Trump's Win Yields Important Wisdom

Good Morning,

U.S. equities closed mostly higher on Friday, with the three major indexes posting their best weekly gains of the year on the back of a surprise Republican sweep.
 
Stocks skyrocketed after Republican Donald Trump's surprise victory over Hillary Clinton, as investors considered the prospects of higher infrastructure spending and less regulation within the financial sector.
 
Since Trump's victory, investors have been quickly reallocating assets, increasing exposure to financials and industrials, while lowering positions in sectors like utilities, real estate and consumer staples.
As of Friday's close, financials and industrials had gained 11.33 percent and 7.96 percent, respectively, while utilities, consumer staples and real estate were down 4.08 percent, 2.13 percent and 1.47 percent, respectively.
 
What is winning and losing? (Too soon to say whether these trends will continue)

* WINNERS:

• BANKS: rallied as Trump has vowed to reduce regulation
• DRUGMAKERS: surged as Democratic threats of price controls are no longer a concern with Republicans retaining both houses of Congress
• DEFENSE & INFRASTRUCTURE: Lockheed Martin Corp. and Caterpillar Inc. climbed on Trump’s pledge to boost spending in both industries
• PRISON OPERATORS: Corrections Corp. soared on speculation the new administration will rescind a government contract phase-out

 
* LOSERS:

• INTERNATIONAL TRADE: Coca-Cola Co. and Procter & Gamble Co. retreated
• GUNMAKERS: Sturm Ruger & Co. sank on speculation that fewer people would rush out to stock up on pistols and rifles with the threat of stronger gun control laws fading
• HOSPITAL OPERATORS: Community Health Systems Inc. sank on speculation Trump will move to repeal Obamacare
• CLEAN ENERGY: SunPower Corp. fell on concern Trump will weaken demand for renewable energy

 
In addition, the dollar surged on the week as sharp moves were also seen in the U.S. Treasury market with the benchmark 10-year yield breaking above 2 percent.
 
Could we be seeing market participants considering a Trump presidency as a transition from a government that had its hands around the neck of growth to a free economy?

Our Take
 
Quite frankly these moves were incredible yet understandable given that the “conventional wisdom” going into election got it wrong yet again (like they did for Brexit). As I wrote after Brexit investors would do well to distinguish between the trend of the system and the trends in the system.
 
Political preferences aside, what happened on Tuesday was not a collapse of democracy but simply a powerful blow to the misplaced arrogance of the U.S. elite.
 
Trump won not because he was perceived to be a racist, xenophobic and even sexist candidate (in fact Trump won several states that voted twice for America’s first black president). He won despite these deplorable characteristics because he was not just a nationalist populist but an anti-corruption crusader that was masterful at turning anger – over lost jobs, lost wages, lost hope – into votes. Americans simply had become fed up with a ruling elite that appeared to have become increasingly corrupt and out of touch with a growing majority of Americans that have been left behind by a wave of prosperity that has lifted only a few large boats.
 
Six out of ten Americans didn’t even like Donald Trump. But the number that mattered in the election was this one: Two-thirds of voters said the U.S. was on the wrong track.
 
Thus, he was the outsider they wanted. And he knew it. He was a master marketer that understood the political marketplace better than any pundit, pollster or status quo politician. He successfully painted Clinton as the embodiment of the Washington establishment Americans had grown tired of, and she never crafted a capable comeback.
 
Now we can argue (as many have) that the Clintons are not in fact corrupt, but that isn’t the point. The optics were sufficiently convincing. Furthermore, Democrats once represented the working class. Not any more. Bill Clinton and Barack Obama in fact shifted power away from the people towards corporations. It was this that created an opening for Trump.
 
Luckily, business as usual looks to have been disrupted and the Trump administration has been presented with a unique opportunity to start with a set of bipartisan issues that could begin the healing process for the country and pave the way for continued innovation.


Thought of the Week

 

" The stock market will be higher 10, 20, 30 years from now, and it would have been wih Hillary, and it ... will be with Trump," –Warren Buffet
 

Stories and Ideas of Interest

• Trump’s win yields investing wisdom. I’m getting tired of hearing the endless bickering on social media regarding what happened during the election. The continued negative and elitist judgments from the left about Trump’s supporters etc. The result was a major surprise for many but the reaction should be to decipher what lessons can be learned, rather than to confirm one’s prior beliefs. Barry Ritholtz puts together an excellent list of lessons.
   

