Monthly Archives: December 2014

Blue Period

Courtesy of Mertim Gokalp

Courtesy of Mertim Gokalp

With tax-loss selling behind us, it’s time to contemplate 2015 and what the markets may have in store. Pundits predict a generally robust year, albeit with increased volatility. Despite the blather about the market being rational, it’s as zany and fickle as the people who trade in it. How else to explain seasonal effects like the “Santa Claus Rally”, “January Effect”, and the fact that years ending in a “5” give positive stock markets? (The number 5 was certainly lucky for Coco Chanel who named her first perfume Chanel No. 5. Its financial success has made the brand the juggernaut it is today.)

Despite attempts to explain these effects as expressions of rational behavior, I think it’s best not to overwork the dough, so to speak. Is the January Effect, when stock indices get a bump, the result of investors buying back stocks after December’s tax-loss selling?  I say, when Nature gives you a boon, just say ‘thank you’ and shuffle off before She changes her mind.

Pablo Picasso said, “If I don’t have red, I use blue.” This is great investment advice.

The latter half of the year saw a lot red. When the price of West Texas Intermediate dropped through the floor, the share valuations of many senior, mid-, and junior-oil and gas companies went along for the ride. Of course, some are now in oversold territory and may attract investor interest next year. Others, particularly those with overly-leveraged balance sheets, high production costs, and unhedged contracts, will find the capital markets unobliging, forcing them to slash dividends, put themselves up for sale, or simply close shop. Until sentiment towards this sector changes, best to put down the red brush and pick up the blue.

In 2015, it’ll be blue skies over the country the world loves to hate, America. Lower fuel costs will be a boon for consumers— and Americans do love to spend their way to happiness. Hence small-and mid-cap companies that sell within the domestic economy like Coach, Nordstoms, Home Depot, and TJX Cos., as well as those who typically spend a significant chunk on transportation, like Fed Ex and Amazon, for example, are sure to see fatter margins in 2015 and beyond.

Another ‘blue’ area is luxury products. According to a recent special report in The Economist, shares of public luxury companies have outperformed those of other companies since 2005. Hermes, LVMH, Prada, Burberry, Swatch, Kering, Richemont, and Diageo are doing smashing business. Avid consumers in Asia are more than compensating for lower demand in Europe and North America. But don’t cry for Europe. Its luxury industry sold $726 billion of covetable mercy in 2013 and has 70% of global sales. So, while its citizens have cooled it on luxury spending, the continent is still running the show and reaping the rewards through employment, exports, and increased GDP.

Bernard Arnault, the sharp-eyed LVMH honcho was once asked by the late Steve Jobs for his advice on retailing. “I’m not sure we’re in the same business,” replied Arnault. I don’t know that we will still use Apple products in 25 years, but I am sure we will still be drinking Dom Perígnon.”

So, let’s raise a glass of Dom to next year’s most promising sectors: U.S.consumer goods companies, U.S. financial institutions (the regional ones too), small-and mid-cap U.S. domestic companies, and U.S. pharma and technology companies. Russia is a dud but India is looking interesting, and if monetary policy loosens up in Japan, that region may be worth a gander. Higher interest rates in the U.S. and, by extension, Canada, will put a damper on the allure of high-dividend paying stocks. But don’t be blue because steady growth in the U.S. economy will more than off-set this. And, for those going long, you could do worse than investing in luxury goods. No red ink in sight.

Here’s to good health and good fortune to all in the year that ends in “5”.



Courtesy of Hermes

Courtesy of Hermes

Long gone are the days of sumptuary laws. Fine gems, furs, gold and rich fabrics were verboten to the hoi polloi and wearing them meant risking punishment or sometimes, death. Today, the biggest risk to indulging in a bit of luxury shopping is carrying a balance on your credit card. Not ideal but some distance from summary execution.

But in a world where luxury is available to nearly all, how do we define it? And what’s with all the qualifiers? Today we hear terms like “affordable luxury”, “aspirational luxury” and “absolute luxury”…My favorite definition of luxury comes, not surprisingly, from Hermes: “That which can be repaired.” 

Many years ago a friend bought his mother a classic black Birkin in a vintage shop in Paris. The bag was authentic but missing the lock and key. The salesman assured them that if they took the bag to the Hermes boutique on Rue Faubourg, they could replace the missing accessories.

But at the boutique they were informed, “Before we can sell you the lock, we must send the bag to our spa. The leather is dry and stressed. You will be contacted in a few months when the bag has fully recovered.” (Readers will be pleased to know that several months and several hundred Euros later the bag made a full recovery.)

