February 15, 2017
Any attempt to figure out the Trump administration, to date, would clearly be a Fool’s Game. Although mother would contend that she didn’t raise a fool (my apologies to you, dear Mom, for what’s to follow), it is in my nature to try and make sense of things. Mom also taught me a valuable lesson worth sharing– to be in alert mode when someone says, “Trust me”.
The purpose of this letter is to convey GCM’s tactics going forward based on my current concerns. My basis for rendering a strategy evolves from an educational and applied background in both macro- and micro- economics, coupled with 40+ years of investing. Caveat: This qualifies me to offer nothing more than an opinion.
Investing in the current environment requires humility and acceptance of the fact that we know very little of what the future holds. I would want the person who manages MY money to have some level of discomfort with the economic crystal ball and use that discomfort constructively to inform a portfolio for the “unknown” that lies ahead. (Trust me , I am officially in a state of discomfort.)
BEWARE of the opinions of an economist!
Do you remember why Truman asked for one-handed economists? It was so that they couldn’t say, “on the other hand”.
It is my responsibility to generate and protect the wealth of my clients. At this critical juncture, my greatest concern is how to continue maintaining the financial well-being of my clients. Period.
I am humbled knowing that you have retained me to make critical financial decisions for you. I believe that now is a good time to be more conservative. I am hired to manage your wealth and determine how it is invested. For those concerned with compensating me for managing cash in their accounts, I offer the following rationale: I can invest 100% of your wealth (e.g. NO cash in your portfolio) and put it all at risk, or I can hedge when times feel uncertain. As we know with equities, we can lose a sizeable portion of our investment. By retaining those same dollars in cash, there’s a 100% guarantee of not losing these monies. Some of you may recall the excruciating climate of the investing time periods 2000-2002 (down approx 50%) & 2008 (down 37)! (Investing behavior has proven that financial losses are of much greater concern than the pleasure derived from financial gains.)
Hedging with cash/fixed income allows us to significantly lower risk since I cannot predict when damaging event(s) might affect our investments. In poker, second-best hands may be tolerable if when going all-in you wisely did not: leverage your house, empty your kid’s college fund or pawn your mother-in-law’s heirloom broach. Even if you lost your money, you will live to play another hand — maybe just not today.
Allow me to clarify: we are not getting out of the stock market. Rather, it is simply my intention to reduce our exposure to equities. This does not mean that I will stop evaluating and buying companies. There will always be what I believe to be bargains; however, I currently believe that the downside market risk today outweighs the potential for upside gains.
Some recent moves by GCM:
Sold the remaining 25% investment in Qorvo (QRVO) – formally RF Micro Device – for the following reasons:
- To raise cash
- To diversify. Our largest investment is now in Tower Semiconductor (TSEM). They are in the same industry (semi-conductors) as QRVO. Too much of our monies were in this industry.
- Upon the final sale of QRVO, GCM profited over 3.5 years of ownership. As a client dutifully pointed out, GCM left a few hundred thousand on the table but, in all honesty who can argue with a $7.4+ million profit from one company?
- The potential for TSEM to go up 50-100% far outweighs the potential for QRVO to do the same. TRUST ME.
For those who owned JP Morgan—Half of our shares were sold in order to raise cash, realizing an approximate 175% gain on the sale.
Overall, we have done very well since 2009 (start of Obama administration), and particularly well throughout the past 5 years (2012-). GCM had only one down year (2011) since 2009 and when the S&P500 was down in 2015, GCM was up. It’s been a nice run and the adage that markets neither go up forever, nor in a straight line, is prescient at this point in time. This leads us to current events and the Trump administration.
Allow me to share some of my foolish thoughts:
– Speculating on the final outcome of legislation could lead to disappointment. Trump and his advisors may be frustrated by how hard difficult it is to get things done. (Obamacare, for instance) Congress has its own timetable and processes and as he now realizes, so does the judicial system.
– As mentioned in my year-end communication, many of President Trump’s priorities are likely to increase the deficit (debt is typically the major arsenal in a real estate developer’s bag-of-tricks). However, many conservative Republicans in the House of Representatives have consistently opposed any legislation that increases the federal deficit.
