Year End Talk For 2017

What a year.

The markets showed little in the way of volatility, even if everything else seemed wired for it.

Given that low volatility, I was able to keep to our suite of investments with little in the way of fiddling or adjustment. The Fed signaled its policies well, and our real estate related holdings were able to position themselves for them. I was concerned that the drop in corporate tax rates may affect real estate, but the new "reform" code itself is very favorable to REITs and mortgage holdings. Hotel properties continue to book solid business as more people join the workforce. Although job creation is down slightly on a year over year basis, it's still providing about 2 million fresh faced consumers into the economy, and as long as that is in play, we should continue along in steady fashion.

There is no sense of an impending recession, despite a few gauges that economists watch that signal the onset of one. One of them is the yield curve. When it inverts, that is, when the short dated 2 year paper pays out more in interest than the long dated 10 or 30 year maturity, that generally signals a recession.

Things are narrowing, and the bond geeks are reaching for sedatives.

However, there are plenty of positives out there. For one, no recession has ever started until the Fed Funds Rate went over 3%. We're at 1.4% now. And as mentioned before, earnings, hiring, wages, transportation of goods and raw materials continue to show expansion. So if we remain in this "virtuous cycle" we've been in for years now, I would think slow and steady will win the race.

However, this does present a problem for bond purchases. The short end of the market isn't compelling, and neither is the long end as long as this squeeze endures. So looking for special situations to seed portfolios with paper to own is the order of day. Much searching, and not much finding.

This is a year I'm glad I stuck to what works and simply avoided entire sectors to invest in. Almost two years ago, I noted the retail sector was ripe for a considerable amount of pain, and over a dozen chains closed their doors, putting pressure on mall properties. So investments in retail real estate were scrupulously avoided. One quick note about the retail washout: yes, online shopping plays a role. But the real story is the debt loads that private equity larded on to these companies made it impossible to survive the first stiff wind that hit them. Toys 'R' Us, Sears, and J.Crew were poster children for this kind of recklessness. Following the bond market as closely as I do can give an advisor an edge, as the credit markets have a completely different take on viability than the equity markets do.

I avoided the energy markets almost entirely, with the exception of firms that transport the stuff by pipeline or tanker. This is one sector that is going through some very profound changes, and I follow the space closely. Over the next twenty years, we will witness a complete remaking of how we supply our homes, cars and factories with energy. It will be gradual, but steady, as alternative energy and new efficiencies continue to erode the fossil fuel industry's base.

The ETF craze continued unabated. We are now in the phase where marketing departments assemble and reassemble funds from the same bunch of stocks and give them a theme.

Continuing on a trend we saw last year, some of the most visible names in money management had spectacular blows ups in their portfolios. Some predictions offered by these celebrity managers couldn't have been timed worse. Many hedge funds closed down for gross underperformance, and for the hedge funds that actually do hedge, the long/short model just doesn't work right now. I have no idea how some of them retain clients.

There were plenty of “fad” stocks coming to market that recalled the dot com days. While this is mostly contained (thankfully) to private equity, the ability of a company to raise $100 million on the strength of a whisper of an idea is both preposterous and frightening. Many of the IPOs that came to market tanked not long after going public. Sometimes they make for good investments once the bagholders are cleaned out. Others, like the highly visible Blue Apron, are more than likely headed for history.

Predicting what will happen in the coming year is a fool's errand, so I never bother to. Every year, these “Investor Roundtables” take place and highly compensated analysts try to stick the landing on where the Dow or the S&P will end up by the end of the year. They are almost always wrong- by a lot. The sell side is ALWAYS bullish, because they have things to sell. So the point of making a prediction isn't to be right, it's to market yourself.

What I will say is that I believe the tax "reforms" being voted on will probably strengthen stocks as most of the largesse will go into buy backs and dividend hikes, just as they have before. However, there are always unintended consequences with these undertakings, and as we've seen so many times, tax policy isn't about economics or job creation- it's about winners and losers and distorted incentives. So that has to be watched as the new rules work their way into the economy.

Thanks to all of my clients for their loyalty and patronage. As always, I faithfully promise my best efforts to preserve and grow your assets.

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FloMartin Securities, Inc.

Donald R. Davret, Investment Advisor Representative

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