Spring Forward

Quarterly economic growth has been a proverbial accordion over the past few years; accelerating a few quarters than decelerating only to reaccelerate once again.

First quarter growth is typically the slowest for any year due to the inability of the government to seasonally adjustment the numbers correctly. The government reports economic growth quarter over quarter rather than year over year such that growth during winter normally slows from the fall/holiday season only to re-accelerate come spring. Expect the same pattern this year.

We spent the last two weeks canvassing companies across the globe to gain a sense of not only where we are economically but also more importantly to gain a clear outlook where we are likely to go over the foreseeable future.

Paix et Prospérité prides itself on merging a well-researched, top-down global view of the macro economy with an in-depth, bottom-up analysis region by region, industry by industry and finally, a company by company micro analysis where we establish the likely winners and losers. We make these research calls throughout the year as we continually test our investment thesis. This analysis serves as our compass and a test as we refine our portfolio. It keeps us one step in front of the pack, which affords us the ability to outperform all indices. We are always searching for investable multi-year trends whose waves we ride as the core of our portfolio to achieve out-sized gains over time. It is important to always challenge our core beliefs and each one of our investments often squeezing/upgrading our portfolio during periods of wide market fluctuations such as existed over the last few weeks. The markets have a way of making you look foolish over any short period due to indiscriminate systematic trading; but if your fundamental analysis is on the mark, you win and outperform in the end. We always maintain excess liquidity to take advantage of these sudden, irrational market moves. By the way, we sell some too if there is a ridiculous up move in the market – always maintaining our core holding as long as the upside is still substantial.

Incredibly the pundits continue to look through the rear view mirror and are now betting on a slowing economy just when it is picking up steam as we move into the springtime. Have you noticed that the 10-year treasury fell back beneath a 2.80% yield? We expect that to reverse and the yield curve to steepen as we move through April as strong results and future forecasts are reported. While we expect excellent first-quarter results across the board, look for the more economically sensitive companies to meaningfully raise estimates for the year as backlogs are increasing along with price realizations. It is important to note that companies reporting strong results and hiking earnings estimates meaningfully make strong up moves in the markets. April should be a very good month indeed!

We are confident that U.S. growth will exceed 3% for the next several quarters supported by over 3 million newly employed people over the last year, tax and regulatory reform, and change in trade policies boosting capital spending for years to come (our multi-year trend) supported by a pro-growth, pro-business America First Administration. There is nothing wrong calling for open, fair and reciprocal trade agreements as well as protecting our IP. Let’s hope that the American negotiators bring in our closest trading partners with the same issues with China on the “deal.” We don’t expect much friction to occur between China and the United States at least until at least conclusion of the direct talks with North Korea at the end of the month. By the way, the impending trade deal with South Korea has quotas on imported steel and aluminum which will serve as a model for other trade deals, so don’t cry for our domestic steel and aluminum industries as Trump did not forget them as many “pundits” thought. In fact, domestic steel and aluminum demand and pricing are improving more than it normally would seasonally.

It was clear from our conversations with managements that a disciplined approach to spending and hiring will be maintained despite an improved business environment and much higher cash flow due to tax changes. This is great news as traditionally managements’ meaningfully stepped up spending big time, especially the more cyclical companies, just at the wrong time in a cycle, which ended up exaggerating the next inevitable downturn creating a boom/bust scenario. These decisions will not only extend the cycle but also lead to much higher levels of sustained profitability for years to come. For example, industrial commodity companies which are earnings record profits today continue to sell assets, keep capital spending beneath depreciation, improve their balance sheets while raising their dividends and buying in their stock. Believe me when I say that this is refreshing and will lead to higher valuations over time. We own the best in breed in this sector.

One of our core beliefs has been that M & A activity will stay exceptionally strong as corporations restructure their lines of businesses emphasizing the strongest areas while disposing of the weakest ones; tax reform unleashing trillions of dollars, low interest rates; and a strong global economy. M & A had its strongest first quarter ever with deals totaling over $1.2 trillion dollars. Prices paid in most cases were at substantial premiums underpinning stock markets. Sorry Warren, making deals is not getting any easier and the prices paid continue to go up!

Global growth continues quite strong. In fact, China, which many perceive as slowing down economically, just reported a substantial pick up in both its manufacturing and service sectors such that first quarter growth could hit 6.8%, above most estimates. We remain optimistic that global economic activity will stay strong in both 2018 and 2019 with only mild inflationary pressures as global competitive pricing and higher productivity gains offset cost pressures. We continue to expect yield curves to continue to steepen so DO NOT OWN BONDS!

The bottom line is to stay the course, as springtime will bring its traditional economic acceleration after an especially harsh winter. The markets remain undervalued today.  We continue to emphasize the financials, global industrial and capital goods companies who will benefit from a multi year capital spending cycle, technology at a fair price, U.S. defense stocks, industrial commodity companies including domestic steel and aluminum and special situations.

A successful investor looks through that proverbial windshield while the pundits/traders are always using the rear view mirror. Use sharp market moves down exaggerated by systematic, computer trading as opportunities rather than times to panic. And always maintain excess liquidity to take advantage of forced sales.

Paix et Prospérité wishes all of you a Happy, Healthy and Prosperous holiday season.

Remember to review all the facts; pause, reflect and consider mindset shifts; analyze your asset allocation with risk controls; do independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

Leave a Reply

Your email address will not be published. Required fields are marked *