– Mr. Trump ran on a platform of anti-globalism, and among his first acts as president was the withdrawal from the Trans- Pacific Partnership trade agreement. What we might be witnessing is the beginning of the end of 30 years of globalization and convergence. Since the 1980s, we’ve seen convergence in global trade, the World Trade Organization and an emphasis on reducing tariffs and reducing impediments in capital flows. Trump will talk tough, hoping for concessions, but he’s fully prepared to raise tariffs and pull out of trade deals. As stated in my previous letter, I truly believe that this will ultimately be harmful to the investment community.
– For decades, Trump has asserted that the U.S. was getting “ripped off” by trading partners. He will not be dissuaded on this issue. He is adamant that the U.S. has been fleeced by countries like China.
– Trump’s comments and tweets seem to affect company stock prices, industry sectors and the market. He has no reluctance to meddle in the private sector, intimidating companies that displease him. (Good luck, Ivanka!)
– Some speculate that the Trump presidency represents the decline of globalization and the rise of nationalism. And while Mr. Trump’s tweets may be transitory, the end of globalism could have far-reaching and long-lasting investment implications.
– Corporate tax reform could be a game changer. It could change where the U.S. ranks in competitiveness on the tax scale. A more attractive tax rate should make a compelling case for U.S. companies to stay here and manufacture domestically. The attractiveness of being based in U.S. has jumped dramatically.
– The Obama years were a low-growth and low-interest-rate environment. Under Trump, there may be better fundamentals, but there are already higher valuations. Assuming the economy improves — and it’s already in good shape — wages will rise, which will detract from corporate earnings, and interest rates will rise as well. Higher rates increase borrowing costs and make bonds more appealing (versus stocks).
– The way that the President and his team react to the inevitable setbacks and delays will be revealing. Trump’s apparently thin skin might be his undoing.
– Despite Mr. Trump’s pre-election assertion that the stock market was in a “big, fat, ugly bubble,” he recently joined in the celebration after the Dow Jones Industrial Average closed above 20,000 for the first time. “We just hit a record, and a number that’s never been hit before. So I was very honored by that,” Mr. Trump told ABC News.
– For starters, the 20K mark is meaningless. It’s just a big, round number. Trust Me (just one last time!) no one should ever that take credit for the stock market, at least in the short-term. One can only wonder what excuse will be used when the markets go down!
– It would be ludicrous to make concrete investment moves based on tweets and off the cuff remarks. We should brace for volatility and wait for the details to unfold.
These days, it appears that nonsense is a more effective organizing tool than truth. (Has any prior administration required so much fact-checking?) My experience tells me that creating proverbial and actual barriers and increasing tariffs will have the opposite effect of what Trump and Bannon hope to accomplish. Companies such as Wal-Mart and Koch Industries that are big importers have banded together with some 120 trade groups to oppose the border tax plan. Without the $1 trillion over 10 years of projected tax revenue from the border adjustment tax, the corporate tax rate cannot be cut to the House Republicans’ target of 20% from the current 35% level. This will also affect the plans for infrastructure spending. This may stall the Trump so-called rally to make America great again.
I believe America is already great and is the best country in the world in which to invest. I also believe that improvements can be found and should be made. However, adopting insular and isolationist rhetoric and behavior is not the answer and will have profoundly negative long-term impact on our society.
The rallying cry– Make America Great Again–might just end up as a brutal irony. However, I am confident that GCM will navigate through the mayhem and continue to find companies on the horizon that will prosper. We already own many today!
I look forward to updating you at the end of the first quarter.
Goldberg Capital Management is an investment adviser registered with the State of CT Department of Banking. This Newsletter and its contents are for informational and educational purposes only. You alone will need to evaluate the merits and risks associated with the use of the information provided herein. Although this Newsletter may provide information relating to approaches to investing or types of securities and other investments you might wish to buy or sell, no information provided in this Newsletter is intended or should be construed as an investment recommendation or endorsement from Goldberg Capital Management. Please remember that past performance is no guarantee of future results.