Buffett

Do Bull Markets Die Of Old Age?

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Good Morning,
 

The S&P 500 and Nasdaq composite closed lower on Friday as tensions between the U.S. and China weighed on investor sentiment while both countries continued negotiations on trade.

 

On Thursday, the two largest economies in the world began the second round of trade talks. But President Donald Trump told reporters he doubted the negotiations would be successful.

 

Later, reports emerged saying China would offer the U.S. a $200 billion trade surplus cut. Those reports, however, were quickly denied by a Chinese ministry spokesman on Friday.


Investors are closely watching progress on the latest China-U.S. trade talks for signs of a breakthrough that could reignite a recent rally in global equities, while factoring in oil prices at a four-year high and a 10-year Treasury yield now firmly above 3 percent. Politics in peripheral Europe are also back in the spotlight after Italy’s populist leaders sealed a coalition agreement and a plan for reforms seen as a challenge to the European Union establishment.
 


Our Take

 

In a bull market pushing through its 10th year, market timing has again become a preoccupation. One week stocks are climbing to reflect fundamentals ie. stellar earnings growth. The next they’re dropping as yields jump, trade talks with China stall and an executive suggests “peak earnings” on a call. The cost is less to the wallet than the psyche, given that we are coming off two years of relatively straight line low volatility gains.


Furthermore, both stock market bulls and bears can marshal data in their favor. Considering the S&P 500’s current forward P/E which runs above its 5 and 10 year averages, as well as its elevated CAPE ratio, the market looks rich. On the other hand, looking at the market’s PEG ratio or a P/E that accounts for earnings growth, stocks appear to be trading at their cheapest level since 2012...


Best to focus on particular businesses rather than on market prices. How could the business create value in the years ahead? As Thomas Phelps reminds us: “When experienced investors frown on gambling with price fluctuations in the stock market, it is not because they don’t like money, but because both experience and history have convinced them that enduring fortunes are not built that way.”


Chart of the Month

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Source: More Than Never. Less Than Always


Musings
 

This month, the current U.S. expansion reaches the 107-month mark, making it the second longest business cycle expansion in the post-war period. It’s looking increasingly likely that this expansion will continue for more than a year and will become the longest since World War II. Most economists will tell you that expansions don’t die of old age, but the odds of fatal mistakes and excesses increase the older they get.

 

The age of this bull market is the elephant in the room for investors who each year get less enthusiastic about increasing long exposure. How worried should we be? What should we make of comments suggesting that things have “peaked”?

 

What should be remembered is that output growth during this expansion has severely lagged other expansions. There has been no robust recovery. The slow start in this expansion in the wake of the Great Recession was counterintuitive to the thinking of most analysts, who expected a robust recovery following the worst recession in a generation. However, there is evidence indicating that recessions caused by financial crises tend to be deeper and have longer recovery times than normal recessions.

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In addition, this expansion has seen comparatively low rates of personal consumption. Personal consumption which comprises nearly 70% of GDP, has been a major contributor to the overall slow economic performance in the current expansion. Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991-2001 and 1961-1969, respectively.
 

Consumers are not the only group that has shown uncharacteristic restraint during this expansion; investment by the private (non-government) sector has also lagged since the last recession. Real private fixed investment has grown by 50% in this expansion, compared to growth rates of 89% and 76% at comparable points in the 1991-2001 and 1961-1969 expansions, respectively.

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Perhaps one of the most interesting aspects of this U.S. expansion is its global ubiquity. The subpar economic growth seen in the U.S. following the global financial crisis has been simultaneously experienced by many other countries. Whatever the causes of mediocre economic growth in the U.S., the same factors have been at work around the world due to the increasing level of global economic interdependence.


So what?


All we can say at this point is that the mediocre growth of the U.S. economy since the Great Recession is likely a contributing factor in this expansion’s length. As such, although there appears to be pockets of excess across the market (see below), there doesn’t seem to be the kind of widespread excess and economic robustness which is typically characteristic of an expansion’s “final inning”. This time may be “different”, yet the faster and higher you climb, the further and faster you fall. Have we climbed high? Have we climbed fast?


Long-term investors should be wary of remaining “underinvested” on the sidelines waiting for the cycle to turn, as the wait may be longer than planned.


