Random Gleanings on a Flight to Montréal

Greetings from Montréal one of my favorite cities in the World. The climes here are cooler than in Florida and the weather is perfect, which is a nice respite from Florida’s heat and humidity. I am here to see some institutional accounts and speak at an event in one of my favorite restaurants on Peel Street, namely Café Ferreira (https://ferreiracafe.com/en/). Last week we were in Washington D.C. and Richmond, Virginia doing the same thing. The two ubiquitous questions we keep getting is about a looming recession and a concurrent bear market. As often repeated in these missives there is NO sign of any recession. In fact, the Present Situation Index has predicted every recession and it is still acting perky. Recall, The Present Situation Index is a sub-index that measures overall consumer sentiment regarding the present economic situation. This index is determined via a survey conducted by The Conference Board and is used to derive the Consumer Confidence Index. This is also sometimes known as the Current Situation Index. Accordingly, we are unconcerned about a coming recession. As for the bear market question, it usually goes like this – we are into the longest bull market in history, so the stock market is on borrowed time. This statement is patently untrue unless you assume a 20% pullback in equity prices represents a bear market. We do not embrace that view since there were numerous 20%+ pullbacks in the 1949 – 1966 secular bull market, but that bull market lasted 17 years. Moreover, the 1982 – 2000 secular bull market experienced the 1987 Crash, but the bull market extended for another 13 years. So hereto, we are unconcerned with a looming bear market. As our pal, and market wizard, Leon Tuey writes:

“You will like my upcoming report. In December 2015 the Fed raised the discount rate for the first time in the current recovery. Since then, pundits have been warning about a recession and a bear market. Starting last year, they blab about the inverted yield curve and their warnings got even more strident. These folks behave like robots, always reacting to situations without thought. They react conventionally. They never bother to understand why the yield curve is inverted or whether they are using the correct yield curve. Is it ignorance, confirmation-bias, or for marketing purpose? It's probably all three. Folks like Howard Marks, Jeff Gundlach, Ray Dalio, George Soros, David Rosenberg, Morgan Stanley, and many others have been bearish for two or more years. If they follow their own advice, I wonder how their clients have fared?

As I've said before, this great bull market will continue to surprise all in terms of magnitude and duration. Although in its 11th year, investors are sitting on record cash and are fearful. How much higher and how much longer will it take before they get euphoric? Remember what Sir John Templeton said: ‘Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.’ Investors are not even pessimistic. They are outright fearful!”

We agree with Leon and are not concerned about a recession or a bear market. What we are concerned about is the sea-surface temperatures (SST) in the waters surrounding Florida and the potential impact on the Property & Casualty (P&C) insurance stocks. This summer the water temperatures are ~3° above normal. In fact, in some areas the water is 5° above normal. While that does not sound like a lot, it is huge when it comes to spawning and sustaining category 4 and 5 rated hurricanes. Remember, cat 4 and cat 5 class hurricanes can develop very quickly and pack winds of up to 185 miles per hour. Given the dense population along the Florida coast this could be a bad year and a concurrent disaster for insurance companies. We own no P&C stocks.