? With interest rates so low for so long, and billions of dollars in government bonds around the world with negative yields, dividend stocks have been on fire. Yet with the probability of a rate rise increasing, these stocks are selling off….
 
Nevertheless, for the long-term investor they still may be your best bet. Long-term stock performance is helped greatly when companies not only pay dividends but reduce the share count by repurchasing shares.
 
Lower borrowing costs and a long economic expansion in the U.S. mean that domestic small- and mid-cap companies are in “great shape” as they’re holding a lot of cash.
 
Steven DeSanctis, an equity strategist at Jefferies used his bank’s data, as well as information provided by FactSet and Russell Investment Group, and calculated that, from the end of 1985, companies that reduced their share counts through buybacks while paying dividends outperformed the overall U.S. stock market significantly:
 

  • Companies that reduced share counts achieved an average annual total return of 14.1%, compared with 6.7% for companies that let share counts rise or stay at the same level.
  • Companies that paid dividends had an average annual return of 11.7%, versus 6% for non-payers.
  • Companies that had done both — reducing share counts while paying dividends — had an average annual return of 13%, against an average return of 9% for the broader market.

 
If rate increase fears continue to drag the dividend payers down start looking for companies that have shareholder-friendly management (paying dividends and reducing share counts), healthy balance sheets, strong free cash flow and high ROIC. 
 
Companies to consider: Cal-Maine Foods Inc. (NASDAQ: CALM), A&W Revenue Royalties Income Fund (TSE: AW.UN), Rocky Mountain Dealerships Inc. (TSE: RME), Grupo Aeroportuario dl Srst SAB CV (ADR) (NYSE: ASR), Brookfield Infrastructure Partners L.P. (TSE: BIP.UN), Enercare Inc. (TSE:ECI)

Thought of the Week
 

"New beginnings are often disguised as painful endings.” –Lao Tzu


Logos LP in the Media


Logos LP will be presenting at this year’s MoneyShow Toronto ConferenceSeptember 16-17, 2016  at the Metro Toronto Convention Centre. We will be presenting as a panel looking at family run businesses and whether the nature of their ownership can be an indicator of equity outperformance. Our Panel will be held at 2:45PM -3:30PM Sept. 17, 2016.

For more information on our talk please click here
 
There will be many other interesting speakers on both days so join us and Click here or call 800-970-4355 to register for your free spot at The MoneyShow Toronto!  (please mention priority code 041782).

Our Head of Strategy opened the Toronto Stock Exchange last Friday with Big Brothers Big Sisters of Toronto as an Ambassador to the Financial Community. September is Big Brothers Big Sisters Toronto awareness month.

Stories and Ideas of Interest

 

  • Does time kill periods of economic growth? Australia has now gone 25 years without being in recession, the second longest streak in the developed world. "But it is no time for complacency," said Treasurer Scott Morrison. "We continue to fight for every inch of growth." Official numbers from the Australian Bureau of Statistics revealed seasonally adjusted Q2 GDP growth of 0.5%, a shade under forecasts of a 0.6% increase.

 

  • Wall Street’s next frontier is hacking into the emotions of traders. Startups wielding sensors and algorithms promise a new era of surveillance. Ben Waber, chief executive officer at Humanyze, discussesnew technology that measures and tracks traders' emotional responses in an attempt to limit losses and improve returns. He speaks on "Bloomberg Markets." 

 

  • Conditions are right for a big city exodus. The stock market of the late 1990s is remembered mostly for high-flying dotcom equities that eventually crashed back to earth. Yet, from a money flows standpoint, the bigger imbalance of that era was that large-cap stocks fetched very high valuations relative to small cap stocks. This market opportunity was exploited by hedge funds, leading to a decade of outperformance and huge growth in the industry. Conor Sen for Bloomberg posits that in many ways, the national housing market is similarly positioned today.

     

  • The World Wide Cage. Nicholas Carr for Aeon posits that technology offered to set us free. Instead it has trained us to withdraw from the world into distraction and dependency. 

     

    “What Silicon Valley sells and we buy is not transcendence but withdrawal. We flock to the virtual because the real demands too much of us..”

