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Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
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  • Iron Capital Insights
  • March 9, 2020
  • Chuck Osborne

Fear

“[T]he only thing we have to fear is…fear itself.” – Franklin D. Roosevelt.
This quote is truer today than at any time I can recall in my career. The coronavirus itself will pale in comparison to the damage done by the fear of the coronavirus.


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  • Iron Capital Insights
  • February 24, 2020
  • Chuck Osborne

Coronavirus

Will the coronavirus change the market’s overall momentum? Anything is possible, but it is not very likely. In our opinion, trying to guess the long-term impact of such global events is a fool’s errand. Prudent investors know what they own and why they own it.


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  • Iron Capital Insights
  • January 31, 2020
  • Chuck Osborne

Excuses, Excuses

Health scares, political scandals, natural disasters – you name it; when it is time for selling and nothing else is around, Wall Street will grab any excuse to generate some trades. That does not mean those trades are actually related to the value of a stock.


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  • Iron Capital Insights
  • November 22, 2019
  • Chuck Osborne

On-Again, Off-Again

This is why so many in the administration have tried to assure us that all this tariff business is just negotiating. They believe in free trade; they just want it to be fairer, and they believe these tactics will help make that happen. I have doubts about this strategy, but I’m pulling for them to work because that would be a better world. I don’t understand people who route against their country.


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  • Iron Capital Insights
  • November 4, 2019
  • Chuck Osborne

Recession Avoided?

The slowdown in the economy has been driven by business investment, or the lack thereof, and the slowdown in business investment has been driven by uncertainty in international trade. The stock market seems to understand that, even if many who pontificate about the market do not.

  • [T]he only thing we have to fear is…fear itself. – Franklin D. Roosevelt.

    Most people are familiar with this famous quote. Many mistakenly believe that FDR was talking about War World II, but that is not the case. This quote came from his inaugural address in March 1933, and the fear he spoke of was economic fear – the fear that had crashed the stock market in 1929 and brought on the Great Depression.

    This quote is truer today than at any time I can recall in my career. The coronavirus itself will pale in comparison to the damage done by the fear of the coronavirus. The last time we dealt with a pandemic was 2009, with the novel H1NI virus, also known as the swine flu. How many people remember it? It did cause some issues; schools and camps closed for short periods here in the Atlanta area, as in many places around the U.S. and the rest of the world, but to be honest, I personally don’t really remember much about the ’09 outbreak. Do you? According to Wikipedia, H1N1 killed 575,400 people globally. Any death is a tragedy, but I note this for perspective. According to the Wall Street Journal, there are now approximately 110,000 cases of coronavirus globally. In South Korea, where there has been the most widespread testing thus far and therefore the best data, the mortality rate is 0.6 percent. Let’s put this another way: 99.4 percent of the people who get the coronavirus will have flu-like symptoms for a few days and then go back to work. Run for the hills!

    The difference between today and the far more serious pandemic of 11 years ago is that we now have multiple groups in our society that profit from fear. The “reporting” of the coronavirus has been far closer to screaming fire in a crowded theater than actual information. Case in point: the headline in this morning’s Wall Street Journal is, “Coronavirus Cases Outside China Tripled in Past Week.” If one actually reads the article, the cases have gone from 10,000 to 29,306. The world population outside of China is 6.3 billion people. I set my business calculator to go out three decimal points and all I get is zeros when attempting to calculate this percentage. I was going to say this is like going from 1 to 3 percent, but it isn’t even within three decimal points of 1 yet.

    I told our staff what I was going to write about this morning, and one of our analysts pointed out that he saw a headline in Globe magazine in the grocery store checkout aisle this weekend which said, “Coronavirus Will Destroy the World.” We expect that kind of sensationalism from tabloids, but The Wall Street Journal? The fact is, the media is loving this. They profit from fear. No one clicks on an article that says, “Number of Coronavirus Cases Outside of China Remains 0 Percent out to 3 Decimal Places.”

