Stocks Have Become Cheaper Today Than 4 Years Ago

Good Morning,
 

The S&P began April on the right foot on the first day of trading. The sustained strength into the end of the week suggested that it was no April Fools' joke as investor sentiment was boosted by better-than-expected jobs data and progress on the U.S.-China trade front. As is, the S&P stands at a gain of 15+% for the year, and 1.5% from the all-time highs. Not too shabby given the calls of “this is the end” and “earnings have peaked” which led the market lower in December.

After a brief pause, global markets have resumed their up trends. Even if we look at the MSCI Emerging Markets ETF (EEM) it also remains in a healthy uptrend after the December sell-off with a series of higher highs and higher lows. Interestingly, this pattern is the same just about everywhere one looks around the globe. Worldwide equity markets are rallying, which may be signaling a re-setting of expectations from fear and gloom to cautious optimism.

The U.S. economy added 196,000 jobs in March, according to data released on Friday by the Bureau of Labor Statistics. Economists polled by Dow Jones expected a print of 175,000. The U.S. unemployment rate, meanwhile, remained at 3.8%. However, wage growth expanded 3.2%, below an expected gain of 3.4%.

Overall, however, the March employment report has become the latest in a series of better data this week, including stronger home sales and a pickup in ISM manufacturing activity. Recession fears have been fading as economists have been nudging up their expectations for GDP growth, with some seeing over 2% in the first quarter from earlier forecasts closer to 1% or lower.

Our Take
 

The demise of the U.S. economy has been greatly exaggerated. The unemployment rate is low, so that should have a positive impact on consumer confidence, but it’s not so low that wages are growing quickly. From the shareholder’s perspective, margins are expected to remain high. In fact, earnings expectations for Q1 2019 are low and upside surprises are likely to push equities higher. With 23 companies in the S&P 500 having reported actual results for the quarter, 19 have already reported a positive EPS surprise and 13 have reported a positive revenue surprise.

Funnily enough the pundits who were screaming recession in December are still beating their drums albeit less aggressively stating instead that there “is a risk of a recession next year.”  

At the end of the day there is always “a risk of recession” in any given year, the question for an investor is whether the current investment environment and where a number of elements stand in their cycles suggest a re-positioning of one’s portfolio? Does the current environment demand a re-calibration along the continuum that runs from aggressive to defensive?
 

Musings

In our view, the current environment does not warrant excessive defensiveness. If we define risk as the likelihood of permanent capital loss (downside risk) as well as the likelihood of missing out on potential gains (opportunity risk) we should also view the future as a range of possibilities rather than as a fixed outcome.

Thus, investors - or anyone wishing to grapple successfully with the future - need to form probability distributions with regards to future outcomes. What are the range of possible future outcomes and what probability can we assign to each?

As Howard Marks has suggested: “it is useful to think of investment success as choosing a lottery winner. Both are determined by one ticket (the outcome) being pulled from a bowlful (the full range of possible outcomes). In each case, one outcome is chosen from among the many possibilities. Superior investors are people who have a better sense for what tickets are in the bowl, and thus for whether it is worth participating in the lottery. In other words, while superior investors - like everyone else - don’t know exactly what the future holds, they do have an above average understanding of future tendencies.”

As such, what sense do we have for what tickets are currently in the bowl? What insights do we have about future tendencies? Can we tilt the odds in our favor?

In last month’s newsletter we put out a call suggesting that we saw an opportunity in this market. We had put this call out to our limited partners in December. What did we see?

In short, we saw that global equity markets actually appeared to be cheaper, or less risky (downside risk) today than they’ve been over the last four years.

Without diving too deeply into the other factors we had been observing about the cycle/investment environment and are still observing today, the nature of the lottery (the tickets and bowl) as we saw it then and as we see it now are summed up nicely by Andrew Macken, Chief Investment Officer at Montaka Global Investments.

This perspective begins with the understanding that over the last 4 years global equities have delivered a real return of approximately zero.

The MSCI World Net Total Return Index has delivered +4.5 percent per annum over the four-year period to 31 December 2018. On its face this return above any global average rate of inflation suggesting real global equity returns have been positive over the period.

The problem is that the most substantial contributor to the MSCI World’s return was the +7.2 percent per annum return generated by US equities – as measured by the S&P 500, in this case. Now, the US accounts for approximately 54 percent of the MSCI World Net Total Return Index, so this substantial return drove more than 80 percent of the total return of the MSCI World over this four-year period.

What is sometimes forgotten is that US domiciled businesses benefited from a significant reduction in their corporate tax rate, from 35 percent to 21 percent, as part of President Trump’s Tax Cuts and Jobs Act of 2017. This reduction in the corporate tax rate effectively provided a one-time rebasing of US corporate earnings upwards.

The question is what US equities would have delivered absent the Trump tax cut? Montaka’s analysis suggests that approximately 70 percent of US equity returns over the last four years was driven by the Trump tax cut. Absent this tax cut, US equities would likely have delivered an average return of 1.9 percent per annum – exactly the same as the average yield of the five-year US Treasury Bond over the same period.

Now, upon adjusting the MSCI World Net Total Return Index for the Trump tax cut, the four-year annual return of +4.5 percent reduces to just +1.6 percent per annum. Arguably this return is in line with global inflation suggesting real global equity returns over the period have been approximately zero.

What are we to make of this? The implication of the above is: “as earnings grow without commensurate growth in total shareholder return, then equities are essentially becoming cheaper, absent some material change to the trajectory of future growth or cost of capital.”

Over the last four years, global equities have basically drifted sideways (absent the one-time Trump tax cut the effects of which will likely fade very soon); but pre-tax earnings have been increasing!

In the US, for example, S&P 500 pre-tax earnings have increased by 16 percent over the last four years. Said another way: global equity markets have actually become cheaper, or less risky (downside risk), over the last four years. The tickets in the bowl suggest participation in the lottery. Being overly defensive now suggests opportunity risk at a time when downside risk appears less pronounced.

As equity prices fall, the probability that they will be higher in the future rises.

But the conventional wisdom is that equities are heading for a prolonged “bear market” similar to the drawdown at the beginning of the century. Lets remember that recessions are relatively rare, so constantly forecasting them and positioning portfolios to prepare can be a risky proposition (opportunity risk). Furthermore, between 2000 and 2002, the S&P 500 Total Return Index roughly halved and we should note that the forward P/E ratio of the S&P 500 TODAY is the same as where it was at the bottom of the 2002 bear market – and roughly half of where it was at the top, in the year 2000...

