Stay Away from Grisly Bears // C.J. Lawrence Blog
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Stay Away From Grisly Bears

Investors have pulled more than $60bn out of US equity funds since the start of this year. Outflows in the 2008 financial crisis were $85bn and $65bn during bear market of 2002. Flow data for 2016 is magnified given companies themselves are planning to buyback over $600bn in shares this year. At the same time gold is up 21% y-t-d capturing almost three quarters of all flows into commodities. Rising U.S. rates, a strong dollar and benign global inflation have traditionally flashed sell signals for bullion. Crisis remains a rationale for gold’s ascent but where and which one(s) is unfolding: debt, negative interest rates, conflict..? Carl Icahn is betting on a market crash and investors could pull $500bn out of hedge funds in 2016 according to the New York Post. Sentiment is extremely negative and investing in the stock market appears to be a bad idea to many investors at the moment. But such uncertainty creates opportunity and risk is the price you pay for prosperity.

Despite the overwhelming tone, U.S. market behavior has been fair and reasonable. Since Q4 2014 when the fed ended its QE3 program, the S&P500, give or take a few percent, is essentially flat. The period has been interspersed with 3 scary corrections including the largest swoon in January/ February of this year but each event was followed by swift unexpected reversals. Warren Buffet was correct, “What we learn from history is that people don’t learn from history”, to the misfortune of many hedge fund managers.

Many cite the Fed as the market’s party pooper but look more closely and the real reason for the S&P’s trajectory over the past 18 months has been earnings. Coincidently or not S&P earnings peaked in Q4 2014 at $119. In 2015 earnings registered $115 and our forecasts suggest $118-$120 for 2016. Here lies the answer to market performance, certainly not a reason for celebration but neither for the kind of turmoil many are forecasting and dreading. That said if passive investors are to have any success this year they had better hope that earnings revisions move higher in the coming quarters because multiples are not going to expand in such a fearful environment with interest rates increases sprinkled on top. So what is going to drive earnings higher? 1. Global growth 2. The dollar 3. Oil prices, without these your S&P 500 ETF is dead in the water.

As 2016 unfolds and we look towards 2017, hope alone that earnings will rise will not to be a path to fortune. We have two encompassing conclusions regarding the earnings problem: 1. Companies that take market share will sustainably grow earnings 2. In a zero interest rate world investors will have to pay more for such companies. There are great companies in the U.S. and around the world that are flourishing despite the slow economic backdrop and the many uncertainties that pervade. Companies successfully growing their market share are innovators with loyal enthusiastic customers, financially strong with pricing power, and in most cases dominate in their industries. They can out muscle the competition and deliver appreciating earnings and subsequently higher stock prices. Investors should take comfort that such companies will provide the surest path to investment success over the long-term. We call them Bulldogs.

In the short-term, algorithms, emotion and institutional investors will eat amateur traders for breakfast. However, over the long-term the nonsense of minute-by-minute market information is superseded by the true results of the world’s great companies. Identify, validate and stay on top of the best and the short-term pain of volatility will give way to the assurance of hard fought reward.

Disclaimer

We make no representations or warranties, express or implied, as to the accuracy, completeness of any information provided on this Blog nor do we undertake any obligation to update any of the information provided on this Blog. We expressly disclaim all liability for actions taken or not taken based on any or all of the contents of this Blog, as it is not intended as investment advice. This material is intended for discussion purposes only.  It is not an offer to sell, nor a solicitation of an offer to buy any security, nor does it purport to be a complete description of the terms of or the risks or potential of interest inherent in any actual or proposed security or transaction described herein. The data contained in this report were taken from statistical services, reports in our possession, and from other sources. The commentary, opinions and estimates expressed are our own and we make no representations either as to the accuracy or the existence or non-existence of other facts or interpretations which may be significant. The information herein was gathered from responsible sources but C.J. Lawrence cannot guarantee its accuracy or completeness. The directors, officers, and employees of C.J. Lawrence may either from time to time have a long or short position in the securities described in this reports and may buy or sell such securities. The information herein does not take into account the particular investment objectives or financials circumstances of any specific person who may receive it. Before making an investment, prospective clients are advised to thoroughly and carefully review our Form ADV with their financial, legal, and tax advisers to determine whether this strategy is suitable for them. C.J. Lawrence and Cyrus J. Lawrence are trademarks of Cyrus J. Lawrence LLC. C.J. Lawrence is a registered investment adviser.


 

 

1Comment
  • E P Gallacher
    Posted at 03:27h, 27 May Reply

    Very good points, like

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