The Dividend Café


Market Timers Getting Coal in their Stockings - Dec. 1, 2017

Pipe

Dear Valued Clients and Friends,

We hope and trust that you had a wonderful Thanksgiving week, and that you enjoyed the little break from our normal investment commentary (though if you did enjoy that break, you don’t have to rub it in).  I appreciated all the kind Thanksgiving sentiments we received in reply to our Thanksgiving edition last week.  And I am excited to be back in the groove this week, once again absorbing a market continuing to make new highs.  We discuss the basis for this big week up in the market.  We delve into the exciting world of bitcoin.  And we look around the globe a bit at the United Kingdom, Germany, Japan, and elsewhere, evaluating the real lay of the land for investors, and providing you our best thoughts and ideas.  And will we cover tax reform?  Okay, fine, twist our arms …  With all that said, let’s get into it …

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For all you market timers …

Markets moved substantially this week, led by a +250 point day on Tuesday and then another huge day Thursday.  This understandably frustrates those perennially “waiting for a dip” to enter equity markets (all of which will inevitably enter, only at brutally higher prices than when they first said they were waiting for a dip).  What was behind the move?  Two things were happening simultaneously as markets were advancing Tuesday – (1), Fed Chairman nominee, Jerome Powell, was testifying for the first time before the Senate committee; and (2) The Senate was advancing their tax bill out of committee and headed towards more apparent passage across the whole Senate.  How does one determine what event cause markets to advance when two things happen at once?  They don’t.  Causations are frequently impossible to identify in our business, and very often wrongly identified.  And since markets OPENED dramatically up Tuesday, well before these developments, the far better explanation is that markets went higher because there were more buyers than sellers, and leave it at that.

Losing weight the sustainable way

We all know people who have lost weight with a quick-fix diet or workout routine that lasted just days or weeks (okay, maybe that person has been in the mirror), and not been able to maintain it through lasting conditions that lead to sustainable health and fitness.  Any number of market conditions can function the same way – sugar highs, so to speak, that don’t necessarily have staying power.  As readers and clients know, after a 20-year avoidance of Japanese equity markets, we made the first tranche of our Japanese entry this month, and are making the second tranche now.  Our thesis is entirely structural, or secular, if you will.  In other words, we believe a private sector growing faster than GDP is the stuff sustainable market advancements are made of – especially with the proper long-term view and mindset.  Corporate profits are growing, but have much more room to grow, and a nation devoid of investment income stands to see substantial dividend growth from their mature equity markets in the years to come.  Reflation out of the most painful deflation in economic history is happening, and the way we believe their corporate equity market will selectively offer sustainable strategic value to our client portfolios.

All dessert, no vegetables, please

Often times I describe my role in our investment process as the Asset Allocator in Chief, as even though the security selection and manager due diligence are the most exciting parts of our overall investment procedures, the weightings to various asset classes on a client by client basis so as to properly optimize the risk/reward trade-offs we think most appropriate case by case is actually the most important.  And ironically, the asset allocation process that we are describing as primary in its contribution to final results is the one that ends up generating the most angst from many investors, despite the good work it does to optimize returns and risk.  Why is that, you ask?  Because with the gift of hindsight, we naturally wish that we owned all the winners, in heavy doses, and didn’t own the under-performers.  Indeed, in prolonged and low-volatile equity bull markets, it is easy to wonder why any asset class besides large growth stocks ought to be in a client portfolio.  But alas, asset allocation is about the art and science of blending asset classes together to diversify, to offset the zigs of one asset class with the zags of another, to produce a strategically and tactically cohesive portfolio meant to respect a particular client’s comfort level for what can go wrong in different fluctuations.  Lots of factors go into creating an asset allocation – from tax exposure to liquidity needs, to timeline, to risk appetite, to cash flow objectives, to other assets on the balance sheet, etc.  If stocks did nothing but go up the way they have from March 2016 through present, permanently, would any other asset class be necessary?   Of course not.  But lest we forget the ten years that started this millennium, and lest we forget what normal periods represent in terms of volatility, asset allocation remains the freest money available to investors – the diversification of a portfolio and optimization of risk/reward trade-offs, without costing an arm and a leg.

