December 2016


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I’m adding a position in the Gold Miners here at circa $19 and change. They are pretty volatile, so there should be plenty of opportunities to trade around the position.

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Employment security is a concept that generates legal and economic controversy. This is due to the conflict between the rights of capital to run a business to its maximum profitability and the argument that employees have a right to employment security.

For people living and working in an advanced economy, viz. an economy where there is specilisation within the process of production in goods or services, then employment security ought to depend on access to a market that demands their goods or services.

The law however adds some further stipulations: that employment security can also be taken to include all factors that affect a person’s employment opportunities. These would include factors such as additional protection for limited periods if they choose to leave paid employment to raise children.

The need for employment security was summarised by Judge Perkins, who, was the Judge in my recent case.

“A heavy onus rests upon an employer before a dismissal can be validly effected. The reasons for this are obvious. The right to be in employment and earn the means to support oneself and one’s dependants is a substantial right requiring protection. There is a strong societal imperative behind this, supported by economic need for full employment as founding a strong overall economy. A position of employment is a valuable asset. Employees are the most valuable asset of any business hoping to thrive. If the employment is to be terminated it is essential that it be justifiably fair.”

Clearly the Judge is not an economist.

Employment in production, when analysed as an economic proposition, can be analysed as a series of property rights, which, lends itself to a concurrent legal analysis.

The first right enumerated is ‘the right to be in employment’. This is another way of saying that as an entrepreneur, who supplies the capital, must provide employment.

Clearly this is incorrect. I have a legal right to my property, in this case capital. There is no requirement that I subjugate that right to another who has no legal claim to my property. There can be no ‘right to employment.’

Employees are a valuable asset, but they are no more valuable than other economic inputs, such as raw materials etc. The most valuable asset is capital, without which, there is no business and no employment. Capital pays the wages of the employee.

This is clearly true, as, production takes place over time. Employees are paid before the production results in consumer goods and the capitalist can earn the market return on those consumer goods.

What the law is actually talking about is the right of the employer to discard under-performing employees. Employees who earn less than their ‘discounted marginal value product’. These employees can create losses to capital and quite rationally, the employer wants to discard this underperforming factor of production.

The law does allow this, but requires that the employer evidence this and thereby justify their dismissal. This prevents the employer dismissing employees, not because they are underperforming, but because there is a personality clash and the employer wants to dismiss on this basis.

 

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From Ray Dalio

Now that we’re a month past the election and most of the cabinet posts have been filled, it is increasingly obvious that we are about to experience a profound, president-led ideological shift that will have a big impact on both the US and the world. This will not just be a shift in government policy, but also a shift in how government policy is pursued. Trump is a deal maker who negotiates hard, and doesn’t mind getting banged around or banging others around. Similarly, the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics and in foreign policy (as well as other areas such as education, environmental policies, etc.). They also have different temperaments and different views that will have to be resolved.

Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do as her books pretty well capture the mindset. This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers. It wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power. The shift from the past administration to this administration will probably be even more significant than the 1979-82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan, and Helmut Kohl came to power. To understand that ideological shift you also might read Thatcher’s “The Downing Street Years.” Or, you might reflect on China’s political/economic shift as marked by moving from “protecting the iron rice bowl” to believing that “it’s glorious to be rich.”

This particular shift by the Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital. Regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge. Regarding attracting capital, Trump’s policies can also have a big impact because businessmen and investors move very quickly away from inhospitable environments to hospitable environments. Remember how quickly money left and came back to places like Spain and Argentina? A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors.

Regarding foreign policy, we should expect the Trump administration to be comparably aggressive. Notably, even before assuming the presidency, Trump is questioning the one-China policy which is a shocking move. Policies pertaining to Iran, Mexico, and most other countries will probably also be aggressive.

The question is whether this administration will be a) aggressive and thoughtful or b) aggressive and reckless. The interactions between Trump, his heavy-weight advisors, and them with each other will likely determine the answer to this question. For example, on the foreign policy front, what Trump, Flynn, Tillerson, and Mattis (and others) are individually and collectively like will probably determine how much the new administration’s policies will be a) aggressive and thoughtful versus b) aggressive and reckless. We are pretty sure that it won’t take long to find out.

