The Coteau 10/13

The Coteau

The View from Bannerstone Capital

by Biff  Robillard


Zoonosis, Ruth Patrick and Bay Ridge, Brooklyn 

Do well and you will have no need for ancestors.  –Voltaire

Sometimes I am just glad I am not dead already. It’s a miracle we aren’t all dead. I am reading David Quammen’s Spillover: Animal Infections and the Next Human Pandemic. Everybody knows you can’t judge a book by its cover. More proof: I own the Kindle version and didn’t see the cover until just now while verifying the complete title via Google. The cover’s terrifying mandrill may keep you up at night, but let me tell you, it ain’t half as scary as what is inside. I have been washing my hands more often.

Last issue I described how the economy seems for all the world to be in transition, or better said, transitions, and the evidence continues to mount. I have, as you know Dear Reader, put a bullish cast to the current economic transitions, away from past bad things and toward more future good things. But just as I get enthusiastic about a constructive trend in transitions, I learn a new word describing a not-so-good transition: zoonosis (I can’t say it, either). Thank you, David Quammen. Zoonosis, I have learned, is when an infectious agent inexplicably leaves one common host, say via a dollop of fruit bat poop or a sizzling grilled monkey steak, and infects a less common host, say you.

Nobody can explain, illuminate and amplify natural history like Quammen. I discovered him years ago with his The Song of the Dodo, which my sister gave me, feeding my affliction of what E.O. Wilson calls “biophilia”. Yes, I am a biophiliac. Quammen’s  Dodo changed my life as only a book can. I was already an avid naturalist, a hobbyist, but Dodo helped me realize just how deep my love of the subject is. If David Quammen taught an Introduction to the Natural Sciences to college freshmen, we would be utterly awash in career scientists. The drought in STEM majors in the U.S.? Solved in one fell swoop. Honestly.

Anyway, as Quammen scares the bejeezus out of me, I have been reflecting on the subject of deadly infections, newly empowered by the book’s villains: viruses, protists, and bacteria. These suckers lurk everywhere and some of them are really, really, lethal. Lately the meat counter just ain’t what it used to be for me. Worse, we are essentially defenseless against them, at least as individuals. But I already suspect Quammen is leading me to ask the question “How come we, the human race, weren’t totally wiped out by a Hendra virus, Henipavirus, long ago?” Why is anybody left? The answers are fascinating and complex, and by way of metaphor, also useful to investors.

It’s pretty hard to kill off an entire species (as opposed to an individual) with an infection, and it’s pretty hard to snuff out an entire economy (as opposed to a large investment bank) with a financial crisis. Not impossible, which is what scares us, but pretty hard nonetheless.

After the turmoil of the past five or six years, with one pecuniary catastrophe after another threatening our economic well-being, I am just glad the economy isn’t dead already. It has seemed, at times, all but inevitable: Imminent zoonosis of virulent financial
pathogens lurking in over-leveraged investment banks, bankrupt Southern European governments or fraudulent collateralized debt obligations. If the economic realm has half as many deadly pathogens as we think—government shutdowns, budget-ceiling disputes, derivatives, central bank profligacy, Bernie Madoff, soaring national debts, bubbles, recession, Depression, war, higher taxes, lower taxes—you get the idea—why is there any economy left? While the answer may not help if indeed your particular business is the hapless victim of random economic extinction, you may nonetheless be somewhat assured by the macro outcome: The economy, very broadly speaking, seems to adapt and endure. There is an economy left. I went to Chipotle for lunch. There was a line . . . again. The economy is still out there.

Somehow we Homo sapiens, in the ancient grinding arms race with Quammen’s deadly viruses, as a group, are one step ahead of the deadly bugs, en masse, most of the time. Take heart. We may not understand why, but the empirical evidence abounds: Despite Ebola, despite Hanta, you are reading The Coteau. You’re alive. And so it is with things economic: Despite all the potential agents of destruction, the modern Western, profit-driven economy, like some resilient species, survives even the occasional pandemic. Some luck, yes, perhaps, but something larger is clearly afoot. Every species, after all, is a snapshot of the adaptations embodied within, an infinite number of accumulated random events bestowing reproductive success upon the organism. When you think of an economy as loosely the same thing, i.e. an adaptive system responding to a long history of selective agents, maybe it shouldn’t be so surprising the NYSE opened this morning. Play the percentages.  Stay pretty bullish.

