Who Do You Trust?

We are bombarded with information every second of every day influencing our investment process. There is way too much hitting us making it difficult to separate the wheat from the chaff. It is challenging to synthesize it and then make timely and accurate decisions. That’s why I always say to review all the facts; pause, reflect and consider mindset shifts; look at your asset composition along with risk controls; do independent research and finally invest accordingly.

Let’s talk about the mountain of data hitting us with earning season upon us. It is very important not only to read the earnings releases but to listen to the conference calls as it is the one time that management can offer their view of the economic landscape and how their company is positioned to successfully compete while adding to shareholder value.

Last week we heard from Warren Buffett who discussed succession at Berkshire Hathaway; Jamie Dimon, Chairman of J.P. Morgan; and Larry Fink, Chairman of Black Rock. I know each one personally and respect their views of the economy and investment landscape more than virtually anyone else out there. Then I read Barron’s 2018 Investment Roundtable which also happened to include several long time friends of mine. (We each began as analysts in the 70’s eventually becoming CIO’s at our own firms. We stay in touch today.)

The bottom line is that virtually everyone recognizes that we are in a golden period for investing with a Goldilocks economy with rising earnings and low inflation/interest rates, which are the discounting factors in stock valuation. Key comments came from Dimon, who saw a positive mindset shift in the way corporate managements and the consumer are looking at the future and spending; Larry Fink, who commented that investors are still under-invested in equities with a shift from bonds to stocks just in the early innings; and from Warren Buffett, who said that he is still finding undervalued companies in the stock market to buy and that he is not a seller.

The Baron’s roundtable was optimistic, too, with some reservations as we move much later in the year. Primary concerns revolve around the potential for rising inflation and interest rates, which could lead to more aggressive restraint from all monetary bodies. All of them see clear sailing for the foreseeable future. We hear their stock picks next week but their batting average is so-so.

Please listen to or read the transcripts of managements’ year-end earnings calls as you can as you will learn so much from those on the actual firing line seeing real time what is actually happening out there including future planning.

A successful investor must have core beliefs that serve as their True North. These beliefs underline the investment decision process. I have shared our core beliefs many a time to you while simultaneously challenging them based on what is occurring in real time to see whether we need to adjust them along with our investment thesis.

Our current view remains that:

  1. The global economy is accelerating without inflationary pressures for the moment. Global competition and technology/the disruptors will keep a lid on inflationary expectations longer term although we see some move up in inflation in 2018 and 2019 for cyclical reasons. Traditional measures of productivity no longer work nor does the Philips curve.
  2. Monetary policy on the whole remains accommodative but we are monitoring the ECB and BOJ closely as we expect them to throttle back even more than generally expected this year. If so, expect the dollar not to firm as we earlier expected.
  3. Global interest rates have bottomed, and we expect yield curves to steepen everywhere.
  4. Other countries will follow the U.S. lead and implement pro-growth, pro-business policies after years of restraint. We see the global expansion lasting well beyond 2018.
  5. Financial regulators here and abroad will no longer mandate additional increases in bank capital and liquidity ratios, thereby boosting lending capability across all sectors. China will be the exception as the government mandates higher capital and liquidity ratios to strengthen its financial foundation to sustain longer-term growth above 6%.
  6. M&A will accelerate across all borders.
  7. Capital spending will accelerate big time in the U.S. for both U.S. and foreign-based corporations for many years due to the new tax laws, less regulations and Trump’s trade policy. Growth in employment will follow.
  8. Industrial commodity prices including energy will benefit from the global expansion and limited growth in supply for the next few years.
  9. Earnings growth will be stronger than widely anticipated for all the right reasons: growth vs cost containment. S &P earnings will exceed $150 per share in 2018.
  10. Global stock markets are still undervalued but not all regions, sectors or stocks are equal. Change in patterns is everywhere. Herein lies our advantage.

We recognize that corrections can occur anytime but the trend for the market over the foreseeable future remains up. We continue to emphasize the financials, global industrial and capital goods companies, technology at a fair price, low cost industrial commodity companies including domestic steel and aluminum and special situations, which are on off. We are well positioned to benefit from a surge in capital spending in the U.S. over the next few years.

So remember to review all the facts; pause, reflect and consider mindset shifts; look again at your capital allocation along with risk controls; do independent fundamental research and …

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC




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