Stay Disciplined

Proper investing is a skill set built on years of experience and learning not only from your successes but also just as much from your mistakes.

The reason that I returned to managing hedge funds five years ago after a very successful 35 + year run including being CIO/partner of George Soros’ Quantum Fund for nearly ten years was to prove that investing was the only real way to create wealth.

When interviewed by Bloomberg News as to why hedge funds/investors were performing so poorly, I responded that there was “too much” news and investors simply pushed the button before pausing to reflect on the facts, reviewing their core beliefs and consider global mindset shifts, This became my tag line. Active managers were becoming traders rather than investors. And they failed miserably at it.

Paix et Prospérité manages money by staying disciplined.

We begin with our core beliefs that serve as our compass for investing. We monitor events daily searching for any changes that may signal a review of our core beliefs. We factor in current mindsets from the consumer to corporate management to governments. Lastly our independent research on each investable idea rounds out our ultimate actions.

We have stated forever that in order to be a successful investor in any and all asset classes that you need a global perspective. You must understand the interaction between and among all regions and markets.  For instance, negative yields abroad caused a flood of money flowing into our bond market reaching for our higher yields pushing up the dollar and reducing yields from what they otherwise would be. Simply stated each market affects the others. That’s systems theory.

While I am very proud of the fact that Paix et Prospérité has continued to outperform the S & P by 50+% over the last year(s) and hedge funds by much more, I am aware that one could become complacent but that is NOT our way. We maintain a one to two year investment horizon and monitor all events everywhere closely as you can tell from our weekly blog. We are not only looking for validation of core beliefs, we focus even more attention on where we could be wrong; challenging our very theories. We realize that protecting the downside is even more important at times than focusing on the upside.

The significant out-performance of the large banks over the last two weeks shows best why Paix et Prospérité kills the competition. Simply put, the pundits were bashing the financials over the last several weeks as they continued peering out the rear view mirror while we were stating that regulatory changes and results of the Fed stress were both on the horizon which would be game changers and the beginning of another major up leg for the large city center banks. We were adding to BAC, C and JPM amongst others, which we felt, were going to be the big winners. Financials, in the aggregate, became the largest percentage of our portfolio by mid- June. These stocks rose by over 7+% over the last week as the overall market faltered. And this move is just beginning. Ask Buffett who converted his BAC preferred into 700 million common shares!

Our strength remains our ability to “Look Beyond the Valley” which was the title of a  major Forbes article about us in 1995.

Okay! Let’s discuss where we are going and how best to position your portfolio to significantly outperform the averages while controlling risk.

We continue to believe that the global economy will continue to surprise on the upside despite failure of growth in the United States to accelerate as we had earlier anticipated as Trump’s pro-growth, pro-business legislative agenda remains stuck in his own self-made quagmire in DC. Nonetheless, Trump has passed many executive orders, reduced regulations and has persuaded many foreign and domestic companies to step up their spending in the states, which are all beneficial for future domestic growth. We continue to expect upside surprises in China, Japan, Europe, India and the Emerging Markets while there will be further weakness in the Mideast, Russia, Canada and South America due to faltering energy markets.

It’s worth noting that last week French President Macron’s attempt to “change the social model” by throwing out over 3,000 pages of labor rules that have hindered growth with a new package that the unions are literally up in arms against. Also. India Prime Minister Modi introduced a major tax overhaul simplifying the system with a national goods and services tax while removing over 800 state and local taxes. Clearly the status quo is in question and major social/regulatory changes are in the air everywhere. Finally it appears that Japan and the EU are about to complete a major trade agreement in response to Trump’s trade threats. Our multinationals won’t get hurt as they have plants located most everywhere in the world.

Earnings season begins this week, and we expect the majority of quarterly surprises to be on the upside much like first-quarter performance. Earnings will benefit from improving volume and pricing; tight controls over costs; a weaker dollar quarter to quarter and a reduced shares outstanding. While we expect managements to be cautiously optimistic on the remainder of the year and for 2018, we expect many to raise their forecasts at this time as they have more clarity as order books and pricing have continued to improve throughout the quarter.

We continue to recommend investing in companies that will benefit from an improving global economy whose earnings and returns are accelerating at the margin. We short companies whose incremental returns are declining like all those companies who cannot compete against Amazon and other industry disruptors. Our portfolio today includes financials, multinational industrials, the strongest domestic steel and aluminum companies who will benefit from trade protection from dumping; and some of the strongest industrial commodity companies, excluding energy, where supply/demand is favorable for higher pricing.  We own some big tech too. Finally we would NOT own bonds of any duration as we expect that yield curves will steepen, as it is only a matter of time until the monetary authorities take the foot off the accelerator.

Tomorrow is the 4th of July, the birthday of our country. It is time for our nation to come together for the good of all people.

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

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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