Real estate

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.


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

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

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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

How To Make Better Decisions

Good Morning,

U.S. stocks limped into the weekend on a sluggish final day of trading, while the dollar fluctuated with oil as investors assessed data showing the U.S. economy on solid footing.


The S&P 500 Index moved between gains and losses before closing higher by less than a point -- good enough for a seventh straight gain and fresh record in trading 25 percent below the 30-day average.


The U.S. economy’s first quarter GDP came in this Friday and it wasn’t so miserable after all, as consumption contributed more to growth and business investment was even stronger than thought.

Our Take

The S&P 500 and Nasdaq indexes both hit record highs this week, and the Dow flirted with its own all-time high. Investors seem to be signalling that everything is honky-dory even as the political headlines remain concerning. Tax and healthcare reform appear to be even further out of reach as the investigations into the Trump administration (now Jared Kushner under scrutiny) deepen.


But are these headlines so concerning? In the short-term political events can trigger short term buying opportunities but research has shown that political crises rarely have a lasting impact on markets. There is an abundance of liquidity in this market with a lot of cheap money chasing a returns. This is no doubt one factor contributing to the rally, but more importantly investors are focusing on the strengthening economy, signs from the central bank that interest rates will continue to rise, and the best quarter of corporate-earnings growth in five years.


Furthermore, there still exists a record amount of bearishness. The S&P 500 Index has climbed 7.9 percent since January, including its biggest gain since April in the just-completed week. At the same time, short interest as a proportion of total shares outstanding has also expanded, rising by 0.3 percentage point to 3.9 percent. Never before has an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg that goes back to 2008.

There is no euphoria!


Bloomberg this week reported that investors are pulling money out of stocks after the initial rush to buy faded along with the optimism over Trump’s pro-growth policy. They have withdrawn $20 billion from exchange-traded funds and mutual funds this quarter, reversing about one third of the inflows seen between November and March, according to data compiled by Bloomberg and Investment Company Institute.  


Bullish bets are also shrinking in the futures market. Net long positions in S&P 500 contracts held by large speculators fell in seven of the last eight weeks and were closer to turning net short than any time since December, data compiled by Commodity Futures Trading Commission show.


The challenge for short sellers is how long they can stay solvent before being forced to buy back the shares that they have borrowed and sold. And the pressure to cover is building. The potential for a swift melt up is increasing…..



Last weekend I was on vacation and had the opportunity to read a wonderful book “Charlie Munger: The Complete Investor” by Tren Griffin. Munger is one of the world’s most successful investors better known as Warren Buffett’s partner at Berkshire Hathaway.


What is most interesting about Munger is not his success as an investor but the way he thinks and keeps his emotions under control.


The book offers a great overview of Munger’s ideas and methods which can help us make better decisions, be happier and live a more fulfilling life. Why? Because investing, like life is about decision making. Everyday we are faced with a spectrum of possible decisions which will set us along one path or another.


As such, misjudgement can wreak havoc upon the outcomes of our lives.


What is the psychology of human misjudgement?


Humans have developed simple rules of thumb called heuristics, which enable them to efficiently make decisions. Heuristics are essential as without them humans would be unable to process the vast amount of information they face on a daily basis.


The problem is that these shortcuts can sometimes result in tendencies to do certain things that are dysfunctional.


The upside is that we can learn to identify these dysfunctional tendencies and overcome them. This is the key to better decision making. What are some of the most common of these tendencies? There are over 20 explained in the book but these are those that stood out most:


  1. Liking/Loving Tendency

    1. People tend to ignore or deny the faults of people they love and also tend to distort the facts to facilitate love.

  2. Inconsistency-Avoidance Tendency

    1. People are reluctant to change even when they have been given new information that conflicts with what they already believe. The desire to resist any change in a given conclusion or belief is particularly strong if a person has invested a lot of effort in reaching that conclusion or belief.

  3. Kantian Fairness Tendency

    1. Humans will often act irrationally to punish people who are not fair. In other words they may act irrationally when presented with a situation that they feel is unfair. Some would rather lose money in an investment than see another person benefit from “perceived” unfairness.

  4. Envy/Jealousy Tendency

    1. Very primal emotions are triggered when humans see someone with something they don’t have often causing dysfunctional thoughts and actions. In this world of abundance there is nothing but unhappiness to be gained from envy.

