The stock market has hit a high.  At the same time, corporate profits are stagnant.  When numerator is divided by denominator, what you get is a record high number showing stocks as expensive, rivaling the peaks recorded in 1929, 1972 and 2000.  The current recession in corporate earnings is expected through at least the end of the year, as evidenced by second quarter results.

Meanwhile, measures of manufacturing activity are contracting, purchases of cars and trucks are in decline and rail shipments are slipping across the U.S.  The ISM New Orders index is 50, a number that means zero growth in the industrial sector of the economy, down from 63 in 2018.   Auto sales are on a steady descent, down -3% this year (only Subaru is achieving sustainable growth).  Trucking is down -5%, rail transport fell even more, to a level last recorded in 2014, reversing five years of growth.  While 2018 was marked by strong economic growth, 2019 so far shows gravity is pulling the economy towards the ground.

The Trump Administration has pushed foreign trading partners to revise long-standing agreements, arrangements which have arguably benefitted consumers and corporations despite numerous loopholes sacrificing labor and environmental conditions (yet the Trump Administration hasn’t targeted improving these two areas of concern).  If you can make sense of Trump’s logic on trade, beyond his headline-grabbing tactics, then congratulations.  Trade dislocations mean price increases and production relocating to other countries, away from China.

The Federal Reserve, although its members were split, signaled future reductions in short-term interest rates at its last meeting.  They’d be supportive of economic growth to calm market worries – these monetary magicians hope to achieve the trick of “look away, nothing to see here”.  It’s been working, until it doesn’t.  Longer-term interest rates have declined to nearly record lows. 

Worries fuel the stock market.  The ability to push worries aside levitates stock prices.  Gathering worries are pressures that, once the container breaks, cause investment prices to cascade lower.

It takes time for lower interest rates to spur economic growth.  It might have the opposite effect.  Worries over the health of the economy might further suppress spending.  The Fed might not deliver dramatically lower interest rates.  I question whether the U.S. would ever join the club of countries with negative interest rates, ex. Germany, Japan, Switzerland, along with several other European countries.  The 10-year government bonds of even somewhat dodgy credit Italy are yielding the same as those of the U.S. (shorter 1-year Italian bonds are more notably paying investors an interest rate of 0%).  Remarkably, over $17 trillion of bonds currently trade at negative interest rates, an absurdity only logical when you stand reason on its head.  This means investors could expect to be repaid less than what they paid to buy their bonds.

I’m not throwing in the towel, just giving perspective on how we live in interesting times.  I’ve erred on the conservative side, meaning that we invest in stocks for growth, bonds for income and retain reserves to not only meet your upcoming cash withdrawal needs but also add a cushion of cash that’s ready to invest if and when prices decline to levels more in sync with opportunities.
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Ready to invest across a range of possible future scenarios, I believe that’s a better way of investing for the long run.     

​– poet Clive James

Enron in the year 2000 was a fraud hidden in the plain sight of public disclosure.  The professional investment experts who recommended buying the stock couldn’t explain, or understand, how the company made its money.  In short answer, it didn’t make any money.  Enron made itself look like it was making billions, until it came crashing down.  Its CEO, Jeff Skilling, was later sentenced to 24 years in prison, later reduced, so that at age 65 he’s just been released.

Of note, Enron fooled the nascent socially responsible investing community.  Every environmentally managed mutual fund owned the stock.  Enron was the electric and gas utility that didn’t pollute: it traded only financial claims on energy.

Lehman Brothers was a similar sort of bad deal, on Wall Street. During the financial crisis of 2008. Lehman masqueraded as a bank worth saving.  It actually wasn’t a bank and so they didn’t save it.  Lehman became the poster child for, financially, making something out of nothing.  In the end, it was a nothing.  And yes, anyone paying careful attention could have seen it coming.

Over the past couple of years, Theranos, the medical testing startup once highly acclaimed, was also revealed a scam, with lawsuits in progress to prove it.  Promising a new diagnostic test based on a single drop of blood, in reality, the test Theranos claimed to have developed wasn’t accurate.  That didn’t stop some big corporate names from buying into the myth, as did its all-star board of directors, including the former CEO of Wells Fargo bank, former Secretaries of State and James Mattis, former Secretary of Defense.  It was Wall Street Journal’s reporter John Carreyrou who first broke the story, as was recently told in HBO’s documentary The Inventor.  In March 2018, the U.S. SEC filed fraud charges against Theranos and its now 35 year-old former CEO Elizabeth Holmes, who awaits trial and could face 20 years in prison.

Tesla, I expect, will meet a similar fate.  The company operates a business, in automobiles, solar installations and batteries, that we all hope might bring a brighter future for our world.  In reality, we can’t overlook Tesla’s many burdens despite its pioneering role in bringing electric cars to market in a big way.  Tesla’s funding needs are large, its competition strong and numerous managers have departed.