    The media is not the only segment of our society which profits from fear; short sellers make money when stocks go down. Selling a stock short means one sells shares of a company that he does not actually own; he “borrows” the shares and promises to eventually close his short position by buying the stock, but he hopes to sell high and then buy back at a lower price. Historically, speculators who did this had to wait for what we called an uptick. In other words, the last trade of the stock in question had to be positive, then he could sell it short. Then, he would have to wait for a positive move, and he could sell it short again. This is the way the market worked from 1938 until 2007, when the uptick rule was removed.

    Today short sellers can just sell away with nothing stopping them. They do it by computer, so they can sell more and more until markets open down 7 percent. During this latest crisis, at Iron Capital we have had no one call us panicked; we have had only a few calls from any client who was concerned. We have had more clients sending us money to take advantage of these prices. I point this out because at some point one has to ask, who is selling? Investors are not selling, so that leaves us with the short sellers. They are profiting from fear.

    All of this would be just a sad commentary on the state of our media and Wall Street if it did not have real impacts. However, people and organizations are canceling events all over the place. This may not seem like such a problem, but it is if you are in the hotel business or travel industry, for example. This impacts lives, and for more than just a few sick days. Economists and people like myself who think in terms of growth are often labeled as cold and calculating; nothing could be farther from the truth. Economic activity means jobs. It means food on tables and roofs over heads. If we allow those who profit from fear to create an actual economic crisis out of this bug, then people will lose wages. Some will go hungry, and others may even lose their homes – because of fear.

    The stock market will bounce back, and 99.4 percent of the people infected by this virus will bounce back, but the people who get laid off because of this fear will truly struggle. People who give up on investing for retirement because of the day-to-day craziness of computerized speculators will not be able to support themselves in retirement. Fear of the coronavirus will do and is doing far more harm than the virus itself. Is this now how we are supposed to act each and every flu season?

    We talk all the time about being prudent investors. We should all be prudent with our health, all of the time. Hiding from our fellow man because of a virus is not prudent. We have to fight the fear as well as the virus.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Fear

  • The market is down on coronavirus fears: that is the headline that welcomed us this morning. While the coronavirus news out of China is still improving, there are now more cases in Italy, South Korea, and Iran. This has the market dropping.

    The coronavirus is a human tragedy and our thoughts and prayers go out to anyone affected. Hopefully we learn the lesson and at the very least the practice of so-called wet markets is eliminated. Having said that, our role at Iron Capital is to navigate the crazy world of investing for our clients. We have to think about how the coronavirus impacts our client portfolios.

    Outbreaks like this are similar in impact to natural disasters: they have an impact on economic activity in the immediate term, but that impact is short-lived. Once the crisis is over, people return to their normal lives. Of course, nothing feels short-lived while it is happening, but when we look back at 2020 three years from now (and it may not take even that long), the coronavirus is most likely a small footnote. I say most likely because I am projecting the future, and the future, of course, is always uncertain. When the weatherman says there is a 10 percent chance of rain and it ends up raining, that does not mean that he was wrong; once out of every ten times, the 10 percent chance hits. This is how averages work.

    The odds of the coronavirus having a lasting meaningful impact on the markets is far less than 10 percent, but there is some minute chance that this time it is different. However, betting on such long odds is not the prudent thing to do. In fact, betting on these kinds of global news stories is never the prudent thing to do.

    Some perspective is always helpful while going through such events. As of this morning, the market by almost any measure was still positive for the year. The S&P would have to drop another three and a half percent to simply go back to where the year started, and that was after being up more than nine percent last quarter. Being up a little more than nine percent in five months is not exactly bad. In fact, coronavirus or not, the market was well overdue for a correction. Markets never go up in a straight line.

    Another way to look at the market is through moving averages; many market participants view the markets this way. Instead of paying attention to daily price movements, which can be very volatile, some look at the average price over the last fifty days or the last two hundred days. As of this morning, the current price was still higher than the fifty-day average, which is well above the two hundred-day average. That means the market’s momentum is still going up.

    Will the coronavirus change the market’s overall momentum? Anything is possible, but it is not very likely. In our opinion, trying to guess the long-term impact of such global events is a fool’s errand. Prudent investors know what they own and why they own it. They invest from the bottom-up, meaning they judge each investment on its own merit as opposed to speculating over global events. This is what we do at Iron Capital, and it is what we will continue to do.