     

    Has the internet given you greater sense of freedom in your life? 

 

  • An MIT scientist claims that he has invented a pill that is the fountain of youth. Leonard Guarente is certain he’s succeeded where doctors (and quacks) before him have failed. His pill will either extend lives or tarnish his career. 

 

  •  Canada’s unemployment rate rose to 7% in August. Nearly half of all Canadians are draining their bank accounts between pay periods, and many are adding to their debt levels to cover expenses as they grapple with an uncertain economy, according to a poll released Wednesday. 

 


All the best for a productive week,

Logos LP

Disclosure: Logos LP is long Cal-Maine Foods Inc. (NASDAQ: CALM), A&W Revenue Royalties Income Fund (TSE: AW.UN), Rocky Mountain Dealerships Inc. (TSE: RME), Grupo Aeroportuario dl Srst SAB CV (ADR) (NYSE: ASR)

Logos LP Is Presenting At This Year's MoneyShow Conference

Good Morning,

U.S. equities closed higher on Friday, with the three major indexes posting weekly gains, following a disappointing employment report.
 
The Jobs report came in a bit below expectations but didn’t necessarily take a rate hike off the table for 2016 as the labor market still appears to be improving. The dollar as well as U.S. treasuries supported that view with the dollar trading higher and the yields on both the 2 year and 10 year moving higher.
 
Our take: Was bad news good news in this report pushing stocks higher? The fact that utilities rallied suggests yes. But with USD rallying and treasury yields rising it isn’t so clear. Let’s remember that August marked the 71 straight month with positive job gains, the longest on record.
 
Looks like the Fed is still faced with a conundrum. Mark Whitehouse for Bloomberg puts together an interesting chart showing where four indicators -- unemployment, prime-age employment, wage growth and inflation -- stand compared with where they were before the previous cycles.
 
Given the uncertainty, why would the Fed go ahead? Should she stay or should she go?

 

Thought of the Week

" A man who is a master of patience is master of everything else.” – George Savile

 

Logos LP in the Media

Logos LP will be presenting at this year’s MoneyShow Toronto Conference September 16-17, 2016  at the Metro Toronto Convention Centre. We will be presenting as a panel looking at family run businesses and whether the nature of their ownership can be an indicator of equity outperformance. Our Panel will be held at 2:45PM -3:30PM Sept. 17, 2016.
For more information on our talk please click here
 
There will be many other interesting speakers on both days so join us and Click here or call 800-970-4355 to register for your free spot at The MoneyShow Toronto!  (please mention priority code 041782).


Ideas from Logos LP


Our CIO looks for out-of-favor investment ideas and here on The MoneyShow he discusses his strategy, his emphasis on "catalysts", and a trio of stocks he considered undervalued in the current market.

 

Stories and Ideas of Interest

 

  • Have we really learned our lesson since the financial crisis of 2007-2008? Maybe not. Rumors of leverage's death have been greatly exaggerated. Bloomberg looks at a bevy of derivatives investors are using to juice returns.

 

  • Why do business executives—people who already possess status and wealth—commit financial crimes? Eugene Soltes offers some interesting theories in his new book, Why They Do It: Inside the Mind of the White-Collar Criminal, including the notion that many senior business people operate in a moral "gray zone." An associate professor at Harvard Business School, Soltes posits that they step over the line—breaking accounting rules or making illegal insider trades—in part because they rely on intuition. And, it turns out, their instincts stink. 

 

  • You don’t have to be an expert on digital currencies like bitcoin to be intrigued by the potential of the technology underlying them. Bloomberg looks at Blockchain, as it’s called, as something new in computing. It mashes up cryptography and peer-to-peer networking to create what amounts to a shared database of transactions and other information—which can be open to all, controlled by no one. It’s not just for securely recording payments in crypto-coinage; a blockchain can handle complex transactions, even entire contracts. True believers say blockchain could reduce the need for businesses to organize as companies, which get work done via command and control. Hype or not?

