Takeaways from the Intellectus Partners Investment Committee for the week ending Nov 2,2018: At this meeting our mission was to attempt to take a hard look at whether or not we are entering the “End of Cycle” period for the economy and thus the Bull Market that begin in 2013. The Intellectus very bullish call in the Fall of 2016 positioned us well for the run that followed. To see a meaningful correction post a move like that is not surprising. Our Investments & Allocations have had excellent success since our launch three years ago we and want to make sure that we continue to be prudent in protecting all of the profits we have created. Our opinion is that, while there are certainly stresses
With the recent volatility we wanted to share some of our thoughts on what is happening , and how we think about these types of interruptions of the Bull Market. Markets are hard to predict, so we do not really spend too much time on predicting them. What we do is look for powerful trends, innovation, great management teams and undervalued companies. Each and every analyst, portfolio manager or trader that interacts with our capital has the same high bar to achieve. Make sure that the capital invested is allocated in the most optimal long term risk adjusted method as possible. The investments that we own carry a strong combination of accelerating revenue and profit growth along with generally undemanding valuations. The large majority of single names
Profit margins in Japan are quietly surging. This is a phenomenon that we certainly have been seeing in the US for years, and incrementally in Europe. But, the rate of change in Japan is in fact, far better than the other two. Better yet, as the Wall Street Journal points out, with Net Margins at just about 6%, they have room for further improvement as they still lag these other developed markets. Since Abenomics has begun, the productivity of working age population 25-54 year old has risen sharply, from 80% to more than 85%. But the biggest evidence is in the change in real GDP per working age adult. After years of lagging the US, it is now accelerating faster than the US in recent years.
President Trump is set on the economy to grow beyond 5 percent real GDP. But high growth has a natural ‘side effect’ and that is a strong dollar. Reducing the trade deficit to spur growth increases domestic investment and appreciates the dollar. Trade tariffs hurt other economies and weaken their currencies. That too raises the value of the dollar. Resolving lower tariffs and trade barriers by invest and build in the U.S. will drive up demand for the dollar. Thus, a policy of targeting a lower trade balance has a paradoxical effect on the dollar and the economy. One reason is corporate earnings and cash held overseas. The Bureau of Economic Analysis estimates $300 billion in overseas corporate earnings returned to the U.S. in
The plunge in the Turkish Lira attributed to a tweet and a defiant speech. But underneath there was a “sudden stop” in the Turkish currency. In 1997 this happened in Indonesia that went from a darling in the eyes of foreign lenders to a nightmare. The rupiah crashed and Indonesia’s debt to GDP soared to 170 percent. Capital flows to Indonesia ‘stopped’ leaving financial markets in disarray. What followed next was contagion spreading across the South East Asia region. A key reason for contagion is debt denominated in foreign currency. When confidence of foreign lenders shaken, capital flight leads to a currency plunge. Loans in local currency fall in value and impact balance sheets of foreign lenders. As a result, foreign direct investment collapses. In
Investors throughout history have been utilizing technology to try to get an informational edge in markets. This was true in the famous story of Nathan Rothschilds use of carrier pigeons to get information about the outcome of the Battle of Waterloo ahead of other traders. It was also true in the more recent latency race among high frequency traders who moved from laying fiber between Chicago and New York to funding microwave towers for microsecond decreases in latency. Until recently, the ability to use technology to gain an informational edge in the fundamental analysis of single stocks has been relatively minimal. Even as quantitative investment strategies grew their assets by hundreds of billions of dollars, fundamentally focused funds tended to use the human aggregation of data
If there is a word to recap past months in markets, then it is “chaos.” Recent tensions in Italy were a reminder Europe could break up at some point in the future. Investors responded by seeking “safe havens” like U.S. Treasuries and the Japanese Yen. When uncertainty reached a climax in June, Italian interest rates spiked above those of the U.S. (see Figure 1). A situation like this can lead to a political resolve. Markets were for example discounting the Federal Reserve to hold off on interest rate increases if the crisis in Italy were to get out of control. On the other hand, after much last-minute wrangling, Italy managed to get a government together. That eased concerns only brief when the U.S.