    I have witnessed a lot of human tragedies during my career – hurricanes, earthquakes, tsunamis, outbreaks, and, of course, terrorist attacks. Each one was horrible and almost universally caused the market to drop; and every single time, those market drops created great buying opportunities.

    I’m reminded of the wisdom of the old stockbrokers who were around when I was young in my career: the stock market is the only store in the world where people want less of the product every time that product goes on sale. That is when prudent investors want to buy.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Coronavirus

  • To paraphrase comedian George Carlin, have you ever noticed how other people’s reasons are excuses and your excuses are reasons? A couple we know made a New Year’s resolution to do a “Whole 30” diet challenge with some friends. I’m sure your question is the same as mine: how do they lose weight eating a whole cake instead of just one piece? However, I found out that is not what they meant by “whole” foods. Ten days into the challenge, they texted us a picture of them with pizza and a beer. Their reason (excuse)? The challenge consumed their thoughts all day long…and they got hungry. How long did your resolutions last this year?

    Well, the market has been going steadily upward. That is, until this week. Volatility has risen its head and while we really have not gone anywhere, we have had some down days. Why? The coronavirus of course. That is what all the news networks are telling us. The market is down because of the coronavirus. Is that really the reason?

    I want to be clear that the coronavirus is a serious and tragic thing. I am not making light of that. Our thoughts and prayers go out to all who are affected, either directly or through the loss of a loved one. It is a tragedy and a real public health scare.

    However, it is not a reason for American companies to be worth less today than they were a few days ago. No, it is an excuse. Markets do not go up in straight lines; they take three steps forward and two steps back. That is their nature. We have been on a sustained upward movement, and we are overdue for a breather. When this situation occurs, any headline becomes a convenient excuse.

    Health scares, political scandals, natural disasters – you name it; when it is time for selling and nothing else is around, Wall Street will grab any excuse to generate some trades. That does not mean those trades are actually related to the value of a stock.

    The real news affecting stock values is not so dramatic. The Federal Reserve met and essentially said, “all is well, we are leaving rates right where they are.” Fourth-quarter gross domestic product (GDP) came out Thursday and the U.S. economy grew at a better-than-expected 2.1 percent. It is still early in earnings season, but thus far the news has been good. The new trade deal with our North American partners is now official, and we have a “phase one” deal with China.

    All real signs point to stocks climbing higher, it just will not be in a straight line. As always, we need to remain prudent in our decisions. It can be hard to know when it is just an excuse or a veritable reason; this is why we believe so strongly in investing from the bottom-up.

    Amazon is still selling a lot of stuff and Apple is still delivering iPhones. It is far easier to have some understanding of the future of a specific company than it is to try and figure out how the coronavirus will impact Chinese GDP.

    So, whatever your reason, enjoy the thing you promised to give up less than a month ago and understand the media’s reason for day-to-day market activity is just an excuse.

    Warm regards,

     

     

    Chuck Osborne, CFA
    Managing Director

    ~Excuses, Excuses

  • Just when we thought we had a deal, it went away. I have talked so much about tariffs in the last year that I am really getting tired of it. We all know, or should know, that tariffs we place on foreign goods hurt us just as much if not more than the foreign country we are trying to penalize. We should all know that we, the consumers, pay for those tariffs. This should be both common sense and common knowledge.

    This is why so many in the administration have tried to assure us that all this tariff business is just negotiating. They believe in free trade; they just want it to be fairer, and they believe these tactics will help make that happen. I believe I have made clear my views on this:  I have doubts about this strategy, but I’m pulling for them to work because that would be a better world. I don’t understand people who route against their country.

    One fear I have had from the beginning of this China trade negotiation is that the tariffs end up being more than a negotiating ploy. A few weeks ago it seemed from reports that all that was left to be done on a “phase one” deal was to schedule the signing ceremony. The market reacted by sailing onto new highs; all was looking good in the world again.

