- July 28, 2020
- Blog , The Trusted Navigator - Bernhard Koepp
Mid-Year Update & Outlook – by Bernhard Koepp – YouTube Video & Transcript
In this video, Bernhard Koepp, CEO of C.J. Lawrence provides a mid-year update & outlook for 2020. C.J. Lawrence is a New York based investment adviser providing platinum level service and investment portfolio customization to individuals, families, and institutions. With a legacy that dates to 1864, C.J. Lawrence was re-launched in 2014 as an independent SEC registered investment adviser. The firm combines the talents of a highly experienced portfolio management team with an environment centered only on delivering optimal results for clients.
Video Transcript
Bernhard Koepp:
Yeah. Hi there. This is Bernhard Koepp from C.J. Lawrence and it is July 20th. I wanted to give you a mid year review of some of the themes that we’ve talked about in many of our videos, some of the things we’ve learned, talk about the markets and give you an outlook basically for the rest of the year. So we’ve come a long a way. I mean, as you can see, I’m still in my home office. Our company was supposed to move offices in May. We’ve been able to delay that, so we’re looking somewhere around August now for our move in. So this has been on a micro level an interesting ordeal and moving offices in the middle of a COVID pandemic in New York City.
Bernhard Koepp:
So I want to cover roughly seven points relating to the markets and the economy. So back in March, our strategist, Terry Gardner, said quite boldly that the markets will recover before the economy. So we’ve seen a pretty tremendous bounce back in the markets here. I think it’s fair to say that it’s caught a lot of people off guard. It’s like, how can this market just blast ahead here, when there’s still 25 million people unemployed and you see recession like certain sectors that your restaurants, your leisure sector and all these hard hit services sectors that are really having a tough time in this environment?
Bernhard Koepp:
So I think, we continue to believe in this concept that Terry introduced it in a tilted V shaped recovery. And we had a very severe downturn in the economy, and that was really because we closed the economy. So, if you think of the concept of closing an economy and not the concept that the economy is broken, then you have a different way of thinking about the recovery. Because if you think of previous cyclical downturns that we saw in 2008, or if you think of previous recessions, there was always something incredibly broken in the economy.
Bernhard Koepp:
So this time the COVID crisis really just shut everything down. So it was just a question of when are things opening. So it’s really been a tale of two economies. The part of the economy that has never closed is really the digital part. And it’s the analog part of the economy that’s really having a tough time here, and we can continue to watch that. So the COVID-19 pandemic, if we look back at this in 10 years, one of the things we will probably be saying as economist is, and as stock pickers, that this was the ultimate stress test when it comes to business models.
Bernhard Koepp:
So one of the things we focus on a lot here at C.J. Lawrence is to identify really unique business models that have sustainability. So, that’s something that has just been accelerated during this shutdown. So if we think of some of the themes that we’ve highlighted in some of our videos, and we’ve been playing in our portfolio, the move to the cloud. So remember Microsoft in two months booked two years of cloud revenues, which is just extraordinary. So all of this technology that we’re using today is all enabled through cloud computing. So we think that trend will just continue.
Bernhard Koepp:
And the important thing here is this is not a new thing. All of these trends, these digitization trends or transformational digital economy adoption, this was all in place way before we had this crisis. The second part of this trend is really, you see this in the retail sector. And certainly the US economy is highly dependent on retail, or the consumer. So this move to omni-channel, that was really pioneered, you could say, by companies like Amazon. And it’s really the taking e-commerce and bricks and mortar together.
Bernhard Koepp:
So in today’s environment, if you didn’t invest in e-commerce, you can’t operate. So omni-channel retail, and this concept of what is called BOPUS, which is buy online and purchase it, or pick up in store. It is something that has kept certain retailers alive. So many retailers will certainly go out of business. We’re seeing that in many of the bankruptcies. You look at very prominent companies that have been around for many, many years, like J.Crew or JC Penney, or you look at some of the shopping malls that are in trouble, so where you’re really seeing the epicenter of this process.
Bernhard Koepp:
So the other part is stay at home. It’s going to be very interesting, whether we will have a permanent feature of people like us in the financial services business, staying at home, working from home. There’s many anecdotal sort of stories out there where it’s working very well. So if you’re in the financial services business, or you work for a big bank, or you’re in FinTech, there’s really no reason to have massive headquarters, and occupy a lot of space in urban areas. So that’s going to be a very interesting trend to see.
Bernhard Koepp:
So in terms of the portfolio, look, we’ve been doing something which is called “bulldog investing” for 25 years now. And this is really, what I had said is a process where we try to identify unique business models that have sustainable growth, in growing sectors. So we want to find companies that are quite unique, that have a focus on taking market share, but operate in industries where they can dominate. So it’s quite interesting during this shutdown, the COVID pandemic, this has been the ultimate test for these kinds of companies.
Bernhard Koepp:
And it’s quite interesting for us to see the companies we’ve been investing in before this, I mean, we had no idea we were going to go into this scenario, certainly last December. It’s very interesting to see how our companies have fared and whether we’ve done our jobs well as stock pickers and as portfolio managers to identify companies that have sustainability. So we’re quite happy in terms of the performance of our portfolio. If you were in these types of companies this year, your portfolio is substantially up. If you were not in these kinds of companies, your portfolios are substantially down.
Bernhard Koepp:
So it’s interesting if you look at history, look, we are fortunate to have Jim Moltz as our chairman. Jim has been a strategist and a sage in the market for 40 years now. And he’s taught us that there are these very unique periods that we need to watch. So one of these periods that he identified back when he was at C.J. Lawrence back in the 1960s, was this period of the Nifty Fifty. So this began in the 1960s, when went well went on for about a decade into the 1970s. This is where a smaller group of stocks, of companies, got premium valuations versus everybody else.
