Sunday, October 30, 2016

Investment Stimuli:
Short-Term, Intermediate-Term and Long-Term


Almost every moment we are exposed to various stimuli. Often we are not aware of being exposed to factors that are going to impact us at some point in our lives. One of the reasons that I conceived the Timespan L Portfolios® is to be able to focus on the known factors that will impact investment success. As we live in a nanosecond world of instant global communication and too many instant communication devices, we are besieged by the very current items, and longer term implications are drowned out. As a defense against this condition I have attempted to assign inputs into different time buckets. While the assignments are undoubtedly imperfect, the pigeon holing helps to clear the plate to give more time to each of our client’s needs that we will attempt to fund through wise investments.

Short-Term Inputs

As an investor I try to read into the current markets for insights to the immediate future. I have found that too few investors examine the changing market structure for clues. These are some of the elements that I am seeing:

  • Most people last Friday  afternoon were mesmerized by the announcement that the FBI found additional emails that conceivably will have an impact on the US Presidential election. While that is in the immediate future, to me there was a major signal to all investors. Within a period of about one hour the Dow Jones Industrial Average, the stodgiest of stock indices fell 160 points, approaching 1%. By the end of trading most of the decline was recovered. The key to me is how "thin" the market is. My apprehension is that if we have a serious negative input the rapidity of the fall could be greater. Having just come from an investment committee meeting that was in the process of changing allocations to reduce risk to the orderly payment of needs, I am very conscious that on any particular day or hour when stocks are to be sold to generate a particular sum of money, execution prices may be temporarily lower. If one uses the VIX ratio the current market is trading significantly below its historic average and way below its peak, Thus I believe we need to be prepared for substantially more intraday and daily volatility.

  • High quality bond prices have been weak globally. Some point to China as the source of the instability. Spot commodity prices in Shanghai for non precious metals have been moving sharply higher recently, aluminum and zinc in particular. I suspect that the increase in demand is not an increase in likely Chinese industrial production, but a reaction to a government edict. In order to reduce a surge in heavy truck accidents, the government has lowered the size of cargo that can be carried. A further concern longer term is the fact that factory gate prices recently rose for the first time since 2012. Thus, China is no longer exporting deflation. (More on China in the intermediate input section.)

  • Often mutual fund net flows can be a reaction to changing conditions. For the last four weeks it has been reported by Lipper, Inc., that there has been positive flows into financial funds. (I am the portfolio manager for a private financial services fund.)

  • Once again the so-called experts have been proven to be wrong on the impact of Brexit on the UK economy. A survey of expected UK retail sales predicted a 2% decline. The latest results showed a gain of +21%. Particularly now around important elections, I question the accuracy of various predictions and pools.

Intermediate Inputs

Steve Roach, now teaching at Yale, points out China is directly or indirectly through other nations, producing just about all of the world's growth in GDP. At the moment  China is in the midst of a transition from a heavy industrial exporter to a more consumption  product and services user. While there are lots of opportunities for "hard landings" on the switch, they haven't happened yet.

In reviewing the third calendar quarter reports for brokerage firms, asset managers, and banks there seems to be a trend to reduce some of the high priced customer-facing people and building up the "tech gang." Unless revenues rise dramatically there is a good chance that some of the more expensive tech people will follow some of the investment bankers out the door. Part of the digitalization of the financial community is the awaking interest in Bitcoin, which in theory can reduce back office personnel.

One of the conundrums in dealing with the growing deficit of retirement capital globally is the individual savings rate. The FT points out that in the aggregate, the savings years are on average between 25 and 65. The periods before and after the savings years are the consuming years. While most of the developed world is experiencing little or no workforce growth, the average lifespan is growing and there is an increase in healthcare spending as we get older. Many believe that the "new normal" will include low productivity and increase costs. (I believe that there is a chance that through technology we will partly address these concerns.) However, people are worried. In a recent survey people were asked what was their single biggest worry. Of the respondents,  61% indicated that they were most worried about "Corruption of Government Officials." My guess is that people are particularly concerned about their healthcare expenditures in their retirement. I am not suggesting that the level of corruption is any worse than in other parts of our society. Just that people feel increasingly vulnerable at the end of their lives to regulation that deprives them of deemed care.    

Long Term Inputs

Often I find that a concept or thought pattern from one area in my life can have  application to other portions. For example, I have just returned from a three day offsite annual meeting of the Caltech board of Trustees. As you might expect, much of the discussion was on what the senior management of Caltech thought about what they should be doing about their future. Below are some of their topics which I have translated into our investment world:

Concentrated Excellence - Assemble only the best investments and talent, others won't do. Don't accept average.

Fearlessness & Reinvention - Don't be afraid of challenging conventional thinking and imaginatively reworking old problems. (The final proving the correctness of Einstein's 100 year old theory took 50 years of study that started with disbelief in the ability to prove it.)

Intersection of Disciplines - combine knowledge and instincts of fundamentals, price/volume studies, trading inputs and techniques with international market patterns.

Pick important hard problems - Seek large volume solutions

Heisenberg Uncertainty Principle - The mere focus on a problem changes the nature and extent of the challenge.

Committing to a funded Space Based Solar Power Initiative which will beam back to earth solar power from space could in time be a major input to our needs for energy

In summary wise investors in securities and investment organizations should strive to lead and not follow through concentrated "smarts."

Question for all of us: How do we apply these and other inputs to our portfolios and investment work?   

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