     

  • The explosion of the gig economy is real. One of the reasons Mustafa Muhammed finally broke down and bought a smartphone was because he needed to find a job. Why? Because there is an app for that. Bloomberg dives deep into the workforce trend of people wanting to choose their own hours. Human-resources startups raised $1.2 billion this year as “alternative work arrangements” -- including temp work, on-call work, contractors, and freelancers -- accounted for all the net employment growth in the U.S. from 2005 to 2015. That trend is widely expected to continue.

 

  • No but really real estate in Canada (Vancouver and Toronto) is getting silly (bubbly). Vancouver homeownership costs now eat up a record nine out of every 10 dollars of a typical family’s income. If you have to ask about upgrading from a condominium to a single-family home, you really can’t afford it. How does this end? No wonder fear of a housing crash in Canada is spreading…

 

  • If It’s Stability You Want, Then Rent, Don’t Buy. Anyone who got caught in the real estate bust last decade in the U.S. or U.K. probably knows this already, but now the economic data is in: home ownership can be bad for you. More accurately, it can be harmful to the financial stability of whole economies. That’s the evidence from a new study published this week by European Central Bank research economist Gerhard Ruenstler.
     

All the best for a productive week,

Logos LP

Are We Able To Come To A Stop In Our Lives, Even For One Moment?

Good Morning,

More Fed watching this week. Yawn Yawn. U.S. stocks closed mixed on Friday, with utilities lagging, as investors digested remarks made by Federal Reserve Chair Janet Yellen and Vice Chairman Stanley Fischer.
 
The Dow Jones industrial average closed about 50 points lower after briefly falling more than 100 points. Earlier, Fischer told CNBC next week's jobs report would weigh on the Fed's rate hike decision.
 
Our take: The U.S. economy continues to show signs of recovery. Although we believe a rate hike is unlikely this year, if the U.S. continues to add jobs at a rate of more than 200,000 per month heading to year's end, we wouldn't be surprised to see the Fed raise rates by 50 basis points in December.
 
Something I’ve been thinking about a lot this week is the concept of “stopping”. These days we spend most of our time running around doing, scrambling to digest and process a seemingly endless flow of information. Are we able to come to a stop in our lives, even for one moment?
 
What stopping can do is make the going more vivid, more deep, more purposeful. Things get simpler. Meaningful information becomes more readily discernible as our inner voices become more present. By making time to “stop” every now and then, can we free ourselves to truly have time for the present and allow ourselves to be exactly as we are?

 

Thought of the Week

"If your mind isn’t clouded by unnecessary things, this is the best season of your life.” – Wu-Men
 

Stories and Ideas of Interest

  • The Fed risks "shocking" consequences if it admitted outright that a hike wasn't coming this year, said Rabobank's Michael Every." It effectively would be locked into a paradigm where we can't ever really raise rates” an admission that monetary policy had become ineffective.

 

  • More and more economic data points have erased the financial crisis and we appear to be quite close to where we started in 2007. The question is where is the risk? Has it disappeared? Or is it hiding somewhere investors haven’t looked yet?

 

  • Could emerging markets be an investment opportunity to consider? BlackRock said it upgraded EM equities to overweight as the firm expects a stable U.S. dollar, low rates and a better outlook for growth. Nevertheless, vulnerabilities remain. Indebted corporations in several emerging markets – including China and Brazil – could face trouble in the near future, which may send shocks reverberating through their national banking sectors. In addition, there is heightened risk of financial distress in the medium-term in Turkey.

     

  • Could unaffordable housing prices be a good thing? Conor Sen for Bloomberg suggests that housing constraints in some cities in the U.S. accelerate economic development in emerging parts of the country. They decrease economic inequality between metro areas and lead to economic interdependence that drives civil rights. Quite interesting ideas to consider in light of Toronto's hot real estate market...

 

 

  • Could polls and betting odds be wildly inaccurate and Trump is going to be elected? Could people be lying about who they plan to vote for like they lie about what they are watching when they are being monitored? They won’t say it’s the Kardashians or Trump because it’s just too embarrassing… But when they are no longer being watched they may just go back to their favorite shows and their favorite politicians: those who offer the most mindless entertainment…4 years of Clinton in the Oval Office…who wants to watch that?