 

Logos LP April 2018 Performance



April 2018 Return: -3.84%


2018 YTD (April) Return: -3.79%


Trailing Twelve Month Return: +8.22%


CAGR since inception March 26, 2014: +18.39%


 

Thought of the Month


 

Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings, according to data compiled by Jay Ritter, a professor at the University of Florida’s Warrington College of Business. That was the largest number since the peak of the dot-com boom in 2000, when 81 percent of newly public companies were unprofitable. Of the 15 technology companies that have gone public so far in 2018, only three had positive earnings per share in the preceding year, according to Mr. Ritter.” -Kevin Roose




Articles and Ideas of Interest

 

  • Hooray for unprofitable companies!  Interesting article in the NYT that discusses an omnipresent characteristic of this cycle: the proliferation of unprofitable companies. The start-up pitch is basically this: “It’s called the 75 Cent Dollar Store. We’re going to sell dollar bills for 75 cents — no service charges, no hidden fees, just crisp $1 bills for the price of three quarters. It’ll be huge. You’re probably thinking: Wait, won’t your store go out of business? Nope. I’ve got that part figured out, too. The plan is to get tons of people addicted to buying 75-cent dollars so that, in a year or two, we can jack up the price to $1.50 or $2 without losing any customers. Or maybe we’ll get so big that the Treasury Department will start selling us dollar bills at a discount. We could also collect data about our customers and sell it to the highest bidder. Honestly, we’ve got plenty of options. If you’re still skeptical, I don’t blame you. It used to be that in order to survive, businesses had to sell goods or services above cost. But that model is so 20th century. The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road.” Instead of pointing the finger at Musk and his unprofitable counterparts the author makes an interesting suggestion: For consumers who are willing to do their research, though, this can be a golden age of deals. May you reap the benefits of artificially cheap goods and services while investors soak up the losses. What could go wrong?

           

  • Who’s winning the self-driving car race? A scorecard breaking down everyone from Alphabet’s Waymo to Zoox. Spoiler alert: Tesla isn’t even top contender.

 

  • Could Argentina’s woes be the tip of the iceberg of an even bigger crisis for the world economy? Tightening U.S. monetary policy could threaten a broad range of emerging markets. Tighter monetary policy will drain liquidity and lift borrowing costs for much of the world economy. Debtors beware.

 

  • You’re not just imagining it. Your job is absolute BS. Anthropologist David Graeber’s new book accuses the global economy of churning out meaningless jobs that are killing the human spirit. There is no doubt that many jobs could be erased from the Earth and no one would be worse off, but this is a tough argument to make as personal fulfillment is relative. Furthermore, in his comfortable seat as a professor at an esteemed institution, musing amusedly about the mind-numbing hours most working people have to put in and put up with—even at jobs that have lively, meaningful moments—appears to fit neatly in his own category of a BS job…

 

  • Bitcoin fans troll Warren Buffett with ‘Rat Posion Squared’ clothing line. Oh it's on! A 10 year wager perhaps between the CCI30(A Crypto Currencies Index) against the SPY (a low cost S&P 500 ETF)? Any takers?  

 

  • Why winners keep winning and why accepting luck as a primary determinant in your life is a freeing worldview. Cumulative advantage goes a long way to explain a moat.  The Matthew effect, and explains how those who start with an advantage relative to others can retain that advantage over long periods of time. This effect has also been shown to describe how music gets popular, but applies to any domain that can result in fame or social status.  As for luck, when you realize the magnitude of happenstance and serendipity in your life, you can stop judging yourself on your outcomes and start focusing on your efforts. It’s the only thing you can control. 

 

  • The epic mistake about manufacturing that’s cost Americans millions of jobs. Quartz suggests that it turns out that Trump’s story of US manufacturing decline was much closer to being right than the story of technological progress being spun in Washington, New York, and Cambridge. Thanks to a painstaking analysis by a handful of economists, it’s become clear that the data that underpin the dominant narrative—or more precisely, the way most economists interpreted the data—were way off-base. Foreign competition, not automation, was behind the stunning loss in factory jobs. And that means America’s manufacturing sector is in far worse shape than the media, politicians, and even most academics realize.