1. Forecasters are terrible: they almost always get it wrong
2. Confirmation bias: everyone reads what confirms their prior beliefs (this is even worse in our echo chamber social media world.
3. Models are not perfect
4. Optimism bias: we each think we are above average. Most of us are not.
5. Random factors and luck: we underestimate the impact of luck and confuse random chance with skill.
6. Hindsight bias: many of us believe we knew it all along.
7. The Narrative: we create a story line after the fact to try and make sense of what we can’t explain.
8. Nobody knows anything: my personal favorite. Be humble.

• Startups and Tech under Trump. From carried interest to cybersecurity to tech talent concerns, VCs for CB Insights analyze the impact of Trump's victory on startups and tech. Interesting trends here including bio-tech, cybersecurity and infrastructure boosts  

• 2016 was an awful election. 2020 will likely be worse. Interesting piece from Quartz looking at the trends that will shape the 2020 election. One in particular I like:  “Red” and “blue” America will fragment further into self-contained worlds of fan fiction.

• Things won’t get any easier for the low skilled worker. Trump / Clinton it doesn’t matter. Robots could displace millions of jobs with industries favoring a digital revolution at the expense of human workers, according to a UN report.

• What’s behind a sudden foreclosure spike? Foreclosures had been falling steadily to the lowest levels in nine years, but a curious spike in October may be the first sign of a crack in the recovery.

All the best for a productive week,

Logos LP

US Election Investment Opportunity

Good Morning,

U.S. equities closed mostly lower on Friday after the Federal Bureau of Investigation announced it is investigating new emails related to Democratic nominee Hillary Clinton.
 
Bit of a wild ride today as the Dow Jones industrial average ended about 10 points lower after trading 74.71 points lower following the announcement. The index was trading about 75 points higher before the new probe was announced.
 
The U.S. economy grew at an annualized rate of 2.9 percent in the third quarter, the Commerce Department said. The 2.9 percent clip marked the fastest economic growth in two years.
 
Despite the moderation in consumer spending, the third-quarter rise in growth could help dispel any lingering fears the economy was at risk of stalling. Over the first half of the year, growth had averaged just 1.1 percent.

Our Take

This latest probe into Hilary Clinton’s dealings could have an impact on undecided voters, but for the most part it is likely that people have already made up their minds about which candidate is most fit for the Oval Office. Yet we must say that what is peculiar is that although the FBI has not yet re-opened the investigation, it is now conceivable that a sitting US President could be the subject of an open FBI criminal investigation…
 
Also of interest is the fact that an AI robot that has a perfect record of predicting electoral races is now predicting a Trump victory. As Brexit showed us, nnything can happen….
 
As for the US economy, the third quarter 2.9 percent print is encouraging. Growth does not appear to have stalled and this is consistent with the S&P 500 now reporting earnings growth for Q3 2016. The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for the S&P 500 is 1.6%, which is above the year-over-year blended decline of -0.5% at the end of last week and the year-over-year estimated decline of -2.2% at the end of the third quarter (September 30). If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).
 
What is particularly interesting is that at the sector level, all 11 sectors have contributed to this increase in earnings. However, the Financials sector has been the largest contributor of all 11 sectors to the rise in earnings growth for the index since the end of the third quarter.

Musings
 
All in all, I must say that we are getting tired of talking about this election. The whole thing has turned into a sort of endless cascade of tabloid style trash. Yet the nightmare is that as prime time news, it is unavoidable even to he most careful consumer of information.
 
As such these two “leaders” have reminded me of the important distinction David Brooks makes between resume virtues and eulogy virtues. Resume virtues are those skills you bring to the job market and that contribute to external success. Eulogy virtues are deeper. They are the virtues that get talked about at your funeral, the ones that exist at the core of your being- whether you are kind, trustworthy, honest, faithful, loyal; what kind of relationships you formed.
 
Now most of us faced with this distinction would claim that eulogy virtues were more important but this election has made me question that. I believe that the tragic-comedy surrounding BOTH candidates is a symptom of a society that has lost sight of the value of eulogy virtues.  
 
Most of us spend our time focusing on what it takes to achieve career success and this often occurs at the expense of eulogy virtues. Have we lost track of how to develop a profound character? Have we as a society lost focus on the value of serving the world in favor of conquering the world? Chosen ambition and status over respect, self-discipline and humility?
 
