How Will The Market React To A Trump Or Clinton Presidency?

Good Morning,

U.S. equities closed higher on Friday as Deutsche Bank shares rebounded amid a report that the German banking giant was near a settlement with the Justice Department.
 
Deutsche's U.S.-listed shares hit an all-time low on Thursday after Bloomberg reported that approximately 10 hedge funds were reducing their exposure to the bank. The bank's German-listed shares hit an all-time low overnight. The selloff was caused by worries surrounding the bank’s possible collapse posing a systemic risk to the global financial system. Could a 2016 Lehman Brothers be back on the cards…..? For more details on these worries see Bloomberg.  
 
The Dow Jones industrial average jumped 226.17 points at session highs before closing about 165 points higher, with Goldman Sachs contributing the most gains. The S&P 500 gained 0.8 percent, with financials rising more than 1 percent to lead advancers. The SPDR S&P Bank ETF (KBE) rose nearly 1.5 percent.
 
With the 3rd quarter officially coming to a close today, where do we stand with the S&P up about 6% YTD? What can we expect in the 4th quarter?
 
Our Take: As I’ve pointed out previously, analysts are still quite gloomy. Based on the average estimate of forecasters surveyed by Bloomberg, they expect the Standard & Poor's 500 Index to finish the year 1 percent lower than yesterday’s close.
 
Barry Ritholtz points out that this is noteworthy because it's so out of character. Most of the time -- 82 percent during the past decade, to be precise -- analysts are bullish. To be fair, this outlook has usually been rewarded; markets rise about three-quarters of the time.
 
The unusually bearish demeanor from the normally cheerful analysts on the street of optimism might be the most useful piece of news about equity markets moving forward.
 
What has them spooked?
 
-Rising interest rates
-A flat market
-High valuations
-Declining corporate profits
-Aging business cycle
-Presidential elections
 
I won’t address all of these in great detail but instead will make a few observations. The first is regarding the US Presidential election. I’ve had a few of you contact me asking how the stock market will react to either a Trump or Clinton Presidency. My answer is that although the market abhors uncertainty, once elected neither candidate will cause a significant impact on the stock market.
 
The President alone simply is not powerful enough to change the course of business. Any major change either candidate may make will need the support of Congress. Unless you think both houses of Congress are going to go Democratic (unlikely given Republican advantage in the house) not much radical change will occur.
 
Remember that big business hated the early Obama administration and look at the returns on the S&P since he took office. Stay relaxed and maintain calm.
 
As for the other concerns, interest rates (even if they rise) will rise very little and will stay lower for longer, as I’ve written a flat market is nothing to be afraid of. As for declining earnings, people have been crying wolf on this for years, as for valuations, they have been at the high end of the spectrum for the last few years given historically low interest rates. As for forecasters they are typically useless and finally it would be naïve to believe that the market hasn’t already priced in all these old saws…
 
So looking forward to Q4, keep your emotions in check and consider the facts….Since 1970, the fourth quarter usually has been the best for equity markets. Bloomberg News noted that since 2009, the fourth quarter has seen gains in the S&P 500 that average 6.7 percent. That's more than “twice the average gains of the next-best quarter…” One other interesting fact: hedge funds and mutual funds are suffering…People’s actions can be understood based on incentives and keeping one’s employment in a high-paid job is the mother or all incentives, after, let’s say, life and sex….So friends as Josh Brown puts it, the career risk trade is on.

 

Thought of the Week


  "Most men would rather die than think. Many Do." -Bertrand Russell

 

Stories and Ideas of Interest

 

  • Scientists and the accuracy of their research are in doubt. The Economist takes a deep dive into the sad state of science. The idea that the same experiments always get the same results, no matter who performs them, is one of the cornerstones of science’s claim to objective truth. If a systematic campaign of replication does not lead to the same results, then either the original research is flawed (as the replicators claim) or the replications are (as many of the original researchers on priming contend). Either way, something is awry…

 

  • A bond bubble? Jim Cielinski looks at persistent buying despite valuations. He identifies four elements and produces this interesting graphic.

 

  • The next Big Short? High yield bonds have done well this year. But someone  -- or more than just one -- out there is really bearish on this debt. Take a look at the short interest in BlackRock's $16.4 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest junk-debt exchange-traded fund. It's never been higher.

 

  • Goldman Sachs: OPEC oil deal doesn't change our price outlook. The OPEC deal to cut oil production may provide a short-term support for prices, but chances are it won't change the supply outlook much, Goldman Sachs said. FactSet does a nice piece on oil prices and energy earnings showing that both are expected to rise into 2017.

