Tariffs, Tweets and Valuation

Clients of the Firm,

As we start the second quarter of 2018, volatility continues in the market, precipitated by fears of a trade war with China through tariffs and the response to the Fed tightening cycle.  Last night, the Trump administration proposed tariffs on over $50 billion of China’s imports.  This proposal would assess levies on 1,300 categories of products.  Tariffs of 25% would apply to goods from medical equipment to chemicals. 

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Peter Wernau
Market Correction and Value

Clients of the Firm,

The steep decline of over 11% in the market from its peak this week gives us pause, of course.  Corrections of this speed are fairly rare.  Yet, many corrections have happened of this magnitude in most bull markets.  In fact, we have seen several declines like this even in the bull market we have recently experienced since March 2009.  The obvious question is: Will this time be different?

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Peter Wernau
Tax Reform and the 2018 Market Outlook

Clients of the Firm,

A new US tax bill was signed into law just before Christmas in 2017, bringing with it a myriad of questions and considerations as we enter 2018.  The impact of the tax law on the stock market, bond market, and Fed is still uncertain at this point, but initial indications is that it is positive..  Entering 2018, the stock market is at all-time highs. We continue to see the prospect of future potentially positive economic news fueling further gains, although at a more measured pace.  Finally, the likelihood of higher inflation and higher interest rates has increased for the coming year as synchronized global growth and the Fed’s tightening policy begin to have impact.        

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Peter Wernau
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