Perhaps this election presents us with a unique investment opportunity. The opportunity invest in ourselves by examining who we are and to decide whether we need to work harder to re-balance and reconcile our resume virtues with our eulogy virtues. After all, we can choose which virtues we wish to espouse whereas we sadly cannot chose when we face our eulogy…
 
Thought of the Week


  "The line separating good an evil passes not through states, nor between classes, nor between political parties either- but right through every human heart.” –Aleksandr Solzhenitsyn
 

Stories and Ideas of Interest

• Pirates look set to conquer Iceland. The Pirate Party, founded less than four years ago by a group of activists, anarchists, and hackers, could upend Icelandic politics with an Oct. 29 general election victory. It is led by Birgitta Jonsdottir, a former WikiLeaks contributor who describes herself as a “poetician.” This is an example of a trend we see intensifying. People are fed up and want change…

• Google is firing on all cylinders. We liked them going into earnings and we like them coming out. The company’s monopoly on search is growing while mobile and YouTube continue to represent growth drivers. In addition, they remain focused on building their mobile ecosystem launching AI/machine based assistants to provide users with useful information. If you really want to take a deep dive (which you should if you want to learn where next generation tech is going) check out this fascinating report on Google from CB Insights. They dissect the company’s strategy not by listening to what their senior execs say but by looking at where they are allocating resources. What we see is a company betting the house on AI and Cloud Services. I like that bet and at current multiples this large cap tech behemoth remains attractive.

• Understanding tech investment: A how-to guide. The five largest companies by market cap in the world are all technology companies. They have a combined market cap of ~$2 Trillion and combined revenues of $530 Billion over the last 12 months. The fact is, technology is no longer just a sector, almost every business is now a technology company to some extent. Investors can no longer ignore these companies altogether. The dilemma is understanding how to approach investing in technology stocks. With this in mind, Livewire reached out to contributors who are experts in technology to get their preferred metrics for analyzing technology stocks, and their recommended reading.

• You are never to old to avoid making financial errors. Great article in the NYT with a primer on how to get smart with your money.  Also a must read in the WSJ outlining the mistakes we make decade by decade.
   
  20s: playing it too safe (46% of millennials say investing is too risky with 70% of their investments in cash)
  30s: overwhelmed by complexity (too many decisions leads to decision paralysis)
  40s: misjudging big expenses (spending too much on a house and children)
  50s: the difficulty of catching up (realize you don’t have enough for retirement)
  60s and beyond: not delegating (our analytical capabilities can’t keep up)

• The consequences of risk taking. A Wealth of Common Sense looks at risk as something that only matters when there are consequences attached to your actions. To understand true risk, investors need to ask themselves: “What are the consequences if I am right or wrong?” Many so-called investors believe that they can jump in and out of markets and try and get their timing just right. Ben Carlson deconstructs the historical performance of the S&P 500 to get a sense of why a wrong move can really cost you. Sit tight.

• The next 10 years of returns look ugly. It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates. In fact, over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.” What is more likely is a return of about 2.3%. Could stock picking make a comeback…?
   

All the best for a productive week,

Logos LP

The Sky Is Falling...

Good Morning,

Stocks closed mostly flat on Friday amid a strong dollar and as earnings season continued.
 
The S&P 500 ended around breakeven after holding lower for most of the session, with consumer discretionary leading advancers. Consumer discretionary stocks were led by Time Warner, which rose more than 7 percent amid reports the firm has engaged in talks for a deal to be bought out by AT&T, which dragged the telecommunications sector lower.
 
So far Q3 earnings have been pretty good according to data compiled by The Earnings Scout, 80 percent of the 116 S&P components that had reported as of Friday morning had beaten Wall Street's earnings estimates, while 65 percent had beaten revenue estimates. This week also saw encouraging beats from Microsoft, Netflix and MacDonald’s in addition to a juicy bid announced by British American Tobacco to acquire  one of Logos LP’s holdings Reynolds American (RAI). Look for strength next week as Apple, Amazon and Google report.
 