 

  • The burbs are back. Americans are once more fleeing the cities to the suburbsAccording to the National Association of Realtors, a trade association for estate agents, more than half of Americans under the age of 37—the majority of home-buyers—are settling in suburban places. In 2017, the Census Bureau released data suggesting that 25- to 29-year-olds are a quarter more likely to move from the city to the suburbs than to go in the opposite direction; older millennials are more than twice as likely. Economic recovery and easier mortgages have helped them on their way. Watch this trend continue as interest rates rise and large mortgages become even more difficult to obtain.

 

  • Biology will be the next great computing platform. Just as the exponential miniaturization of silicon wafers propelled the computing industry forward, so too will the massive parallelization of gene editing push the boundaries of biology into the future.

Our best wishes for a fulfilling month, 

Logos LP

Our Inner Scorecard

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Good Morning,
 

The S&P 500 closed at a record Friday, helped by gains in technology stocks on the last trading day of the quarter. The tech-heavy Nasdaq composite rose more than half a percent to post its 50th record close for this year. The Dow transports and small-cap Russell 2000 also hit record highs.

 

The Dow posted quarterly gains of 4.9 percent its eighth straight quarter of gains for the first time since 1997. The S&P 500 rose nearly 4 percent in the quarter, also its eighth straight quarter of gains. The Nasdaq composite gained almost 5.8 percent for the quarter, its fifth straight positive quarter since 2015.

Our Take
 

Strength begets strength. Virtually every asset class is moving up. New record highs are being made in virtually every corner of the market. We suggest remaining cautious as positive sentiment is building.

Of note this week this week was the announcement surrounding Trump’s tax reform. As expected it was thin on details and appeared to favor the rich. On a first read it is likely to
increase the U.S. budget deficit but beyond that, its impact is still unclear. Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut) questioning whether tax cuts stimulate growth. Tax cuts are still the GOP’s go-to solution for nearly every economic problem and extravagant claims are made for any proposed tax cut. Bruce looks into whether they hold water.


Musings
 

Over the last few weeks I’ve been busy setting up a new venture yet I finally found some time to get to a staple in the value investor’s library: The Education of A Value Investor by Guy Spier. What a breath of fresh air in my increasingly busy world.

 

What was so refreshing about the book was that it wasn’t what I’d been expecting. As the esteemed manager of Aquamarine Fund I figured Guy would spend a considerable amount of time on his stock selection approach yet the book offers something much more valuable.

 

This is a book about life. About Guy’s life. Guy’s education. Guy’s path and Guy’s alone. This point teases out its key piece of wisdom. We spend so much time trying to compete with others. Looking for their acceptance and adoration failing to realize that true success in life, true fulfillment can only occur through the acceptance of self.

 

Once we shift from orienting ourselves towards an outer scorecard towards an inner scorecard we can become aligned with ourselves. Authenticity is a powerful force. Guy’s story is the story of this shift. It is the story of the magical success one can have when one becomes aware of one’s own values and perspectives.

 

This message really spoke to me at this particular point in time as I’m starting to realize that the outer journey we start at birth; going to school, learning how to build friendships, learning how to navigate relationships, deciding what to take in school, getting our first jobs, navigating heart aches and let downs is only the starting point. The real growth occurs when we are able to drive ourselves toward the inner journey of spiritual development and self-awareness.

 

In our early years we are often driven by the outer scorecard - that need for public approval and recognition, which can easily lead us in the wrong direction. Come to think of it, many of the mistakes (perhaps all of them) I’ve made in my life have occurred because of my pursuit of this outer scorecard.

 

What I’ve realized and what Guy so eloquently posits is that the inner journey is not only more fulfilling but is also a key to becoming a better investor. If we don’t understand our inner landscapes - including our fears, insecurities, desires, biases, and attitude to money- we’re likely to get run over by reality. As such it is important to look within:

 

Are we the same people on the outside as we are on the inside? Are we pretending to be something we aren’t? Are we building a rock-solid understanding of who we are and how we want to live? Are we building environments in which we can operate rationally and calmly? Do our friends support and stimulate the authentic version of ourselves? Why are we building wealth?

 

The outer journey may bring us to money, professional advancement or social cachet yet the inner journey, the one we also start at birth is the one that puts us on a path toward something less tangible yet more valuable. The inner journey is the path to becoming the best version of ourselves that we can be, and this appears to me to be the only true path in life. It leads us closer to finding the answers to the real questions that matter: What is my wealth for? What gives my life meaning? And how can I use my gifts to help others?

