Vector Money Management

 2019 was a banner year for the financial markets with most indices having their best returns in half a decade, but some context is necessary.  The great returns are in no small part due to the gut wrenching     -20% “bear market” in the 4^th quarter of 2018 which compressed stock valuations to bargain basement prices, bottoming on Christmas Eve.  Over the 2018 Christmas holiday the Federal Reserve made a subtle change of course on monetary policy that flipped the investing traffic signal from red to green.  So, 2019 turned out to be a inflatable slide two Santa Claus year for investors.  Another angle:  While the S&P 500’s total return for 2019 was 31.5%, the annualized return for the 15 months from the September 2018 high to year end 2019 was a more normal 10.1%.  Tech stocks once again led the market in 2019.  Apple (+85.7%) and Microsoft (+54.9%) topped the Dow Jones 30.  Advanced Micro Devices (+148%) and Lam Research (+114%) topped the S&P 500.  Other chip stocks of interest Micron Technology (+69.3%), Qualcomm (+56.7%), Tower Semiconductor (+63.2) and Impinj (+77%) all rallied as fears of a China trade war subsided.

Bull markets usually climb a wall of worry and there was plenty to worry about in 2019.  Tariffs and trade wars, an inverted yield curve with its foreboding of recession, internecine conflict in the nation’s capital, and global turmoil in Venezuela, North Korea, Hong Kong, and Iran.  A resounding reaffirmation vote for Brexit in Britain demonstrated again that change is in the air and how fragile the old establishments’ grip on power has become two decades into the 21^st century.

It wasn’t just stocks that went up in 2019.  It seemed like everything went up – bonds, commodities, everything – except cash, which still returned little to nothing depending on the country and its central bank.  Ten years post the financial crisis and great recession, the interest rate environment is historically low and heavily managed by the world’s central banks.  Thus we have the very strange global phenomenon of $11 trillion in sovereign debt trading at negative interest rates.  This alone should give investors pause for concern.  Another anecdote:  In its year-end review the Wall Street Journal published a list of 116 bond and stock indices, commodities, and currencies from around the world ranked by performance.  There were 88 ups and 28 downs.  Of the downs, most of them {22} were currencies from across the world.   It is reasonable to conclude that a big part of 2019’s financial market gains were liquidity driven – cheap, plentiful money for those who qualify to borrow it.  And borrow it they did – whether it was corporate share buybacks, private equity acquisitions, or governments running deficits.  The central banks’ punchbowls are bigger and fuller than ever.  This is further validated by the 18% gain in gold, history’s oldest form of money.

As we write this letter, Iran is launching missiles into Iraq in retaliation for the death of the world recognized terrorist, Qassim Suleimani.  It is impossible to know how this situation will play out, but the oil market’s modest reaction to these dramatic events says volumes about how much things have changed over the past decade.  The power of fracking technology to reconfigure the world’s energy markets continues to amaze.  Thanks to U.S. frackers, especially in the Permian Basin, the world now has excess production of crude oil.

Ashby M. Foote, III  –  President                                                                                                     January 8, 2020

The coronavirus has caused havoc in China and caused health authorities around the world to ring alarm bells in hopes of minimizing what could become a global health crisis.  As one would expect world financial markets suffered spasms as news reports came out from China and the city of Wuhan.   It was one of those events when no one not even the authorities closest to the event knew what would unfold.  Would it be a worldwide contagion like the Spanish Influenza epidemic of inflatable water slide a century ago that killed millions across the globe or could modern medicine and the latest DNA techniques respond with treatments that quarantine this latest viral outbreak?  No one knows at this time.  For investors it is easy to let emotions override the rational decision making process that should drive long term portfolios.  In the meantime watching the price of gold can be a useful barometer of fear in the marketplace.  Gold is recognized around the world as a safe haven and stable investment in times of great uncertainty and turmoil.  In this case gold shot up as the world’s stock markets sank on worse case fears.

Ashby Foote

Book Review | Indistractable: How to Control Your Attention and Choose Your Life by Nir Eyal

By: Ashby Foote

December 18, 2019

For sixty years, Silicon Valley has been a key engine of the U.S. and world economy.  That small stretch of land from San Francisco down to San Jose is where some of the brightest engineers and entrepreneurs invented much of what is today the world’s computer and communications network.  Their feats of innovation, productivity gains and wealth creation are the stuff of legend.

But the innovative output of Silicon Valley over the past fifteen years has taken a new turn and different course.  The chips, devices and networks are still getting faster, smaller and cheaper but many of the most popular applications (apps) that run across those networks and smartphones are headwinds to the  productivity that drives progress.  In short, some of the Valley’s newest big things have created an ocean of diversion and distraction.  To quote venture investor Peter Thiel, “We wanted flying cars and settled for 140 east jump characters.”

Technology entrepreneurs learn early on that scaling up a business can be a quick way to create stupendous wealth.  Silicon Valley excels at scaling and social media platforms are the latest and greatest examples.  Enabled by the remarkable rise of the smartphone, social media platforms have now connected billions of people in a new era of 24-7 always on devices.  This is a very big deal and the consequences, both good and bad of this new digital pulsating connectedness, are still being sorted out.

