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billehrman · 3 years

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Growth versus Value

Growth Versus Value

The financial markets are fighting a tug of war between an accelerating economy, a steepening yield curve, and investing in growth vs. value stocks. Growth stocks are considered longer term duration assets while value stocks, in this instance, are companies tied to the economic recovery with significant operating leverage in the expansion. A steepening yield curve, which we continue to forecast, will penalize all multiples, but growth stocks will be hit harder as their multiples compress more as duration shortens. Value stocks will benefit from a surge in profits more than offsetting any multiple decline as the recovery gains steam.

We expect first quarter earnings reports to be very telling and confusing as businesses were hurt by weather and shortages, especially semi-conductors, which penalized auto sales and other industries. Shortages are likely to persist for several quarters so the key will be watching orders and backlogs as true indicators of a company’s strength and potential earnings power. We would use any confusing first quarter results to add to positions to companies leveraged to the economy as we expect the expansion to last well into 2023. That expansion would be supported by expansive monetary and fiscal policy, as well as trillions of excess liquidity in the system. Naturally, getting our arms around the virus globally, which we still see globally by the end of this year, is key when evaluating the sustainability of the expansion. Don’t forget when investing that we are just in the very early innings of a surge in global economic activity, steepening yield curves. and much higher corporate earnings/cash flow so invest accordingly! We are concentrating in areas with both cyclical and secular winds to their backs.

We continue to focus on the virus, monetary and fiscal policy, and current economic data points to see if the recovery is unfolding as predicted and has legs.

News on the virus domestically continues to brighten by the week while news abroad continues to be disappointing. It is interesting that countries with the highest incomes are vaccinating 25 times faster than those with the lowest incomes. As of Thursday, 40% of COVID vaccinations administered globally have gone to people in 27 wealthy nations that represent 11% of the global population. The U.S, for example, has 24% of the world’s vaccinations but just 4.3% of the population. It is clear that all Americans could easily be vaccinated by the summer and all in the world before late fall such that the recovery will be sustainable into 2022 and beyond.

We continue to hear from the heads of all monetary authorities that they will maintain overly accommodative stances well into the recovery and will not even consider raising rates until the end of 2023 at the earliest, even if inflation runs hot, as expected, for a few months. Fed Chairman Powell spoke Thursday at the Spring meeting of the IMF and reaffirmed his view that it will take years to bring back employment levels to pre-pandemic levels and that the recovery remains uneven and incomplete. Fed minutes from the last meetings on March 16 -17th pointed to a brighter outlook for the economy while agreeing to provide continued support through ultralow interest rates and large monthly bond purchases. The Fed is so focused on unemployment repeating again, that rates will not be hiked until the labor markets reach maximum employment (another 10 million jobs) and inflation sustains at or above 2%. Powell said that “changes in the path of policy will be based primarily on observed outcomes rather than forecasts.” Isn’t it time that we believe the Fed, BOJ, ECB and Bank of England that they will let economies run hot, even overheat, before adjusting policy? We do! Doesn’t that favor value stocks with cyclical/secular strengths over growth stocks with lots of potential multiple compression?

The debate about Biden’s proposed “American Jobs Plan” and human infrastructure plan began in earnest last week focusing on defining infrastructure and how best to pay for it while remaining globally competitive. We believe that the plan will be divided in two parts. First it will focus on a $1.5+ trillion infrastructure bill for roads, bridges, ports, transportation, broadband and some green spending and another, over $1 trillion, dealing with human infrastructure like free community college, caregiving, long-term care and prescription drug overhaul. The Democrats do not want to go to a budget reconciliation process as many “social” parts of both bills won’t make it and several Democrats do not support much of the tax plan to pay for them. Even Biden acknowledged last week that he is willing to negotiate many aspects of the tax bill as long as there is enough money there to fund both plans.

Interestingly, Janet Yellen raised the issue last week for a global tax rate to “make sure the global economy thrives based on a level playing field…that spurs innovation, growth and prosperity.” The bottom line is that we still see the corporate tax rate increasing but only to around 25% with incentives for hiring, research and domestic capital investment. Individual taxes will go up, too, but we believe that the definition of wealthy may increase from $400,000 to a number closer to $500,000. Closing loopholes, broaden the tax base, user fees, and increasing collections will be major components of both tax bills. While we expect the large infrastructure bills to be passed this year, we do not see it benefitting the economy until 2022 and it will be spent over 10 years with added tax revenues collected cover 15 years.

Let’s take a look of some of the most recent data points that confirm that the economic recovery here and even abroad has begun: consumer credit rose a staggering $27.7 billion in February, mostly non revolving credit; U.S. jobless claims increased to 744,000 which shows that the labor market has a long way to go; Services PMI increased to 63.7; Business Activity Index at 69.4; Employment Index at 57.2; Supplier Deliveries at 61.0; and the PPI Price Index for final demand increased 1% in March with final demand prices up 0.5%.

The IMF increased its global forecast last week saying that “a way out of the crisis is increasingly visible.” The world economy is now projected to increase 6% in 2021 vs a forecast of 5.5% back in January and 4.4% in 2022 vs a forecast of 4.2% in January. Specifically, growth in 2021 is forecasted at 6.4% for the U.S., 4.4% for the Eurozone, 3.3% for Japan, 8.4% for China and 12.5% for India. Global trade volumes are forecasted to increase 8.4% which will help lift all boats. By the way, China’s auto sales are now above pre-pandemic levels exceeding 5 million in the first quarter.