Our Take: The investment mood is still downright miserable. Hedge funds are bleeding money, closing up shop and complaining that: “There’s gloom everywhere,” or that the financial crisis “was a sudden death for a lot of people, like a heart attack, but this feels like cancer to many people, a slow death.” Or that “There was a playbook based on logic that worked most of the time before 2008...But the game has changed and logical investors haven’t got the new playbook figured out yet.”
 
The International Monetary Fund chief economist Maurice Obstfeld said in October, while presenting the fund’s 2017 outlook, that “taken as a whole, the world economy is moving sideways” with other pundits stating that: “The crisis has left a cocktail of interacting legacies—high debt overhangs, nonperforming loans on banks’ books, deflationary pressures, low investment, and eroded human capital—that continue to depress potential investment levels.”
 
Furthermore next year ends in a 7. If you’re superstitious or a little loose with statistics, that makes us due for another financial crisis. The biggest one-day stock drop in Wall Street history happened in 1987. The Asian crisis was in 1997. And the worst global meltdown since the Great Depression got rolling in 2007 with the failure of mortgage lenders Northern Rock in the U.K. and New Century Financial in the U.S.
 
And if that wasn’t bad enough, calls for a correction in Silicon Valley are multiplying. Bloomberg reports that “things were different in Silicon Valley in the distant year of 2012, when iPhone sales were skyrocketing and you could still buy a house in Palo Alto for less than $2 million. Back then, most restaurants had menus, not tasting menus. Chief executive officers could say something grandiose at a tech conference without worrying about getting mocked on HBO six months later by the Beavis and Butt-head guy. And a talented entrepreneur could walk into a venture capitalist’s office, say his startup was a mobile-first solution for pretty much any problem (payments! photos! blogging!), and walk out with a good-size seed investment. “That pitch was enough to get going,” says Roelof Botha, a partner with VC firm Sequoia Capital. “It’s not enough anymore.””
 
Well from where I’m sitting things aren’t that bad. There are still plenty of ways to outperform the market if one is patient and thoughtful in their approach. (We would be happy to show you how we do it.)
 
Furthermore, as I’ve stated before being bearish costs nothing and quite frankly is a healthy sign of a market that hasn’t yet peaked. The most likely scenario is a sideways market in which returns will be more difficult to come by but this is how systems work. Reset expectations and take a close look at what the market is now offering you.

There are still many individual businesses that are generating immense shareholder value growing their top and bottom lines. Instead of “whining” about a “rigged system” or “unconventional central banks” or a “climate you don’t understand” or “no longer recognize,” enjoy the challenge. Relish in it. It is through adversity that growth occurs. Life like investing is in many ways simple. But never easy….

Thought of the Week


  "Times of transition are strenuous, but I love them. They are an opportunity to purge, rethink priorities, and be intentional about new habits. We can make our new normal any way we want.” –Kristin Armstrong

Stories and Ideas of Interest

• A visual history of US elections and global markets suggests business as usual. A few weeks ago I addressed the question of whether a Trump victory would send the markets into a tailspin. My answer was that a win by either candidate would most likely have very little impact. Chris Groskopf and David Yanofsky, after charting changes of power in the White House going back to 1992, show that market reactions to new presidents are generally a great big “meh.” Ignore the noise.

• The real danger of Donald Trump’s conspiracy theories. The Republican nominee is whipping up his supporters into a state of paranoia, convincing them that the election will be rigged and everyone is against them. To prevent violence, Sarah Kendzior argues, Trump’s critics—especially Republican ones—should stop pressuring him to drop out; it just gives him ammunition. Furthermore, the claims are unfounded. “It is more likely that an individual will be struck by lightning than that he will impersonate another voter at the polls,” said a 2007 report from the New York University School of Law’s Brennan Center for Justice that the center has been referencing in light of Trump’s claims.

• An alternative way to cope with failure. At present there is a craze for celebrating failure in entrepreneurial culture. The problem is that it is confined to those who’ve eventually made it big. What about those who haven’t? Bene Cipolla argues for a new way of confronting failure: accept it. Bask in it as it can be life giving.  

• The smart money suggests that Italy will leave the EU. The country’s outflows are accelerating - up €118 billion ($130 billion) from just a year ago. No I suppose we haven’t seen the last of troubles originating in the EU….