Charts of the Month

Logos LP March 2019 Performance
 

March 2019 Return: 3.88%
 

2019 YTD (March) Return: 12.61%
 

Trailing Twelve Month Return: -6.94%
 

Compound Annual Growth Rate (CAGR) since inception March 26, 2014:+14.34%

Thought of the Month

"To be a warrior is to learn to be genuine in every moment of your life.”-Chogyam Trungpa

Articles and Ideas of Interest 

 

• MTY Food Group: There’s Still Value In Food. An article by us looking at MTY one of our best ideas.   

• Picking stocks is hard. Josh Brown and Michael Batnick discuss diversification and portfolio concentration. In a recent study, Vanguard took a look at the last 30 years worth of data for the Russell 3000 index, which represents the total stock market. They found something remarkable - over the last 30 years, 47% of stocks were unprofitable investments and almost 30% lost more than half their value. They also found, and this is the big one, that 7% of stocks had cumulative returns over 1,000%.But imagine how hard it would have been to identify that winning 7% and concentrate only on those holdings in advance?

• Is the yield curve inversion important? The 10Y-3M yield curve recently inverted, and market pundits are running around like their hair is on fire. Should we care? Contrary to popular belief, there is little theoretical or conceptual support for using inversion of the 10Y-3M Treasury yield curve as a leading indicator of recessions. Contrary to popular belief, there is little theoretical or conceptual support for using inversion of the 10Y-3M Treasury yield curve as an asset allocation signal to sell stocks.

• The happiness recession. Today’s young adults are replacing church and marriage with friendships. But there’s one thing for which they have no substitute….the sex recession is in full swing.

• Reality is delicious all on its own. A Zen teacher and chef says that the secret to appreciating life lies in accepting that nothing is perfect, but everything is useful. No food or experience should ever go to waste. Just as he saves the remains of today’s dishes for tomorrow’s meals, the chef suggests we relish everything life brings our way, or at least learn to resist less. Instead of always trying to control things, which is impossible, the chef argues that we can get better at dealing, making delicious recipes in the kitchen and in our lives by using limited ingredients and learning to savor the flavors that arise naturally.

• How digital technology is destroying our freedom. Douglas Rushkoff, a media theorist at Queens College in New York, is the latest to push back against the notion that technology is driving social progress. His new book, Team Human, argues that digital technology in particular is eroding human freedom and destroying communities.

• Andreessen Horowitz Is Blowing Up The Venture Capital Model (Again). Andreessen and Horowitz, who rank 55th and 73rd, respectively, on this year’s Forbes Midas List, intend to be disagreeable themselves. They just finished raising a soon-to-be announced $2 billion fund (bringing total assets under management to nearly $10 billion) to write even bigger checks for portfolio companies and unicorns the firm missed the first time. More aggressively, they tell Forbes that they are registering their entire firm—a costly move requiring reviews of all 150 people—as a financial advisor, renouncing Andreessen Horowitz’s status as a venture capital firm entirely. Why?
  

• Different kinds of information. The amount of raw, accessible information we have is orders of magnitude more than it was 15 years ago, let alone 129 years ago. Yahoo has historical financial statements of every public company; 20 years ago you had to ask each company to mail you hard copies. Twitter spits out 200 billion tweets a year; it barely existed a decade ago. The firehose makes it easy to mirror the poor Oxford boy: since information is free and ubiquitous but adding context has a mental price, the path of least resistance is to know facts without a clue where they go or whether they’re useful. Morgan Housel suggests that one step to dealing with this firehose is acknowledging different types of information. When you come across a piece of information – any kind of information – I’ve found it useful to bucket it into different groups.

• This Negative-Fee ETF Will Pay Investors to Invest. While the biggest exchange-traded fund shops such as BlackRock and Vanguard battle for fresh money by undercutting each other on fees, small and relatively new entrants of ETF-land are going whole hog. Salt Financial, an ETF shop with less than two years under its belt, filed on Tuesday to launch an ETF that will actually pay investors for investing in it, at least at the start. The negative-fee ETF is finally here, making online lender Social Financial or SoFi’s zero-fee ETFs old news.

• It's not just corruption. Entrance into elite US colleges is rigged in every way. An FBI sting revealed that wealthy parents are buying their children a place in top universities. But they’re not the only problem: the whole system is rigged. But here’s the thing: the whole system is “rigged” in favor of more affluent parents. It is true that the conversion of wealth into a desirable college seat was especially egregious in this case – to the extent that it was actually illegal. But there are countless ways that students are robbed of a “fair shot” if they are not lucky enough to be born to well-resourced, well-connected parents. The difference between this illegal scheme and the legal ways in which money buys access is one of degree, not of kind. The mistake here was to do something illegal. Meanwhile, much of what goes on in college admissions many not be illegal, but it is immoral.

  Our best wishes for a fulfilling April,

  Logos LP
  



Get Out or Go All In?

Good Morning,
 

Stocks fell for a fifth straight day on Friday after the U.S. government released employment data that missed expectations by a large margin, adding to mounting concerns that the global economy may be slowing down.

The indexes posted their biggest weekly declines of the year. The major indexes all dropped more than 2 percent this week. The Nasdaq snapped a 10-week winning streak, while the Dow notched its second weekly decline of the year.

To put things in perspective, while the headline was that the S&P suffered its worst week in 2019, the index gave back 2.5% of the 19+% gain achieved during the recent rally.

The U.S. economy added just 20,000 jobs in last month, marking the weakest month of jobs creation since September 2017. Economists polled by Dow Jones expected a gain of 180,000.

The data come amid growing concerns about the global economy possibly slowing down. Data out of China showed its exports slumped 20.7 percent from a year earlier, far below analyst expectations and wiping out a surprise jump in January.
 

The weak data all come less than 24 hours after the European Central Bank slashed its growth forecasts for the euro zone and announced a new round of policy stimulus.

Our Take
 

The bears came out again this week screaming the usual platitudes they’ve been pushing since 2015: “The bull market is old and tired, the economic recovery has run its course, we are headed for a recession and the market’s best days are behind us.”

This may or may not be true, but it is important to remember that investors as humans have a tendency to think in terms of extremes. Things are “good” or they are “bad”. You should be “in” the market or “out” of the market. Given this tendency, it is no surprise that most pundits will offer an insight that suggests “go all in” or “get out”.

The reality is that much of the market’s activity occupies a middle ground. Things are fine and there is no need for any extreme actions or reactions. Why?

Because there are no immutable rules that explain what is going on in the market. There are no physical laws at work in investing. The future is uncertain, vague, and random. Psychology dominates and therefore there are no laws only tendencies.

As such, instead of thinking in extremes which imply the existence of laws governing the market such as “when the yield curve inverts that means a recession is coming thus get out of equities” it is better to examine certain tendencies which can be associated with the stock market.

What tendencies can we observe? Nick Maggiulli points to several:

1) Stocks will provide long-term positive returns

The historical evidence illustrates that equity markets around the globe have provided long-term positive returns to investors.  