In the next section we look at some of the new appointees via some statistics to characterize what they’re like. Most notably, many of the people entering the new administration have held serious responsibilities that required pragmatism and sound judgment, with a notable skew toward businessmen.

Perspective on the Ideology and Experience of the New Trump Administration

We can get a rough sense of the experience of the new Trump administration by adding up the years major appointees have spent in relevant leadership positions. The table below compares the executive/government experience of the Trump administration’s top eight officials* to previous administrations, counting elected positions, government roles with major administrative responsibilities, or time as C-suite corporate executives or equivalent at mid-size or large companies. Trump’s administration stands out for having by far the most business experience and a bit lower than average government experience (lower compared to recent presidents, and in line with Carter and Reagan). But the cumulative years of executive/government experience of his appointees are second-highest. Obviously, this is a very simple, imprecise measure, and there will be gray zones in exactly how you classify people, but it is indicative.

Below we show some rough quantitative measures of the ideological shift to the right we’re likely to see under Trump and the Republican Congress. First, we look at the economic ideology of the incoming US Congress. Trump’s views may differ in some important ways from the Congressional Republicans, but he’ll need Congressional support for many of his policies and he’s picking many of his nominees from the heart of the Republican Party. As the chart below shows, the Republican members of Congress have shifted significantly to the right on economic issues since Reagan; Democratic congressmen have shifted a bit to the left. The measure below is one-dimensional and not precise, but it captures the flavor of the shift. The measure was commissioned by a National Science Foundation grant and is meant to capture economic views with a focus on government intervention on the economy. They looked at each congressman’s voting record, compared it to a measure of what an archetypical liberal or conservative congressman would have done, and rated each member of Congress on a scale of -1 to 1 (with -1 corresponding to an archetypical liberal and +1 corresponding to an archetypical conservative).

When we look more specifically at the ideology of Trump’s cabinet nominees, we see the same shift to the right on economic issues. Below we compare the ideology of Trump’s cabinet nominees to those of prior administrations using the same methodology as described above for the cabinet members who have been in the legislature. By this measure, Trump’s administration is the most conservative in recent American history, but only slightly more conservative than the average Republican congressman. Keep in mind that we are only including members of the new administration who have voting records (which is a very small group of people so far).

While the Trump administration appears very right-leaning by the measures above, it’s worth keeping in mind that Trump’s stated ideology differs from traditional Republicans in a number of ways, most notably on issues related to free trade and protectionism. In addition, a number of key members of his team—such as Steven Mnuchin, Rex Tillerson, and Wilbur Ross—don’t have voting records and may not subscribe to the same brand of conservatism as many Republican congressmen. There’s a degree of difference in ideology and a level of uncertainty that these measures don’t convey.

Comparing the Trump and Reagan Administrations

The above was a very rough quantitative look at Trump’s administration. To draw out some more nuances, below we zoom in on Trump’s particular appointees and compare them to those of the Reagan administration. Trump is still filling in his appointments, so the picture is still emerging and our observations are based on his key appointments so far.

Looking closer, a few observations are worth noting. First, the overall quality of government experience in the Trump administration looks to be a bit less than Reagan’s, while the Trump team’s strong business experience stands out (in particular, the amount of business experience among top cabinet nominees). Even though Reagan’s administration had somewhat fewer years of government experience, the typical quality of that experience was somewhat higher, with more people who had served in senior government positions. Reagan himself had more political experience than Trump does, having served as the governor of California for eight years prior to taking office, and he also had people with significant past government experience in top posts (such as his VP, George HW Bush). By contrast, Trump’s appointees bring lots of high quality business leadership experience from roles that required pragmatism and judgment. Rex Tillerson’s time as head of a global oil company is a good example of high-level international business experience with clear relevance to his role as Secretary of State (to some extent reminiscent of Reagan’s second Secretary of State, George Shultz, who had a mix of past government experience and international business experience as the president of the construction firm Bechtel). Steven Mnuchin and Wilbur Ross have serious business credentials as well, not to mention Trump’s own experience. It’s also of note that Trump has leaned heavily on appointees with military experience to compensate for his lack of foreign policy experience (appointing three generals for Defense, National Security Advisor, and Homeland Security), while Reagan compensated for his weakness in that area with appointees from both military and civilian government backgrounds (Bush had been CIA head and UN ambassador, and Reagan’s first Secretary of State, Alexander Haig, was Supreme Allied Commander of NATO forces during the Cold War). Also, Trump has seemed less willing to make appointments from among his opponents than Reagan was (Reagan’s Chief of Staff had chaired opposing campaigns, and his Vice President had run against him).\

