Thinking About a Washing Machine That Can Fly

thinking about a washing machine that can fly

During the recent Super Bowl, instead of watching the halftime show, I switched the channel to watch part of the movie Apollo 13. I really like that movie. I really dislike Super Bowl halftime shows. I know this makes me odd.

Far away, my favorite line from Apollo 13 was uttered by Astronaut Jim Lovell’s mom Blanche, at one of the most tense and frightening moments of the story. As the world worried about the fate of the astronauts during the dangerous re-entry, Blanche tried to calm the nerves of her frightened grandchildren. And then came the best line in the movie –

“If they could get a washing machine to fly, my Jimmy could land it.”

It takes a special person to exude confidence when everyone else is fearful.

Who are those confident people today? What would give them the confidence to speak up in the face of pervasive doubt and insecurity?  And would we believe in them and follow them?  Perhaps that is the most important question.

Back to the Apollo 13 story… Blanche believed in her son. She also believed in his training and his fellow astronauts.  She had confidence in the scientists and engineers at Mission Control in Houston.  So, she believed when most others doubted. And therein lies the inspiration. Unwavering confidence in the face of widespread doubt.

You can’t fake this kind of confidence. You can’t manufacture it in a sound bite or social media tweet. It must come from deep inside and it is unshakable.  

Think Herb Brooks before the U.S. team played the Russians at Lake Placid in 1980.

Think General Patton as he led his troops toward Bastogne to liberate the surrounded 101st Airborne troops.

Think FDR as he spoke to the U.S. Senate on December 8th, 1941.

The United States is an amazing country. There are few limits as to what we can accomplish.  That has been our undeniable legacy. In our short history, we have produced our best when some noble cause is in our crosshairs. 

Think about the engineering and industrial accomplishments during WWII, from Higgins boats to atomic energy. 

Think about landing a man on the moon.

Think about how rapidly we discovered and produced a vaccine for Covid-19.

Every noble pursuit has a unifying impact on our country. If that is true, then perhaps it is also true that any pursuit that isn’t unifying isn’t noble. I suspect not everyone will agree with that statement (I’m not sure I do, actually). Nevertheless, I sense there is a lack of unshakable confidence in our country’s future, and I think it is because we lack a noble purpose. So, here are a few suggestions:

  1. Right-size government. Make it efficient, productive, fair, and incorruptible at all levels.
  2. Lead the world toward a cleaner environment AND faster and more sustainable economic growth.
  3. Rebuild a sense of community throughout our country and help the marginalized and disadvantaged accomplish goals and dreams conventional wisdom might consider impossible.

I am convinced that there are leaders out there today who can make these suggestions reality. We just have to motivate them to come forward (more on that in future editions).

In the meantime, it behooves one to keep modest expectations as we struggle with crony capitalism in the face of higher taxes and more government regulation, both of which seem likely. Low interest rates and low inflation (thus far) should support higher stock prices. Entrepreneurialism still produces amazing new companies, even as it disrupts the prospects for current leaders. Moreover, improving productivity through advanced technology continues to be a strength across much of the corporate sector.  The U.S. is still an economic superpower and likely will be for longer than many pundits predict.

Where there is fear and uncertainty, there is always hope and opportunity. There is no challenge that cannot be overcome with the right combination of boldness and unshakeable confidence toward noble pursuits. 

We have already proved that just about anything can fly, even washing machines, and we can land them, too. It is time to think much bigger, isn’t it?

Michael Kayes, CFA

A Sellers Film Festival

Every once in a while, a new movie is released, at just the right time, to help us form an accurate perception of an important event or issue.  Other times it makes more sense to watch a classic from the past to understand the current environment.  Which brings me to one of my all-time favorite movies, “Being There,” starring Peter Sellers, as Chance the Gardner, AKA Chauncey Gardiner, released in 1979.       

To summarize, the story revolves around the life of a simple-minded man who has spent his entire life as the gardener at a wealthy estate.  Chance the Gardener never leaves the estate and learns everything he knows about the world through what he watches on television.  Literally by accident, Chance is placed in the care of a well-connected business mogul and the rest of this hilarious movie is Chance the Gardener becoming misnamed and mis-interpreted as Chauncy Gardener, economic and political advisor to powerful politicians, including the President.

