Market Sell-Offs and Business







The broad markets are experiencing a sharp sell-off which started yesterday (September 3, 2020) and has continued today, prompting many market observers and pundits to declare that the long-anticipated “bubble bursting” from the market’s “fevered rally” had finally arrived (to use quotations we have seen in actual market commentaries this week). One comment we saw a few days ago applied a quotation from Ludwig von Mises to the current situation, who said: “there is no means of avoiding the final collapse of a boom brought about by credit expansion.”  

 

Those commentators who have been saying for months that the positive price action of the past several months is nothing more than a “boom brought about by credit expansion” (or, as the pundits at Zero Hedge have lately been calling it, a “gamma melt-up”) are now understandably saying that their views are being vindicated and taking a victory lap. Meanwhile, the many investors who have been hearing those same views (that this is all a “melt-up”) for several months and have been growing increasingly more nervous are suddenly thinking that those voices must have been right and the day of reckoning must have finally arrived. 

 

We ourselves are asset managers, not market commentators, and we don’t try to predict markets and we never have. We concern ourselves with predicting businesses. We have certainly formed some opinions over the past thirty-plus years of being professional asset managers running portfolios for investors, and we don’t disagree that many names as well as the market in general have probably been due for a pullback for some time, but we don’t try to predict when those will hit or how long they will last. But we are sure of one thing: well-run businesses with truly necessary technology or other innovative products and services such as the companies we own for our investors are not the result of any “gamma melt-up” or “excessive credit expansion.” 

 

For example, just this week we were reviewing the technology of one of our microcap holdings, Transphorm, Inc. (TGAN), a pioneer in the design and manufacture of Gallium Nitride (GaN) power conversion products and the only company right now capable of producing 900V GaN transistors for commercialization. That technology is real technology: it is not the product of financial engineers on Wall Street or at the Fed, but rather of real engineers in Goleta, California led by some of the most respected names in semiconductor materials science. 

 

Another company we own for clients is Compugen (CGEN), which uses scientific modeling and computing power to predict and discover new target pathways for the development of oncology treatments. Results of clinical trials thus far suggest that some of their discoveries are showing promise for patients with recalcitrant forms of cancer which have resisted all previous forms of treatment.  

 

These kinds of real innovation and real industry are not the product of “credit expansion” or “market melt-ups.” We don’t deny the possibility that melt-ups have taken place and that those melt-ups will eventually have to come out of the market, and we know from experience that there will sometimes be extreme volatility (including to the negative side) when that takes place – and that this volatility will impact our companies along with the rest of the market. But our approach is to put our money into companies where we have a good idea that in five years the world will be using more of their product, not less. And we sometimes use sell-off situations to buy more of those kinds of companies, adding to existing positions or adding new positions in companies we have already researched and whose story we already like. We think too many investment professionals and market pundits have lost sight of that perspective on investing. 




 

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.

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An Honor From George Gilder






Today, our firm, and specifically our CIO, Gerry Frigon, was highlighted in preeminent technologist George Gilder's "Daily Prophecy" newsletter.

"I consider George Gilder to be the foremost American sage of the last sixty years.  His predictions on technology, economics, and society have been spot on, and at 80 years of age he is going as fast and strong as he ever has.  Without a doubt the lessons I have learned from George over the years far surpass whatever lessons he may have gleaned from me.  Most importantly, George is a friend and partner unlike any other.  I am blessed to know him.  Thank you for such an honor George!  I am humbled. Thank you!" - Gerry Frigon.

Read George Gilder's Newsletter About Gerry


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.
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Narrative-based Investment Strategy In The News...

Achievement on Flipboard by Joshua Zhang





Our Chief Investment Officer, Gerry Frigon, was featured in a series of articles recently in which he describes our investment strategy and the reasons for its success, as well as provides insight on the increasing impact of tech companies on the market...

