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

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