C’mon Man!!!

There are many potential risks and rewards associated with attending a small college. Given my current patient and prudent positioning, I’d like to remain focused on the risks. There is one risk in particular that my high school counselor neglected to share with me. It’s a significant risk that I didn’t fully appreciate until after I enrolled in my small college of choice, Stetson University. It’s a risk and sacrifice I endured throughout my college career and for most of my adult life. I’m referring to the risk of loss — in fun and excitement — associated with missing out on big-time college football games.

As with most risks, there are ways to hedge. A popular small college hedging technique is adopting another team as your own. For example, most of the Stetson University alumni I know root for University of Florida, Florida State, or University of Miami. While adopting another college team may suffice for some, it doesn’t have the same fandom feel that comes with attending the school or being an alumni.

Another option for small college students and alumni is shifting their game-day focus from Saturday to Sunday. In other words, become an NFL fan. This is the option I selected after graduating from college and moving to Jacksonville, Florida. Shortly after my arrival, the city of Jacksonville was awarded an NFL franchise. Since I didn’t have a college team I could legitimately root for, I eagerly adopted my new NFL team, the Jacksonville Jaguars.

The Jaguars were pretty good in the early years (first season 1995), making it to the AFC Championship in 1996 and 1999. Since then, the team really hasn’t done much. In fact, they’ve been pretty awful since 2008, suffering through a nine year playoff drought. Interestingly, the Jaguars losing streak started about the same time the Federal Reserve launched its Quantitative Easing (QE) program and the current market cycle began. It’s unfortunate, but I seem to be the only fan that has made this connection. To this day I have not received a single high-five after yelling my favorite chant, “End the Fed! Quantitative easing and the Jags losing streak is perfectly correlated!” I often wonder what will happen first, the Federal Reserve loses credibility and the current market cycle ends, or the Jaguars make it to the playoffs? I’m not sure, but thinking about either possibility brightens my day!

Similar to most NFL fans, I like to watch Monday Night Football. Before the game, I often watch ESPN’s Monday Night Countdown. A popular segment of the program is called “C’mon Man”.  During this segment, the ESPN crew reviews the most outrageous and often humorous NFL highlights of the week. If you haven’t seen the show, I provided a sample below.

C’Mon Man Link

I thought of ESPN’s “C’mon Man” while reading some of last week’s top financial news. At this stage of the market cycle, few things surprise me. As asset prices often write the financial news, I expect the outrageous and at times even humorous. That said, even I was caught off guard by the number of “C’mon Man” moments last week. While there were too many to discuss in one post (I try to keep to 1000 words or less), there were several I thought were worth highlighting.

My favorite of the week came from the FOMC minutes released on Wednesday. In the minutes, some Fed members expressed their concern about valuations, stating equity prices were “quite high”. Is this the same Fed that has kept the federal funds rate below 1% for over eight years, encouraging investors to chase yield and inflate valuation multiples?  Is this also the Fed that “fixed” the bond market by purchasing $3.6 trillion of mortgages and USTNs, lowering yields and providing speculators with “relative” valuation cover? And isn’t this the same Fed that has transformed QE into an accepted monetary tool for global central banks, with the ECB and BOJ continuing to buy hundreds of billions of public and private assets a year? And now some Fed members are concerned asset prices are “quite high” after they, along with other global central banks, have completed over $12 trillion in asset purchases? C’mon Man!!!

Federal Reserve members also discussed the possibility of shrinking their bloated balance sheet. It was only two quarters ago that the Fed was openly discussing expanding its asset purchases to include corporate stocks and bonds during the next downturn (See post: Fed Raises Facebook to Strong Buy). In September Reuters reported, “The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.” The Fed has gone from discussing the possible benefits of buying stocks and bonds to now contemplating reducing its balance sheet. What has changed over the past two quarters? The economy must have improved, right? It has not. In fact, economic growth has slowed considerably from 3.5% in Q3 2016 to current expectations of less than 1% (the Federal Reserve Bank of Atlanta is forecasting 0.6% growth for Q1 2017). If it’s not the economy, what is driving the Federal Reserve’s balance sheet narrative? While GDP growth has slowed considerably over the past two quarters, the S&P 500 has actually increased from 2160 to 2355 and the Russell 2000 is up from 1251 to 1364. Is it possible that asset prices, not the economy, are the main determinant influencing monetary policy? If so, C’mon Man!!!

William Dudley of the Federal Reserve Bank of New York was also busy last week. According to Bloomberg (link) William Dudley stated, “Free college is a ‘reasonable conversation’ to have.” With student loans reaching $1.4 trillion, student debt is a growing problem. Another issue is fewer students are paying back their loans. While there are many possible explanations, the belief that student debt will eventually be forgiven must be a major contributing factor. With politicians frequently waving the free college carrot in front of voters, it’s difficult to blame students for believing their debts will be forgiven. Politicians discussing free college doesn’t surprise me, but central bankers who actually have the ability to make anything “free” with an effortless stroke of the QE pen? C’mon Man!!!

Also last week, Panera Bread (PNRA) announced it was going to be acquired by JAB Holding Co. for $7.5 billion. JAB paid 19x EV/EBITDA, 32x EV/EBIT, and 49x earnings. Wow! I suppose these sort of valuations can make sense for a business growing rapidly. However, based on Panera’s slowing revenue and earnings growth over the past three years, its concept appears to have matured considerably. Although extremely low interest rates can make almost any acquisition look appealing on a spreadsheet, 19x EV/EBITDA for a maturing business in a saturated, hyper-competitive, and slow-growth industry? C’mon Man!!!

And finally last week, there was the taunting of short sellers by Tesla’s CEO, Elon Musk. Overconfidence is extremely dangerous in business and investing. Not to mention taunting is bad for the karma balance (and no, you can’t replenish your karma balance with a secondary offering). Mr. Musk should know better. C’mon Man!!!

Considering the current investment environment, I’m certain there are many more outrageous and humorous financial market moments on the way. It will be difficult, but I’ll try to keep up!

With all kidding aside, at this stage of the market cycle, humor can be an effective tool in helping absolute return investors manage through their difficult and frustrating opportunity sets. Instead of taking some of the news and events too seriously, sometimes it’s better to just laugh and say, “C’mon Man!”