What Tesla has going for it are customers who are fanatically loyal and goals dramatically ambitious, aiming to overthrow the fossil fuel-based economy.  Its leader is Elon Musk, a modern-day P.T. Barnum who fakes it until he makes it, while the harsh reality is billions of dollars in losses, kept afloat by a free-spending investor base.  However, as I write on the cusp of Tesla’s two billion dollar stock offering, needed to keep the business going, operations aren’t going well and poor finances are finally catching up with it, in the form of vendors who demand payment in the courts and sales falling at a double-digit percentage rate.

The truth in these cases is that they became frauds hidden in plain sight.  At first, we might have an investment theory.  We might wish for it to be true, about how it will work.  And it might seem to be working for a time and we feel good to be associated with a good cause or what goes up – the perpetrators of frauds rely on investors’ perceived indicators of success to be proof of success.

When I was an auditor at the U.S. SEC, I helped uncover many frauds where everyone, victims included, were happy with the situation right until the very end, when something happened to derail the fantasy.  In our analysis, if we can’t find fundamental truth in what’s wished for, your wishes probably won’t turn out true after all.

Passive funds invest broadly across the market, holding a portfolio of securities regardless of their prices — passive investing is much like going to the supermarket and buying everything in the store, as opposed to choosing your items carefully.

Active investing is a curated collection, an active choice to buy a stock, for example, and avoid another.

You do this in life all the time.  One doesn’t marry every person you meet.  While you might have a collection of partners, hopefully love also means you can be carefully prudent with whom to match and, at least at the time of the wedding, you feel you made a good choice, all things considered.

If you go to college, you don’t attend every available college.  You attend the one, two or the few you select.  You take care, perhaps do some research, and then act on your insights.

No different in investing, active investing is making positive choices to allocate wealth to a select few investments.  Via this wealth, perhaps your buying boosted the stock price or lowered an interest rate paid on debt, a company’s management puts your money to work.

It’s up to us to decide where to invest wealth —  whether or not we choose to decide, we make choices even by default.

Passive funds have been gathering an increasing share of investors yet their portfolios look so much the same.  To passive investors, value doesn’t matter, buy or sell.  They buy whatever the entire market has to offer.

We active investors make informed judgments based on value and price.  As the carpenter’s saying goes, we measure twice and cut once.

Tom Wolfe, the acclaimed journalist and novelist of the Wall Street tale The Bonfire of the Vanities, passed away several weeks ago.  If you’ve read Wolfe, he might prefer we use the present tense to write about his life.  He wrote in that form, as the reporter he was (is).

Modern finance works along similar lines as Wolfe’s description of modern art.  Those who advocate Modern Portfolio Theory say that the model is more important than the qualities of individual investments within a portfolio.  If a stock or group of stocks in the past has moved in price according to certain patterns of return and volatility (risk), then buy if favorable, regardless of the companies the stocks represent.  An intellectually consistent theory, I believe, just rather incomplete.

In one of Wolfe’s critical masterworks, The Painted Word, he tells how modern art begins with a Truth, a theory of the art.  Wolfe also calls it the Word — modern art avoids reproduction of real scenes.

Wolfe ridicules those who champion theory even as they minimize an artwork’s technical or realist qualities.  He writes that they believe as “like Plato’s cave dwellers watching the shadows, without knowing what had projected them.”

In modern art, Wolfe says, what the viewer sees, the reality of what is painted or sculpted, is thought unimportant.  It’s theory that tells you what you see!

Let’s not forget (as many financial advisors do) that in the real world a stock represents an ownership stake in a business.  Over the long term, the underlying prospects of the business are arguably what drives its stock price up or down.  In the historical record, we see how stocks moved as they did.

When a company’s return on investment falls below its financial costs, that’s bad.  If a company can’t pay the interest on its borrowings over an extended period, that’s even worse, i.e. Tesla automobiles.

As much as the Modern Portfolio Theory can tell you how a portfolio’s risk can be reduced through holding investments in combination, reducing the risk that any single investment would drag down the portfolio’s returns, it doesn’t tell you a whit about how to identify an undervalued investment.

So many investment managers value theory more than what you can see.  Don’t allow theory to overrule.

I believe that a composite picture of real world observations builds what we’re looking to create — a balanced portfolio where each individual investment stands on its own merits.
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Sources:
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Tom Wolfe (1975).  The Painted Word.  New York: Farrar, Straus and Giroux.

Steven D. Bleiberg (2018 April).  “The Limits of Theory."  Epoch Investment Partners, Inc.  Retrieved http://www.eipny.com/white-papers/the-limits-of-theory/

With solid returns, it’s been good times for those with capital to invest.

As clear today as it was then, democratic republics, like financial fortunes, are dependent upon the informed involvement of their citizens for continued good health.  In 1787, after Ben Franklin was asked following the Constitutional Convention what sort of government had been created, he replied, "A republic, if you can keep it."  And keep it, and also improve it, we must. 

