​Last week I took the CFA Level II Exam in Seattle. It feels good to be on the other side. Between finishing college and the CFA, the past three years have been nonstop academics. I’m glad I did it. It was a challenge and I conquered it! At the same time, I feel a bit behind in the career game. The CFA is a ridiculous amount of work and it didn’t help me get into the investments industry as the universal truth of, It’s not what you know but Who you know, flexed it’s might..
 
The ugly truth is the industry is dying. Countless veterans’ have told me the same thing. Despite a rip-roaring bull market, the professional landscape is scarred. The proliferation of passive investing and low-cost ETF’s has gutted the need for analysts and portfolio managers. Everybody has more-or-less the same access to information thanks to the Internet and if everything is just going to grind higher in financially engineered unison why bother with stock-picking or investing money in an actively managed fund? The ugly truth is that what limited roles remain in Wall Street are reserved for the ivy-league elite. You are born into it.
 
I tend to think that everything happens for a reason. Perhaps it’s for the best I didn’t end up in a concrete jungle, suffocated by smog and diseased from the rat-infested sewers. Montana is God’s country. The air is fresh and the water clean. Life is better here. I got a good job with a local bank that I’m excited about. Who knows where I’ll be in ten years but at least for now I’m on the right track.
 
 
There have been many interesting developments in markets. I’ll do my best to keep you updated with greater frequency from now on.

The market’s gotten extremely volatile. So volatile that the Average True Range (ATR), a measure of volatility, on the Nasdaq composite is the highest it has been since the dot-com bubble.

When volatility reaches extremes, it is a sign of market uncertainty.
Investors are scrambling to make sense of the environment. There is great confusion with money managers on how to allocate capital. Money is getting shuffled through this market like a deck of cards.
There are several primary factors stoking the volatility:
I.)      Timing         Q1 2018 ended last Friday.
End of quarter is always a busy time for money managers. There are many regulatory reporting requirements that must be dealt with. End of quarter is when you see ‘window-dressing’, essentially this is money reallocation. Managers want to maximize returns (and thus fees) for clients and show them that they were invested in the right places at the right time.
For 9 quarters in a row, the S&P posted positive gains. Q1 2018 was the tenth straw that broke the camel’s back. The parabolic march of tax-cut euphoria finally ended with a bang as the S&P ended Q1 18 with a 1.17% loss.

II.)     ‘Trade War’        Proposed Tariffs on Chinese Imports
On Tuesday April 3rd, the Trump administration said that it will place a 25% tariff on Chinese imports such as flat-screen televisions, medical devices, aircraft parts and batteries, etc.. The proposal outlined more than 1,300 imported goods that will soon face levies as part of a sweeping trade measure aimed at penalizing China for its trade practices.
China responded to this threat by saying that it would impose tariffs of 25% on 106 types of imported U.S. products worth $50B, including soybeans, aircraft, and automobiles.
I am a big proponent of tariffs having outlined the history of trade-restrictions in previous posts. The American middle-class has been gutted, a fact which is impossible to ignore through examination of the rust-belt. It is my opinion that import tariffs will drastically help with the competitiveness of American manufactures and lead to strengthening of the labor force.
While not the least protectionist nation in the world. USA trade-weighted tariffs are among the lowest of developed nations. Push-back by areas such as the EU, Canada, and especially China is quite frankly hypocritical.

The tech unraveling began with Facebook as the spotlight revealed egregious privacy concerns. Indeed Facebook believes the data of up to 87 million people was improperly shared with the political consultancy Cambridge Analytica. These tech companies are sitting on mountains of personal information and it should not be surprising to see increasing regulatory pressures in the near-future which could put downward pressure on margins.
Amazon was next in the FAANG fire line as president Trump repeatedly lashed out against the company with claims that they were strong-arming the US Postal Service, avoiding paying their fair share of tax, claiming that Washington Post was Jeff Bezos personal propaganda outlet, etc..
The fact of the matter is that Amazon has gotten immensely powerful. Where a decade ago it was Walmart that was the main culprit of disruption, today it is Amazon who is almost single-handedly gutting brick and mortar retail. The company is quickly becoming an all-encompassing monopoly as they expand into grocery, entertainment, cloud-computing, shipping, financial, and almost every other industry imaginable. At some point anti-trust regulations become a serious and valid concern. After all, the last thing we need is for our society to become one giant Amazon network where we are all working and living for the company store.

