What Is History Telling Us About This Market?

Good Morning,

Stocks concluded a third straight week of gains Friday, climbing to new record highs a day after President Donald Trump promised to release a “phenomenal” tax plan in the near future. The man went so far as to say in a meeting with airline executives Thursday that “lowering overall tax burden on American business is big league” pleasing investors with his renewed focus on the business environment.

Economic data also continued to paint a mostly positive picture of the U.S. economy, after Thursday’s unexpectedly low number of Americans filing for jobless claims and as corporations added to one of the best sets of earnings since the financial crisis.

In addition, enthusiasm for the equity market is surging in 2017, according to a BNP Paribas SA measure of investor sentiment called the Love-Panic indicator. The index, which takes into account options positioning, equity fund flows and sentiment surveys, reached the highest since April 2014 on Monday, the last reading….

On the local front Canada’s economy added 48,000 jobs in January while economists were expecting job losses. Growth has exceeded expectations for 2 straight months reinforcing the message that the job market may have turned the corner. The problem is that pay gains were slowest since 2003. Furthermore, this week Fitch Ratings warned that potential U.S. protectionism puts countries like Canada at the highest risk of damage to their credit fundamentals.

Our Take

As we said last week this is a policy driven market. Investors were fretting that Trump had put tax reform on the backburner and now it appears to again be a priority. This is welcome news for markets. Last week Trump got bogged down with a series of bizarre tweets and other immigration noise and this week he appears to be back on track. Expect further volatility as he vacillates between sensible economic priorities and the sensationalist triviality.

As for sentiment appearing to reach levels not seen since 2014, it is important to take the temperature of the market. Was the market telling us to walk away in 2014? Were we at a top in 2014? Despite the myriad of pitfalls which could beset the market, perhaps we are just getting going. Things are always uncertain and uncomfortable when you are living in it and so obvious and sure when you are looking back. Lloyd Blankfein this week stated that:

“The change in the market today is from a cycle where we were of very low economic activity, consequently very low interest rates, and a very, very high level of—maybe call it pessimism about where we go. And it feels like we’re changing to one in which it’s going to get growthier. More growth out there, more opportunity and one in which we are getting a bit more optimistic.”

Nevertheless, other big names like George Soros, Seth Klarman and Stan Druckenmiller remain more bearish as they believe investors seem to have been lulled into a false sense of security.

Update on our Best Ideas for 2017

Peter Mantas
Huntington Ingalls Industries (NYSE: HII): +8.77% YTD
Cemex SAB de CV (NYSE: CX): +12.58% YTD
S&P 500: 3.45% YTD
Matthew Castel
Aaron Inc. (NASDAQ: AAON): +3.93% YTD
Syntel (NASDAQ: SYNT): +12.35% YTD
S&P 500: 3.45% YTD


I read an interesting book this week: Amusing Ourselves to Death: Public Discourse in the Age of Show Business by Neil Postman. This book written in the 80s, covered the media’s effect on us suggesting that there were two key dystopian novels written by British cultural critics: Brave New World by Aldous Huxley and Nineteen Eighty Four by George Orwell – and that Americans mistakenly feared the latter. In the Orwellian future the state overtly censors what we see, hear and experience. Individuality is emaciated while movement and freedom are overtly restricted. In the Huxley version citizens are sedated by technology, conspicuous consumption and self-righteous instant gratification.

Postman believed that it was Huxley’s vision we should be worried about. He wrote:

“What Orwell feared were those who would ban books. What Huxley feared was that there would be no reason to ban a book, for there would be no one who wanted to read one. Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egoism. Orwell feared that the truth would be concealed from us. Huxley feared the truth would be drowned in a sea of irrelevance. Orwell feared we would become a captive culture. Huxley feared we would become a trivial culture.”
Our information environment has become our entertainment environment. Facts have become blurred with opinion and public debate has degenerated into superfluous sound bites. The average person now spends roughly 74 hours in front of a screen in a given week and checks their phone over 150 times a day.

