The Most Precious Resource Of Our Era: Data

Good Morning,
 

U.S. equities closed mostly lower on Friday as investors digested a tough week for retailers as well as mixed economic data.

Several retailers, including Macy's and Nordstrom, saw their stocks tank this week after reporting weaker-than-expected quarterly results, putting the sector under pressure.

The dollar fell while Treasuries rallied after tepid data on retail sales and inflation in the U.S. economy rekindled concern that growth won’t accelerate to levels economists project.

Consumer prices rebounded last month, though at a slower pace than expected, while retail sales advanced after an unexpected drop in March. That was enough to support the case for Federal Reserve tightening in June, though not enough to push stocks higher or dislocate bonds. Investors cast a wary eye on Washington, where President Donald Trump escalated his war with fired FBI director James Comey at the same time his cabinet attempted to move forward on trade and regulatory reforms.

While that was a slowdown from March's 2.4 percent increase, the year-on-year gain in the CPI was still larger than the 1.7 percent average annual increase over the past 10 years.

Overall markets were pretty quiet this week as the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 10 earlier this week, raising concerns about complacency in the market.

In addition, with valuations at record levels many investors and commentators are still actively seeking to identify the next “boogeyman” that will tank markets.

Our Take
 

In light of fears surrounding the low VIX reading in addition to bearish sentiment I want to highlight two things:

1. Since September 2001, the S&P has secured 311% of its gains when volatility is as low as it is now.

2. The first step of a corporate earnings rebound is now in the books with a 13%+ increase in year over year profits being reported in Q1.

Moving to the political front, I’m tired of the attention this man continuously garners, but Donald Trump’s dismissal of FBI Director James Comey on Tuesday merits attention for all the wrong reasons. This is the third time he’s fired someone involved in an investigation of him or his associates.

The bureau has been probing Russian involvement in the U.S. election and possible involvement of Trump associates since the summer. Earlier, former acting U.S. Attorney General Sally Yates was dismissed after she refused to defend Trump’s first travel ban. And former Manhattan U.S. Attorney Preet Bharara was initially asked to stay on in his role before being fired in March.

Bloomberg’s helpful graphic shows how, in each of these cases, the justification for dismissal was inconsistent with prior actions, or immediately followed events related to investigations.

How can we interpret this dismissal? As Timothy L. O’Brien for Bloomberg View opines: self-preservation. There is no point trying to analyze Trump's motives and actions as rational and long-term oriented.  He clearly doesn’t care about policy or process. So searching for "strategy" or "deal-making prowess" in the president is usually a “fool's errand”.

What drives Trump today, and what has always driven him, are twin forces: self-aggrandizement and self-preservation. Most of his public actions can be understood as a reflection of one or both of those needs.

Comey’s firing was a manifestation of the second force: self-preservation. He came for the FBI, what’s next? The rule of law? Nevertheless, while unnerving for world leaders, citizens and investors, at the end of the day the firing is unlikely to lead to previously unforeseen problems in enacting health care and tax reform.

On a more positive note, the election of Emmanuel Macron in France is a clear repudiation of populism as represented by Marine Le Pen. This is a remarkable accomplishment at 39 years old. Macron has managed to triumph over the two parties that have dominated the presidency since 1958 “potentially” heralding in a new era of forward thinking politics.

I say “potentially” as now comes the hard part: turning his political movement into a vehicle capable of winning a majority, or at least garnering enough seats in parliament to govern or form a coalition. We predict that he will win a majority.

Musings
 

More and more buzz is being generated about those who control the most precious resource of our era: data. Like the oil majors of days past when oil was the most precious resource on the planet, the wise are turning their gaze to the giants that deal in data, the oil of the digital era.

And so they should.

These behemoths: Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft- look to be unstoppable. They are (unsurprisingly) the most valuable firms in the world the likes of which even Warren Buffett and Mark Cuban Marvel over. Buffett this week went so far as to say that he was “dumb” not have have recognized their brilliance sooner and Marc Cuban stated that these companies are still undervalued. I would agree.