* Chart appears courtesy of HighTower Holdings, HSW Advisors, Zephyr StyleAdvisor

Tax reform inches closer, for good or for bad

The Senate voted to approve beginning formal debate on their tax bill, meaning a Senate-wide vote is expected any time (for all I know it has happened by the time you are reading this).  There are amendments being thrown around, so-called companion bills, and various tweaks and concessions that will have to get sorted before the final vote.  But all indicators are that they are much closer to successful passage.  The caveats include what adjustments will be made to treatment on pass-through entities (s-corps, partnerships, etc.), and whether the final corporate rate will be 22% or 20%.  There is even some talk about triggering a tax increase if revenue drops enough or some convoluted weird thing like that which only a politician could think of.  This trigger idea is messy, and may or may not make the final cut (and may be necessary to get some votes).  The trigger would, in our mind, defeat the purpose of business stimulus in the corporate cuts, and dramatically alters the attractiveness of the plan.

So we are watching minute by minute and still maintain our view that the Senate will pass a bill, soon, and that the House bill will look more like the Senate bill after conference, and that a bill will be on the President’s desk by the end of the year.

Sizing up Brexit

We maintain a long position in UK equities and continue to monitor the constantly moving processes around the UK’s negotiations with the EU pertaining to Brexit.  One thing that is fascinating to us amidst all the criticism that Brexit will kill the UK’s ability to do business with foreign countries.  And yet, the data shows that exporters have crushed the heavily domesticated companies in stock performance since the Brexit vote (markets are forward-looking).  The sterling pound went from way over-valued to way under-valued, and markets are now responding to that reality superbly.  There is a lot of chatter about Brexit, most of it incoherently bad, and fundamentally we return to the principle guiding us through all of this:

Find us one example in history where greater independence and freedom led to less economic prosperity.

How long will you ignore Bitcoin?

As long as it takes.

Our view is not that it cannot go up, as it did violently this week, or that it cannot go down, as it also did violently this week.  Our view is not that it may not go from $10,000 to $100,000 (it may), or that it may not go from $10,000 to $1,000 (it certainly may).  Our view is that it is not an investment, it is a speculation.  If someone is talking about buying bitcoin to sell it at a higher price, it is a speculative play that currently represents every single thing we are against as fiduciary investment professionals.

Now, if someone means “do you see Bitcoin and crypto-currencies as a block-chain phenomena replacement to fiat money, posing true sociological and economic and political disruption for the global economic system?” then we have a different approach to the subject, but not one that is any more favorable.

Merkel moving markets?

The German equity market has dropped 3% or so in the last month, but it still up 3% or so in the last three months.  You have, on one hand, German economic momentum and earnings success pitted against political dysfunction and volatility (hmmm, sound familiar?).  The German political structure is quite different than the Constitutional structure we enjoy here in the states, and while Angela Merkel was re-elected as Chancellor, her coalition has not been sustained electorally and it has led to a real mess in the political power centers there.  They may or may not work it out (there are signs of new talks), and it is true that Germany’s political stability plays a larger role in European markets due to the nature of the European Union.  Our lack of interest in the German equity markets is not a statement about Angela Merkel or party coalitions, but rather the broader challenges in Europe that we see as potentially tradable, but still unattractive on a relative basis to U.S., Japanese, and emerging markets.

2017 prediction

Our biggest theme entering the year was the dispersion of returns within the market – correlations from one stock to the next falling apart.  We could never have predicted how prescient that call would prove to be, with correlations amongst stocks and sectors in the market collapsing:

Happy Anniversary??

Three years ago this week OPEC shocked the world by announcing a continued production/supply run around crude oil, at the time already in deep excess levels of supply, causing oil prices to begin what would become a 75% drop in prices.  They are now up over 100% from their bottom but remain down about 40% from 2014 highs.  There are so many things in flux with the Saudi empire these days, there persists the ever-present reality of geopolitical risk in the Middle East, and there is the constantly changing economics around U.S. shale producers -the new swing producer (marginal producer).  So while commodity traders may remember the events of three years ago, the reality is that supply and demand continue to trump all, and oil has found an equilibrium for now many thought we would never see again.

Chart of the Week

Who exactly pays the highest corporate taxes in the present system, and therefore stands to benefit the most in reform?  Most of this analysis has focused on repatriation of foreign profits (companies with large cash balances offshore that they may be incented to bring back to the states).  But on a pure forward-looking tax rate basis, telecom and energy stand to benefit the most.

Quote of the Week

“It is better to tell your money where to go than to ask where it went.”

– Farmer’s Gazette

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This week’s Dividend Café is dedicated to my long-time client, Alec Evans, who went to be with His Lord on Tuesday night after a real battle with cancer.  He was surrounded by family, a beloved and special family they are, and he will be sorely missed by all his loved ones, and all of us at The Bahnsen Group.  R.I.P. Al.  You were a special man.

With regards,

David-Full-Signature-Transparent-300x52

David L. Bahnsen, CFP®, CIMA®
Chief Investment Officer, Managing Partner
dbahnsen@hightoweradvisors.com

The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.