• We need to plan for a future without jobs. Very interesting article in Vox from Andy Stern former president of the Service Employees International Union (SEIU), which today represents close to 2 million workers in the United States and Canada. A Universal Basic Income is coming…..Consider the types of businesses on Forbes’ list of 25 Next Billion Dollar Start-Ups….Lots of “productive” software offerings…. What are you worth anyway? Career website Glassdoor Inc. is releasing a new tool aiming to help employees find out if what they are earning is fair based on their location, employer, job title, years of experience, and education. Is it a cruel world that our efforts have been reduced to each worker having a simple fair “market value”? Or is this a helpful tool?

• Toronto real estate looks set to slow down. Evan Siddal CEO of the CMHC raised a red flag this week and stated in relation to the new real estate measures: “If people can just save a bit more money and have a bit more equity in their homes, that would be safer,” Mr. Siddall said. “A 5-per-cent down payment means you don’t have a lot of cushion on the downside.” Yet he states that there may be unintended consequences. Luckily Toronto Life Magazine looks into their crystal ball and finds that the average home in Toronto in 50 years will be 4.4 MILLION….(average price now is $620 000 which represents 7% CAGR over next 50 years. A lot can happen in 3 years let alone 50…)
   

All the best for a productive week,

Logos LP

Will Inequality Bring The Economy To Its Knees?

Good Morning,

It is getting dicey out there for investors, although stocks eked out a modest rise on Friday.
 
U.S. equities have been bouncing around lately. And the trend has been predominantly lower. Although it hasn’t been the sort of dizzying tumble for equities that would elicit an instant spike in fear, it has been, however, the kind of plodding descent that has the Dow Jones Industrial Average down nearly 300 points since the end of July.
 
In fact, the Dow and the S&P 500 index are on the verge of tallying three straight months of declines, with October shaping up to be the ugliest monthly fall since January—the month after the Federal Reserve raised rates for the first time in a decade. (Friday’s jump on better bank earnings will have to be factored after the close.)
 
Our Take: Nothing new this week as economic data was neither great nor poor. Lack of consensus at the Fed about what to do with rates continued. More than 80 S&P components are scheduled to report next week, including Bank of America, streaming giant Netflix, BlackRock, Goldman Sachs and United Continental and so the direction of fourth-quarter estimates will need to be observed. Look for strength in banking and technology.
 
This week, I found myself thinking about ethnic nationalism’s link to global economic weakness and the rise in inequality.
 
What got me thinking about this was the response an audience member got from Trump at the Presidential debate last Sunday when she essentially asked what it meant to be Muslim in America. Trump’s campaign has suggested that there is something wrong with Islam in America. Although fighting labeling with labeling isn’t ideal (“basket of deplorables”) we must ask: What is causing many among us in the developed world to retreat into hate and fear?
 
I’ve touched on this in other newsletters but this week I came across an excellent piece by Yale Professor Robert Shiller which goes a long way in addressing this issue.
 
Across the world economic growth (GDP) has been inching along at a reduced pace since the recession began in 2007. Combined with another factor: rising inequality, along with considerable fear about future inequality we get ethnic nationalism.
 
Looking at the data earnings for workers have been basically static since 1979 with the TOTAL INCREASE since then standing at 1.2 percent or 0.03 percent a year. The issue is that most of these miniscule gains have been going to the very top earners not the median wage earner. So we have a situation in which roughly half of full-time wage earners are doing less well in real terns than their parents.
 
Shiller draws on work from Ben Friedman from Harvard to say that although most people aren’t familiar with such data they are aware of what they personally are being paid.
 
If they realize that they are doing less well than their forebears, they become anxious. If they can’t see themselves or others in their cohort, especially their children as progressing over a lifetime, their social interactions often become angry, resentful and even conspiratorial.
 
Ethnic nationalism creates an ego-preserving excuse for self-perceived personal failure: Other groups are blamed for bad behavior and conspiracies.
 
There is a major shift going on moving economic power away from the working class. (Perhaps the “working class” is also expanding in size) and even those who have not lost out yet in terms of economic power are fearful that they might.
 
Why? The forces resulting in greater inequality: technological advances and low interest rates are not slowing down.
 
Interestingly, Shiller cites a 2015 study published in The American Economic Review by Michael Kumhof of the Bank of England, Romain Rancière of the International Monetary Fund and Pablo Winant of the Bank of England who found that both the Great Depression of the 1930s and the Great Recession of 2007-9 had their origins, in part, in rising inequality.
 