MarketWatch (first article)
Wealth Professional
Value Walk







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.
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The Power of Time

All About Your Body Clock

We have emphasized the importance of a long term view of investing for as long as we have been in the professional investment business.  Recently, our CIO, Gerry Frigon, was quoted in Rocket HQ regarding the importance of "staying the course" during difficult times like we have just experienced in the last few months with the COVID-19 panic.

Frigon was quoted in March 2020 as saying:

"Don't panic and liquidate long-term investments," Frigon says. "This kind of thinking is dangerous, because when the market turns it happens so rapidly, it is shocking. The more the market recovers, the more difficult it becomes emotionally for those who got out to buy back in, often resulting in tremendous losses for those who panic-sold near the lows."

We have stated such things many times in the past, most notably in this post from March 2, 2009, in which we all but begged investors not to "get off the train" during the market rout that was occurring in the wake of the 2008-2009 financial crisis.  Remarkably, barely a week later, the bottom was hit on March 9, 2009 and the market exploded forward for the next decade.

The bull market born on March 9, 2009 ended in March 2020 with a massive panic sell-off, exacerbated by the crisis industry's over-hyping and the government's overreaction to the COVID-19 virus.

Since our CIO  uttered those words in March 2020, the market averages climbed their way back to almost break even by June 30, 2020, finishing the first half of 2020 down a few percentage points, on average. And our own Core Growth Strategy finished the first half up well over 20% YTD!

How many more times will this have to happen before the average investor realizes the folly of trying to guess what the market is going to do?




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.
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Have you heard of this company? Vapotherm (VAPO)




We first began researching Vapotherm* in January of 2019, long before anyone would have ever dreamed that events taking place in 2020 were possible. The company had only recently gone public (in November of 2018) and had achieved about $42 million in sales the previous year -- well below the estimated break-even for the business of between $120 million and $150 million.

What attracted us to learn more about the business was the potential for Vapotherm's technology, a non-invasive delivery system for high-velocity respiratory support, to create a paradigm shift in ventilation treatment for patients having difficulty breathing on their own and potentially displace mask-based NIPPV as the standard-of-care (NIPPV stands for "non-invasive positive pressure ventilation" which uses a mask with positive pressure to assist patient breathing much like the CPAP masks used to treat sleep disordered breathing). 

There are a variety of reasons why Vapotherm's "Hi-VNI" technology (Hi-VNI stands for "high-velocity nasal insufflation") is a valuable tool for treating undifferentiated respiratory failure, including the fact that a significant percentage of patients simply do not tolerate a mask, as well as the fact that Vapotherm's solution uses small-bore nasal cannulas (or cannulae) inserted into the nostrils, which enables the patient to eat and drink more easily (tasks that are impossible for a patient wearing a mask). 

An important aspect of the story involves the delivery of high-velocity oxygenated air in order to help clear lungs of carbon dioxide during respiratory failure: the fact that their device delivers heated, humidified, oxygenated air at higher velocities differentiates Vapotherm's Hi-VNI product (the Precision Flow device) from traditional high-flow nasal cannulas (HFNC) with which many physicians are already familiar (Vapotherm's Precision Flow is considered a specific type of high-flow nasal cannula device: the differentiating factor is the fact that Vapotherm's delivers high-velocity oxygenated air). 

When we spoke with Vapotherm's CEO Joe Army (in early 2019), he used his favorite metaphor of clearing a work bucket full of mud with a hose (a very effective comparison for understanding how high-velocity air clears out the carbon dioxide). If you put a hose in the bucket of mud and gunk, and turn on the water, the water flow will eventually clean out the mud. However, Joe explains, if you put your thumb on the end of the hose opening, the same amount of water will still be flowing through over the same amount of time, but that same volume of water will now flow with much greater velocity and clean out the bucket more rapidly and effectively. 

The same principle applies to the high-velocity oxygenated air: delivered at higher velocity, it will swirl around in the nasal cavities and flush out the old CO2 more rapidly and more effectively than will low-velocity gas.