 

Logos LP in the Media

 

Forbes has done a special feature on Canadian Investment Opportunities and we offer one of our ideas.


Thought of the Week

 

"This became my own goal: not to be Warren Buffett, but to become a more authentic version of myself. As he had taught me, the path to true success is through authenticity.”-Guy Spier



Articles and Ideas of Interest

 

  • Successful investing isn’t easy. They say a picture is worth a thousand words, but in investing it is worth so much more. Check out this great collection of extreme charts as a helpful reminder that there is no such thing as "can't", "won't," or "has to" in markets. The market doesn't have to do anything, and certainly not what you think it "should" do. The market doesn't abide by any hard and fast rules; it does what it wants to do and when it wants to do it. That's what makes it so hard and at the same time so interesting.

          

  • The plastic fantasy that’s propping up the oil markets. Kenya's mountains of plastic bags might not seem central to oil's grand narrative, but they are. Last week, the East African country banned almost everything about them: making them, importing them, selling them, using them, with penalties of up to four years in jail or fines up to $38,000. This type of prohibition carries a warning for an oil business that's depending on petrochemicals -- and the plastics made from them -- to pick up the slack when we all switch from gas guzzlers to electric cars. Petrochemicals are seen as the strongest source of global oil demand growth in 2015-2040. On the current track, by 2050 our oceans could contain more plastics than fish (by weight), according to a 2016 report by the World Economic Forum and the Ellen MacArthur Foundation. But, as Kenya shows, the days of single-use plastic packaging may already be numbered. And with this stuff making up about a quarter of all the plastic used, that will have a profound impact on the petrochemicals industry. Let’s not forget that there is now a Great Pacific Garbage Patch that is estimated to be about the size of Texas while a new report (dug into by National Geographic) has shown that extreme weather, made worse by climate change, along with the health impacts of burning fossil fuels, has cost the U.S. economy at least $240 billion a year over the past ten years...Can the oil industry really avoid disruption?

 

  • Brace yourself: the most disruptive phase of globalization is just beginning. Great piece in Quartz covering Richard Baldwin’s new book The Great Convergence: Information Technology and the New Globalization. Baldwin argues that globalization takes shape in three distinct stages: the ability to move goods, then ideas, and finally people. Since the early 19th century, the cost of the first two has fallen dramatically, spurring the surge in international trade that is now a feature of the modern global economy. A better understanding of globalization is more urgent than ever, Baldwin says, because the third and most disruptive phrase is still to come. Technology will bring globalization to the people-centric service sector, upending far more jobs in rich countries than the decline in manufacturing has in recent decades. Baldwin argues that we shouldn’t try and protect jobs; we should protect workers. It’s really a fool’s errand to struggle with “protecting jobs” because after a year or two those jobs will still go. Governments should instead focus on comprehensive retraining, help with housing, help with relocation.

 

  • Some market myths hurt investors. Nice piece by Ben Carlson looking over some of the rules of thumb and aphorisms that investors accept without investigating their merits based on the historical evidence: Low volume rallies spell trouble for stocks, There is tons of cash on the sidelines, Margin debt at all-time highs mean euphoria in the markets, Something’s gotta give between stocks and bonds, Bonds always lose money when interest rates rise.

 

  • Do tax cuts really equal growth? Excellent piece in the Washington Post from Bruce Bartlett who was a domestic policy advisor to President Ronald Reagan (Mr. Tax cut). Tax are still the GOP’s go-to solution for nearly every economic problem. Extravagant claims are made for any proposed tax cut. Do they hold water?

 

  • The shorter your sleep, the shorter your life: the new sleep science. Leading neuroscientist Matthew Walker on why sleep deprivation is increasing our risk of cancer, heart attack and Alzheimer’s and what you can do about it. We are in the midst of a “catastrophic sleep-loss epidemic”, the consequences of which are far graver than any of us could imagine. More than 20 large scale epidemiological studies all report the same clear relationship: the shorter your sleep, the shorter your life. To take just one example, adults aged 45 years or older who sleep less than six hours a night are 200% more likely to have a heart attack or stroke in their lifetime, as compared with those sleeping seven or eight hours a night (part of the reason for this has to do with blood pressure: even just one night of modest sleep reduction will speed the rate of a person’s heart, hour upon hour, and significantly increase their blood pressure).

