Bernhard Koepp, Author at C.J. Lawrence
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06 Feb Corrections vs Crashes – What are We Watching?

What are we watching this morning? Despite being fundamental investors, we need to turn to technicals today to understand if a correction is “normal” or something more ominous. We look to the structure of the sell off, ie is it orderly etc. We need to make sure price discovery is achieved and markets can cope with the extra volume of sell orders. We watch the relationship between Treasuries and Stocks. So far, the markets have coped well with the higher than usual volume and circuit breakers which are set at -7% for the S&P500 were not reached. Looking at levels, just before the open, futures markets tested the 200-day long-term average on the S&P500 and bounced off it. Normally the market will retest these levels before a real near-term bottom can be achieved. See the first chart below. The second chart shows Financials. We often look to the banking sector as an indicator of health in markets and Financials also represent the higher Beta sector along with Semiconductors. The chart of the XLF, an ETF representing the Financials sector, suggests that the current correction is not over yet. Looking at 10-year Treasury yields (see 3rd chart), there was a clear sign of “flight to safety”. Yields dropped from the recent peak at 2.85 to 2.75 today. These are all signs that the markets are functioning how they should during market corrections.

S&P 500 (SP50-SPX)

S&P 500 (SP50-SPX)

Financial Select Sector SPDR Fund (XLF-USA)

Financial Select Sector SPDR Fund (XLF-USA)

U.S. 10-Year Treasury Note

U.S. 10-Year Treasury Note

How is this effecting our CJL portfolios? CJL Equity and balanced accounts are still slightly up for the year, having given up gains achieved in January only. Will keep you posted…


Bernhard Koepp - The Trusted Navigator


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

17 Jan The Death of “New Normal” – Preparing for Normal

The term, New Normal became the new paradigm in business and economics to describe the financial environment in the wake of the 2008 crisis and the global recession that followed. Mohammed El-Erian, the then head of PIMCO, first used the term in 2010 in a lecture titled “Navigating the New Normal in Industrial Countries.”

For market practitioners, the conditions underpinning “new normal” ironically sowed the seeds for one of the longest bull markets in recent history. Reluctant money managers have only slowly adjusted to this new set of conditions. The notion of “This Time It’s Different” was famously debated between long-time market sages, Jeremy Grantham of GMO and Jim Grant, of the Interest Rate Observer at last year’s Grant’s conference. Grantham argued that a combination of slow burning low interest rates, high profit margins and low inflation has created the conditions for much higher valuations down the road. He famously asked the question, “when does dry powder become dead weight?”

As we begin the new year, investors are again perplexed by a market which is not giving the public a chance to “buy the dip.” Volatility as measured by the VIX continues to be low and we have not had a 3%-plus correction in the market since the last presidential election, the longest in history. Earnings continue to rise and interest rates are on the move. The market is signaling a return to more normal conditions.

What does “normal” mean for investors?

  • Stocks and bonds will no longer move in the same direction.
  • Our financial system will move back to being based on positive interest rates: inflation & deflation is what sets risk premiums.
  • Deficits will matter: as corporations adjust to lower corporate tax rates in the US, the added cost to the fiscal deficit could be substantial. The current tax deal may add at least 600 billion annually to the current deficit.
  • Crowding out: as we learned in the 1980s, the government will get its money given that 50% of total outstanding debt matures in the next 3 years. The average coupon rate of this outstanding debt is less than 2%. To refinance that debt, rates should rise substantially.
  • High profit margins will come under pressure due to rising interest expenses and wage costs. To sustain profitability, successful companies need to demonstrate pricing power.
  • Business cycles will become more compressed. The tax bill has certainly been a boost to US-GDP growth, but it will shorten the current cycle. As a result, we will worry about the next recession much sooner.
  • The cost of capital will go up. For investors, this mean finding companies and management teams that are good allocators of capital rather than financial engineers. Using debt to finance growing dividends and stock buybacks will become less common.
  • The relative strength of currencies, including reserve currencies like the US-Dollar, will be dictated by the relative strength of their economies rather than central bank interference.
  • The key challenge for money managers will be to be more active. A return to more “normal” conditions means there will be winners and losers.