The following chart, adapted from this study published in the Annals of Emergency Medicine in January of 2018, shows that Hi-VNI reduces CO2 in patients at least as effectively as the current standard-of-care (NPPI: the positive-pressure mask).






















At that time, Vapotherm was working hard to get their Precision Flow device into more emergency departments to help with patients in the ER needing breathing assistance, but the company actually got its start back in 1999, long before its IPO, focusing primarily on applications in the neonatal intensive care units (or NICUs), helping doctors and nurses who treat premature babies and other newborns in need of respiratory assistance (their products started finding their way into the NICU in 2000). 

We were impressed by a new product that Vapotherm was developing for the NICU: they recently won approval in Europe for a product called the Oxygen Assist Module for their Precision Flow system which provides automated delivery of oxygen to keep babies in the desired blood oxygen level (SpO2) range, and has been shown to do so more precisely than with human monitoring and adjustment alone. 

As part of our research, we spoke to an experienced NICU doctor, who told us that "breathing is the single most-common reason for a baby to go to the NICU," and explained why keeping the infant in the desired range between too much oxygen and too little oxygen is so important (too much oxygen can lead to too much blood vessel and tissue growth behind the retina of a newborn, leading to possible retinopathy and vision damage).

We also spoke with an experienced ER doctor who had not previously heard of Vapotherm, and so we arranged for him to assess their Precision Flow, and he told us that in his assessment it was an "impressive product with a lot of potential" and "very easy to use."

Based on our own research into the company's filings, our conversation with doctors and with the company itself, our conversation with analysts, and our assessment of the potential for the company's technology to create a change in the standard of care, we took an initial position in Vapotherm for our clients in June of 2019. 

As with many other companies with innovative technologies which we expected would create change in their industries, but which we felt might take some years to gain traction, the pressures of the COVID crisis that became most serious beginning in early 2020 dramatically accelerated the adoption of Vapotherm's Hi-VNI technology in emergency rooms and other healthcare settings.

In their most-recent earnings call, from May 5 of this year, CEO Joe Army explained that Vapotherm's business had been "significantly and sustainably transformed over the past quarter." He said:
At the beginning of the pandemic, high-velocity high-flow oxygen therapy was not viewed as a first-line therapy for treating the respiratory distress experienced by many COVID-19 patients, as physicians believed patients requiring more than supplemental oxygen would need to be placed on a mechanical ventilator. Now, the CDC, WHO, and NIH, the Society of Critical Care Medicine, the American College of Emergency Physicians, the Chinese, German, Italian, and Australian Thoracic Societies, and hospitals that are getting hit with the COVID-19 surge around the country all recognized our technology as an appropriate first-line therapy. In the pre-pandemic world, the development and alignment of these guidelines would have taken a lot longer to come together in my opinion.
He noted that thus far in 2020, the company's global installed base of products had grown by more than 3,500 units, whereas it grew by only 2,500 throughout the entire year of 2019 (revenues in 2019 were around $48 million, as the company made some major changes to the salesforce and sales strategy). Sales in 2020 are expected to top $84 million.

Perhaps most notable on the call was an actual patient story that Joe Army shared at the end of his prepared remarks, about a 54-year-old male patient in New York City who came into a hospital intensive care unit in a state of respiratory distress and an oxygen saturation rate in the low 60% range. Army said:
This low saturation rate is very dangerous for patients. Our sales rep learned that the patient's doctor wanted to intubate the patient and put them on a ventilator. But this patient refused to be intubated. Our sales rep was there at the time, assembling the new Precision Flow units that had just been delivered. The doctor grabbed one of the units and put the patient on at 40 liters at 100% oxygen. Our sales rep learned that within ten minutes, the patient's oxygen saturation rate was at 95%. his work of breathing was reduced, his respiratory rate had declined, and he now seemed to be sitting comfortably in his bed. Our sales rep shared with me that from his perspective, this patient went from almost being put on the mechanical ventilator and potentially dying, to being put on Vapotherm and being discharged home three days later to recover.
It is examples like this one which help explain why our long-time approach has always been to focus on analyzing and evaluating and predicting the future of individual businesses, rather than on trying to predict markets

It also illustrates a fact we have observed over and over again during this recent crisis (as well as during previous periods of economic strain): that when a longer-term narrative regarding the direction that an industry will go in the future is the correct narrative, times of stress will often accelerate that narrative, by providing the catalyst for change to happen now (change that would have eventually happened anyway, but might have taken more time under conditions of less stress).

