Leon Tuey on the markets in Late August, 2018

Leon Tuey on the markets in Late August, 2018

Why the motor mouths on Wall Street have so much trouble predicting the market's direction is difficult to comprehend. All they need is a clear understanding of the market's logic, the economic cause/effect relationships that drive the markets. They need to have an understanding and appreciation of the mandate of the Fed. As pointed out on numerous occasions, one of the key mandates for the Fed is to “maintain orderly economic growth and price stability.” It’s a dual mandate and it is statutory. The only other thing they need to remember is that the stock market is a leading economic indicator; the economy does not lead the stock market. When the economy slows and heads into a recession,

investors don't need an IQ of Mensa to know what action the Fed will take; the Fed will use all means at their disposal to turn the economy around. (The most powerful tools at the Fed's disposal to affect monetary policy changes are the Basic Monetary Policy Variables - the Bank Reserve Requirement, the Discount Rate, and the Margin Requirement. I wonder how many gurus on Wall Street ever heard of this?). If it doesn't work, they will keep easing until the economy responds. The market being a leading economic indicator, therefore, always bottoms six to nine months before a recovery begins, not after

Conversely, when the economy overheats; inflation surges; and speculation is rampant, the Fed will tighten monetary policy by raising the Discount Rate multiple times in succession; by draining liquidity from the system; and invert the Classic Yield Curve. The market, being a leading economic indicator will have peaked and started to head south long before the onset of a slowdown or a recession. This is like night follows day. Yet, this simple logic escapes most on Wall Street. Anyone with an IQ slightly above room temperature would understand this

Last week [August 13-August 17], "the market" reached another record high. "Not so!" growl the bears. No doubt, they will point out that the S&P 500 Index and the Dow Jones Industrial Average have not exceeded their respective January high. Clearly, they don't know which end is up. These are the same folks who will tell you that "the market" bottomed on March, 2009 which it didn't. "The bottom" was on October 10, 2008 when globally, investors panicked. On that day, over 90% of the U.S. stocks and most other world markets made their lows. These are the same folks who were certain that a bear market commenced in February, 2016, right at the bottom of the correction and a powerful rally ensued. In

February of this year, they all thought the world was going to end, again.

If they take their eyeballs off the major market averages; look at "the market;" try to understand the market's logic; and stop reacting to the headlines, they will see the world differently. Take a gander at the various internal measures. Last week, the following Advance-Decline Lines closed at record highs -SPX, DOW, NYSE, NYSE Common Stock Only, S&P Mid-Cap, and S&P Small-Cap. These A-D Lines tell investors more about "the market" than any market index. Given their bullish action, investors can absolutely be certain that the S&P and the Dow, too, will see record highs.Also, the S&P Mid-Cap Index, the S&P Small-Cap Index, and the Value Line Arithmetic Index closed at record highs.The Wilshire 5000 Composite Index stands within spitting distance of its record high and new highs are assured. By the way, two weeks ago, the NASDAQ Composite Index hit another record high

Make no mistake, Ladies and Gentlemen. You are witnessing the greatest bull market on record and the best is yet to come. Despite its longevity, this bull remains a calf.

Take partial profits on stocks that are grossly overbought and show a loss of momentum. Accumulate stocks that have broken out of long bases and become oversold. But stay invested. As mentioned, one of the biggest mistake investors make is selling too soon in a bull market, particularly in a market such as this

Earlier this year, many talking heads felt that the market has seen its high for the year and some even declared that a bear market had commenced. Bear market? What bear market?

Given their lousy track record, one wonders how they even have a job. Thankfully, they are not in the medical profession. As mentioned before, if these talking heads expend some effort trying to understand the market's logic instead of flapping their gums incessantly, they would improve their performance. Ignorance is bliss, I suppose. What about the Dow Jones Industrial Average and the S&P? Rest assured, they, too, will reach record highs.

Resources,

https://www.raymondjames.com/pdfs/share/morning_tack.pdf

The above material was edited by myself. As always interesting comments from Mr Leon Tuey. I include it here primarily for his instructive comments on how the Fed takes action to control monetary policy and his views on the importance of the 'breadth of the market'...Personally I don't like to forecast the future but I think its important to know what the market is currently doing and where it might be in its overall cyclic pattern.

Underused Information is a Select menu

Underused Information is a Select menu


Since the four Brookfield Limited partnerships make up about 54 percent of my entire investment portfolio I decided to start blogging about Brookfield and how they go about their business. As this blog is primarily aimed at making notes to myself, these posts about Brookfield should help me sit tall in the saddle the next time the markets get antsy and decide to take me down an emotional road where I might crash and burn. I will hopefully have the courage of my convictions, holding my investments knowing that I’ve partnered up with a management team that is thinking in terms of years and even decades rather than what happens over the next few months.

