ACM’s 2020 Points of Focus

Taken from December 2019 Newsletter:

2019 review:

2019 was a record year for global markets.  After narrowly avoiding bear market territory in the S&P, global markets staged a dramatic rebound in the beginning of the year shrugging off any concerns that had led to the market sell off and propelling indices to record highs.  Markets were compelled upwards by continuing positive corporate earnings and economic growth brought by worldwide government stimulus and intervention. Our cautious stance, although qualitatively merited by geopolitical volatility, did not estimate the fervor of investors in the face of a continuing bull market run.

2020 Predictions:

We foresee increased potential for volatility in 2020.  Underlying risk has continued to rise in lock step with the spectacular returns of 2019 without being priced in by market valuations.  Markets ignored increasing global protests, unicorn flops and economic growth that was heavily premised on government intervention.  We see these trends continuing into the new year; although we are not predicting an outright recession, we do not find the market as it stands particularly attractive. There are many potential avenues for the market to be derailed.  The higher valuations, the worst the final outcome.

Geopolitical risk:

In the past year we have seen contentions grow with the current US administration and its pursuit of a trade war with China, the swings in the UK in connection with Brexit, as well as the rise of global protests shaking otherwise stable economic centers such as Hong Kong, Chile and India to their core. Markets have remained positive in the face of lowered GDP forecasts, reduction in corporate margins and even outright recession.  We see difficulty sustaining this trend through 2020, as the current US administration vies to remain in power in the face of an election, developed nations grapple between inflation and ongoing stimulus and others such as Hong Kong continue to deal with the unrest of the masses.

Emerging Markets:

In the last decade investors have pointed to emerging markets as engines for global growth.  Money has in-flown into these countries premised purely on the potential for economic growth and the promise of the next China.  This has ignored the cultural nuances, political disputes and other frictional damages within these nation that pose risk to these growth projections.  For example, India has recently dealt with demonetization, tax reform, and highly controversial anti-Muslim initiatives leading to growing unrest within the country.  Yet investors ignore this and continue to pour capital into the nation.  Markets are ultimately tied to the underlying economies.  This disconnect is unsustainable just as we saw with Argentina in 2019’s surprise election results.

Corporate Actions:

The last few years have set the stage for some of the largest mega mergers that we have seen in history.  As we reach what we perceive is the top of the business cycle, we predict that we will see corporations accelerate this trend and promote growth through acquisition.  This will continue in hotbed sectors such as IT and Healthcare but we see particular focus in IT security, Alzheimer drug development and allogenic gene therapies.

Is This How It Ends? Corona Virus Edition

Corona Virus

After updating friends and family (and investors too) regarding performance and views regarding the Corona Virus at the end of February, we have been fielding a consistent stream of emails and phone calls regarding market volatility.  We thought it would be prudent to put our thoughts down on metaphorical paper and return to publishing on our website during these very unique times.

The ferocity with which we saw the end to the longest bull market in recent history has many investors on edge believing that we may be facing a recession on the scale of 2008; at least that is what they have been led to believe by the recent swath of aggressive surprise rate cuts.  The fact is that a decade of prosperity and relatively easy lifts on the investment front have softened many memories.  The better way to examine the virus in a historical context is the combination of the turn of the century tech bubble bursting followed by the fallout from 9/11, but in reverse order.  We have a specific event causing people to be concerned of their safety and the potential for escalating fallout which has drawn attention to some of the glaringly obvious disconnects between markets’ dangerously precipitous valuations and real economics.

