Carty Capital Management
Carty Capital Management

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Blog

Lights Out

Good Morning,

 

Ready to sell?  End the pain?  Me?  Well, I have been rummaging around my desk drawers all morning trying to find the screwdriver and wrench to get my windows open so I can get out onto the ledge. 

 

Then I realized, we are only on the third floor in the Florida office. 

 

But, before I get to all that --- 

 

Happy Easter Weekend to You and Yours!

 

We send the very best of Blessings to you and yours for the new Spring!

 

You know that feeling...that pit in your gut where you are sure it's going to get a lot worse - right? 

 

Yep, we all get it - and the latest data points are clear.  Here is the deal - it may get worse - and then it gets better.  Here is what it looks like this moment when taking the temperature of the audience heartbeat:

 

Hey - only 5 more ticks to go.  I added some data from history - at the peak of fear in the 2008-2009 crisis, we got to 12 on this reading.  We are at 6 now - and now more afraid than not only in 2008-2009 but also in 2016, after the markets started the year off 13+% in the red. 

 

Buckle up - and hold on tight - for your interest

 

There is more:

 

Stop me if you've heard this before...

 

The questions above is what millions answer each week in the sentiment survey from AAII.  And guess what?  Right on time, there are once again more bears than bulls - perfect:

 

"Mike, it's much worse than you think...."

 

Man if I had a nickel for every time I have heard that....

 

Here is a better one for you - Q1 earnings season is about ready to unfold:

 

Focus on the Facts - Not The Fiction

 

You do recall that a few weeks ago, the crowd was petrified of 3.00% 10-year rates, yes? 

 

They are not close anymore. 

 

That's what fear does.  

 

It makes you scared of things selling at 16 times earnings and...

 

It causes you to buy things selling at 35 times earnings. 

 

Yes - do the math.

 

>> Stocks are at 16 times earnings which will rise over the next 10 years

 

>> Bonds are at 35 times earnings which will not rise one red cent over the next 10 years - guaranteed.  

 

Sorry - But This Was Never Meant to be FUN

 

Never confuse trading with investing - it's a poisonous venture and ruinous to your long-term effectiveness - if - you are trying to build real wealth. 

 

Bet your bottom dollar, the louder the emotional stress gets - Warren is buying. 

 

Oh Yes, China

 

Just to be sure we don't buy into the "Trump is an idiot on everything" hysteria - and in effect, throw ourselves off track, let's make certain all understand the data from the latest USTR report on the trade "war" elements:

 

Today, we discuss the USTR’s assertion that China’s technology transfer regime is unfair for US companies doing business in China. It has been stated in private that voluntary technology transfers take place in China like the “business transactions engaged in by the fictional gangster of the Godfather series, Vito Corleone, were voluntary. China is effectively making an offer multinationals cannot refuse.”

 

Let's break down the related section of the USTR’s report to make it easier to digest:

 

Controlling interest. Foreign investors are prohibited from doing business in certain industries in China unless they partner with a Chinese company, typically through a joint venture (JV) arrangement. Oftentimes, the “Chinese partner is the controlling shareholder.” For example, China has “long required U.S. and other foreign car makers to enter into JVs where non-Chinese ownership is capped at 50 percent.” JVs are also used as “a key mechanism for obtaining the technology needed to support the development of a domestic supply chain for Chinese-made aircraft.”

 

These arrangements directly support China’s IDAR initiative, because the intellectual technology property possessed by the US entity that has been introduced into China (i.e., the “I” in IDAR) is slated for digestion, assimilation, and reinvention. In many instances, as a condition of partnership, the technology is turned over to the controlling Chinese entity, a.k.a. “partner.” One anonymous expert called Chinese instructions to voluntarily hand over technology “today’s rules of the road.”

 

Why would US companies agree to unfair terms? Because “they must either transfer their technology to the new China-based joint venture, or they must cede the world’s fastest-growing market to foreign competitors,” according to the National Association of Manufacturers.

 

The American Bar Association says that many big US multinationals have “sued for the misappropriation of trade secrets by JV partners, employees and others in Chinese courts,” including American Superconductor Corporation, Corning, DuPont, Eli Lilly, and General Motors.

 

FDI scale. “By promoting foreign investment in certain industries while limiting or altogether prohibiting investment in others, the Chinese government uses its foreign investment regime to channel foreign investment into industries of its choosing to support policy objectives.” China’s “Foreign Investment Catalogue” (“FDI Catalogue”) is the go-to source for industries that face the most significant deal-making barriers.

 

The FDI Catalogue divides industries into three categories: (i) “encouraged,” (ii) “restricted,” and (iii) “prohibited.” These categories represent a scale of sorts for industries that are “subject to stricter government review and a case-by-case administrative approval process.” (See Table II.1 of the USTR report.)

 

If an industry is not listed, it is generally considered to be “permitted.” The implicit “permitted” category represents China’s “negative list” system, “in which foreign investment in all sectors is permitted unless it is expressly included on a negative list.”

 

China shifts industries in and out of categories as they progress through the IDAR stages. For example, the FDI Catalogue included “manufacturing of complete automobiles” on its “encouraged” list until 2010. From 2011 to 2014, the activity was “permitted.” Once China had increased its domestic capability, the activity became “restricted” in 2015.

 

Unwritten rules. According to the USTR report, when China joined the WTO in 2001, it committed “not to condition the approval of investment or importation on technology transfer.” However, sources cited in the report say that China has implicitly violated WTO rules. China has gotten away with these violations by not putting technology transfer contingencies in writing, often conducting negotiations verbally and “behind closed doors.”

 

So seriously folks - this is not fake news - and it is time we took back the control of this process.  If it takes a trade war - so be it.  (It won't...)

 

Besides, they can afford it a great deal less than we can.  

 

Closing

 

As ugly as these windows of time always feel - and believe me, I get it - a patient and disciplined view of the larger forces defining our collective future tends to be a more productive philosophy...

 

Forget the White House.

 

Over wide spans of time, people make markets. 

 

The Barbell Economy is real. 

 

You can ignore it, you can disagree - but the two largest generations of our time are set to drive U.S. economic growth for the next 40 years. 

 

In time, innovative and well-run companies standing in that Barbell structure will be set to generate long-term profits, and the shareholders (owners) who patiently invest for the long-term will hopefully participate in the value creation that takes place as a result.

 

As such - panics like the one the markets are currently (still) finding their way through tend to be good for the long-run.  They reset values and perspectives and provide the long-term investor new opportunity to be patient and disciplined.  

 

No one ever stated it would be easy.

 

Be assured of this: if it were easy, the returns available would be insignificant.

 

For long-term investors, hunting season is open...time to start looking.

 

Be grateful for the latest bouts of panic.  

 

They are resetting values and building future larger returns. 

 

Demogronomics keeps you on the leading edge of change but there is a cost:  it requires a much larger, more patient and disciplined view of the elements at work.

 

It's the long-term currents we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon - just as they are now, causing doubt in the minds of millions once again. 

 

Those waves are the noise too many will likely continue to be lost in...and the reason the long-term game is so hard to win based on fearful activities.  

 

In the end, like it or not, long-term investors have learned this: 

 

Demographics Rule The Long-Term Game

 

Until we see you again - may your journey be grand and your legacy significant.

InvestingMike Williams