Reality is not static, it continues to evolve, and is constantly reshaped by perceptions.  Moreover, one person’s reality might be viewed as complete nonsense by someone else, leaving both sides confused and frustrated.  And that, in a nutshell, is the state of our country.  We are all trying to figure out the new reality.  The questions we are faced with, from an economic perspective, are almost endless.  Here are a few important ones:     

  • Will more government stimulus help the economy, or will it only worsen the debt situation leading to financial disaster?
  • Will an increase in minimum wage have a net positive impact, or will businesses dependent upon minimum wage workers be forced to reduce staff?
  • How long can the Fed keep interest rates low?
  • When will rising inflation be the party-killer some pundits expect it to be?
  • What tax increases will we face and what will be their impact on the economy?

The answer to these questions will largely drive the markets in 2021 and over the next several years.  Over time, we will discover the real economic answers.  Then, only in hindsight, will we be able to evaluate the predictive accuracy of today’s political narrative or agenda.   

I suspect 2021 will be a year for guarded optimism and valuation discipline.  Within equity portfolios, our focus will be on incremental changes, not magic moments to make extraordinary portfolio bets.  In other words, it may be a year to focus even deeper on individual company fundamentals and less on macro developments or political rhetoric.    

Which brings me to another all-time favorite movie, also starring Peter Sellers – “The Pink Panther Strikes again.  In this fifth film of The Pink Panther series, Sellers plays the bumbling Chief Inspector, Jacques Clouseau. (I highly recommend them all).  Throughout the movie we are left wondering whether Clouseau is really a brilliant crime solver or an imbecile.  There is ample evidence on both sides of the debate, so, like today, it depends on who you ask.

While it may be better for our mental health, or at least our disposition, to watch Peter Sellers movies, instead of the nightly news, we must remain engaged even if we vehemently disagree with the dialogue.  With a new administration and Congress, changes are coming.  Some may help the economy and markets, some will not.  Virtually every decision made by the President or Congress will be applauded by half the country and despised by the other half.  There is just no getting around the fact that the country remains deeply polarized.  The goal here is not to pick a side but figure out the economic impact of every change and then adapt portfolio strategy accordingly.   

So, here it is, our overall investment strategy for 2021…

  • Be incremental and disciplined, not emotional and reactive
  • Stay engaged and objective, searching for truth not spin
  • Maintain perspective, balancing risk and opportunity
  • Stay informed, be discerning, and occasionally, watch a Peter Sellers movie. 

Laughing can be good for the soul.

Michael Kayes, CFA

The Dreaded Snowplow

Every year at this time, I find myself reflecting on my favorite Christmas memories.  Christmas lights, midnight mass, eggnog, and shoveling snow.  What??  Shoveling snow??  Let me try to explain…

It was Christmas day 1978, in our Norman Rockwell town of Herkimer, NY when Old Man Winter dumped 24” of snow in one day.  Two feet of thick, wet, very heavy snow.  Early Christmas morning, with my siblings, cousins, aunts, and uncles, still sound asleep, I went outside and began shoveling the driveway.  There was no logical reason why I felt compelled to do that, it was Christmas day, everything was closed, there was nowhere to go.  Nevertheless, I picked up a shovel and went at it.  About four hours later, exhausted and drenched in sweat, our long driveway was clear and ready for use.  Then, stealing defeat from the jaws of victory, the dreaded snowplow came by creating a massive wall of snow at the end of our driveway.  I had more work to do.  The lesson that day was this – Sometimes, setbacks occur due to forces completely out of our control.  But with a little grit and determination, challenges can be overcome.  The sheer challenge of shoveling that much snow was what motivated me to do it.

Later that evening my best friend and I put on our skis and traveled around town, helping motorists who were stuck in the snow, and visiting friends along the way.  We had a blast, assisting our neighbors and spreading holiday cheer.  There is always somebody to serve or encourage. 

For the record, I miss snow at Christmas, although I have no interest in shoveling two feet of it ever again.  Covid-Christmas 2020 is going to be tough on a lot of people who are isolated from friends and family.  The challenge for all of us is to find a way to connect and share fellowship and enjoy the Christmas spirit, remotely.    