 

  • Education isn’t the key to a good income. The Atlantic presents a growing body of research which debunks the idea that school quality is the main determinant of economic mobility.

 

  • The secret to Germany’s happiness and success: Its values are the opposite of Silicon Valley’s. To Germans, caution and frugality are signifiers of great moral character. Moreover, for Germans, a good work-life balance does not involve unlimited massages and free meals on the corporate campus to encourage 90-hour weeks. Germans not only work 35 hours a week on average—they’re the kind of people who might decide to commute by swimming, simply because it brings them joy.

 

  • Take some time to enjoy the scenery. Check out The Atlantic’s coverage of the 2017 National Geographic Nature Photographer of the Year Contest.

 

Our best wishes for a fulfilling week, 

Logos LP

Just Ask Warren Buffett or Charlie Munger

Good Morning,
 

U.S. stocks bounced back from the most significant selloff since May, while Treasuries fell after unexpectedly strong hiring data improving confidence in the American economy, bolstering the Federal Reserve’s case for raising interest rates.

Broad-based payroll gains that topped estimates boosted sentiment among equity investors a day after stocks suffered the biggest drop in six weeks. The Bloomberg Dollar Spot Index was flat as tepid wage growth stoked concern that inflationary pressure remains weak. The hiring report supported the Federal Reserve’s stance that recent signs of labor market sluggishness are transitory, though the tepid wage gains gave fuel to arguments that weakness remains. 

On the Canadian side, Canada’s job market delivered another stellar performance in June by adding 45,300 positions, Statistics Canada said Friday.

The number, which vastly surpassed economists’ consensus expectation of 10,000 new jobs, increases the probability that the Bank of Canada (BoC) will raise interest rates at its next rate announcement on July 12.

 

Our Take
 

There are plenty of reasons to be bullish as global earnings per share are expected to grow around 11 percent this year, compared to just 2 percent growth last year. In fact, all the major economies around the globe and the companies which compose them are gaining momentum at the same time, the first such simultaneous recovery in years.

What we are looking at is a “global synchronous recovery”. This is a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions.

Furthermore, Janet Yellen's bet on pulling workers back to the labor force appears to be paying off.
The flow of people moving from outside of the labor force straight into jobs jumped in June to 4.7 million, its highest level in records that go back to 1990. Labor force participation has stabilized after a long-run decline, and the share of the population that works continues to rise moderately. And as long-hidden labor market slack gets absorbed, it could be helping to keep wage gains modest and inflation in check.

Nevertheless, there are reasons to remain cautious as central bank chiefs in the US and UK seem very sure of themselves. Mark Carney, the governor of the Bank of England and chair of the international Financial Stability Board, said this week that issues of the last financial crisis had been “fixed“.

Last week, his American counterpart, Janet Yellen said at a Q&A in London:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

Last week, Mario Draghi, governor of the European Central Bank, sent the euro to its highest level in more than a year by proclaiming that the euro-zone economy was improving and that he was “confident” the bank’s policies working. Both the Bank of Canada and Sweden’s Riksbank have also recently suggested that their economies probably don’t need any more monetary stimulus.

The problem is that the wage increases which should go along with increasingly low unemployment are nowhere to be found. Inflation remains below central bank targets. 

In response, central banks are largely sticking to the script: The retreat in inflation is transitory, idiosyncratic even, and the slow-but-steady slog back toward the central bank's 2 percent target will probably resume.

The prevailing wisdom based on the Phillips curve is that the jobless rate is so low that wages and inflation just have to -- at some point -- really start to pick up.

So far this isn’t happening and thus as we have stated before, it may be wise to allow inflation to run above the 2% target rather than raise rates prematurely and risk undermining a still fragile global recovery.

 

Musings
 

A shorter note this week. For insights into how we are navigating this market I urge you to read our Q2 letter to our investors included below.

Nevertheless, to pick up on the themes of patience and discipline included in our letter, I wanted to briefly consider an article I read this week from Nir Kasissar in Bloomberg.

Nir reminds us that despite the reams of financial data and vast computing power to process it, investing remains a stubbornly superstitious and emotional pursuit.

As such, it should come as no surprise that the investment world has always prized “discipline” as the holy grail of personal attributes. 