We could not have predicted what the first half of 2020 would look like when we were researching and eventually buying equity in Vapotherm during the first half of 2019, but we believe the above discussion helps illustrate what we call "the power of narrative investing."


* At the time of publication, the principals of Taylor Frigon Capital owned securities issued by  Vapotherm (VAPO).

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.








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Investment Climate July 2020: Making History...While Looking Ahead









The second quarter of 2020 will go down as one of the best quarters in the history of the stock market.  The unprecedented and swift recession that was “self-inflicted” by government responses to COVID-19, the world over, bottomed during the quarter and stock markets sensed that turn and rallied fiercely.  On average, markets made up most of what they lost in the first quarter, ending June 30, 2020 with year-to-date returns down only a few percentage points after being down around 20% in the first quarter of 2020. 

It is hard to believe so much has happened in such a short period of time.  The crisis industry (otherwise known as the media) had endless crises to highlight given the COVID-19 response and then the civil unrest that spread across cities around the United States.  Nonetheless, the market action is testimony to the importance of staying fully invested in times of extreme volatility and crisis.  Simply put, it has been our view for decades, and we have regularly pointed out, that trading-based strategies are hazardous to most investors’ lives, and that was proven handily this year. 

As we pointed out in our last Investment Climate, our view has always been that it is crucial to look at investing in the context of the business and not the stock, or the stock market.  Our TFCM Core Growth Strategy experienced the best two months in its history and finished the first half of 2020 up over 23%.  This was the result of painstakingly applying our narrative-based investment approach.   

Many of our clients have asked us what specifically drove this significant outperformance.  We believe what we are witnessing is a recognition, in difficult times, of real and sustainable businesses in core technology, medical technology and financial technology.  Frankly, while we certainly don’t expect this type of performance every quarter (or year for that matter!), we believe we are in the early stages of growth for most of our companies.  And while we have certainly outperformed in our growth strategies over the years, we believe the market focus on trendier themes such as social networking, “green” industries, and app-based software (as opposed to platform software), resulted in an undervaluation of the types of businesses we favor (and the narratives which apply to those businesses) over the past several years. There is nothing like real concern on the part of investors to cause them to seek out sustainable business models. 

As for the overall economic and market environment, we believe the world overestimated how many businesses were “shut down”.  We mentioned in our previous commentary that we spent a significant amount of time speaking to company management teams during the dark days of the downturn and, in general, they were reporting that they were still functioning.  The fact that the hardest-hit businesses were those that were the most consumer-facing, and thus visible to the average person, gave the impression to most observers that things were far worse than in reality.  This is not to suggest that the downturn was not significant, it absolutely was and still is, but it was not quite as bad as was expected -- and that is the primary reason that the markets have reacted so positively and swiftly. In our view, the reaction has been quite rational. 

Going forward, we believe there are important challenges to overcome.  We have never witnessed such actions from government as we have experienced in the current situation.  The massive amount of spending gives us serious concern, not to mention the more philosophical, yet pertinent questions surrounding the role of government in society.  These issues go beyond the scope of what we address in our commentaries, and yet have real implications for the free enterprise system in which we live and which are required for our companies to thrive.  

These days, it is more important than ever to have a very solid sense of the trends that will drive business in the coming years.  It is imperative that investors pay attention to those who run the businesses in which they invest to be certain they are up to the challenges facing them in the twenty-first century.  Now more than ever, predicting the business is far more important than predicting the market. 


