Strategy

Silence Is Strength

Good Morning,

Could the “trump trade” have hit a major turning point this week?

U.S. stocks fell the most since the week leading up to the U.S. election as President Donald Trump suffered a major setback when he was forced to pull his health-care bill from a vote amid dissent among congressional Republicans.

Both conservatives and moderates opposed the bill even after Trump met personally with many lawmakers and traveled to Capitol Hill on Tuesday to address House Republicans. The setback also cast doubt on the president’s ability to shepherd other parts of his agenda, including promised tax cuts and regulatory reform, through Congress.

Tuesday saw the biggest drop in stocks since October and financial stocks were the biggest laggards this week, as the group lost 3.8 percent as investors turned to bonds as U.S. Treasuries rallied for the second week.

 

Our Take

Largely lost in the headlines about stocks at records before the selloff is the fact that the advance has been led by just a handful of large, mostly technology companies (think Apple, Amazon, Google and Facebook), while the shares of smaller companies are actually down for the year. This is simply “bad breadth”.

The divergence should be watched as smaller companies generally get a greater portion of their revenue from domestic sales and ideally would benefit the most from the Donald Trump administration's policies. Yes, small companies' shares did outperform last year, but their recent performance may be a sign that this year's rally wasn't built on a solid foundation.

As for the political fiasco, Barry Ritholtz reminds us that whether you support Trump or not, his combination of a corporate tax overhaul, repatriation of overseas profits and individual tax breaks could be a powerful cocktail.

The problem is that this week’s bumbling suggests an inability to govern. As we approach the 100-day mark, the promised pivot toward becoming “presidential” has yet to be seen. Instead, we see the entire economic agenda -- much of which was supported by those on both sides of the aisle -- now in danger.

It doesn’t help that Trump is now beginning to suffer from a credibility crisis as his near pathological and cavalier disregard for truth is catching up with him...In an exclusive interview with TIME magazine on Thursday Trump explained that it is okay to say something false as long as it later turns out that something vaguely similar is true. To end the interview he stated his rationale for anything he does: “I can’t be doing so badly, because I’m president, and you’re not. You know.”


Musings

I didn’t write last week as I felt that some silence was needed. A conscious effort to seek calm and relaxation. An opportunity to get beyond the noise.

I think as we age we come to realize the benefits of tuning in to the needs of our minds and bodies. I’m not talking about what we we believe we need from our external worlds. I’m talking about what we need from our internal worlds. The worlds that hold us together. That keep us whole. That keep us grounded and compose the fabric of our very existence. 

It is this world that has been a special focus of mine over the last 2 weeks. This is about cultivating a disciplined practice for managing information flow and creating periods of deep silence.

Why?

Recent studies are showing that taking time for silence restores the nervous system, helps sustain energy, and conditions our minds to be more adaptive and responsive to the complex environments in which so many of us now live, work, and lead.

Duke Medical School’s Imke Kirste recently found that silence is associated with the development of new cells in the hippocampus, the key brain region associated with learning and memory. Physician Luciano Bernardi found that two-minutes of silence inserted between musical pieces proved more stabilizing to cardiovascular and respiratory systems than even the music categorized as “relaxing.” And a 2013 study in the Journal of Environmental Psychology, based on a survey of 43,000 workers, concluded that the disadvantages of noise and distraction associated with open office plans outweighed anticipated, but still unproven, benefits like increasing morale and productivity boosts from unplanned interactions.

But purposeful silence isn’t just about blocking out others. It is about quieting inner noise. It is about taking a break from life’s most basic yet often most burdensome responsibility: having to decide or think of what to say.

Hal Gregersen writes in a recent HBR article, that silence “increase[s] your chances of encountering novel ideas and information and discerning weak signals.” When we’re constantly fixated on the verbal agenda—what to say next, what to write next, what to tweet next—it’s tough to make room for truly different perspectives or radically new ideas. It’s hard to drop into deeper modes of listening and attention. And it’s in those deeper modes of attention that truly novel ideas are found.

I didn’t have any ground breaking ideas over the last 2 weeks during my focus on silence yet that isn’t the point. The point is to allow yourself some mental and spiritual space that is agenda free. That is boundless. So perhaps this week you may want to ask yourself what you are doing to cultivate periods of sustained quiet time? Believe me, the email, the meeting, the media and the rebuttal can wait….


Logos LP News

This week, at a private event we presented some of our research entitled: "A top indicator for investing in growth or turnaround stocks"

Please contact us if you would like a copy of the presentation which included several stock specific case studies and picks.

