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Tip-toeing into September

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source: http://rall.com/comic/trump-controversy

Summer has officially drawn to a close putting a lid on one of the most bizarre three months in U.S. history. With so much activity in D.C., I am highlighting the key events though I am sure to have excluded others just as bizarre or galling.

Domestically, Congress has failed to pass any major legislation despite Republican control of both chambers and the White House. Republicans did pull together to present several bills to replace Obamacare but none provided a feasible solution, just options that, if passed, would strip healthcare coverage from tens of millions of Americans. The final round played out with John McCain, after undergoing blood clot surgery (the clot being discovered during routine care covered by his health insurance), flying back to Washington to vote in favor of moving a Senate bill forward and then, just a day later, casting the decisive vote to kill that same legislation. Trump’s response has been to strip out the insurance payments under Obamacare, threatening the viability of the exchanges while presumably hoping that the public blames someone else for the carnage.

Internationally, the White House has accelerated ten years of global decline into a single season. Key trade agreements are being dismantled, stripped or threatened in every economic zone creating uncertainty amongst our key trade partners who have responded by aggressively forming alternative trade arrangements with China and others. Trump’s conduct during his European tour continues to make the United States government look incompetent, exemplified by Trump’s holding private one-on-one meetings with Putin without, at minimum, a U.S. translator present.

If trade loss was not enough, we have somehow entered nuclear brinksmanship with one of the world’s poorest nations and no viable way to counter their aggression without the massive loss of life. From a broader perspective, China has 90% of North Korea’s trade and full ability to put a stop to the Hermit Kingdom’s aggression. While I am not a policy expert in the region, it appears that China might be using North Korea to test how far one can push the Trump administration in anticipation of the trade war that he threatened to start with China.

Inside Washington, the White House staff are ineffective and struggling from eight months of disarray. Firings have been aplenty and the the few adults left in charge are ready to walk away. With such turnover in the executive branch, Trump’s varied responses to the incident in Charlottesville highlight the biggest risk to the markets. His Economic Advisor Gary Cohn, a Jew and strong supporter of Jewish causes, was deeply offended by Trump’s comments and nearly resigned. If Mr. Cohn does resign, the markets will view it as the loss of the last bit of hope for market friendly and timely policies. In short, the loss of Mr. Cohn would be the final straw for stocks.

Finally, lest we forgot, the Meuller investigation went into full swing this summer. The home of Trump’s former campaign manager, Paul Manafort, was raided in July and Meuller has now teamed up with the New York Attorney General to pursue allegations of money laundering against Manafort. Keep in mind that Presidential pardons only work at the federal level, opening the possibility that Manafort might testify against the Trump campaign in a plea deal. The phrase that best sums up the White House’s preparations against Meuller’s all-star team of prosecutors came from Nicholas Allard, Dean of the Brooklyn Law School, “is like going to a knife fight with a stick of butter in your hand.” [Bloomberg, August 10, 2017]

In stark contrast to what is happening at the seat of our government, the market’s response to this summer was almost blissful: a small rise of 2.6% in U.S. equities with continued low volatility. We had a couple of spikes in the volatility coupled with market dips, but nothing materialized to keep the markets down. One theory to explain the market’s stability is that as long as there is substantial quantitative easing somewhere in the globe stocks will go up (European Central Bank is the current source of money printing). But with September being a historically volatile month and the potential for surprise events from all corners of the White House and the world, that theory will be strongly tested in the coming weeks.

Protected: Market Update – January 2017

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Fallout From U.S. Election Results

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Dear Members of the Vodia Community,

Well, I don’t exactly know where to start.  The election results from Tuesday night are a turning point for this country and for the world in a way that I never expected to witness in my lifetime.  Unfortunately, it points to a distressing chapter in our history.  I have a number of theories on what happened and what will happen but we will cover that in depth later.

The markets have responded positively after a night of utter chaos. The Dow swung a total of 1,000 points from high to low in twelve hours, currencies have gone every which way with the Peso losing 10% and commodities are flying around as well.  The salient points for our portfolios, as of right now, are:

– Our equities have all done well despite this chaos.  We have a large concentration in healthcare (for fundamental reasons) and healthcare is well ahead today based on the prospects of no Congressional action against drug company price increases – a strong part of Clinton’s platform.

– Our financial holdings in equities also rallied based on the perception of expected lower regulations for the banks.

– The heavy emphasis on fixed income investments has buffered all portfolios.  The expectation of higher inflation combined with dovish Fed policy has created a steeper yield curve, boosting the income stream in our structured notes.

– The private pooled investments are entirely decoupled from this volatility.  Only long-term economic trends will have the potential to impact those investments and we are assessing what this impact may be.

For lack of a better phrase, this is a s***-storm that we are weathering well based on our relatively conservative positioning focused on income generation.  It will take us several weeks to assess the actual impact of the election on our investment portfolios during which time you should expect to see adjustments in your holdings to reduce risk.

Overall, this “change” is likely to harm our economy over a long time span while it, in the short-term, creates some optimism around business-friendly legislation by a Republican Congress.  Though we seem to be well positioned in all aspects as of now, the potential for abrupt change is cause for us to review the portfolios.

As many of you know, together we have weathered other distressing times and our staff has worked consistently during such times to protect your portfolios.  We have never taken for granted your trust in our work and appreciate your partnership as we move forward.

We will be hosting a Live Market Commentary webinar on Tuesday, November 15th, at noon to fully assess the impact of the election on markets, the economy and our society.

Until then,

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David Matias

 

Signals Point to a Troubled Economic Psyche

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Since our last update, a few events have occurred that are worth discussing. Starting with the more benign, the jobs numbers for April were disappointing. There were 160,000 new jobs created, which is healthy but a deviation from the 200,000 new jobs that have been created each month on average over the past two years.

We have also begun to see a quiet trend forming of a few large corporations trimming down travel and consulting budgets. These areas are the first to get cut when there is a contraction in the economy, with the potential that this is an early sign of economic trouble.  The trend is not fully formed enough to indicate economic trouble ahead, but we will be watching it extremely closely in the coming summer months.

Secondly, Apple had a miss on earnings and reported that iPhone sales dropped significantly in the past quarter.  While we anticipated this event and took measures to reduce our exposure to the company earlier in the year, it nonetheless took the market by surprise and cut 15% from Apple’s market value. It is yet to be seen how pervasive this trend becomes for the broader consumer economy, but as the largest technology firm, it is an important indicator to watch.

In a similar vein, Macy’s announced their worst quarterly sales since the recession.  It is not yet clear what this indicates – it could be a reduction in consumer confidence in response to Q1’s stock market volatility or simply the shift from physical retailers to online merchandisers.  Either way, it is another datapoint pointing to a troubled economic psyche.

Finally is the uncertainty around the presidential race. Plenty of ink has been used to describe the abhorrent policies of the presumptive Republican nominee, despite the lack of specificity that has characterized his proposals. While primary results show a Democratic victory in the general election (ignore the national polls released this week, they are grossly inaccurate this far away from the election), there is still a chance that Trump could be president. Should that happen, the agenda he has outlined would lead to near certain economic decay for the U.S., of unknown duration.

Given this signaling towards an economic contraction, we remain light on equities and heavy on cash and fixed income to take full advantage of their inherent stability.  For equities that we do hold, we have companies that will continue to expand their cash flow despite variable economic conditions.

It is a more uncertain time than most in recent memory. Awareness, transparency, and thoughtful discussion are vital to managing through this period.

 

All the best,

David