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A Year's End Summary

Well, what a horrible way to end the year! It's been a rough time in the market of late, but the good news (or bad) is that this sell-off is mostly self inflicted. In fact, at this point, I believe we're oversold. As an example, Apple shouldn't be off 25% from its highs, and I suspect it will come back in due course. If you have the assets, use this downturn to build for the future.

At this time of year, one hears all kinds of “predictions” for the economy. Almost all of them will be wrong, and the ones who guessed right will do just that: they guessed right. Years of investing and following the markets have taught me that no one can know what tomorrow will bring. You just look for value and opportunity the best way you know how.

There were the usual fads: Bitcoin, which, for the uninitiated, was a “digital currency” that would replace that nasty fiat currency (U.S. Dollars) we use to buy things from cream cheese to cars, soared to a price of $17,000 before crashing to under $4000 as of this writing. There is enough fraud in this space to keep the SEC busy for decades. Pot stocks also went up and down. This is one of those spaces that could be profitable, but there is that small problem of investing in companies that currently lose money, and have no clear path to profitability. As an example, the TV content streaming company Roku is currently unprofitable. But I have enough reason to believe that their sales and growth metrics will propel the stock. It's something all consumers can use, and it has universal utility. I can't say that for the pot stocks. Some people think they HAVE to be in on something just because it's being talked up. That's how people got sucked into Bitcoin.

Speaking of fraud, the rising market brought out all kinds of “alternative” investment products, which are now blowing up, and getting investigated. Unfortunately, few will get their money back. One such private placement involved an investment in auto dealers.With a 10% commission paid up front, it was irresistible over to 60 broker dealers who merchandised over a billion dollars of the product.

Another big Ponzi scheme, run by a firm called the Woodbridge Group, collected $1.2 billion from 8400 investors promising returns of 5% to 8%. Folks, I can duplicate this quite easily, and legitimately, by investing in the debt of real firms with real debt coverage. Just ask.

The usual crimes were committed by the industry, including “forgetting” to discount mutual fund breakpoints, annuity switches, excessive bond markups, churning, etc. The regulators collected their fines to support their own families, while the investors who were looted got little back in return. I make note of this every year.

Lately, I've been exploring a space I've avoided for decades, development stage pharmaceuticals. I haven't recommended any purchases, but I find the space interesting, and the public has a fascination with medical cures, as the pot stocks show. But most of these things are uninvestable from a standpoint of fundamentals. A case in point is a firm called Amarin, which is marketing a fish oil supplement that might actually work to sharply reduce cholesterol, unlike the stuff many people currently waste billions on. The company hemorrhages cash, sales are lower than some 7th Avenue sportswear firms I've known, but the market cap is $5 BILLION. I mean, this is like buying stock in air. The stock could triple on a tip of the hat from the FDA. But this is impossible to know, and I prefer not to speculate on something like this for now.

I've been very gratified for the way REITs have held up. The industry has been growing without being reckless. I actually credit social media for some of this. Today, industry players are so connected, they're aware of even a hint of overbuilding in a given sector (say, hospitality or multifamily) or a certain region. That prevents players from getting in too deep. Rents and values hold up, and supply neither expands or contracts to levels that will create a price bubble or a price depression. There were a few exceptions to this, specifically in high end Manhattan residential, and Senior Housing, but things seem to be on an even keel, and industry groups think this measured pace should continue. Valuations and dividends have held up well, and it's hard to find anyone who sees any clouds on the horizon. It is said the last bubble was caused by people who confused leverage with genius. Perhaps they learned their lesson. There's growth, but no wild speculation. For Senior Housing, the macro story was too good: the fastest growing age cohort in the country is 70+, and the reasoning was that millions would flock to these housing developments that also offered medical care. It got overbuilt in a hurry, and vacancies went up.

Corporate bonds are starting to shine again. There are a couple of reasons for this. I've found that buying paper after an earnings miss is a great way to scoop up yield. I'm not sure why- maybe the past decade of Fed policy has had an effect- but bond prices now sell off viciously after a bad quarterly report, only to creep back up again in price after the market experiences it's “decent interval.” It was never really this way. Bond prices just weren't that sensitive. I'm sorry I didn't bite more on these. But at long last, investors are getting paid for the risk again. The other reason for the price movement is the prevalence of bond ETFs, which now account for a large part of trading volume in corporate paper. So when retail investors get skittish and start bailing on them out of fear, the sell-offs dent bond prices. Which makes buying individual bonds for a retail portfolio an even better value. Keep in mind that with the bond resources I have here, we squeeze the nickel 'til the bull shits.

Speaking of which, I've seen some very questionable practices on some of the trade blotters that are visible to me, and I'm surprised the authorities haven't caught on yet. I make it a point to protect my clients from these pricing tricks.

Individual stocks we bought have suffered in the last quarter, but it's not based on fundamentals. The administration doesn't understand that words have consequences in moving markets. One day, trade issues are on their way to settlement. The market soars. The next day, there's another war of words, and the market slides. One could trade that sentiment once or twice, but not for long. The frantic and panicked actions of Treasury Secretary Mnuchin revealed stunning incompetence. No one knows when or how this ends, so it's like holding a hot potato, and technical analysis is no match for an angry tweet. There's some good value out there, and if you have the time horizon to make it worth your while, there are some good things to own for the future.

Growth stocks we own, like Roku and Shake Shack, for example, should continue their upward trajectory as their business models remain sound and their earnings continue to grow. However, even companies that aren't remotely affected by tariffs or trade issues get dragged down with the rest of the market. But it should remind us that investing is a long game, and if the fundamentals are there, we should be rewarded later on. Emotion still counts for a lot in investing, sometimes like fire on ice, but in the end, I believe that if a firm executes, so should the portfolio.

Speaking of which, the economy, in the aggregate, is still doing well. Multiple metrics I track, including things like freight traffic, hotel occupancy, etc., signal people are willing to spend money, which creates more hires who go out and spend more money. It's a “virtuous cycle,” as they say, and as long we don't shoot ourselves in the foot (which is a distinct possibility) it should continue. Adding 200,000 jobs per month on a steady basis isn't recessionary, nor is the lack of layoffs or fresh unemployment insurance claims. The psychology is almost brutal in the market right now, but we've been here a dozen times since the crash, and sticking to our knitting has worked.

Once again, thank you so much for your patronage. I believe my focus on fixed income has served you especially well this year, and no matter what happens in the market, you will continue to collect your cash payouts month after month, quarter after quarter. It has been very gratifying to see this go on during this market turmoil.

Here's wishing for a better year for all.

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