Few would wish to live without the products/services of any of these companies which underpin both our personal and professional lives. On their face these companies do not appear to transgress antitrust rules yet their control of our data gives them tremendous power.

As data proliferates, those who control it are better able to compete by developing better products, services and experiences thereby creating an even stronger protective moat.

Furthermore as the Economist points out, the possibility of these incumbents being blindsided by a startup in a garage in data age is becoming increasingly slim. They explain that “The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat.”

A current and obvious example is Snapchat. If the business does not collapse under its own unprofitability, Facebook will continue to bleed it out by successfully mirroring its most attractive features.

Interestingly, The Economist suggests that antitrust authorities should move into the 21st century by not considering size as the deciding factor in a merger but rather take into account the size of a firm’s “data assets” when assessing the impact of deals. They also suggest that regulators could loosen the grip that providers of online services have over data and give more control to those who supply them with the data aka: consumers. They prescribe more transparency and more data sharing.

These are novel ideas but highly unlikely to be implemented absent significant public outrage. Will that public outrage be forthcoming? I think not.

Perhaps the most underappreciated fact of internet-age capitalism is that we are all in the inescapable clutch of these companies and we like it that way.

We are already living in a world in which our own human “feelings” are no longer the best algorithms in the world. We are developing superior algorithms which use unprecedented computing power and giant databases. The algorithms of these 5 giants not only know exactly how you feel, they also know a million other things you hardly suspect. When a non-human algorithms knows us better than we know ourselves we are likely to stop listening to our “feelings” and defer decision making to these external algorithms instead. I would argue that this is already happening and we adore it. We are coddled by our conveniences, entertained and comforted by our personal echo chambers of self-importance. 

Be honest, if some anti-tech dictator forced you to drop all five companies, how would you do so? In what order? What would your life look like? Strip each away and take a moment to look at your life and how it would change. Is it one you yearn to return to? I doubt it. 

Power has shifted. As both the volume and speed of data increase, classic institutions like elections, parties and parliaments might simply become obsolete - not because they are corrupt but simply because they don’t process data fast enough.

By the time the cumbersome government bureaucracy makes up its mind about regulating data or the big 5 for that matter (it can’t even pin down immigration, tax, healthcare, and trade reform) the internet/digital world will have morphed ten times. As Yuval Harari states: “The government tortoise cannot keep up with the technological hare.”

Thus, it should come as no surprise that In March, Trump’s Treasury secretary, Steve Mnuchin, said the problem of job displacement by robots is “not even on our radar screen” since it will only come “in 50 to 100 more years.” This is a government completely out of touch. The big 5 will continue their supreme control of today’s most powerful resource: data.
 

*(The above is inspired from a conference I am giving this weekend at MENSA about the societal effects of AI and emerging technologies. Contact me if you wish to see the slides)

Logos LP April Performance
 

April 2017 Return: 4.57%

2017 YTD (April) Return: 18.98%

Trailing Twelve Month Return: 38.16%

Annualized Return Since Inception March 26, 2014: 27.06%

Cumulative Return Since Inception March 26, 2014: 85.70%

Thought of the Week
 

"“What will happen to society, politics and daily life when non-conscious but highly intelligent algorithms know us better than we know ourselves?- Yuval Harari

 

Articles and Ideas of Interest

• Populism is great for stock returns. If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism. A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.

• Why you should have (at least) two careers. It’s not uncommon to meet a lawyer who’d like to work in renewable energy, or an app developer who’d like to write a novel, or an editor who fantasizes about becoming a landscape designer. Maybe you also dream about switching to a career that’s drastically different from your current job. But in my experience, it’s rare for such people to actually make the leap. The costs of switching seem too high, and the possibility of success seems too remote. Harvard Business Review suggests that the answer isn’t to plug away in your current job, unfulfilled and slowly burning out. I think the answer is to do both. Two careers are better than one. And by committing to two careers, you will produce benefits for both.

