Election, Earnings, Uncertainty Brings Market 9 Straight Down Days

All courses of action are risky, so prudence is not in avoiding danger (it’s impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer. -Niccolo Machiavelli, The Prince

Friday, the October jobs report showed a net gain of 161 thousand jobs, a bit short of the 173 thousand estimate. The Federal Reserve indicated they were very close to raising interest rates in December as they are satisfied with the recent data, specifically employment and wage trends.

Over the course of the last few weeks, corporate earnings and the realization of the interest rate hike in December have sapped any inclination of buyers to purchase financial assets, specifically stocks. Of course, there is one other little item in the equation, the small matter of the presidential and congressional elections.

In the study of statistics, one key concept is a binary outcome. Essentially, an event can go one of two ways and one should calculate the chance of either to determine the ultimate gain or loss so one can plan accordingly. When making business or investment decisions, either personally or for an enterprise, a key determination is the risk and magnitude of permanent loss versus the size of the potential benefit.

In making these choices, the principals involved have to be concerned with the current state of their entity and what effect this situation could potentially have on what they own today. One school of thought is to diversify the risk of the entity as much as possible to minimize the magnitude of a loss from one event. A completely different strategy is to put all your eggs in one basked and watch that basket like a hawk, especially if it is very valuable. Two different approaches, but the first is far more conventionally accepted. So why do I bring this up?

Over the course of the last few weeks, many public companies have reported their financial results to the investment community. These are impacted by the long term growth strategy, operational execution, and risk management practices. As always, some companies stand out while others slump.

In an industry which has undergone a very difficult few years, the large integrated oil companies generally performed well because they have business models which mitigate weakness of the price of oil by owning refineries and downstream revenue streams. Yes, their profits are down, but big oil is focused on return on capital, which is a key point in risk management.

Another industry also undergoing more competition is casual dining, as grocery store chains and convenience stores have less costly alternatives. Papa John's (NASDAQ:PZZA) showed nice results this week, as has Domino’s previously. Their use of technology to increase volumes is a fine example of strengthening ones own operations to compete more effectively.

Markel (NYSE:MKL), a fabulous specialty insurer, reported a poor quarter this week, but has been a great company on the investment side because of their ability to find profitable niches in the insurance industry. They are a great example of focusing their capital on specific areas as a way to control risk.

Finally, as we head into the mother of binary outcomes, the ultimate resolution of the presidential election, it is interesting to note the risk management positions of both major parties. The Democrats have declared they have no backup position if Donald Trump were to win, saying they have not even considered the possibility.

Republicans have publicly stated their focus on keeping the House of Representatives and try and maintain control in the Senate. They also have proclaimed they will pursue impeachment proceedings if they keep control of the House, and stonewall in the Senate to prevent any Supreme Court nominations from Mrs. Clinton from being accepted. Certainly, the risk management strategies from the major political parties are bit different, eh?

The reason for this is the extreme ideological bent which dominate each group and has made any semblance of a functioning governing body nonexistent. As for the the end result on Tuesday, the key states to watch are North Carolina, Florida, Pennsylvania, Ohio, Iowa, Colorado, New Hampshire, and Nevada. The biggies are North Carolina, Florida, and Ohio. Trump has to have them early or you can go to bed early. You might use your risk management calculations to decide how much more time you want to devote to watching the outcome of this binary event.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.