Bulls And Bears Match Each Other As Market Fades At Week End

You are a very fortunate person if you found a ‘partner’ for life, what you might call the perfect match. When you are a young person, usually right out of high school or in college, social activity is a priority and finding your perfect match might be the ultimate goal, depending on the individual. Finding your ideal soulmate can be an event which changes the course of a person's life. Many believe it is the most important choice one makes during your time on earth. Clearly, matching is quite significant in the social segment of one’s journey. Interestingly enough, the idea of a good match may even be more crucial in the financial realm. Let’s take a look.

First, in terms of an individual’s portfolio, most financial planners and advisers understand you want to select asset classes and weight those assets to match a person's age and risk tolerance. For example, you would not want a 25-year-old’s portfolio entirely placed in cash, cd’s, and bonds as they have 50 years or so before they might need to live off the portfolio’s income. Conversely, a 70 year old should not have all their assets in small cap, high tech, or biotechnology stocks as that would not match their risk profile either, though you never know with some octogenerians.

Second, if you were to look at a pension fund for a state university, or an endowment or foundation, matching the liabilities and the assets in that fund is a critically important task. If the fund has obligations which are short term in nature, let’s say spending obligations for buildings or capital projects, the fund’s assets should be placed in instruments which are liquid enough to meet those immediate needs and not subject to market fluctuations which would cause dramatic drops in those assets, or not allow the liabilities to be easily met.

Third, if you look at an individual company, it is important for the board of directors and management team to match a business model to the working capital requirements of the business. As a recent example, WeWork has been in the news because of their inability to go public. A major part of this is corporate governance weakness, but probably more important is the mismatch in their business model. WeWork has long term lease liabilities in the billions, meaning they have significant committed capital obligations on real estate. The plan is based on using those real estate locations for short term leases to prospective renters. If the business cannot attract renters, or the rates do not cover those long term lease obligations in a sufficient way, cash flow can become, shall we say, uh, insufficient, meaning not enough. Clearly, not enough for the investment bankers, lenders, and now Softbank.

When we talk about matching in finance, you do see it is a very meaningful idea, both theoretically and practically.

In the markets last week, the bulls and the bears matched each other with both positive and negative events. On the plus side, JP Morgan, Bank of America, JNJ, and Morgan Stanley all produced good earnings numbers, and after three years, the UK and EU agreed on a Brexit plan. Going the other way, Schlumberger took a huge impairment charge on prior acquisitions, Boeing has more problems with its 737 plane, JNJ found a trace of asbestos in one bottle of baby powder and subsequently pulled 33 thousand more off the shelves, and the British parliament decided to delay a vote on the EU agreement. All in all, pretty much a wash, or a luke warm match.

Politically, on the Democratic side, moderate candidates attacked Senator Warren for her inability to have a plan to fund her massive capital needs regarding universal health care. Nancy Pelosi and House Democrats continue to pursue their long time quest for impeachment, and just as important, agreed with House Republicans on economic sanctions for Turkey. Turkey crossed over the border into Syria to attack Kurdish forces after Mr. Trump decided he wanted out and the US would pull back its troops along that border. On the Republican end, Mr. Trump decided to hold the G-7 next year at Doral, one of his clubs, which has the appearance of being tone deaf (in addition to possibly violating the emolument clause). Mr. Trump also made this decision knowing how much controversy he is already in with the whole Ukranian situation and impeachment looming in the House. The Democrats, have their own bout of being tone deaf as well, closing off the questioning of witnesses in the Ukranian proceedings. If you were a neutral observer, which I am not, you might think that House Democrats and President Trump were a match made in heaven.