• The difficulty lies not so much in developing new ideas as in escaping from old ones.

    John Maynard Keynes

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
  • February 4, 2019
  • Chuck Osborne

We Hear, But Do Not Listen

Federal Reserve (Fed) Chairman Jerome Powell has a communication problem. It must be incredibly frustrating because the problem really isn’t with anything he says; the problem is that the people he is talking to – market participants mostly – don’t actually listen.


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  • Iron Capital Insights
  • January 4, 2018
  • Chuck Osborne

The Market Is Wrong?

We are still in a market downturn even after Santa tried to come to town on the second day of Christmas. We are even hovering right at bear market territory. This is happening in spite of record low unemployment and real wage growth. All signs are that the real economy within the U.S. is actually doing very well. So, what has the market so upset?


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  • Iron Capital Insights
  • December 20, 2018
  • Chuck Osborne

Bah Humbug!

We were hoping for Santa Claus and thus far all we have gotten is Scrooge. The market is simply in a foul mood and nothing seems to be shaking it. Yesterday we got what we were all wanting and expecting when the Federal Reserve (Fed) raised rates a quarter of a percentage point and then…


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  • Iron Capital Insights
  • December 11, 2018
  • Chuck Osborne

Groupthink

What are we to do? When markets move downward it is important to keep things in perspective. We are prudent investors not traders, so it is the long term that matters. Prudent investment is done from the ground-up: know what you own and why you own it. The companies we own are doing well, and ultimately their stock price will reflect that reality.


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  • Iron Capital Insights
  • November 20, 2018
  • Chuck Osborne

Glass Half Something

You know the saying: There are two kinds of people in this world, glass-half-full people and glass-half-empty people. Of course it is the same glass holding the same amount of liquid, but depending on his point of view one is either happy about it or grumpy about it. At the moment, Mr. Market is in…

  • “Most people do not listen with the intent to understand; they listen with the intent to reply.” ~ Stephen Covey

    Federal Reserve (Fed) Chairman Jerome Powell has a communication problem. It must be incredibly frustrating because the problem really isn’t with anything he says; the problem is that the people he is talking to – market participants mostly – don’t actually listen.

    Don’t get me wrong, the market “hears” everything. In fact, the computer programming traders create programs specifically to look for certain words: If this word is in the statement then sell stocks, but if this word then buy stocks. Believe me, the computers hear it all. But, computers, at least for now, are not capable of listening.

    Back in October Powell discussed the Fed’s plan to slowly raise interest rates to get them back up to a more historically normal range. The Fed’s outlook for the economy was very strong and they felt there would be plenty of room to raise rates. The market panicked.

    What the market didn’t hear was that this plan was contingent on the Fed’s rosy outlook coming to fruition. When the Fed met a few months later, the market was down and signs of economic slowing were apparent in Asia and Europe. The economy in the U.S., with which the Fed is concerned, was doing great. Powell said the Fed still saw the economy doing well and that at this point they were still on target with their plan. Unfortunately, he used the word “autopilot.” That word is what the market heard. If they had been listening they would have known that they were on “autopilot” as long as the economic data stayed positive.

    The story, however, was that the Fed was tone deaf, and everyone started beating them up while the market continued to sink. Then Powell spoke at a lunch in Atlanta. He emphasized that the Fed is dependent on the current economic data. All of a sudden, the market took off. The rebound was on and the story became the Fed has completely reversed course.

    Last week the minutes of the last Fed meeting came out. Economic data is still good, but the rate of growth has slowed. The Fed spoke of altering their course if the data continues to show slowing growth. The market popped on the news. Now everyone is saying the Fed has become dovish and already people are beginning to question if it has become too dovish. The pundits start talking about this word being left out of the statement, or that word being added to the statement.

    The truth is the Fed is continuing to do what it has always done. Parsing words may prove that one heard everything that was said, but it doesn’t mean he listened. If our economy is strong, the Fed will raise rates in the hopes of avoiding an overheating situation. If the economy is weak, the Fed will lower rates in an effort to stimulate growth. The effectiveness of their actions is, in my opinion, not questioned enough, but their actual message has not really changed since Paul Volcker retired in 1987.

    If an investor wants to know what the Fed is going to do, then look at the data – that is what they do, after all. The good news for investors is that the market no longer sees the Fed as a risk in 2019; the bad news is that they never should have to begin with. The market would have known that if it stopped being the word police and started actually listening.