Bernhard Koepp:
And it was really because these companies had unique growth characteristics that allowed them to prosper, to be profitable, and to earn earnings per share growth well above what the market was giving you at that time. So we’re in a period like that again. So we saw even similar periods like that in the 1980s, back then we called that the New Nifty Fifty. And today, we call it bulldog investing. And we think this process that is in place, will be with us for a number of years. The only thing that can really derail that sort of process is inflation. And we don’t see any ingredients out there that would be highly inflationary in the short term.
Bernhard Koepp:
Even in the longer term, meaning one or two years out. I mean, it’s impossible to predict what’ll happen in three or five years. But in terms of the environment, if we looking at the things that are inflationary, look at rents, look at the energy costs, look at material costs, a lot of these things are quite depressed. So rents are a big component on that of CPI. I mean, if you look what’s happening in urban areas, people are moving out, rents are getting pushed down and people are buying homes in more suburban areas.
Bernhard Koepp:
So all of these things are deflationary. If you put on top of that the digital economy, which has really put a lid on pricing, and has been very deflationary over decades, that’s the underlying part of this, that’s part of the technology part of the deflationary story. So we continue to be very bullish on our investment strategy. And we think the outlook for our stocks for the rest of the year and the coming years is actually quite good.
Bernhard Koepp:
So we’ve talked a lot about valuations. Terry did a very good video a couple weeks ago on normalized earnings. Look, we think on normalized earnings, the market is not expensive. I mean, it’s certainly not cheap, but it’s not expensive. So if we’re looking at the market’s PE ratio, on current estimates next year, so for 2021, the market is selling at 20 times earnings. Certainly that’s not cheap given that there is basically no growth. But if you look at normalized earnings, then we’re looking at 18 times earnings.
Bernhard Koepp:
And if we use an inflation number of 1%, then if we use our tool, which is the rule of 20, that is again, something Jim Moltz came up with some 30 years ago. It was a great tool to see what’s the relationship between inflation and the market’s PE ratio. So if you use 18 times earnings for the market, plus 1% for inflation, you get a score of 19. So the rule of 20 says, if you’re above 20, if you add the PE and inflation, if you’re above 20, it’s a very expensive market. If you’re at 20 or about break, even if it’s below that, it’s actually, okay.
Bernhard Koepp:
So based on our very simple rule of 20, this is not a market that’s badly priced. So that said, one last thing we’d like to talk about is the US dollar. It’s very interesting just in the last month, what’s happened to the US dollar versus other currencies in the world. The Euro has started outperforming the US dollar just in the last month. The Euro has been in decline versus the US dollar for over two years now. The peak there was about February 2018, and it’s really been a decline ever since.
Bernhard Koepp:
So the good news here is for our companies, and for our investments is, that the international markets are much more cyclical. So if the international markets and currencies reflect a better outlook, that’s actually a positive sign for the global economy. So for us, it’s quite good to see that other currencies are carrying some of the weight here in this environment, because you cannot have the US dollar constantly being the currency of last resort.
Bernhard Koepp:
So what’s happened to, if you look at our yield curve as well, the longterm rates keep being very depressed, and that’s why every time you see the yields pop up on the longer end 10 year treasuries, you get international money coming in, buying that treasury, and then that yield comes down again. So it’s very interesting to us and very positive to us that there is some out-performance now of the Euro versus the dollar. That’s also good for many of our international companies, as you know, the S&P 500, the market has a lot of companies, or half of the earnings are actually in the S&P 500 come from abroad. That is the same for many of our great technology companies or healthcare companies, a lot of their business is abroad. So if the US dollar is a little bit a weaker versus that, that’s actually very positive for earnings.
Bernhard Koepp:
So in summary, look, we continue to have a pretty constructive view here of the market, as well as the economy. We continue to see very interesting kind of V-shaped type data out of the economy. We’re not only seeing that in the United States, we’re also seeing that in China. I mean, if you look at things like car sales in China, they’re back to the previous peak. We’re seeing that sort of trend pretty much all over the place. I mean, certainly there are sectors, the leisure sector and so forth, that will never come back the way they were before. And that may take years.
Bernhard Koepp:
But in a broad sense, I think things are coming back much quicker than everybody thought. So in terms of markets, we think actually the markets will be higher from this point by year end. Look, there’s plenty of headline risk into the year end, certainly the election is something that’s coming up. Typically, the market starts worrying about the election about in August. So we think there’ll be some volatility there. We think that’s a good opportunity to put new money to work. We will certainly get some volatility after the markets.
Bernhard Koepp:
There’s been a lot of worry about what does a Biden Administration mean for the economy and the market. Look, certainly the Biden Administration has said all along they would raise corporate taxes to 28%. But I think it’s unlikely that they will do that on day one. I think the day one scenario, if it’s a Biden Administration is more on infrastructure. There are certainly the only thing that Republicans and Democrats actually agree on is infrastructure, that is highly supportive for economic activity. So if I would bet on what’s the policy, a process that will be in place after the election, if Biden wins, first thing is they’ll be heavily skewed towards infrastructure, which is positive, and the tax debate will be deferred into 2021, if not 22, because the last thing a new administration would want to do is put something in place that would stop the economy in his track. And certainly raising taxes is one of those.
Bernhard Koepp:
So in closing, I just want to say that I think active management is really back. There’s been a big debate over the years, is indexing a way to go or active management? We are certainly active managers at C.J. Lawrence, and this environment is the perfect environment for us to pick stocks and actually outperform. That’s something that certainly has been good for us. If you’re interested in what we do, give me a call on (212) 888-6342, or visit our website at CJLawrence.com. We’re happy to help you. Again, we manage money for high net worth individuals, institutions, foundations, and family offices. Thank you for listening, and be well.