Strategy Moving Forward
When volatility levels get elevated as they have in recent months often the best strategy is that of sitting on one’s hands. In markets such as these it becomes easy to get carried away, overtrade and get caught on the wrong foot. I suspect that the rotation away from tech is just beginning as money flows towards more ‘safer’ more traditional high-yielding assets in industries that have been overlooked and underappreciate throughout the crazed FAANG era.
As such moving forward, I will keep a diversified and hedged portfolio long value, short FAANG.

Three months out of school.

My life consists of two activities: trading and studying for the CFA Level II in June.
Perhaps I will attempt another tedious job search in July. Until then, I’m taking my fund and running with it as far as I possibly can.
Reconnecting with my mentor. The man is hands-down the best in the business! I’ve been at this for nearly six years now with the past two a prisoner to the library, full-time grinding theory and textbooks. My knowledge base is immense and there are no obstacles too great to overcome!
My focus is bottom-up. When the fundamentals and technicals align: that is where the magic happens!
At it’s core, my portfolio will consist of high-yielding securities. Within that a crisp slice of alternative real-estate investments that perhaps I will illuminate in a later post.
Orbiting this core will be satellites. The satellites are likely to come in the form of derivatives which will be responsive to the quick hits, executing trades when prime-opportunities present themselves.

My fund is called the:
BIGSKY INVESTMENTS® Hidden Gems Portfolio

​Let me preface this post by informing my audience that I am in need of a job.
With over five years of trading experience, a degree in finance, as well as partial-completion towards the CFA Charter, I am well-equipped. I am a hard-worker with the knowledge and passion it takes to thrive in the financial services industry. This is a labor of love, but now it is time to take it to the next level with a professional career. If you are aware of any opportunities related with Equity Research, Portfolio Management, and/or Trading; Please reach out to me at rjsullivan@bigskyinvestments.com
 
The risk of quantitative easing has always been primarily concerned with the bond markets.
Bonds have experienced a 30-year bull-market, commensurately characterized by steadily declining interest rates.
 
In response to the financial crisis of 2008 the authorities at the Federal Reserve reacted by lowering interest rates to the lowest levels historically documented.
*Bond Prices are inversely-correlated to Interest-Rates.
Rates got to such an extreme deviation from the ‘norm’ that sovereign bonds of various European countries traded at negative nominal yields. This is a condition in which bond investors willfully lose money for the privilege of holding the note.
Needless to say this development in markets fundamentally goes against core structural tenants of finance. Specifically, this violates the notion of time-value-of-money, e.g. ‘a dollar today is worth more than a dollar tomorrow.’
 
There are risks underlying the market that are not easily quantifiable, understood, indeed even understandable. We are truly in uncharted territory. Sitting out, let-alone attempting to short and bet-against this historical bull market has been a terrible strategy. This is precisely why I caveat to speculate on much of this ‘top-down’ macro analysis. Global-macro hedge funds have been gutted with many legendary funds dropping like flies in recent years. It is my opinion that a fundamental-based bottom-up analysis is a far more actionable approach to building a survivable lucrative portfolio.
 
That said, no analyst or investor worth his salt would ignore major inter-market developments. The bond market dwarfs the equity market in terms of gross capital. Reverberations in the bond-market and movements of interest-rates can have sizable and far-reaching effects across many asset classes.
For one, there is the issue of collateral and the mountains of derivatives piled upon 30 years of appreciating bond prices.
Another way to think of it is that if money leaves bonds, where will that money migrate?
There are no obvious answers to these questions.
 