The equity market has been in a bull market:

1. 76% of the time since 1929.

2. 80% of the time since 1940.

3. 84% of the time since 1980.

The majority of the time, stocks mostly go up.

2) Higher returns do not come without volatility

You can put your money in stocks and sleep tight....but the reality is far more punishing. Most developed country stock markets from 1900-2018 experienced at least one an annual decline of at least 37%. Furthermore, in a recent article in Bloomberg which backtested a “God” portfolio (an equal-weight portfolio comprising the best 100 stocks in the Russell 1000 since the bottom of the financial crisis that would have returned nearly 20 times the benchmark) to the bottom of 2009 and found that even this portfolio fell behind the benchmark by as much as 10 percent for part of certain years and also plummeted more than 22 percent at certain points -- six percentage points more than largest drawdown for the S&P 500.

"If God is omnipotent, could he create a long-term active investment strategy fund that was so good that he could never get fired?” The conclusion was no. While long-term returns were obviously astounding, shorter stretches -- the ones by which fund managers are often judged -- were “abysmal.”

Large crashes and volatility help explain why equities have a positive real long-term return. You are being compensated for taking risk. The compensation process simply requires patience.

3) Markets occasionally crash

Markets crash from time to time, but then they recover. Market crashes happen because of a rapid shift in investor psychology.  Sometimes this shift is warranted but other times the market is oversold and a recovery becomes inevitable.

4) Cheap stocks and rising stocks tend to outperform the rest

Though stocks in aggregate tend to do well over the long run, cheap stocks (i.e. value) and rising stocks (i.e. momentum) tend to do even better. Although there is a lot of talk at present surrounding the relative “failure” of “classical” value strategies based on low price-to-book it is best to think of “value” as stocks trading at a discount to their intrinsic value.

Musings
 

This month we wish to highlight two pieces of news:

1. We see a unique opportunity in the markets at present. Please contact us for more information.
    

2. After receiving many requests, we have also decided to launch a 1 on 1 coaching service designed to help investors build their own custom equity portfolios. Please contact us for more information.

Charts of the Month

The majority of the time, stocks mostly go up more than pretty much everything else.

Logos LP February 2019 Performance

February 2019 Return: 3.03%

2019 YTD (February) Return: 8.41%

Trailing Twelve Month Return: -8.32%

CAGR since inception March 26, 2014: +13.46%

Thought of the Month

"There were a lot of questions today — people trying to figure out what the secret to life is, to a long and happy life: You don’t have a lot of envy. You don’t have a lot of resentment. You don’t overspend your income. You stay cheerful in spite of your troubles. You deal with reliable people. And you do what you’re supposed to do. And all these simple rules work so well to make your life better. And they’re so trite."  - Charles Munger

Articles and Ideas of Interest 

 

• Why we fell for clean eating. The oh-so-Instagrammable food movement has been thoroughly debunked – but it shows no signs of going away. The Gaurdian suggests that the real question is why we were so desperate to believe it. In the spring of 2014, Jordan Younger noticed that her hair was falling out in clumps. “Not cool” was her reaction. At the time, Younger, 23, believed herself to be eating the healthiest of all possible diets. She was a “gluten-free, sugar-free, oil-free, grain-free, legume-free, plant-based raw vegan”. As The Blonde Vegan, Younger was a “wellness” blogger in New York City, one of thousands on Instagram (where she had 70,000 followers) rallying under the hashtag #eatclean. Although she had no qualifications as a nutritionist, Younger had sold more than 40,000 copies of her own $25, five-day “cleanse” programme – a formula for an all-raw, plant-based diet majoring on green juice. But the “clean” diet that Younger was selling as the route to health was making its creator sick. Sound familiar?      

• The servant economy. Ten years after Uber inaugurated a new era for Silicon Valley, the Atlantic checked back in on 105 on-demand businesses. The basic economics of moving human beings and stuff around the physical world at the touch of a button is not an obviously profitable enterprise (almost none of this 105 are profitable despite raising over 7.4 billion dollars). Looking at this incredible flurry of funding and activity, it’s worth asking: These companies have done so much—upended labor markets, changed industries, rewritten the definition of a job—and for what, exactly? An unkind summary, then, of the past half decade of the consumer internet: Venture capitalists have subsidized the creation of platforms for low-paying work that deliver on-demand servant services to rich people, while subjecting all parties to increased surveillance. These platforms may unlock new potentials within our cities and lives. They’ve definitely generated huge fortunes for a very small number of people. But mostly, they’ve served to make our lives marginally more convenient than they were before. Like so many other parts of the world tech has built, the societal trade-off, when fully calculated, seems as likely to fall in the red as in the black.

• What would happen if Facebook were turned off? Imagine a world without Facebook. The Economist reviews comprehensive research which suggests that it might be a better place.

• By the Numbers: Toronto Real Estate vs. The Stock Market. I often get questions which pit the supposedly fabulous returns which Toronto real estate has generated against stock market returns and this excellent research by Vestcap does a great job to demonstrate that Toronto home ownership produced a 5.7% compounded return while the TSX and S&P 500 each grew by 7.9% and 11.6%, respectively. I also get questions about investment in rental properties vs. investing in common stock and this article does an excellent job comparing the two. In general, rental property can be an attractive investment, but profitability is highly dependent on local conditions, global REITs offer compelling value that can replicate much of the returns you could achieve by investing in rentals and investors in favorable markets (cheap real estate) can leverage rentals for large returns.

• The greatest investor you’ve never heard of: an optometrist who beat the odds to become a billionaire. Dr. Herbie, as he is known to friends, is a self-made billionaire worth $2.3 billion byForbes’ reckoning—not including the $100 million he has donated to Florida’s public universities. His fortune comes not from some flash of entrepreneurial brilliance or dogged devotion to career, but from a lifetime of prudent do-it-yourself buy-and-hold investing.
  
   

• Where do disruptive ideas happen? Not on a big team. Innovations are more likely to arise from lone researchers or very small groups.

• How AI will rewire us. For better and for worse, robots will alter humans’ capacity for altruism, love, and friendship. As machines are made to look and act like us and to insinuate themselves deeply into our lives, they may change how loving or friendly or kind we are—not just in our direct interactions with the machines in question, but in our interactions with one another. Meanwhile, China has banned 23m people from buying travel tickets as part of their “social credit” system. People accused of social offences blocked from booking flights and train journey.

Our best wishes for a fulfilling March,

Logos LP

Can God Beat Dollar Cost Averaging?

Good Morning,
 

Stocks surged on Friday amid increasing hopes for a U.S.-China trade deal as equities posted another solid weekly gain.