Before both these difficult periods low to middle income people borrowed more to maintain their standards of living. There was a shame that developed as the borrowing intensified. Are we seeing the same today? The ethnic nationalism we are witnessing may simply be a symptom of a powerful shame, mixed with fear and disillusion that is percolating in certain hearts and minds.
 
What can be done? Does the system have to go through a major shock to find another way? Will disaster be necessary to pave the way to change? Could fiscal stimulus be enough? A hand-out? In any event the next President (Repub. Or Democrat) will face a daunting problem that doesn't appear to be improving. For investors, we should be mindful of what credit markets are telling us (subprime borrowers are falling behind on their car loan payments at the highest rate in more than six years) and what history has (*we hope) taught us.

Thought of the Week

"A man willing to work, and unable to find work, is perhaps the saddest sign that fortune's inequality exhibits under this sun." - Thomas Carlyle

 

Stories and Ideas of Interest

• Millennials don’t care about money. Oh wait they are just like everyone else and do. Interesting study done by American Advisors Group demonstrating that millennials have some things in common with boomers after all.

• Reading novels teaches us humanity. Literary fiction improves our ability to comprehend that our beliefs and desires might not be the same as those of others. Interesting piece chronicling how literature has changed attitudes throughout history. Furthermore, what you spend your time reading changes your brain. Seriously, our sound bite culture is destroying our brains…

• Where is tech headed? Reading a startup’s bio doesn’t usually make for interesting reading yet in aggregate, company descriptions reveal important trends shaping technology and innovation. CB Insights mines the data and identifies which technologies are trending up and which are falling out of favor. Finally….. “social” and “apps” are on the decline (bye bye Twitter) as well as “solar” and “Microsoft”. “VR” and “AI” are hot….

• Silicon Valley isn’t visionary. ReCode on why today’s tech entrepreneurs are too busing trying to fix things that aren’t broken. How about more of a focus on things that are broken: Health care, education, homelessness and poverty, food waste, climate change....

• Slow down on the happiness juice. The Economist puts forward the argument that companies that try to turn happiness into a management tool are overstepping their mark. Zappos is so happy with its work on joy that it has spun off a consultancy called Delivering Happiness. It has a chief happiness officer (CHO), a global happiness navigator, a happiness hustler, a happiness alchemist and, for philosophically minded customers, a happiness owl. Seriously? Great article here in Quartz suggesting that we weren’t meant to be happy all the time anyway. In fact, perpetual bliss may completely undermine our will to accomplish anything at all….
   

All the best for a productive week,

Logos LP

Is It A Bubble Or Not? Happy Thanksgiving!

Good Morning,

U.S. equities closed lower in choppy trade on Friday as Wall Street digested a weaker-than-expected employment report and kept an eye on falling oil prices. The September jobs report came in yesterday and the U.S. economy added 156,000 jobs last month and the unemployment rate ticked up to 5.0 percent. Economists surveyed by Reuters had expected 176,000 new jobs and the jobless rate to hold at 4.9 percent. The total was a decline from the upwardly revised 167,000 jobs in August (compared to the original number of 151,000).
 
If you drill down below the headline, did wages go up? Yes. Did hours go up? Yes. Did participation go up? Yes. That's what makes it fine. What would've made it great? A number above 200,000.
 
Our Take: A blah September jobs report lends no urgency for anything on the economy's to do list: There's no sign of an overheating economy that would justify a rate hike; no acceleration of construction hiring that would finally hint at a return to a normal pace of housing starts; no big wage gains that would give hope for renewed productivity gains. Just a stubbornly average report at a time when the economy is looking for a jolt of the exceptional…
 
Nevertheless, despite the mediocre report, market expectations for a December rate hike stand above 60 percent following its release, according to the CME Group's FedWatch tool. Markets mirrored this rate hike expectation all week with yields rising, gold selling off and rate sensitive stocks getting hammered. We maintain that a small rate hike will occur in December. Consider your portfolio’s sensitivity to a hike but continue to think long term.
 