  5. Reciprocation Tendency

    1. The urge to reciprocate favors and disfavors is so strong that people will feel uncomfortable until they can extinguish the debt.

  6. Simple, Pain-Avoiding Denial

    1. People hate to hear bad news or anything inconsistent with their existing opinions and conclusions. If something is painful people will work to even deny the reality.

  7. Excessive Self-Regard Tendency

    1. People tend to vastly overestimate their own capabilities. The most effective way to reduce risk in any situation is to genuinely know what you are doing.

  8. Deprival Super-Reaction Tendency

    1. Loss aversion- we irrationally avoid risk when we face the potential for gain, but irrationally seek risk when there is a potential for loss.

  9. Social Proof Tendency

    1. Humans have a natural tendency to follow a herd of other humans. We view a behaviour as more correct to the degree we see others performing it. This is how bubbles form. The herd is rarely correct.

  10. Authority-Misinfluence Tendency

    1. People tend to follow people who they believe are authorities or have the right credentials. Especially when they face risk, uncertainty or ignorance.


Think independently!

Thought of the Week

"The best thing a human being can do is help another human being know more.” - Charlie Munger

Articles and Ideas of Interest


  • The meaning of life in a world without work. As technology renders jobs obsolete, what will keep us busy? Sapiens author Yuval Noah Harari examines ‘the useless class’ and a new quest for purpose. Could playing virtual reality games be the answer? But what about truth? What about reality? Do we really want to live in a world in which billions of people are immersed in fantasies, pursuing make-believe goals and obeying imaginary laws? Well, like it or not, Harari suggests that may be the world we have been living in for thousands of years already...


  • Why you should learn to say no more often. The NYT suggests that humans are social animals who thrive on reciprocity. It’s in our nature to be socially obliging, and the word no feels like a confrontation that threatens a potential bond. But when we dole out an easy yes instead of a difficult no we tend to overcommit our time, energy and finances. Do you have the ability to communicate ‘no’ and reflect that you are actually in the driver’s seat of your own life?


  • The cryptocurrency mania may just be starting. Practically this entire week on CNBC the top 5 most popular articles were bitcoin related with bitcoin more than doubling in price this year alone and its closest rival Ether up over 2,300 percent! Yes 2,300 percent. There are a few theories for why the currencies have been rallying so much the most convincing being that bitcoin has been getting support from certain governments and investors and that the ethereum blockchain has been getting serious backing by major corporations wishing to use the technology for smart contract applications. I have no interest in trading currency or speculating on its price action but what worries me about products like Ether is that they can be cloned. The people buying Ether are buying a specific blockchain while the technology underlying it is what is most valuable. Cryptocurrencies are proliferating with new currencies being launched at record speeds. Canada-based Kik's cryptocurrency, Kin just launched this week which is also based on the ethereum blockchain. If I were to invest in a crypto currency I would look at bitcoin and take 1% or less of what I own, buy bitcoin with it, and then forget about it for at least the next five years; ideally the next decade. The way I see it you will either lose 1% of your net worth or make incredibly large sums. You can find the ways to buy it here.


  • Toronto homeowners are suddenly in a rush to sell. Toronto’s hot housing market has entered a new phase: jittery. After a double whammy of government intervention and the near-collapse of Home Capital Group Inc., sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren’t attracting the bidding wars their neighbors saw just a few weeks ago in Canada’s largest city. Interestingly, a Canadian regulator this week said it disciplined two mortgage brokers who funneled business to Home Capital Group Inc., marking the first disclosure of action taken against dealers who submitted fraudulent loan applications to the embattled mortgage lender. The Financial Services Commission of Ontario conducted its own review into Home Capital in relation to the company severing ties in 2015 with 45 brokers who used falsified client income on applications. This is a big deal….this means that many Canadians may be delinquent or be under real stress in affording their home since who knows what they put down as income. According to Equifax, mortgage fraud jumped 52 percent last year from 2011, showing the issue may only be growing. House of cards? No wonder a recent Manulife study indicated that a mere 10% hike to mortgage payments would sink almost ¾ of Canadian homeowners. Robert Shiller for the NYT reminds us how tales of “flippers” led to the last housing bubble.