The 30-stock Dow's eight-week winning streak is its longest since the one ending Nov. 3, 2017. The Nasdaq also posted its eighth consecutive weekly gain. The S&P 500, meanwhile, closed its seventh weekly gain in eight extending its post-Christmas rally past 17 percent. The indexes rose at least 2.4 percent each this week. The S&P 500 now sits 6% off the all-time highs.

As we suggested in our December 30th newsletter, the selling was in fact overdone and December marked a near term low. As such, U.S. stocks are now bouncing back from their worst December since the Great Depression, triggered in part by concerns over a slowdown in earnings.  

Interestingly, most other asset classes are also bouncing back:
 

Oil: +21% YTD

Small caps: +17% YTD

MLPs: +16% YTD

REITs: +14% YTD

S&P 500: +11% YTD

Commodities: +10% YTD

EAFE: +8% YTD

EM: +8% YTD

Preferreds: +6% YTD

High Yield: +6% YTD

Investment Grade: +3% YTD

Gold: +3% YTD

US Dollar: +1% YTD

US Bonds: +1% YTD

Furthermore, some of the most economically sensitive and important market industry groups are finally showing signs of strength - and even leadership - after lagging the S&P 500 Index last year. Among the late-comers to the bounce back party are the critical homebuilders, the transports, and the semiconductors.

With three of the most economically sensitive industries showing signs of being in full-fledged recovery mode, investors can feel more confident about the bear finally going into hibernation. With real estate, transportation and semiconductor stocks all in sync to the upside, the probability of a bear market occurring anytime soon is low.

Our Take


Given the intensity and velocity (irrationality) of the sell-off last fall, the market is finally becoming more rational. The pendulum is swinging back down from extreme fear.

Nevertheless, based on the average of analysts estimates, U.S. firms are on the verge of suffering two consecutive quarters of profit declines, the common definition of a recession.

Earnings are said to contract in the first quarter, and while a small increase is currently projected for the following period, that is likely to evaporate. Analysts have been lowering forecasts since the start of the year as companies continue to slash outlooks, citing everything from a stronger dollar to weaker demand in China and rising costs.

Interestingly, the coming profit slump won’t necessarily kill the bull market. In a recent piece in Bloomberg, it was suggested that lower interest rates will likely act as a buffer to support equity valuations. That is, even as profits contract, an expansion in the price-earnings ratio would be able to absorb the blow. At 16.2 times forecast profit, the S&P 500’s multiple is down from a peak of 18.5 in 2017, trailing its five-year average.
 

In addition, BMO’s Brian Belski studied the 15 earnings cycles during the past seven decades and found the stock market has tended to rise even after the start of a profit recession. In the six and 12 months after one began, the S&P 500 on average climbed 3.4 percent and 13 percent, respectively. Ben Carlson comes to a similar conclusion.

The last profit recession, beginning in mid-2015, brought five straight quarters of shrinking income. While the S&P 500 suffered two 10 percent corrections over that stretch, stocks erased the losses and returned to record highs in July 2016. A soft patch need not lead to a recession.

Musings

I came across a wonderful blog this month entitled “Of Dollars and Data” and found one post entitled “Even God Couldn’t Beat Dollar Cost Averaging” of particular interest.

Given most financial pundits’ (and most people’s) favorite pastime is to attempt to “market time” and predict when to “buy the dip”, are these approaches useful?

Is a “Buy the Dip” approach better than simple “Dollar Cost Averaging (DCA)”?

What are we talking about?

DCA: invest $100 (inflation-adjusted) every month for 40 years.  

VS.

Buy the Dip: You save $100 (inflation-adjusted) each month and only buy when the market is in a dip. A “dip” is defined as anytime when the market is not at an all-time high. But, for good measure we sweeten the strategy. Not only will you buy the dip, but you are the greatest market timer out there: you are omniscient (i.e. “God”) about when you buy.  You will know exactly when the market is at the absolute bottom between any two all-time highs. This will ensure that when you do buy the dip, it is always at the lowest possible price.

The author suggests that logically, it seems like Buy the Dip can’t lose.  If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period.  However, he demonstrates that if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time.  

This is true despite the fact that you know exactly when the market will hit a bottom.  Even God couldn’t beat dollar-cost averaging.

Why is this true?  Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Who can do that even once let alone over long periods of time?

This revelation is particularly important given the dip we are currently exiting. While markets were selling off I had many conversations with investors as well as other asset managers who were selling their stock positions and talking about holding cash and cash equivalents ready to “buy the dip” or “buy the next dip” or some variation.

As the market has rebounded many of these investors and managers are still on the sidelines emotionally invested in the idea that there will be “another dip” just around the corner.

Whether they are right or wrong about an impending dip isn’t the point. In fact, it is this kind of thinking about investing that is counterproductive.

The more broad point is that “if you attempt to build up cash and buy at the next bottom, you will likely be worse off than if you had bought every month.  Why? Because while you wait for the next dip, the market is likely to keep rising and leave you behind.”

“Missing the bottom by just 2 months leads to underperforming DCA 97% of the time!  So, even if you are somewhat decent at calling bottoms (which you are likely not), you will still most certainly lose in the long run.
 

Keep calm and buy continuously and regularly. Successful investing is undoubtedly simple but rarely easy...


Charts of the Month

The situation today looks far different from what we saw before the financial crisis hit.

Underinvestment and lack of participation are conditions ripe for a heavy FOMO melt up. Market timing at its ugliest.

Logos LP January 2019 Performance

January 2019 Return: 5.22%

2019 YTD (January) Return: 5.22%

Trailing Twelve Month Return: -14.36%

CAGR since inception March 26, 2014: +12.99%

Thought of the Month


"Plus ça change, plus c'est la même chose."  -- Jean-Baptiste Alphonse Karr

Articles and Ideas of Interest 

• Why you should work less and spend more time on hobbies. This is more significant than it may sound, because it isn’t just individuals who are missing out. When people don’t have time for hobbies, businesses pay a price. Hobbies can make workers substantially better at their jobs. And things are getting worse with the weekend being killedand with young people pretending to love their work?      

• Why does it feel like everyone has more money than you? Financial help from parents comes in many forms, and it’s the basis of so many success stories. 3 out of 4 parents help their kids pay debts & living expenses, including rent, utilities and cell phone bills. A recent study from Merrill Lynch and Age Wave reported that 79 percent of the parents surveyed are providing financial support to their adult children, at an average $7,000 a year—making for a combined $500 billion annually. The help continues in death; roughly 60 percent of America's wealth is inherited. So why do millennials act like it doesn't exist? Jen Doll examines the myth—and tyranny—of the "self-made" millennial success story.

• The ethical dilemma facing Silicon Valley’s next generation. Stanford has established itself as the epicenter of computer science and a farm system for the tech giants. Following major scandals at Facebook, Google, and others, how is the university coming to gripswith a world in which many of its students’ dream jobs are now vilified?

