A successful money manager must be cynical. We begin by thinking about what could go wrong before factoring in the upside potential.
As discussed last week, it would be easy for us to take some of our chips off the table after having such a successful run over the last several years. We beat the averages by a lot. I concluded that it would be the wrong decision as I’d be running another risk… opportunity loss.
There are two ways to look at risk…up and down side. Rarely in my 40 plus years of successfully managing hedge funds have I seen the global economic, financial and political landscape as positive as it is today. And it is still not fully factored into the markets. There is much more room to run in 2018 and perhaps, even beyond. We pride ourselves on selecting stocks that beat the averages by a mile on both the long and short sides of the market.
Byron Wien, Vice Chairman at Blackstone and my former partner and Co-CIO at Century Capital Associates, came out with his annual list of 10 surprises last week. His long-term record attests to his capability. He is forecasting that the S&P will hit 3000 by the end of this year but may have a 10% correction along the way. So, how should you play that? Go fully invested looking for another 10+% in the market or hold back/possibly selling then hoping for that correction to go all in? Well, no one can time a correction and there are no guarantees that a correction of that size will occur anyway. It did not happen last year! My strategy is to stay all in while keeping some reserves, as we always do, for the unexpected. I agree with most of Byron’s surprises and suggest that you read them. He is smart and is plugged in. And yes, we stay in touch today.
Let me also suggest that you listen to or read Dave Tepper’s interview last. His hedge fund, Appaloosa Management, has a sensational long-term record. He is even more bullish that Byron and correctly states that the market sells at only 17 times projected 2018 earnings after factoring in tax reform.
I realize that the global markets began the year with a bang. I also know that the markets have a way of not letting you in as occurred all last year.
So what should you do today?
My positive global backdrop for investing was only reinforced by all the statistics that came out last week. We truly have a goldilocks environment: not too strong to increase inflationary fears and sharply rising rates over the near term nor too weak such that deflationary forces will intensify and earnings estimates will miss the mark. It really is just right with global growth accelerating; inflation staying muted; interest rates ridiculously low and earnings moving up strongly for all the right reasons. Then add in tax reform and regulatory relief in the states that will force other nations to follow suit. Not a bad backdrop for rising stock markets.
Bryon and the consensus, including me, are all forecasting domestic growth in excess of 3% in 2018 bolstered by tax reform and regulatory relief. We see inflationary forces building slowly but increasing as the year progress, which will keep the monetary authorities on a path to raise rates at least three times in 2018. I feel that the 10-year treasury will exceed 3% by year end and the dollar will strengthen too as monetary authorities abroad, the BOJ and ECB, reduce sooner than anticipated their monetary ease as the year progresses closing the interest rate differential with U.S. bonds. Finally, S & P earnings could exceed $150 per share, up from about $128 per share in 2017 bolstered in good part by tax reform and global growth.
So where do we differ from the consensus? Most of the pundits who share our 2018 view are not looking through the windshield at the longer-term benefits to U.S. growth from tax reform and regulatory relief. Corporations cannot just turn on the capital spending spigot overnight as it will take years to implement including additional hires of workers to operate the facilities. We see the benefits spread over many years bolstering and sustaining higher growth in the states than we have had in years. We also see foreign corporations building new plants here for the same reasons: tax reform, regulatory relief and Trump’s trade policies. Initially the U.S deficit will rise as tax reform is implemented. So if GNP is Consumption + Investment + Government spending than it is not hard to forecast rising growth rates in the immediate years ahead led by more capital spending (I).
It is time to step back and think as an investor, not as a trader. Soros always searched and successfully found new long-term trends and rode the wave for years. He took advantage of temporary weakness by adding to positions as long as he felt that the trend was intact. Paix et Prospérité does exactly the same thing and that is one of the reasons why we have successfully outperformed all indices over the last few years and run circles around the hedge fund index.
There are many implications from the longer-term trends mentioned above. While investment and production will rise more rapidly than consumption in the states, the opposite will happen elsewhere. For example, Paix et Prospérité is investing in companies in China and elsewhere that will benefit from their shift from production to consumption which will occur over many years so you need to invest accordingly. Domestically we are emphasizing financials, industrial and capital good companies, industrial commodities, technology and special situations that all will benefit from the aforementioned trends.
The bottom line is that risk is not just about protecting against the downside but also protecting against missing upside opportunities. Change is everywhere and what has happened in the United States has taken us back to the early innings in investing. Tax reform, regulatory relief, and new trade policies along with a pro-growth, pro-business government happens once in a lifetime. Don’t miss it. That is your risk!
Review all the facts; pause, reflect and consider mindset shifts; look at your capital allocation along with risk controls; do independent research and …
Paix et Prospérité LLC