 

Thought of the Week
 

"Silence is a source of great strength.”-Lao Tzu


Stories and Ideas of Interest

 

  • The biggest threat facing middle aged men isn’t smoking or obesity. It’s loneliness. Interesting piece suggesting that those who fall into the categories of loneliness, isolation, or even simply living on their own see their risk of premature death rise 26 to 32 percent. No wonder that “deaths of despair” are surging among the white working class. Perhaps not a coincidence that hedge fund king Ray Dalio published a long winded piece this week describing the phenomenon he sees as shaping economic conditions: populism.

     

  • Waking up from the American dream. The US’s wealth, high standards of living, and world-class services make it one of the best countries to live in—for some. But on UN sustainability goals in areas like healthcare, education, and violence, it scores dismally, Annalisa Merelli finds. Not a pretty picture. In addition, this week more disturbing data came out of the US suggesting that things are not as solid as they may seem: Car loans on the US have hit record levels and delinquencies are rising fast and private label mortgage bonds are rising from the grave...

 

  • Many are afraid of automation eliminating jobs but so far only one us occupation has been eliminated. Though almost all of today’s jobs have some aspect that can be automated by current technology, very few jobs can be entirely automated, according to a recent McKinsey analysis. “This distinction is important because it implies very different economic outcomes,” Bessen wrote in a column last year. “If a job is completely automated, then automation necessarily reduces employment. But if a job is only partially automated, employment might actually increase.” Anyway, Google’s chief futurist Ray Kurzweil thinks we could start living forever by 2029.

 

  • Why are employees at Google, Apple, Netflix and Dell more productive?  According to research from the leadership consulting firm Bain & Company, you might think that it’s because these companies attract top-tier employees–high performers who are naturally gifted at productivity–but that’s not the case, says Bain & Company partner Michael Mankins. How? Grouping A players together instead of spreading them out, cutting down bureaucracy and ensuring that leaders are inspirational.

 

  • Start-ups shouldn’t be unicorns they should be zebras. Quartz suggests developing alternative business models to the startup status quo has become a central moral challenge of our time. These alternative models will balance profit and purpose, champion democracy, and put a premium on sharing power and resources. Companies that create a more just and responsible society will hear, help, and heal the customers and communities they serve. Interesting outline of what a zebra company looks like and the barriers facing founders who focus on sustainable prosperity.

 

  • Can’t tax won’t tax. The hole in western finances. There is a persistent shortfall between revenues and spending and it may get worse. This is a timely piece from the Economist as Trump eyes a tax cut and Trudeau released his “placeholder” budget this week which did not include any significant tax increases. This does not surprise me. The average voter has no understanding of the bind western governments find themselves in. “The fundamental problem is that OECD populations are getting older, which implies a steadyincrease in spending on health and pensions. That will make it very hard to bring overall spending down. Meanwhile the proportion of the population that is of working age is set to decline—not good for tax revenues. Governments could raise taxes but we live in an era of mobile people and companies. Governments are competing to reduce corporation tax rates to attract multinationals and highly skilled workers. And as we have seen, there is no political will to raise taxes. This suggests there is a structural problem. At the moment, the problem is not hitting home because of low rates. But imagine if today's debt levels were accompanied by 2000's yield levels; then interest payments would be 4.5% of GDP, more than double today's levels. And that of course would only make the financing problems even harder.”

 

All the best for a productive 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.

Musings

 

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

Did We Beat The Market In 2016? Outlook For 2017

Good Morning,
 

Welcome to 2017. We hope that you all had a restful holiday. 

U.S. equities closed higher after hitting all-time highs on Friday as the technology sector led, while investors parsed through key employment data.

The Dow also came within 0.37 points of hitting 20,000 for the first time. The S&P 500 gained 0.35 percent and posted intraday and closing record highs, with information technology advancing 1 percent.

The U.S. economy added 156,000 jobs in December, according to data from the Bureau of Labor Statistics. Economists polled by Reuters expected an increase of 178,000. The unemployment rate came in at 4.7 percent, in line with expectations. On balance this was a good report as forward momentum remains intact. 

Nevertheless, certain investors are getting nervous about all the money pouring into U.S. stocks. We would agree. 
 

