Friday, March 6, 2020

This week's interesting finds

What helps us sleep at night - part 6
The recent market volatility is undoubtedly keeping many investors up at night. While we have no idea how long the recent downturn will last, the investment team continues to rely on our investment approach and long-term thinking. Today, Tye and Geoff wrote “What helps us sleep at night – Part 6”, which should prove to be useful in conversations with clients.

Nobody Knows II
So many questions and few answers surround the coronavirus and its impact on global markets. In Howard Marks’s latest memo he shares his own questions, guesses, observations and inferences to help make sense of the potential impact of the virus on global economies and markets. Here are some takeaways.

There’s no doubt about the fact that coronavirus represents a major problem, or that the reaction so far has been severe. What really matters is whether the price change is proportional to the worsening of fundamentals. For most people, the easy thing is to say:

The disease is dangerous, 
It will have a negative impact on business, 
It has kicked off a major reaction to date,
We have no way of knowing how far the decline will go,
We should sell to avoid further carnage.

But none of the above means selling is necessarily the right thing to do.

Will stocks decline in the coming days, weeks and months? This is the wrong question to ask, primarily because it is entirely unanswerable. Instead, intelligent investing has to be based on the relationship between price and value. In other words, not ‘will the collapse go further?’ but rather ‘has the collapse to date caused securities to be priced right; or are they overpriced given the fundamentals; or have they become cheap?’

US traditional flu in numbers

The stock market is not the economy
The chart below plots every time the Fed changed rates since 1994 against U.S. real GDP:.
What’s amazing about this plot is how little U.S. real GDP fluctuates in comparison to the stock market.  For example, the largest decline in U.S. real GDP since 1994 occurred during the 2008 financial crisis when it contracted by only 4%. 
This is just a simple reminder that the stock market is not the economy.  Just because investors react quickly and negatively to a breaking news story doesn’t mean that those fears will ever materialize.

30-Year Mortgage Rate in the US hit a new all-time low

Canada’s economy remains dependent on housing
While the U.S. economy has only spent about 3.8% of GDP per quarter on gross private residential investment, Canada is spending roughly twice that … even after large declines since the peak at the end of 2017.

Most private equity firms are not achieving their projected margin expansion
For 65 fully realized buyout deals completed between 2009 and 2015, the average margin was well below the deal model forecast.