  • The phrase “late capitalism” is suddenly everywhere. The Atlantic suggests that “Late capitalism,” in its current usage, is a catchall phrase for the indignities and absurdities of our contemporary economy, with its yawning inequality (new research suggests that your financial fate is sealed by the time you turn 25) and super-powered corporations (new research also suggests that employers often implicitly, and sometimes explicitly, act to prevent the forces of competition from enabling workers to earn what a competitive market would dictate, and from working where they would prefer to work) and shrinking middle class. Interesting read chronicling the perverse ways our “developed” economy is progressing. What do growth and productivity even mean in an economy that has moved from manufacturing (whose products can be counted) to services (which can't be)? Do economies driven by information and software need new metrics for progress? And what, if anything, can an economy at the technological frontier do to make living standards rise faster?


Our best wishes for a fulfilling week, 

Logos LP

Free Lunches and The Catch 22 of the Canadian Economy

Good Morning,

U.S. stocks finished near all-time highs Friday, Treasuries gained and oil closed in on $50 a barrel even after the world’s biggest economy reported its slowest pace of expansion in three years.

A large portion of those stock gains came this week. Stocks posted sharp rallies on Monday and Tuesday as corporate earnings season continued to reveal strong performances from some of the top companies in the world.

The Nasdaq 100 Stock Index added to its record level as Alphabet Inc. and Inc. rose after reporting strong earnings late Thursday.

Also of note was the Bureau of Labor Statistics employment cost index, which climbed 8 percent in the first quarter, its largest gain since 2007 and a sign that wage growth is accelerating. This builds on data from Europe showing higher than expected price growth in April.


Our Take

Overall, a soft report on U.S. Q1 GDP, but this number fits in with the seasonal pattern that has been common over the past few years, where Q1 has tended to be weak.

Markets continue to digest other concerns as President Donald Trump fights an uncertain legislative battle to make his promises a reality while tackling the North Korea issue. The administration’s tax-cut plan (which some believe the U.S. can afford) and mixed signals on its view of Nafta stirred markets this week leaving investors unsure of his position on either.

 As for the growth slowdown, investors will now question the Federal Reserve’s resolve to raise interest rates two more times this year.

What we are seeing is a market that is taking sides when it comes to the direction of the U.S. economy. In the green corner are stocks. The Standard & Poor’s 500 index is just 0.2 percent away from a record high reached in March on bets that Donald Trump’s administration will push through tax-code changes to spark growth. In the red corner sit U.S. government bonds, where benchmark 10-year Treasury yields have unwound almost half of their post-election increase, suggesting a far more pessimistic view the economy.

We still maintain that this earnings cycle is doing a good job of justifying these valuations despite the fact that economists such as Robert Shiller and other pundits view current valuations as dangerously high.

 Of note is economist Jeremy Siegal’s criticism that Shiller's "valuation statement takes no account of returns elsewhere in the asset markets, it takes no account of where interest rates are, where real estate are, where anything else is; it says there's one right price for equities, and the average from 1871 through, let's say, 2000 should be that average."



“He was going to live forever, or die in the attempt.” -Joseph Heller, Catch 22

The above quote goes a long way to describe the current state of the Canadian economy.

Canada’s economy unexpectedly stalled in February as manufacturing and production in other goods producing sectors shrank during the month. The real estate sector, which expanded 0.5 percent, had its best one-month gain since 2015 as housing in Toronto soared.

Canada’s housing sector, particularly in Toronto, has become both the main driver of growth and one of the biggest sources of uncertainty amid concern the gains aren’t sustainable.

To assuage angry voters struggling with unaffordability, the Federal and provincial governments have taken action to slow down the overheated housing markets around Toronto and Vancouver, but they may want to be careful not to overdo it.

That’s because the housing boom was pretty much the only thing holding up Canada’s economy in February.

Virtually all of the strength in February’s numbers comes from industries related to the housing boom — construction, finance and insurance, and real estate. Had it not been for strength in those areas, the economy would have shrunk in February.

This isn’t new. Many economists have raised the alarm about Canada’s increasing dependence on housing for its economic growth. Global banking consultancy Macquarie found last fall found that Canada’s reliance on real estate investment hit a record high last year — the same thing that happened in the U.S. shortly before its housing bubble burst.

It should not come as a surprise that Fitch, a leading U.S. Ratings agency just came out saying that the province’s 16-point plan to create affordability in the Greater Golden Horseshoe — an area home to nine million people and that wraps around the GTA in the southern end of the province — may derail the market.