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.
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ETFs Are Exacerbating Market Volatility


Published in Forbes April 28, 2020
Written by Gerry Frigon
Forbes Finance Council

Capital market mechanisms are in danger of destruction by the hidden byproducts of exchange-traded funds (ETFs), and passive vehicles in general, that have spread across the system. The primary problem is these vehicles claim to provide liquidity where liquidity doesn't exist, thereby exacerbating volatility and limiting "natural" liquidity in the underlying securities that make up ETFs. While I would not necessarily advocate outlawing ETFs, I will say that there is a public interest in protecting capital markets.
My firm and I have spoken out for years about the potential systemic dangers of the ETF craze, and we haven't been the only professional investors to sound this alarm (see Carl Icahn's statements on this subject over the years).
ETFs have been portrayed as benign, investor-friendly products that help the average investor get "one up on Wall Street" by giving one a low-fee investment vehicle tied to an index, with complete liquidity. But in reality, the spread of ETFs/passives is choking the market mechanism and creating added volatility that costs investors in entirely different ways. 
The mechanism of an ETF is complicated (even though it is portrayed by ETF marketers as a friendly "basket of securities"), and it involves arbitrage to keep the price of the ETF shares aligned with the net asset value, or NAV, of the underlying assets. This mechanism occasionally results in startling divergence of ETF share price from NAV, but although those events grab headlines, the bigger concern is the fact that even in normal conditions, the arbitrage function is necessarily done by computer algorithms on an automated basis. Further, as ETFs have proliferated over the past three decades we have now reached a point where more than half of all trading volume is driven by ETF/passive algorithms. Some traders we speak with believe the percentage may be closer to two-thirds.
The dominance of trading volume by ETFs/passives magnifies volatility in the markets, but at the same time, it has not resulted in increased liquidity. On the contrary, I have seen a massive drying up of liquidity in individual companies, which is difficult to explain and not fully understood, even by professional traders I speak to on a daily basis. So, ETFs are adding tremendously to volatility (through the algorithms that are a necessary aspect of the way ETFs are constructed) while not adding the liquidity that their supporters like to claim ETFs provide — certainly not in the underlying securities they supposedly "invest" in. ... CONTINUE ON FORBES

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.
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Investment Climate April 2020: Crazy but insightful times!



As we write this quarter’s Investment Climate, hunkered down under orders from authorities to “shelter in place” in an attempt to “flatten the curve” of the COVID-19 virus outbreak, we can only describe the current investment climate as unprecedented.  We have already spent a fair amount of writing time penning comments on our views about the situation, so we urge readers to check out our Taylor Frigon Adviser blog for more detailed commentary on the crisis.

However, for purposes of setting the tone, and to give a sense of where we are coming from on the topic, suffice it to say that we believe this whole situation will turn out to be one gigantic “unforced error” with regard to government response to circumstances the world over.  Maybe we will be proven wrong.  We don’t think so.  But it really doesn’t matter at this point.  Our responsibility is to evaluate the investment merits of companies in which we invest our own and our clients’ hard-earned capital.  On that front, this crazy time has been very insightful.

As a recap of the first quarter, disappointing as it was, our growth strategies weathered the storm of the first quarter relatively well.  Our flagship TFCM Core Growth Strategy was down roughly in line with the large capitalization S&P 500 index and handily outperformed the major mid-cap and small cap indices (given that our portfolios are mostly small and mid-sized growth companies, we are pleased with that). 

Strangely, the worst performing strategy was our Income Strategy.  And even more strangely, some of the worst performers in that strategy were those companies tied to credit markets: mortgage REITs and business development companies (those that make loans to mid-sized companies).  These companies pay the highest dividends in the strategy and generally are considered more stable.  However, accompanying this “crisis” was a concurrent freezing of credit markets, reminiscent of the 2008-9 financial crisis, which frankly made no real sense except that, once again, the world was convinced everything on the planet was going to default.  The result was a complete and indiscriminate selling of anything and everything that was involved in lending money.  As of this writing, that has already started to significantly reverse itself as an astounding amount of Federal Reserve liquidity has been thrown at the situation to back-stop the credit markets.  It appears to be working as intended. 