The potential for recession is not one truly brought on by lack of demand, but the barriers brought on temporarily by COVID-19.  The rational question to ask is if the virus were gone tomorrow, how would markets react?  As I write this, the world has ground to a halt.  Chinese manufacturing has dropped by double digit percentages, major US cities have shut down and global airlines are whispering the forbidden word of bankruptcy.  Russia and Saudi Arabia have decided to play a game of chicken that neither can reasonably win.  In fact, it has shifted their own fortunes to consumer countries such as the USA and China who will hoard and stockpile oil in their own reserves and has put on display how weak Russia and Saudi Arabia’s own hands are implying that both countries are already in the midst of recession.  The Federal Reserve, the last backstop to any economic contraction has brought a bazooka to a baseball game, wasting precious ammunition on a hair trigger that never should have been pulled.  Instead of reassuring markets, it has been misconstrued as a lack of confidence by the Fed regarding the economy causing investors to interpret it as signs of the worst potential scenario rather than a pre-emptive strike.  If a vaccine or new infections evaporated miraculously by tomorrow, we would probably have a sharp V like recovery.  But with a loss of confidence and dwindling flow of capital through the economic machine, as time goes by economic impact will grow lock in step as businesses shut down in the face of dwindling revenue, unemployment growth and future demand for goods and services  declining and cycling through as the world tightens its belt.  This grim reality relies solely on the actual viral fallout, and more specifically the fear surrounding the viral fallout.

COVID-19 has proven virulent and highly contagious.  But let’s examine the facts.  The virus maintains a higher mortality rate than the flu, but much lower then historical epidemics (H1N1, SARS, etc) with a susceptibility weighted towards geriatrics with compromised immune systems or pre-existing conditions.  It has similar properties to the common cold and the flu in terms of infection rates but seasonality as well hypothesized by documented temperature sensitivities.  This has led to some experts believing that we would see a reduction in viral progression as we enter spring/summer months, but that like the flu, we would see annual occurrences.  We would suggest that the best way to examine the viral life cycle is to observe its progress in China and other Asian countries as they have reached a certain level of containment.  Similar levels of containment may take an extended period of time in the western world, but with growing efforts to quarantine and limit the spread, we should see eventual progress.

The true test of weathering this market is to be able to separate market fear and economic reality.  Market fear will be our guide in the short term; it will dictate markets and cause ongoing volatility as we have seen with double digit swings in major market indices as of late.  As we examine these swings, we need to frame them in the context of economic reality.  Do these moves make rational sense?  Do they represent a true change in economic activity, or are they more representative of market mentality and investor confidence?  As we examine market movements under this lens, we can position tactically to not only preserve capital and lessen the volatility of our overall portfolios in the short run, but to profit from the reactionary investing of others.  As we observe longer term impact and market stabilization, we will find opportunities to invest in themes, sectors and companies at valuations that appear only once a cycle.  The key is to be rational and nimble in the immediate.

As my wise and brilliant mother always likes to remind me, “This too shall pass”.  Markets will eventually shrug off much of the overhang that the virus has caused.  Confidence will return to markets, companies will recover lost revenue and the economic machine will start up once again.  I cannot guarantee that we will emerge unscathed; we have spent the last several years urging investors to recognize how the underlying risks in the market were not being appropriately priced into asset valuations.  Geopolitical tensions, isolationism, cash burning unicorns and persistently low interest rates have been constant red flags as we position our investments.  As investors take stock of their current portfolios, I strongly endorse more prudent examination of investments.  There are many companies who do not have the balance sheet let alone the business model to re-emerge from this routing of the market and global economy.

Even as we deal with the current volatility at hand, we have become more concerned about the eventual next roadbump we face with interest rates back at their lows.  With persistent low interest rates, the tendency is for investors to deploy even more capital into markets.  But as that capital floods back into traditional assets and drives valuations back up, this capital will begin to trickle back down to riskier asset classes as we saw with the deployment into emerging markets (I’m looking at you Argentina), cryptocurrencies, and cannabis in recent years.  We will again face an overvalued and overheated market that could again topple for a number of black swan like events that are financial in nature rather than pandemic.  Monetary policy will be unable to stimulate during these periods as we have spent the bullets prematurely and ineffectually in the wrong scenario yielding a very Japan style economy in its aftermath.



ACM Outlook 2019

2018 review:

In our 2018 Point of Focus, we highlighted several key factors that caused us to stress caution for 2018.  The continued rise in asset class valuations while disconnecting the underlying risk caused by geopolitical tension had the predicted outcome as markets fell in the last quarter.  Too much liquidity was flowing to a limited set of asset classes in an effort to diversify risk away and replace low yielding government securities.

