The Coteau 3/14

The Coteau

The View from Bannerstone Capital

by Biff Robillard


Bicep2, Branta canadensis and Nikita Khruschev

“Endurance is patience concentrated.”—Thomas Carlyle

Inflation may be hard to find in macroeconomics these days if you ask Janet Yellen. Ever since the monetary policy shock therapy beginning in 2009, economists have more or less held their breath. How would this injection of billions of dollars of credit affect the inflation rate? Ben Bernanke had his ideas, Paul Krugman has his ideas, of course, and the current Federal Reserve Board has its ideas. So far inflation seems to have its own ideas. Nobody is particularly happy. I have made my own case elsewhere for an underappreciated increase in Real Potential GDP as a possible explanation for the absence of inflation in the face of so much Keynesian stimulation.                       RPG

Figure 1    Is the Blue Line, Potential Real GDP, Improperly Drawn: Is It Too Low?

Another kind of inflation, cosmic inflation, has been evidently found and explained. Astronomers and cosmologists at Bicep2, a telescope at the South Pole, have found long anticipated evidence. Ripples in space, in fact polarization of faint microwave radiation left over from the early universe, has been finally detected and measured.  This is widely considered among scientists to be evidence for gravitational waves, which are evidence of cosmic inflation. Like financial inflation, the actual causes of it are still debated.  But the phenomenon itself is manifest as the uncanny tendency for space to inflate, or grow, in the very early universe. So now scientists have Bicep2 and economists still have Milton Friedman.

The seasons provide natural metaphors for investing and I watch for them. Branta canadensis, the Canada Goose, provides one of my favorites right about now in the Boreal North. Carl Linnaeus himself named this creature and his choice of “from Canada” is apt: the bird is native only to northern North America. Canadian creatures must adapt or succumb to long cold winters, of course: hibernation, migration, curling, hockey and colorful beer labels all come to mind.

Patience is an essential virtue for investors.  It is also an unobvious adaption for surviving winter to ultimately fulfill an organism’s raison d’etre: reproduction. Canada geese have many redeeming qualities, although this is frequently overlooked if you own lakefront property they frequent.  They mate for life, they form strong family groups and they are intelligent. They even employ some game theory.

Geese are rewarded for obtaining ideal nesting sites each spring. This makes sense since some nest sites must be perennial winners with less predation, better protection from the elements, better food sources and so on. The early bird gets the worm and the real estate. If a pair of geese attempts to retain a coveted successful nest site by wintering over, certain death awaits them. The genes for this strategy left the gene pool long ago. Geese can be rewarded for coming back to nest sites before anyone else gets there, but late enough in the winter to avoid starvation and bitter cold. This creates the scene I witnessed this morning: groups of geese, invariably in odd numbers (are these geese who have sadly lost last year’s mate?), standing on the ice of our many frozen lakes, ponds and sloughs, fending off rivals and awaiting the melt. Their instincts are pretty good. The forecast is for above 50F.

Investors should think like geese. You can’t wait forever; you will starve if you don’t freeze first. You can’t be too early. Same fate. If you wait for the all clear, well, you’ll find the best is long gone.  Lastly, even when you do everything you can, the outcome is always still uncertain. Not every season yields a brood. You makes your bets and you takes your chances.

This first quarter of 2014 is wrapping up. Like a Canada Goose standing on March ice, I can’t tell just how this will turn out. But then again, we never know until we know. A sense of certainty in markets is usually an ominous sign to be ignored, so I welcome the general ambivalence. Good things can still happen when ambivalent about the stock market. Maybe even the best things happen when ambivalent.

Score Sheet for Q1 Excluding Dividends

Dow              -.72%

S & P 500   +1.28%

NASDAQ      +.54%

Gold          +6.45%

20 Year U.S. Treasury Zero Coupon Bond (ZROS) +13.63%

The most obvious technical issue is the age of a cyclical bull market underway since the March 2009 low. A five year old cyclical bull is clearly vulnerable. History suggests we be particularly mindful of the third calendar quarter. So many markets in the past have succumbed there. A market faltering mid-summer with narrowing breadth and various divergences, despite hovering near highs, should be treated with delicacy and respect. I believe the evidence is rather convincing for a new secular bull market for stocks being underway. The next cyclical bear market will test the hypothesis. A bear market low well above the 2009 low (or even above the 2011 lows) and will be consistent with the secular forecast.