This Catch 22 situation is becoming more and more common at the national level in our increasingly complex worldGovernments are expected to deliver all the benefits people want at no cost. In other words the electorate believes in the “free lunch”. The reality is that there is little a country can do in terms of policy actions to improve its situation that a) doesn’t have negative ramifications and b) will enhance the long-run outlook in the absence of fundamental improvement in economic efficiency.

Perhaps Canada and more specifically those who have disproportionately hung their hat on one asset class/one industry (blowups like Home Capital often occur at market peaks) will learn that there is simply no such thing as a “free lunch”


Logos LP 2017 Best Picks Update

Huntington Ingalls Industries (NYSE:HII): 9.07% YTD (ex dividend of 1.09%)

Huntington has only been public since 2012 but the company holds a virtual monopoly on the maintenance of U.S. naval and coast guard ships, giving it very high returns on capital with high growth. With a focus on military spending and a strong moat, we still find HII best in class among the aerospace and defence sector.

Cemex SAB de CV (ADR) (NYSE:CX): 14.82% YTD

This highly cyclical company is entering into a perfect storm of strong growth and a beaten down valuation. With a price to sales of 0.3, PE ratio at around 12 and free cash flow growth north of 87% over the previous year, the company has been growing revenue from high single digits to low double digits over the past 2 years while experiencing strong returns on capital. These returns are no surprise given the increased demand in construction and infrastructure spending. We expect this trend to continue for the next few quarters at least.

AAON (NASDAQ:AAON): 10.89% YTD (ex dividend of 0.64%)

With a 10 year average ROIC near 20% with no debt, Aaon is set to face a record year in addition to the infrastructure and housing tailwinds that are occurring in 2017. The company trades at a premium due to its impressive qualities and can be volatile due to the nature of infrastructure and maintenance for major complexes. With low inflation and steady demand for housing and construction, we expect the company to continue to perform well this year.

Syntel (NASDAQ:SYNT): -11.02% YTD

With tight control by executive management (only a minority float on the exchange) this turnaround story has incurred drastic losses due to repatriation and slowing revenue growth. However, historical ROIC has been at least 22% going back ten previous years and in light of their restructuring in the highly sticky IT outsourcing market, there is an excellent opportunity for a turnaround in a stock trading at very depressed valuations.

Thought of the Week

"The Texan turned out to be good natured, generous, and likeable. In three days no one could stand him.” -Joseph Heller, Catch 22

Articles and Ideas of Interest

  • I’ve worked in foreign aid for 50 years-Trump is right to end it, even if his reasons are wrong. Interesting perspective in Quartz from someone who has worked in foreign aid for over fifty years, in over 60 developing countries in Africa, Latin America, and Asia. Tom asks what if we are not even that sincere about doing good? What if we are in the aid business to make sure our own piece of the pie keeps growing? Should we end the “aid-industrial complex”?


  • What is meditation and how is it practicedNice overview including graphics for those interested in meditation. What are the styles, postures, objects of concentration, common hindrances and effects of practice?


  • The happiness experiment. Quartz launches a project focussed on exploring the concept of happiness and the human obsession with it. How to find it, how to keep it and how to define it. They examine happiness from the perspective of economics, history and evolutionary psychology to understand how our notion of happiness has changed over time.


  • An anatomy of “Modern Love”. Emma Pierson and Alex Albright analyzed every “Modern Love” column from The New York Times for a decade and found that the messy process of dating leads to the best stories. Here’s what else they learned.


  • The benefits of solitude. Our society rewards social behaviour while ignoring the positive effects of time spent alone. What really happens when we turn too often toward society and away from the salt-smacking air of the seaside or our prickling intuition of unseen movements in a darkening forest? Do we really dismantle parts of our better selves? A growing body of research suggests exactly that.


  • America is regressing into a developing nation for most peopleA new book by economist Peter Temin finds that the U.S. is no longer one country, but dividing into two separate economic and political worlds. In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration - check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.


Our best wishes for a fulfilling week,  

Logos LP

Why You Shouldn't Sell Everything

Good Morning,

U.S. equities rose in choppy trade Friday following a strong jobs report, while investors were already looking ahead to a Federal Reserve meeting next week.

Signs of strong growth in the economy weren’t enough to propel stocks higher this week as investors weighed the impact of a potential interest-rate increase by the Federal Reserve next Wednesday. Futures traders now see a hike as a sure thing. According to the CME Group's FedWatch tool, market expectations for a March rate hike stood at 93 percent.