Lately the markets have been more than a little stressed themselves. During the volatility of the past few weeks, broad swaths have been hit, chief among them oil and gas exploration companies and related industries such as pipelines, heavy machinery, and even some financials.

A good question would be: Which of these companies can, like the Hermes bag, be repaired?

Whenever sentiment turns against a sector, perfectly decent, even great, companies suffer collateral damage. While the price of oil is not going up anytime soon, rest assured that it will go up again. Companies with solid balance sheets, manageable levels of debt, astute management who are savvy capital allocators, and who attract patient institutional investors, will do just fine. Their stock valuations will be repaired.

Junior exploration companies, or highly-leveraged small-and mid-caps are less likely to fare well. Some will get acquired by larger firms who will cherry-pick the best. The remainder will twist in the wind burning cash, slashing dividends and capex, and praying for a recovery in the oil price before their stock certificates end up as landfill.

While business strategies at high-luxury companies do not naturally translate to firms in other industries, (for example luxury companies are not too concerned about the cost of production; goods will be priced to ensure high profit margins), a few general rules still do apply. Among them, of course, is Warren Buffett’s adage to invest in companies with a wide economic moat.

Companies like Hermes benefit from an indelible aura of luxury, including their famous after-service. This gives them, in Buffett parlance, a wide economic moat. When they stumble, as all companies do at some point, they recover.

Oil stocks are experiencing a rapid vertical compression. But they’re not all lemons and many will make a full recovery. Here’s what to do: Find a charming café and order a citron pressé. Sip it slowly while browsing the financial pages. You’re bound to uncover a few oil patch gems. Or, you could always just buy an Hermes bag because their prices only go up.

Upstairs Downstairs

M. Agnelli in Balenciaga  Courtesy of Joao Chaves

M. Agnelli in Balenciaga
Courtesy of Joao Chaves

In case you hadn’t noticed the world is bifurcating. Whether it’s income distribution or fashion, it’s an upstairs/downstairs situation. The middle is going, going, gone. It’s Balenciaga or bust. (As an aside, isn’t Agnelli’s Balenciaga satin opera coat to-die-for?)

In fashion, if you want cheap-and-cheerful—COS, H&M, Zara, Topshop, UNIQLO—are happy to provide you with glad rags: trendy clothes in fair-to-middling quality. Just don’t expect any  personal service and wardrobe consultation. It’s every shopper for herself and good luck snagging a change-room.

On the other hand, if circumstances permit, there are the luxurious ministrations of Prada, Gucci, Chanel, Dolce& Gabbana, Dior etc. Serene environments and personal attention, complete with a glass of Champagne.

The middle way, highly touted by Buddhists, is on the way out fashion-wise. Sears is toast but Wal-Mart is booming.

On the finance front, things are diverging too. Garden variety brokers—the kind that would call you with an investing idea or suggest when to take profits— are on the way out. These old-school types hand-built a unique portfolio made up of individual securities. Transactional accounts like these were a boon for buy-and-hold blue-chip investors. You paid once when you bought and once when you sold, even if the timing of those two events was decades apart.

Now banks and other financial institutions are converting clients to the “wealth-management” model. In exchange for managing a client’s portfolio, the advisor receives an annual fee. This fee ranges anywhere from one-percent of assets-under-management to several hundred basis points. The more money you have to invest, the lower your management fees.

Plunk down a minimum of $2 or 3-million and charges come in around 150-basis points or less. That’s considerably better than the typical management expense ratios on mutual funds that average 250-basis points and up. Of course, whether your advisor trades a little or a lot on your behalf, the charges stand, yea- after-year.

For those who don’t meet investment minimums, there are low-cost alternatives including ETFs, index funds and robo-advisors. With fees in the low single-digits, these are the Zara’s of the investing world. For a modest fee you participate in the capitalist zeitgeist—and benefit, or suffer, based the aggregate performance of a basket of businesses. These off-the-rack offerings are strictly for ‘downstairs’ types. Or are they?

A recent study has shown that clients with investment advisors average 1.8-percent better than DIY-types. Yet these returns are gobbled up by higher fees. So it appears that, for the average investor working with an average advisor, there is no advantage to paying for advice!

There are a 3-ways around this. One, you can find a manager who charges less than 180-basis points. This way you get to keep at least some excess gains in your pocket. Two, you can do your own investing with a low-cost online brokerage. Or, three, you can blend the two approaches.

Moral of the story: We may aspire to bespoke but off-the-rack seems to work out just fine.