1st Quarter Update Summary


We continue to focus on the growth of the economy and the one variable of greatest impact on economic growth, interest rates and money supply. Fortunately, the markets rebounded and weathered quite well the Fed’s aggressive interest rate increases of the past year. In December, the month of the last rate increase, the markets were quite tumultuous, but they bounced right back after the Fed promised to “stand pat” this year. The markets appear to accept at face value the central bank’s promise to hold off on further rate increases until a clear need arises, nevermind what the Fed perceives what the “normal” interest rate level should be.

The economy, continues to grow despite these headwinds (shutdown, trade, Brexit, rate increases, etc.) thrown up by the Administration and the Fed recently. It has proven its considerable momentum built up over the past decade. Given its recent sensitivity to the markets and headwinds mentioned, we believe it will continue to require additional stimulus to sustain future growth. Tax cut revision and infrastructure spending are on the table, but are unlikely to pass in a divided government. Continued monetary stimulus would be helpful, but the Fed seems to be paranoid of “non-existent but possible future” inflationary pressures given our large (by historical standards) deficits.

One of the most accurate leading indicators of an economic downturn, an inverted yield curve, has been discussed in the press recently and has begun to rear its head, but only as a partial inversion between one and five year bonds. At best it indicates a possible slowdown in growth sometime in the next two to five years but only if the curve does not return to normal in coming months. In short, we see continued growth in the economy and in the markets based upon momentum, but not as dramatic or strong as seen in recent years. We had built up some cash positions in our accounts last year and we anticipate being much more selective in the opportunities in which we seek to re-invest.

We remain cautious and vigilant. Although our cash positions increased last year, stock prices bounced back to relatively high levels and bargains remain hard to find. Please  remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call if you wish to discuss our outlook in greater detail.

Very Best Regards,

Joe Toronto

Year-end Summary 2018

Our accounts turned in exceptional performance this year with positive returns while the market indexes were all down for the year. Our largest holding, Amazon, was up 28.4% and contributed substantially to those gains. The merger of our second largest holding Oclaro, was a 24% gain for the year and was completed in December with a cash payout together with Lumenthum stock. Consequently we are starting this year with large cash balances in a tumultuous market environment.

As you are likely aware, there are several important issues (shutdown, Brexit, tariff trade disputes, etc.) that all could significantly affect the economy. Thankfully, further increases in interest rates by the Federal Reserve do not appear to be among those concerns. Chairman Powell has announced that future interest rate increases are now on hold pending future data on the economy. In other words, there will be no further rate increases unless the economy begins to outpace the Fed’s projections for economic growth. Our view is that the Fed’s recent program of raising interest rates has overshot what our economy could tolerate. The Fed was trying to “normalize” interest rate levels, but after a decade of zero interest rates with no inflation, obviously, they had no means of determining what “normal” rate levels should be now. Many Fed watchers suggest that the Fed’s next move may be monetary easing with a possible rate decrease. Of note, longer-term interest rates as determined by the bond market, ended the year exactly where they began the year.

On a positive note, the Administration and the new Congress have both expressed an interest pursuing full scale infrastructure legislation. If agreement is reached, it would provide further economic stimulus to overcome the headwinds mentioned above. Congress is also suggesting a do-over of the recent ideologically driven tax cuts towards economically driven tax cuts that would be more efficient and of greater benefit to the economy.

We remain cautious and vigilant. We are on the lookout for new and emerging growth technologies. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

The Economy Chugs Along, But Whither the Markets?

While the Fed continues to increase short-term interest rates as the economy chugs along, we had a new wrinkle appear this quarter. Previously, long-term rates remained relatively stable as short-term rates rose. This had the effect of a flattening of the term structure of the yield curve, an indicator that future growth may slow. This month however, those stable long-term interest rates have begun to rise sharply in pace with short-term rates controlled by the Fed. The cause of this is quite unknowable at this point, but we note that oil and some commodity prices have been rising together with wage increases finally showing signs of life. The takeaway here is that the economy remains robust and that a slowdown or recession does not Continue reading The Economy Chugs Along, But Whither the Markets?