Collectively, my sense is that we all want Santa to bring us a more normal year in 2021.  As we contemplate what that might look like, perhaps a pertinent question is this – What surprises are in store for us next year?  To answer this question, we must first identify the forces currently driving the economy and markets:

  1. Historically low interest rates
  2. Quantitative easing and ongoing government stimulus
  3. Relatively benign inflation

Let’s examine the sustainability of each one.

#1- Low interest rates

The Fed has stated numerous times that it intends to keep rates low until the economy has fully recovered from the Covid shut down, and until inflation is at or above 2%.  With the potential for higher taxes and more government regulation from the new administration, it is unlikely that economic growth will accelerate enough in 2021 to lead to higher inflation.  Given this outlook, low interest rates are likely to continue in 2021.

#2 – Quantitative easing and ongoing government stimulus

At least one more stimulus bill is likely coming in early 2021, perhaps more than one.  For better or worse, we are in the mode where government is becoming more involved in managing the economy.  While this can have some benefit in the short run, the major concern is the ever-growing deficit.  It’s difficult to gauge when the deficit will finally drive inflation and interest rates higher, which is what most pundits have been predicting for quite some time.  It is definitely an area we will be monitoring closely going forward.

#3 – Relatively benign inflation

There are several powerful forces keeping inflation below the Fed’s target of 2%.  Demographics, productivity, technology, slack in the economy, and global competition, all play a role in keeping inflation under control.  My sense is inflation will remain benign in 2021, but again, it bears watching very closely.

#4 – Continued economic recovery from the shutdown

Corporate earnings are forecasted to grow next year between 5-10%.  As we have seen in recent years, companies that can achieve faster growth will be rewarded with expanding P/E multiples.  The “growth-scarcity premium” that has driven numerous stocks, particularly in the Tech Sector, will continue into next year.

In summary, it seems logical to assume that these four driving forces will continue in 2021.  At the same time, I suspect there will be a few unpredictable events and developments that upset the apple cart.   Our investment team will continue to employ valuation discipline and prudent risk management while being ever vigilant for the dreaded snowplow.

Merry Christmas and Happy Holidays to all.  

Michael Kayes, CFA


I started the first draft of this edition of Exencial Views on Veteran’s Day.  A day that we should all be thankful for and inspired by.  Thank you, Veterans, for your sacrifice and devotion to duty and country.

My plan is to send this out a few days before Thanksgiving, to share all that I am thankful for, before being consumed with football and overeating.  So here goes –    

I am thankful for my amazing friends who have supported me over the years, who have tolerated my faults, encouraged my dreams, and laughed with me during this journey toward old age.

I am thankful for my family, for the unconditional love they share so freely.

I am thankful for my spiritual warriors who pray for me and with me, and for the hope they give to even the darkest moments we face.

I am thankful for the words of John F. Kennedy, “that one man can make a difference, and every man should try.”

And for the words from John Wooden, “It is amazing what a team can accomplish when no one cares who gets the credit.”

And from Abraham Lincoln, “I like to see a man proud of the place in which he lives.  I like to see a man live so that his place will be proud of him.”

It is good for the soul to reflect upon that which we are thankful.  It is also good for the soul to be inspired and to offer inspiration to others.

It is good for the soul to serve somebody, to offer a word of encouragement at just the right time.  To believe in people when they doubt themselves. 

Of all this, I am thankful.

With the election virtually over, and vaccines seemingly on the way, it seems appropriate at this time, to look ahead and perhaps make a list of things I hope we can all be thankful for one year from today.  So here goes –

On Thanksgiving Day, 2021, I hope we are all thankful that we have put our masks away.  That we can once again shake hands and hug each other.  I don’t know about you, but there are days I really need a hug.

I hope we can be thankful that with new leadership, our political process has become more effective and less polarized.

From a market perspective, hope really isn’t part of the equation.  Let me try to explain.  As most investors know, the stock market is a discounting mechanism.  It looks ahead, driven by future expectations for earnings, cash flow, and valuation drivers like interest rates and inflation.  As reality exceeds or falls short of these expectations, stock prices move accordingly.  The never-ending comparison of expectations to eventual reality is what drives stock prices.  While hope might be a good thing, as Andy Dufresne explained in The Shawshank Redemption, it can be dangerous when it comes to predicting future stock prices.  Essentially, analysts and portfolio managers must separate what they hope will happen from what they think will happen.  In short, removing emotion from the process is critical to long-term investment success.  No small task, especially in today’s environment.

