More Reasons To Correct

The market actually was given two reasons to sell off this last week, the Fed's weak performance with last weeks interest rate cut, and President Trump's escalation of the Chinese trade war (and China's response in allowing the RMB to break below the psychologically significant 7RMB-to-the-dollar level).  As today's (Monday August 5th, 2019) markets more than exemplified, at least a mini "hissy fit" has begun.

We can't say that it's all that surprising to get a correction in stock prices here, as the market has been driving forward with quite a bit of strength since the beginning of 2019.  However, it's never fun to watch the force of sharp market corrections (3 and 4% down in a single session seems more and more commonplace).  That said, it was not all that long ago (4th quarter 2018) that the market experienced similar -- and worse -- down days and we have certainly survived; we will survive this one too (as all those before!).

Now for a quick comment on the two "reasons" for the selloff, cited above.

We believe the Fed displayed weakness in its statements after the meeting in which they decided to lower the target rate for Federal Funds by a quarter of a percentage point.  Chairman Jerome Powell seemed to struggle to justify the rate drop, suggesting it was a "mid-cycle adjustment."  Huh?  Yeah, that type of weak statement doesn't go far to assuage the manic traders who stake their financial lives on every breath taken by the Fed Chairman.

We are on record that despite what Donald Trump wants (have you ever known a real estate guy that doesn't want lower rates?) interest rates do not need to be lowered.  In fact, as virtually every economic data point of late has indicated, the economy is doing just fine, and we believe much of the weakness the economy experienced in the wake of the 2008 - 2009 financial crisis was exacerbated by zero percent interest rates for far too long.

As for the trade war with China, we want completely free trade.  No tariffs anywhere, levied by anyone!  We also know that is wishful thinking.

For most of our careers (now in the fourth decade for the oldest of us at Taylor Frigon Capital), we have believed two wrongs don't make a right.  In other words, it was for the better of all concerned that even if the Chinese government wanted to charge tariffs on goods coming into China, raising prices on goods for their own consumers, or otherwise forcing them to buy inferior products, it was their prerogative, and the US should not follow suit and do the same to its own consumers.  It certainly benefitted US consumers and businesses and aided growth in the global economy, (especially in the developed world, China being the largest developing country at the time). No doubt there were geopolitical benefits as well.

That said, there were other costs absorbed by the US which were not as visible.  Particularly rust belt manufacturing companies and their workers took a major hit (folks are not so worried about the cost of consumer products when they don't have a job).  Additionally, the theft of intellectual property (IP) in China has been rampant.  Certainly, technology firms would fare better if they could sell software under terms similar to the western world and not worry about seeing bootleg copies on the shelf in Chinese stores; that's just one of the many IP-theft issues.

We think that what this trade battle is really about is asking China to step into the first world.  They are not an emerging economy any longer and while it may have been prudent to "look the other way" in the interest of geopolitics, global economic growth or whatever, the time has come to demand adherence to the rule of law.

Many of our colleagues who equally tout "free enterprise" and a loathing for tariffs are staying "pure" to the doctrine of free trade, even if it is "one-sided."  We thoroughly understand that and respect it.  However, we think the view we are taking now is worthy of consideration, and may be the correct course of action in what is a very complex topic.

Regardless, we think these trade issues will ultimately be resolved, as it is not in either party's best interest to have them linger on.  It should also be understood that the amount of goods subject to trade tariffs that Trump recently announced would take effect 9/1/2019 is 10% on $300BB in goods.  This in an almost-$21 Trillion economy in the US, is minuscule, so some perspective is in order.

Meanwhile, what is far more important is the health of the companies in our portfolios, and on that front, in large part, the second quarter earnings reports for our companies are confirming that things are going quite well for our businesses.  We will continue to monitor that constantly, as always.  

Stay tuned.

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

Investment Climate July 2019

The following Investment Climate was published on our website on July 16, 2019.

Despite a brief correction in May, the general trend in stock prices since the beginning of the year has been decidedly upward.  Our growth portfolios have continued their relative outperformance. 

While we are quite pleased with these recent outcomes, we continue to be impressed with the prospects for the future of our portfolio companies.  It is noteworthy that our portfolio has had more turnover in the last couple of years than in the previous twenty as there comes a time when prudence takes precedence and it is necessary to position for the next great narratives, themes and theses.  We have been doing that fervently of late and are confident that we are in front of significant opportunities in areas such as medical technology, distributed ledger computing, security, manufacturing processes, ultra-low power sensor processing, omni-channel retail, augmented/virtual reality, computer graphics rendering, 5G edge computing, financial technology and enterprise software,  just to name a few.

  

We are often asked about what we think could derail the current favorable market conditions.  We would start by saying that while conditions have improved significantly in the last couple of years (lower regulation and corporate tax rates), conditions are still not ideal.  If we were granted all of our wishes, what would that look like? 

Here goes:

• A low, flat tax rate across ALL forms of income and all entities, individual and business, with an inflation adjustment for capital gains.
• A repeal of Sarbanes-Oxley, Dodd-Frank, Regulation FD, and streamlining the process it takes for a company to go public.  These regulations were all put in place with the best of intentions, to stop fraudulent activity in the financial markets.  But fraud was illegal before all of these rules were put in place, and it is still illegal today.  Perhaps if regulators spent their time finding and prosecuting fraud instead of forcing the 99.9% of honest people working in the financial industry to comply with all these rules and regulations, there wouldn’t be a need for them.
• Less government spending.  The amount of money the government spends is staggering.  Regardless of the department (Defense or any other), the government is simply too large and drains resources from the productive economy.  We don’t fixate on deficits, per se, but the pure size of government results in dollars being allocated too often to unproductive endeavors.  That needs to stop.
• A gold standard.  That’s right, dust it off and bring it back!  The Federal Reserve does not cause economic growth.  But it sure can keep it from happening.  And it is simply too powerful with its dual mandate of price stability and full employment.  Price stability?  Just look at a long-term chart of the value of the U.S. Dollar and let’s talk about price stability!  We have long advocated that the dollar should not be strong or weak, but STABLE.  We want our businesses to not have to worry about what the value of the dollar is going to be in the course of their business activities.  The Fed is in the news quite a bit lately with the talk of them lowering rates.  We tend to think that they probably don’t need to lower rates but that is not really the important issue.  Rates could be appropriately much lower, and with a continued upward slope to the yield curve (short term rates lower than longer term rates) if there was true price stability.  The only reason this rate discussion happens is because the Fed “manipulates” those rates, and therefore the dollar.  If you don’t think we are right, just look at a chart of interest rates for the first 150 years of the existence of the USA.

Okay, we’re done.

And we emphasize that we don’t think any of this is going to happen; but if it did, we would see an almost immediate, and probably significant, revaluing of the prices for our businesses upwards.

That said, we continue to heed the word of our mentor, Dick Taylor, who would say: “We get by in spite.”  We won’t let “perfect” get in the way of “good enough.”

Have a great summer!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.