 

  • Millennials can’t afford startups. Young Americans aged 18 to 34 (also known as millennials) seem to love the idea of being entrepreneurs. Since many are burdened with massive student debt, they can’t afford to launch startups. So a new survey shows they’ll grudgingly join America’s corporate workforce…

 

 

  • These shoes offer buyers an immediate 500% profit. An opportunity to turn a profit of as much as 500 percent awaited Yeezy buyers on the global sneaker resale market, said Josh Luber, CEO of StockX. What Kanye West touches in fashion still turns to gold. Alternative assets anyone?

 

  • Blaming foreign buyers for inflated Toronto real estate prices may be mislead.  Interesting research presented in the Globe and Mail suggesting that the persistent price increases are a supply side issue. Meanwhile….Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble.

 

  • Getting older is the cruelest blow to global growth. Older workforces mean slower GDP growth and interest rates around the world. Canada is the case and point.


All the best for a productive week,

Logos LP

Is Conventional Wisdom Wrong

Good Morning,

U.S. stocks closed lower on Friday, with energy falling more than 1 percent, as oil prices fell sharply while investors digested key manufacturing data, following two strong sessions.
 
Earlier this week, the Federal Reserve kept interest rates unchanged and hinted at a possible rate hike later this year. The central bank also lowered its economic forecasts for the next few years.
 
That said, three Fed officials dissented, expressing their desire for higher interest rates. Boston Fed President Eric Rosengren explained why he dissented on Friday, saying the sustainability of the economic expansion makes the case for raising interest rates compelling.
 
Equities in the U.S. rallied following the Fed's decision, with the Nasdaq posting back-to-back record-setting sessions.
 
The Bank of Japan also revamped its monetary policy earlier this week. Both central bank moves support a lower for longer trend. The financial markets seemed to have approved of the BOJ's paradigm shift on Wednesday, sending shares higher and the yen lower, but analysts called it a damp squib. Others suggested that the BOJ is experimenting at exactly the wrong time.
 
Our Take: Traders and pundits will spend far too much time obsessing over when the Fed will tighten next, yet at this point nothing matters more for share appreciation than strong growth in light of extremely optimistic earnings forecasts for 2017 and forward multiples that already stand close to record highs.
 
Could conventional wisdom be wrong? I was looking through Freakonomics by Steven Levitt this week and it got me thinking about conventional wisdom. Could conventional wisdom vis-à-vis monetary policy be wrong? Steve Williamson of the Federal Reserve Bank of St. Louis for the past three years or so has been trying to convince the macroeconomics world to consider a bold new theory -- that central bank policy works in reverse, and that low interest rates cause low inflation. This is an idea sometime referred to as Neo-Fisherism.
 
Recently, Williamson has challenged Bloomberg View columnist Narayana Kocherlakota, formerly of the Federal Reserve Bank of Minneapolis, in an extended blog and Twitter debate on the subject. The result has been the deepest, most illuminating exchange about monetary policy ever posted on the internet. Why do we cling to ideas that may clearly no longer be relevant? What tidbits of conventional wisdom are holding you back?

 

Thought of the Week

 

"Swim upstream. Go the other way. Ignore the conventional wisdom.” –Sam Walton

 

Logos LP in the Media


Our CIO is interviewed on the MoneyShow and presents two family owned businesses he likes as long-term investments: Cal-Maine Foods (CALM) and JM Smucker (SJM).



Stories and Ideas of Interest

 

  • Why you should stop worrying about a US recession. Deutsche Bank has detailed the case for optimism on the U.S. economy, suggesting the year 1986 might offer some reasons to be confident.

 

 

  • Canadian Shadow lending is booming as banks have stepped back from riskier loans. Joe Shmos with $300K are chasing returns…While crowdfunding in the USA is helping house flippers raise record amounts of money…Yeehaw the debt fuelled real estate train grinds onwards and upwards.

 

  • Canada’s economy needs more diversification as it is moving towards becoming a real-estate nation. Interesting report from FactSet:
     
    “While rising home prices benefit investors from an asset valuation perspective, and the accompanying wealth effect has saved the economy from severely dipping when other major sectors have disappointed, reliance on the real estate market poses a significant risk to the health of the Canadian economy. In this situation, it is crucial for the government to assess whether a policy mix focusing on limiting demand will alleviate the problem or lure the housing market into a sudden crash that could create immeasurable negative repercussions for the Canadian economy.”