With the first-quarter earnings season almost over, stocks lost the boost provided by profits that on average beat Wall Street expectations.

In U.S. economic news, 235,000 jobs were added in February, the Bureau of Labor Statistics said, adding the unemployment rate ticked lower to 4.7 percent.

In Canadian economic news, Canada’s labour market continued its rally into February, bringing the unemployment rate to the lowest in more than two years, but with continued signs of sluggish wage increases.

Canada added 15,300 jobs in February, and employment has increased by 288,100 over the past 12 months, Statistics Canada reported today in Ottawa.

The quality of the job picture was also better than what was thought only a month ago, with an improved mix of full-time and part-time jobs. The full-time gain in February was the biggest since May 2006.


Our Take

The US Jobs report was solid and the labor force participation rate finally ticked up. If the fed was looking for further confirmation from the labor market it got it. Yet interestingly U.S. Treasury yields and the dollar turned lower after the report came out, with some investors disappointed with the hourly wage growth last month. Hourly wages rose at an annualized rate of 2.8 percent, the BLS said.

Also the average hourly earnings were a bit disappointing yet as we have said before expectations are sky high and any choke is immediately reflected in markets. What will come next as a major test for market strength is the break-down in crude oil prices. For most of this year, we’ve managed to ignore rising inventories for crude and refined products while speculators were record long.

Oil posted its worst weekly decline since November as a Bloomberg Commodity Index dropped 3.4 percent for its fourth straight weekly loss. Energy companies slid 2.6 percent as nine of the 11 main industry groups in the S&P 500 retreated.

On the Canadian side, this was also a good jobs report which takes the likelihood of a Bank of Canada interest rate cut off the table yet we believe the central bank is also unlikely to raise rates anytime soon as the economy still has a ways to go given its dependency upon real estate and its weak business investment.

Non-residential business investment has fallen in eight of the past nine quarters, and is down 19 percent over that time.

The two-year decline is the biggest since at least 1981, when the current GDP data set begins. Older data sets aren’t comparable, but can be indicative, and they show the drop may be the biggest since the 1950s.

Investment in machinery and equipment now represents 3.7 percent of GDP. That’s the lowest share of the economy since at least 1981, possibly in the post-World War II era.



I keep hearing from people that they sold their stocks because “the market is getting expensive” or “there just has to be a crash coming” or “things are getting frothy” or “this run has only been because of monetary policies put in place by the Federal Reserve.” They ask me whether we are trimming winners or at least getting more defensive.

I’ve grown tired of explaining the same thing over and over again Read About Businesses, Not Stock Market Predictions! 

Yet I came across something presented by Jim Cramer from CNBC this week that I found quite relevant to this discussion and which goes quite far to illustrate this point.

Cramer also suffers from the same malaise and thus took a look at the top 9 performing stocks since the bottom of the market on March 10, 2009 to signal the end of the market's free-fall and challenged anyone to argue that these companies need the Fed to fuel their stock rallies:

No. 1 Incyte Corporation: This is a biopharma company with a pioneering immunotherapy play that is up a staggering 6,543%

No. 2 United Rentals: Up 4,002% in the last eight years.

No. 3 Regeneron: This biotech company created a drug called Eylea to treat age-related macular degeneration with a once-a-month injection in the eye that was much better than the alternative of once a week. The stock has now rallied 2,975% since the market's bottom.

No. 4 Alaska Air Group: Known as a niche company that knows its market well. A 2,631% gain.

No. 5 Wyndham Worldwide: The stock had 178 million shares at the Haines bottom and now has 108 million. Talk about a buyback!

No. 6 Netflix: Janet Yellen Not a bad at a 2,451% gain.

No. 7 American Airlines: This company managed to come out of bankruptcy and become a top performer. Cramer gave some of the credit to the government for its 2,133% rally because regulators did allow major airlines to merge.

No. 8 Priceline: You won't find anything in the Fed minutes about creating Priceline. The success of its business model was pure innovation, and what travelers were looking for. The stock is up 2,125%.

No. 9 CBS: Cramer attributed the terrific job of CEO Les Moonves for excellent programming and disciplined cash management for the stocks 2,101%.