The concerning part is that unlike the Orwellian world in which control is overt, it is more difficult to resist in a world in which we are lead to believe we occupy the center of….

Thought of the Week


"That men do not learn very much from the lessons of history is the most important of all lessons that history has to teach.” –Aldous Huxley

Stories and Ideas of Interest


  • Snapchat destroys value and thus its IPO is pre-mature. We keep getting questions about the impending Snap IPO and based on our reading of the S-1 IPO filing it is too early for such a move. Tim Connors puts together a compelling account as to why Snap has not proven that they have a great business (not a single dollar of gross margin). Going public now as a business that loses more money the more users they get isn’t fair to the founders, those who would buy the IPO (not the 1% but the retirement savings of American workers) and those founders who have created value-generating ventures. Perhaps Snap should take notice of Twitter’s dismal earnings report this week (Twitter has been losing around $100 million a quarter for the past three years, and its user growth has been essentially flat) in order to see what may be in store if glaring business-model questions are not addressed. Quartz digs in and asks whether Snap will be the next Facebook, a humble startup turned massive, revenue-generating cash cow? Or will it be the next Twitter, a company that can’t seem to grow or make money? Not a company we would invest in but important to watch as a barometer for the "growth at all costs" model.


  • Seth Klarman speaks in a private letter to his investors. This famed value investor who has lost money in only 3 of the last 34 years weighed in on Trump suggesting that investors have become hypnotized by all the talk of pro-growth policies, without considering the full ramifications. He worries, for example, that Mr. Trump’s stimulus efforts “could prove quite inflationary, which would likely shock investors.” He also finds that “The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.” He also had an interesting perspective on the many hedge funds that have underperformed over the last 5 years: “With any asset class, when substantial new money flows in, the returns go down.” He also sounded the alarm on ETFs suggesting that “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.” “This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”


  • The United States is coming to resemble two countries, one rural and one urban. What happens when they go to war? Although I’m not a fan of dividing groups of people, I found this description of America in The Atlantic to be quite interesting. Perhaps dividing people between red states and blue states is no longer that helpful when one is attempting to understand the fault lines of American politics. Perhaps instead the gulf between urban and nonurban voters is wider than it ever has been. David Graham writes: “An important lesson of last year’s presidential election is that American political norms are much weaker than they had appeared, allowing a scandal-plagued, unpopular candidate to triumph—in part because voters outside of cities objected to the pace of cultural change. Another lesson is that the United States is coming to resemble two separate countries, one rural and one urban. Only one of them, at present, appears entitled to self-determination.”


  • The term “fake news” is officially meaningless. Once upon a time the term was used to refer to completely fabricated stories about politicians. Today the term has been hijacked to mean any news someone doesn’t like.


  • Donald Trump might be more popular than you think. Once again there is evidence suggesting
    that traditional polls are not accurately measuring support for the president and his policies. Support appears to increase when the poll is conducted using more anonymous methodologies…Could there be a difference between what one believes and what one will say publicly. Could their be a “social desirability bias”?


  • Could coding be the next blue-collar job? Provocative piece in Wired suggesting that for decades, pop culture has overpromoted the “lone genius” coder. “We’ve cooed over the billionaire programmers of The Social Network and the Anonymized, emo, leather-clad hackers of Mr. Robot. But the real heroes are people who go to work every day and turn out good stuff—whether it’s cars, coal, or code.”


  • Sex doesn’t sell any more, activism does. And don’t the big brands know it. From Starbucks supporting refugees to Kenco taking on gangs, big businesses are falling over themselves to do good – and to let us know about it. Great piece in the Guardian outlining how political business has become. There is no room for humility when a brand does a good deed and sadly brands are allowing people to pat themselves on the back without them personally having to sacrifice anything.


All the best for a productive week,

Logos LP

Is There Really Such A Thing As The "Good Old days"?