    Warm regards,

     

     

    Chuck Osborne, CFA

    ~We Hear, But Do Not Listen

  • The year was 1999, I was an analyst for INVESCO, and my boss asked me to go with him to meet with one of the firm’s most senior portfolio managers. Our mission was to teach an old dog new tricks. I was the 30-year-old analyst who instilled confidence in most audiences because I was smart enough to impress and young enough to be ignorant of all the things I didn’t know. We showed the gentleman lots of charts and data about how his investment process was out of touch with the market. He listened with more respect than we probably deserved and then he looked at my boss and said something I will never forget, “The market is wrong.”

    My boss was respectful until we left the room. He then muttered some things I can’t print, but the point was, “Can you believe this old, out-of-touch so-and-so having the guts to say he is right and the market is wrong?” Shortly after that meeting, the senior portfolio manager was encouraged to retire. Four months later, the tech bubble burst. My boss was moved within the firm and I took his place. The senior portfolio manager formed a new firm and entered into a decade of incredible success. Turned out he was right and the market had indeed been wrong.

    Fast forward 20 years and I feel a little like that old man. I’m not as impressive as I used to be because time has taught me to be more humble. I do know two things: The market can be wrong; in fact I believe it is wrong right now. I also know that John Maynard Keynes was correct when he famously said, “The market can stay irrational much longer than you can stay solvent.”

    We are still in a market downturn even after Santa tried to come to town on the second day of Christmas. We are even hovering right at bear market territory. This is happening in spite of record low unemployment and real wage growth. All signs are that the real economy within the U.S. is actually doing very well. So, what has the market so upset?

    Tariffs. Yesterday the Institute for Supply Management (ISM) Manufacturing Index came out and was weaker than expected. This index is a survey of manufacturers throughout the country who report on a host of business activity measures. The number itself wasn’t bad, although it was lower than the previous month, but when one reads some of the surveys there is a theme: Business is on hold until we figure out this tariff situation.

    Here is the thing that seems to escape the Federal Reserve and some in the administration, and in fairness would have escaped me 20 years ago: Markets are based on moods and emotions. Most of the companies surveyed will likely see little if any real impact from the trade war, where thus far the barking has been worse than the biting. That doesn’t matter, because the threat that they might be impacted is enough to cause doubt. Doubt causes managers to put off business expansion.

    Then one adds to that doubt with a bad report from Apple Inc., who sees revenues declining and blames it on a slowdown in China, at least in part due to trade tensions. Then Delta Airlines reports mostly good news, but has a slight miss on their revenue growth outlook. These are the types of reports that go practically unnoticed when the mood is high, but right now anything even slightly negative will drive the market down.

    Reality is now very likely to be better than the market is forecasting. In other words, the market is wrong. This is an opportunity. Perhaps the best opportunity to buy stocks that we have seen in a decade.
    I feel extremely confident that three years from now an investor who bravely buys while others are panicking will be hugely rewarded. The problem is what happens between here and there.

    This is a long-term buying opportunity for patient investors, but three months from now may be an even better opportunity. In other words, to paraphrase Keynes, the market can stay wrong for longer than one can stay solvent.

    Investing is about balance. Balancing risk and return. Today the market is offering up a lot of short-term risk in return for some attractive long-term gain. Finding the balance is what prudent investing is about, and that is exactly what we will strive to do.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~The Market Is Wrong?

  • We were hoping for Santa Claus and thus far all we have gotten is Scrooge. The market is simply in a foul mood and nothing seems to be shaking it.

    Yesterday we got what we were all wanting and expecting when the Federal Reserve (Fed) raised rates a quarter of a percentage point and then lowered the forecast for future raises. Chairman Powell said several times in his remarks that the Fed would ultimately be driven by the data. If the economy actually slows, then they will alter course.

    Mr. Market acted like a spoiled child who just got everything he wanted for Christmas but throws a fit anyway. Since this market downturn started in October there has been a litany of reasons given for it. The first was that our economy is growing so fast that interest rates must rise; the 10-year Treasury has gone from 3.2 percent to under 2.8 percent as of this morning. The second reason was the trade tensions with China; there is now a cease-fire, and negotiations are at least happening. The latest reason is global growth slowing; there is no doubt that this is actually occurring. Asia, in particular, is looking weak with Japan already reporting a negative quarter and China’s growth slowing.