Our Take
 

For our humble reflections on 2016 and our thoughts on where economies/markets are and where they may be headed in 2017, we have published the outlook half of our annual letter to our unit holders. You can find it here


Teaser: 
 

“2016 proved to be a good year for the "active" investor and 2017 will unfold similarly as 3 big picture investment themes suggest continued volatility and divergence.” 

*If you would like to read a copy of our entire 18 page annual letter to our unit holders please contact us. In it you will find a detailed description of our investment approach, our activities in 2016 as well as out outlook for 2017. 

 

Musings Special: How Have Our Picks Performed Since Publication?

 

A lot of managers and analysts make stock picks yet are they held accountable? Here is a performance report card of the publicly disclosed (published) picks we made in 2016: 
 

Marathon Petroleum (NYSE: MPC) - Total Return since January 21st, 2016: +27.23%

IBM (NYSE: IBM- Total Return since January 11th, 2016: +32.09%

Global Brass and Copper Holdings Inc. (NYSE: BRSS- Total Return since January 13, 2016: +62.49%

Jack Henry & Associates Inc. (NASDAQ: JKHY- Total Return since January 26th, 2016: +18.64%

Credicorp (NYSE: BAP) - Total return since March 1st, 2016: +41.88%

Munro Muffler (NASDAQ: MNRO) - Total Return since March 18th 2016: -15.16%

Dorman Products (NASDAQ: DORM) - Total Return since March 18th 2016: +30.93%

Rocky Mountain Dealerships (TSE:RME) - Total Return since April 7th, 2016: +65.36%

Teledyne Technologies (NYSE: TDY- Total Return since April 22, 2017: +34.44%

Renasant Corp (NASDAQ: RNST) - Total Return since April 24th, 2016: +23.47%

Agrium (TSE: AGU) - Total Return since August 26th, 2016: +18.59%

Enghouse Systems (TSE: ENGH- Total Return since August 26th, 2016: -0.43%

Luxoft (NYSE: LXFT) - Total Return since August 26th, 2016: +19.93%

Cal-Maine Foods (NASDAQ: CALM- Total Return since September 14, 2016: -1.49%

J.M. Smucker (NYSE: SJM) - Total Return since since September 14, 2016: -3.1%

 

If you had bought 1 share of each of these companies upon publication and held until Jan 6, 2017 your portfolio would have returned roughly: +23.65%

This year we have again provided the MoneyShow with our top 4 picks for 2017. Unfortunately, they are scheduled to be published next week so we will provide you with the links in the next letter. The picks are: 

 

Peter Mantas: 

Huntington Ingalls Industries (NYSE: HII): +5.05% YTD

Cemex SAB de CV (NYSE: CX): 0% YTD

 

Matthew Castel:

Aaron Inc. (NASDAQ: AAON): -1.06 YTD

Syntel (NASDAQ: SYNT): +3.03% YTD

 

How Did Logos LP Perform In 2016?

As of December 30st 2016 on a total return basis for the year, Logos LP has returned 22.9% in CAD whereas the S&P 500 has returned 11.67% in USD and the TSX has returned 21.11% in CAD. On an unlevered cumulative basis, Logos LP’s units have appreciated 52.88%. Since inception on March 26th 2014 a Logos LP unit holder would have earned an unlevered annualized net return of 19.22% in CAD, outpacing both the S&P 500 and TSX composite indexes during that time span in their respective currencies. 
 

To put this performance in perspective the Barclay Hedge Fund Index which is a measure of the average return of all hedge funds (excepting Funds of Funds) in the Barclay database showed a 2016 YTD performance of 6.18%.
 

Data from HFI was even worse indicating that the average investor in a hedge fund in 2016 would have seen their money grow a mere 2.5%. 
 

Based on data from Openfolio a network with more than 70,000 members who share their investment portfolios, the average investor had a gain of roughly 5% in 2016. 
 

We had a pretty good year but we believe we can do much better. 

 

Thought of the Week

 

"There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.” -Ernest Hemingway



Stories and Ideas of Interest

 

  • Is Donald Trump the modern day Mussolini? President-elect Donald Trump’s targeting of corporations, to make them change their practices, is reminiscent of policies in Italy under dictator Benito Mussolini, according to billionaire bond manager Bill Gross. To be honest I am already growing weary of Trump’s disruptive tweets. It isn’t clear to me why the most influential man in the world would bother to tweet about things like the new star of The Apprentice yet threatening publicly traded companies via twitter is concerning. Furthermore, with no known special security protections @realDonaldTrump could be exploited for financial gain, to cause geopolitical instability or worse. It is now in fact the most powerful publication the the world as it has moved markets, conducted shadow foreign policy, and reshaped the focus of media around the world. The irony of Trump’s Twitter interventionism in US business is that Ford’s bow to Trump benefits robots, not workers