 

All the best for a productive week,

Logos LP

 

 

Is There Really Such A Thing As The "Good Old days"?

Good Morning,

U.S. stocks closed lower on Friday, with utilities dropping more than 1 percent, as investors digested hawkish rhetoric from Federal Reserve officials and kept an eye on oil prices.
 
Investors continue to watch for hints regarding when the Fed will raise interest rates but more fundamentally there is a lot of cash on the sidelines and no strong conviction that stocks are cheap. Does this really signal a top or rather a directionless market?
 
Market expectations for a rate hike in September were just 18 percent Friday and 43 percent for December, according to the CME Group's FedWatch tool. Bear in mind that the markets and the Fed have consistently overestimated the timetable for rate hikes…
 
More interestingly, this week I read a fascinating article by Alan Jay Levinovitz and I’ve been reflecting on whether there really is such a thing as “the good old days”. Is there really some period of time or cultural state that we can each point to and look back upon with joy, comfort and longing? Or does nostalgia have a dark side?  
 
“Make America great again!” yells Donald Trump to a raucous crowd that hangs on his every word. Is there anything new here? Playing on people’s fantasies and their need to believe is as old as the rising sun. Prophets both secular and religious alike have been doing it for centuries. But it's important to make a crucial distinction between harmless nostalgia aka. remembering that sunny day on the beach in Jamaica vs. the belief in a past societal perfection.
 
The former represents harmless sentimentality, the latter form of nostalgia represents the ideological foundation for political movements such as Greece’s Golden Dawn, which calls for a return to Hellenic glory via radical right wing nationalism, and ISIS, which waxes rhapsodic about a distorted Islamic golden age. “The good old days” isn’t a joke. The fairy tale isn’t something to be taken lightly.
 
As Levinovitz explains it “is a virulent falsehood that infects those whose intellectual defences have been weakened by fear and insecurity. It is easily weaponised by power-hungry propagandists who seek to replace nuanced discourse with patriotic platitudes, and diverse ideologies with homogenous tribal nationalism: Mao, Pol Pot, Hitler, the Ku Klux Klan. In its endless incarnations this myth has shackled people’s thoughts and actions to the promise of a fiction, facilitating evil on all scales, from everyday racism to the greatest human rights catastrophes of the 20th century.”
 
There is no doubt that there are lessons to be gleaned from the past. Perhaps certain lessons in simplicity or commitment, yet looking back must be done responsibly.  People have an overwhelming need to believe in something. Life is distressing and thus those who can manufacture romance or conjure up pleasant fantasy are like oases in the desert: people flock to them. This isn’t to say that the present is perfect but it is to say that letting go of a romanticized and often fabricated version of the past is necessary if we want a chance at building a better future.

 

Thought of the Week

"Things ain’t what they used to be and probably never was.” – Will Rogers

 

Stories and Ideas of Interest

  • Howard Marks of Oaktree Capital has released a new memo on political reality. He does not disappoint diving deeply into the oxymoron of “political reality”. The world of politics has its own altered reality, in which economic reality often seems not to impinge. No choices need to be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real word, politicians seem to feel free to ignore them. If a pesky journalist asks about consequences of a policy statement the politician can simply ignore them.

 

  • Could the best stock market indicator be the Financial Media’s competition for clicks? Price action blog suggests that the frequency of articles in the financial media and blogosphere with calls for a stock market collapse is often a good indicator of a bullish market. No wonder Marc Faber who again recently announced that the stock market would soon crash 50% has basically never been right. Sex sells!

 

  • Morgan Housel offers some a few big ideas. 2 of my favorite:
     
    Recessions and bear markets are very easy to predict, except for the timing, cause, magnitude, duration, location, and policy response. 
     
    Bubbles occur because confidence rises as fast as asset prices. People don't just get excited about making money; they feel brilliant, and intellectually justified to play harder in the next round. (Sound like the average Toronto real estate enthusiast?)

 

  • Leonid Bershidsky for Bloomberg explores how the most successful technology companies are platforms. What makes a platform successful? Could the technology industry be more socially focused than technology focused?

 

  • Some of the smartest minds in finance tell Business Insider how Wall Street is going to change – This is what they said. Spoiler: Blockchain and Automation.

