If you are a sports lover, or a competitive person, you recognize one of the most common characteristics of poorly performing teams, which is finding a way to make errors which undermine what the group is trying to accomplish. Here in Las Vegas, we have two prime examples of such entities. First, the perennial puff bag of losing, that being the UNLV college football team. In the last decade, I am not sure if they have had one winning season. It is appropriate that UNLV will play in the same stadium (partially underwritten by the welcoming hotel tax on those visitors who occupy a room) with the soon to be native Las Vegas Raiders, another organization that has experienced virtually zero success over the last decade.
Simply put, whatever way one can find to lose a game, these entities will do it. Of course, the world is not based on sports success, as there is plenty one can do in life which is productive, profitable, pleasing, or some combination of all three. However, in any competitive endeavor, much can be learned from the polar opposites of accomplishment and failure. In turning to investing, there might not be a more dog eat dog area of the world as there are thousands of entities which manage capital. Many individuals go it alone and manage their own funds, and in the current environment, it is quite challenging, for anyone actually. So an important question I’d like to bring up is the notion of a self fulfilling prophecy from the investment world? Have investors been so focused on downside risk, especially given that the economic expansion and market is now in its ninth straight year, that the microscopic focus on any potential problem has lead to a psychology which leads to the current joy we are now experiencing? In case you were not aware, a five percent down week is not the most usual outcome for stock markets, although one probably would not know that based on the last few months of results. Is it possible, in essence, that the quote from above captures all that ails the market?
Well, that might be a bit of a stretch as there are some problems facing investors. First, all across the globe, markets have sold off on fears of slowing economic growth. Tariff and trade issues have played into this notion, especially with large mature countries like Germany, which has high exposure to the global auto market as an exporter with three major manufacturers. China also faces the export predicament, and it can be seen in the drubbing in its mainland market, down about 30% this year. Let’s throw in the idea of higher interest rates here in the United States as Mr. Powell has been raising, and will lay on another dollop of higher priced money on in a few days. Investors have also begun to fret about the possibility of an inverted yield curve in the bond market, although it is traditionally thought of as the 2-10 year maturity slope.
Right now, the inversion actually exists between the three and five year length. If we take the price of oil and its decline, the brutality and rapidity of that selloff has been difficult as well. Currency markets have been treacherous all year long, and the selloff in the peso down south (about 20%) is a good example of that. So if you put this cocktail together, the best description would be complete unpredictability on factors that can have a dramatic impact on the golden goose, that being earnings of public companies. When profits are questionable, valuations across the board are reexamined, ahem, if that is what you want to call it. So, there are definitely some things which one could fret about regarding the current financial environment. However, there is also another question to consider, and that is should public companies in the United States be trading at below historical multiples when the economy trends toward 2-2.5% growth, after posting greater than 3% expansion this year?
Last week, I attended the excellent LD Micro cap conference in Beverly Hills, CA. Over three hundred companies presented, and if you investigate a great many of these enterprises, quiet a few trade at prices right at their historical low. Let’s be clear, the market has been very rough for a great many companies. The fact that the overall indexes are only down a few percent for the year doesn’t give you an indication of how many public companies have seen their equity values really beat up. Many spoke about their businesses and were quite optimistic about their prospects. So, we get back to that initial question, which resides in the mind of any person considering the capital allocation consideration. If one makes the circumstances impossible, or considers them overwhelming, it may be that while there are issues to be concerned about, the main hurdle is internal. My readers are quite intelligent, and I suspect that is not the case, but for others in the market, well, you be the judge.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.