elections

US Election Investment Opportunity

Good Morning,

U.S. equities closed mostly lower on Friday after the Federal Bureau of Investigation announced it is investigating new emails related to Democratic nominee Hillary Clinton.
 
Bit of a wild ride today as the Dow Jones industrial average ended about 10 points lower after trading 74.71 points lower following the announcement. The index was trading about 75 points higher before the new probe was announced.
 
The U.S. economy grew at an annualized rate of 2.9 percent in the third quarter, the Commerce Department said. The 2.9 percent clip marked the fastest economic growth in two years.
 
Despite the moderation in consumer spending, the third-quarter rise in growth could help dispel any lingering fears the economy was at risk of stalling. Over the first half of the year, growth had averaged just 1.1 percent.

Our Take

This latest probe into Hilary Clinton’s dealings could have an impact on undecided voters, but for the most part it is likely that people have already made up their minds about which candidate is most fit for the Oval Office. Yet we must say that what is peculiar is that although the FBI has not yet re-opened the investigation, it is now conceivable that a sitting US President could be the subject of an open FBI criminal investigation…
 
Also of interest is the fact that an AI robot that has a perfect record of predicting electoral races is now predicting a Trump victory. As Brexit showed us, nnything can happen….
 
As for the US economy, the third quarter 2.9 percent print is encouraging. Growth does not appear to have stalled and this is consistent with the S&P 500 now reporting earnings growth for Q3 2016. The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for the S&P 500 is 1.6%, which is above the year-over-year blended decline of -0.5% at the end of last week and the year-over-year estimated decline of -2.2% at the end of the third quarter (September 30). If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).
 
What is particularly interesting is that at the sector level, all 11 sectors have contributed to this increase in earnings. However, the Financials sector has been the largest contributor of all 11 sectors to the rise in earnings growth for the index since the end of the third quarter.

Musings
 
All in all, I must say that we are getting tired of talking about this election. The whole thing has turned into a sort of endless cascade of tabloid style trash. Yet the nightmare is that as prime time news, it is unavoidable even to he most careful consumer of information.
 
As such these two “leaders” have reminded me of the important distinction David Brooks makes between resume virtues and eulogy virtues. Resume virtues are those skills you bring to the job market and that contribute to external success. Eulogy virtues are deeper. They are the virtues that get talked about at your funeral, the ones that exist at the core of your being- whether you are kind, trustworthy, honest, faithful, loyal; what kind of relationships you formed.
 
Now most of us faced with this distinction would claim that eulogy virtues were more important but this election has made me question that. I believe that the tragic-comedy surrounding BOTH candidates is a symptom of a society that has lost sight of the value of eulogy virtues.  
 
Most of us spend our time focusing on what it takes to achieve career success and this often occurs at the expense of eulogy virtues. Have we lost track of how to develop a profound character? Have we as a society lost focus on the value of serving the world in favor of conquering the world? Chosen ambition and status over respect, self-discipline and humility?
 
Perhaps this election presents us with a unique investment opportunity. The opportunity invest in ourselves by examining who we are and to decide whether we need to work harder to re-balance and reconcile our resume virtues with our eulogy virtues. After all, we can choose which virtues we wish to espouse whereas we sadly cannot chose when we face our eulogy…
 
Thought of the Week


  "The line separating good an evil passes not through states, nor between classes, nor between political parties either- but right through every human heart.” –Aleksandr Solzhenitsyn
 

Stories and Ideas of Interest

 

  • Pirates look set to conquer Iceland. The Pirate Party, founded less than four years ago by a group of activists, anarchists, and hackers, could upend Icelandic politics with an Oct. 29 general election victory. It is led by Birgitta Jonsdottir, a former WikiLeaks contributor who describes herself as a “poetician.” This is an example of a trend we see intensifying. People are fed up and want change…

 

  • Google is firing on all cylinders. We liked them going into earnings and we like them coming out. The company’s monopoly on search is growing while mobile and YouTube continue to represent growth drivers. In addition, they remain focused on building their mobile ecosystem launching AI/machine based assistants to provide users with useful information. If you really want to take a deep dive (which you should if you want to learn where next generation tech is going) check out this fascinating report on Google from CB Insights. They dissect the company’s strategy not by listening to what their senior execs say but by looking at where they are allocating resources. What we see is a company betting the house on AI and Cloud Services. I like that bet and at current multiples this large cap tech behemoth remains attractive.