Bernhard Koepp - The Trusted Navigator


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

28 Dec “US GDP Moves Above Potential” – Implications for Markets

EvercoreISI_ChartUsing Reinhart and Rogoff’s work, suggesting that it normally takes a decade for an economy to reach potential output growth following a financial crisis, our former CJL colleague, Ed Hyman, at Evercore ISI points out that the US economy has finally broken out of its decade of sub-par growth (see chart), and is entering a “new decade” of growth. This has profound implications for investors. Clearly “animal spirits” are back and businesses have been incentivized under the new tax regime to deploy capital and invest in their businesses. Under the new tax bill, corporations can expense at a 35% rate, and book profits at a 21% tax rate. That should spur an investment boom leading to accelerating productivity, especially if coupled with foreign cash repatriation. Today’s Chicago Purchasing Managers Index (an index measuring the health of the US manufacturing sector) came in at 67.6 for December (consensus was 62.0), the highest reading for the year. The January 2017 reading was only 50.3! The economy is clearly on the move, but capacity utilization is still 2.8% below the long-term average (since 1972) of 80%.

The new Federal Reserve Board, led by Jerome Powell, will be paying close attention to this, given rates are still abnormally low.  It also means the unemployment rate should continue to decline, and the lack of supply of labor and the rising participation rate should lead to higher wages. This is all very bullish for an economy that is led by consumption. There are still very few economists using a 2018 GDP estimate above 3%. That may change. Our outlook at C.J. Lawrence is that we should continue to see a normalization of economic conditions in 2018 and another good year for stocks.

Bernhard Koepp - The Trusted Navigator


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

20 Dec “A Perfect Year” – Outlook for 2018

As of this writing, 2017 is the first perfect year where the S&P500 had a positive return every month for the entire year. 2017 also coincides with the US Output Gap swinging back to the long-term trend line which we haven’t seen for a decade meaning that the economy is back on track. Economies around the World are in a synchronized upswing and populist pro-business, anti-tax & regulation politicians are challenging establishment politics everywhere. Meanwhile, Central Banks around the world are still slow to exit highly accommodative monetary policies.

At my recent visit to my local barber shop customers were debating the merits of the latest rise in bitcoins and if it is a good time to get in. My friends in the art world are still trying to explain how a questionable, poorly restored DaVinci painting could sell for $450 million, more than double the latest record set by a prominent Picasso. The public is starting to pay attention to the stock market and rising asset prices.  The world is clearly awash in money and excess liquidity.

As a market practitioner since the late 1980s, 2017 feels much like the mid-nineties when markets continued to move up despite plenty of pessimism and cautionary advice from strategists and policy makers. In fact, 1995 was the last near perfect year and was followed by a few more years of 20%plus returns. The key difference to the late nineties is the absence of inflation in the current cycle. If bonds, the largest global assets class, do not offer competitive yields, stocks will continue to be the only game in town. It is not lost on portfolio managers that exceptional years are often followed by higher returns, because asset allocators are often slow to adjust to new conditions.

At C.J. Lawrence, where we manage portfolios for private clients, we try not to get too caught up in the macro debate but continue to find value in traditional growth sectors: Technology and Healthcare. Both of these sectors’ P/E ratios based on 2018 estimates trade at no premium excluding cash to the S&P500 while defensive sectors like Utilities and Consumer Staples sell at a premium to the market on the same measure.  This should be in reverse. Free cash flow yields and returns on invested capital (ROIC) are also significantly higher for technology and healthcare stocks.

2017.12.20 PE 2018 Chart




Among our core Technology holdings, we are confident that much of the future revenue growth driven by innovation will be captured by the larger companies. These fierce competitors, which we call “Bulldogs” at C.J. Lawrence (Google, Facebook, Microsoft, Intel, Amazon) are investing heavily in machine learning or what is known as artificial intelligence (AI). AI will drive the next leg of growth in the economy building on the head start these companies already enjoy in cloud computing. The barriers to entry in AI are high for new companies because they don’t have access to the large pools of data that have been accumulated by these dominant companies. New entrants also lack the human resources to exploit this new opportunity.  Innovations in Technology are also a reason we remain optimistic about the healthcare sector where “Big Data” is a disruptor in how we administer and distribute traditional healthcare. The intersection of cheap computing power and the advent of human genome sequencing are creating new competitors on the diagnostics side which are the new emerging growth stocks of the next decade. This has drawn the attentions of the likes of Amazon which is applying to become a distributor of healthcare products and services, and Apple whose suite of wearable devices are increasingly geared towards personal health.