The internet has opened a whole new world to people over the last 20 years (it’s hard for me to believe it’s been that long). It has been a great resource but where knowledge is easily obtained a problem of choice remains. There is simply too much information to choose from  and with it too many blind alleys to wander down that will do you no good at all.

Remember one of the core themes of this investing blog is ‘Wager Value’…

https://nivag18.blogspot.com/search?q=wager+value

Wager Value is simply paying attention too and pursuing underused information. You won’t find this information in newspapers, on television, on radio, or various websites on the net where the goal is to increase traffic to the site. As a matter of fact you generally won't find it where the great unwashed have a tendency to go, but over time an investor will develop his own sources of information. For myself, I've found that reading the actual materials put out by some of the corporations themselves (Bruce Flatt of Brookfield Asset Management) and even the quarterly reports of some the fund managers (Stephen Takacsy of Lester Asset Management) can add important insights into the investing process that other investors might not be paying attention too...In other words, hunt where no one else is hunting.

This blog has helped me gather some of this information and put it all in one place where I can more easily access it. It has also allowed me to write a little about the markets which I have found to be a creative experience. It has also been a window to my progression as an investor as well as well as acting as a check to my mental and emotional blocks.

How do you invest to deal with the recent disruptive or destructive technology trends?

How do you invest to deal with the recent disruptive or destructive technology trends?

While Amazon may get the most press for disrupting industries and economies around the world, there are plenty of companies making their own waves on this front. The way to go about investing on the right side of these trends is to think: what companies can Liberty investors own today that will still be around in 10 years to benefit from the growth in their free cash flow and dividends? And what sectors should be avoided?

The sectors we are currently avoiding are energy, telecoms and most utilities that don’t have much exposure to renewable energy.

Their growth could wane quickly – if it is 5, 10 or 15 years from happening, investors should do a discounted cash flow valuation of these stocks. If the valuation reaches that price, they should sell the stock.

Or they could face the “Last Man Standing” scenario, whereby the last purchaser of Nortel or Valeant stock at its peak saw the stock move only lower.

Below is a table of the current investment trends for the future. Unlike the bubble that burst in 2000 that sent technology stocks plummeting, these companies all have real and growing revenues, profits and free cash flows:

TREND	LIBERTY STOCKS INVOLVED IN THESE SECTORS
Water	A.O. Smith, Lindsay Corp., Danaher Corp.
Agriculture	Agrium, Lindsay Corp., Raven Industries
Healthcare – Pharma	Novo-Nordisk NV
Healthcare – Medical Devices	Becton Dickinson, Atrion Corp., Coloplast A/S, Globus Medical, Stryker Inc.
Other Medical	Balchem, Mesa Labs, Steris
Fintech	Chubb, Fairfax, Great-West, TD Bank, First Cash Financial, Paychex
Robotics	Cognex Corp., Danaher Corp
Life Sciences	Danaher Corp., Thermo Fisher Scientific
Logistics	Dassault Systemes, Roper Technologies
Artificial Intelligence	Dassault Systemes,  Open Text, Shopify Inc., Cognex Corp.
Government Regulations	Halma plc., Intertek Group, Spectris plc.
Renewable Energy	NextEra Energy, Novozymes A/S
Infrastructure	Toromont Industries, Stantec, Roper Technologies
Aerospace	Heico Inc.,RBC Bearings
Automotive Computerization	Littelfuse Inc.

Resources

https://www.libertyiim.com/

The Times, they are A-Changing

The Times, they are A-Changing

I wanted to follow up and let you know that Bill Nygren, the Portfolio Manager for Oakmark Fund and Oakmark Select presented at our sales conference last week and had some great points about how to value companies in the world we live in today, and why the Morningstar style box can be misleading. Since we do get questions about how he might own a stock like Netflix or Alphabet in a value portfolio, I thought this might help.

In 1975, 83% of assets on the balance sheet for the average S&P500 company were tangible, today only 13% of the assets are tangible.

In the days of Benjamin Graham, defining value was much more straightforward and easy to categorize. Low price to book value was an accurate picture of value, because most companies were “asset heavy”.

Example: a company buys a machine to manufacture a good, this expense is amortized over the expected life of the machine, and therefore the entire expense does not impact the balance sheet all at once, immediately. Future value creation is accounted for. Today, when a company spends money on something like R&D to develop new products, that expense hits the balance sheet immediately, all at once, even though the return on that investment may carry on for 10 years. This affects ratios like P/E and P/B immediately with a large up front expense, making “asset light” companies look more expensive using existing GAAP accounting methods.