• New AI fake text generator may be too dangerous to release, say creators. The creators of a revolutionary AI system that can write news stories and works of fiction – dubbed “deepfakes for text” – have taken the unusual step of not releasing their research publicly, for fear of potential misuse. OpenAI, an nonprofit research company backed by Elon Musk, Reid Hoffman, Sam Altman, and others, says its new AI model, called GPT2 is so good and the risk of malicious use so high that it is breaking from its normal practice of releasing the full research to the public in order to allow more time to discuss the ramifications of the technological breakthrough.

• Howard Marks: The Wisdom of a Value Superinvestor. Howard Marks cofounder and cochairman of Oaktree Capital Management shares his wisdom periodically in his memos, which reveal timeless insights while relating them to the realities of the market environment. The memos should be a key component of any value investing curriculum. Howard is also author of the instant classic, The Most Important Thing as well as Mastering the Market Cycle. MOI global sat down with him recently and he shared his thoughts on the most dangerous thing to neglect, the twin pitfalls of overconfidence and lack of ego as well as adjusting your level of aggressiveness based on the market environment. His most recent memo entitled political reality meets economic reality is also a gem in which he explains what happens when political behaviour collides with economic reality as illustrated in one area where the government is taking steps- tariffs - and another in which debate among politicians is heating up - restrictions on the capitalist system. Marks’ most interesting insight is perhaps a rare defence of capitalism as the most desirable economic system. He states: “A great deal of America’s economic progress has resulted from people’s aspiration to make more and live better. Take that away and what do we have? The people at the bottom won’t have as many at the top to resent. But without the contributions of those who aim for the top, everyone will have less to enjoy.”

• Your online shopping has a hidden cost. The world is addicted to free returns. Here’s why that’s a serious problem–and what consumers can do about it. A recent survey found that 40% of all online clothing purchases are returned. It’s hard to pin down the environmental cost of returning clothes specifically, but the evidence suggests that it is significant. In 2016, transportation overtook power plants as the top producer of carbon dioxide emissions for the first time since 1979.

• Stop worrying about the Fed’s balance sheet. It’s not the threat that people seem to think it is. Great piece by Bill Dudley taking on the popular argument that cheap money will eventually sink us. Market participants would be better off focusing on the economic outlook. 
  

Our best wishes for a fulfilling February,

Logos LP

2018 Meltdown and What to Think of 2019?

Good Morning,
 

Santa Claus rally? No Santa Claus rally? Naughty or nice? One thing is for sure the last two weeks on Wall Street have been gut wrenching. Not for the faint of heart. During that time, the major U.S. stock indexes have suffered losses that put them on track for their worst December performance since the Great Depression. Investors have also been gripped by volatile swings in the market as they grapple with a host of issues.
 

The S&P 500 has logged six moves of more than 1 percent over the period, three of which were of more than 2 percent. For context, the broad index posted just eight 1 percent moves in all of 2017.
 

The Dow Jones Industrial Average, meanwhile, has seen seven days of moves greater than 1 percent. Its intraday points ranges also widely expanded. The 30-stock index has swung at least 548 points in eight of its past nine sessions, and also posted its first single-day 1,000-point gain ever on Wednesday. The index ended down 76 points Friday after vacillating throughout the session.
 

These moves are remarkable and what has been equally remarkable has been the fact that many pundits and astute market veterans haven’t had much of a satisfying explanation; fears of the Fed after Chairman Jerome Powell said he did not anticipate the central bank changing its strategy for trimming its massive balance sheet, a U.S. federal government shutdown, disfunction in Washington (almost every part of Trump's life is now under investigation), slowing global growth, weaker data coming out of the U.S., “end of cycle”, and thus fears of a recession. All of which seem convincing as a root cause of this vicious selling. Watching CNBC has been almost comical with pundits like Jim Cramer recommending gold one day only to recommend nibbling on stock as markets move higher the next.
 

2018 was the year nothing worked: In fact, in 2018, just about every single asset class one can invest in — from stocks around the globe to government debt to corporate bonds to commodities — have posted negative returns or unchanged performance year to date.
 

Even during the financial crisis in 2008, government bonds and gold worked...
 

What gives?

Our Take

While any 20 percent sell-off hurts (both the Russell 2000 and Nasdaq led the way into bear market territory. The S&P 500 (-19.8%) and the Dow 30 (-18.8%) did manage to fall just short of the 20% threshold yet the average stock is down far more than that) the one happening now is far from unheard of in terms of depth or velocity. Over the past 100 years, there are almost too many examples to count of stocks tumbling with comparable force.
 

THIS IS INEVITABLE AND NORMAL. WELCOME TO THE STOCK MARKET.

Investors over the Holidays have time to reflect on history, now that stocks have avoided a fourth straight down week via the biggest one-day rally since 2009. After coming within a few points of a bear market on Wednesday, the damage in the S&P 500 stands at 15 percent since Sept. 20.
 

This is normal but seems abnormal because we are all talking about it from morning to night.
 

As we are reminded by a recent article in Bloomberg: “A fair amount of complaining has gone on in recent months about the role of high-frequency traders and quantitative funds in the drubbing that reached its peak around Christmas. Perhaps. Those groups are big, and in the search for villains, they make easy targets. Treasury Secretary Steven Mnuchin is among the people who have made the connection.
 

One thing that makes it tough to lay blame for the meltdown on machine-based traders is the many past instances when markets fell just as hard without their help. The Crash of 1929 is one big example. However bad this market is, it’s a walk in the park compared with then.”
 

This pattern holds for the Dot-com Bust (S&P 500 lost 35 percent over the course of two months), Black Monday of 1987 (S&P 500 rose 36 percent between January and August 1987 in what was set to be the best year in almost three decades. Then the October sell-off pushed the S&P into a 31 percent correction over just 15 days), 1974 Sell-Off (the S&P 500 saw the index fall 33 percent in 115 days as a weakening economy, rising unemployment and spiking inflation pushed investors to head for the exits. Stocks subsequently rebounded, surging more than 50 percent between October 1974 and July 1975), 1962 Rout (S&P 500 Index lost a quarter of its value between March and June 1962), Not so Fat ‘57 (20 percent correction over 99 days in 1957).
 

Last I checked there were no high frequency traders then BUT there were equally dysfunctional administrations and equally irrational humans…
 

The selling is likely overdone. When the SP 500 peaked in late September '18, the forward 4 quarter estimate was $168.72; today, that same estimate is $169.58. The point is with the S&P 500 index falling some 15%, the forward estimate on which it's valued is actually slightly higher. The question is will these estimates hold. Clearly the stock market is not so sure despite the fact that the U.S. economy is in a good position to sustain a 2.5-3 percent growth rate in 2019.
 