    The big question is, will this slowing global growth spill over to the U.S.? Of course we can’t really know, but here is something to consider:  The U.S. economy remains consumer-driven. Consumer spending represents roughly 70 percent of our total economic activity. More consumers are working today than at any time in almost two generations. Wages are growing above the rate of inflation for the first time since the 1990s. The U.S. looks very capable of once again leading the world economically.

    A glimpse into this was seen yesterday in Federal Express earnings. Federal Express’ revenue grew faster than expected overall. They saw good growth domestically, but painted a bleak picture for their European and Asian business. The market punished them. Lost in this knee-jerk reaction was the fact that the U.S. demand was strong enough for Fed Ex to beat on revenue even with its international business being down. I’m old enough to remember when the U.S. often led the world in this way.

    The probability of the global economy being better than expected next year is high and growing, partially because the pessimism is exaggerated, and partially because they are not giving the U.S. consumers the respect he and she deserve. That bodes well for the future and may explain why emerging market stocks, which had been the worst place to be all year, have quietly begun to outperform.

    It is always painful to see portfolio values drop. However, it is precisely in times like this that we must remind ourselves of our long-term (three- to five-year) goals and the prudent fundamentals that will help us achieve those goals. We invest from the bottom-up. There are many companies that remain strong and whose businesses are doing very well. Their stock has just gone on sale and in some cases represents great bargains. It is far easier to spot a bargain than it is to guess what the market as a whole will do.

    We have to be risk-averse. Now is a time for looking for opportunities. To paraphrase Warren Buffett, a prudent investor is greedy when others are fearful and fearful when others are greedy. Our mindset should be one of seeking opportunity, but we also have to respect the market. It is not time to jump in with both feet, as no one really knows how long this selloff will continue.

    So we are neither going to panic nor go hog wild. We are going to keep our heads about us while those around us lose theirs. If we do that consistently then the world just might be ours, as Mr. Kipling suggested all those years ago.

    The market may be delivering a lump of coal, but Christmas morning will come nonetheless and all will be much cheerier in the real world.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Bah Humbug!

  • Groupthink is a term first used in 1972 by social psychologist Irving L. Janis. He was referring to a psychological phenomenon in which people strive for consensus within a group to the point where they set aside their personal beliefs, preferring to keep the peace rather than disrupt uniformity.

    Wall Street has increasingly become a giant lesson in groupthink, and simultaneously more and more disconnected from anything resembling reality. This downturn is the perfect case in point. Wall Street seems to have forgotten already that this downward movement in stock prices began in October with Federal Reserve (Fed) Chairman Powell making comments about the need for interest rate hikes because of the rapid growth of the economy.

    The groupthink at that moment was that things are so good that the Fed would keep raising rates and this would cause stocks to fall. Then the focus went to what we believe is the real cause of this nervousness, the trade tensions, especially with China. Corporate earnings – the thing that actually matters to corporate owners (aka stock investors) – were very strong for the third quarter, and on every earnings call, CEO’s were asked about tariffs.

    Here is a lesson in groupthink for you. In this most recent earnings season, analysts asked just about every CEO that I am aware of about the impact of tariffs on their business. Then analysts started talking to financial media about how every CEO was talking about tariffs…which was largely due to the fact that they were answering the analysts’ questions. The idea that CEOs are universally worried about tariffs became consensus, and this meant an economic slowdown is coming.

    So now, this market downturn – which was caused because the U.S. economy is somehow too good – is being prolonged by the idea that an actual economic downturn is coming. On Friday one analyst on a CNBC panel had the nerve to be somewhat optimistic about stocks, and she then had to defend herself. She said something to the effect of, “We all know that the economy will slow next year.”

    According to the website www.verywellmind.com, the top two symptoms of groupthink are illusions of invulnerability and unquestioned beliefs, respectively. We all know that the economy is going to slow next year? What happens in the future is by definition unknowable, so while we can make predictions and weigh probabilities, no one knows what is going to happen next week, let alone next year. The idea that we do is a clear sign that we have shut down our individual brains and surrendered to groupthink.

    So, what is the probability that we are headed towards a slowdown? Globally we may already be in one. Japan had negative growth last quarter. China’s economy, while still growing rapidly, has seen the rate of growth slow. There have been negative indicators in Germany and some other European countries. On top of all of that, we now have a delay in the Brexit vote in Great Britain.