Ah, percentages. It’s hard to believe the ancient Greeks and Romans, who accomplished so much, had virtually no understanding of the science of probabilities. The concept of odds simply did not exist in their math. Ruth Patrick, Great American, certainly beat the odds: She lived to 105, sadly hearing Gabriel’s horn last month. To put her 105 years in some perspective, she was born the same year as Rachel Carson (Silent Spring), another giant among American scientific women. Carson died merely 49 years ago. Both women made incalculable contributions to the welfare of the human race. Awareness they at first divined then cultivated and then courageously shared with the modern world. Ruth Patrick is the founder of a science we now call limnology: the study of freshwater ecology. But it wasn’t easy. But, man, did it pay off.

Like Rachel Carson, Ruth Patrick got it. Fortunately for all of us, she also had the fortitude to overcome biases and societal roadblocks we cannot imagine today. Her dad pushed her, too evidently. From a B.A. at Coker College in South Carolina, she clawed her way to a Masters and a PhD at the University of Virginia. She pioneered examining freshwater biological diversity as a basis for ecological assessment. I owe her. When I was a young lad, discovering my own innate fascination with the natural world (biophilia!), everywhere I looked in a river or lake I found ruin. The St. Joe River in South Bend, the Great Lakes, even the rivers of Maine coursing through my Uncle Jack’s remote forested property were all practically empty of life, polluted to death by unenlightened profiteers and ignorant indifference. I remember how disappointed I was, almost heartbroken. It was as if it was all wrecked just before I got there. Yet, forty years later, thanks largely to Ruth, a week ago I was standing above the Charles River in Boston. It appeared perfect. Yes, the very same river made famous by The Standells’ 1966 AM radio hit “Dirty Water”:

“…down by the River Charles…oh, I love that dirty water….Boston you’re my home…”

Talk about dated. Ruth Patrick was already 59 in 1966, by the way, and the Charles was still a mess. But Ruth was on the job and now in my middle age, America’s waters have rebounded.

The Charles last week was clear and beautiful, effortlessly reflecting the fall colors along the woody banks. A crewing shell sped past. I could clearly see the bottom along the shallows by the banks. A dip seemed plausible. The St. Joe River in northern Indiana today is clear and beautiful, amazingly resurrected, too. Even Lake Minnetonka, the impressive amoeba of glacial kettle lakes a few hundred yards from where I sit, has benefited mightily from the understanding Ruth Patrick’s once-nascent limnology has provided. I have women in my life and I root for them. As a son of a mother, a husband, a brother to two sisters and a father to a daughter, I find Ruth Patrick, a female, scientific American icon both compelling and wonderful. So long, Ruth. Thanks. You remind us that important things often take time. And guts.

Transitioning the Fed to a new Boss this fall is troubling. It isn’t so much who, it is more when. It’s as if the New Guy brings with him a virus that ignites an outbreak. I think Bernanke has been a distinguished and indefatigable chairman during the most challenging Fed Era since the 1930s. My hat off to you, Ben; I will miss your calm effectiveness. But as you know from personal experience, Dr. Bernanke, trouble soon finds a new Fed Chairman: The first few innings often don’t go real well. There have been eleven new chairmen in the history of the Federal Reserve, and a market fever of sorts often breaks out soon after taking office. Although partly myth, there is something to this idea that new chairmen soon get tested at the Fed, sometimes immediately. Bernanke himself, after all, was appointed in early 2006. The Credit Crisis erupted in late 2007, and both Bear Stearns and Lehman collapsed in 2008. But that’s just one.

The most famous example is certainly Alan Greenspan, appointed in August of 1987 by George H.W. Bush. Remember October of 1987? Paul Volker, economic superstar and fly fisherman, was sworn in August of ’79, Jimmy Carter’s guy. Two miserable back-to-back recessions in two years followed, with interest rates reaching an historic high in January of 1981. Going back further still, Thomas McCabe got the nod from President Truman in April of 1948. A recession began later that same year, followed by the Korean War in 1950. You get the picture. It makes me nervous.

Market view update:

Stocks: still up for now with recent Dow Theory confirmation with the Industrials peaking September 13 and Transports confirming September 20. NASDAQ Composite made its own 52-week high. The Dow was first at today’s levels in mid-May and the S & P 500 was here last July. A four-year-old bull market since March of 2009 is no kid, however, and option premiums are suggesting more confidence than I like to see. IPOs are back in force.