I have been documenting the inversion of the yield curve. Certain market anomalies, such as suspiciously low rates being commanded for Greek sovereign bonds may well suggest material mispricing.
Charts have been appearing on my radar that from a technical analysis perspective suggest change of trend. The authorities at the federal reserve continue to threaten further increases in the Fed-Funds rate.
 
My plan moving forward, apart from hunting for a job & studying for the CFA will be to continue to focus energy towards discovering hidden gems in the form of over-looked and undervalued equities. Indeed, there is a universe of companies that are not Apple, Google, and Facebook that present great opportunity. However, a close eye will be watching the bond market.
 
If we can successfully identify trends, we can profit from them.

Upon graduation, I have a newfound respect and approach to looking at markets.
Gazing down at 50,000 feet, the cities blur. Detail is lost to broad sweeping landscape. Geographical features clear enough, but what of the sticks & stones, flora & fauna?
There are certain truths to finance and investing that must never be lost-sight-of or disrespected.
This marketplace is not a casino. A weighing machine perhaps. A mechanism for commerce, certainly. These corporations are not merely stock-tickers flipping themselves up and down. These are living breathing entities, with vision, innovation, trials, tribulations and life spans to each their own.
Which brings me to my next point. Real Companies Survive.
I’m not talking about flash-in-the pan momentum movers, story stocks or seedy message board pump-and-dumps. I’m talking about companies with cash-flow, EBITDA, Net Income. I’m talking about operational-excellence and societal advancement. I’m talking about investments that pay dividends. Those whose equity represents a genuine asset.
There are No Shortcuts in finance.
Easy-money is a dangerous myth. Fast-Money exists, but by its very nature it’s come-and-go.
Wealth is earned, accumulated: Methodically. Through focus, patience, and discipline. You must put in the work to reap the rewards and there is no escaping the risk-reward paradigm.
Diversification is the most important tool in finance. This is because diversification unequivocally and mathematically reduces risk.
That said, the one advantage given is time. What you do with it is up to you.

Walking into the Gallagher Business School one cannot help but notice a slick new LCD ticker streaming the real-time stock-quotes of a portfolio I have been helping to manage for the school.
 
My first-semester back, determined to complete my degree & learn as much about the intricacies of business as humanly possible; I joined a club. ‘The Finance Club,’ how fitting. Unsure of what was in store, but hoping to meet like-minded individuals, I took a seat.
 
The D.A. Davidson $50K Portfolio had been a class taught by a local advisor for nearly a decade before I arrived. The professor had recently relocated & so the portfolio migrated into the stewardship of the Finance Club.
 
For many weeks we discussed, debated, researched, analyzed, and determined which parameters should be emphasized. Finally a strategy was unanimously agreed upon and the portfolio was set.
 
There was some political influence in our selections.
EXP: Eagle Materials, a building materials play on the infamous ‘Trump Wall.’
Marijuana legalization was spreading like wildfire. With a presence in the industry, combined with a respectable dividend & healthy financials, PM: Phillip Morris fit the bill nicely.
 
Of course how could we ignore the $160T gorilla in the room that is Interest Rates? Minneapolis Fed chairman Neel Kashkari even visited the University that semester and gave a speech. Look, for as long as I have been trading, betting on the Fed to make a move has been like betting on the Atlanta Falcons to win the Superbowl: It’s a lock, definitely, going to happen… ummm maybe…not.: ‘Rates Unchanged.’
Still, coming off the lowest levels in history, unless we are going to break finance & go full-on NIRP like our European friends; Interest rates had one place to go and that’s up.
To capitalize on rising rates, FITB: Fifth-Third Bancorp, a regional bank was added to the portfolio.
 
Legacy positions: AAPL, GILD, UNH, JBHT, and IPGP were all assessed & deemed solid securities that should remain as bedrocks.
With our large-cap diversified carefully crafted portfolio of 10 stocks we competed against 19 rival universities & the market itself.
 
In the one-year period 8/31/2016 – 8/31/2017, I’m proud to say that our portfolio nearly doubled the S&P, delivering a 30% total return! Not only was this performance incredible, due to the construction methodology: a portfolio beta of 0.42 & sharpe ratio of 4.36 meant that Risk-Adjusted returns were off the chart.
Superior returns through solid companies while taking on a low level of risk. Certain investment principles hold timeless.
 