 

 

  • The world economy remains in a "low-growth trap" and weaker conditions in advanced economies will persist into 2017, the OECD has warned, predicting global growth this year to expand by only 2.9%, the lowest rate since the financial crisis. The economic think tank also backtracked on its warning that the U.K. would suffer instant damage from a Brexit vote and has thrown its weight behind Theresa May's plans to provide fresh post-referendum support.

 

  • A risky assumption lurks in your portfolio. On the topic of conventional wisdom. Hiding in most portfolios is a big assumption about risk -- namely, that assets are uncorrelated (or at least less than highly correlated) to each other. So when one asset is down -- emerging-market stocks, for example -- a typical portfolio relies on some other asset to pick up the slack -- U.S. high-yield bonds, let’s say.  Not so much anymore…


All the best for a productive week,

Logos LP

Should This Market Be Keeping You Up At Night?

Good Morning,

U.S. stocks closed lower on Friday, but posted weekly gains, as investors digested key inflation data and looked ahead to next week's Federal Reserve meeting.
 
Market participants are still unsure what the Fed will do as unemployment looks fine but inflation is still muted. We know they want to raise rates, but the economic calendar is telling them this may not be the right time. In addition, concerns about a narrowing race between Hillary Clinton and Donald Trump, as well as a fall in commodity prices, are weighing on market sentiment. It just isn’t clear what will take the market higher in the short term as the bears roar and volatility picks up...
 
On a more positive note there was excellent data out of the USA this week. Median household income rose 5.2% from 2014 to 2015, data from the Current Population Survey show.
 
Income gains were spread across nearly all age groups, household types, regions and racial or ethnic groups. One exception: Incomes didn’t rise for households living outside metropolitan areas. We may have moved from “economic recovery” to “normal times” which is good yet if the recovery is over…further improvements may be even tougher to come by…
 

A great story I found this week:


“There is a Taoist story of an old farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit. “Such bad luck,” they said sympathetically. “Maybe,” the farmer replied.
 
The next morning the horse returned, bringing with it three other wild horses. “How wonderful,” the neighbors exclaimed. “Maybe,” replied the old man.
 
The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy on his misfortune. “Maybe,” answered the farmer.
 
The day after, military officials came to the village to draft young men into the army. Seeing that the son’s leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out. “Maybe,” said the farmer.” -Zen story
 
My Take: Everything passes. Events seem easy to judge in the moment but they often have future repercussions far beyond our capability to understand. This is a difficult market. NO ONE knows exactly how things will play out but there is simply little to gain from getting too worked up about it…


Thought of the Week
 

"This is my secret, he said— I don’t mind what happens.” -Eckhart Tolle


Logos LP in the Media

Logos LP will be presenting at this year’s MoneyShow Toronto Conference TODAY 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 TODAY 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).


Stories and Ideas of Interest

 

  • What unites and divides America? Bloomberg puts together a really interesting collage to visually explore how America became so divided. DON’T MISS THIS PIECE IT IS FASCINATING

 

  • The Free-Time Paradox in America: The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening. Why? The Atlantic explores this question.

 

  • Thinking can be really hard. Luckily Buster Benson of Slack puts together an interesting list of our cognitive biases. Check it out here.

 

 

  • Here's where wealthy investors are putting their money. Rich investors have been pouring more money into private equity to avoid a potential stock market downturn. The thing is….public markets effect private markets as they have an impact on consumer spending and business spending.

 

  • The surplus in global oil markets will last for longer than previously thought, persisting into late 2017, as demand growth slumps and supply proves resilient, the International Energy Agency said. Look for the Canadian dollar to continue weakening.

 

  • Warning! There is a company called Point that is fundamentally rethinking the largest asset class in the United States — owner-occupied residential real estate (> $10 trillion!). Point is an alternative to traditional home equity loans and HELOCs. Point buys into a fraction of your property. There are no monthly payments…

 

  • Bloomberg held its annual Canadian fixed income conference in NYC this week. Highlights included:
     
    -Trudeau should make up his mind on Bombardier aid
    -Vancouver housing may correct 10% or more
    -Canada’s economy is rotating in the wrong direction
    -It’s High time for manufacturing to step up
    -Vancouver, Toronto home price gains are precarious
    -The Canadian Dollar is poised to extend declines


All the best for a productive week,

Logos LP

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