By and large, deal-maker businessmen will be running the government. Their boldness will almost certainly make the next four years incredibly interesting and will keep us all on our toes.

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Nike have invented and are releasing a self-tying shoe. For pretty much $1000. Normally I wouldn’t even bother reading the article much less actually commenting on the article. However, sneakers are absolutely a fashion article. Sneaker collectors happily pay thousands of dollars for them. So for every person like me who considers it a total waste of time and money…there are some who live for this type of garbage.

Nike is breaking new ground with the HyperAdapt 1.0, its first self-lacing sneaker for the general public.

The sneakers are pretty slick and easy to use for a first-generation product, and they’re full of promise for things to come, as I said in my hands-on review of the shoe.

For most buyers, however, there remains a AUD$986 (US$720) barrier to purchase.

Though the shoe is not part of a limited-time collection, it’s being rolled out slowly, in waves, and only in particular stores in the US. Interested customers need an appointment to test out or purchase the shoe, and stock can be hard to come by depending on how you time your visit.

Nike says it has seen an “extremely strong response” from customers interested in the product.

Though it’s not the newest Jordan-branded shoe or a limited-time collaboration, it’s clear who the shoe is targeting with its high price and limited supply: collectors, according to NPD sports retail analyst Matt Powell.

“I think the shoe will sell very well,” Powell told Business Insider.

Flight Club, one of the biggest shoe resellers both in New York City and online, has noticed that demand for the shoe has been high.

“Since its release, the Nike HyperAdapt 1.0s have sold extremely well for us,” Flight Club spokesman Steven Luna told Business Insider. “Being the first of its kind, a self-lacing sportswear shoe, we were certain it would generate much fanfare amongst sneaker and technology enthusiasts.”

According to Flight Club’s systematic pricing, which takes into account pricing history, what people are saying about the product on social media, and other recognised sale patterns in order to tell what a shoe is worth, the sneakers are worth about $5,478 to resellers, depending on the size.

That pricing is corroborated by a cursory look at listings for the HyperAdapt 1.0 on eBay, which show a similar range.

Stadium Goods, another big name in reselling in New York City, is seeing a high demand for the shoes as well as “tons of curiosity around how it functions,” according to John McPheters, the founder of the store.

McPheters theorizes that buyers so far have been motivated by the technology and rarity of the sneakers, and less so their athletic functions.

“I’m doubtful there’s a lot of sporting interest in these shoes at the moment, given that they have a very prototype-y feel,” McPheters said.

The technology used in the shoes originated from a “what-if” technology-focused scenario first dreamed up in “Back to the Future II.” That’s a slight deviation from Nike’s usual mandate of making the training or sport experience better for the athlete who wears its shoes.

Once the tech does progress into truly adaptive functions — constantly tightening and loosening based on the wearer’s movement — that mandate will be fulfilled.

While it is currently available in New York City at the Nike Soho store and Nike+ Clubhouse, the shoe’s release will soon be a bit wider, as customers will be able to try it on in Los Angeles and Chicago starting December 20. A new grey colour in addition to the current black will also be launching that day.

McPheters noted that, if or when the shoe enters a wider release, the prices could fall, though the 1.0 will always have the unique designation of being the first self-lacing sneaker on the market.

The shoe has broader implications for the brand moving forward. Nike CEO Mark Parker went On CNBC earlier this year, Nike CEO Mark Parker claimed that self-lacing sneakers will be as big as self-driving cars in the future, with mainstream appeal, application, and pricing.