There is no doubt that there is plenty of optimism going into 2018, not only among market practitioners but also increasingly among the investing public. Retail investors have been largely on the sidelines during the ‘great recovery’ in stock prices off the 2009 low. In fact, inflows into bonds have trumped inflows into stocks by a wide margin in the last decade. History teaches us to be vigilant at this point in the cycle but also not too cautious. We believe 2018 could be another good year for the patient investor.

Bernhard Koepp - The Trusted Navigator


Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

31 Oct American Renaissance in Manufacturing: Fact or Fiction?

Those of you who still read the daily newspapers in print, will have noticed a small article buried away in the back pages of the Wall Street Journal on October 3rd which did not get enough attention in my opinion. The title was “Manufacturing Hits a 13-Year High”. This fact did not escape our good friend Ed Hyman at Evercore ISI, Wall Street’s most relevant economist by a mile, who taught us that when US-Manufacturing is on the rise, despite being a relatively small part of the overall economy, it is usually associated with higher real GDP growth in the future.

Friday’s Q3 GDP data with a 3-handle in front of it was a sign that the US-economy is on the move.  Pessimist point to an inventory build which may be temporary, but it is a confirmation that the economy is accelerating.

In 2013, I launched the American Renaissance Portfolio at our predecessor firm ISI Group Inc., as an investable basket of about 60 stocks benefiting from this nascent trend. Inspired by Nancy Lazar’s great macro work then at ISI (now at Cornerstone Macro) we identified a universe of companies that benefitted from three underlying growth drivers:

  1. A resurgence of US competitiveness
  2. Favorable labor cost demographics (relative to other OECD countries)
  3. Access to low cost domestic energy

These three characteristics were a tough sell in 2013 when we were more concerned about government shut-downs and the blow back from the great recession.  It seemed unreal then that the US shale revolution could grow US production to rival that of Saudi Arabia’s.  Stocks that participate in the American Renaissance can be found not only in the traditional industrial and manufacturing sectors, but also include housing, infrastructure, domestic rails, petro-chemicals, regional banks, defense contractors, and of course local energy producers.

Today the debate rages among politicos about who gets credit for the “Trump trade” or what Keynes referred to as the unleashing of “animal spirits”. There is a consensus building among economists that the train has left the station and we are well on our way to normalizations. Lift off may be just around the corner.  There is no doubt that despite being 8 years into an equities bull market, we are still early in the economic cycle.  What this means for investors is to be aware of a thematic shift to American Renaissance type stocks. Portfolio strategists will use concepts like sector rotation to value or shift to smaller size, and reflation to describe the same phenomena.  It is a fact, that American Renaissance stocks tend to be smaller, more skewed to value sectors and certainly do well when inflation is on the rise, so get on board for the ride!

Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

BK 10/27/17

25 Oct Applying The Long Wave in the Age of Disruptors – What Does This Mean for Stock Picking?

In the early 1920s, Russian Economist Nikolai Kondratiev developed the concept of the long wave when applying technological change to traditional economic cycles. He observed that these periods of long waves can range from forty to sixty years and consist of alternating intervals between high sectoral growth and intervals of relatively slow growth. There is much disagreement among economists how these long waves affect economic growth and when.  There is, however, no disagreement that the bunching of in many cases several innovations at a time, can launch profound socioeconomic change.  See chart below:

Chart source:  Wikipedia

When applying the concept of the long wave to stock picking, it is important for today’s portfolio managers to stay abreast of technological change. One needs to identify who future agents of change will be. Today we call these forces disruptors. These are often companies that take rapid market share in sectors that did not exist before. Forbes magazine recently published a list of the most valuable companies at 50 year intervals in its recent 100th Anniversary edition (see chart). It is a stark reminder that investors need to, identify long waves and their potential disruptive effects but, and perhaps more importantly anticipate the timing of these changes before they become obvious. A case in point is Kodak in the 1990s: It was already losing market share to other competitors before it was obvious that digital photography would kill its business.