2019 Predictions:

2019 will be a transitional year.  Underlying fundamentals will continue to drive global growth, albeit at a slower pace, with valuations reflecting this adjustment in reality.  We do not predict a recession, but a return to sanity as growth comes at a cost as we depart from the historic decade of nil level interest rates.  Markets will become increasingly volatile in the mid term as it adjusts to the new equilibriums.  There are several points we want to draw attention to in the coming year that will contribute to market movement:


Geopolitics will be at the forefront this year.  Despite a modicum of volatility in recent, markets have largely shrugged off the growing bouts of political tension arising across the globe.  The longer term implications of populist policies are beginning to take hold to a level that investors can no longer turn a blind eye to.  In 2019, elections in Europe, India, Argentina coupled with policy movements in China and the developing markets will cause greater uncertainty towards the international order of trade that has dominated global norms in past decades.  The current destabilization of the US and UK political systems will continue to contribute to volatility moving forward this year.    


Equity valuations remain a concern even after the most recent retracement as they are still trading at the high end of historical ranges.  Risk premiums for debt are still low, and property prices globally are still unaffordable for the average person.  These factors point to the beginning of a potential devaluation cycle. 


China’s economy is wading through a trade war slowdown as well as a government sponsored deleveraging.  We remain cautiously optimistic that the Chinese government will be able to keep tight controls and navigate these perils; however there will be winners and losers.  Fortunately, they have been consistent in telegraphing which industries will come under pressure and which industries they will support.

Emerging Markets:

Emerging markets suffered the most in 2018 as investors fled to safety in developed markets, depressing valuations to historic lows.  As volatility continues, there will be opportunities to invest in the next set of global growth engines at bargain prices.  But focus will have to be sighted on a combination of true fundamentals and a calculation of underlying political and economic risks. 

ACM Market View, 7-2-2018

With the first day of the second half 2018 off to a rocky start we wanted to highlight a few key areas that we think investors should focus:

  • Tariffs:  Although this has been the highlight of markets as of late, our focus is to look to who ultimately benefits and who ultimately suffers in the worst case scenario.  Many investors have flocked back into risk assets regardless of the rising geopolitical tensions stemming from the tariffs.  From an economic standpoint, the US with its history of strength may appear to have the advantage here, but they have isolated themselves while other countries such as China have cultivated trade partners in the last two years.  On the surface, the US might seem to be propelling growth via fiscal stimulus, but tariffs threaten the real growth drivers of the most recent economic boom (tech, pharma/biotech, etc) as well as the purported beneficiaries of tariffs (automakers, basic commodities, consumer staples) with margin compression as trade partners retaliate with tariffs in kind.  This has the potential of unseating the market at at time when the Fed has already begun the process of raising rates.
  • Argentina:  With the elimination from the World Cup, it is back to reality for Argentina.  With the IMF loan in place, the real work is in now at the forefront.  Much of the meteoric rise of the Merval index over the last couple years has been premised on an opening of free trade economics and foreign investment stimulating growth.  However the slip in the peso has revealed the ugly balancing act as the quickly devalued peso has left many local Argentinians unable to purchase basic goods or earn a wage commiserate with inflation.  This has the potential to send the pendulum swinging as Argentina remembers its ugly past with the IMF and protest against potential austerity which in either case, could stifle growth.  GDP projections for the next year have already been lowered by economists and market analysts.  Argentina is in a precarious situation; it the global economies slow, Argentina is at greater risk than the most.
  • Oil:  Pundits of Oil prices rising have focused on the benefits to oil shale producers and the cold war that is going on among oil producing nations as reason for prices to continue to ascend.  However, times have changed and the reliance on oil has shifted.  Despite incentives and recent lower oil prices, automakers have begun to make the shift to a fully hybrid/electric line up and the world is moving forward.  Long term shifts aside, in the short term, the volatility of the markets and potential fragility of a continuing bull market will reign in oil prices.  A market crash would not benefit oil prices as we saw in 2008.  Many of the oil producing countries have broken from the pact in order to generate revenue over margin and are willing to produce at lower selling points just to reap some benefit from selling oil while they can.
  • VIX:   Despite the recent rise of VIX with market volatility, the asset continues to trade below its historical average as many investors shrug off geopolitical risks and believe that the government put option will prevent any recession instead of a failsafe against a market collapse.  There are some structural reasons that have kept volatility low, although we saw earlier this year the consequences as the short VIX instruments were shuttered.  The question remains, is the market shrugging off the risks or has VIX become irrelevant as a measure of risk and should we be looking elsewhere as an indicator of fear?
  • Consolidation:  Companies continue to consolidate in rapid succession with the recent acquisition of PillPack by Amazon and the increased bid of Fox by Disney.  Although the consolidation is providing some very lucrative opportunities for select investors, the record breaking price tags are pushing valuations even higher with a potential of a fallout if topline growth fails to achieve promised levels if we experience a pullback.  It should be noted that historically mega mergers such as AOL-Time Warner have failed to deliver on the promise of “synergies”.