Gold and Silver: Bear markets. Sell and walk away despite the occasional one- or two-day Wonder Rally. See Figure 1:



Figure 1   Weak Gold Miners Portends Weaker Bullion

Bonds: Avoid. Cash equivalents sure beat money market funds, so maturities out a year or two have a place, but consider the 1981 bond bull market a goner for long-term investors. Don’t fall for emerging market bonds, either. They may need a long rest and lower prices, and the dollar may not help them term. See Figure 2:


Figure 2   Lower Bond Prices Mean Higher Interest Rates

Emerging Markets: Who needs them with developed markets doing this well and the potential for a stronger dollar with the (inevitable but apparently distant) Fed Taper? I think like the bond bull, the sheer dominance and duration of the last bull market in BRICs makes me want to fade them.

October has a dicey reputation for market fireworks, but this is can be misunderstood and overrated. October is historically the bear killer, where many nascent or existing bear markets come to die. We do not have a pre-existing bear market to kill this month—quite the contrary—so that scenario is apparently off the table. A swift karate chop to the nose is still possible, which we are inclined to buy, as is just about everybody else if you can believe the pundits on TV. Given this consensus, I’m not counting on it. So far, the market seems resilient to the Washington gridlock news, but experience tells me this kind of tolerance can crumble quickly after a prolonged period of apparent indifference. Crowds can be weird. We’ll buy a market break but perhaps exit on evidence of a post-correction melt up. It’s possible. The market can do anything.

Syria? Ignore it unless it gets kooky enough to entail Israel directly.

New Ideas

The global high-seas shipping industry is on its knees and has been for years. As the commodity super cycle winds down, it has put additional economic pressure on the various fleets already reeling from a general global slowdown during the Great Recession. The endless convoys of ships filled with iron ore leaving Brazil and Australia for China have slowed. Order books were brimming by 2006 and 2007 for more capacity and soon a glut of new ships collided with a disastrous drop in shipping rates and ruinous overcapacity. A perfect storm drove many shipping company equities down 90 percent from the 2007 highs.

Some have already become extinct. But survival of some is all but assured. There will be a high-seas shipping industry for decades to come, the globalizing world requires it; and profitability, when it comes, could drive equity prices higher for many years, possibly in explosive fashion. During the initial nascent phase of the recovery, I like Aegean Marine Petro Network (ANW on the NYSE). Think of it as a global filling station for high-seas shipping. Profitable, with a half-billion-dollar market capitalization, ANW provides fuel and fuel-related services. As fleets get busier, ANW gets busier too. I have dithered a bit and watched it work higher in September. I intend to buy it for our Thales portfolios at the next technical signal.

See Figure 3:

ANW (2)

 Figure 3  Fill ‘er Up: High-Seas Ships Require Fuel

The world can be a small place, but it helps if your hometown has 2.5 million people in it. My mom and dad met in Bay Ridge, Brooklyn, as high school students in the 1940s. I was born there, too. This brings me to Janet Yellen, prospective Federal Reserve Chairman. Turns out Professor Yellen, then just Janet Yellen, was born in Bay Ridge around the time my teenaged folks-to-be were newly smitten. Janet went to the same high school my Uncle Jim attended: Fort Hamilton High. Now my venerable Uncle Jim spent his entire adult life in education. Like Yellen, he turned pro. He’s smart. He was in the Smart Business, you might say. Although he never quite cottoned to the hometown Dodgers (to the dismay of my dad, a full-blown Dodgers guy, Uncle Jim loved the dreaded Yankees, but Dad married Jim’s little sister anyway), Uncle Jim did have respect for his hometown Fort Hamilton High. And I quote, “The curriculum was . . . challenging.” I believe him.

Who knows, maybe Janet Yellen and Stan Fischer will wind up in a game of Rock, Paper, Scissors in the hallway outside the Oval Office to settle this thing. It doesn’t matter who. It just matters when. You can expect a nonlethal stock market infection of some kind soon thereafter. Chills and fever may follow. Yep, a little economic zoonosis is likely in the cards. Economies and markets get sick, too, but they are hard to kill. Count on the natural immune system in the market economies to kick in. Meanwhile, wash your hands, cover your mouth, and stick with Quammen: Forget the monkey steak. That’s pretty easy.



This publication does not constitute investment advice. The views described may have changed by the time you read this, anyway. Use your head, for crying out loud. Craig Cox is our editor. Thank you, Craig.

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