Altus Insight October, 2017

The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: October 31, 2017
FR: Forrest Jinks
RE: Upheaval

October was quite the month. As most of you know, our main offices are located in Santa Rosa, California, in what is considered the “North Bay”. Starting the night of October 8th, three different fires started burning in the North Bay and raged for well over a week. The Tubbs Fire, which started in northern Napa County and burned all the way west into Santa Rosa proper (in Sonoma County), is considered the most damaging wildfire in state history. The other two fires, the Altas Fire and the Nuns Fire, which burned in Napa County and southeast Sonoma County, respectively, also rank in the top ten worst fires in state history. All told, over 7000 structures were lost, with most of them being residences. (This doesn’t include the almost 550 structures destroyed at the same time in Mendocino Lake Complex fire in Mendocino County, one county north of Sonoma County. All told there have been forty three deaths confirmed due to the fires.

Unfortunately, the Altus family was severely impacted. Scores of people were evacuated and several lost homes. Thankfully, to the best of our knowledge, everyone is safe. Though far, far less important, we’re also thankful that none of our business operations were damaged, though the evacuations and ensuing fallout from the fires has delayed and/or slowed down local business operations to some degree. It is going to be a long road back for the area. Much of the flora and fauna will probably return to the area before all who lost homes have their homes rebuilt again. One positive take away I have from the tragedy is the memory of neighbor helping neighbor, citizen helping citizen…regardless of age, color, politics, or religion. I hope that we can hold on to this, our better selves.

Activities related to the fire have required substantial time and attention, and frankly, have been a little overwhelming. As such, this Insight will be a bit shorter than normal. And, due to the lack of preparation, a little more scattered.

News is probably not fake, it is just bad: The term fake news has been all the rage of late, with both primary political parties claiming the term as their own, in relationship to their thoughts of the other. But what if the news isn’t fake, at least not purposely so, it is just poorly done? In the current reporting environment, news outlets are rushing to break any big story they can. No one has time to check the accuracy of the story, in the race to be the first to report. To use the example of our own first-hand experience with the area fires, it became apparent that even local reporters, reporting on a local tragedy, couldn’t get the story straight. “Such and such burned!” (It didn’t.) “This quadrant of the city is being evacuated!” (There is no such quadrant.) Larger and more remote news organizations picked up the inaccurate stories, and a few minutes later I could read about a mobile home park being destroyed though located in a completely different town than where the fire was occurring. Fake? No, just bad.

Speaking of news…: About ten days before the fire, I went on a news fast. I don’t watch TV, so a news fast to me is not reading a newspaper or the internet. Other than reading some news about the fire, the fast has continued. The world has continued to spin, life has continued on, I don’t feel less informed, and I have less stress in my life (well, minus the fires). My thinking was, instead of following the ping- pong of fake/bad news, wait until the dust settles and read about what really happened. No decisions made based on hysteria are going to be good decisions anyway, at least not in our business. We are not day-traders, we are long term investors. For us, researching and understanding statistics and trends, and how they may impact our business, is far more valuable than the latest news cycle. And trust me, if something big happens, everyone will want to tell me about it anyway.

GDP growth, yes, but not beneficial growth: First with the recent hurricanes in Texas and Florida, and now closer to home with the fires, I have been asked on several occasions about each event’s impact on the gross domestic product (GDP) of each region, and the country as a whole. With the way GDP is measured, there will almost certainly be a bump, likely pushing back the inevitable recession. (We don’t know how long it pushes it back, because we have no way of knowing when it was to arrive in the first place.) But this bump to GDP is hollow, and has no long term benefit to the economy. Unlike true economic growth, this GDP is only replacing what already existed. To say it another way, people often get wealth and income mixed up. At a very basic level, GDP measures the country’s income. It doesn’t take into account all the homes that were lost, businesses that were destroyed, timber that was burned, and ecologies that were impacted. The fuel for this GDP growth starts with money coming from insurance claims. It then flows through the economy as purchases of new “stuff”, and wages to rebuild the physical structure “stuff” that was lost. The money from the insurance claims comes from cash or cash equivalents held by the insurance companies, or from insurance policies owned by the insurance companies paying the claims. If it is coming from secondary insurance policies, that insurance company then pays the claim from their cash or equivalents, and so on. While that money is infused into an economy and immediately boosts GDP, by it being pulled from the insurance companies accounts it somewhere reduces cash in a bank, in turn reducing that bank’s ability to lend out to borrowers that would be using those funds to invest in economic activity. The country’s “wealth” hasn’t severely impacted, its short-term “income” is now needed to rebuild that wealth to get back to where we started.

Completely out of character: I haven’t had a brokerage account for 15 years. Contrary to popular belief, this isn’t because I hate securities, but other than some positions I hold in private companies, I generally feel I can find better places to invest my money by investing directly into real assets. I feel much more comfortable investing than speculating, and when it comes to stocks and bonds, I don’t have the time to really research individual companies to make good investment decisions. However, now I am going to do some speculating, well out of character for me. While the VIX index (the measurement of perceived volatility in the markets) has increased a little over the last week or so, it is still bouncing along cyclical lows, and has been for quite some time. Assuming the VIX settles a little over the next few days, I will be buying out of the money 6-month call options, hoping for a large spike in volatility, though even a return to historical norms would pay off nicely. I have no control over the movement of the index, nor does my “investment” have any hope of producing cash flow. The only return possibility is through appreciating in the price of the call options.

Why would I do this? The best analogy I can think of is the card game “Blackjack”, or 21. If you play 21 long enough you will end up losing to the dealer, though you might hit a big hand now and then. It is the sort of situation I normally hate. However, if I didn’t have to bet until after I had the first card in my hand, and the first card was always an ace, then I would be placing consistent bets. Yes, I am still speculating which cards may be flipped next, but compared to a typical 21 hand where the odds are with the dealer, once the ace is in my hand the odds are definitely in my favor.

I feel like the current level of the VIX index is very similar to this. The cost to buy the long-dated calls is extremely cheap, so the cost of playing in the game is low. Meanwhile, it doesn’t take much of a change to investor sentiment for the position to pay. Volatility is out of favor right now, but volatility is normal, and someday normality will return.

Will it work? Who knows? Is it a good “investment”? Again, who knows, and even if it pays off, it doesn’t mean it was a good use of investment dollars. It might just be luck. But this one time, I am willing to take my chances.

 

Happy investing,

Forrest Jinks

Altus Equity Group, LP

off: 707/932-5887

fax: 707/544-2972

www.altusequity.com

 

About the Author: Forrest Jinks is a managing director of Altus Equity Group, LP and licensed real estate broker. Forrest has many years of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start up (online marketing and site retail). He can be reached at fjinks@altusequity.com.