Put America First

The White House and Congress are playing with fire not agreeing on a broad-based stimulus bill to replace the Cares Act that expired a few weeks ago. Trump’s executive orders are just band-aids and the most important one, extended unemployment payments at $400, will run out in 6 to 8 weeks. Then what? His executive orders exclude much-needed money for schools, states, hospitals, and small/medium-size businesses who are desperate for more support.
The surge in coronavirus cases has peaked and our economy has indeed re-accelerated which will be seen in August. Why stop the momentum? We need a new stimulus bill in the range of $1.5 trillion without special-interest carve-outs. Unfortunately, politics during an election year seems more important than doing right for Americans. Did you know that the Dems are demanding $25 billion for the post office so that they are prepared for a home voting? Since Trump does not want that, it alone appears to be a deal-breaker. And the Dems won’t do a partial deal without it. Nuts!  Put America first!
If not for the failure of our government to make a deal (which we still expect as the ramifications of no deal would be bad for both parties) our outlook for Fed policy, the coronavirus, the global economy, the stock market, and specific company results are only getting better. And we have gotten more even concerned about bond yields as the global economy improves, utilization rates rise, and with it, inflation. Just look at the CPI and PPI data last week.
MMM, a global industrial company, reported 6% year over year revenue increase in July after a large decline from March to June.  Large companies are in far better shape than small to medium size companies to come through the pandemic due to their financial strength. Cisco said as much in their earnings call last Thursday. This is another reason why we need a broad-based stimulus bill now. And we need to help the schools as they open. Right now, it appears that only half will open fully which is an incremental positive.
The news on vaccines and therapeutics remains favorable. There are close to 140 pharmaceutical companies working on this problem and we feel confident that we will have at least 3 vaccines available before year-end as well as many additional therapeutics/cocktails to manage those with the virus. We listened to five-plus calls from heads of research at major pharmaceutical companies last week and were impressed by the confidence each imbued as well as their different approaches. Merck stood out. Their approach may take longer to complete but they expect to have the best in the class vaccine by next spring that will be highly effective, over 80%, long-lasting, and with an easy delivery system. The government signed agreements with several companies last week to lock in supply for this year and next. All of this is very good news as it will be positive for growth as we move through 2021, 2022, and into 2023. You need to think long term, as an investor.
The Fed is all in and may even have to expand their buying programs as government issuance rises dramatically to finance the deficit. Several Fed governors spoke last week, and their economic outlook was universally cautious focused on the virus and government stimulus. It is very important to note that the futures market has rates for short term instruments near zero for several more years.  That says it all! Think like an investor discounting future earnings/cash flow using a historically low discount rate supported by the treasury market. Stocks remain undervalued using earnings yield and free cash flow yields relative to 10-year Treasuries.
Our government remains unable to represent the people. It’s all about politics, posturing, and getting elected. It is clear what needs to be included in this stimulus bill: more unemployment benefits ($400 is fine); money for small and medium-sized businesses; money for schools, states, hospitals; eviction, and liability protection.  Does anyone disagree? There is over one trillion left from prior plans that should be unlocked immediately as well an additional $1.5 trillion to help take us to the other side. That should do it. Hopefully, a new plan is agreed to over the next few weeks which is our base case as the alternative would be devastating for all.
We were satisfied with Biden’s selection of Kamala Harris as his Vice-Presidential running mate. Our concern remains that Biden’s agenda would move too far to the left overly influenced by the fringes of the party while we have known him and his running mate to be closer to the center. Regardless of what their platform may be on taxes, which is a concern of ours, we doubt that if he wins that there will be any tax increases when unemployment is so elevated which will continue in 2021 and even 2022. We would expect demand stimulus programs to be introduced by both Biden, if he wins, or Trump, if he wins, in 2021 and 2022 to boost the economy.
We must put America first!
Investment Conclusion
We believe that the markets may be in a holding pattern waiting to see whether there will be a new stimulus bill. The economy has gotten better which is sustainable if our government puts politics aside and puts America first. It is simply amazing how much liquidity is in the system, far more than the needs of the economy. While all companies can access the bond market to raise funds, it is extraordinary how low long-term cost of funds are for great companies like Apple and Google. Less than 3%. Think about that when you value them.
What is the proper discount factor to use?  The same goes for the over-all stock market. Look at earnings yield and free cash flow yield relative to 10-year Treasuries.  The market remains undervalued today for all of these reasons plus we expect operating margins, profitability, and cash flow to surprise on the upside as managements right size costs having learned so much during the pandemic. There was a 7.4% increase in second-quarter productivity.
We expect favorable news in the months ahead on both additional therapeutics and vaccines. We would not be surprised to see at least three vaccines successfully conclude Phase 3 testing this fall followed by the FDA permitting usage for extreme cases before year-end. And it will get only better in 2021 as we expect great companies including J & J and Merck to successfully conclude testing and begin supplying billions of doses by the end of 2021. All of this is good for the market, again, thinking like an investor in 2021 and 2022.
We expect the Fed to keep rates low as evidenced by the futures market combined with improving economy/earnings translates into higher overall prices but not all stocks will perform equally. Herein lies our strength.
While we continue to own the new normal winners, as we expect these trends to be long-lasting, we have added in economic sensitivity, too, in great companies that have successfully navigated the pandemic and will come out even stronger in the future. Each of these companies has great managements, winning strategies, above-average yields, and generate lots of free cash flow.
Finally, we strongly recommend owning defensive growth companies yielding around 3+% as an alternative to cash, money market funds, and bonds.
Our weekly investment webinar will be held on Monday, August 17th at 8:30 am EST. You can join the webinar by entering https://zoom.us/j/9179217852 into your browser or dialing +646 558 8656 and entering the password 9179217852.
Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; turn off your business news; do independent research and …
Invest Accordingly!
Bill Ehrman
Paix et Prospérité LLC

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