2017 Year-End Client Letter, Part 6: Conclusion

Link to Part 1
Link to Part 2
Link to Part 3, Section 1
Link to Part 3, Section 2
Link to Part 3, Section 3

Link to Part 4
Link to Part 5

At last, it's time to close our year-end message for 2017: 

Herein we've presented what we believe to be the characteristics of good portfolio managers. We've expressed the sense of security we gain in the understanding that while not all good investments make money, if we strive to make only good investments the odds are strongly in our clients' favor over the long-term. We highlighted the whys and wherefores of the sectors we presently like and those we don't. We shared our views on the importance of maintaining a global investment mindset. We expounded on why we think that (despite valuation) many currency traders once again may be on the wrong side of the dollar going into 2018 -- and how it's perfectly okay for our portfolios if they're right this time. And we discussed the not-so-safe nature of today's bond market as well as our presently not so bullish view of precious metals.

2017 Year-End Client Letter, Part 5: The Dollar, Bonds, Gold and Silver

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Link to Part 2
Link to Part 3, Section 1
Link to Part 3, Section 2
Link to Part 3, Section 3

Link to Part 4


The Dollar:

Several times in this year's lengthy final message we've cited the potential for a rising U.S. dollar to be a headwind for a number of sectors, as well as foreign equities, in the year to come. 

Our view is that a relatively strong U.S. economy, aided by the potential near-term positives of corporate tax reform, not to mention an infrastructure spending package (should it happen), along with a higher interest rate regime, and a Fed that is no longer reinvesting all of the income from its massive balance sheet, are factors that stand to support the dollar -- if not see it rising -- going forward.

Don't get used to it!

Yes, 2017 has been a very good year for equity investors. Honestly, given the overall setup going in, a good 2017 should have been no big surprise to anyone. What has been surprising to us, however, is the remarkably low level of volatility! Make no mistake folks, in that regard, 2017 was highly unusual.

2017 Year-End Client Letter, Part 4: Global Investing

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Link to Part 2
Link to Part 3, Section 1
Link to Part 3, Section 2
Link to Part 3, Section 3

If there's been a common theme over all the years we've been blogging, and, for that matter, managing money, it's that the world is a very big place, and the U.S., in terms of its share of the world's human capital, is a very small place. While we can debate the causes of the miracle that makes the home of a mere 4% of the world's population the far and away world's largest economy, we can't deny the fact that the human race is becoming more connected by the minute and, thus, the nations and institutions that embrace the interdependence that this global connectivity breeds -- while successfully navigating the at times turbulent geopolitical waters -- will prosper the most in the decades to come.

2017 Year-End Client Letter, Part 3: Sectors, Section 3: Healthcare, Utilities, Telecom, Consumer Staples and REITs

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Link to Part 2
Link to Part 3, Section 1
Link to Part 3, Section 2

Here's a brief synopsis of what we view as today's fundamental aspects of the healthcare, utilities, telecom, consumer staples and reit sectors. We want to emphasize "brief", as we could easily offer up a lengthy research paper for each. 

Note, the following relates primarily to the prospects for sectors within the U.S. economy. Our targets are also influenced by our assessment of each sector within other countries -- as we maintain target allocations to foreign markets as well. A topic we'll tackle in Part 4.

2017 Year-End Client Letter, Part 3: Sectors, Section 2: Industrials, Materials, Energy and Consumer Discretionary

Link to Part 1
Link to Part 2
Link to Part 3, Section 1

Here's a brief synopsis of what we view as today's fundamental aspects of the industrial, materials, energy and consumer discretionary sectors. We want to emphasize "brief", as we could easily offer up a lengthy research paper for each. 

2017 Year-End Client Letter, Part 3: Sectors, Section 1: Financials and Technology

Link to Part 1
Link to Part 2

Along with our perspective on general conditions, in our year-end letters we like to offer up some detail in terms of what inspires our sector weightings going into the new year. After bullet-pointing financials and tech below, I realized that if I carry this year's narrative through each major sector in one post I'd be asking our readers to devote far too much of their precious time herein, especially during the holiday season. So we'll stop this one at technology, and dribble out the rest between now and the end of the year.

Pay no mind to Soandso!

Every now and again a client will quote a Wall Street guru's market prediction. Goes something like "Hey Marty, Soandso says the S&P's going up 12% next year." Or, "Soandso says the next bear market (that would be a 20+% decline) is just around the corner."

It's Clearly A Sellers' Housing Market

Econ 101 says that when you have an excess supply of a thing relative to the demand for it, the thing's price will decline.

