There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.
Desiderius Erasmus
In the investment world, a macroeconomic and globally based strategy has become the flavor of the month. The more a fund's style is based on finding mispricing in global currencies, sovereign state growth rates, interest rate discrepancies, central banking policy, or a combination of these, the more that entity might be apt to call attention to itself. Imagine the possibilities if they could generate above market returns to boot? They really might have something going then. Interestingly enough, with so few investment managers outperforming their benchmarks in either debt or equity, the public has decided forget active investing, and just own the whole darn market, as Vanguard's Jack Bogle has long advocated. A big part of the problem for any investor is the futility of basing investment decisions on macro based themes. You see, as Desiderius so eloquently states, facing reality versus living in a dream might be a good place to begin.
Let's cut to the chase. The U.S. economy is currently in slow growth mode. It has been this way for quite some time, probably for the last five years. Other than low energy prices, robust corporate profits and incredibly attractive interest rates, the business community does not believe end market demand justifies a great deal of capital investment. As a result, companies are looking for growth through merger and acquisition activity, or improving shareholder returns by engaging in massive stock buybacks. Investors have been scared to death of a change in the direction of interest rate policy for the last few months. The last thirty days have been particularly interesting in this regard. Bond yields in Germany and the United States have started to actually rise, imagine that. It is causing pain for anyone who bought overpriced fixed income assets in these countries during the last few years.
Global exchange rates for currencies have been volatile as well, as can be seen with recent dollar weakness. The one sided nature of going long the dollar has been in place for about the last six months. In sum, the constantly changing dynamics of the various different and important variables in macroeconomics makes forecasting these areas nearly impossible. From my point of view, the best approach is to concentrate on the microeconomics of investing in specific companies at prices which you believe make sense.
When you focus on owning equities from the long side, you are going to be vulnerable to short term market swings. You know this before you spend one dollar. In fact, you want to use other investor's psychological weakness to your advantage, which is not always easy. One particular area where this is exacerbated is in the small company arena. When you own little entities, like any business, they are constantly changing. Investors often give up on them when results are not what they should be. Which is why there is opportunity for the analytical and the observant, or as Erasmus advises, for those of us who want to turn reality into a dream, if you know what I mean.
It was a relatively quiet week in the financial markets as not many large companies reported their earnings. Of note was Cisco (NASDAQ:CSCO), which continues to perform pretty well. John Chambers announced his retirement and successor. A long time ago in the height of the internet bubble, Chambers was considered the best CEO on the planet, and Cisco was the most valuable company on the planet. The market has since humbled him, the company, and the stock. Looking back on it, the idea Cisco was worth half a trillion was lunacy. Valuation matters, it always matters.
Trying to teach this same idea to Silicon Valley venture capitalists is a whole different issue all together. Currently, a record number of private companies are considered 'Unicorns', or enterprises worth over one billion smackers. Using this as some of his evidence, a financial blogger gave other examples as proof financial bubbles are everywhere (click here for the article). The culprit is easy central banking policy, which critics contend has been the case for quite some time. Markets have a way of deciding these things, so stay tuned.
Elsewhere, a couple of newly minted IPO's announced their results, Godaddy Inc (NYSE:GDDY) and El Pollo Loco Holdings Inc (NASDAQ:LOCO). Daddy was a kind father and had a good result. The chicken chain, which I used to call the 'slaughterhouse' during my time in southern California, slaughtered investors as it's results did not taste so good. In the pharmaceutical world, Mylan (NASDAQ:MYL), Perrigo Co (NYSE:PRGO), and Teva Pharma (ARCA:TEVA) continue jostling for the right to buy one another. The same phenomenon is transpiring in plenty of other areas of the corporate sector, aided by flush activist investors who are itching to put their fresh capital to use.
In the political arena, President Obama continued to bring up the divisive topic of executive compensation, comparing top hedge fund pay versus all the teachers of the country. His partner in crime, the New York Times, ran an article today mentioning the rewards of the leadership at Liberty Media (NASDAQ:LMCA). As a fellow shareholder of all of these companies, I find it interesting both the President and the Grey Lady did not bring up the lavishness of Al Gore's Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) options or Bill Clinton's $125 million worth of speeches in their analysis. I am sure you are surprised as well. By the way, the guys for Liberty earn the majority of their compensation through restricted stock and options, which is all based on company and stock performance. Mr. Malone owns the majority of these companies, so regardless of what anyone thinks, it ain't going to change. Based on Liberty's long term track record for shareholders, the New York Times (NYSE:NYT) could certainly use Malone's advice on how to incentivize management. Perhaps they might give him a call. Oh yes, that is right, I must be dreaming.
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.