Some Oil In Your Healthcare
Happy Anniversary — really, it is happy.
Eight years ago last Monday the market hit a generational bottom, with the S&P 500 reaching 666 and the Dow hitting 6,470 intra-day. Both of those moments proved to be the low point in what was a simply horrific period of time in American history, beginning with the descent from all-time market highs in October 2007 and really accelerating in the fall of 2008 when the official financial crisis struck, culminating in the demise of Lehman Brothers, AIG, Merrill Lynch, Fannie Mae, Freddie Mac, IndyMac, Washington Mutual, and Wachovia. The specific history of what went on those fateful months and why has been a huge passion in my studies for the last eight years, and professionally the practice of applying the investment lessons of the great financial crisis has been an obsession. The one thing we want to say on this anniversary that just never gets said enough: There was no reason that stocks bottomed on March 6, 2009 – there was no catalyst, no news, no particular event. The reason they bottomed was because they were done going down, period. The market was tired of going lower, so it became time to go higher. Was it time-able? Was it obvious? No. The market was just exhausted. The market has now tripled since that level. Those who had exited the market in the midst of the crisis carnage had a very hard time getting back in. Most did get in at some point, but missed out on a large percentage of the recovery. We have had a lot of ups and downs since March of 2009, but we remain in a stunning recovery from what was a brutal and indescribable period. So happy anniversary – happy, because that carnage is long behind us, and happier still, because those who did not make temporary declines a permanent loss have now seen a glorious rebound in capital markets. This is the stuff wise investing is made of.
Keeping our heads on straight
We want to continue writing about various inflationary themes as they enter our thinking in portfolio management decisions, but we also want to stay very clear about what we see as the risk to investors. We would be fearful of (a) Any belief that growth itself is necessarily inflationary (it is not); (b) The various responses to inflation (even if necessary and wise) that could certainly have an impact on risk markets. We believe it behooves investors to always be prepared for the reality of inflation (hence our passionate commitment to growing dividend stocks, the best defense against inflation we have ever seen). And we also believe it behooves investors to understand that should real and significant inflation above Fed targets begin appearing (it has not yet), the reaction to those signals are the things recessions are made of – sudden contraction of the money supply. It is why we advocate a smooth and stable monetary policy as opposed to an excessively accommodative one – because smooth and stable lowers the need for reactions and overreactions.
Getting clarity at the border
Here is our latest summary of where things seem to stand around the “border adjustment tax,” and where it may fit into broader corporate tax reform: President Trump’s Chief Strategist, Steve Bannon, supports it, as does senior advisor, Stephen Miller, and certainly Trade director, Pete Navarro. Commerce Secretary, Wilbur Ross, says he is undecided. And Treasury Secretary, Steve Mnuchin, as well as National Economic Council director, Gary Cohn (former president at Goldman Sachs), have grave concerns with it. So to clarify things, about half of the key decision makers are for it, and half are against it. The President himself has not yet chimed in. Is this all clear now?
Money well spent
We have become increasingly convinced of the benefits many companies pick up from what we will politely call their “lobbying” efforts. Using skill, strategy, and pressure to benefit from shifts in public policy or to defend one’s own way of doing business may seem somewhat unseemly, but it also has become a near necessity for many publicly traded companies given the increased size and role of government in the private economy. Lobbying costs money, but we suspect it often generates a ROI multiples of the expense. At the end of the day, our own personal beliefs about the nature of the “swamp” are not relevant here; “rent-seeking” is a reality in the corporate sphere, and we do not think this is an area of competitive advantage that analysts are able to follow or monitor very effectively.
Repeal and maintain?
The Trump administration and House GOP leaders revealed their plans for substitute legislation for ObamaCare this week. Political reality seems to have smacked a lot of Republicans across the face, and many are left trying to reconcile the fact that they want to blame the House GOP/Speaker Ryan for the parts of this proposed bill they think fall short, when in reality this is the plan the Trump White House has essentially mandated. We do know more changes are coming as this bill works through committee and conference and eventually into reconciliation with the Senate. It is completely impossible to draw any investment conclusions out of the bill at this stage because we have no idea what the final version will look like, and what the political odds of passage will end up being. If there is any investment precedent here as we prepare for tax reform and other parts of the Trump agenda, it is that those who believed a knight on shining armor was coming to make politics and legislation easy in D.C., well, now they know – it ain’t happening!
Story of the week in the market:
While the press digests the tragedy of a market down 200 points in four days after a single day that was up 300 points and four months that were up 3,000 points, we will make instead a few comments on oil prices, which were hit hard this week, dropping to just above $49 at press time (from $54 earlier in the week). The drop comes in response to the Saudi oil minister making comments that U.S. shale production were helping to undermine the OPEC deal to curb global oil production. Inventories have expanded, and you either have to believe that supply challenges persist, or that the market has been so chalk full of speculators that the comments forced some weak short terms hands out very, very quickly. Our position is totally agnostic as to what oil prices do in a 24-48 hour period – and a 6-month window as well.
In all thy credit concerns, consider this:
We wrote recently about the state of the High Yield Bond Market and the spreads that exist relative to the Treasuries. We talk frequently about national debt realities. We believe credit creation and contraction are deeply significant macro economic considerations in how we view economics and the big picture landscape for client investing opportunities. And with all those concerns alive and well. we would point out that eight years of central bank insanity, low interest rates, QE (quantitative easing), and so forth and so on, please note how credit extended as percentage of GDP is still significantly below pre-crisis highs.
Chart of the Week
History has been filled with equity bull markets. They often last much longer than bear markets do for the simple reason that the incentives of free markets reward profit generation, and stock prices are, in their essence, claims on the future profits of America’s best companies. But yes, bear markets happen too — generally as a result of economic slowdowns (recessions) and when we get into valuation bubbles that have to correct (purge excesses). What you see below is that this bull market has been a thing of beauty.
Quote of the Week
Of all sad words of tongue or pen, the saddest are these, ‘It might have been.’
― John Greenleaf Whittier
Article originally published on Dividend Cafe.
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