As an investor, you should find a strategy and have the discipline to stick to it over the long-term. Just ask Warren Buffett or Charlie Munger.

The problem is that every style of investing -- no matter how thoughtfully constructed and ably executed -- goes through a long, agonizing period when it doesn’t work. Again just ask Warren Buffett or Charlie Munger.

Only a few years ago pundits dared to suggest that Buffett’s underperformance was evidence that perhaps he had “lost his touch”.

The longer an investing style falters, the harder it is to know whether that style is temporarily out of favor or destined for retirement. The line between discipline and foolishness becomes increasingly blurry, even to elite investors.  

Further compounding this dilemma are two issues:

1) Current markets are abnormal : Value stocks, for example, are supposed to shine during recoveries. They haven’t. Low interest rates are supposed to translate into meager returns from bonds. Sub 5% unemployment is supposed to translate into greater than 2% inflation. Again nope.

2) “Long-term” doesn’t mean the same thing anymore : In the 1960’s the average hold time for stocks was roughly six years. Today that average hold time is from six weeks to six months.

In this environment, patiently finding the line between discipline and foolishness is itself a fantastic test of discipline...



Logos LP Updates
 

June 2017 Return: -3.69%

2017 YTD (June) Return: 19.66%

Annualized Returns Since Inception March 26, 2014: 24.89%

Cumulative Return Since Inception March 26, 2014: 82.99%



Logos LP in the Media


Our Q1 2017 letter to our investors picked up by ValueWalk

Our Q2 2017 letter to our investors picked up by ValueWalk




Thought of the Week

 

"Patience is bitter, but its fruit is sweet" -Jean-Jacques Rousseau


Articles and Ideas of Interest

 

  • What history says about low volatility. For all that's being said and written about the lack of volatility in financial markets these days, you might think something unusual is going on. In fact, history suggests it's the opposite. Nice piece in Bloomberg suggesting that volatility is lower than average historical levels, but it’s at levels typical of the bottom of a quiet period between two crises. Instead of fretting about complacency, it appears that history shows us that crises occur when the VIX and realized volatility are above 20 percent, and investors typically get warned months in advance of what the headlines refer to as “shocks”...the market anticipates news events about 18 months in the future. It’s not perfect, of course, but it may be a lot better than experts and commentators. Evidence of smooth sailing over the next while?

 

  • Rising inequality may be the real risk of automation. Technological change has had more impact on earnings distribution than on demand for workers. If your main worry over automation is losing your job, history suggests you’ll probably be just fine. The bigger concern, economists David Autor and Anna Salomons reckon is how technological advances will affect earnings distribution. Interestingly, in the AI age, “being smart” will mean something completely different. HBR suggests that we will need to take our cognitive and emotional skills to a much higher level.

 

  • How to deal with North Korea? The Atlantic proposes that there are no good options. But some are better than others. For his part, Trump has tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” For his part, Trump has also tweeted that North Korea is “looking for trouble” and that he intends to “solve the problem.” Nevertheless, the U.S. has 4 broad strategic options: 1) Prevention : crush them using a military strike 2) Turn the screws : limited targeted precision strikes and small scale attacks to debilitate 3) Decapitation : remove Kim and his inner circle and replace the leadership with a moderate regime 4) acceptance : allow nuclear ambitions and train and contain. Acceptance is how the most current crisis should and most likely will play out…

 

  • Baby boomers will live long but might not prosper. The biggest threat to the majority will be outliving their nest egg. As life expectancies continue to climb, managing longevity risk will be a key input in the portfolio management and planning for the 10,000 or so baby boomers retiring every day for the next 19 years or so. Ben Carlson suggests a few tips to stay above water. One I particularly like is try generational financial planning. Bring other trusted family members into the retirement planning process. Just don’t count on millennials buying your home. Student loans are a problem for all of us not just the young. Great piece in Businessweek suggesting that mounting student debt in the U.K., U.S. and elsewhere, might hold young people back from buying houses and saving for retirement. That would endanger economic growth and asset prices, with the effects made worse by shifting demographics. This should worry everybody.

