bubbles

Market Cycles

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Good Morning,
 

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

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

 

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

 

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


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

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

 

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

 

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

 

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


Our Take
 

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

 

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

 

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

  1. Demand Side Explanations:

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

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

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

  2. Supply Side Explanations:

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Is this time any different?

 

Chart(s) of the Month

 

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

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

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Musings
 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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


 

Logos LP July 2018 Performance

 

July 2018 Return: -0.34%

 

2018 YTD (July) Return: 0.00%

 

Trailing Twelve Month Return: +12.79%

 

CAGR since inception March 26, 2014: +18.29%


 

Thought of the Month

 

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



Articles and Ideas of Interest

 

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

 

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

 

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

 

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

 

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

     

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

 

 

Our best wishes for a fulfilling month, 

Logos LP

Where Is "The Crowd"?

Good Morning,
 

U.S. equities rose on Friday on better-than-expected employment data. The Dow Jones industrial average hit a record high and closed 66.71 points at 22,092.81. Goldman Sachs contributed the most gains. The index also posted its eighth straight record close.

 

Banks, including Goldman Sachs, outperformed the market, with the SPDR S&P Bank exchange-traded fund (KBE) advancing 0.81 percent. The space received a boost from a jump in interest rates, which followed strong U.S. employment data. The U.S. economy added 209,000 jobs last month, according to the Labor Department, well above the expected gain of 183,000.

 

On the Canadian side, Canada’s labor market continued its stellar performance in July, with the jobless rate falling to the lowest since before the financial crisis. The unemployment rate fell to 6.3 percent, the lowest since October 2008, as the labor market added another 10,900 jobs during the month, Statistics Canada reported from Ottawa. The total increase over the past year of 387,600 is the biggest 12-month gain since 2007. These jobs figures will likely bolster confidence that the country is quickly running out of economic slack and higher Bank of Canada interest rates may be needed to cool off growth...

 


Our Take
 

The US report was very strong. Timing couldn’t be better as we are moving into the tail end of Q2 earnings as well as into August and September which are typically weak months for the market. This was a beat and raise guidance jobs number and the second month in a row the U.S. has come in above 200,000 and above expectations.

 

Furthermore, although lower wage Americans are still reeling from the great recession, they are finally getting some relief in the jobs market. Underneath a 209,000 gain in July payrolls, significant shares of job growth were in lower-wage industries such as restaurants and home health-care services. As the overall labor-force participation rate ticked up 0.1 percentage point, the level for people age 25 or older without a high school degree surged to the highest since 2011. In leisure and hospitality, which typically carries lower pay, annual wage gains of 3.8 percent outpaced the average. (For a breakdown of who is hiring see here)

 

Other indicators suggest that even with the tightening job market, some slack still remains. That leaves room for additional gains that would back up President Donald Trump’s drive to bring people back into the workforce as well as support the Federal Reserve’s go-slow approach to tightening credit. This is good news and suggests that perhaps we haven’t yet reached the peak of this economic cycle.

 

U.S. equity indexes have been on a roll lately with the Dow notching eight straight record closes.

 

Nevertheless, all is not rosy. Amid the talk of new highs and record levels, one section of the equity market is having trouble keeping up. Small-cap stocks, on track for their second weekly decline with a loss of 1.7 percent, are falling further behind benchmark equity gauges.

 

In addition, underneath what was another up week for the S&P 500 Index, things were a little more complicated. An equal weight version of the S&P 500 that strips out market value biases just posted its biggest weekly drop since May, and its worst week versus the regular S&P 500 all year. The reason: while enough megacap stocks rose to keep the S&P 500 afloat, single-stock blowups were far more common than single-stock rallies.

 

Perhaps we haven’t quite reached euphoria just yet…
 



Musings
 

During these summer months I’ve gotten the opportunity to reconnect with old friends and learn a few new things whilst doing so. Of great interest have been several conversations with those in the corporate sector.

 

Among many other enlightening insights, I was startled to hear of a new phenomenon in current deal making circles: deal quality has been decreasing. Deals are getting done that just 1-3 years ago would have been laughed at for their overvaluation, shoddiness, and/or high risk. Interesting data tending to support that risk-taking may be on the rise...