• There’s no Canadian crisis in sight despite downgrade hitting assets. Moody’s downgrade of Canada’s biggest banks beat down assets in a market already rattled by woes of mortgage lender Home Capital Group Inc. Yet analysts say this isn’t evidence of an impending crisis. We would agree. Sentiment will help to cool an overheated housing market but do not expect any kind of 2007 style housing bust.

• How homeownership became the engine of American inequality. Interesting piece in the NY Times looking at the perverse effects of the mortgage interest deduction (MID). Important in light of the current real estate situation in Toronto. Poverty and homelessness are political creations. Their amelioration is within American grasp and budget. But those Americans most likely to vote and contribute to political campaigns are least likely to support (MID) reform — either because it wouldn’t affect their lives or because it would, by asking them to take less so that millions of Americans could be given the opportunity to climb out of poverty.

• A roadmap to investing for the next 100 years. The University of California looks at where we have been and how we can invest for the long-term. What will work: Less is more, risk rules, concentrate, creativity pays, build knowledge, team up,

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

Avoiding Mistakes

Good Morning,

U.S. stocks posted their first weekly gain since the end of March as bond yields rose amid gains in industrial and financial companies.

On Friday the Dow briefly turned positive in afternoon trade after President Donald Trump told The Associated Press his administration will unveil a "massive tax cut" in a new reform, though the timing of that package was unclear.

While the “Trump Trade” may not be the force it was in the months after the election, it showed some signs of life as the S&P 500 Index rallied 0.9 percent in its biggest weekly gain in two months. Eight of 11 industry groups climbed, with industrial stocks advancing 2 percent and financials gaining more than 1 percent.

Our Take

Investors are still a bit spooked about the French election. Le Pen will make it to the 2nd round along with centrist Macron. We feel that it is too early to say whether she will win the presidential election. As for the Trump trade, lots of noise. Continue to watch Q1 earnings quality.

Musings

Selecting stocks that beat the market for long periods of time is very difficult. To pick up where we left off from the last newsletter, where we considered Vilfredo Pareto’s 80/20 rule, the following should not come as a surprise:

For more on underperformance, see the WSJ article published this week lambasting active management. Consistently beating the market is certainly reserved to only a select few yet where is the bulk of stock market wealth being created?

Interesting piece in The Irrelevant Investor outlining research from a new paper suggesting that  the top thirty firms together accounted for 31.2% of the total stock market’s wealth creation from 1926 to present. The 1,000 top performing stocks, less than four percent of the total, account for all of the wealth creation from 1926 to present. (on the 26,000 stocks that have appeared in the CRSP database since 1926) The other ninety six percent of stocks that have appeared on the Centre for Research in Security Prices (CRSP) database collectively generated lifetime dollar returns that only match the one-month Treasury bill. The median stock underperformed the market with an excess lifetime return of -54%.

What should the average investor glean from this beyond the obvious (the odds of beating the market are not in your favor)? Well it appears that to improve stock picking performance perhaps less focus should be placed on identifying “star firms” than simply avoiding the worst…Keep things simple in both investing and in life. In our daily quests to shine we often forget that there is perhaps greater distinction in simply avoiding mistakes…

Logos LP Updates

Our fund performance for March is in: 5.13%

2017 YTD to March: 13.67%

Annualized return since inception March 26, 2014: 25.10%

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

Articles and Ideas of Interest

• Paul Tudor Jones says U.S. stocks should terrify Janet Yellen. The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him. This isn’t really anything new as other hedge fund managers also point out that margin debt -- the money clients borrow from their brokers to purchase shares -- hit a record $528 billion in February, a signal to some that enthusiasm for stocks may be overheating. Yet what is new and somewhat interesting is what Tudor points to as the spark for the next market crash: risk parity funds.

• The American economy isn’t actually becoming more concentrated. Donald Trump’s election win, many speculated, must be due to geographic inequality and the increasing concentration of economic activity in a handful of big coastal cities. It was tough to escape the woeful tales of small-town and Rust Belt voters in the final months of 2016. But as Jed Kolko, chief economist at Indeed.com, pointed out last September, the economy isn’t actually becoming more concentrated. Something much more insidious is happening. Economic opportunity is becoming more concentrated, but Americans’ ability to move to take advantage of that opportunity is declining. Consequently, the rising average incomes in big coastal cities are being offset by those cities’ declining share of the population.

