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Quarterly Letter to Clients

October, 2017

Indices at quarter-end (September 30, 2017):

Dow Jones Industrials: 22,405.09 3Q'17 +4.94% YTD +13.37%

Standard & Poor's 500: 2,519.36 3Q'17 +3.96% YTD +12.53%

In the later 1960's, fresh out of college, as a young stockbroker, I ran an ad campaign. It centered on commodity futures and pointed out that calamity—man made or natural—led to dramatic price swings, which meant trading opportunities in various commodities and in some stocks. A number of people pointed out to me (often in hostile terms) that I was profiting from the misfortune of my fellow man. They were right in a sense, though I had not thought of it in that light. I was, after all, barely into my twenties and focused on building a business. I had never experienced much in the way of personal catastrophe. Now I sit on the ledge of advanced age, from which the view is more expansive and my perspective has been broadened.

Some of the folks who responded to that long-ago campaign had another vision: they were the then so-called “gold bugs,” and they were convinced that the government was about to release gold from the strictures that had been in place since 1933. If you don’t remember, gold was pegged at $35 per ounce; the dollar was backed by gold and silver; and it was not legal for Americans to own gold other than in jewelry. The only buyer was the U.S. government. I should have listened to that minority, as they were right. Only a few years later (1971) Nixon closed the gold window, dropping gold and silver as a backing for our currency. The metal’s price, released from government control, shot up by a factor of twenty-five by the end of that decade. In the ensuing years I came to feel that gold (as an investment) was “dead money,” costly to hold and paying no dividend. It was, and remains, a sort of insurance policy against erosion in the value of the dollar. I am not convinced that it is the best way to retain value; then, as now, I lean toward equities. But I note that during this past quarter our dollar declined by some 7% to 10% versus a number of major currencies, notably the Euro and the Canadian dollar.

This is of concern to me, as I have allowed cash balances to build for quite some time now, waiting for opportunity. That is another way of saying that I am a little nervous at this point in time. But rates have not yet begun to climb, and stocks have not begun to fall, and nothing is cheap.

Recently, the economy has flattened in many areas. Employment is still strong, but housing has leveled off; auto inventories have been building up on dealer’s lots; industrial production has slowed; and retail sales across the board have been sagging. This is not showing up on my screen, as stock prices continue at elevated levels and bond prices seem to me to continue trading at unsustainable heights.

And then along come two hurricanes: Harvey in Texas, and Irma here in Florida. Texas was not as lucky as we have been, though for a period of ten days our home was without power and the water was not potable. The storm in Texas disrupted gasoline supplies nationwide, and the price at the pump shot up immediately. Here in Florida the major storm that was predicted tapered before it could do any "real" damage (though I would hate to see what "real" damage looks like).

This may seem ghoulish, but the general consensus on Wall Street is that the storms will ding the economy for one quarter, but be beneficial to business for the following few quarters as the states rebuild. It is easy to see the benefit to companies like Lowe’s and Home Depot. The auto makers should also benefit, as a large number of cars will need to be replaced, and trucks should see increased demand. Foodstuffs need to be replaced; homes and landscapes are in need of repair. Many industries will see a pick-up as the rebuilding process begins, some not so obvious.

During the storm, as I mentioned, we lost power and water. But we were very lucky to have evacuated to a hotel where both were available. We rode out the hurricane safe and comfortable, with full electric, TV and air conditioning, so feel no sorrow for us. Food was another matter. We brought a little with us, but it went rapidly, and the day following the storm we went out looking for a restaurant. It was futile, all closed and the one or two that opened soon ran out of food. While supplies were back within a day or two, our home remained without electricity for ten days. That is a bigger problem than you might think.

Forty-odd years ago (this is a time for me to reminisce) I was a bridge player. At a club in New York City I sat opposite an elderly woman of regal bearing, purportedly deposed Russian royalty. In conversation she said, rather snidely, that, “…some people think they are rich because they have a refrigerator and a TV.” I had less of a filter then than I do today, and I shot back that some people thought that because they had a little money they were intelligent. Today, looking at news reports of refugees, earthquake victims, people living in mud, I can tell you that having a TV and a refrigerator may well be considered marks of wealth.

I am now a little more aware of what life must be like for the millions of people in the world who are constantly at war, constantly in need of food, fresh water and medicines. Our lot was just a hiccup, a bit of an inconvenience. Others have much more serious problems.

While I feel—deeply—for those of my fellow humans experiencing shortages of necessities, I still do not feel guilt at making investments based upon those shortages, and I wonder if perhaps I should? On the other hand, it is my job to identify investment opportunities wherever they arise and to take advantage of such situations. The markets have been exceptionally quiet all year, new highs notwithstanding. At the moment, opportunities are few, but I am patient, and I am certain that there will be a knock on the door.

Jim Pappas