With the selling frenzy pushing stock prices lower, investors are now pricing in zero growth in earnings for 2019. Is this reasonable? 2018 earnings will come in at around $162 for the year. Clearly, the market has lost a lot of confidence in the staying power of earnings and the health of the economy. If we apply a conservative 14-15 multiple to that, it yields a range for the S&P at 2,268-2,430. So with the index closing at 2,488 Friday, we are just above that range. The issue is that the stock market generally overshoots in either direction when it sees change. Emotion takes over and causes the rapid move.
 

Despite existing negativity, the market’s valuation has changed for the better. The S&P 500 is actually heading into 2019 with a P/E ratio right in line with its historical average going back to 1929. And if you look just at the last 30 years going back to 1990, it is actually undervalued.
 

Unless one sees another financial crisis upon us (which at this time we do not), the probability is high that this could also mark a near term low.
 

As for investor sentiment, bearishness sits at record highs. In fact, half of individual investors now describe themselves as “bearish” for the first time since 2013. The latest AAII Sentiment Survey shows greater polarization, with neutral sentiment falling to an eight-year low.
 

On December 24 73% of financial stocks hit 52-week lows. That exceeds all days from the worldwide financial crisis…
 

In the past 28 years, there have been 2 times when every stock in the 2&P 500 Energy sector was below their 10-, 50-, and 200 day average and more than half were trading at 52 week lows.
1) During the depths of the 2008 financial crisis
2) Now

The pendulum of the market may be set for a swing in the other direction.


A Few Things We Like for 2019 That We Have Been Nibbling On During The 2018 Rout

Cerner Corp. (CERN:NASDAQ): major player in the healthcare IT industry as its software is highly integrated into the operations of several large provider networks. The firm has internally developed much of its software, which makes its product lineup close to seamless and effective within the healthcare IT sector. The secular demand tailwinds for Cerner’s products are robust given ACA mandates that require providers to upgrade their health records management systems. This highly positive trend will be enhanced over the next several years by changing payer reimbursement structures. Trading at a roughly 30% discount to intrinsic value (earnings based DCF), 10 year low P/E, P/S and P/FCF.

CGI Group Inc. (GIB.A:TSX): deeply embedded in government agencies across North America and Europe. Gained greater scale with its acquisition of Logica in 2012. This scale will allow the firm to better meet the needs of global clients. The firm has a backlog of signed contracts of more than CAD 21 billion, with an average duration of approximately five to seven years. Growing IT complexity is expected to support long-term demand for IT services as companies look to simplify and streamline their IT landscape. Trading at a roughly 20% discount to intrinsic value (earnings based DCF), attractive 10 year low P/E, PEG ratio and EV/EBIT.


Chart(s) of the Month 


“Equity prices are said to have far outpaced earnings during this bull market. In fact, better profits accounts for about 70% of the appreciation in the S&P over the past 8 years. Of course valuations have also risen, that is a feature of every bull market, as investors transition from pessimism to optimism. But this has been a much smaller contributor. In comparison, 75% of the gain in the S&P between 1982-2000 was derived from a valuation increase (that data from Barry Ritholtz).”
 

Musings

I began reading a fantastic book over the break which I highly recommend entitled “The Laws of Human Nature” by Robert Greene. The book takes as its fundamental premise that we humans tend to think of our behaviour as largely conscious and willed. To imagine that we are not always in control of what we do is a frightening thought, but in fact is the reality. We live on the surface, reacting emotionally to what people say and do. We settle for the easiest and most convenient story to tell ourselves.
 

Greene writes: “Human nature is stronger than any individual, than any institution or technological invention. It ends up shaping what we create to reflect itself and its primitive roots. It moves us like pawns. Ignore the laws at your own peril. Refusing to come to terms with human nature means that you are dooming yourself to patterns beyond your control and to feelings of confusion and helplessness.”
 

These principles are all the more relevant in light of 2018’s market action. What is interesting is that like this sell off (including the cryptocurrencies sell off), when we look back at other selloffs like that of 2008, most explanations emphasize our helplessness. We were tricked by greedy banking insiders, mortgage lenders, poor government oversight, computer models and algorithmic traders etc.
 

What is often not acknowledged is the basic irrationality that drove these millions of buyers and sellers up and down the line.
 

They became infected with the lure of easy money. The taste of wealth and the envy of their fellow market participants appearing to make effortless gains.
 

This made even the most rational, experienced and educated investor emotional. Hungry for his own slice of the action. Ideas were rounded up to fortify such behaviour such as “this is game changing technology, this time it is different and housing prices never go down”. A wave of unbridled optimism takes hold of the mind and panic sets in as reality clashes with the story most people have accepted.
 

Once “smart people” start looking like idiots, fingers begin to get pointed at outside forces to deflect the real sources of the madness. THIS IS NOTHING NEW. IT IS AS OLD AS THE HUMAN RACE.
 

Understand: Bubbles/corrections/bear markets “occur because of the intense emotional pull they have on people, which overwhelm any reasoning powers an individual mind might possess. They stimulate our natural tendencies toward greed, easy money, quick results and loss aversion."
 

It is hard to see other people making money and not want to join in. It is also equally hard to watch one’s assets drop in value day after day. THERE IS NO REGULATORY FORCE ON THE PLANET THAT CAN CONTROL HUMAN NATURE.
 

As demonstrated above, the occurrence of these selloffs will continue as they have until our fundamental human nature is altered or managed.
 

As such, it is important during these periods that we look inward to acknowledge and understand the true causes of these phenomenon and even take advantage of them as they occur. The most common emotion of all being the desire for pleasure and the avoidance of pain. The most meaningful experiences of pleasure typically follow the most most meaningful experiences of pain…

Logos LP November 2018 Performance

November 2018 Return: 0.15%

2018 YTD (November) Return: -11.06%

Trailing Twelve Month Return: -7.60%

CAGR since inception March 26, 2014: +14.06%

Thought of the Month

"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks."

-- John Bogle

Articles and Ideas of Interest

• 2018: The Year of the Woeful World Leader. Trump, May, Macron, Merkel. Italy, Spain, Sweden, Latvia. Even the dictators stumbled. So much bad governing, so little time.   

• What the Fall of the Roman Republic can teach us about America. The bad news is that the coming decades are unlikely to afford us many moments of calm and tranquillity. For though four generations stand between Tiberius Gracchus’ violent death and Augustus’ rapid ascent to plenipotentiary power, the intervening century was one of virtually incessant fear and chaos. If the central analogy that animates “Mortal Republic” is correct, the current challenge to America’s political system is likely to persist long after its present occupant has left the White House. 

• Low fertility rates aren’t a cause for worry. AI, migration, and being healthier in old age mean that countries don’t need to rely on new births to keep growing economically.  

• Start-Ups aren’t cool anymore. A lack of personal savings, competition from abroad, and the threat of another economic downturn make it harder for Millennials to thrive as entrepreneurs.