 

  • There is a “wellness” epidemic going on. Why are so many privileged people feeling so sick? Luckily (or unluckily) there’s no shortage of cures. Wellness is a very broad idea, which is no small part of its marketing appeal. On the most basic level, it’s about making a conscious effort to attain health in both body and mind, to strive for unity and balance. This is not a new idea. But perhaps what is new is that there is something grotesque about this multi billion dollar industry’s emerging at the moment when the most basic health care is still being denied to so many in America and is at risk of being pulled away from millions more. In addition, what is perhaps most concerning about wellness’s ascendancy is that it’s happening because, in our increasingly bifurcated world, even those who do have access to pretty good (and sometimes quite excellent, if quite expensive) traditional health care are left feeling, nonetheless, incredibly unwell. Will all the high priced meditation retreats, aromatherapy, yoga, pressed juice, spiralizers and supplements really change anything? Or is history repeating itself with the resurrection of the 18th century peddler with dubious credentials, selling “snake-oil” with boisterous marketing hype often supported by pseudo-scientific evidence? Get your ashwagandha, bacopa, chaga mushrooms, colloidal silver, cordyceps mushrooms, eleuthero root, maca, selenium and zizyphus while supplies last…

 

  • Last Domino’ just fell for Canada rate hike. Canada added more than four times the number of jobs economists had expected in June, capping the best quarter since 2010 and solidifying the view the Bank of Canada will raise interest rates at its meeting next week. A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported Thursday. The Toronto Real Estate Board also lowered its forecast for sales and prices. Expect prices to decline further as central banks begin to reign in easy money policies.


Our best wishes for a fulfilling week, 
 

Logos LP

Warren Buffett Is Right

Good Morning,
 

Stocks posted weekly gains Friday, while Federal Reserve Chair Janet Yellen suggested that she may raise rates this month.

 

While leaving just enough wiggle room in case conditions should change, Yellen said Friday that economic improvements of late will be a big part of the discussion at the March 14-15 Federal Open Market Committee meeting.

 

Recently, a slew of top Fed officials indicated that tighter monetary policy may be coming soon.  Market expectations for a March rate hike have skyrocketed to 81 percent, according to the CME Group's FedWatch tool, on the back of hawkish rhetoric and solid economic data.

 

The market has an excellent track record for predicting rate increases and will most likely get this one right.

 

Furthermore, markets seem to be applauding a raise as stocks have risen to record levels since the U.S. election fueled by expectations of tax reform, deregulation and government spending. The three major indexes posted their best day of 2017 on Wednesday, notching fresh record highs as global stock markets have also been rallying.

 

Donald Trump delivered his debut address to Congress this week which although quite “Presidential” was light on policy detail and big on rhetoric.

 

Trump restated his key campaign themes, issuing a rallying call for the "renewal of the America spirit." Wall Street will have to keep waiting on specifics of the plans for tax cuts, infrastructure investment and regulatory reform that have helped drive a global rally since the November election.

 

SnapChat’s IPO was a resounding success this week. As stated before we would certainly not be buyers but the 44% surge on open is a bullish sign for the overall market. Interestingly, a high school in Mountain View, California, made millions from the IPO less than four years after investing $15,000 in the company. They cashed out 24 million…..

 

Nevertheless, a declining user base and a lacklustre monetization plan suggest a "greater fool theory" in which the stock's price is determined by irrational expectations.

 

No wonder S3 Partners LLC, a financial analytics firm, says short interest in the photo-app maker is liable to reach $1 billion within a week, particularly if the rally continues. The contrary bet won’t be cheap, either, with the cost to borrow shares likely to start at 25 percent and rise.

 

“We expect that 10 percent to 20 percent of the initial offering will be shorted in the first week of trading, which roughly translates into $500 million to $1 billion of short interest right from the start”

 

Let’s not forget that Twitter surged over 70% at open from IPO price. That investment hasn’t seemed to have worked so well...

 

Musings
 

Warren Buffett sent his annual letter to shareholders this week and took questions on CNBC for 3 hours.  Along with more prosaic investment suggestions, the head of Berkshire Hathaway offered advice on how to leverage fear.

 

He also praised the US’s “miraculous” economic achievements and the country’s “tide of talented and ambitious immigrants”. He railed against asset managers and suggested investors should utilize low cost ETFs. He  also suggested that there is simply no other better long-term investment than in the common stock of high quality businesses.

 

He even went so far as to say that  "Measured against interest rates, stocks actually are on the cheap side compared to historic valuations,"

 

"But the risk always is interest rates go up, and that brings stocks down.” He also stated that he had invested about $20 billion in stocks since shortly before the election.

