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Contributors

08 Aug May Merkel Mediate an Amicable Divorce

Brexit, what Brexit?  Investors have largely brushed off the impact of the largest political event in the European Union’s short history.  The exit process will take years to unfold so the current relative market tranquility may be the most plausible outcome short-term but Brexit is real and undoubtedly there will be turbulence equally opportunity.  Truthfully no one really knows what the relationship between the EU and Britain will look like one, five or ten years from now but it will be different, at the very least constitutionally.  In such a scenario investors have no longer-term macro framework from which to reasonably forecast economic fortune for the region.  Some investors will guess right, some wrong but that’s not the way we do things at C. J. Lawrence.  When in doubt focus on company earnings.  Brexit will have a major impact on some industries/companies and virtually zero impact on others.  Our job is to identify those companies that we expect, with a high degree of confidence, to deliver superior earnings growth.  Whether investing in Europe, the U.S. or anywhere else in the world we hold firm to this rule and believe such an approach is the only insurance policy for equity price support. 

So what do we know so far about Britain’s status in the EU?  Well in the ten weeks since the vote was cast Britain has already a new Prime Minister.  For reference, Theresa May’s political fulcrum is right of Cameron and therefore pulls the conservative party towards conservatism, or to the right of the center ground that Cameron largely occupied over the past six years.  The UK also has a new Chancellor, Phillip Hammond will be driving Treasury policy.  May is traditionally a Eurosceptic who campaigned quietly for Remain leaving her ideally placed to succeed the premiership in the political embers of the of the Brexit vote.  May will need all of her political experience to capture the most favorable outcome possible for Britain during EU negotiations.

May’s most important partner in these negotiations will be Angela Merkel.  Trade between Germany and the UK is mutually crucial and Merkel, ever the pragmatist, has struck the most constructive tone among her European peers for a favorable exit outcome for all sides.  The two major building blocks of the EU will be the main focus of negotiation:  Trade and the Movement of People across the region.  Unsurprisingly Britain, who invented Trade Liberalism, are anxious to maintain friction free access to European markets.  However, Britain’s wish for sovereign control of immigration within the EU is the main stumbling block.  European leaders see these two issues as a mutually exclusive requirement for EU status.  There are some exceptions but Europe is determined not to set precedents that would encourage other partners to follow Britain’s exit if the terms are too sweet.   These negotiations will take considerable time but we believe ultimately a satisfactory outcome will prevail.

So what to do now?  Europe including the UK is in much better shape economically than it has been for years and has tracked our thesis for continued economic recovery.  Equity markets across the region have been volatile, certainly more so than the U.S. and a valuation discount is evident when comparing similar European and U.S. companies.  The currency environment particularly for the UK is even more favorable than it was when we banged the table last year and as an export region this will be a material tailwind.  Add to this backdrop central bank action that is as aggressive as anyone would have possibly dreamt of two years ago with the addition of the Bank of England that surprised markets with its injection of funding.  The result, Investors have a launch pad for equities that is unprecedented in economic history.  Answer─Buy European stocks with sustainable quality earnings growth, watch valuations and avoid the traps. 

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.


20 May 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.