 

If not by coincidence one of our favorite investors Howard Marks put out a cautionary memo last week entitled “There they go again...Again” suggesting that “they” are “engaging in willing risk-taking, funding risky deals and creating risky market conditions.

 

Marks suggests 4 attributes of today’s investment environment: 1) uncertainties are unusual in number and scale 2) prospective returns for the vast majority of asset classes are about the lowest they have ever been 3) asset prices are high across the board 4) pro-risk behaviour is commonplace

 

These attributes support his overall suggestion that in this environment one should move forward with caution. As always, the memo is worth a close read.

 

Marks supports his 4 overarching attributes of the current market environment with several fascinating vignettes each showcasing “willy nilly risk taking” in a variety of asset classes.

 

  1. U.S. equities: Many metrics such as average p/e, Shiller p/e and the “Buffett yardstick” and record low interest rates suggest stock prices are at lofty levels.

  2. The VIX: The VIX is at record lows and this suggests that investor sentiment is largely positive.

  3. Super-stocks: Bull-markets are marked by a single group of stocks that are “the greatest” and the FAANGs are having their moment. When the mood is positive multiples rise as one “can’t lose” in these names.

  4. Passive investing/ETFs: These approaches are on the rise and in the current up-cycle, over-weighted, liquid, large-cap stocks have benefitted from forced buying on the part of passive vehicles, which don’t have the option to refrain from buying a stock just because its overpriced. Investors are thus turning capital over to a process in which neither individual holdings nor portfolio construction is the subject of thoughtful analysis and decision-making, and in which buying takes place regardless of price…

  5. Credit: Low grade credit instruments are proliferating. Junk bond offerings are over subscribed and offer weak investor protections.

  6. Emerging market debt: For only the third time in history, emerging market debt is selling at yields below those on U.S. high yield bonds.  

  7. Private equity: PE firms will probably add more than a trillion dollars to their buying power this year.  Where will it be invested at a time when few assets can be bought at bargain prices? Too much money is chasing too few good deals. Standards are relaxing.

  8. Venture capital: SoftBank’s recent raising of $93 billion for its Vision Fund for technology investments – presumably on the way to $100 billion. Can one wisely invest $100 billion in technology?

  9. Digital currencies: digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it.  The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000).


This is a fascinating selection of examples yet perhaps the most interesting thing in the memo was his acknowledgement that many market participants are aware of these issues and agree that things can’t go well forever – that the cycle is extended, prices are elevated and uncertainty is high.

 

These cautious beliefs are what makes calling a top in this market so hard. Just this week CNBC ran a poll which asked readers “Is the stock market about to suffer an epic crash?”

 

11,736 readers voted and 44% of them said yes, 33% said no and 26% said not sure.

 

Think about that.

 

The poll didn't ask, "Is the stock market overvalued?" or "Will the stock market decline for the rest of the year?" (or in the next year, or anything like that). It asked about "an epic crash," and not just any time, but specifically about whether the market is about to crash. "About to" means that it's going to happen very soon.

 

It is rather incredible that such a large proportion of people say they expect such an extreme and rare event to happen within such a narrow time frame.

 

Not to mention, as Josh Brown reminded us in response to the Marks memo, that we’ve got an entirely lost generation of investors, the millennials, who prefer to hold cash and even bonds than own stocks.

 

Could the behaviour of the crowd (as Brown defines it) be telling a different story than the anecdotes in the Marks memo? A story of caution and bearishness?

 

Without a doubt, as Josh Brown points out, it is as good a time as any to be cautious as caution should be the default orientation for any serious investor.

 

But I believe this debate highlights something else of great importance that has plagued the pundit, the asset manager and the individual investor throughout this epic bull run: the consensus or “crowd” has been incredibly hard to pin down. Each of these groups seems unable to agree upon what the “consensus view” is.

 

Timeless investment wisdom suggests that avoiding the crowd is a good bet for beating the stock market but this is difficult for most as there is ample evidence to support one’s own definition of “the crowd”.

 

The crypto currency trader believes his asset class is misunderstood and unloved. He sees himself as ahead of the curve and thus ahead of the crowd while the value investor looks upon him with disdain. “Just another herd follower chasing returns with the crowd…”

 

As such, rather than expending excessive energy on the identification of “the crowd” it may be best to humbly return to first principles: What do I understand and what is my sphere of investment competence? What do I reasonably believe is valuable and can be acquired for less than it should be? Am I being skeptical enough? Do I accept that there is no free lunch?