     

  • 10 charts for tracking whether Trump is delivering on his economic promisesQuartz has provided an at-a-glance dashboard for measuring the economy under president Trump. They have collected 10 indicators that reflect his main campaign promises, with data from the George W. Bush and Barack Obama administrations to provide context. They’ll update the data as Trump puts his plans into action. Things are tense as millennials aren't so optimistic. In fact, this generation is the only one to say they're feeling worse, financially, about 2017 than 2016. 

         

  • What history says has to say about the economy trump will inherit. Interestingly, research suggests factors beyond the control of any U.S. president, not their actual policies, set the course of the economy. Yet with voters, President-Elect Donald Trump will secure much of the praise or blame when it comes to the impact of his agenda over the next four years.


     

  • The Ultimate Authoritative Unimpeachable Top 20 Books of 2016. You could easily read so many best-books-of-the-year rankings that you’ll never get around to reading the actual books. Kira Bindrim has saved you the bother by aggregating dozens of rankings to create a master list. 

          

  • Bloomberg News reporters in more than 100 cities will cover the stories that matter most in 2017Here's a selection of key events for the year, plus links to related QuickTake guides. QuickTakes highlight the underpinnings of complicated subjects, providing a concise, fun-to-read entry point to current debates. 

     

  • The year in technology: 2016 in chartsBloomberg puts together a nice visual compilation of some of the most significant 2016 events in tech. Also don't miss IBM's annual list of 5 innovations that it thinks will change our lives within 5 years.

     

  • Travel in 2017. Today’s fast-changing, hyper-globalized world has no shortage of incredible travel opportunities. This year, Bloomberg has done all the legwork for you in rooting out the best, pinpointing the biggest hotel openings and cultural events of the year—along with the places you’ll want to see now, before they change forever. Looking to retire? CNBC puts together a list of the best spots worldwide to do so. 
     

All the best for a productive year,

Logos LP

How Did Our Top Picks For 2016 Perform? Happy Holidays!

Good Morning,
 

Happy Holidays from Logos LP to you and yours!

Not much to report this week.

U.S. equities closed mostly flat on Friday ahead of the Christmas holiday, as the Dow Jones industrial average failed again to reach the psychologically important level of 20,000.

Canada’s gross domestic product shrank unexpectedly in October as factories suffered their worst month in almost three years, adding to signs the country’s outlook is worsening. The GDP numbers add to recent indicators showing low interest rates and a program of federal government stimulus are so far failing to spur a recovery.

Nevertheless, growth in the U.S.A. should help the TSX to continue its march in 2017. The question is whether and for how long there will be growth. Here’s a frightening factoid for Donald Trump as he prepares to take office next month: Every Republican president since World War II has been in power during at least one recession. Can Trump escape history?

 
Musings
 

Over the next week we will be finishing up our outlook for 2017, as well as assembling our top 4 ideas for the MoneyShow’s 2017 Top Manager Picks Symposium.

Looking back at the performance of our top 4 picks for 2016 which were published by the MoneyShow at the beginning of the year:
 

Peter Mantas:
(NYSE: BRSS) : +63.15%
(NASDAQ: JKHY) : +14.54% 

Matthew Castel:
(NYSE: IBM) : +21.14%
(NYSE: MPC) : -2.04%

If you had blindly bought and held all 4 of these picks in an equal weight portfolio you would have returned 23.85% unlevered YTD.

Stay tuned for our next letter when we offer a similar audit of the other picks we made publicly in 2016 as well as report our 2016 return for Logos LP fund. 

 

Thought of the Week

 

"The is only one happiness in this life, to love and be loved." -George Sand
 


Stories and Ideas of Interest

 

  • The U.S. is now a country that can be ignored. Interesting piece in Bloomberg this week suggesting that one of President Barack Obama's most important legacies is a sense that the U.S. is no longer the dominant global power: It can be ignored. It's a new reality that became apparent this year as various authoritarian regimes and populist movements have tested it out.

     

  • The modern economy is suffering from a spiritual crisis. The main source of meaning in American life is a meritocratic competition that makes those who struggle feel inferior.