• Housing trends will keep U.S. interest rates suppressed. If we’re all downsizing, who’s upsizing? That question should be critical to aging and retiring baby boomers whose main “asset” is the equity in their homes. If current demographic trends remain in place -- and there is not a shred of evidence that they won’t -- then we are facing a generation of subdued home demand even as retirees will be looking to sell. We’re not even considering the impact of what “normalized” interest rates means for mortgage borrowing. This raises broader economic problems, too. Beyond the obvious, which is that retirees will face difficulty selling their biggest asset, household formation will remain sluggish. When new households are formed, they buy a lot of things, because along with houses go new cars, appliances, furniture, maintenance, and toys for the kids. Empty-nesters don’t have those needs, and so they spend less. Less household formation means less consumption overall, which will prove problematic in an economy where consumption stands at a record 69.4 percent of gross domestic product. In other words, upward pressure on interest rates becomes more subdued.

• Jeff Bezos explains how he makes business decisions. In his (excellent) letter to shareholders Bezos last week explained his approach to decision making. "Most decisions should probably be made with somewhere around 70% of the information you wish you had," "If you wait for 90%, in most cases, you're probably being slow." Business moves fast. This Day 1 mantra allows one to make high-quality, high-velocity decisions while maintaining a certain comfort in the face of uncertainty.

• Will robots displace humans as motorised vehicles replaced horses? The Economist suggests that as robots encroach on human work, studying the fate of the horse could provide guidance. Horses might have fared better had savings from mechanisation stayed in rural areas. Instead, soaring agricultural productivity led to falling food prices, lining the pockets of urban workers with more appetite for a new suit (or car) than anything four-legged. Similarly, the financial returns to automation flow to profitable firms and their shareholders, who not only usually live apart from the factories being automated but who save at high rates, contributing to weak demand across the economy as a whole. Indeed, roughly half of job losses from robotisation (as from exposure to Chinese imports) are attributable to the knock-on effect from reduced demand rather than direct displacement.

• 11 charts that show marijuana has truly gone mainstream. Many marijuana users hide their stash in their closets. Most people who use marijuana are parents. There are almost as many marijuana users as there are cigarette smokers in the U.S. Those facts and many more are among the conclusions of new survey from Yahoo News and Marist University, which illustrates how pot has become a part of everyday life for millions of Americans. Here are 11 charts that explain how and why. Big tobacco is sure to makes its move…We like (Altria: MO and remain long Reynolds: RAI)

• Love in the time of numbness. Great essay in the New Yorker suggesting that today, and especially today, as the threat of desensitization—and the accompanying seductions of detachment, outrage, revulsion, indignation, piety, and narcissism—looms over all our lives, we might need to ask ourselves the following question: What will move me beyond this state of anesthesia? How will I counteract the lassitude that creeps over my soul? Each of us will find individual answers to these questions. There is no formula that describes what your solution might be…..but introspection is where the journey begins.

Our best wishes for a fulfilling week, 

Logos LP

The 1% Rule

Good Morning,

Stocks closed flat Friday as investors parsed through a mixed employment report, a U.S. airstrike in Syria and comments from a top Federal Reserve official.

The 10-year Treasury yield topped 2.35 percent after falling as low as 2.28 percent amid a weaker than expected jobs report and the first military strike undertaken by President Donald Trump’s administration.

On the data front, the U.S. economy added 98,000 jobs last month, well below the expected gain of 180,000. The unemployment rate fell to 4.5 percent from 4.7 percent. Wage growth was not as strong either, with average hourly earnings up by 2.7 percent on an annualized basis. Nevertheless, the report masked a key problem: The number of open jobs hit a record 5.8 million last April and hasn't dipped below 5.4 million ever since. Sure job creation is important but it appears Americans are not equipped to perform the jobs that exist in a rapidly changing economy.