A new absolute low is very bad news for the secular bull theory. Don’t count on it.

I continue to evolve as an investor, and this is a hallmark of my philosophy: your best round is likely still out there. There was a long time when I held a belief that reducing total market exposure and holding cash anticipating periods of high turbulence was effective for improving performance. This practice looks very good on paper, but it has proven wanting over my many years of attempt. Almost invariably a fully invested portfolio of truly promising stocks has performed better, in practice (and that’s what matters) even a relatively short time after the emotionally disturbing turbulence ends. Of course, certain events will always warrant consideration of immediate wholesale liquidations like nuclear war, certain types of epidemics, or certain natural disasters.  But short of these, using technical analysis to choose promising stocks to buy (and to sell) rather than using it to time cyclical market breaks, is the approach I prefer.

I am not a Talking Head on political TV, and this next missive may explain why. I think Crimea going back to Russia is probably a small thing. Khrushchev should have never given it away in 1954 in the first place. Russian lore claims he was drunk when he signed the papers. It’s an amazing historical accident Crimea left Russia, perhaps having more to do with punishing Nazi sympathizers than anything else. The Russians understandably have a thing about the Nazis.

The global markets really haven’t cared about Crimea. Perhaps the commodity markets should be more interested than global equities. Ukraine’s largest import is natural gas. Ukraine provides 100,000 merchant marine sailors moving goods around the world, it provided 50% of the USSRs iron ore in the day and it is the world’s largest supplier of sunflower oil. It also provides grain (wheat), sugar (from sugar beets, like North Dakota) and much of Europe’s honey. A Russian invasion would prove disruptive to global commodity markets first.


Figure 2    Dr. Copper Daily Prices: Right or Wrong This Time?

Dr. Copper is sending worrisome messages. When global demand for copper falls, copper prices tend to fall. A strengthening U.S. dollar can contribute to commodity price weakness. Convention has it that copper prices can presage economic weakness early. If that is the case here, one better pay attention.

Then again, copper could be signaling a natural market rotation from stuff to paper–by this I mean a commodity cycle giving way to a financial asset cycle, as we saw in the 1980’s. Is it China? Is a stronger dollar? Is it a coming recession? Aluminum stocks and steel stocks have shown signs of life in an apparent challenge to the slowdown case. Commodities like corn are stirring.

Electric cars are here to stay. Tesla is remaking the world like synthetic rubber, steamships, and the jet airliner did. These were not merely progress. They were bigger than that. They were permanent changes in the way we thought about everything. High quality, long lasting electric cars will change how we think about cars themselves, the road trip, the highway itself, the power grid and the American Dream. Like synthetic rubber, steamships and jets, fortunes will be made and lost in the long transition. We aim to stay on the winning side at Bannerstone.

Tesla Motors Inc. (TSLA) is an obvious play on this change. We do not own Tesla at the moment in any meaningful quantity although a few accounts have traded it successfully. This has been a classic growth stock error since about $90 per share. It has looked too expensive while it has ignored valuation and simply moved higher. The recent pullback to its 50 day moving average is intriguing and we will likely be buyers if “systematic risk” (academic for a market-wide rout) presents an opportunity. Fundamental analysis is of little value when a paradigm shift is underway. Exploiting price action with a gut check is the best you can do. It is 25% off its recent all-time high. Maybe now is the time.

Speaking of electric, the U.S. power grid is a mess and nowhere near ready for the twenty first century.

Tesla is just the beginning. The use of clean, steady voltage is clearly a giant wave in a society being transformed by the Internet, personal communication and now electric transportation. Quanta Services Inc. (PWR) is in the business of improving the grid. We owned it before.  I grew impatient with the price action and the lack of political momentum around the grid and I sold it. Well, it is performing better.  Mr. Market seems to like it, and we are likely to add it to Thales during an opportunity.

Finally, my thoughts and prayers go out to the families suffering from the mysterious fate of Malaysian Air 370. Modern life is so full of daily technology miracles we take the inherent safety of modern travel for granted. We all trust our most beloved family members to air travel regularly, and who doesn’t offer a prayer for a safe trip? A jet hurtling through the atmosphere at night far out over the sea is a technological miracle. I still hope for a miracle of the more traditional kind. The odds are very, very long. That’s why they call them miracles.


This publication does not constitute, in any way, 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. Bannerstone Capital Management, LLC is a registered investment advisor. We are on the web at