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Large-cap stock correlations

Why are expectations for 2019 earnings growth so much higher than other regions? Another round of downgrades for European equities?

Celebrating Chinese New Year's!  Don't recognize the friendly face on the far right?
Adam is the newest EdgePointer joining our Compliance team. Judy & Sayuri are thrilled! 

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Good Morning! Here is what piqued our curiosity this week:
 
1. Howard Marks: America should be worried about the rising tide of anti-capitalism (Link)
"What I'd like to do is get some of the progressive politicians and the less-capitalist young people in a room and ask them a simple question: To what do you attribute America's preeminence in the world over the last hundred years and the generally superior living standards of its people? In short, what has been behind the United States' progress to the top of the heap? What's absolutely clear to me is what it's not: that we're superior people, smarter, better, more virtuous or more deserving.  Instead, I think it's our democracy, our freedoms, and our less rigid social and financial structures.  But, extremely importantly, I also think there have been enormous contributions from capitalism/free enterprise, the free-market system, economic incentives, private ownership of property, individual economic opportunity and the very limited involvement of government in the economy.

2. We are now up to 25% of Albertans that want to separate from Canada $(Link)
"The province’s future promises to be one of barely contained civil war with its fellow Canadians. If $13 billion a year in payola can’t appease Quebec, the cause is probably beyond salvaging. A Donald Trump re-election could invite talk of becoming the 51st U.S. state. If Obama-like pipeline opponents are returned to power in Washington in 2020, the squeeze will be even worse. Then what? A weak state with enormous fossil energy resources caught in the West’s culture wars over climate and energy? The cash cow of Canada up for grabs? We could spin lots of scenarios."

3. What do the oil sands look like? You'd be surprised (Link)

4. Oil bull markets past & present, and yellow jackets (Link)
Interesting comments on probable overestimation of electrical vehicle penetration, sunspot impacts and Saudi reserves.

5. Hustle culture $(Link)
"Millennials are just desperately striving to meet their own high expectations. An entire generation was raised to expect that good grades and extracurricular over achievement would reward them with fulfilling jobs that feed their passions. Instead, they wound up with precarious, meaningless work and a mountain of student loan debt. And so posing as a rise-and-grinder, lusty for Monday mornings, starts to make sense as a defense mechanism."

Charts & graphs 

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Has Trudeau destroyed Canada's resource future? (Link)


200 years of stock market history (Link) 


The basis of technical analysis (Link) 

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Too busy during the week? Catch up with last week's articles and charts:

Investing

Don't have a crystal ball? Base rates are the next best thing (Link)  

CPP takes bigger bite from Canadians (Link)

Putting in the reps (Link)

Interview with Bob Rodriguez, the former CEO of First Pacific Advisors (Link) 

Risk is where you're not looking (Link)

Why we look for scapegoats after a market decline (Link)

Seth Klarman offers a warning. Davos should listen. (Link) 

The rich are getting richer? Maybe, but they're also getting younger! (Link)

Businesses

How open-source software took over the world (Link)

Survival is the ultimate performance measure of a business (Link)

How to invest for the long-term in a turbulent market (Link) 

The world's biggest brands want you to refill your orange juice and deodorant $(Link)

Charts

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The rich are getting richer? Maybe, but they're also getting younger! (Link)
A survey of U.S. investors with $25 million or more finds their average age dropped by 11 years since 2014, to 47. These fabulously rich Americans, whose ranks have more than doubled since the depths of the Great Recession, are younger than less wealthy millionaires. The finding suggests a vast generational transfer of wealth is just beginning.