Good Morning,

U.S. stocks closed lower on Friday, with utilities dropping more than 1 percent, as investors digested hawkish rhetoric from Federal Reserve officials and kept an eye on oil prices.
Investors continue to watch for hints regarding when the Fed will raise interest rates but more fundamentally there is a lot of cash on the sidelines and no strong conviction that stocks are cheap. Does this really signal a top or rather a directionless market?
Market expectations for a rate hike in September were just 18 percent Friday and 43 percent for December, according to the CME Group's FedWatch tool. Bear in mind that the markets and the Fed have consistently overestimated the timetable for rate hikes…
More interestingly, this week I read a fascinating article by Alan Jay Levinovitz and I’ve been reflecting on whether there really is such a thing as “the good old days”. Is there really some period of time or cultural state that we can each point to and look back upon with joy, comfort and longing? Or does nostalgia have a dark side?  
“Make America great again!” yells Donald Trump to a raucous crowd that hangs on his every word. Is there anything new here? Playing on people’s fantasies and their need to believe is as old as the rising sun. Prophets both secular and religious alike have been doing it for centuries. But it's important to make a crucial distinction between harmless nostalgia aka. remembering that sunny day on the beach in Jamaica vs. the belief in a past societal perfection.
The former represents harmless sentimentality, the latter form of nostalgia represents the ideological foundation for political movements such as Greece’s Golden Dawn, which calls for a return to Hellenic glory via radical right wing nationalism, and ISIS, which waxes rhapsodic about a distorted Islamic golden age. “The good old days” isn’t a joke. The fairy tale isn’t something to be taken lightly.
As Levinovitz explains it “is a virulent falsehood that infects those whose intellectual defences have been weakened by fear and insecurity. It is easily weaponised by power-hungry propagandists who seek to replace nuanced discourse with patriotic platitudes, and diverse ideologies with homogenous tribal nationalism: Mao, Pol Pot, Hitler, the Ku Klux Klan. In its endless incarnations this myth has shackled people’s thoughts and actions to the promise of a fiction, facilitating evil on all scales, from everyday racism to the greatest human rights catastrophes of the 20th century.”
There is no doubt that there are lessons to be gleaned from the past. Perhaps certain lessons in simplicity or commitment, yet looking back must be done responsibly.  People have an overwhelming need to believe in something. Life is distressing and thus those who can manufacture romance or conjure up pleasant fantasy are like oases in the desert: people flock to them. This isn’t to say that the present is perfect but it is to say that letting go of a romanticized and often fabricated version of the past is necessary if we want a chance at building a better future.


Thought of the Week

"Things ain’t what they used to be and probably never was.” – Will Rogers


Stories and Ideas of Interest

  • Howard Marks of Oaktree Capital has released a new memo on political reality. He does not disappoint diving deeply into the oxymoron of “political reality”. The world of politics has its own altered reality, in which economic reality often seems not to impinge. No choices need to be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real word, politicians seem to feel free to ignore them. If a pesky journalist asks about consequences of a policy statement the politician can simply ignore them.


  • Could the best stock market indicator be the Financial Media’s competition for clicks? Price action blog suggests that the frequency of articles in the financial media and blogosphere with calls for a stock market collapse is often a good indicator of a bullish market. No wonder Marc Faber who again recently announced that the stock market would soon crash 50% has basically never been right. Sex sells!


  • Morgan Housel offers some a few big ideas. 2 of my favorite:
    Recessions and bear markets are very easy to predict, except for the timing, cause, magnitude, duration, location, and policy response. 
    Bubbles occur because confidence rises as fast as asset prices. People don't just get excited about making money; they feel brilliant, and intellectually justified to play harder in the next round. (Sound like the average Toronto real estate enthusiast?)


  • Leonid Bershidsky for Bloomberg explores how the most successful technology companies are platforms. What makes a platform successful? Could the technology industry be more socially focused than technology focused?


  • Some of the smartest minds in finance tell Business Insider how Wall Street is going to change – This is what they said. Spoiler: Blockchain and Automation.



  • A new report from credit agency Equifax shows debt delinquencies continue to soar in Canada's oil-producing regions, but it also shows a troubling new trend: Canada's youngest debtors are increasingly having a hard time managing their debt.


All the best for a productive week,

Logos LP