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One of the things I failed to learn after writing a book was the simple fact that methodically demonstrating a thing with data and evidence doesn’t resolve that issue. I shouldn’t have been so naive, given that some people still are flat-earthers, or are anti-vaxxers, or Holocaust deniers, or claim that global warming is a Chinese hoax.

Which is why, despite all of the earlier discussions about the folly of forecasts, I find myself once again compelled to bring up this subject. Blame it on the time of year, when all of the forecasts for 2017 are being rolled out, while the old ones that were so-often wrong are forgotten instead of being reviewed.

So please consider this column a public service. Here is a round-up of some of 2016’s forecasts, and a look at why they didn’t quite work out as expected:

• Get Ready for $80 Oil: “When oil drilling activity collapses, oil supply goes down too.” That may or may not be true, but one thing we know is that oil never got anywhere near $80 this year, peaking at about $53 earlier this week. The error here is assuming you can: Accurately measure a drilling activity slowdown; figure out what that impact will be on supply; and determine how that will affect prices. This forecast, made by Raymond James, tried to thread that needle. It didn’t happen.

• The recession of 2016: “Central bank bungles, oil price fluctuations and overregulation indicate contraction.” This forecast, published in the reliably ideological Washington Times, commits the classic analytical error of infusing emotional politics into forecasts. The author opposed the Federal Reserve’s program of quantitative easing as well as government regulations, so of course these things will cause a recession! Only, they didn’t. Economic analysis colored by political bias equals awful investing advice.

• Recession sign is in play and has 81% accuracy: Recessions have followed consecutive quarters of corporate earnings declines (whenever that happens) four out of five times, according to JPMorgan Chase & Co. strategists. There are at least two reasons for this: First, as we have discussed before, relying on a single variable to explain a complex system such as the economy is a poor approach to analysis. The world is just not black and white. Second, it confuses correlation with causation.

• Billionaire Sam Zell Says Recession Likely in Next 12 Months: This one blames the Fed and the strong dollar, which fell in the six months after Zell’s prediction. We have discussed Zell’s call before, but a few words about the halo effect, or the tendency to give people successful in one field more credibility than is warranted in other areas. Although we have to give credit to a billionaires’ ability to make money, they probably don’t have a comparable ability to foretell recessions.

• Why Gold Will See $2,000: Gold bugs are too easy to debunk. But as a reminder, the market has managed to figure out that China and India are net buyers of gold, and have been for thousands of years. That isn’t what is going to drive its price, which never reached more than about $1,375 this year.

Debate Night Message: The Markets Are Afraid of Donald Trump: “Wall Street fears a Trump presidency. Stocks may lose 10 to 12 percent of their value if he wins the November election, and there may be a broader economic downturn.” So wrote Justin Wolfers in the New York Times on Sept. 30, based on a “close analysis of financial markets during Monday’s presidential debate.” This looks like another classic error of causation and correlation. This prediction, for all we know, may yet prove true. But we have to note that since the election, the Standard & Poor’s 500 Index is up 6 percent.

• This Dow rally will end March 23: This forecast was made on Feb. 16, so at least it didn’t have much shelf life. Studies have shown that people prefer false precision to accurate ambiguity. The forecaster who tells you that the future is inherently unknowable, and all forecasts 12 months out are just guesses isn’t as well received as someone saying with certainty that the Dow Jones Industrial Average will top 21,000 on the day Donald Trump is inaugurated as president. Why don’t investors recognize this? The answer is quite simple: It is just human nature.

Those who make forecasts for a living, or are asked to do so by the news media, should use the opportunity when they make a prediction to point out the absurdity of the exercise. My own 2017 predictionsattempt to do just that.

The bottom line remains: forecasts and predictions are exercises in marketing. Outrageous and wrong forecasts are typically forgotten, and when one randomly happens to come true, the guru is lauded as the next Nostradamus. It is an expensive and fatuous practice, and the finance industry should give it a permanent rest.

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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.

 

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