 

 

  • A new report from credit agency Equifax shows debt delinquencies continue to soar in Canada's oil-producing regions, but it also shows a troubling new trend: Canada's youngest debtors are increasingly having a hard time managing their debt.

 

All the best for a productive week,

Logos LP

S&P at Record Highs. Danger?

Good Morning,

U.S. equities closed mostly lower on Friday as investors digested disappointing economic data, following a record-setting day on Thursday. Retail sales for July came in unchanged, with economists expecting a 0.4 percent increase. Meanwhile, the July reading of the producer price index showed a decline of 0.4 percent, as economists forecast a 0.1 percent gain. Has the market gotten ahead of itself? Is the consumer showing signs of weakness?
 
What of valuation? Although we stress the analysis of individual businesses, it is interesting to consider the fact that yesterday the value of the S&P 500 index closed at yet another all-time high at 2185.79. The trailing 12-month P/E ratio for the S&P 500 now stands at 19.5, based on yesterday’s closing price (2185.79) and trailing 12-month EPS ($111.89). Given the high values driving the “P” in the P/E ratio, how does this 19.5 P/E ratio compare to historical averages?

The current trailing 12-month P/E ratio of 19.5 is above the three most recent historical averages: 5-year (15.9), 10- year (15.9), and 15-year (17.6). In fact, this marked the highest trailing 12-month P/E ratio for the S&P 500 since February 12, 2010, when the trailing 12-month P/E ratio was 22.3. On that date, the closing price of the S&P 500 was 1075.51 and the trailing 12-month EPS was $48.19.
 
This historically high reading should be taken into consideration yet we have yet to see signs of euphoria. Bullish side of the equation: improving earnings momentum, junk bonds holding up and loose central bank policies. Bearish sentiment: lowest volatility in the past year, slower global growth and U.S. election uncertainty.

 

Thought of the Week

"Beware of dissipating your powers, strive constantly to concentrate them. Genius thinks it can do whatever it sees others doing, but it is sure to repent of every ill-judged outlay." -Johann Von Goethe

Stories and Ideas of Interest

  • Investors appear to have placed a one way bet on Uber as the company that will be at the center of an utter transformation of our collective lifestyle. Steve LeVine for Quartz considers whether the consensus has miscalculated. What if the coming trends expected to propel Uber—primarily a decline in private vehicle ownership and the rise of self-driving, clean-powered cars—do generally unfold, but not quite transformationally? What if they take much longer to materialize than anyone is expecting?

 

  • Gold may have met its match after a stellar start to the year as a probable trio of rate hikes from the Federal Reserve through to the end of 2017 means there’s little room for it to rally further from near a two-year high, according to Pictet Wealth Management. With the dollar in a long-term uptrend, bullion isn’t likely to break the $1,430 an ounce level, and may stabilize around $1,250 to $1,300.

 

  • The world will consume less oil next year than previously thought due to a "dimmer macroeconomic outlook," the IEA said in its monthly oil market report. The energy watchdog expects global oil demand to grow by 1.2M barrels per day in 2017, a decrease of 100K bpd compared with last month's forecast. Adding to the recent pressure on crude prices, EIA data on Wednesday showed a U.S. crude inventory build of 1.1M barrels last week, while Saudi Arabia said its output hit a record high in July. Furthermore China’s imports of crude oil, coal and natural gas slowed in July, offering no solace for producers hoping demand from the world’s largest energy consumer may help mop up global gluts of the fuels.

 

 

  • Driverless cars may not be a boon for our cities. They may cause more congestion, mass unemployment, and a huge infrastructure deficit.

 

  • llison Schrager on the diminishing returns of a college-educated workforce. “[G]iven the current state of technology and invested capital, turning the unskilled into skilled workers won’t do much for growth because the US economy already has all the educated workers it needs.” Read more here.

 

  • We find ourselves in the middle of one of the greatest sporting events on the planet the Rio Olympics. Is the gymnast Simone Biles really unbeatable? Quartz breaks down the physics behind her gymnastics.


All the best for a productive week,

Logos LP