• This McKinsey study of 300 companies reveals what every business needs to know about design for 2019. In a sweeping study of 2 million pieces of financial data and 100,000 design actions over five years, McKinsey finds that design-led companies had 32% more revenue and 56% higher total returns to shareholders compared with other companies.
   

• What do we actually know about the risks of screen time and digital social media? Some tentative links are in place, but many crucial details are fuzzy.

• Start-up economy is a 'Ponzi scheme,' says Chamath Palihapitiya. Tech investor Chamath Palihapitiya addressed concerns about his investment firm, Social Capital, while also calling the start-up economy "a multivariate kind of Ponzi scheme.”

Our best wishes for a fulfilling 2019, 

Logos LP

Market Cycles

Good Morning,
 

Bit behind on this July update but better late than never!
 

Stocks fell on Friday for the fourth straight day, capping off a volatile week for investors as rising trade fears and a tech sell-off led to broad weekly losses. The Nasdaq Composite fell 0.3 percent to 7,902.54, led by declines in Apple, Amazon and Alphabet. The tech-heavy index posted its fourth straight loss — its first since April — and is worst start to September since 2008.

The S&P 500 pulled back 0.2 percent to close at 2,871.68 as utilities and real estate both dropped more than 1 percent.

President Donald Trump, speaking from Air Force One, said Friday the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods. His remarks come after a deadline for comments regarding tariffs on another $200 billion in Chinese goods had passed last night.

"The $200 billion we're talking about could take place very soon, depending on what happens with them," Trump said. "I hate to say this, but behind that, there's another $267 billion ready to go on short notice if I want." (targeting a sum of goods equal to virtually all imports from China)
 

The selloff pummeling emerging market currencies shifted to stocks as contagion concerns weighed on risk assets. MSCI Inc.’s EM equities gauge entered a bear market on Sept. 6 and had its worst week since mid-August.

The fear also comes after the Wall Street Journal reported, citing U.S. officials, that the possibility of the U.S. and China reaching a trade deal are fading as the Trump administration tries to revamp the North America Free Trade Agreement (NAFTA). Meanwhile, Bloomberg News reports that the U.S. and Canada will likely end the week with no trade deal in place.

Wall Street was also under pressure after strong wage data stoked fears of tighter monetary policy in the U.S. Average hourly earnings rose 2.9 percent for the month on an annualized basis, marking the largest jump since 2009. The U.S. economy added 201,000 jobs in August, more than the expected increase of 191,000.

Treasury yields jumped to their highs of the session following the jobs report release, while the dollar also rose. The Fed has already raised rates twice this year and is largely expected to hike two more times before year-end.

Our Take
 

There is little doubt that the U.S. economy is in a boom. The Conference Board is reporting the highest levels of job satisfaction in more than a decade given a tight labor market — the ratio between the unemployment level and the number of job vacancies is at its lowest level in a half-century. A broader measure, the prime-age employment-to-population ratio, is back to 2006 levels. Meanwhile, real gross domestic product growth for the second quarter was just revised up to 4.2 percent. Corporate profits are rising strongly. And investment as a percentage of the economy is at about the level of the mid-2000s boom.

Wages are still lagging. But all other indicators show the U.S. economy performing as strongly as at any time since the mid-2000s — and possibly even since the late 1990s.

Why? A few reasons present themselves as outlined recently by Noah Smith:

1. Demand Side Explanations:

   1. Low interest rates: lowered borrowing rates for corporations and mortgage borrowers, which tends to juice investment. Fiscal deficits provide an added boost to demand, and deficits have been rising as a result of President Donald Trump’s tax cuts. Typically pumping demand will eventually lead to rising inflation but this hasn’t happened yet.

   2. “Animal spirits” or “sentiment” as small business confidence is at record highs, and consumer/investor confidence also is very strong.

   3. Tail end of the long recovery from the Great Recession — consumers and businesses might finally be purchasing the houses and cars that they waited to buy when the recovery was still in doubt. Housing, traditionally the most important piece of business-cycle investment and consumption, is still looking weak, with housing starts below their 50-year average. But business investment might be experiencing the positive effects of stored-up demand.

2. Supply Side Explanations:

   1. The Trump tax cuts removed distortions that held back business investment, and that fast growth — and the attendant low unemployment — is the result of the economy’s rapid shift to a higher level of efficiency.

   2. Technology: Information technology advances such as machine learning and cloud computing might be driving the investment boom — perhaps also spurring companies to invest in intangible assets such as brands and workers’ skills.

Which one is responsible? It is difficult to say but determining which are responsible matters as it can give insight into how the boom will end and how it can be prolonged. In our view all these factors have played a role, albeit certain ones have played a more crucial role during different stages in the bull market.  

At the current stage of the bull market we see evidence that the demand-side “animal spirits” or “sentiment” factor is doing a lot of the heavy lifting.

It should be remembered that although of late there has been a minor repricing of high multiple/risk assets, the trend is still firmly in place: investors are not put off by unprofitable companies. In fact, the proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Last year, 76 percent of the companies that listed were unprofitable in the year before their initial public offerings, according to data compiled by Jay Ritter, a professor at the University of Florida's Warrington College of Business.

That's lower than the 81 percent recorded in 2000, but still far higher than the four-decade average of 38 percent.

Investors are currently keen on “new business models” and are willing to overlook losses. In fact, many are questioning whether “value investing” and classic investing principles even makes sense anymore. The market's euphoria for so-called "growth companies" has even made billionaire hedge fund manager David Einhorn question if classic investing principles that worked for him still make sense today.

As Howard Marks reminds us, in investing as in life, there are very few sure things. Very few things move in a straight line. There’s prograss and then there’s deterioration. We must remain attentive to cycles.

The process/cycle is typically the same: 1) the economy moves into a period of prosperity 2) providers of capital thrive, increasing their capital base 3) because bad news is scarce, the risks entailed in lending and investing seem to have shrunk 4) risk aversion disappears 5) financial institutions and investors move to expand their businesses - that is, to provide more capital 6) they compete for market share by lowering demanded returns (e.g. cutting interest rates), lowering credit standards, lowering prudence, disregarding the linkage between price and value, paying less attention to profits or disregarding them all together and providing more capital for a given transaction.

At the extreme, providers of capital finance borrowers and businesses (investments) that aren’t worthy of being financed. This leads to capital destruction -that is, to investment of capital in projects where the cost of capital exceeds the return on capital, and eventually to cases where there is no return of capital.

Is this time any different?

Chart(s) of the Month

JP Morgan shows us that holding cash for too long can be a dangerous proposition. 