Social media combined with the smartphone is a game changer.  Why – because the distraction of social media platforms is not an accident, but rather a designed-in feature.  Social media’s business models crave engagement to sell ever more ads and collect more and more private information about users.  That means algorithms and feedback loops that keep users coming back to check out likes, friends and comments that can perpetuate overuse and even cause addiction.

The power to ping and ding devices has turned smartphones into weapons of mass distraction.  It’s not just distracted driving that threatens us, it is distracted everything.  Walk across a college campus today and you will see zombie-like students strolling along — eyes glued to their phones.

It is this new virulent strain of distraction — a 21^st century social pathology — that author Nir Eyal confronts in his important new book, “Indistractable: How to Control Your Attention and Choose Your Life.”  It is an easy and concise read about a critical topic of our time.

The author is well qualified to opine on the subject having been a writer and lecturer at Stanford on the interplay of technology, psychology, the work place and the home.

The book begins with keen insights on human psychology and how internal and external triggers can undermine our effectiveness.  The author provides a inflatable slide for sale framework and some wise rules that if embraced can help readers better understand the drivers of their behavior and become better stewards of their time.  It is worth remembering that, in a world of abundance time is the final scarce resource.  Time stewardship is a key theme in this book.

Most importantly, “Indistractable” points out the perils and hazards of living, working and raising a family in an always connected world.

If you want to be more focused and indistractable, you should read this book.

Ashby Foote

18 December 2019

On Tuesday, July 13th, I was honored to be the guest speaker at the Discovery Luncheon sponsered by the Mississippi Technology Alliance (MTA).  I was asked to prepare an updated version of a presentation I had done in Novemeber of 2009, addressing various paradigm shifts and aptly titled “What’s Hot – What’s Not.”  The thrust of the comments that accompanied the power-point slides was that paradigm shifts matter mightily to investors and entrepreneurs – get on the right side of one and Inflatable Theme Park For Sale you can make above average returns – get on the wrong side and you can lose your shirt.  Hot new trends, products or services aren’t Bouncy Castle With Slide For Sale necessarily paradigm shifts themselves but can often be early indicators of paradigm shifts underway.  To get a better understanding of my thinking for each slide, I’ve uploaded my ‘talking points’ for each inflatable slide for sale here.
Ashby Foote

The financial markets continue to struggle with what we consider to be irregular conditions – record low interest rates, record high gold prices, record government borrowing, record government spending and a 9.5% unemployment rate.  At times like these, it is crucial to understand, as best you can, the real situation and not default to a standard plan developed for more normal conditions.  The real situation, as we see it, is that the U.S. economy is slowly recovering from the financial crisis of 2007-08, a crisis caused by a gross misallocation of capital into residential and commercial real estate.  The reaction of government policy makers from both parties has Inflatable Water Park For Sale been to focus on minimizing failure – from the largest organization to the individual home owner.  The unintended consequence of their (often ad hoc) actions has been to create an unusualCheap Jerseys Market and unproductive policy mix (monetary, fiscal and regulatory) that is severely Acheter Parcours Obstacle Gonflable limiting the expansion of the economy during this recovery period.  With little foreseeable change in the current predicament, we have focused our “portfolio design” process on sectors, industries and companies that stand to benefit from opportunities outside the U.S. where economic growth is much more robust.

On the Defensive Side:  This is the most challenging period we can recall when it comes to preserving capital while also generating a reasonable return.  There is a growing debate over whether Inflation or Deflation is a bigger risk.  Both can wreak havoc on investment portfolios, so the issue is a crucial one for Bouncy Castle For Sale investors.  We have focused on and studied the issue for a long time and it is our considered opinion that Inflation is the much more likely outcome of the current policy mix and, thus, rates as the more serious risk for investors.  The U.S. Treasury Department and the Federal Reserve have run a weak dollar policy for almost ten years and there is no indication that they will adopt a strong jumping castle dollar policy any time soon.  It is no coincidence that during this weak dollar decade the Periodic Table of Elements (metal commodities) has easily outperformed the S&P 500 Index.  For these reasons, orologi replica cinesiour portfolio design continues to include a significant weighting in natural resource related companies.  A weak dollar is a tail wind for the businesses of these companies, so they provide some hedge against the risk of rising inflation in the months and years ahead.

Continuous Assessment: The upcoming election on November 2^nd could very well shake up the policy mix coming from Washington, especially in the fiscal and regulatory arenas.  More certainty on the issue of future tax rates could be an important catalyst to putting some of the $2 trillion on corporate balance sheets to work in the U.S. economy.  The latent potential of the American entrepreneur should not be underestimated.

If you have any questions or feedback please let us know.

Ashby Foote

This commentary appreared in the Clarion Ledger on 21 Sep. 2008
September 21, 2008

COMMENTARY — Historic Wall Street woes: Building back from bust

Three of nation’s top five investment banks collapsed with two more in merger talks

Ashby M. Foote III
Special to The Clarion-Ledger

Watching the conflagration that is consuming Wall Street one is reminded of the famous words of New York baseball manager and philosopher, Casey Stengel: “Can anybody here play this game?”

