Market Notes

August 6, 2018

July is a wrap. The S&P 500 was up 3.60% and the Barclay’s Aggregate Bond Index was up 0.02%. The Nasdaq is where the fireworks happened with Facebook (FB) falling 11% for the month (after a drop of 25% on missed earnings) and Netflix (NFLX) falling 13%.

When the market leaders start to show signs of weakness we take notice. We think you should too.

As you know, we have remained cautiously bullish throughout the 2018 calendar year and as of today, we still haven’t seen any clear indications that the bull market is over. For now, the economy is strong, unemployment is low, the yield curve has not yet inverted and interest rates are historically pretty low.

Cracks may be beginning to form with the market not making new highs on the back of the highest GDP number since 2014. United States Gross Domestic Product (GDP) came in at 4.1% but meanwhile the market leaders are reporting their first earnings misses in some time. The overall market has been stuck in a range and we see some risk of a sharp correction before a potential run higher.

This simply means that the odds of an event similar to what we saw in late January and early February have increased. We have looked for and taken opportunities to reduce risk and increase cash across portfolios. As that cash has been redeployed we have allocated to the highest‐quality, capital‐efficient companies available.

We have thought a lot lately about asset allocation and index funds. We have spoken to many of you about our concerns with both equity and bond ETF structures and the dangers of passive investing and index funds. It seems that the market may be catching on, as Jesse Felder said in an interview on the Macro Voices Podcast this past week:

“This is another speculative mania. This time instead of being driven by the dot‐com craze or anything like that, this is being driven by a kind of euphoria surrounding the idea of passive investing. And so, anything that has to do with passive, including buying a value‐based index in a passive fashion, is not going to fall into what I categorize as ‘true’ value. So, where I’ve found value is outside of the indexes and really this hit home for me when I talked with Steve Bregman a little over a year ago and he pointed out to me that owner‐operated companies are systematically under‐owned by the indexes because they don’t have enough free float for the indexers to be able to allocate money to them so they’re systematically under‐owned by the indexes. And really these are the companies that you find do the best over time and so I think where investors can find value is in owner‐operated companies that have low float and are ignored by the indexers. Those are the only places where I have found ‘value’“.

We couldn’t agree more, Jesse. (and Steve).

On the bond side of the house the issues are even more apparent with the largest borrowers representing the largest weightings in the bond index and therefore funds. I have yet to encounter an investor who would intentionally loan most of their money to companies which have already borrowed the most – whose balance sheets are in the worst shape.

In other news, Amazon (AMZN) and Apple (AAPL) reported amazing numbers with Apple shares rallying to over $207.05 eclipsing the $1,000,000,000,000 (that’s 1 Trillion, with a “T”) market capitalization. WOW. Congrats, Apple!

Perhaps all is not lost…


Shane Fleury,

CIO Elevate Capital Advisors


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