Also of note was the retreat in the auto sector reported Monday which mirrored lackluster broader consumer spending data released last Friday. Both readings fly in the face of the two most-followed gauges of consumer sentiment, now at 17- and 11-year highs. It also contrasts with an index of optimism among small businesses -- local car dealers among them -- holding near levels unseen since the mid-2000s.

On the Canadian front, the two-faced nature of Canada’s labor market was on full display this week as employers continued to hire but resisted raising wages.

Canada added 19,400 jobs in March, for an employment gain of 276,400 over the past 12 months, Statistics Canada said Friday from Ottawa. Yet, the pace of annual wage rate increases fell to 1.1 percent, the lowest since the 1990s.

The weakness in wage gains seems to be an Ontario phenomenon. The province, which has led employment increases over the past year, recorded an annual 0.1 percent increase in wages in March, also the lowest on record.
 

Our Take

Investors may be getting ahead of themselves on their confidence in the economy, with the chance of a short-term sell-off increasing as such hard data measures are contrasting with the more positive soft data but one must remember that short-term sell offs aren’t unusual. The VIX tallied its 103rd session Friday below 15, the longest streak since February 2007, according to Bloomberg data. Thus, a 10-15% correction is looking more and more likely. Nevertheless, we maintain (as outlined in previous letters) that while it may be a struggle to find reasons to get enter this market, the reasons to sell are limited and uncompelling

Do bull markets die of old age?

LPL Research compares the best bull markets in history for us:

At the same stage of the 1990s bull market, the S&P 500 was up 255%, before powering to a 417% gain at its peak about 18 months later.

This bull market is up about 250%. Of course there are no guarantees, but given the fact that after six consecutive monthly gains, the U.S. Leading Economic Index (LEI) is at its highest level in over a decade, the haters need to come forth with some pretty solid evidence of a deteriorating economic picture to convince that the bull market ends here….
 

Musings

Came across a wonderful article this week by James Clear entitled “The 1 Percent Rule: Why a Few People Get Most of the Rewards” which reminds us of Vilfredo Pareto’s 80/20 rule. The majority of output or rewards tend to flow to a minority of producers or people.

Inequality is everywhere. It is perhaps the “natural” state of the world.

Clear states that: “For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships. Furthermore, just two franchises—the Boston Celtics and the Los Angeles Lakers—have won nearly half of all the championships in NBA history. Like Pareto's pea pods, a few teams account for the majority of the rewards.

The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries—Brazil, Germany, and Italy—have won 13 of the first 20 World Cup tournaments.

Examples of the Pareto Principle exist in everything from real estate to income inequality to tech startups. In the 1950s, three percent of Guatemalans owned 70 percent of the land in Guatemala. In 2013, 8.4 percent of the world population controlled 83.3 percent of the world's wealth. In 2015, one search engine, Google, received 64 percent of search queries.”

But why?

Accumulative advantage: What begins as a small advantage gets bigger over time. One plant only needs a slight edge in the beginning to crowd out the competition and take over the entire forest.

This principle applies to our lives. We compete for a variety of things: a job, a resource, a distinction, another human’s affection or love etc.

The difference between these options can be razor thin, but the winners enjoy massively outsized rewards.

Clear reminds us that “Not everything is winner take all but nearly every area of life is at least partially affected by limited resources.” Anytime resources are limited a winner take all situation will emerge.

Winner-Take-All Effects in individual competitions can lead to Winner-Take-Most Effects in the larger game of life.

From this advantageous position—with the gold medal in hand or with cash in the bank or from the chair of the Oval Office—the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule.”

Should we be so surprised that we were so close to having 2 US Presidents with the same Clinton last name? 2 Presidents with the last name Bush? Or 2 Prime Ministers with the last name Trudeau?

Winning one reward increases your chances of winning the next one. Each additional win cements the position of those at the top. Over time they end up with the majority of the rewards. 

What does this mean for us?

The key takeaway here is that small differences in performance (even 1% better: The 1% Rule) that are consistent can lead to VERY unequal distributions when repeated over time. Think compound interest.

Thus, to pull away you need only to focus on being “slightly” better than your competition. But doing so once isn’t enough. You need to develop a process which enables you to maintain this slight edge over and over again. Simple but never easy...


