Value Portfolio Reports Week Review – October 10, 2016

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Last week (Week 40) 3 October to 7 October

The market moved slightly upward over the week as news agencies made constant predictions on the upcoming presidential debate. It dominated the news so much that major economic events were totally lost in the mix. Before we take a look at some of the market activity I must say that I was extremely impressed with the Massachusetts Eye & Ear Annual Gala that I attended in Boston on Thursday. I learned about some of the most fantastic advances in medicine that I only thought was possible in dreams. The research that this organization accomplishes is beyond expression. Their patients are hearing and gaining sight for the first time in their lives because of unique advances at the hospital. I cannot imagine what it must mean to someone that gains sight for the first time at the age of 20. While we busily evaluate the markets to gain value, these doctors and research professionals are saving lives. Congratulations and job well done!

Last week was a confirmation of many forecasts we made earlier this year and late last year. Last year “experts” were forecasting the end of the energy industry as we know it. Energy stocks were being sold off in almost panic style with expectations of long term oil prices in the $20/bbl range. Our view was different. We see oil as a long term commodity and the companies that are major participants manage the business on a long term basis. We see them not getting caught up in short term price fluctuations and manage the companies with decade long visions. Oil closed last week above $50/bbl very close to our expectations expressed in 2015 and throughout this year. Oil stockpiles are falling as they rationally should, as marginal highly leveraged explorers and refiners find it increasingly difficult to operate in the lower margin environment.

The second prediction we made to start to come to fruition was involving the mutual fund industry. We have expected the mutual fund industry to consolidate for a long time. As more regulatory scrutiny is focused on the industry discovery of abusive and inefficient practices will become more evident. We never expected Janus to work their way out of problems that started ten years ago and the hiring of Bill Gross was a nice attempt but even the King of Bonds couldn’t solve inherent problems in the industry. Last week Janus Capital agreed to be acquired by Henderson Group PLC which is based in London. This is a major acquisition that we believe is only the beginning of what will probably turn out to be the beginning of a multi-year shrinking of the business in both the number of providers and total assets under management. Many believe this is the outcome of active versus passive management competition. This comparison has accelerated the trend, but it has its origins in too many funds chasing too few assets and funds without a distinctive competency; they are just another fund on the list.

Related to the consolidation of the mutual fund industry is the increased regulation of advisors. The dreaded idea of watching out for your client’s best interests appears to be creating a bad rash with some advisors. I think if you polled the universe of investing clients you would find that the client always believed the investment manager/broker was always looking out for them. How can it be a problem for the industry unless they were never looking out for the client to begin with? It appears simple, take care of the client and they will take care of you. Simple and straight forward. I find it interesting that an industry that can figure out how to split up a commission 10 ways across three or more platforms using five different schedules is saying tracking the sales activity for fiduciary rule is too complicated for their systems to monitor. Really? Well if they can’t figure it out, clients will. Fiduciary rules are easy, put the client first!

In the beginning of the year when high-flyer non-profitable companies came forward with multi-billion dollar valuations we said this was not logical. We said this will not last. Last week we were not surprised to see potential suitors back away from Twitter. We were also not surprised to see Uber come to terms that they were not going to bully their way into China and sold their operations to Didi Chuxing. Uber may have redesigned the taxi business but at some point you must make a profit. The story of growing so fast that you are using up capital more efficiently to pay a dividend gets old to the investor and you begin to wonder if the “Greater-Fool” story has stepped in. Twitter has fallen a long way from the $69/share high right after they went public. I guess the Fools are getting harder to find.

Economic news was rather scarce last week with only the International Trade in goods and services figure coming forward. Remember the strength of the U.S.$ was supposed to end all trade for the country. August exports reached $187.9 billion which was an increase of $1.5 billion over the previous month. Evidently, Americans still have an appetite for foreign products because imports reached $228.6 billion, an increase of $2.6 billion from the previous month. The deficit between exports and imports is improving over last year by $4.3 billion. We still have a current deficit between exports and imports, but it is moving in the right direction from last year.

This week (Week 41) 10 October to 14 October

This week may not see relief from the presidential campaign mudslinging effort. Of course, the markets may come to a complete halt from shock if the two candidates started to discuss the differences in their approaches to solving economic and social problems. Could you imagine if one of the candidates started saying something such as, I agree with you on the topic and we should move forward but there are a few ways I which I differ in the solution? Time may stop, so maybe it is best we just hear about how terrible the other candidate is to be dog catcher.

Later this week we will be watching for the mortgage applications data. With interest rates unchanged an increase in mortgage applications will demonstrate a willingness to accept debt which usually indicates an optimistic view into the future by the consumer. We need the consumer to see a positive future so that economic activity increases.

The JOLTS report comes out this week as well which also is a bit of a view into the future. The most interesting part of the report is the data that shows how willing people are to switch jobs. The more willing to switch, the higher the confidence. All good.

Toward the end of the week employment data around jobless claims and retail sales will be released. Jobless claims continue to drop which is an improvement in the employment markets and an even, or slight improvement in retail sales will be welcome. Retail has been a bit slow recently and many of the retailers are adjusting their tactics. We expect to see consolidation between retailers going forward and continued contraction in the number of physical stores. As this continues the successful implementation of strategic changes will improve profitability.

This is NOT a Specific Recommendation and Should Only

Be Viewed as News Based Information for Your Consideration

By | 2016-10-11T14:23:39+00:00 October 11th, 2016|Categories: Money Basics|0 Comments

About the Author:

Steven Albrecht was the President and CEO of Charter Trust Company from 2001-2016

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