With the summer officially over, the varsity returned back to Wall Street and as always, there was plenty of news which investors have to evaluate in making their capital allocation decisions. The ISM number came in especially strong, which is a very good sign for the domestic economy. Offsetting that news was a very disappointing August jobs number, coming in at 142K versus an expectation of nearly 220k. As the last six months have seen generally favorable job creation numbers, the most recent report is seen as a hiccup, but one I would imagine the Fed's board members were paying particularly close attention to. You see, the weak number could again prolong Janet Yellen's decision to accelerate the tapering schedule, and bond yields could remain submerged at the below 3% levels for longer than capital markets thought. If we take into consideration what happened this week in Europe, where Mario Draghi decided to have the ECB lower interest rates even further and begin their own quantitative easing program, U.S bond yield look enormous relative to our compatriots across the pond.
Many believe the vast differential in yield is what is strengthening the U.S bond market versus the wide assumption that yields would rise by the end of the year. In sum, the right side of the trade for the last five years has been to assume interest rates would remain low, lower, and lowest, and if you thought so and invested accordingly, you have been well rewarded for being correct. The same policy is probably going to be with us a little while longer, but you have to think interest rates are going to start to drift higher beginning in early 2015.
As always, there was specific company news during the last few weeks as Tiffany & Co (NYSE:TIF) reported a very strong quarter in an indication the high end consumer remains better off than ever. Costco Wholesale Corporation (NASDAQ:COST) also recorded a good figure, which is never a surprise considering their quality. Elsewhere in retail, Home Depot Inc (NYSE:HD) reported strong results but guided down for the rest of the year and showed that yet again, data security remains a huge issue across all of the corporate world. The Gap Inc (NYSE:GPS) surprised people with a poor August total, and in the 'what company got butchered section', Conns Inc (NASDAQ:CONN) saw one third of its market value contract when it reported credit quality issues across its store base.
In the 'Oh, what a shock decision,' BP (NYSE:BP) was found guilty of gross negligence by the same judge who has rendered quite a few interesting rulings against them on any number of issues before its legal court. I suspect the leadership at BP had a good idea this was coming, even though there is no legal precedent for the gross negligent decision. If I were BP, I would make sure to tie these issues up in courts for a good long while, appealing everything on every grounds it can. Ten years time would be a starting point, and twenty years would be fine as well. If I were the government legal team, I would get nice and comfortable with your BP peers because I suspect you will see plenty of them for quite some time. (full disclosure- BP is held across the firm and for our self and family)
Howard Marks issued his latest market narrative this week and it's topic was certainly pertinent as he weighed in on risk. Marks, in case you are not familiar with him, is the founder and Chairman of Oaktree Capital Management. His firm has an outstanding track record of investing in all areas of the fixed income arena, high yield, municipals, convertible, distressed, event-driven, and corporate. His latest note lists nearly every aspect of risk you can think of, nearly twenty five in all. He has an interesting philosophy in that he wants to outperform when the market falls, and do at least as well as the averages when markets gain. My own thought is a bit different as statistically, the market gains usually about eight out of ten years. I want to stay even in the downturns and outperform during the expansions as the difference in the total gain of capital becomes enormous, especially if your results even best the indexes by a minimal amount. Marks has been a great investor for a long time and his returns prove it. He is always worth reading, and his thoughts on risk versus reward should, at the very least, be required reading for any student of finance or someone interested in money management.
Next week, Apple Inc (NASDAQ:AAPL) will have its much anticipated yearly event where it rolls out its new products. Rumors have flown regarding the Iphone 6 and a far larger screen, along with the integration of its payment system with a variety of large retailers and credit card companies. In addition, a new wearable device may be introduced as well. Until we know, we don't know, so let's wait till we do know before we speculate on how many units will or won't be sold (I suspect a lot).
Alibaba will begin its road show next week for the long awaited IPO, which is scheduled to take place on September 19. Published reports indicate the pricing will be at 60-66 dollars a share, making the market value in the neighborhood of $150 billion. I am sure Marissa is counting the dollars, oops, days.
In my little neck of the woods, the week was full of both positive and negative news as we had several holdings get upgrades, but the BP news and the change of a CEO and a poor result from a turnaround specialty retailer kind of kept things in perspective. When you own a bunch of different companies, you are going to have companies whose news is not, shall we say, full of sunshine. Part of investing is trying to find situations which have a ton of potential relative to what you are paying, and in some instances you may find yourself putting money into businesses which are not performing very well, in the expectation performance will get better. Historically, we have benefited from these types of opportunities. However, not everything you invest in always turns out perfect and in this case, the CEO resigned and the company announced another terrible quarter, its fourth in a row. Even more lovely, they stated they would issue more shares, meaning existing owners get diluted. I call this dealing with dung, and it is a part of investing. You expect business to improve, but if it does not, the turnaround never experiences a turn, which is not good for the good guys. In any case, there was very little capital used in this position as risk management is also a part of the practice we have a bit of experience in as well. Yes, I do appreciate your concern.
I was reading a book on the start of the Revolutionary War and was paying particular attention to how George Washington handled the hardest part of being the leader of an army which faced especially difficult circumstances in dealing with its opponent. What struck me was how his biggest losses were in part because of his inability to make decisions in a timely manner. In thinking about our current leader and situation with ISIS, the logistics of dealing with the joy that is the Islamic state makes it a tricky task. Still, it seems pretty clear ISIS is a group that while disgustingly masochistic, is very much something our leadership position in the world is capable of addressing. That is, if it is addressed, although I get the sense our fearful leader is starting to recognize, at a minimum, of why confronting ISIS will become more urgent as the days pass.
Disclosure: 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.