Adam Smith, that founding capitalist philosopher who most notably believed business should be moral, wrote in 1759: 

“The care of …the fortune...is considered as the proper business of that virtue which is commonly called Prudence….  Security, therefore, is the first and principal object….  [Prudence] is rather cautious than enterprising.” 

As well as prudence, investors would do well to develop an awareness of the big picture, a profound introspection when goal-setting for the financial future, possessing the courage to bring goals to life.

I can’t tell you how many times over the years I’ve sat down with someone whose retirement plans are expensive dreams supported by relatively small sums of money.  The solution can be to reduce expectations and seek additional sources of income.  That certainly takes courage.

It’s no shame to take care, to preserve your fortune and be enterprising in pursuit of your goals.  Return to the wisdom of Ben Franklin.  It’s prudent to be secure in your planning.

Let wisdom, courage, skill and a steady hand strengthen you now and in the future.

Would you like your vote counted?  Proxy voting is the method by which we as shareholders, who cannot physically attend the corporation’s annual meeting, instruct how to vote our shares.

In addition to electing board members, recent issues on corporate proxy ballots include executive pay, corporate lobbying, human rights and climate change reporting.  The first is less of an issue for us, because I don’t invest in companies that pay their managements outrageously.

​A stunning event occurred in May for Exxon’s management.  A majority of shareholders voted for the company to report on the impact of climate change and how regulations restricting carbon emissions would affect the company’s business in the future.

Larry Fink, CEO of the world’s largest investment group BlackRock, in his annual letter this year to global CEOs wrote that managing investments according to non-financial concerns can provide “essential insights into management effectiveness and thus a company’s long-term prospects.”  BlackRock now operates an entire division aptly named Impact, joining almost $9 trillion in the U.S. managed according to at least one factor of corporate responsibility.

​The big names have moved into a field pioneered by smaller independents, yours truly included.

We all can do our part.  To improve the behavior of corporations, write your elected representatives, pen letters to the editor, respond to government’s requests for public comment, demonstrate in the public square, shop as an informed consumer and vote your values.  I’ll continue to vote those proxies.

President Trump fails to grasp that governing requires more than a committed base.  The ultimatums he’s issued and controversies he’s sparked have been deeply disruptive, with so far little progress to show for it all.

Trump is an excellent winner, a poor loser.  He’s declared bankruptcy four times, admittedly not a mark of shame in our dynamic economy.  The only public company he’s led, Trump Hotels and Casino, he pillaged as chairman and CEO, receiving $44 million in salaries and bonuses, enjoying the good life on the company’s dollars, and engaging in sweetheart deals to enrich his private business empire, until finally wiping out shareholders in 2005.

Trump declared that even as chairman in this instance: “I wasn’t representing anybody but myself.”  No wonder many banks on Wall Street would no longer lend or do business with him. His business actions were inexcusable, in this sole instance in which he managed a public enterprise, before 2017.

Are you familiar with the child’s game Ker Plunk, 1967, or the somewhat similar Jenga, introduced in 1983, where pulling out the sticks and planks would eventually lead to the collapse of all the marbles?

As Wall Street likes to rhyme, the rally to the upside in the stock market since election day has become known as the Trump Bump.  US stocks gained +12% from the election to the end of winter, without really much of any decline on a single day.  It’s been all blue skies and sunny days.
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Times have a way of changing.  At the risk of being a conspiracy theorist, check out Louise Mensch, especially if you’re a Twitter user.  Perhaps only weeks away from change at the top, do you think the page will turn over on this era?  Of course it will.

Mark Baumer, 33, was a librarian, a writer, poet, a former high school baseball star, noted for his kindness.  Last October he set out on a walk across America to call attention to climate change.  He posted his video and stories on the internet.

Following the inauguration, he walked with bitterness.  He picked arguments with people he passed.  On Saturday, he was struck by a driver, who had departed her lane, entered the shoulder and that was that.  Charges are pending.  Mark's chronicles survive him and are well worth watching and reading.

I write this not to point out a senseless tragedy, or the futility that comes out of frustration.  It's more a hope that engaging in civic debate and demonstration would continue to remain within the realm of what it is to be an American.

I've voted for Democrats, some Republicans, also third party candidates.  I wrote a thesis on the racist hatreds in our history that have fueled antagonisms against immigrants, of German-Americans specifically.  As a park ranger a couple of decades ago, at Gettysburg and Philadelphia, I led tours that paid tribute to military sacrifice, the tug of war in our politics and the blessings (and the flaws) of our Constitution.

And yet, here we are again. Trump, volatile, aggressive, dividing.  He's our president. Wall Street, admittedly skewing wealthy and anti-regulation, has rallied the stock market higher and sympathizes with the new president's tax & small government initiatives, while disagreeing on trade & social policies.
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The country seems to have moved into a cycle of protest and counter-protest, likely increasingly tumultuous over the months ahead. This represents only the beginning of a process singled out by Trump, in his inaugural address, of giving power "back to you, the American People."  It's supposed to renew our spirit.