Thought of the Week

"There's a certain consistency to who I am and what I do, and I think people have finally said, "well you know I kinda get her now." I've actually had people say that to me." - Hilary Clinton
 

Articles and Ideas of Interest

• Did Trump’s Syria air strikes accomplish anything? Piece in the Guardian
  suggesting that the US bombing of a Syrian airfield is a flip-floppery at its worst. And it signals to America’s foes that Trump can be easily dragged into military quagmires.

• Europe in crisis? Despite everything, its citizens have never had it so good. Contrarian piece in the Guardian suggesting that despite the media’s constant coverage of populist sentiment, the EU’s achievements are huge. As Brexit begins, don’t forget that hundreds of millions still want to be part of it. “It is easy to take what we have for granted. It has become easy to criticise the European project for its many insufficiencies and its repeated unpreparedness when crises arise. But it is perhaps harder to step back and take stock of what the EU has accomplished and what many, outside the region, continue to admire and yearn for.”

• The myth of shrinking asset managers. It's easy to assume that the recent upheaval among asset managers would result in a much smaller industry. But that's far from certain. Some big investment firms have certainly shrunk, but many have remained roughly the same size over the past few years. Going forward, the amount of net job reductions will depend in large part how well firms adapt to changing technology and trends. The number of employees in asset management has stayed surprisingly stable in many corners.

• How moats make a difference. An important element of our investment approach is focusing on companies that that have or more ideally that appear to be building a wide competitive moat. Usually when people talk about different kinds of moats, they are referring to the elements of the business model that give rise to the company’s competitive advantages. Fun piece here from intrinsic investing on identifying different types of moats.

• Which tech CEO would make the best supervillain? Funny piece in the Ringer considering tech’s greatest minds gone bad. Jeff Bezos’s doomsday device: “On next year’s Prime Day, he will offer all products for 50 percent off. After customers irrationally empty their bank accounts in the pursuit of deals, he will fulfill zero orders as he makes off with the entirety of the United States GDP.”

• Luxury is an addictive drug. Great piece from a man who was a multi-millionaire at age 27. Few of his lessons: 1) Money doesn’t make you happy 2) You can only help people to help themselves 3) There will always be someone richer than you 4) Luxury is an addictive drug 5) Some people are very shallow 6) Everyone respects wealth 7) Most financial advisors know nothing 8) Banks rip wealthy people off too More zeros are just more zeros 9) The biggest issue people have with money is limiting beliefs 10) F--- you money is overrated 11) Being wealthy is a full time job.

• America’s unhealthy obsession with productivity is driving its biggest new reading trend. Audiobooks are the latest trend in book publishing. But why? Audiobook listening is growing rapidly specifically with 25- to 34-year-olds, thanks to a pernicious “sleep when you’re dead” mindset reflective of the young, aspirational, educated American: We are fearful of mono-tasking, find downtime distasteful, and feel anxious around idleness. Even when picking socks from a drawer, young workers feel better if information’s somehow flowing into their brains. And this is exactly the restless market that book publishers need. They’re a cure to widespread restless mind syndrome, with its daily self-imposed nagging to make progress: Be more effective, says your productivity tracker. Do and learn more, says your to-do list. Optimize your to-do list, says your faddish new notebook. Yawn…...The Buddha is surely turning in his grave...

• The nine to five is barbaric. Generation X author on the future of work and how we’ve all turned into millennials. Are there smart and creative young people out there that are better than their bosses, but unable to thrive in the corporate world? “The nine to five is barbaric. I really believe that. I think one day we will look back at nine-to-five employment in a similar way to how we see child labour in the 19th century,” he says. “The future will not have the nine till five. Instead, the whole day will be interspersed with other parts of your life. Scheduling will become freeform.”

• What are the 50 best restaurants in the world? On Wednesday this week the list was released and Eleven Madison park in NYC became the first U.S. establishment to win the top spot since 2004.