Seth Klarman offers a warning. Davos should listen. (Link) 
Klarman argued that American capitalism has been damaged by the obsession with short-term stock prices. “Does anyone really believe that shareholders are the only constituency that matters: not customers, not employees, not the community or the country or Planet Earth?” he asked. In those remarks, Klarman challenged CEOs and fellow-investors to accept greater responsibility for the consequences of their actions. “It’s a choice to do things that ‘maximize profits,’ to pay people as little as you can, or work them as hard as you can,” he said. “It’s a choice to maintain pleasant working conditions or, alternatively, particularly harsh ones, to offer good benefits or paltry ones.” Also, without naming specific cases, he criticized the kind of buyouts in which private-equity investors saddled a troubled company with so much debt that it helped push the company into bankruptcy. “I’m convinced, as an investor, that the world I live in every day has gotten more short-term-oriented,” he said. “The pressure on the game changed the game.” Some investors, he said, are too quick to demand ephemeral fixes: “Why aren’t you restructuring? Why aren’t you doing a spinoff? Why aren’t you buying back stock?"

The world's biggest brands want you to refill your orange juice and deodorant $(Link)
Proponents of refillables say they can reduce greenhouse-gas emissions, waste and energy use. A bottle refilled five times as part of the project has an impact equivalent to five single-use bottles when accounting for the use of resources and the release of pollutants, estimates TerraCycle. Each use after that is incrementally better for the environment.

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Why we look for scapegoats after a market decline (Link)
Whenever stocks experience a large decline, it’s normal to look for someone or something to blame; The Fed, China, inflation, computers, etc. We can never determine exactly why stocks do what they do, especially when we’re searching for answers on a daily basis, and in the age of click bait and sensationalism, it’s unlikely that we’ll ever read an honest news update.
  
Survival is the ultimate performance measure of a business (Link)
Old companies are often the most innovative and adaptive companies. They have focused on an area for a long time. Many old companies aren’t large companies. They are small to medium sized companies that focused initially on an area that they ultimately ended up dominating. They wouldn’t have survived 50-100+ years if they weren’t innovative and adaptive.

How to invest for the long-term in a turbulent market (Link) 
There are three things that can allow you to use market volatility to your advantage: 1. The right structure 2. A long-term investment process 3. A behavioral checklist to allow you to remain rational when everyone else is being anything but.

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Putting in the reps (Link)
There’s no singular path to success in any endeavor so my advice to anyone looking to further themselves is to put in the reps, even when they seem meaningless.
- If you want to become a writer, start writing every single day, even if it’s terrible.
- If you want to become a better investor, start reading about the markets, and put some actual money to work.
- If you want to work in a specific company, start out as an unpaid intern or figure out how to provide value to someone who already works there.
- If you want to become an entrepreneur, quit reading hashtags on Instagram and actually try to start a business or sell a product.
- If you want to become something or someone you have to put in the reps.
There are no shortcuts...

Interview with Bob Rodriguez, the former CEO of First Pacific Advisors (Link) 
Q: In my Jan. 30, 2018, interview with you, you called the stock market “Alice in Wonderland” populated by a host of irrational “Mad Hatters.” Are they still in the Rabbit Hole?

A:The equity market was delusional and still is. All the excitement from the Trump tax cut has been washed away. And where did the corporate tax cuts go? Stock buybacks and dividends. Capital spending hasn’t occurred, which means that productivity is unlikely to improve appreciably. We’re substituting labor for capital. That’s part of the reason for lower unemployment rates.

Risk is where you're not looking (Link)
To date, the increase in supply of corporate bonds has partially been soaked up by the increase in corporate bond exchange traded funds (ETFs). Such passive funds have grown from an immaterial amount in 2008 to $600 billion today. A relevant trait of most such funds is that they transact indiscriminately with frequent, ratable purchases and sales – a function of ETF inflows or outflows, respectively – that can drive bond prices to both new highs and new lows. In a downturn, passive investment vehicles could be forced to indiscriminately sell those investment grade bonds that the ratings agencies have downgraded to junk. Given the huge size of the BBB market, downgrades could incite a large volume of selling that could then infiltrate the rest of the market and quite possibly exacerbate the negative price action. There is no bond exchange, unlike the many exchanges for stocks, so matching buyers and sellers of bonds isn’t always an easy task. Trading desks of investment banks used to facilitate markets by assuming risk and holding bonds on their balance sheets. Such market making represented about 10% of the overall corporate bond market a decade ago, but today, trading desks hold less than 1% of total corporate bonds in inventory.