The other weak area was the energy sector, which is not surprising given the collapse in oil prices as Russia and Saudi Arabia decided to institute an oil price war in the midst of the whole COVID-19 mess!  The overall “shoot first and ask questions later” mentality that prevailed in 2008-9 was back in full force.  We believe these issues will sort themselves out and eventually recoup full value.

As we mentioned earlier, we have gained some insights that confirm our overall approach to investment and also have reinforced our convictions regarding which industries and sectors will benefit as the world recovers from this debacle.  We are more convinced than ever that taking a “business approach” to investment decisions based on well-researched narratives surrounding demographics, technology and business processes, is a superior approach to investing. 

We have spoken, at length, to all of our portfolio companies and have been extremely impressed with the way they are handling this difficult situation.  This is not particularly surprising to us given that our mantra is “investing in well-managed companies in front of fertile fields for future growth”.  We have been privileged to witness the “well-managed” part in spades in recent weeks.   What is remarkable is that virtually every one of the companies in which we are positioned is still positioned in front of those fertile fields in spite of the massive shock the world has been hit with these past few weeks.

Areas like internet/network infrastructure (even more critical to business operations today than ever, as well as to our daily lives), business collaboration software, enterprise intelligence software, network security, 5G mobile edge clouds (how important is your cell connection right now?), automated factories (business process efficiency is key in this environment), virtual/augmented reality platforms, platform drug discovery (very important to streamline this process in a health scare) are just a smattering of the verticals that stand to benefit from what the world is experiencing at present.  Essentially, we liked our positions before this mess.  We like them more now! 
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Still Pushing Back

On March 23rd we posted a piece "It's Time For A Pushback".  In it, we argued that shutting down the economy, and thereby creating severe economic hardship, can cost lives as it tends to harm the most economically vulnerable most severely; those at the lowest levels of the socio-economic ladder.  We usually are pretty benign in our commentaries, and thus, don't get much outside commentary back at us.  With that piece however, we had some detractors who thought we were crazy.

We want to emphasize that we fully support efforts to use common sense at controlling the spread of the COVID-19 virus.  That should go without saying.  We also understand that policy-makers are in a difficult situation of being "damned if you do, damned if you don't."  Therefore, our point was simply meant to balance the conventional wisdom about the repercussions of closing the world economy in the battle against the virus.  Those who don't believe that economic hardship cost real lives are simply denying the facts of history.

Since that time we have come across other voices who have echoed similar sentiments, here also.  One who we respect greatly for his insights on the economy and who we have been monitoring for over 25 years is Brian Wesbury of First Trust Advisors.  In his piece published today "Do the Least Harm", it would appear he has similar views to ours with respect to the economic impacts of shutting down the economy.  We appreciate Brian's commentary, as always.

Lastly, we have been in constant contact with our companies in the last few weeks, and while their stock prices have by no means been immune to the downturn, we are extremely impressed with the capable management teams that run our companies and are very confident that they will come out of this stronger than ever.  And in some cases, they will strangely benefit from this debacle.  Investing in "well-run companies in front of fertile field of future growth" has worked very well in the past and we believe will continue to work into the future.  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.
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Don't own Zoom? Here's the next best bet: fund manager


Reuters, Posted April 3, 2020

Buy stocks of software companies that boost business efficiency such as AudioCodes, whose technology helps power Zoom and Skype, says growth fund manager Gerry Frigon of Taylor Frigon Capital Management. CLICK HERE for interview

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.
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QUICK TAKE: ETFs Exacerbate Market Volatility

Trader's Magazine posted THIS article yesterday, April 1, 2020 by John D'Antona Jr.

Stock gyrations might not be the only thing pushing equity prices around.

ETFs – exchange-traded funds – which are baskets of individual stocks that are traded are tossing prices around and exacerbating volatility like a ship on the water during a hurricane.