As comparisons: 

A rough estimate of the appreciation of a Toronto home since March 10, 2009 = 150%

The S&P 500 since March 10, 2009 = 247%


Now to be fair these are indexes and I’m sure you could find homes that have appreciated more or less yet the point is that these kind of colossal returns (20x or more on your money in roughly 8 years) are specific to businesses. They are specific to outstanding capital allocation and management not to the Fed or to “THE MARKET”.

Another interesting note regarding the “stocks are expensive time to sell because a crash is surely around the corner” camp comes from John Huber a fellow value investor who conducted a great study looking at roughly 189 years of stock market returns.

What he found was interesting:

  • The market had 134 positive years and 55 negative years (the market was up 71% of the time)

  • 44% of the time the market finished the year between 0% and +20%

  • 60% of the time the market finished the year between -10% and +20%

  • Only 14% of the time (26 out of 189 years) did the market finish worse than -10%

  • Only a mere 4.8% of the time (fewer than 1 in 20 years) did the market finish worse than -20%

So to put it another way (using the 189 years between 1825 and 2013 as our sample space), there is an 86% chance that the market finishes the year better than -10%. There is a 95% chance the market ends higher than -20%. And as I mentioned above, there is a 71% chance that the market ends any given year in positive territory.

One last observation: the market was 5 times more likely to be up 20% or more in a year (50 out of 189) than down 20% or more in a year (9 out of 189)!

Although certain to happen again, crashes are rare. The 2008 type scenarios, are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That’s about once every 63 years. I can’t emphasize this enough to the market timers out there. People tend to overestimate the probability of a market crash when one recently occurred.

The storm clouds of 2008 are in the rear view mirror, but they are still visible, and the effects of the storm still evident so before you pay too much attention to the headlines and sell everything or even sell anything, look at the businesses you own and bear in mind the above statistics...


Thought of the Week

"If you do what everyone else does, you will get what everyone else gets." -Stephen Richards

Stories and Ideas of Interest


  • Credit Suisse says the $1.5 trillion of cash on large cap company balance sheets is obscuring profitability and distorting valuations by making companies seem more expensive than they really are. It estimates that, ex-cash, stocks are trading near their historical averages. For example, at a current 18.6 forward P/E multiple, the S&P 500 is trading 13% above its 10-year average because of historic cash levels. Interesting point. Important to remember that a high P/E ratio can point to overpriced stocks, but it can be caused by high cash balances and low debt ratios.


  • A little can go a long way. When thinking about their financial situation, most people spend way more time thinking about investing than they do about spending and saving. Michael Batnick shows that it should be the exact opposite, because saving and spending is something we have complete control over. We can’t know if our portfolio will be up or down next year, but we can decide whether or not to take that $5,000 vacation. Saving to invest in ALMOST ANY VANILLA STOCKS SUCH THOSE IN A LOW COST ETF should be the priority rather than trying to figure out the perfect portfolio or avoid the next crash.


  • Big tobacco has caught startup fever. Something we have been watching for a bit as big tobacco may be entering into a renaissance of sorts. It’s not smoking. It’s platform-agnostic nicotine delivery solutions. Interesting story in Bloomberg highlighting how big tobacco is entering into an innovation war.


  • A world without wifi looks possible as unlimited plans rise. The Wi-Fi icon -- a dot with radio waves radiating outward -- glows on nearly every internet-connected device, from the iPhone to thermostats to TVs. But it’s starting to fade from the limelight. With every major U.S. wireless carrier now offering unlimited data plans, consumers don’t need to log on to a Wi-Fi network to avoid costly overage charges anymore. That’s a critical change that threatens to render Wi-Fi obsolete. And with new competitive technologies crowding in, the future looks even dimmer.


  • Robert Mercer: The big data billionaire waging war on mainstream media. With links to Donald Trump, Steve Bannon and Nigel Farage, the rightwing computer scientist is at the heart of a multi-million dollar propaganda network. This is a must read. Welcome to the future of journalism in the age of platform capitalism. News organisations have to do a better job of creating new financial models. But in the gaps in between, a determined plutocrat and a brilliant media strategist can, and have, found a way to mould journalism to their own ends.


  • Moral outrage is self-serving, say psychologists. When people publicly rage about perceived injustices that don't affect them personally, we tend to assume this expression is rooted in altruism—a "disinterested and selfless concern for the well-being of others." But new research suggests that professing such third-party concern—what social scientists refer to as "moral outrage"—is often a function of self-interest, wielded to assuage feelings of personal culpability for societal harms or reinforce (to the self and others) one's own status as a Very Good Person.