 

  • Understanding tech investment: A how-to guide. The five largest companies by market cap in the world are all technology companies. They have a combined market cap of ~$2 Trillion and combined revenues of $530 Billion over the last 12 months. The fact is, technology is no longer just a sector, almost every business is now a technology company to some extent. Investors can no longer ignore these companies altogether. The dilemma is understanding how to approach investing in technology stocks. With this in mind, Livewire reached out to contributors who are experts in technology to get their preferred metrics for analyzing technology stocks, and their recommended reading.

 

  • You are never to old to avoid making financial errors. Great article in the NYT with a primer on how to get smart with your money.  Also a must read in the WSJ outlining the mistakes we make decade by decade.
     
    20s: playing it too safe (46% of millennials say investing is too risky with 70% of their investments in cash)
    30s: overwhelmed by complexity (too many decisions leads to decision paralysis)
    40s: misjudging big expenses (spending too much on a house and children)
    50s: the difficulty of catching up (realize you don’t have enough for retirement)
    60s and beyond: not delegating (our analytical capabilities can’t keep up)

 

  • The consequences of risk taking. A Wealth of Common Sense looks at risk as something that only matters when there are consequences attached to your actions. To understand true risk, investors need to ask themselves: “What are the consequences if I am right or wrong?” Many so-called investors believe that they can jump in and out of markets and try and get their timing just right. Ben Carlson deconstructs the historical performance of the S&P 500 to get a sense of why a wrong move can really cost you. Sit tight.

 

  • The next 10 years of returns look ugly. It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates. In fact, over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.” What is more likely is a return of about 2.3%. Could stock picking make a comeback…?
     

All the best for a productive week,

Logos LP

How Will The Market React To A Trump Or Clinton Presidency?

Good Morning,

U.S. equities closed higher on Friday as Deutsche Bank shares rebounded amid a report that the German banking giant was near a settlement with the Justice Department.
 
Deutsche's U.S.-listed shares hit an all-time low on Thursday after Bloomberg reported that approximately 10 hedge funds were reducing their exposure to the bank. The bank's German-listed shares hit an all-time low overnight. The selloff was caused by worries surrounding the bank’s possible collapse posing a systemic risk to the global financial system. Could a 2016 Lehman Brothers be back on the cards…..? For more details on these worries see Bloomberg.  
 
The Dow Jones industrial average jumped 226.17 points at session highs before closing about 165 points higher, with Goldman Sachs contributing the most gains. The S&P 500 gained 0.8 percent, with financials rising more than 1 percent to lead advancers. The SPDR S&P Bank ETF (KBE) rose nearly 1.5 percent.
 
With the 3rd quarter officially coming to a close today, where do we stand with the S&P up about 6% YTD? What can we expect in the 4th quarter?
 
Our Take: As I’ve pointed out previously, analysts are still quite gloomy. Based on the average estimate of forecasters surveyed by Bloomberg, they expect the Standard & Poor's 500 Index to finish the year 1 percent lower than yesterday’s close.
 
Barry Ritholtz points out that this is noteworthy because it's so out of character. Most of the time -- 82 percent during the past decade, to be precise -- analysts are bullish. To be fair, this outlook has usually been rewarded; markets rise about three-quarters of the time.
 
The unusually bearish demeanor from the normally cheerful analysts on the street of optimism might be the most useful piece of news about equity markets moving forward.
 