Our best wishes for a fulfilling week, 
 

Logos LP

You're Leaving Value On The Table

Good Morning,

U.S. equities closed down on Friday — the last day of the first quarter and of the month — as investors digested a slew of economic data.                                  

The Dow Jones industrial average fell about 65 points, with Goldman Sachs and Exxon Mobil contributing the most losses. The S&P 500 slipped 0.23 percent, with financials lagging.                       

The Nasdaq composite closed just below breakeven.                                                                           

The three major U.S. indexes posted quarterly gains of at least 4.6 percent. The Nasdaq also recorded its best quarterly performance since 2013 as tech stocks rose more than 12 percent in the period.
 

Our Take

Last week there were some jitters about whether or not Trump’s potential pro growth policies would be delayed, but the market has since remained resilient. March marked the 8th anniversary of the bull market and we hold that the show will go on despite Trump’s bumblings.

There are pockets of value despite repeated calls that “stocks are overvalued” and furthermore for the first time in 6 years double digit earnings growth looks real. Focus on the fundamentals. While stocks have been ascending ever since the election, it’s unlikely the rally would’ve gotten this far without the contemporaneous improvement in earnings, which last year ended one of the longest streaks of declines ever in a U.S. bull market.

Despite oil’s slump to skepticism over Trump’s growth agenda, Wall Street analysts have been standing firm on forecasts that represent almost twice the profit growth seen in 2013, a year when the S&P 500 rose 30 percent.

S&P 500 operating income will rise 12 percent to $130.20 a share this year, estimates compiled by Bloomberg show.

For the health of your investments, earnings are what matters. Long-term fundamentals drive stock prices. Short-term the political noise can impact sentiment but time and time again over the last 8 years buying the dips has worked…

Musings

A focus on the long-term matters. It has a determinate impact on our investment outcomes but more importantly on whether our lives will be remarkable or simply average.

More on that later. First I wanted to highlight the incredible outcomes reserved to those who think long-term. This week I read an excellent research report produced by a team from McKinsey Global Institute in cooperation with FCLT Global which found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2011 across almost every financial measure that matters.

The differences were dramatic. Among the firms the team identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. The returns to society and the overall economy were equally impressive. By their measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015.

In addition, they calculated that U.S. GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level their long-term stalwarts delivered — and generated more than five million additional jobs over this period.

What indicators were studying? 1) Investment 2) Earnings Quality 3) Margin Growth 4) Earnings Growth 5) Quarterly Targeting

After running the numbers on these indicators, two broad groups emerged among those 615 large and midcap U.S. publicly listed companies: a “long-term” group of 164 companies (about 27% of the sample), which were either long-term relative to their industry peers over the entire sample or clearly became more long-term between the first half of the sample period and the second half, and a baseline group of the 451 remaining companies (about 73% of the sample).

What is clear from the performance gap between these two groups is the massive relative cost of short-termism.

From 2001 to 2014 those managing for the long term cumulatively increased their economic profit by 63% more than the other companies. By 2014 their annual economic profit was 81% larger than their peers, a tribute to superior capital allocation that led to fundamental value creation.

Now this makes me think of the countless examples I encounter on an almost daily basis of short-termism. It is not simply corporations that favor these costly short-termist agendas. It is the average human or at least 73% of the population…..that chooses the easy money vs. the long money. The easy choice or the choice that seemingly brings the most juice today. Nevertheless, real change is possible. This is one of the key messages from the research.

The proof lies in a small but significant subset of the long-term outperformers identified in the study — 14%, to be precise — that didn’t start out in that category. Initially, these companies scored on the short-term end of the index. But over the course of the 15-year period they measured, leaders at the companies in this cohort managed to shift their corporations’ behavior sufficiently to move into the long-term category.

As an investor it is best to develop the ability to identify such long-term value creators, as well as those companies who are shifting their behavior.

As a human it is best to look at ourselves in the mirror and ask what short-termist behaviors we are exhibiting and how we can change such habits. Upon honest reflection, what we will undoubtedly find is that we are leaving a considerable amount of “value” and long-term “fulfillment” on the table….