Here are three positive developments that should unfold as we move into the New Year –

  1. At least one effective vaccine will arrive sometime in the first half of 2021.  By the end of 2021, Covid-19 will still be around, but we will be well on our way toward defeating it.
  2. Corporate earnings will accelerate in 2021 as the economy continues to recover.    
  3. Political vitriol will reside as divided government and legislative gridlock settles in.

As in most years, unpredictable events will occur.  Some will be positive, some not so.  As an investment team, we will remain vigilant in our disciplined, analytical process.  Searching for opportunities, adapting to changes, avoiding emotional extremes as best we can.  All while remaining thankful for the many blessings we receive each day.     

Michael Kayes, CFA

Wisdom of the Elders

I’ve always been a remote kind of guy. Ever since I read the book “My side of the mountain” when I was a kid, I’ve longed for the wilderness. Many years ago. I penned this poem about solitude…

What is calling way out there?

Beyond the desk we sit and stare.
What is calling way out there?

A freedom search, quite possibly.
In wilderness we long to be.

Where all around the boundaries gone.
In solitude from dusk ‘til dawn.

In quiet search for self-reliance.
To continue on – no small defiance.

Our choice to make, should we turn back?
Not from fear nor courage lack.

But search we must, inside the lines.
For freedom lies within our minds.

What is calling way out there?
An echo from a calling near.

Today, I can’t help but be concerned about the undeniable trend toward a permanent remote workforce. Many companies, particularly in the tech industry, are moving in this direction, taking advantage of this trend to reduce salaries for employees who move from high-cost areas like Silicon Valley to lower cost cities and towns. Corporations also see great opportunity to reduce expenses for office space. What’s not to like?

When I started in the business, in the dark ages of the early 1980s, I went to lunch every day with my colleagues. Since I was the rookie, I took advantage of this time to ask as many questions as I could without being annoying. Over time, these and many other face-to-face, informal conversations, provided valuable insight into how these seasoned portfolio managers and analysts approached their profession. This hanging-around-apprenticeship taught me the nuances of stock picking. If the chatter around the coffee pot centered around a stock that had been doing particularly well, I learned that most of the news was already discounted in the stock price. Conversely, if the buzz around the office was decidedly negative, that might be a name to dig into as a potential buying opportunity. I also learned to read the body language of my peers which gave me instant feedback as to the persuasiveness of my arguments during our daily debates on the economy, markets, and individual stocks.

In a nutshell, there is no effective substitute for face-to-face communication, especially when it comes to transferring the wisdom of the elders to the next generation. While reduced overall expenses for payroll and office space may enhance the bottom line in the short run, the loss of this informal training and mentoring will be an issue companies will have to deal with well into the future. Companies that can right-size cost structures, while preserving all-important, face-to-face mentoring, will have a leg up on their competition.

With only a couple weeks to go before the election, the stock market is very close to an all-time high, baffling pundits and market strategists of both political persuasions. As I have previously written, both sides fear disaster for the markets and for our country if the other side wins. I suspect reality will land somewhere in the middle. What does this mean from an investment perspective? It means the election is likely to create winners and losers across our economy and markets. Some will be short term, driven by fear and over-reactions, and some will be more substantive and long term. It will be important to distinguish the latter from the former. Maintaining valuation discipline will be critically important to take advantage of opportunities that may result from political or legislative change. As has become our motto, internally – we will do our best to control what we can control.

While many of us would like to control the election outcome on the state and national level, none of us can. We can all vote and should. We can all support whoever wins, and that perhaps is our civic duty. And when science solves the pandemic, which it will, we should hang around with our neighbors and loved ones, and marvel at the wisdom of the elders among us.

Michael Kayes, CFA

A Balanced Approach

Ah, The Big 10 has decided to play football this season, reversing its decision to cancel all fall sports.  What a relief to football fans all over the country who were having a difficult time imagining an autumn without college football, which represents the heart and soul of campus communities all over the nation.  Like almost everything else, this season won’t be a normal one, with no fans in the stands, no non-conference games, and athletes and coaches living in a protective bubble, whatever that means.