In a brief conversation with Traders Magazine, Gerry Frigon, President and Chief Investment Officer at Taylor Frigon Capital Management said that ETFs are contributing to market volatility.

“If anyone really enjoys the kind of wild swings in individual stocks that make no fundamental sense, then they should just keep proliferating the “derivative” phenomenon of passive vehicles like ETFs and the algorithmic trading (algos) that are creating and profiting from such activity,”Frigon began. “All of those who say “I just use index funds” have no idea what they are investing in from a business standpoint. They are essentially allowing black-box models to deploy their investment dollars which are at the center of the problem with the market mechanism and these investors are actually contributing to the crazy volatility we are seeing, and have been seeing for some time now.”

Say it isn’t so, Gerry.

Yep, it is. Frigon pointed out that it was one thing when so-called “indexing” was a tiny fraction of the market, but now that almost 35% of invested funds are indexed, it’s an entirely different situation. When one couples that massive increase with the regulations spanning the past twenty years that essentially made it unprofitable for brokerage firms to make markets in OTC stocks (those are the small/mid-sized companies), and you have an illiquid market, subject to the whims of the computers.

And thus the wild daily or intra-daily price movements in ETF prices or their underlyings. As of this writing (April 1, 10:35 am EST) the DJIA was down 575 points at 21,341, just one hour after the open that saw the market down close to 1,000 points.

“After 35 years of watching our industry abdicate responsibility for making real investment decisions and come up with “products” that have nothing to do with financing real businesses, frankly, we have no problem saying what we see going on,’ he said. The same cannot be said for ETF issuers and their sponsors, he added.

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.
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It's Time For A Pushback


As we are now in a government mandated lockdown in the entire state of California, and New York as well, it is time for cooler heads to prevail, if they exist, amongst public policymakers.  We are not health experts, as we have said, but we are a professional research organization in that we make a living researching ideas of all sorts, and making determinations as to whether or not we want to invest our and our clients' hard-earned money in those ideas.

From what we have observed from research on the coronavirus, while it is serious for a small subset of the population, the statistics appear to show that the vast majority of people infected by the virus are not at risk of death.  Yet, the entire economy is being sacrificed at the altar of "public health" with no understanding that the economic damage that we are facing will cost real lives, potentially far in excess of any death rate that can come from this virus.  This is an important point to understand, yet  many don't. It is a fact that when percentage points are taken off of GDP,  it costs lives.

It has been seen throughout history that the most vulnerable and poor are the ones that suffer the most when lower standards of living exist.  There is a direct link to standards of living and economic growth.  And at the lowest socio-economic levels  (ie. where standards of living are already low) allowing those standards to drop further will result in death.  In first world nations, like the U.S., it may not be as obvious, at least initially, but in second and third world nations, it can become obvious quickly.  Just look at what lack of economic growth has done in places like Haiti, Africa, etc.  

Granted, there are external reasons why this has happened in those places, but it ultimately comes down to the reality that a lack of economic growth is the primary culprit, regardless of how it has come to pass.  Is this really the path we want to take?

Many have tried to "guess" at what the economic impact will be in the United States.  We have seen estimates for Q2 GDP being down anywhere from 10-50%!  This is a massive contraction, and it is hard to believe that there will not be some unable to survive, literally, such a drastic cut in economic activity.

We have quietly and to ourselves been saying we thought the cure was going to be worse than the disease with this coronavirus situation; now we are convinced.  It's time to end this insanity!

Now that we have gotten that off our chests, what to do?  We have been hard at work speaking to the managements of our companies and making a determination as to the fallout to our portfolio (of course notwithstanding the obvious decline in values).  Thus far, we have determined that with very few exceptions, our companies will come out of this okay.  There will definitely be a hit to most businesses revenues (and, thus, earnings).  However, the narrative-based investment approach works and we can say that these narratives are either going to survive or, in some cases, oddly benefit from the circumstances this situation has created.  Now, more than ever, the concept of "owning businesses through multiple market and economic cycles" is being tested.  But we believe it will, once again, be proven to be a successful approach, especially in difficult times.