This week I’ve been thinking a lot about bubbles. It’s as if everyone I talk to has identified their bubble of choice that “no one” is paying enough attention to. I’ve talked a lot in the past about taking the temperature of the market but also of great importance is the distinction between a bubble and a cycle.  Where do we stand? Well according to various media sources we now have at least 16 bubbles on our hands:
 
A new real estate bubble
A bond bubble
A tech bubble
A VC bubble
A startup bubble
A stock bubble
A shale oil bubble
A healthcare bubble
A dollar bubble
A college tuition bubble
A social media bubble
A China bubble
A residential real estate bubble (Vancouver or Toronto Canada)
A "find happiness" bubble (See below)
 
One Economist recently gave up and just said “Everything’s a bubble.”
 
But before throwing in the towel slow down…Morgen Housel offers a very useful discussion about the difference between a bubble and a cycle which is one of the most fundamental and normal parts of how markets work.
 
Bubbles should be avoided, as you risk widespread permanent loss of capital. Cycles, by and large, shouldn’t, because all they imply is that you have to be patient and humble to earn long-term returns, which is by and large the path to successful investing.
 
Could a bubble simply exist if return prospects don’t improve after prices fall? Only when the asset class offers you no hope of return ever?
 
As Housel suggests: “If you find an asset whose price looks expensive and is probably going to fall, you likely haven’t found a bubble. You’ve found capitalism. Excesses will correct, recover, and life will go on.”
 
So over Thanksgiving weekend take some time to consider which one you are looking at: A bubble or cycle? And/Or reflect on all that has contributed to the person you are today. The things you have accomplished, the fears you have overcome, the laughter, joy and love you've felt. Focus on gratitude and enjoy the present moment finding contentment in the people and places that surround you.

Thank you all again deeply for your support and trust. We will continue to try our best to add value.

Thought of the Week

  "Gratitude is not only the greatest of virtues, but the parent of all others." -Marcus Tullius Cicero

Stories and Ideas of Interest

• New housing rules in Canada Released by Ottawa are a big deal. They will likely raise funding costs for lenders – and borrowing rates for consumers. Lenders will have to run stress tests on all new insured mortgages to ensure that borrowers can meet their debt obligations even if interest rates rise. But the biggest change is one that is still in the works: Finance Minister Bill Morneau said Ottawa will take a closer look at what is known as “lender risk-sharing” – which is the idea that the banks could have to pay a deductible on mortgage insurance provided by Canada Mortgage and Housing Corp. (CMHC) and its private sector competitors. Such a change would likely force banks to hold additional capital against mortgages, raising their funding costs. The banks would likely pass the new costs to consumers in the form of higher mortgage rates. Looks like our friend the millennial home buyer is getting priced out even further. Perhaps his best bet is to rent for life....Toronto Life Magazine explores...

• Bloomberg thinks Canadian Assets are expensive. I must say it was easier for us to find value in Canada earlier this year than at present. Bloomberg runs through assets classes and argues Canadians didn’t get the memo about weak global growth. Coming into 2016, many global asset managers highlighted Canada as an attractive place to invest; and combined with the rally in resources, you have a market that’s outperforming S&P TSX up around 15% YTD. If you think Oil is still cheap today (questionable) and gold may continue to rally (very questionable), then I see no reason why Canadian stocks should begin underperforming in the short-term…but this year’s broad market performance may be an outlier…Not that this is anything new but some high profile short sellers are betting heavily against Canadian financials, pharmaceuticals and gaming companies…

• It’s still possible to build a high growth technology business the old fashioned way. The NYT explores how under the radar, slowly and steadily, and without ever taking a dime in outside funding or spending more than it earned, MailChimp has been building a behemoth…

• How long can a human live? People who play golf could live five years longer than those who don’t according to new research from Scotland. Furthermore, according to new research in the journal Nature presented in the NYT, the longest humans can live is 115…Luckily other heavyweights in the field rejected the study’s findings calling it a “travesty”. Is the best hope for our species not to extend our life spans but instead to lengthen our years of healthy living?

• Americans are obsessed with happiness. And it is making them miserable. Interesting piece written in VOX from the perspective of a Brit living in America: “It seems as though happiness in America has become the overachiever’s ultimate trophy. A modern trump card, it outranks professional achievement and social success, family, friendship, and even love. Its invocation deftly minimizes others’ achievements (“Well, I suppose she has the perfect job and a gorgeous husband, but is she really happy?”) and takes the shine off our own.” Is it working? As I’ve written before: the more people see happiness as a goal, the less happy they are. Excesses will correct, recover, and life will go on...

All the best for a productive week,

Logos LP