The “Great Virus Crisis,” as noted economist Dr. Ed Yardeni has called it, is still impacting virtually every aspect of our lives.  Nevertheless, every day we get closer to a solution, as research labs around the world are working diligently to discover an effective vaccine.  It’s only a matter of time until science solves this problem. 

In the meantime, the GVC’s impact on the stock market has pretty much run its course.  Unless every potential vaccine currently in clinical trials fails, I don’t envision another significant downturn driven by Covid-19 developments.  In a nutshell, the market has discounted the economic impact.  The speed and magnitude of the recovery is now going to be more of a driving factor for the market.  On that note, the recovery will be far from a smooth one.  Even within industries, the rate at which earnings recover will vary depending on how well companies have adapted to the challenges caused by the pandemic. 

Will the stock market continue to be led by the same familiar names – Facebook, Amazon, Netflix, Google, Tesla, Microsoft, and Apple?  Or will out of favor sectors – Financial, Energy, and Cyclicals drive a reversion to the mean?  The recent performance gap between the aforementioned leading “growth stocks” and the underperforming “value stocks” has never been greater.  Large Cap Growth stocks have appreciated 33% over the past year, while Large Cap Value stocks have actually depreciated over 3%.  Like the eventuality of an effective vaccine, reversion to the mean will happen eventually.  What does this all mean for investors?

It seems reasonable for investors who own substantial positions in these highly successful, leading growth names (FANGTMA) to continue to do so, but it would be a valuable exercise to limit the percentage held in these names in relation to the size of one’s overall portfolio, particularly if they continue to appreciate at the same pace.  One of the most challenging investment decisions to make is when to sell a stock that keeps going up.  Invariably, few investors do this well, primarily because they become too emotionally attached.  A better approach is to set a target price and then manage the position incrementally within predetermined active-bet limits.  In other words, compare the percentage weight of the holding relative to your overall portfolio v the percentage weight of that stock in the benchmark.  In essence, easing into a stock, then easing out of a stock in phases, can be an effective way to remove the emotional attachment which so often prevents prudent investment decision making.

What might cause this “growth” v “value” reversion to the mean?…  As we saw briefly earlier this month, a sharp market correction is often led by the same stocks that led the prior advance.  Most of the FANGTMA names fell more than the market during the pull-back in early September.  An extended market correction, if one occurred, would most likely spur further profit taking in this group, causing these stocks to lead on the downside.

Additionally, should any other geopolitical event cause an economic downturn, value stocks would likely hold up better.  While the Fed is doing all they can to extend the economic recovery, the potential for higher taxes and onerous regulation is always a threat to global economic growth. 

Balance seems warranted… From an equity portfolio perspective, it makes sense to have a balanced approach.  Maintain reasonable exposure to the leading growth names, while steadily and deliberately adding exposure to high quality, out-of-favor value names.  Your investment team is focused on doing exactly that. 

Michael Kayes, CFA

The Whole Truth and the Path to Fairness

I am getting asked a lot lately if I watched any of the speeches at either political convention. A corollary question often follows – How is the election outcome likely to impact the economy and markets? I didn’t watch a single minute of either convention, on purpose. None of it, on neither side. Reminds me of this story…

A teenager borrows his dad’s car to attend his senior prom in high school. The evening goes particularly well. In fact, he falls in love, has the romantic evening of his life, but on the way home he sideswipes another car putting a big dent along the passenger side of his dad’s car. When he gets home, his dad asks, “How was your evening?” His son replies, “The prom was amazing, I had a great time.” Then he goes upstairs to bed.

Was he being honest? Technically, yes. Comprehensively and morally? Of course not.

That, in a nutshell, is why I don’t listen to political speeches or sound bites, especially during an election campaign.