Softbank Considers Telecom Spin-Off

Softbank is considering spinning out its telecom assets in a USD 18 bn IPO raise according to the Nikkei newspaper without citing sources.  The Softbank Group (9984 JP) would be selling up to 30% of Softbank Corp, its telecommunications arm in the IPO.  This would leave Softbank Group to focus on its technology investments, leaving it as the largest publicly listed technology investment vehicle.

For more information, please see the link below:



Toshiba Agrees to Sell to SK Hynix/Bain Capital

In an 11th hour turnaround, Toshiba agreed to sell its semiconductor unit to consortium led by SK Hynix and Bain Capital for USD 18 billion instead of Western Digital, which had been said to be the front runner less than a day before the announcement.  The change came as a surprise to the market as many investors scrambled to make sense of the implications.

Following the announcement, Western Digital announced that it had filed a case against Toshiba in the International Court of Arbitration to block the sale.

SK Hynix announced that there were still some key issues that needed to be agreed upon before completion of the sale.

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Softbank Positive on Potential T-Mobile – Sprint Deal

Softbank’s CEO Masayoshi Son is hopeful for a revitalization of the T-Mobile – Sprint merger following a tentative agreement with T-Mobile’s parent company, Deutsche Telecom.  The two entities were originally slated to merge in 2014, but were blocked regulators.

Son is counting on support from the new Trump administration and its appointed regulators.  Following the 2016 election, Son stated that Softbank would contribute up to USD 50 billion in investments in the USA.  If the deal were to fail again, Son has made mention of other potential companies that Sprint could be combined with.

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Toshiba Back with Western Digital

In another turn in the ongoing saga, it is being reported that Toshiba’s board has shifted back to Western Digital as the potential acquirer of their semiconductor unit, according to people familiar with the deal.  This is days after the firm stated that they were siding with a bid that including South Korean chipmaker SK Hynix as well as Bain Capital.

Toshiba’s board is scheduled to meet Wednesday to continue discussions.  Toshiba needs to sell its unit in order to shore up its balance sheet and prevent the initiation of the de-listing process from the Tokyo Stock Exchange.

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Disney Plans Streaming Service; Plans to Leave Netflix 2019

Disney has begun to move towards its own separate streaming service by announcing the formal split with its content and Netflix beginning in 2019.  Currently their are two planned streaming services, one to offer a similar service to Netflix and Amazon Prime Video which will group Disney’s own film collection including its Marvel and Lucasfilm segments and another service which would provide an ala carte access to their ESPN content.

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Sarepta Shares Rise After New Drug Results

Share prices rose in Sarepta Therapeutics (SRPT US) following release of positive clinical trial data for a drug combating Duchenne Muscular Dystrophy (DMD).  Preliminary results were better than indicated and could potentially treat 8% of patients suffering from the disease, although physicians still remained skeptical.  This opens the door for a second potential drug in Sarepta’s portfolio after the approval by the FDA of  Exondys 51 last year.

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