The crazy volatility in the prices of our companies at any given second on the exchanges is not something to which we will react.  We have never seen the most proficient of traders consistently be able to outguess such markets in the short run and we are not about to change our mode of operating at all.  That said, where appropriate, there may be opportunities to add to positions or take new positions in the present environment.  We are diligently looking at those opportunities even as we publish this update.  Thus, there could be small changes but we emphasize they will likely be small.  

So far, our analysis has confirmed our long term, narrative-based process.  We liked our companies before this debacle, and we like them more now!  Stay strong, and stay invested!!





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.

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As for Volatility -- There's More Problems than the Coronavirus!





image: YouTube (link).

If anyone really enjoys the kind of wild swings in individual stocks that make no fundamental sense (and, for that matter, swings in the major stock market averages) and that have been an increasing hallmark of the market for the past couple of decades and not just in the recent sell off, then they should just keep proliferating the "derivative" phenomenon of passive vehicles like ETFs and the algorithmic trading (algos) that are creating and profiting from such activity.

All of those who say "I just use index funds" have no idea what they are investing in from a business standpoint.   They are essentially allowing black-box models to deploy their investment dollars which are at the center of the problem with the market mechanism and these investors are actually contributing to the crazy volatility we are seeing, and have been seeing for some time now.

It was one thing when so-called "indexing" was a tiny fraction of the market, but now that almost 35% of invested funds are indexed, it's an entirely different situation. By the assessment of the many "human" traders we work with (yeah, there are still a few left), a whopping two-thirds of trading activity is now being done by algos/passive.

Couple that massive increase with the regulations spanning the past twenty years that essentially made it unprofitable for brokerage firms to make markets in OTC stocks (those are the small/mid-sized companies), and you have an illiquid market, subject to the whims of the computers.

Of course, as active managers, we will be accused of bias for pointing this problem out: that's fine by us. After 35 years of watching our industry abdicate responsibility for making real investment decisions and come up with "products" that have nothing to do with financing real businesses, frankly, we have no problem saying what we see going on!

We've spent our careers watching the biggest of the Wall Street firms get bigger and fewer in number every step of the way.  These same firms have been pushing more and more financial "product" that has nothing to do with raising capital for businesses or providing quality research to real investors.  BlackRock now "manages" almost $7 Trillion in assets (or they did, until about three weeks ago!).  

How do you manage $7 Trillion in assets?  The answer is: you don't!  You create as many vehicles as you can that keep the "fee train" going: vehicles such as ETFs and index funds, because when you have that much money to manage, you have to own every stock in the world, as the CEO of BlackRock admitted in an interview five years ago that we blogged about (see THIS POST from 2015).

Those big Wall Street firms also emphasize "financial planning" instead of actual "asset management" that would involve analyzing specific stocks (no offense to financial planners, but they are trained for different skills than stock selection and analysis). Those big Wall Street firms also tell their advisors: "you don't want to be managing money, you just find it" -- again, de-emphasizing the responsibility of making real investment decisions about individual businesses, which is at the very core of the problem.  This disengagement from business analysis is a big part of how we got here.  We will be circulating more of this in coming days/week.  If the "smartest guys in the room" don't agree with us, so be that too!

This is why we have spent our professional lives promoting the need to take a business approach to investing!  No doubt, there is enough uncertainty in the real business world right now for us to sort out.  Fortunately, because we take that approach, we are in touch with the managers of the businesses we invest in as they assess the impact the COVID-19 debacle will have on their business. Most definitely it is not completely clear for a number of businesses. But we take great comfort in knowing that one of the most important, if not the most important, aspects of our due diligence process is an assessment of management capability.  And in times like these, this provides us the confidence necessary to advise incremental additions to portfolios for those who are able, and to absolutely stay the course for all.



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.

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