How important is the election outcome to the economy and markets? While there are only four basic election outcomes, there are several more potential scenarios involving substantive change to legislative and regulatory policy. Let me try to explain. Assuming the House is not in play, the first two potential outcomes are: The Republicans win the presidency and hold the Senate, or they win the presidency but lose the Senate. Conversely, the Democrats could win the presidency and the Senate, or just the former, but not the latter. Four potential outcomes. However, it is unclear what any new administration or Congress will then attempt to accomplish, particularly if we have split government. Beyond that, even if the Democrats sweep, it is unclear in what direction they will turn. Will they begin with more “moderate” initiatives or try to push a more “radical, progressive” agenda? The net of all this is that there is too much uncertainty to make significant investment bets which are dependent on a certain election outcome. It will be important to be ready to adapt and adjust portfolio strategies. Depending on which party garners the most political power, there may be significant winners and losers across multiple industries and sectors. Virtually every aspect of our economy is subject to political developments, but they are difficult to predict and subject to continual revision.

Enough about politics. What else matters?… The Fed has signaled that interest rates are likely to remain near zero for an extended period. With the federal debt and deficit seemingly out of control they have little choice. Zero interest rates create a powerful tailwind for stock price valuations. But this valuation tailwind does not blow uniformly. With the post-Covid shutdown-economy still struggling to recover, earnings growth has been lackluster across most of the corporate sector. At the same time, driven by innovation and changing demand trends, several companies have managed to exceed earnings expectations and achieve accelerating profit growth. For these select companies, the valuation tailwind is like a powerful hurricane. In essence, it’s a “growth-scarcity premium” and it is extremely powerful. Going forward, it is likely to propel valuation on successful growth stocks much higher than historical levels.

Nothing grows to the sky… It is important to be ever vigilant to valuation levels achieved by these growth-scarcity winners. Moreover, if there is any crack in the fundamentals these stocks can plummet very quickly. Part of our ongoing research and portfolio management process is to continually retest and challenge the fundamentals of each of these leading companies. The art in this process is determining how long to let these winners ride as valuation levels expand beyond historical norms. There is a risk-management aspect to this as well. For each portfolio strategy, we set limits as to how big individual stocks can get in terms of the percentage of the total portfolio. This is one way to manage the risk in this environment of zero interest rates, slow economic growth, political uncertainty, and a stock market that keeps making new highs.

I am also frequently getting asked questions related to fairness. The question seems complicated to many, but maybe it shouldn’t be. Reminds me of another story…

When I was a young boy, my sister and I routinely fought over who would get to eat the last piece of pie. My mom solved this dilemma by giving each of us the choice of being either the one to cut the piece in half or the first to choose which slice they wanted to eat. Both of us learned that the only logical decision was to cut the piece exactly in half, which we did with incredible precision.

How broadly could we apply that approach today? I’ll give that some thought for next month’s edition of Exencial Views. In the meantime, send me your thoughts. Together maybe we’ll discover the whole truth, and nothing but the truth…

Michael Kayes, CFA

Sausage Rolls

There is a heart-warming story in the June issue of National Geographic magazine titled – “The Last Voices of World War II.”  The article includes the touching story of Betty Webb, age 97, who joined the British Intelligence at age 18, working during the war at a highly-classified location called Bletchley Park, where a team of extraordinary British intelligence personnel broke the German and Japanese codes.  By joining the secret operations there, she knew she would never be able to tell anyone, even her family, what she did during the war.  Despite that vow of silence, Webb enjoyed the job. As she put it, “I wanted to do something more for the war effort than bake sausage rolls.”  In my view, it was that attitude and the incredible sacrifice and courage of the British people that held off the Nazi’s during the early years of the war.

As I read Betty Webb’s story and others like it, this question came to mind – What is the most significant job each of us can do to help our country overcome the challenges we face today?  In short, what would be a Bletchley-Park-worthy job we could take on?

In our battle against Covid, nurses and doctors rise to the occasion every day.  In a time of ongoing civil unrest, police officers and other public servants are stepping into harm’s way as well.  Workers in stores and restaurants throughout the country, who wear uncomfortable masks all day, to protect others, are also sacrificing for the greater good.

And that brings me to the central topic of this first edition of Exencial Views – the Greater Good. What does that really mean today?  With the pandemic on everyone’s mind most people are just tying to stay safe.  Self-preservation is our primary focus and understandably so.  In this period of isolation have we lost sight of the greater good?

For almost every current issue, economic or social, there are numerous viewpoints, but too few public discussions about the greater good.  With four months to go before the November election, we remain politically polarized, with each side fighting, first and foremost, to keep the other side from wining.