  • What do Uber, Volkswagen and Zenefits have in common? They all used hidden code to break the law. Coding is a superpower. With it, you can bend reality to your will. You can make the world a better place. Or you can destroy it.


  • How to be good at anything according to a world expert on peak performance. There is an important difference between practice and deliberate practice...


All the best for a productive week,

Logos LP

Spotlight On A Struggling Canadian Economy

Good Morning,

U.S. stocks closed sharply higher Friday, with the S&P and the Nasdaq posting their strongest close ever, after a stronger-than-expected jobs report. This was an impressive report as it assuaged fears of a faltering economy. Things do in fact appear to be picking up in the US. Perhaps not so much in Canada…
Spotlight on the Canadian Economy: Great article on Bloomberg explaining how the lethargic Canadian economy can’t shake its reliance on housing. At present, Canada is in slowest expansion outside recession in six decades and real estate is now the country’s biggest industry at 12.4% of GDP. Furthermore, Statistics Canada delivered a double whammy of data on Friday that showed a deteriorating employment picture in July — and a higher jobless rate — along with a widening trade gap a month earlier that produced a record deficit as exports declined.
The danger here is that Canada’s economy is now almost completely reliant for growth on bank lending and the hot Vancouver (expose by Bloomberg on the Vancouver boom) and Toronto housing markets.
Real estate and financial services now account for 20 percent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record and policy makers scrambling to slow price gains that are making homes unaffordable for all but the wealthiest buyers. How can this possibly continue? With these new numbers it is clear how difficult it is for policy makers and the Bank of Canada to deal with this growth issue. Damned if you do. Damned if you don’t.

Thought of the Week

"The three great essentials to achieve anything worth while are: hard work, stick-to-itiveness, and common sense." -Thomas A. Edison


Stories and Ideas of Interest

  • Interesting piece from Boston Consulting Group looking at the sustainability of two of the major drivers of global economic progress: globalization and technology. The division between the winners and losers of global integration and technological progress is threatening to derail growth. As more people feel left behind, firms could face an environment of escalating political risk, compromising their ability to invest, to access markets and talent, and to innovate and create wealth. What can corporate leaders can do to shape conditions for continued prosperity?


  • Although Hillary is up in the polls The Clinton camp needs to be careful to avoid falling into the same trap as the remain campaign. The complacency that led to the leave vote must not be repeated in the US. Donald Trump and his populism can only be headed off by positive values. The convention message that love beats hate, that the country is stronger together, is simple but powerful. Every statistic, every fact, every endorsement should be couched in terms of these values.


  • Valuation Spreads: The Brooklyn Investor has a look at some research out of Pzena Investment Management highlighting the fact the valuation spreads between the cheapest stocks and the most expensive is at record highs. At present the spread is at historically high levels. That's kind of amazing. Why does it matter? This is very, very interesting considering the big boom now in 'passive' strategies.  Does this look like an environment where you would want to invest passively? Of course, the obvious way to play it is to stick with cheap stocks. That is usually a great idea, but it seems like it's a really, really great idea now. 


  • The worst ETFs you can own: A Wealthof Common Sense dives into what ETFs are popular, which are poor and what to look for when you buy ETFs.


  • The recovery remains sluggish. Why? The growth of the US economy keeps falling short of expectations. Despite good jobs numbers today, last Friday, we learned that the US economy grew at an inflation-adjusted rate of 1 percent in the first half of 2016. That’s the slowest six-month growth rate since 2012, and it continues the slow growth that has characterized the recovery since 2009. Vox paints an easy to understand picture of the theories that attempt to explain why growth remains elusive:
    1) running out of innovations 2) too little spending 3) bad corporate governance is causing companies to under invest 4) the economy is weighed down by debt 5) excessive regulation 6) excessive regulation in big cities 7) the economy is becoming dominated by big incumbent companies 8) a slow growing ageing population


  • Michael Coren on the technology being developed to hack our bodies. Just think synthetic blood substitutes to boost strength and endurance, brain implants to improve concentration and information processing, and gene splicing techniques that hack the human genome with surgical precision. “Upgrades are not just for software anymore. Humans are steadily gaining access to technologies that enhance our brains and bodies. But most Americans see this as yet another way for the haves to get a leg up over the have-nots.” The future begins now. Read more here


All the best for a productive week,

Logos LP