3rd Quarter 2017 The Risk Reward Trade-Off

CLIENTS OF THE FIRM

The third quarter of 2017 ended with stock markets at record notational highs.  This fact, again prompts us to look at the risk/reward tradeoff that characterizes successful long-term investing.  Much of the current environment is supportive of stock prices although prices are now at the high end of historic ranges with the S&P 500 trailing P/E ratio of 24.22 and forward P/E ratio of 19.19.  Bond prices remain well above normative ranges and consequently bond yields remain depressed, at least for the time being.  US GDP growth was 3% for the 2nd quarter ahead of the trend 2% level for the past several years.  Unemployment is near record lows and manufacturing activity has picked up recently. In addition, the potential for both corporate income tax cuts and repatriation of overseas assets has enhanced bullish sentiment.   Notwithstanding the daily political turmoil, these data points have led many to believe that the elusive escape velocity of the US economy may finally be at hand, thereby justifying current stock prices and elevated forward P/E ratios.

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Peter Wernau
2nd Quarter 2017 Investor Letter

CLIENTS OF THE FIRM,

The first half of 2017 has been punctuated by political and international drama.  While this has been noisy and created consternation for both right and left, it has failed to derail the equity bull market particularly in technology.  Here, earnings have accelerated and we are finally seeing an amplified cannibalization of traditional business, particularly brick and mortar retail.  Earnings for the first quarter were solidly in-line or above expectations for the S&P 500 and dollar-strength was contained.  Interest rates, while rising substantially above pre-election lows, remain at levels that are well below normative ranges.   

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Peter Wernau
1st Quarter 2017 Investor Letter

CLIENTS OF THE FIRM,

The first quarter of 2017 has largely played out according to our expectations with assets behaving in a manner consistent with the unfolding political landscape.  While in the past week market sentiment has shifted somewhat, the underlying economic conditions remain sound and supportive of investment.  This letter will focus on the shifting political landscape, stock and bond prices and the value of the dollar and what to do with a correction in prices. 

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Peter Wernau
Market Outlook 2017

CLIENTS OF THE FIRM,

As the end of 2016 rapidly approaches, we look back on a volatile year in which we saw a very dynamic stock market stoked by the surprise election result and the long-awaited move higher in interest rates begin to materialize.  Our forward focus remains on identifying undervalued investments in a higher price and higher rate environment and the underlying factors that drive incremental profitability in businesses we own and aspire to own. 

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Peter Wernau
Market Outlook Q3 2016

CLIENTS OF THE FIRM,

As we near the end of Summer and the leaves turn amber and brown, permit us to wax a bit poetic at the season that was and what the turn of autumnal clock may bring for our investments. Recently, several macro-economic themes have become clearer as they often do when the mind opens and we turn the page of the calendar.  We will try to distill them here.

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Peter Wernau