Yet, off-camera, out of the spotlight, there is a growing sense of solidarity.  People are balancing the need for social distancing with the equally important need to feel connected.  Serving or sacrificing for the greater good cannot be accomplished in isolation.  Politicians and the mainstream media seem fixated on keeping us polarized and angry.  Despite this, individuals and communities can and are reconnecting and together are finding ways to do more for the war effort than bake sausage rolls.

The path from solidarity to positive change is a process.  To begin with, every issue, whether economic or social, must be analyzed comprehensively.  All sides of the debate must be heard, researched, and evaluated.  Intended and unintended consequences of every potential course of action must be thoroughly discussed and measured.  Mutual respect must always be adhered to by all.  It’s really not that difficult. It just takes a little practice, and a sense of servant leadership.

We have an attitude challenge in our country today.  On one hand, there are those that believe the best days of our country are behind us.  They magnify our nation’s faults without appreciating all that we have accomplished.  They are fearful and mistrustful of institutions and their fellow man and contend that capitalism is inherently unjust, if not evil.   

On the other hand, others are excited about the future. They believe that innovation and entrepreneurialism can eventually solve every problem. Specifically, that science will produce a vaccine and we will end the pandemic. They prefer to oversee their own destiny and understand that there is no such thing as a level playing field.  Despite this they are confident that all obstacles can be overcome through hard work and determination.

Negativity can exist, perhaps even thrive in isolation.  Optimism can only thrive in community.  It is our free will to choose either attitude, as individuals and as a country.  Is there a position of compromise and relative safety somewhere in between?  Interesting question, and perhaps there is, but as the battle rages, neutrality becomes increasingly elusive.

Michael Kayes, CFA

Seneca the Elder

I’ve been wrestling with this difficult decision for the past few weeks. Do I write about the incident involving the death of George Floyd or do I concentrate on other issues? As it states in the right-hand corner, this is my 166th newsletter. The inspiration for each newsletter has always come from current events. What happens in our country impacts the psyche of investors, which in turn impacts the prices of stocks and bonds.

Currently, however, there seems to be a disconnect between current events and stock prices, as multiple people have recently pointed out. What is going on? Let me try to shed some light on what may be happening…

Violent and destructive civil unrest on top of the Covid-19 economic shutdown is certainly cause for alarm. It is possible that there will be a spike in Covid cases in the near future. Worse over, the toll on businesses destroyed in the rioting will not help the economic recovery. It’s hard to find a silver lining in the protests seen in numerous major cities.  Moreover, we have a serious racial problem in this country and there are no easy solutions.

Corporate earnings are likely to be very weak over the next 2-3 quarters. Whether earnings recover in 2021, and at what rate, remains unclear. In the meantime, our nation’s debt continues to grow unabated, which is likely to be problematic down the road.

From all indications, it would seem that we are facing a Cold War with China. The fact that the world’s two largest economies can’t get along is not going to help the global economic recovery.

Given all these unsettling developments, why has the stock market recovered nearly all of the March decline? What could be driving it?

There are three primary reasons for the impressive stock market recovery over the past two months. First, the massive amounts of liquidity pumped into the economy by the government has softened the economic blow from the Covid-19 shutdown. As mentioned previously, all this debt will cause problems in the future, but in the short run, it has helped cushion the blow. Second, interest rates remain extraordinarily low, which supports stock price valuations, all else being equal.

“We are more often frightened than hurt; and suffer more often in imagination that in reality.” — Seneca. 

Third, and less quantifiable, but still powerful, is the worst-case-fear-mentality that has our country in a stranglehold. For some time now, there has been a steady stream of predictions that our economy and country is about to face some historic calamity. From global warming, to debt default, to a second civil war, to a financial collapse from some unknown reason.  A sense of doom and gloom seems pervasive.  Cynicism has replaced optimism, and distrust has replaced a sense of community and shared experience. Despite all this trepidation, there are multiple reasons for optimism. To begin with, our country has tremendous natural resources, the world’s most productive farms and the finest universities.  Moreover, our entrepreneurial spirit combined with access to capital makes us the most innovative country in the world.

The stock market, in its collective wisdom, understands two important things. First, worst case fears, almost by definition, never come true. Second, people are adaptive, resilient, and creative. Most problems we face are eventually solved. Change is constant, and progress, while never steady or predictable, continues.

