Note Précis April 25,2018: Inflection Still Looms – In the equities, fixed income, currencies and commodities space of capital markets as well as in politics, whether raw or on trade. The Federal Reserve with a new Chairman has emphasis on reducing its massive quantitative ease, likely with other central banks at differing paces. Unlike say 1987, there appears no overt manipulation in major currencies but the relative stability in the U.S. dollar, Yen, Euro and Renminbi spaces seems ephemeral to us. Similarly, while 10 year U.S. Treasury Note yields are up 2 ½ times from their lows of June 2016 with BBB Corporate and Emerging Country fixed income aggregate yields at 12 month highs, more risky CCC Corporate yields are closer to 12 month lows. Losses in fixed income holdings have been building but sales may be occurring where possible rather than where needed.
Speak softly but carry a big stick well served statesmen like President Eisenhower and central bankers like Chairman Volker. Bluster without specific backup and subsequent backtracking accentuates the risk of miscalculations by adversaries. We see such subtext in French President Macron’s speech to Congress. We would be underweight fixed income and focus holdings on short duration. Currencies usually lead so their volatility could be latent. We see these political and currency issues as contributory to overweighting precious metals as an alternate asset in portfolios.
The efficacy of earnings beating consensus has deteriorated away from being informative. Currently, earnings management appears only exceeded by the penchant of dictators for over 99% approval ratings. More instructive, individual companies across industries and worldwide appear to be emphasizing that revenue competition remains intense. At present valuations, limited appear to be the margins for error for not being able to continually deliver double digit growth. Globally, so called market valuation gaps for Europe and Japan have much to do with Consumer Staples weights. We would also be wary of using arguments based on forward earnings based valuation comparisons against historical averages, which we stress are usually trailing earnings based. More equity selectivity appears in order over momentum and ETF stances. As financing conditions evolve, leadership from the Financials sector will be critical.
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