    Then, the Chinese announced that part of the phase one deal was the rolling back of the new tariffs on China. Many took this as a given; after all, the tariffs were supposed to be negotiating tools, right? The president has now clarified that the tariffs will not go away, and Reuters is reporting the deal will now likely be put off until 2020.

    The market is down on this news. Of course it could all change with a tweet, as that is the world we now live in. It is disappointing, but unfortunately not surprising. As the saying goes, we hope for the best but plan for the worst. This on-again/off-again phase one deal will continue to drive the market up and down as the news flows.

    What is a prudent investor to do? One cannot ignore the environment in which she has to invest. Economies are slowing around the world, and there seem to be trade tensions and political tensions everywhere. However, prudent investors invest from the bottom-up. There are bright spots and opportunities.

    Thankfully this is the one time of year when we as Americans tune to gratitude and look for those bright spots. It is Thanksgiving, and we have much for which to be thankful. In keeping with our tradition, here is my list:

    I am thankful…

    ~ That the American consumer is doing very well even in the face of slowing global growth.

    ~ For record-low unemployment and real wage growth in America.

    ~ For my children, who are growing faster every day.

    ~ For my family, immediate and extended, which has both celebrated new arrivals and mourned loss in the last year.

    ~ For all of my friends, near and far.

    ~ Of course, I’m thankful for Mama’s pumpkin cheesecake and my loose-fitting pants, which make enjoyment of said cheesecake possible.

    ~ Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.

    Happy Thanksgiving!

    Chuck Osborne, CFA
    Managing Director

    ~On-Again, Off-Again

  • The Federal Reserve’s Open Market Committee met last week and lowered the federal funds interest rate by 0.25 percent. This is the third meeting in a row in which they have lowered the rate, and this time they changed their comments to suggest that this may be it for now.

    Meanwhile, we got a pretty good jobs report telling us that the economy added another 130,000 jobs in September. The unemployment rate is 3.6 percent. We also saw some decent wage increases. So…the economy is all good, right?

    Well…the glass is half full, or is that half empty? The consumer is and has been doing great. The slowdown in the economy has been driven by business investment, or the lack thereof, and the slowdown in business investment has been driven by uncertainty in international trade. The stock market seems to understand that, even if many who pontificate about the market do not.

    When the news from the China trade negotiations goes poorly, as was happening in the beginning of August, the market drops; things get quiet or there is some good news on that front and markets go up, as they did in late August. This same pattern occurred in September; in October the announcement was made that a deal is all but done, and markets rose.

    If this proclamation proves true, we suspect the bull market to continue, but if it proves premature, then down we will go. We seem to have a handle on how the trade war is impacting the stock market, but the unanswered question is, how is it impacting the real economy?

    The fear of the trade war is that the combination of real tariffs and the uncertainty caused by the negotiations would actually put the economy into a recession. The official definition of a recession is two quarters in a row of negative economic growth. Are we close to that actually happening? No we are not, but for years after we were officially out of the last recession, polls suggested most people disagreed with the official definition.

    Things are slowing down. Most companies who still provide guidance have guided for slower levels of growth. However, they are not predicting actual declines, which is what many feared not that very long ago. Maybe we have avoided a recession for now, and that is a good thing for now.

    Recessions used to happen much more frequently. The economic cycle from recession to recovery to boom and back to recession used to be approximately five years. The economic expansion in the 1980’s broke that cycle and was the longest ever. We had a shallow recession in 1992 and then we went on a new expansion that was the longest ever. Then we had the lost decade of the 2000’s marked by a dot-com bust on one end and a financial crisis on the other. Now we are in the longest expansion ever.

    Will it go on forever? No, but it does not appear to be ending now. Many will give the Fed credit for that – “their three rate cuts saved us.” I rather doubt that explanation; low interest rates cannot overcome structural impediments, and tariffs are structural impediments. The key to continuing our expansion is trade. If we get a truce, we can limp along. If we get the improvements we were promised, then we could pick up lost steam. Anything in between would be just fine.

    All the while, we continue to make investment decisions from the bottom-up. That is what prudent investors do.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Recession Avoided?