Thought of the Week
 

"The most important quality for an investor is temperament, not intellect.” -Warren Buffett
 

Stories and Ideas of Interest

• A world without retirement. The population is getting older and the welfare state can no longer keep up. After two months of talking to people in Britain about retirement, it’s clear that old age is an increasingly scary prospect. The Guardian digs in.  
   

• Compelling new evidence that robots are taking jobs and cutting wages. In a recent study (pdf), economists Daren Acemoglu of MIT and Pascual Restrepo of Boston University try to quantify how worried we should be about robots. They examine the impact of industrial automation on the US labor market from 1990 to 2007. They conclude that each additional robot reduced employment in a given commuting area by 3-6 workers, and lowered overall wages by 0.25-0.5%. A central question about robots is whether they replace human workers or augment them by boosting productivity. Acemoglu and Restrepo’s research is a powerful piece of evidence on the side of replacement. Furthermore, automation is set to hit workers in developing countries even harder. The fourth industrial revolution looks set to cause global mass unemployment. Could we tax robots as Bill Gates has proposed? The Economist suggests that this idea is misguided.

• Silicon Valley’s quest to live forever. Can billions of dollars of high-tech research succeed in making death optional? Forget retirement. Some are actively working on finding a cure for death. The New Yorker digs in and considers the incredible amount of money and effort being deployed towards achieving eternal life. I’ve always looked at this through the following prism: does the present moment really have any significance if it isn’t fleeting or precious?

• Your animal life is over. Machine life has begun. The road to immortality. In California, radical scientists and billionaire backers think the technology to extend life - by uploading minds to exist separately from the body is only a few years away. Yes that’s right. Forget the problems with robots replacing humans, when we will be able to achieve “morphological freedom” – the liberty to take any bodily form technology permits. “You can be anything you like,” as an article about uploading in Extropy magazine put it in the mid-90s. “You can be big or small; you can be lighter than air and fly; you can teleport and walk through walls. You can be a lion or an antelope, a frog or a fly, a tree, a pool, the coat of paint on a ceiling.” No wonder Elon Musk is founding another company called Neuralink which will focus on merging man and machine through the “neural lace”...talk about thinking long-term...

• Given the circumstances our existence, shouldn’t we just kill ourselves? French philosopher Albert Camus did an excellent job describing those moments in our lives when our ideas about the world suddenly don’t work anymore, when every daily routine — going to work and back — and all our efforts seem pointless and misdirected. When one suddenly feels foreign and divorced from this world. In these frightening moments of clarity we feel the absurdity of life. Luckily, his interpretation of the myth of Sisyphus offers us salvation. Sisyphus was sentenced to push a boulder up a hill, just to see it roll down again, and keep doing so forever and ever and ever. Camus offers a bold statement: “One must imagine Sisyphus happy.” He says, Sisyphus is the perfect model for us, since he has no illusions about his pointless situation and yet revolts against the circumstances. With every descent of the rock he makes a conscious decision to give it another go. He keeps pushing that rock and recognises that this is what his existence is all about: to be truly alive, to keep pushing.

• A dearth of I.P.O.s but it’s not the fault of red tape. Nice piece in the NY Times exploring possible explanations yet finding that while there might be rational reasons to reduce regulation on capital raising — to make it easier and less expensive — we are kidding ourselves if we think that simply deregulating will bring back initial public offerings.

• Not leadership material? Good. The world needs followers. The NYT suggests that the glorification of leadership skills, especially in college admissions, has emptied leadership of its meaning. I love this. Very contrarian. “Perhaps the biggest disservice done by the outsize glorification of “leadership skills” is to the practice of leadership itself — it hollows it out, it empties it of meaning. It attracts those who are motivated by the spotlight rather than by the ideas and people they serve. It teaches students to be a leader for the sake of being in charge, rather than in the name of a cause or idea they care about deeply. The difference between the two states of mind is profound. The latter belongs to transformative leaders like the Rev. Dr. Martin Luther King Jr. and Gandhi; the former to — well, we’ve all seen examples of this kind of leadership lately.”

All the best for a productive week,

Logos LP