Example: If a company like Netflix spends on advertising—that expense is added to the balance sheet immediately, even if the average expected subscriber is a customer for 10 years. Oakmark would adjust that advertising cost over of the expected life of the customer, which would lead to a lower P/E or price to book.

With existing GAAP accounting, cost of acquiring a customer is expensed up front, immediately, even if the customer lasts a lifetime. In 1975 there was a 71% correlation between the stock price and tangible book value for S&P500 companies, today there is only a 14% correlation, though low price to book is still used to define value stocks in indexes like Russell and by Morningstar, etc. Overall, value investing is the same today as it was over 80 years ago. Investors follow fads, get emotional and over-react; this creates a gap between price intrinsic value, creating a margin of safety and the opportunity to make money.

 via Raymond James, Jeffrey Saut

Investing with a Barbell

Investing with a Barbell

Barbell strategy: a method that consists of taking both a defensive attitude and an excessively  aggressive one at the same time, by protecting assets from all sources of uncertainty while allocating a small portion for high-risk strategies

I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments (how do you know it is medium risk? By listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent in extremely safe instruments, like Treasury bills – as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios (make sure that you have plenty  of these small bets; avoid being blinded by the vividness of one single Black Swan). That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your “floor”, the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent. You are “clipping” your incomputable risk, the one that is harmful to you. Instead of having medium risk, you have high risk on one side and no risk on the other. The average will medium risk but constitutes a positive exposure to the Black Swan. More technically, this can be called a “convex” combination…For your exposure to the positive Black Swan, you do not need to have any precise understanding of the structure of uncertainty.

The Black Swan,
Nassim Nicholas Taleb


Brilliant strategy really but of course there is nothing to stop us from seasoning this to our own taste. In my own investment portfolio I hold heavy positions in all four of Brookfield Management's Limited Partnerships...BIP.UN, BEP.UN, BPY.UN and BBU.UN. These holdings represent a huge (relative to the size of my portfolio) investment in income producing hard assets. Conversely I hold investments in OTEX, DSG, AIF, MAXR, BYL, GUD and RX. The stocks of these companies  largely deal with intangible assets. So there is a dichotomy here, a sort of barbell if you will.

I think there could be many variations on the "barbell" theme. One could employ investing in ETF's as an example of setting up his own personal version of the barbell approach. An investor is only limited to his imagination. Taleb use to trade options for a living and employed this technique in his trading, pretty sharp guy this Nassim Nicholas Taleb.

I find this a highly original and different alternative to the conventional approach to portfilio management which of course resides in the domain of the "institutional imperative" where creative thought is suppressed so as to preserve the status quo of fitting in with the establishment and not clashing with the drapes.

The 52 Week Low List

The 52 Week Low List

Prospecting in Bad News

Digging where the surroundings are tranquil and pleasurable may prove to be as unrewarding as doing detective work from a stuffed chair. You’ve got to go unto places where other investors and especially fund managers fear to tread, or, more to the point, to invest.

Peter Lynch


The daily 52 week new low list published in newspapers everyday can be a very easy and quick way to get some fresh new investing ideas. It's an especially good thing to reference during market sell-offs where the baby often gets thrown out with the bath water. Now a lot of the stocks that show up on this list may deserve to be there and they often stay on the list off and on, for a long time but some stocks will only make a brief appearance and not show up again. It may pay to do a little research on these names. They often will appear during the quarterly earnings season when they have missed their numbers and get punished because of it. At other times there may be a selling capitulation as every one selling feeds off their own energy and dumps a stock into oblivion. At any rate a cool headed investor observing from the sidelines who doesn’t have any history with the stock can look at with an unbiased eye and maybe find something that the sellers can’t see as their emotional point of view blinds them from seeing past their own biases. Check the charts and volume patterns on these stocks to see if there are any useful market reference points that might offer further insight.

I found Maxar Technologies Ltd, symbol…MAXR on the new low list in March of this year. After doing a bit of research on it, I took a position in the stock. A few months later it was on the 52 week new high list…After the last couple of days it may revisit the 52 week new low list again…efficient market anyone? At any rate I see it as a long term hold but that’s another story and another blog post.

On this Monday past, I noticed some new interesting names on the list…CI Financial Corp, symbol…CIX and Boralex Inc, symbol…BLX as well as Sleep Country Canada Holdings Inc, symbol…ZZZ.

All three of these names look interesting to me and I think I will do some further research on them and see what I can come up with. The stock market offers the investor at home the chance to play detective and ferret out those investing opportunities that other people in their haste have given up on. It is the Rolls Royce of hobbies that offers the investor who is willing to learn and apply himself an empowering experience where he can take the wheel and steer his own ship.