Our efforts were recognized by D.A. Davidson with the Fred-Dickson memorial award. Today several gentlemen from D.A. Davidson delivered the school an award of $8,000. The class has been reinstated with an excellent instructor at the helm and today we were privileged to learn and converse with a vivid pair of equity analysts from D.A. Davidsons Seattle branch who radiated knowledge & professionalism.
 
 I’m thankful for this experience & hope that ticker scrolls bright for the rest of my days.

I could go on-and-on about Tesla, story-stocks, irrational exuberance, valuations, etc, etc.. But I’ll just let the market sort this one out.
​
For now, let's all consider the parable of the Tesla Model 3 as an apropos example of: Expectations vs. Reality

Once upon a time there existed this monetary phenomena called 'Interest Rates.' 
Indeed, with these interest rates it was believed that money had value.
People thought that money was 'more valuable today than in the future.' 
This differential fusion of monetary value and time created the concept:
​Time Value of Money that all modern finance is based off.

The  2008 housing crisis hit. Panic, Central Bank Intervention, Quatitative Easing, yadda, yadda: We all know the story...

A decade later we find ourselves swept up in a euphoric stock market at dizzying heights. Euphoria is in the air as engines of cash inciniration capture the fervor of investors with an insatiable appetite for risk!
​

As hedge-funds crumble and passive investing is sung as gospel. We are all reminded of the perils of 'wit.' 
Yet there are developments worth noting; if for nothing but a snapshot in time...

The underpinnings of the entire financial system: US Treasuries provide the 'Risk-Free-Rate.' 
If equities are a stream: Treasuries are the ocean. The domain of whales.
Here, we measure tremors as basis points %'s as earthquakes. A sea of $Trillions.
​After a decade of smooth sailing, the water is stirring...

Credit Conditions are rapidly deteriorating. 

OPEC Disillusionment finally setting in.

Retail is dying at an alarming rate..

Anyways, this is what I'm seeing under the surface of this:

The stock indices are strong. Resilient. 
So what do you do?
Stay the course, work hard, live your life. 
I've got one more semester of school left before I take the CFA and break into the industry. 
The Macroeconomic landscape is certainly fascinating right now. Truly uncharted territory. But market timing?

I think that the best course of action at this point is to keep your wits about you. Diversify your portfolio with high-quality dividend-paying companies trading at reasonable valuations. Play the long-game and be at peace.
Watch that yield-curve though: It's trying to tell us something...

The line between complacency, confidence and arrogance is an opaque tight-rope we must tread carefully every day, for it is far too easy to misstep. Get caught in your head, lose sight of the cold seas lurking below. Before your primordial brain can process the folly, the wax has long melted, the wings tattered..
Such an err is common-place in the world of markets. This is an arena of titans where yesterdays hero becomes tomorrows Valeant victim.
Money is the ultimate manipulator. Rapid accumulation deludes us into blinding egotism. It is a cruel tragedy of life that every high has a low. To ride the wave of emotion, to lose yourself in the moment in a tide of ecstasy is to live! To survey from solid ground is to survive.  
​
              We need to talk about Tesla: The electric car & solar-panel manufacture headed by a maverick named Elon Musk. This man is a visionary with a legendary propensity of attraction. His followers abandon antiquated morals of valuation and status-quo. As a Scientologist Cult, masses of trendy bi-coastal elite sing the praises of revolution as they save the planet from the sickening clutches of fossil fuels by buzzing around in their $100k (coal-powered) electric cars.
Icarus Musk in his fervent love for space exploration has entrapped his followers in a SPACE-X Rocket headed straight for the sun!
On April 10, 2017: TSLA a company with no earnings and an accumulated deficit of $4B had amassed a market capitalization of $50.887B, surpassing General Motors to become the most valuable US car maker.
Such success is bound to infect anybody’s mind and Musk is no exception.