Comey Fired and Macron Hired
Even the firing of the FBI Director by the President of the United States didn’t seem to warrant higher market volatility this week. We got a little check back unrelated to that near end of week but flat as can be otherwise. We remain in a period of very low market drama, and with each passing day of still market waters we feel more reinforced in our posture of defensiveness and prudence. We cover the gamut of market affairs in the Dividend Café this week, from the robust jobs report to the active/passive perpetual discussion. Off we go ..
This time it’s different?
The utterly shocking surprise of President Trump terminating FBI Director, James Comey, did nothing to stir markets mid-week. The rationale for expecting it is simple enough: President Trump has an aggressive economic agenda, markets are relying on success in that agenda, President Trump’s political capital matters in creating that success. and a controversial and scrutinized move like this perhaps undermines that political capital, therefore calls into question the viability of his economic agenda. Simple enough, in theory. However, if the last 12-18 months have taught market observers anything, it should be that the market reaction to political winds is completely unpredictable, generally the opposite of what people expect, and seemingly devoid of any human logic or expectation. Political pundits and commentators will have their own take on the firing of Director Comey, but from a capital markets standpoint, we are not surprised that the market was, well, unmoved.
Are you moving to New York City????
Okay, let’s put this to bed right now. After about the fifth person asked if I and my family were actually re-locating to New York City I decided I would put this to bed right away. We are Southern Californians (no matter how much we regret that every April 15th). I have co-founded a private high school in Orange County that is a life passion of mine. My wife and I built our dream house here over the last several years that we just moved into last August. My three kids are all very set here. Our friends and family are here. And The Bahnsen Group’s headquarters are here. We have 12 people based here with the team with a new member coming on board within a month or so. We are not going anywhere. I have traveled to New York for business between 8 and 12 times per year every year since at least 2006, maybe longer than that. Due to my frequent business needs there, growing clients in the tri-state area, deeper relationships with key New York portfolio managers and hedge funds, and the HighTower primary office located there, I have decided to take office space there to better represent The Bahnsen Group’s needs in New York. This office will be officially open in mid-June. I will be in NYC with the family this summer as my son attends a film camp out there and we give our young children a humid, brief taste of a city experience. But the Bahnsens are staying at The Bahnsen Group in Newport Beach, both after our New York trip this summer, and for all of life evermore.
Jobs, jobs, jobs
The April jobs report contained some surprises in the weeds even if not in the major headline numbers. 211,000 jobs created was higher than the 185,000 expected, but the bigger aspects to us were the U6 “underemployment” rate came down from 8.9% to 8.6%, the lowest level since 2007 and the fact that wages grew 2.5% year-over-year. Only 17,000 of the jobs created were in the government sector. And even retail saw 6,300 jobs created. These subtle details are the substantive items we believe matter in the real economy. We believe the Fed is nearly certain to hike another .25% at the June meeting.
The French have voted
There will likely be two mistakes made in the aftermath of the French election and Macron’s utter pounding of the nationalist Le Pen. One will be to interpret the results as belief that all populist revolt and nationalistic or eurosceptic impulses in Europe are dead or dying. They are not. The country of France remains deeply divided, largely along rural vs. city lines (sound familiar), and angst remains high about the challenges surrounding immigration and globalization. The candidates here mattered a great deal, and the coalitions were not easy to define or binary. But there is another mistake pundits may make, and that is to overplay the idea that Macron’s win means the death of a eurosceptic populist movement in Europe. I read one atrocious research report this week from a firm I respect a great deal actually speculating as to whether or not this Macron win means Brexit will reverse, and the German/Franco alliance will see power go to a new level. This interpretation represents a massive overreach. Legislatively, Macron will not have a huge mandate, reform will not come easy, and structural challenges persist throughout France and Europe. And that is a healthy understatement …
Active vs. Passive Debate: Flows
We know that for ten years there has been a steady increase of passive strategies (index funds and ETF’s), and outflows from active strategies. Many within the camp of mutual funds have failed to perform (or we would add, much more importantly, have not acted like active strategies, but rather like “closet index funds,” charging fees as if they were real active funds).
Active vs. Passive: History
The reality is that a healthy blend of active and passive strategies is generally best for investors, with special attention and customization around the asset class in question. We are highly focused on the very limited pool of companies that are perpetual growers of dividends so that requires active attention. We think emerging markets in particular simply beg for active management for a variety of reasons. Other asset classes can be represented adequately with a passive approach. The historical reality is that active vs. passive outperformance is highly cyclical.
New oil production has to go somewhere
We note the massive increase of production taking place in crude oil from U.S. shale producers, and simply point out a certain fact and reality behind this data: This oil is either going to be put on a truck, in a railroad, or go through a pipeline, to get to its end destination. We believe that the pipelines will be the beneficiaries (environmentally and otherwise), and the increased volumes will mean greater distributions of cash flows.
Purchasing power teeter, Dividends and Earnings totter
The speed at which inflation moves makes it a significant threat for those who plan to be around a decade, or two, or three, or four, etc. Purchasing power is halved every 20-25 years – halved – even if we just have fairly benign inflation. I say “speed” is a “significant threat” because of the slow speed reality of it – the fact that it doesn’t get noticed. Out of this horrific reality and invisible confiscation of wealth comes a key tenant of long term investing: Using dollars that are falling in value to buy companies whose earnings and dividends are rising in value. Do we believe this will represent a return actually in excess of inflation? You bet. But how many investors in their pursuit of avoiding volatility which poses a long term threat to their financial well being will fail to even defend against inflation, let alone grow beyond it?
We’ve covered the danger of earthquakes. Let’s talk tornadoes
Surely readers of the Dividend Café are aware of the catastrophe potential that exists for under-diversified investors. Over-concentration risk and inadequate mitigation of risk exposes investors to ghastly losses – both of the systematic and non-systematic kind. We want to diversify “market risk” via non-equity investments (fixed income, most prominently; alternatives; etc.). And we want to diversify “individual security risk” via diversification in choices of companies and sectors. However, we cannot say enough – OVER-diversification is also a huge threat to investor success. Incoherence kicks in when investors own too many positions, too many strategies, and too many products. A lack of sensible risk-reward trade-offs exists when a portfolio is over-diversified. And ultimately, monitoring of the portfolio and tracking for gaps, inefficiencies, redundancies, etc. (which are often many) become highly inefficient. Elegant and efficient are desirable descriptors of one’s portfolio; under-diversified and over-diversified are not.
Chart of the Week
There is a lot of chatter around the country about residential home prices, and this is an area in which a wide array of views exist, and of course timing matters. One piece that has mystified people on both sides of the debate has been construction starts, as that data has not pointed to as robust a housing market as most other data points too. Our view is that this is, pure and simple, an issue of affordability. We note the chart below to make the point that, well, people at some point can’t buy what they can’t afford. Should affordability conditions worsen for new homebuyers, then current owners enjoy higher prices, but lower buyers enter the market (and less construction takes place). Markets then correct and adjust, and you know the rest.
Quote of the Week
“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”
Originally published on Dividend Cafe.
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