Are overall tech valuations overstretched or only certain segments?  Notice the absence of earnings in the dot com bubble years. Valuations do not appear stretched when put into perspective, prices appear to be in line with the underlying earnings picture. The NASDAQ-100’s price to forward earnings ratio is still a little below its longer run average of about 23x. 
 

Musings
 

What of valuation? What of the relationship between price and value? For an investor (whether a “value” investor or not) price has to be the starting point regardless of where we are in the cycle and especially in the last innings. No asset is so good that it can’t become a bad investment if bought at too high a price.

As an example of the current “animal spirits” climate we should consider the following:

Cannabis : the thesis or “story” here is that cannabis, like alcohol, tobacco and other hedonistic instruments, has now achieved positive momentum with policymakers across the world. As such the fragmented industry will consolidate and a few early movers will reap the profits of this new multi-billion dollar industry. But just like investing in the nascent stages of many industries that in essence were revolutions from a status quo, speculation will initially replace prudent financial analysis of price relative to value.

As Easterly points out in a recent article Cronos' (CRON) current valuation is an outright manifestation of "extraordinary delusions" stemming from the madness of crowds.

Cronos trades at about 17.25 forward price to sales (TTM price to sales of 332.97 and TTM price to earnings of 874.69) compared to its peers. For some further clarity, highly valued SaaS stocks prized for their recurrent revenue stream and high gross margins seldom trade at 17.25 forward P/S ratio. The average P/S ratio for stocks in the software application industry is around 6.8, compared to 2.16 for the S&P 500.

Hence, why does an agricultural commodity producer trade at a higher valuation than Shopify and other?

In Deloitte's "A society in transition, an industry ready to bloom" 2018 cannabis report, they expect legal cannabis sales during 2019, the first full year post-legalization to be [CAD]$4.34 billion. This figure is likely inflated when compared against the results of other markets. Further, the study only surveyed a sample size of 1,500 adult Canadians, which is not significant enough to estimate the Cannabis purchase habit of millions of Canadians.

For some perspective, California, which is regarded as the most important Cannabis market on Earth realized sales of [USD]$339 million or [CAD]$444 million (at current spot USD/CAD) during the first two months post-legalization. Extrapolating this across a full year would infer total sales of [USD]$2.01 billion or [CAD]$2.7 billion. Sure there are other factors to consider like a larger Californian black market and a different set of regulations and taxes. However, the Californian market has also not been as stringent on marketing as Canada will be.

Assuming the Canadian market is at least on par with California, the author models the potential market using an optimistic CAGR of 23.54% from 2019 - 2023 which is more optimistic than some market reports. The author also models Cronos' revenue for the years from 2018 - 2022.

Cronos' current market valuation of [USD]$1.75 billion or [CAD]$2.29 billion is around 84.81% of the total Canadian legal cannabis market in FY2019. (And this does not take into account the fact that the total estimated legal cannabis sales [CAD] $4.34 billion number mentioned above represents a total retail sales projection and that will likely be shared between grower, distributor, retailer, and the government through taxes. Taxes will be large, perhaps even 30%. Retail will be handled by government in a few big provinces like BC -- yet the government will still take a retail margin cut. What will be left for growers could be as low as sub $4 CAD / gram.. half or less of that total [CAD] $4.34 billion number…

At a current market valuation of [CAD]$2.29 billion ($2.79 billion at time of writing) which is around 84.81% of the total estimated Canadian legal cannabis market in FY2019, has the fairness of Cronos’ price been considered? Or have people without disciplined consideration of valuation simply decided that they want to own something because the story is good, risk aversion is low and the future looks bright?

Overall, we see current valuation trends in certain growth stocks (cannabis, select tech.) (not to mention that the ratio of bearish option bets to bullish ones is waning as the S&P 500 keeps churning out records. That implies investors may be loading up on derivatives as way to make up for lost ground should 2018 deliver a year-end rally similar to last year’s, when stocks closed with a 6.1 percent fourth-quarter surge) to be evidence that the demand-side “animal spirits”/“sentiment” factor is doing a large portion of the heavy lifting to prolong the current bull market.

As such, we would advise caution before increasing exposure to these “loved” and therefore richly valued businesses. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. For our portfolio, given where we are in the present cycle and overall market conditions we are abiding by the following maxim:
 

“The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price can only go one way: up.” -Howard Marks

Logos LP July 2018 Performance

 

July 2018 Return: -0.34%

2018 YTD (July) Return: 0.00%

Trailing Twelve Month Return: +12.79%

CAGR since inception March 26, 2014: +18.29%

Thought of the Month

 

"The polar opposite of conscientious value investing is mindlessly chasing bubbles, in which the relationship between price and value is totally ignored. All bubbles start with some nugget of truth: 1) Tulips are beautiful and rare 2) The internet is going to change the world 3) Real estate can keep up with inflation, and you can always live in a house.” -Howard Marks

Articles and Ideas of Interest

 

• After Coltrane, there is nothing left to say. The saxophone virtuoso pushed jazz as far as it could go, and it’s been downhill ever since.            

• These Fake Islands Could Spell Real Economic Trouble. Glitzy property projects and financial crises tend to go hand-in-hand.

• U.S. Household wealth is experiencing an unsustainable bubble. Jesse Colombo suggests that Since the dark days of the Great Recession in 2009, America has experienced one of the most powerful household wealth booms in its history. Household wealth has ballooned by approximately $46 trillion or 83% to an all-time high of $100.8 trillion. While most people welcome and applaud a wealth boom like this, research suggests that it is actually another dangerous bubble that is similar to the U.S. housing bubble of the mid-2000s. In this piece, he explains why America's wealth boom is artificial and heading for a devastating bust.

• Who needs democracy when you have data? Here’s how China rules using data, AI and internet surveillance.

• How tourists are destroying the places they love. Travel is no longer a luxury good. Airlines like Ryanair and EasyJet have contributed to a form of mass tourism that has made local residents feel like foreigners in cities like Barcelona and Rome. The infrastructure is buckling under the pressure. Great 2 part expose suggesting that travel has almost become a human right yet it has become predatory - devouring all the beautiful places which drive it. Has nature itself come to be viewed as merely one more good to be consumed? ; Have we developed a shallow, modern need to present a life free from the tyranny of a nine-to-five office job in the tight frame of Instagram? No wonder you are not original or creative on instagram. Everyone on Instagram is living the same life.  
  
   

• Peak Valley. The Bay Area’s primacy as a technology hub is on the wane. Don’t celebrate. Although capital is becoming more widely available to bright sparks everywhere yet unfortunately the Valley’s peak looks more like a warning that innovation everywhere is becoming harder.  

• Americans live in the ruins of the 2008 financial crisis. Prosperity is undercut by broken institutions, from health care to law enforcement. NYT presents some astonishing facts. Is the American dream dead?

Our best wishes for a fulfilling month, 

Logos LP