What has them spooked?
 
-Rising interest rates
-A flat market
-High valuations
-Declining corporate profits
-Aging business cycle
-Presidential elections
 
I won’t address all of these in great detail but instead will make a few observations. The first is regarding the US Presidential election. I’ve had a few of you contact me asking how the stock market will react to either a Trump or Clinton Presidency. My answer is that although the market abhors uncertainty, once elected neither candidate will cause a significant impact on the stock market.
 
The President alone simply is not powerful enough to change the course of business. Any major change either candidate may make will need the support of Congress. Unless you think both houses of Congress are going to go Democratic (unlikely given Republican advantage in the house) not much radical change will occur.
 
Remember that big business hated the early Obama administration and look at the returns on the S&P since he took office. Stay relaxed and maintain calm.
 
As for the other concerns, interest rates (even if they rise) will rise very little and will stay lower for longer, as I’ve written a flat market is nothing to be afraid of. As for declining earnings, people have been crying wolf on this for years, as for valuations, they have been at the high end of the spectrum for the last few years given historically low interest rates. As for forecasters they are typically useless and finally it would be naïve to believe that the market hasn’t already priced in all these old saws…
 
So looking forward to Q4, keep your emotions in check and consider the facts….Since 1970, the fourth quarter usually has been the best for equity markets. Bloomberg News noted that since 2009, the fourth quarter has seen gains in the S&P 500 that average 6.7 percent. That's more than “twice the average gains of the next-best quarter…” One other interesting fact: hedge funds and mutual funds are sufferingPeople’s actions can be understood based on incentives and keeping one’s employment in a high-paid job is the mother or all incentives, after, let’s say, life and sex….So friends as Josh Brown puts it, the career risk trade is on.

 

Thought of the Week


  "Most men would rather die than think. Many Do." -Bertrand Russell

 

Stories and Ideas of Interest

 

  • Scientists and the accuracy of their research are in doubt. The Economist takes a deep dive into the sad state of science. The idea that the same experiments always get the same results, no matter who performs them, is one of the cornerstones of science’s claim to objective truth. If a systematic campaign of replication does not lead to the same results, then either the original research is flawed (as the replicators claim) or the replications are (as many of the original researchers on priming contend). Either way, something is awry…

 

  • A bond bubble? Jim Cielinski looks at persistent buying despite valuations. He identifies four elements and produces this interesting graphic.

 

  • The next Big Short? High yield bonds have done well this year. But someone  -- or more than just one -- out there is really bearish on this debt. Take a look at the short interest in BlackRock's $16.4 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest junk-debt exchange-traded fund. It's never been higher.

 

  • Goldman Sachs: OPEC oil deal doesn't change our price outlook. The OPEC deal to cut oil production may provide a short-term support for prices, but chances are it won't change the supply outlook much, Goldman Sachs said. FactSet does a nice piece on oil prices and energy earnings showing that both are expected to rise into 2017.

 

  • Millennials can’t afford startups. Young Americans aged 18 to 34 (also known as millennials) seem to love the idea of being entrepreneurs. Since many are burdened with massive student debt, they can’t afford to launch startups. So a new survey shows they’ll grudgingly join America’s corporate workforce…

 

 

  • These shoes offer buyers an immediate 500% profit. An opportunity to turn a profit of as much as 500 percent awaited Yeezy buyers on the global sneaker resale market, said Josh Luber, CEO of StockX. What Kanye West touches in fashion still turns to gold. Alternative assets anyone?

 

  • Blaming foreign buyers for inflated Toronto real estate prices may be mislead.  Interesting research presented in the Globe and Mail suggesting that the persistent price increases are a supply side issue. Meanwhile….Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble.

 

  • Getting older is the cruelest blow to global growth. Older workforces mean slower GDP growth and interest rates around the world. Canada is the case and point.


All the best for a productive week,

Logos LP