So what really happened last week and how does it influence our thinking?
I am most disturbed that the Fed did not imbue confidence last week about the economy. I have said many times that a conservative bias permeates all levels of government, corporations and individuals. That remains a core belief. If I heard the Fed loud and clear, I'd buckle down for a while until the outlook for foreign growth improved. Even though exports are less than 15 percent of our economy and less than 1 percent to China, globalization impacts all markets and right now there are heightened risks.
I have mentioned before that I invest in companies, not the market. If I am correct that my long investments are going through positive changes to increase volume, revenues, margins and free cash flow, these investment will be revalued upward over time and be very profitable. On the other hand, my shorts are just the opposite and incremental rates of return are declining. These stocks go down over time.
While my long and short investments make up the vast majority of my portfolio, I do maintain some trading positions used to hedge risk. I mentioned some of them earlier in this piece. And I maintain excess liquidity at all times, never being more than 95 percent net long.
I want to conclude that the Fed is just stating the obvious and is behind the curve. I am confident that the Chinese government is doing what is needed to stimulate the economy while sticking to its new reforms. Patience is needed, as the fix does not happen overnight. Even though the OECD cut its global forecast once again, it still is forecasting 3 percent growth this year and 3.6 percent in 2016. The U.S stands out by the way and there was a sharp upward revision for the Eurozone. So things are not so bad.
I am sorry the Fed painted a cautionary picture. They were late to the party and I hope they do not get behind the rate curve. My core beliefs remain for the most part intact. A steepening yield curve is delayed once again and will impact financial stocks. The preconditions for a market top are just not present.