"Life starts all over again when it gets crisp in the fall."
- F. Scott Fitzgerald
Fall is a time of the year many absolutely adore, including me. The long, steamy, hot summer days start to temper off and the temperature becomes reasonable, almost even, I dare say, pleasant. It has not happened yet, but it certainly looks imminent, at least here in Las Vegas. With the arrival of fall, comes the beginning of a new school year, both on college campuses and in primary schools. Along with the big day for boys, girls, and quickly maturing young adults, comes an even more important time for sports enthusiasts. You guessed it, the riteful passage of college and professional football, and a little while later, the fall classic in Major League Baseball (known as the World Series). Hockey has become the sport to pay attention to here in Vegas, and so the NHL also must get a mention. Sporting enthusiasts have plenty of activity to pay attention to, so it seems those endless days of nothingness are long past. Similarly, let’s turn to the capital markets as there is always something going on there, too.
The August jobs report came out yesterday morning and it was a touch soft, with the number being 130,000 as opposed to the estimate of 150k. Most economists see the economy cooling some, and the results certainly probably helped Fed Chairman Powell move towards cementing a twenty five basis point rate cut when the FOMC meets next week. With the ten year treasury note yielding a paltry 1.552%, even after a nice rise last week, the bond market is priced for perfection, unless you are a trader. On a relative basis, the US fixed income market is attractive for its high yield, because all across the globe, negative yielding bonds dot the landscape. You may not get much for owning debt here, but you do get a positive coupon, though minimal. Many, including myself, see the negative yielding debt issue as a major problem for rational investing. Negative yields bring a ton of problems, but I’ll let the following video be more instructive as to why- (comes from Jim Bianco, Bianco Research).
In addition to low rates here, one area which is getting little notice is fiscal discipline, or should I say, the lack of fiscal discipline, by our lovely politicians. For this year, the US government is estimated to run a trillion dollar budget deficit. A trillion is a thousand billion. A billion is a thousand million. Under this situation, should the US dollar be strong? Just as importantly, how sustainable is dollar strength, given the lack of spending limits? Interestingly, the Trump administration rightly argues the country actually needs a weaker dollar. There are many positions the current administration takes which I believe are correct, especially those that are energy and growth related. However, running trillion dollar deficits in a year, with no end in sight as far as addressing Social Security and Medicare escalation, is going to solve the strong dollar problem. Be careful what you wish for, Mr. Navarro.
In the energy world, the collapse of the stock prices of the shale producers leaves a new dynamic for investors. With oil trading in the $60 dollar per barrel range (Brent), shale exploration is not very profitable for most E&P outfits, and many are loaded with debt. The new joke is the bankers are calling it Chapter 22, because many of these entities are now facing Chapter 11, but for a second time. The largest integrated oil outfits, the majors, stand ready to cherry pick prime opportunities, particularly in the attractive Permian. Some of this started when Chevron said no to Anadarko, and then Occidental went ahead with that deal, and now the Occidental shares have been punished, along with the rest of the space. Elsewhere, the majors are noticing a slowdown in oil demand from China, clearly related to trade talks. On that front, optimism about a fresh round in October helped lift the market. It will be interesting to see what comes from those negotiations.
Elsewhere, Argentina’s currency and equity market has been drubbed on the realization that the current, pro market leader, Mr. Macri, probably will lose his reelection bid in a few weeks. The IMF is scheduled to consider a fresh bid by Argentina to restructure a loan of $57 billion that matures in 2021. The ECB will meet next week to consider its interest rate policy, and is scheduled to reduce rates again. Lulu-lemon reported a very strong quarter and investors lined up to hit the buy button, as well as do downward facing dog, but fashionably. LULU was one that was in my wheelhouse and I missed it a few years ago, many multiples later. Cannot get them all. Finally, for those of you daring real estate investors, the Bahamas might be worth a look. A few years ago when Puerto Rico was thrashed by hurricanes, investors rushed in for prime purchases, which have paid off in that circumstance. Hurricane Dorian devastated the Bahamas, and the loss of life and property is truly a sad situation. In time, a long time, the area will recover. No guarantees, but something to consider. Thanks for reading and enjoy your first weekend of football.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.