2nd Quarter Update Summary

Last quarter, the markets largely stabilized in an upward trend again following a rambunctious first quarter. Amazon continues its upward surge and Oclaro stockholders last week overwhelmingly approved the merger with Lumentum which will be completed in a few months in a distribution of both cash and Lumentum stock. The capital gains and tax effects of the merger are still not clear.

We continue to focus on monetary policy. The Fed continues to raise short-term interest rates but long-term interest rates, largely controlled by market forces, remain quite stable resulting in a flattening of the yield curve. A flat, or worse yet, an inverted yield curve is a proven precursor to Continue reading 2nd Quarter Update Summary

1st Quarter Update Summary

Despite the fact that the markets began the year in verifiably volatile fashion, they wrapped up the first quarter about where they began. Despite this however, our accounts successfully turned in significant gains for the quarter. This was due primarily to our two largest holdings: Amazon was up 19% and Oclaro was up 45% due to a buyout merger offer from Lumentum Holdings, a leading-edge fiber optic provider. The buyout offer of part cash and part Lumentum stock will likely be completed within a few months. We do not yet know the tax effects of this transaction.

The economy appears to be moving forward on firm footing. Although the current economic cycle is one of the longest on record, economic growth cycles normally don’t merely die of old age and recessions usually have specific causes. This growth cycle, with the recent tax cut and approval of the federal budget containing a sizeable deficit, now has these two additional growth stimuli to continue the expansion. Our economy has yet to explore Continue reading 1st Quarter Update Summary

Market Meltdown? Foreshadow? Not Likely…

The market meltdown in the previous few days was unmistakably a reaction to sharply rising bond yields which previously were rising slowly if at all in response to Fed rate increases. It was not likely a response to inflationary fears as leading inflation indicators (metals and commodities) were unmoved if not down. Add it all together and present value theory of stock prices required a downward move in prices in response to those bond yields. The consequence? The Fed, now chaired by a Wall Street insider, has no reason to be too aggressive in raising short rates and may even temper its planned sales and reductions of its massive bond portfolio.

2018 Annual Outlook Summary

Last year the economy and the markets performed well in part due to the fact that the economy is in the midst of an enduring economic expansion. Now with some new fiscal stimulus in the form of comprehensive tax cuts passed by Congress the expansion received an additional boost to extend its life. This provided there are no unfortunate consequential mis-steps by the Administration and Congress in terms of trade (NAFTA, TPP) or foreign relations (Iran, Korea, China). Although the Republicans have, for now, forsaken their historical misplaced concerns regarding Continue reading 2018 Annual Outlook Summary

3rd Quarter Update Summary

Despite uncertainties on the stage of global trade and relations, the main concern for investors remains primarily the activities of the Federal Reserve’s monetary policies together with the tax and fiscal plans of the Administration and Congress. The Fed’s plans have been consistent and transparent. The Fed will continue to gradually raise short-term interest rates and will begin to reduce its vast reserve of bond holdings potentially raising longer-term rates. Higher rates are rarely if ever Continue reading 3rd Quarter Update Summary

Do Deficits or National Debt Really Matter? No. But Yes, Only in Rare Circumstances.

Anytime a given economy has excess unused labor or plant capacity, deficits and federal spending are essentially mandatory to revive and expand the economy. The greater the excess capacity, the greater federal spending (deficit) is required to employ that excess. The is especially crucial in times of economic stress where private money creation (bank lending) is either dormant or in collapse. In addition, the only constraint on money creation ought to be, and must be, inflation. And inflation, in monetarily sovereign economies generally is not evident in economies with excess labor, plant and resources.

Here’s some background to help you understand a little better:

During the Great Depression, a small recovery had begun in 1936. Unemployment had dropped from Continue reading Do Deficits or National Debt Really Matter? No. But Yes, Only in Rare Circumstances.

Basic Investment Dogma, or, When Is It Safe to Get in the Pool Again?

Yes. There’s yet another cardinal rule that tells you when to get into the market and when to get out (more or less). It has never failed us and following it, helped us avoid entirely the catastrophic markets last year and turn in positive performance for 2008.  You’ve all heard it before but let’s restate it because it’s important and it works. Herewith: “Don’t Fight the Fed!”

Fifteen years ago, Continue reading Basic Investment Dogma, or, When Is It Safe to Get in the Pool Again?