There is a lot of attention for the yield curve lately. Several Fed officials like James Bullard and Neel Khaskari have warned the yield curve could “invert.” That would be a bad signal because historically when the yield curve inverts, a recession could follow a few years later. During the testimony to Congress, Fed Chairman Powell said flattening of the yield curve was a sign of long term rates figuring out when the Fed would stop tightening. Now President Trump has weighed in on that point specifically by expressing concerns rising rates push up the value of the dollar too far. That could threaten U.S. export competitiveness and undo the work of the tax cuts. Thus, the yield curve is the center of attention for
As we have been calling for since the end of last year, there is indeed regime change in the markets. Our point was that the framework of the interest rate deck has changed. The next several years will be different because of this. What it means obviously is yet to be determined. But what really strikes me when I look at this chart below is this: The beginning of this enviornment was when we were reeling from the crisis. Frankly, at the time most of the market participants thought we were still deeply IN it. That is when Mohammed El Erian coined the term "New Normal". It was my opinion that term was really a pejorative for "cant really grow anymore". Well, what this seems to
Market focus has been notably on Trump’s tweets on the subject of geopolitical tensions. Investors do have some experience how Trump’s handles such a situation. Think of North Korea that looked quite threatening but has resulted in a future Summit with Kim Jong-Un. The same may happen with Russia where Trump plans to meet with Putin but uses his “punch in the face” strategy to get meaningful dialogue. The "unknown-unknown" of missile attacks causes the oil price to go up but other traditional safe havens like the Japanese Yen, Swiss Franc or Gold have seen limited impact. Markets could be more driven by other factors. For example, how China will pursue trade policy through its exchange rate, the Chinese Yuan. A sudden devaluation of
New Federal Reserve Chairman Jerome Powell’s first congressional testimony made it clear to markets that it’s no longer business as usual. Under Powell’s predecessor, Janet Yellen, developments in the labor market drove monetary policy. And since employment is a lagging economic indicator and slack in the labor market was large, it was an easy message to convey. Monetary policy would gradually adjust as the labor market showed steady improvement. As a result, market volatility was subdued because a stable and moderately growing labor market became quite predictable. But with Powell saying that he considers the labor market to be “beyond full employment,” fiscal policy must now be considered, driving the Fed toward a message that is focused on the uncertain effects of fiscal
Cash can be a valuable commodity when returns on financial assets turn negative. After all, cash is easy to manage, has no volatility and doesn’t result in losses. Yet, cash is not abundantly available judging from global surveys such as by Bank of America. Those surveys are conducted among a diversified base of global investors. Respondents see excessive valuations and yet, portfolio cash levels have fallen to pre-crisis (see Fig. 1). A growing wedge between the perception of valuations and cash available to invest could pose a dangerous combination. Figure 1: Stretched Valuations and Falling Cash levels Source: Bank of America/Merril Lynch. “EU” = European Union. “Global” = global investors. “FMS” = Fund Manager Survey During the most recent bout of volatility, investors with significant cash positions
We thought that you would find this "white paper" from our long time partners at Polen Capital very interesting. At Intellectus, we need to manage risk on a daily basis. Risk can mean different things to different people. It comes in different forms and most people react to it very differently. A common perception is that diversification, is the primary and only means of reducing risk. In fact, there is an old Investor adage that says, "You make money through concentration, you keep it via diversification". That is generally true. But like most "adages" there is some truth to it but certainly not a complete understanding of risk. We are very proud to have been an early supporter of the team at Polen Capital. Our association
As you have seen us do in the past, from time to time, we invite selected experts in areas relevant to our clients and readers to pen guest posts. We are pleased to have a close friend of the firm, Mr. Trevor Mottl, who has deep expertise in Financial Markets, Derivatives, "Alt Data" in Investment Management and Cryptocurrencies, provide his thoughts on one way to consider Bitcoin as a store of value. Trevor has held leadership roles at the top of Finance and Investment management that include the uber successful hedge fund Balyasny and the leading investment banks Goldman Sachs and Susquehanna, to name a few. Bitcoin has advantages over gold, and actual currencies as a store of value. If you believe that society will spend
Past week’s sell off in equity markets was one of the largest in recent years. When something like that happens, market analysts like to look at indicators such as the “Relative Strength Index.” This index is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The relative strength or weakness is known as “overbought” or “oversold” conditions. The RSI index for the S&P 500 and global equity markets reached historic overbought conditions in December before sharply reversing to oversold in a matter of days last week (see Fig.1). The change in the RSI index