 

"If interest rates were at 7 or 8%, then these prices would look exceptionally high," Buffett said. The Federal Reserve most recently raised its benchmark rate in December, to a range of 0.50% to 0.75%.

 

Although we tend to avoid making any type of suggestion as to the valuation of the  “overall market” and choose to focus on individual businesses, we would tend to agree with Buffett’s suggestion. We would also agree with this statement he made in his interview:

 

When asked: "Wait, it's too late for me to get in. I've missed it. We're past Dow 20k, now I have to wait for the pullback." What would you say to someone like that?                       

Buffett: Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake.

 

I must say buffett’s comments were a breath of fresh air in what has been the most hated bull market of all time. Investor pessimism is soaring and everyone is unhappy:

 

"Money managers are unhappy because the majority of them are lagging the S&P 500 and see the end of another quarter approaching."

 

"Economists are unhappy because they do not know what to believe. This month's forecast of a strong economy or the ramblings of the disenchanted telling them all is not well. They ponder and are vexed when looking at the pros and cons of any proposed changes by the current administration."

 

"Technicians are unhappy because the market refuses to correct."

 

"Investors are unhappy because they are nervous over the bombardment of political ramifications to economic policies that are unknown. They fear new highs as if it were a disease as they are constantly reminded by the skeptics that they could give it all back".

 

"The public is unhappy because they can't figure out what is going on. The political stage says one thing but the stock market is saying another. They sit frozen in place and wring their hands wondering if the stock market can really go higher."

 

"The skeptics are unhappy because everything tells them to be wary of the market, yet the rising indexes continues to prove them wrong time after time."

 

As one market participant astutely observed, the ONLY people that are in the pilot's seat are those that have participated in this historic bull market. Which seat are you in?


Thought of the Week
 

"Our expectation is that investment gains will continue to be substantial – though totally random as to timing – and that these will supply significant funds for business purchases," -Warren Buffett



Stories and Ideas of Interest

 

  • The Singularity will happen within 30 years. Softbank’s CEO says by then a single computer chip will have an IQ of 10,000  and your shoes will have a higher IQ than you. Hurray for progress!

     

  • Netflix is thinking about how to entertain AIs. In 50 years, CEO Reed Hastings isn’t sure if his customers will even be human. At a certain point, when algorithms designed to represent our behavior are dictating our consumption, the real-life viewer—you—might start to get lost. That could be what Hastings is driving at here, as Inverse pointed out. Would entertainment be tailored to the person, then, or to the AI?

 

  • The need for exponential growth kills innovation. Silicon Valley’s obsession with it is damaging a generation of startups. It used to be that successful, upcoming companies would show a prudent mix of present-day profits and future prospects, but such a mix is now considered old-fashioned and best forgotten. Now it’s all potential, all the time.

 

  • Scraping by on six figures? Tech workers feel poor in Silicon Valley's wealth bubble. Big tech companies pay some of the country’s best salaries. But workers claim the high cost of living in the Bay Area has them feeling financially strained. A tech worker, enrolled in a coding bootcamp, described how he lived with 12 other engineers in a two-bedroom apartment rented via Airbnb. “It was $1,100 for a fucking bunk bed and five people in the same room. One guy was living in a closet, paying $1,400 for a ‘private room’.” “We make over $1m between us, but we can’t afford a house,” said a woman in her 50s who works in digital marketing for a major telecoms corporation, while her partner works as an engineer at a digital media company. “This is part of where the American dream is not working out here.”

 

  • Every successful relationship is successful for the exact same reasons. One man set out to create the definitive guide to a long and happy relationship by interviewing people that have been married for at least 10 years. The response was overwhelming. Almost 1,500 people replied, many of whom sent in responses measured in pages, not paragraphs. It took almost two weeks to comb through them all, but he did it. And what he found stunned him…They were incredibly repetitive. This is a great guide. Check out all definitive 13 principles and remember:  “What I can tell you is the #1 thing, most important above all else is respect. It’s not sexual attraction, looks, shared goals, religion or lack of, nor is it love. There are times when you won’t feel love for your partner. That is the truth. But you never want to lose respect for your partner. Once you lose respect you will never get it back.”

 

All the best for a productive week,


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