    In the U.S., however, there is no actual data pointing to a slowdown. Unemployment is less than 4 percent and wages are growing faster than inflation for the first time in a generation. The CEO of Target recently stated that this is the best environment that he has ever seen. Are there threats? Of course there are, there are always threats. The largest right now are the tariffs. Regardless of what anyone may tweet, tariff costs, like any tax on a product, are passed onto consumers. We pay the cost of higher prices. Americans once understood that, and as a result threw a great amount of tea into the Boston Harbor.

    Might the economy slow next year? Maybe. If it grew at 2.5 percent, which would approximately match that fastest pace in the last decade, then that would equal slowing. The data, however, does not point to this, and neither do the outlooks of corporate CEOs who keep telling us that real business is good. No, Wall Street is alone on this, and that is worrisome as an investor.

    While tariffs represent the largest real threat, the stock market itself may become a greater threat. The stock market has the ability to become a self-fulfilling prophecy even when what its prophesizing seems so removed from reality.

    What are we to do? When markets move downward it is important to keep things in perspective. We are prudent investors not traders, so it is the long term that matters (long term being three- to five-year periods). Prudent investment is done from the ground-up: know what you own and why you own it. The companies we own are doing well, and ultimately their stock price will reflect that reality.

    Prudent investing is also risk averse. While we perhaps have not spoken about it enough, most of our moves this year have reduced the risk in our clients’ portfolios. Most notably, we increased our asset allocation to bonds reducing our weightings toward stocks. As of this moment we have not hit any client risk threshold, but IF this downturn continues, we will take action.

    Breaking out of the groupthink can lead to long-term success; not appreciating the damage groupthink can cause can lead to disaster. Balancing those two things is what makes investing more of an art than a science. Caution is in order.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Groupthink

  • You know the saying: There are two kinds of people in this world, glass-half-full people and glass-half-empty people. Of course it is the same glass holding the same amount of liquid, but depending on his point of view one is either happy about it or grumpy about it. At the moment, Mr. Market is in a glass-half-empty mood.

    The market started this correction supposedly because the economy was so good that interest rates were going to keep rising. Then it was blamed on trade tensions. Now the half-empty crowd is saying that the economy must slow and may even go into a recession in 2019. What is the data backing this up? According to the doom-and-gloomers, it is simply time. This good news can’t go one forever.

    Now they are pointing overseas. Japan is the first major economy to post a quarter of negative growth. There is no doubt China is slowing and Europe seems to be losing momentum as well. Does that mean a recession here at home? Not necessarily. Unemployment is at an incredibly low 3.7 percent right now, meaning that 96.3 percent of people looking for work have found it, and perhaps more importantly, wages are growing at 3 percent, which is faster than inflation. We have not seen an employment situation this good sine the 1980’s and 90’s. Forgive me if it is hard to see that leading to a recession.

    Corporate earnings were really good this quarter and it has not seemed to matter. Any company that has hinted at weakness, or even just at slowing of growth, has been punished unmercifully…which brings us to what, in our opinion, is really our greatest threat: the mood.

    We keep hearing how our economy is “late in the cycle,” which is a more sophisticated-sounding way of saying that I know there is no data to back up my melancholy, but I’m in a bad mood anyway. The truth is that no one knows when the cycle changes until the cycle has already changed, so there is really no way of knowing if we are “late in the cycle.” One thing we do know is that economics can often be self-fulfilling. If enough people start to see the glass as half empty and start acting like we are in a recession, then they could make it happen.

    This is what happened is 1992. We talked ourselves into having a recession. It could happen again if we are not careful.

    Thankfully this is the one time of year where we are not allowed to be glass half empty. It is Thanksgiving, and we have much for which to be thankful. In keeping with our tradition, here is my list:

    ~ I’m thankful that the real economy is doing very well, even if Wall Street refuses to see it.

    ~ I’m thankful for real wage growth in America.

    ~ I’m thankful for my children.

    ~ I’m thankful for my family, immediate and extended.

    ~ I am thankful for all of my friends.

    ~ Once again, I’m always thankful for Mama’s pumpkin cheesecake and my loose-fitting pants, which make enjoyment of said cheesecake possible, and are a little looser than last year.

    ~ 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

    ~Glass Half Something