Casey was describing his 1962 Mets team, arguably the worst baseball team in major league history, but compared to today’s Wall Street investment banks the 1962 Mets look Bouncy Castle With Slide like all-stars. 2008 began with five top tier investment banks and less than 10 months later only two are left standing on their own with one of those in merger discussions.

Bear Stearns collapsed in March and was sold for pennies on the dollar to J.P. Morgan. On Sept. 14, Lehman Brothers declared bankruptcy and that same day Merrill Lynch, under duress, Acheter Chateau Gonflable accepted a buyout offer from Bank of America for half of its Jan. 1 value.

The two remaining investment banks, Goldman Sachs and Morgan Stanley, have lost 44 percent and 56 percent of their market value respectively.

Add to that carnage the demise of the insurance giant AIG and mortgage titans Fannie jumping castle Mae and Freddie Mac and you have the biggest bank panic that anyone can remember.

Investment banks have taken the biggest fall in this financial panic but there is plenty of blame and pain to spread around. In short, there has been a systemic breakdown in the fiduciary checks and balances that govern the relationships from borrowers to mortgage brokers to appraisers to underwriters to securitizers to rating agencies to bond insurers to investors.

At the nub of this crisis is a glut in residential real estate and what is now a two-year decline in home prices. The Case-Shiller U.S. home price index peaked in the Spring of 2006 and has declined 18 percent since then.

In the early 1980s a hot political issue was the plight of the homeless. Twenty-five years later, America is the best-housed and, unfortunately, the most over-housed country in the world. Don’t let it be said that capitalism can’t deliver the goods.

Alas, grand production untethered from prudence and market disciplines can result in gross oversupply and the busts that inevitably follow.

What makes this bust so insidious and seemingly intractable is the large role residential real estate plays as collateral for trillions of dollars of complex pools of debt in bank, insurance and pension portfolios. This is how a housing bust has become a credit calamity.

The genesis of this over-build of residential real estate can be traced back to 2003-2004 when the Federal Reserve, fearing deflation, dropped its key interest rate, the Federal Funds Rate, to 1 percent and kept it there for a year.

Ben Bernanke had presaged this move with a November 2002 speech entitled, Deflation: Making Sure “It” Doesn’t Happen Here.

With stocks still suffering from post bear market blues and bonds offering paltry returns, super cheap money gushed into the asset class that was performing best and seemed the most reliable – real estate, especially residential real estate.

This gusher of investment into tangible assets was further supercharged by new levels of clever financial engineering in the form of complex pools of securities with acronyms like CDOs (collateralized debt obligations) and SIVs (structured investment vehicles).

No discussion of today’s panic would be complete without mention of the credit rating agencies Standard & Poor’s, Moody’s and Fitch and the complicit role they have played.

These are public companies compensated by the underwriters to provide ratings on securities being issued but because of rules governing bank and insurance portfolios the rating companies become de-facto regulators.

When the market for CDOs and SIVs took off in 2004 and 2005 the rating agencies gave investment-grade ratings to most of these new structures that included large chunks of junk debt and sub-prime loans.

With yields 4 to 5 percent higher than similar rated corporate bonds, sales of CDOs mushroomed to $500 billion by 2006.

By the end of 2006, CDOs had become the most profitable and fastest-growing portion of the rating agencies business.

The symbiotic relationship between underwriters and rating agencies is an unhealthy one and a major contributor to the proliferation of CDOs in institutional portfolios worldwide. It is fair to say that we are witnessing in real time the end of an era. Investment banks and their bankers have been the castles and crown princes of Wall Street. Need advice for corporate strategy, mergers and acquisitions or how to invest a billion?

It was to investment banks that big companies and big investors turned. Investment bankers have had their detractors as well – portrayed in movies like Wall Street and books like Bonfire of the Vanities as masters of the universe, the egotistical key-masters and gatekeepers to the really big money of capitalism.

As events and companies have unfolded and unraveled over the past eight months it has become clear that investment banks have been pushed to reinvent their business models over the past five years. For some it worked, but mostly it didn’t.

Information technologies and especially the Internet have flattened the investment arena, squeezing profits in some areas and allowing hedge funds, private equity and boutique research firms to compete in areas investment banks once dominated.

In a classic response to such disruptive innovation, the investment banks moved up market to more complex products where better profit margins could still be maintained. In retrospect it is clear now that in many cases they were pursuing complexity for complexities sake rather than for improvement in their product or service offering. In so doing they violated the old G.I. axiom “keep it simple, stupid,” and they have paid the consequences. Lastly is leverage. Lehman Brothers and Bear Stearns succumbed to the same fatal flaw: making outsized bets with outsized debt.

Both firms morphed into huge hedge funds, at times utilizing 30- to-1 ratios of debt to equity in an effort to juice returns. Markets and leverage mixed with hubris makes for a powerful concoction. But get the recipe wrong and it can wipe you out. Stengel had counsel for such folly: “Been in this game 100 years, but I see new ways to lose ‘em I never knew existed before.”