Over the next several years, my sense is we will solve many of today’s problems. We will find solutions for global warming and we will discover a vaccine for Covid-19.  Beyond that, there is always hope that we will eventually find leaders who can unite our country, and encourage us to embrace the critically-important core values of integrity, community and individual responsibility while we recommit to a determined work ethic that built this great country in the first place.   

“Unhappy is the man, though he rule the world, who doesn’t consider himself supremely blessed. In order to consider himself supremely blessed he must deeply understand that things could be much worse but aren’t! To not do that is to always be less happy than he could be.” – Seneca the Elder

Michael Kayes, CFA


For the first time in my life I love to shop for groceries.  Face mask on, running shoes tightly tied, I swerve between the aisles and away from other shoppers, grabbing items off the shelf as fast as possible.  It’s free-form, almost chaotic, and reminds me of my youth, downhill ski racing with my friends.  More on that later, but first back to the grocery store.  From the deli, to the meat counter, to the opposite end for ice cream, swerving to avoid collisions or close encounters with other people.  Eventually heading to self-check-out, I insert my credit card into the chip reader and am soon gone without interacting with a single person.  It’s all rather strange.  I don’t really feel safe, more like I have managed to escape.  At the same time, I feel no sense of community.

The Covid-19 national crisis is impacting our country in profound ways.  Our health, our economy, and our sense of community have all suffered.  I had been hopeful that this national crisis would unite us, but I fear that our political and ideological polarization may survive long after the virus threat is gone.   

It does appear that social distancing, self-quarantines, and business closings have slowed the spread of the virus.  It will eventually run its course while therapies and eventual vaccines will be discovered.  Meanwhile, our economy is starting to reopen, and it will recover over time, although not smoothly.  However, it may take more effort, or perhaps creativity, to rekindle a sense of community, especially since technology makes it convenient to remain isolated.  More people may prefer the safety and convenience of working from home well past the threat of the Coronavirus.  In some lines of business, productivity may actually increase from more people working remotely.  But what does it do to relationships and team building within an organization? 

Some people prefer solitude and isolation.  While there is nothing wrong with that, isolation can be debilitating for others.  At some point, we must reconnect with our neighbors, with our community and we have to do this before it is 100% safe to do so.  My sense is the debate about when it is safe enough will continue throughout the remainder of the year.  In my view, what endears us so much to our health care workers is that they are doing their jobs even at personal peril.  Can the rest of us find a way to serve others, to build community, to be good neighbors, when health risks, though minimized, still exist?  Can we as a nation, step up to this noble challenge?   

In practical matters, the vast majority of our country wants to go back to work and they want to experience some level of personal interaction and community.  Most people are not wired to remain in isolation.  Local, state, and federal government officials are in some cases impeding this process, but in other cases they are offering sensible solutions.  It’s a difficult responsibility, and we should be supportive of their efforts while holding them accountable for policy mistakes. 

Going forward, from an economic perspective, there are countless potential scenarios related to Covid-19: restarting the economy, government debt and out-of-control spending, zero interest rates, upcoming presidential election, and stock price valuations, to name only some of the key issues.  It’s nearly impossible to predict what will happen in the next year with any degree of certainty.  Given this heightened uncertainty, we are utilizing several prudent investment strategies: 

  1. We are maintaining a relatively high level of cash across all our equity portfolios (approximately 15%).
  2. We are continuing to hold a position in gold (GLD) as a hedge against inflation and economic uncertainty.
  3. Our stock selection is focused on companies with these characteristics:  low debt, strong cash flow, industry-leading positions, high return on invested capital (ROIC), and stable revenue growth.
  4. We are using the extraordinary market volatility to take profits after short-term rallies and adding to names after short-term corrections.  Patience and discipline are paramount.

Uncertainty creates risks but also presents opportunities.  We are doing our best to mitigate the former while exploiting the later.

Back to the downhill…  The most fun I ever had ski racing was when we would hide in the woods at the top of the mountain, wait until the ski-lift operators turned off the lights, then race to the bottom navigating only by moonlight. Racing in near darkness seemed foolhardy to some, but we knew the mountain and we knew our limitations.  Was it 100% safe?  Not hardly, but nothing worthwhile ever is.

Michael Kayes, CFA