The future is no more uncertain than the present. - Walt Whitman

The definition of certainty is the quality of being reliably true. The investment world centers around the principle of cash flow, and discounting the value of the stream back to the present in order to come up with a value of an asset. Much depends on the reliability of the cash. How certain is it the cash flow will be there? Will it grow? Will it melt? How quickly will it grow? Could you lose the majority of it in a year? In a month? In a week? Will it double in a year? Triple in a year? Grow by ten times in a year? Ten times in a month? You see there is quite a bit of variability possible. Now, the variability can be eliminated with more knowledge. If the company producing the cash has generated a billion a year for the last ten years, there is probably a high probability it will do the same next year. If the entity just signed a lease last year and is in the retail clothing business, well, the cash generation capability will have a much higher degree of variability. Especially during a pandemic. I bring this topic up because of our existing macroeconomic and political environment. You see, my dear friends, we are in a time of considerable uncertainty. Why does that matter to investors?

It is important in terms of what one is paying for an asset. The more unpredictable the economics, the higher the risk. The greater the risk, the lower I should pay for the asset. The converse is also true. The higher the predictability of the income stream, the more reliable. The more certain, the more I will pay, especially if it is growing at an above average or high rate. We currently have a big dichotomy in the market in terms of reliability. Companies which have businesses which benefit from people staying at home are given massive multiples on their stock. If you haven’t been paying attention, Zoom is now as considered as valuable to investors as Exxon Mobile. Zoom is considered dependable, Exxon is believed to be melting. If you were to evaluate Pelaton, or Salesforce, Fastly, Datadog, Shopify, and others, the same principle is in play. The cash flow is certain, it is growing, and investors are paying up. Of course, the next pertinent question revolves around the economic environment. Let’s take a look at that for a moment, shall we?

The global and U.S. economy started having problems when the Covid-19 virus emerged in China around January, and then arrived here in the U.S. in March. The world is about a year into it, and possible vaccines may help the situation by year’s end, but probably in the middle of 2021. In the mean time, the US economy has recovered about half of the jobs lost since the beginning of the crisis- 11 out of 22 million. The damage remains centered in hospitality, travel, food and beverage, and entertainment. In conjunction with the crisis, and one could make a strong case for exacerbating it, is the current stage of the political cycle. With twenty five days to go before a tremendously heated presidential and congressional election, political issues at the state, local, judicial, and national level also are affecting what transpires in the economy. As such, there is a high degree of uncertainty about the outcome. High uncertainty should mean lower asset prices because of the lack of reliability. If there was ever a time which could be described as not dependable, now is that time. So, as an investor, we are forced to look at this and evaluate what you own within the context of the current situation. It is why predictability is good. Management teams with excellent track records, diversity of the industries, highly profitable businesses or enterprises which are positioned to grow for a long time, and unique models which are tax efficient. If taxes go up, no problem, what you own is already tax advantaged. It is a very uncertain time, and it is not going to change for at least a month, maybe much longer. Pay attention.

In the market last week, there were very few notable earnings reports. Paychex (PAYX) and Levi Strauss (LEVI) both beat estimates while Domino’s Pizza (DPZ) did not deliver. In the sports world, the NBA and NFL are showing huge drops in viewership, with the NBA Finals having the worst audience on record (nearly 70%) declines. If you are a network looking at those ratings, your going to be asking for big price concessions during the next contract negotiations, provided they don’t rebound. In the political realm, the Vice Presidential debate gave Republicans a glimmer of hope that Mr. Trump will be able to use Mr. Pence’s template in the last debate. Probably the most uncertain question, and maybe the most important one, is what the American public really feels about what has gone on the last year. Polls show Biden ahead nationally, but by a much lower number in the swing states. Democrats feel very confident, while Republicans have their own points to give them some assurance. Just as crucial is the status of the Senate, which has about five very close races, including the one in North Carolina where some personal indiscretions of one candidate might have an impact on the outcome. Yes, we are living in a very uncertain time. Whitman would be pleased.