It would be easy for us to cash in some chips today as we have stayed one step ahead of the pack and have been right when most have not. We have stayed true to our core beliefs; understood better than most the interrelationship of all economic, financial and political events in the global landscape; and anticipated, not reacted to, mindset shifts. We have been outperforming the market for some time now by a wide margin while maintaining excess liquidity to take advantage of periodic sharp downward moves in the markets.
We continue to believe that the market remains statistically undervalued and rather than a perfect storm as many still predict, it appears that just the opposite may be true. Most market participants are standing on the sidelines confused as they have no core beliefs and are afraid of compounding their past mistakes. The truth is that things are pretty darn good and the United States markets remain the best game in town.
We have an economy that is accelerating; inflationary pressures that remain subdued; interest rates that are being held down by the infusion of foreign capital flowing across our borders searching for yield; and earnings growth, even for the aggregate S & P, that is about to take off finally beating most estimates.
This does not mean that we would go to 100% net long. We are humble enough to know that we can be wrong, and that external events can upset the apple cart. So, we continue to prune back our portfolio whenever our aggregate invested position exceeds 95% net long which is our maximum exposure even when bullish. In addition, we are constantly adding new names to our portfolio.
We continually vet our portfolio checking to see if any position should be reduced or eliminated, as some positions may no longer offer sufficient upside potential to warrant holding them longer compared to some of the new names. We will never lower the quality of our portfolio and buy only the best in class with strong managements, winning strategies, pristine balance sheets and yielding over 2.5%. Finally, it is very difficult to short and make money in an up market as all stocks tend to be lifted. Did you happen to notice the moves in the box retailers last week? Pretty outstanding and we want to compliment managements' willingness to make hard decisions to compete in a totally new retail environment and to monetize nonessential assets.
We stand ready to short S & P futures when the time is right so we can reduce our exposure, permitting us to sell stocks in an orderly fashion. But now is not the time.
Stay the Course!
It is time to better understand what a Clinton led government would look like and what impact it will have on future fiscal, tax, regulatory and social reforms and their impact on not only our economy but also the global economy. Unfortunately she has had to run a campaign further to the left than I would like and there is much that I dislike in her economic and tax plan presented last week.
Specifically, her plan was not pro growth enough for my liking as it did not cut taxes enough, especially corporate taxes; did not discuss cutting regulatory red tape; and it was not pro global trade. Fortunately we have a government made up of checks and balances and if she wants to be successful, she will have to negotiate like her husband did when he was President. Interestingly, he moved toward center right when President from being left of center as a candidate for the office.
What can I say about Donald Trump? He has imploded and I no longer see a path for him that ends in the White House.
The truth is that I do not like either candidate very much and my vote once again will be a negative vote for the one who will do the least damage to our country. How sad this is, as we need real leadership, real change and the ability to bring our country together with a common purpose and objective so that we thrive in a global economy for decades to come. The status quo is not enough but may the best we get for another four years. Fortunately I have faith in our system and the creativity of our people and of the managements of our corporations to excel in a global competitive landscape notwithstanding weak leadership in Washington.
There were no changes in our views expressed over the last few weeks:
1. The U.S. economy is accelerating and will likely report GNP growth well above 2.5% for the remainder of the year.
2. Interest rates will remain lower than one would expect at this point in the economic cycle held down by huge capital flows from abroad. The 10- year bond yield remains around 1.5%, which is incredible.
3. Inflation will stay subdued for a variety of reasons including low energy prices, globalization and the impact of the internet disrupting and changing the way business is done and the price is paid for products and services.
4. Corporate profits growth will accelerate in the second half of the year exceeding forecasts. Energy and material profitability will begin to turn around as we enter and move through 2017 therefore no longer being a drag on S & P earnings.
5. The dollar will be the currency of choice longer term however we have been surprised by the resilience of the euro which hangs in around 111 to the dollar and the yen which seems to have stabilized above 101 to the dollar. The Chinese yuan continues to trade within a narrow band.
6. M & A activity will continue strong as the benefits for both the buyer and the seller are obvious; most deals are additive almost immediately; the cost of doing deals is so inexpensive and money to finance deals is plentiful.
7. Growth continues to hold up in Europe better than most expected after Brexit however, travel, an important revenue source, has suffered due to terrorism.
8.China is on target to hit its 6.5% growth rate for the year led by its consumer. July industrial production rose 6% from a year ago while retail sales increased by 10.2%. Alibaba, the Amazon of China, reported sensational second numbers last week. We have owned the stock for months as our play is on the Chinese consumer. It appears that the government has a handle on the country's banking problems and is making the right moves to strengthen the system. Don't bet against China.
9. Energy prices recovered in the last half of the week as word emerged that OPEC will be holding a meeting next month in Algiers and the IEA came out with a report that supply/demand is moving into balance even with record OPEC production. We maintain our view that oil prices will remain within a $35-$50 price band over the next 9 months.
Let's wrap this up!
While it would be easy to declare victory and take a lot of chips off the table, we continue to believe that the wind remains to our back owning great companies at reasonable multiples and yielding over 2.5%, especially when the 10 year bond hovers around 1.5%. We continue to make minor adjustments to our portfolio to benefit from the acceleration of the economy by adding to the more cyclical areas while reducing the consumer nondurables, drugs, and utilities.
I am disappointed by the Democratic platform and unfortunately that may mean four more years like the last eight which by the way were not all that bad for the financial markets.
My mission when I returned to money management after a very successful 35-year run was to prove that active management was alive and well and that investing was the only way to create wealth. Remember that not all managers' are equal like not all corporate managements' are equal too. So far, so good!
So remember to review all the facts, step back, pause and reflect, consider mindset changes, review your capital allocation, risk controls and liquidity, do thorough independent research on each idea...and