Logos LP in the Media

 

Commentary from Logos LP on investment opportunities in the defense sector in Forbes Magazine.
 


Thought of the Week

 

"Anyone can hold the helm when the sea is calm.” -Publilius Syrus



Articles and Ideas of Interest

 

  • How bond markets can predict moves in stocks. Interesting research suggesting that high-yield bonds moving with the ebbs and flows of U.S. earnings announcements tend to predict stock returns for a slew of issuers -- particularly firms with a modest level of institutional equity ownership. So perhaps stock investors seeking an informational edge should keep their eyes on junk-bond prices on the heels of earnings reports.

 

  • Commodities are a losing bet. Over the past 10 years, the Bloomberg Commodities Index is down 6.5 percent per year for a total loss of almost 50 percent. Over that same time frame, the S&P 500 is up a total of close to 100 percent, or a 7 percent annual return. This difference in performance has led to a huge divergence in the ratio of commodities to stocks, which has compelled some investors to ask whether there is a buying opportunity in commodities. There is also no financial reason that dictates that commodities must exhibit mean reversion. They provide no dividends or income. They don’t have earnings. Commodities are more of an input than a financial asset. In many ways, a bet for commodities is a bet against technology and innovation. Commodities have shown lower returns than cash equivalents with higher volatility than stocks. This is a poor risk-return relationship.

 

  • There is no U.S. wage growth mystery. Economists are puzzled over U.S. wage growth, wondering why it has been so slow despite a labor market that is allegedly back to or close to full employment. Nice piece in Moody’s suggesting that if you look at the right wage growth and the right measure of employment slack there is no mystery: Wage gains are right where they should be. And it indicates the labor market has room to improve.

 

  • Is productivity growth becoming irrelevant? As we get richer, measured productivity may inevitably slow, and measured GDP per capita may tell us ever less about trends in human welfare. Measured GDP and gains in human welfare eventually may become entirely divorced. Imagine in 2100 a world in which solar-powered robots, manufactured by robots and controlled by artificial intelligence systems, deliver most of the goods and services that support human welfare. All that activity would account for a trivial proportion of measured GDP, simply because it would be so cheap. Conversely, almost all measured GDP would reflect zero-sum and/or impossible-to-automate activities – housing rents, sports prizes, artistic performance fees, brand royalties, and administrative, legal, and political system costs. Measured productivity growth would be close to nil, but also irrelevant to improvement in human welfare.

 

  • Why aren’t Americans moving anymore? In the 1990s, 3% of Americans moved out of state each year. Now the rate is half that, with US mobility hitting the lowest level since World War II. “The lack of mobility in the American workforce is a huge blocker of our economic growth,” says Ryan Sager, editorial director for Ladders. It's "definitely hurting Main Street,” writes business analyst Thanh Pham, who says there’s a mismatch between cities with abundant jobs and areas with potential workers. There are myriad reasons for the slowdown in mobility, from lack of job stability to the prohibitive expense of actually moving. Aeon suggests we are living in the quitting economy where employees are treated as short-term goods and thus market themselves as goods, always ready to quit.

 

  • A highly successful attempt at genetic editing of human embryos has opened the door to eradicating inherited diseases. This is huge and ushers in a new era. Shoukhrat Mitalipov has performed the first highly successful use of the gene-editing technique called Crispr to improve human health: his team was able correct a genetic mutation that causes a life-threatening cardiac disease. None of the embryos were allowed to come to term. But if Mitalipov has his way, future projects could eradicate a disease that affects millions—one in 500 people carry the mutation—and even kills unsuspecting, seemingly fit adults.          

 

  • Best summer reads 2017. Great list out of The Guardian. My favorite I revisit each summer: Herman Hess - Sidhartha.

 

Our best wishes for a fulfilling week, 
 

Logos LP

Is It A Bubble Or Not? Happy Thanksgiving!

Good Morning,

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

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

 

Thought of the Week

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

 

Stories and Ideas of Interest

 

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

 

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

 

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

 

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

 

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

 

All the best for a productive week,

Logos LP