Of course the 2008 housing crisis was a multifaceted phenomenon, yet this 2001 to mid-2008 simple chart showing the supply of existing homes for sale relative to the monthly sales pace (months supply in inventory), by itself, speaks volumes:

2017 Year-End Client Letter, Part 2: General Conditions

Link to Part 1

Long-time clients and readers know that while we pay very close attention to market technicals (price trend, momentum, volume, breadth, sentiment, etc.) when positioning client portfolios, it's our view of general conditions that holds the greatest sway. The overriding question being, are present conditions conducive to growth in corporate earnings? And, if so, which sectors of the economy are best (and least) positioned given those conditions. Or, if not, which asset classes are best positioned to weather, if not exploit, a less than bullish, or outright bearish, macro scenario. 

This Week's Message: December Trends

Keeping it short and sweet this week (as we prepare Part 2 of our year-end letter [link to part 1]), below are the titles to what we've stuffed into our December '17 trends file thus far.

Bottom line: The global economy presently looks good, U.S. inflation -- while the Fed doesn't (per the December meeting commentary this week) seem to entirely agree -- is clearly brewing, China's debt picture is at the margin improving slightly, the Federal government is collecting a lot of tax money, however, it's spending much more than it's receiving (what else is new?), the Dow's recent results are heavily skewed by Boeing, and the recent rally in transportation stocks suggests good things about the go-forward probabilities for U.S. equities. 

2017 Year-End Client Letter, Part 1: What Makes Us Tick

2017 has been quite the year for the stock market! Predictions annihilated, records smashed, and headwinds bucked like they were never there. My, where to begin?

Of course we'll do the obligatory roundup of returns, show off our economic indicators, tell you what sectors we like and don't like going forward, and see how our opinions of a year ago played out. But how do we get it all started in a way that'll inspire you to remain engaged throughout this year's yarn?

Well, if we were on your end of this letter, and you managed our money, we'd want to know what makes you tick. We'd want to know how you view the world, the markets, and how you approach the business of investing our money. Therefore, we'll devote Part 1 to a brief synopsis of how we do/see things here at PWA.

Goldilocks Consumer

The University of Michigan just released its preliminary December read on U.S. consumer sentiment (an input to the consumer sentiment component of our macro model). The headline number, while plenty high (96.8), came in at the lower end of economists' estimates. 

• Forecast range 96.5 to 102.0 from 57 estimates...

Aha! Well, maybe... maybe not..

While, for three+ decades, I've been preaching to investors that financial markets are the definition of uncertain, that they should never take anything for granted, and that they are to shun all gurus like the plague, there are still moments where I find myself scratching my head when the market doesn't move like I might've guessed.

The past few days would be an example.

This Week's Message: Does It Really Matter How Companies "Spend" Their Tax Savings?

The following is me thinking via my keyboard about an article I just read.

A senator from New York is leveraging Bank of America's plan to add another $5 billion on top of a previously announced $12 billion share buyback campaign to argue that 

"big corporations can smell the huge tax cut they have coming, and rather than raising workers' pay or hiring new workers, they're buying back stock and prepping huge dividend payments," 

Chart of the Day: Piling Into Financials

As we've been reporting for some time herein, we like the setup for financial stocks (presently tied with industrials for our highest target weighting). Therefore, XLF (the largest, and most liquid, financial sector ETF) is a prominent holding in most of our client portfolios.

Apparently, the market is beginning to warm up to our thesis:

Bonus Chart of the Day: Global Economy Better Than Expected

We've been expressing herein often of late (here and here for example) our view that the global economic setup looks quite good. The below (again from Bespoke) suggests that it's even better than economists expected:    click to enlarge

Chart Of the Day: New Home Sales

If you're thinking that the housing market, by way of rising prices, is revisiting its bubbly condition of the mid-2000s, well, you're fretting over our last economic battle. I don't suspect that the housing/mortgage market/s will be the catalyst for the next.

Tax Reform and Its Economic Implications

Posted this early this morning, before the revelation regarding Michael Flynn's pending testimony regarding the President and Russia -- which has the market selling off notably (relative to the lack of volatility the market's experienced this year). Of course there'll be commentary coming your way as dusts settle. 

In the meantime, a little something to ponder: While, clearly, traders are reacting to the potential for political uncertainty to come, we have to acknowledge that the world has been rife with political uncertainty throughout 2017. Of course this feels different/dramatic, but, in the end, will it actually culminate in political certainty? Well, it ultimately has to, one way or another. And, in the end, the market likes certainty. We'll keep you posted....

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We've been reluctant, here on the blog, to weigh in much on tax reform and its market implications. Mainly because, up until very recently, the likelihood of either plan passing -- in the forms presented -- was nil, as neither would wash given the "Byrd Bath" rule (has to be revenue neutral in 10 years to allow for a simple majority vote). Now, apparently, it looks as though the ultimate plan will somehow wash, and, thus, we're on the cusp of tax reform becoming reality.