           

  • A call for a new strenuous age. Fascinating piece in “The Art of Manliness” deconstructing the great paradox of the modern age; on paper we’ve made the kind of technical progress that should lead to life feeling absolutely amazing…but it doesn’t. Perhaps we should look back to move forward…

     

  • How to win your next political argument. You’ve probably gotten in a political argument in the recent past, whether with your nutso cousin at Thanksgiving or your militantly ignorant co-worker at a happy hour. And you’ll probably get in another political argument sometime in the near future. Hard as it may be to believe, you can actually win these arguments. Here’s how.

          

  • The long-term jobs killer is not China. It’s automation. No candidate talked much about automation on the campaign trail. Technology is not as convenient a villain as China or Mexico, there is no clear way to stop it, and many of the technology companies are in the United States and benefit the country in many ways.

 

 

  • 4 ways to control your emotions in tense moments. The ability to recognize, own, and shape your own emotions is the master skill for deepening intimacy with loved ones, magnifying influence in the workplace, and amplifying our ability to turn ideas into results. Joseph Grenny for HBR shows how his successes and failures have turned on this master skill more than any other.

     

All the best for a productive week,

Logos LP

A Tough Short But An Interesting Long

Good Morning,
 

U.S. stocks closed slightly lower Friday, with financials lagging, following some renewed concern of geopolitical tension.

Reuters reported in late morning trade that a Chinese Navy warship has seized an underwater drone deployed by an American oceanographic vessel in international waters in the South China Sea, triggering a formal diplomatic protest from the United States and a demand for its return, a U.S. defense official told the newswire.

 
Our Take
 

We talked a bit about Grey swan risks last week. With U.S./China relations in a bit of slump since Trump was elected, it is worth remembering that life, like markets operates in cycles. If you find yourself in a high, begin preparing yourself for the next low. Without fail it is coming.
 
Nevertheless, this rally is tough to short. Investors are facing a swift transition to an activist and all-business American government. Trump has kept his cards close to his chest but the new strategy is set with a firm focus on jobs, incomes, infrastructure, and a desire to put an end to humiliating declines in the quality of American education and healthcare.
 
As Dr. Michael Ivanovitch for CNBC has stated: “These are the things that markets are betting on. Rest assured that Mr. Trump and his Wall Street appointees fully understand the conditionality of that welcome mat.”


Musings

As we prepare our best ideas and outlook for 2017 we came across this interesting long opportunity in Europe:
 
CRH PLC (ADR): Although industrials and construction have been the story in North America of late, could there be opportunity in Europe? In this name we see strength in construction materials, concrete and plumbing units. This company experienced rapid growth in 2015 and is trading at nearly 16.5 times forward earnings, only 1x sales and 2x book value. The company is in a cyclical industry yet has managed to growth revenue by 50% since 2006 and during the bull run of 2006-2008 saw a revenue increase of over 11%. Interestingly, the company generates more revenue and profit today but is trading below its 2006 levels and has a low price to cash flow ratio of 10x. Look for a dip below $30 as a good entry point. As for the macro infrastructure tailwind, we believe it has about 3 good years to play out before the sector reaches fair value. 
 

Thought of the Week

 

"What was scattered gathers. What was gathered blows away." -Heraclitus

 


Stories and Ideas of Interest

 

  • Contrarian indicator? Could hoarding be a sign of a healthy economy? The boom in self-storage units suggests Americans are buying more than ever.  

     

  • Trump’s cabinet picks have more money than a third of all Americans combined. The most affluent cabinet ever boasts $9.5 billion in total wealth. This is actually incredible. Talk about flair…
  • Sometimes disruption is staring you right in the face and you can’t help but look the other way. That’s doubly true when you’re the head of a legacy business desperate to stay relevant. Small players have historically changed the business landscape when the older guys aren’t aware enough or nimble enough to respond. Cb Insights puts together some great examples of big CEOs and executives who minimized disruptive threats when they appeared. When asked about these smaller players at the time (and even now) some companies have remained woefully dismissive.

 

  • Excuses Excuses. Or realism at work? America’s largest pension fund: A 7.5% annual return is no longer realistic. Probably smart to temper expectations...Although stocks do tend to rise....
  • Investing is maybe 60% science, the rest art. Yes, it has numbers and formulas and rules. But the soft stuff you can’t measure or hardly even describe – the art of the business – makes all the difference in the world. Building a valuation model is a science. Calibrating it to reflect the psychology of uncertainty is an art. Morgan Housel offers an interesting look at the art of investing.

 

All the best for a productive week,

Logos LP