Ten Most Highly Valued Companies

1917 1967 2017
U.S. Steel IBM Apple
AT&T AT&T Alphabet
Standard Oil of NJ Eastman Kodak Microsoft
Bethlehem Steel General Motors Amazon
Armour & Co. Standard Oil of NJ Berkshire Hathaway
Swift & Co. Texaco Facebook
International Harvester Sears Roebuck Johnson & Johnson
DuPont GE Exxon Mobil
Midvale Steel & Ordnance Polaroid J.P. Morgan Chase
U.S. Rubber Gulf Oil Wells Fargo

The list illustrates the changing leadership from wave to wave.  Among today’s most valuable companies, like Microsoft, Amazon and Facebook we can continue to point to strong long-wave dynamics based on cloud computing, the rapid adoption internet commerce, and the growth of social media. But we need to stay vigilant.

What will be the disruptors of the future?

Together with my partners at C.J. Lawrence, we constantly try to analyze sectors where we can identify characteristics of new long waves forming. Currently we are spending a lot of time on the healthcare sector to understand what the rapid decline in cost of human genome sequencing will have on healthcare.  Genomics company Illumina claimed on its Q3-quarterly earnings call recently that the price of sequencing a single human genome will decline to $100 as a result of its new Novaseq sequencing system. The effects of this are profound. What used to cost millions just a few years ago, now costs a fraction.

Chart Source: DNAnexus, April 24, 2017

Much like the effects which were observed by Gordon Moore in processing power of semiconductors and the spread and democratization of computing power, we believe low cost human genome testing will spur a revolution in how we think about and deliver healthcare in the future. One area where we are already seeing direct applications of the genomics revolution is in NIPT (Non-Invasive Prenatal Testing). Today, insurance companies cover 150 million patients to receive this important, non-invasive test to determine the health of the baby in the early stages of the pregnancy.  Other important breakthroughs are already being applied to prevent and cure certain tumor cells. Stay tuned, there is a lot more to come!

Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

21 Oct Embracing Market Volatility – Can You Stomach 20% Annual Market Volatility? You should…

As we reflect on the 30th anniversary of the 1987 crash in the context of an 8-year bull market for stocks, it is worth highlighting that investing based on traditional measures of volatility, like the CBOE VIX index, are not always a good indicator of future market returns. There has been a lot of commentary about the VIX trading at low levels not seen since 2004 or the early 1990s. In previous periods these unusually low periods of volatility as measured by VIX, were in fact followed by very robust market returns. It is unclear if the same holds to be true for today’s market.
Perhaps a better way to look at market volatility in the equities’ market is to simply divide the high and the low of the market index (S&P500) annually. This year this difference is 13%. Since 1967 you get an average percentage of 21% on average since 1967. Jim Moltz, C.J. Lawrence’s Chairman and my mentor for the past 25 years, suggests that equity investors should be willing to stomach at least 20% annual volatility if they are allocating into stocks regardless of valuation or market timing. Are you ready for that?
It is interesting to note that since 1967 there were only 6 years where the percentage between high and low was above 30%, the most recent two events were in 2008 and 2009, 48% and 40%, before that in 2001 and 2002, 30% and 34%, and prior to that you have to go all the way back to 1980 when it was 30% and 1974 when it was 38%. These volatility spikes were often signaling to adverse macro conditions or recessions.
If you look to the chart above, when paired with CJL’s Rule of 20 (a measure of the market attractiveness based on adding the market P/E with CPI), market volatility stays in a predictably range between 10% and 30% and tells you very little about how attractive the market is, in other words, there is a low correlation between the market’s valuation and volatility even when accounting for inflation. This means that every investor should be willing to embrace at least 20% annual volatility if allocated into stocks. It is actually quite the norm!
Sources: High-Low data for S&P500 index from Standard & Poor’s handbook. Rule of 20 data from C.J. Lawrence.

Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

19 Oct “Finding The Optimal Balance – Lessons From a NYC Commuter”

Navigating these markets is much like my 30-minute bike commute to work every day through the streets of Manhattan (see video above in 6 min version). Every twist and turn is a split-second reassessment of risk versus reward. Your mind is constantly evaluating speed, risk, braking, volatility, potholes, shifting terrain and anticipating sudden obstacles either human or natural. The key here is to be highly alert and active. Activity is the only way to find the optimal balance.  It not only leads to much safer outcomes, but also leads to better health. In the end, you will arrive at your destination safely and it gives you the satisfaction that you are in charge of your journey.  These lessons apply directly to how I approach investing, which is the basis for successful long-term financial advice.

What do successful market practitioners need when they dive into these markets?

Well, it starts with the proper equipment and tools. My equipment of choice when I leave my apartment on the upper East-side of Manhattan is my Dahon-Mariner bike. I love this bike! It is compact, foldable, it has 8 speeds (just right!), it has a highly nimble but strong aluminum frame, and above all costs half of what some other higher end brands cost.  If your ‘tool’ for navigating these financial markets is a financial advisor follow these same principles: beware of high cost advisors, be suspicious of advisors pushing “passive” investing, find an advisor who is nimble and not too rigid when it comes to advice-giving. All advisors must demonstrate a deep proficiency in their tools of trade, but the good ones possess the intellectual honesty to know when they are wrong and change course when the facts have changed.

I launched “The Trusted Navigator” to share insights and observations on markets and investing, based on my 30-year experience as a banker, institutional portfolio manager and now advisor to private clients at C.J. Lawrence. Hopefully it will give you an insight into how we apply our trade.

Why “The Trusted Navigator”?  I was always fascinated with the concept of navigation.  According to a legendary adventurer1, there are five characteristics of an expert navigator. I believe these same characteristics apply to successfully investing:

  • Equipped with the proper tools
  • Proficiency in the understanding of these tools
  • Attentive
  • Anticipating
  • Experienced

My fascination with navigation began in 1970, when at age five my parents moved our family across the Atlantic from Bonn, West-Germany to Washington D.C. where my father spent the next 25 years at the World Bank.  My Grandfather, did the same in 1927 when he boarded a freight ship in Germany and headed for New York City.

With little money and no formal education, the idea was “to gain work experience” in the new world. He began doing odd jobs like washing dishes to various jobs as an office boy. He learned the language quickly and soon landed a job at a fish-tackle distributor and travelled to all corners and the smallest towns in America to sell his goods.  A year after his arrival in New York, he sent for his fiancé, who he married within days of her arrival in New York harbor (she is in the bottom right row in the picture). As a result, my father and aunt were born in Manhattan at Lenox Hill hospital in the 1930s.  So began our family’s history in New York!

When I started working in New York in 1993 for Deutsche MorganGrenfell/C.J.Lawrence (the long name for Deutsche Bank at the time) followed by 16 years at ISI Group, the circle was complete. The connection to New York has obviously not only shaped my family’s life, but also how I navigate through the ever-shifting financial markets. I believe this perspective gives me an edge when giving financial advice to private and institutional investors. I hope you will follow “The Trusted Navigator” on your way to becoming an expert navigator!

Notes: 1 Andrew Skurka, the 35-year-old is most well-known for his solo long-distance backpacking trips, notably the 4,700-mile 6-month Alaska-Yukon Expedition, the 6,875-mile 7-month Great Western Loop, and the 7,775-mile 11-month Sea-to-Sea Route. In total, he has backpacked, skied, and packrafted 30,000+ miles through many of the world’s most prized backcountry and wilderness areas—the equivalent of traveling 1.2 times around Earth’s equator!

Full Disclosure: Nothing on this site should be considered advice, research or an invitation to buy or sell securities, refer to terms and conditions page for a full disclaimer.

Terms and Conditions

BK 10/16/17

Bernhard Koepp is the CEO and Managing Member of New York based C.J. Lawrence.

C.J. Lawrence

Investment Management