Investment Conclusions

We are in the early innings of a global economic recovery that will extend well into 2023 supported by easy monetary and fiscal policies plus trillions of excess liquidities already in the system. We applaud Janet Yellen’s efforts to have a universal tax code but think chances of one being agreed to, let alone adhered to, are very low, but do indicate her desire that the U.S. have a competitive tax rate, which argues against the proposed 28% rate.

While markets have primarily been driven by excess liquidity over the last year, it will, if it has not already, shifted to one driven by higher earnings as the global economy recovers. Herein lies the debate between growth and value stocks. We shifted our portfolios months ago to companies leveraged to the economy expecting much higher earnings than consensus over the next few years driven by higher volume, improved pricing and record operating margins. Areas of concentration include global capital goods/industrials/machinery companies; industrial/ag commodities; financials, transportation, special situations and technology at a price. Yes, we continue to own some technology as every company in the world to remain competitive and improve operating efficiencies must step up its tech spending. We are focused on areas with the wind towards our backs including infrastructure, 5/6G, broadband, EV, green technology, and building back better in America. We do not own bonds nor any highfliers where we see significant multiple compression.

Our investment webinar will be held on Monday April 12th at 8:30 am EST. You can join the webinar by entering https://zoom.us/j/9179217852 in your browser or calling +646 558 8656 and entering the password 9179217852.

Remember to review all the facts; pause, reflect and consider mindset shifts; look at your asset allocation with risk controls; listen to as many earnings reports as possible; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prosperite LLC

[email protected]

917-951-4139

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xtruss · 4 years

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Space

Summer on Mars: NASA’s Perseverance Rover Is One of Three Missions Ready to Launch

— A new generation of orbiters, landers and rovers will study the Red Planet as never before, setting the stage for returning pristine samples to Earth

— By Jonathan O'Callaghan | July 7, 2020 | Scientific American

Mated to its interplanetary “cruise stage,” NASA’s Perseverance rover sits within a bell-shaped back shell shortly before being attached to the brass-colored heat shield. The next time the back shell and cruise shell will separate should be less than 10 kilometers above Jezero Crater on Mars in February 2021. Credit: NASA, JPL-Caltech and KSC

If space exploration was a popularity contest, Mars would be struggling for admirers. Once the darling of 20th-century planetary scientists, the world’s allure has cooled somewhat as other exciting locales—the woefully unexplored Venus, for example, or Saturn’s thrilling moon Titan—begin to turn more heads. But Mars is not relinquishing its time in the limelight quite yet. This summer, three new missions are launching to the Red Planet—and at least one of them could reinvigorate interest in Mars with a renewed search for life there.

On July 14 the United Arab Emirates’ Hope orbiter—the first interplanetary spacecraft ever built by the the country—is scheduled to take off for Mars on a Japanese rocket. In the same month-long launch window—which occurs every 26 months, when the planet aligns with Earth for easier traversal—it will likely be joined by China’s Tianwen-1 orbiter and lander, also a first mission to Mars for the rising space power. And NASA’s Perseverance rover, the U.S. space agency’s latest effort to hunt for life on the planet, will probably launch in that window as well. A fourth mission, Europe’s Rosalind Franklin rover, was supposed to join this Martian armada. But it was delayed until 2022, in part because of the coronavirus pandemic. Nevertheless, these three missions are as clear a sign as any that the Red Planet has not lost its appeal just yet.

NASA’s exploration of Mars has been steadily consistent. Following the Mariner probes in the 1960s and 1970s, which returned the first images of the planet, the Viking 1 and 2 landers became the first—and still the most ambitious—missions to search for Martian life. While inconclusive, the Viking landers were followed by subsequent orbiters and rovers, culminating in the Curiosity rover’s landing in 2012, that have painted a fascinating picture of what the world was once like. “We’ve learned that Mars has a diversity of habitable environments,” says astrobiologist Kennda Lynch of the Lunar and Planetary Institute in Houston. “People are more positive for potentially being able to find evidence that life, in some point in Mars’ past, existed.”

Perseverance is the next step in that journey. The rover is now scheduled to launch between July 30 and August 15, after a slight delay because of the late discovery of a minor hardware problem in the final stages of testing. If all goes as planned, it will touch down in a fascinating region of Mars known as Jezero Crater on February 18, 2021. Measuring 45 kilometers across, this crater is home to a multi-billion-year-old river delta, an environment that may have preserved clear signs of life on the early planet.

“This is an impact crater that has ancient river valleys over 3.5 billion years old that fed water into the basin of the crater, a standing lake about the size of Lake Tahoe in the U.S.,” says Timothy Goudge of the Jackson School of Geosciences at the University of Texas at Austin, who led the case for Jezero during the landing site selection process. “It’s not the only delta on Mars, [but] it’s one of the best-exposed. Lakes on Earth are very good habitable environments where life flourishes. And delta deposits can preserve a record of any potential life that was extant within the lake.”

Armed with a suite of instruments, Perseverance will probe this region in exquisite detail. In some respects, the rover is a twin of Curiosity: the two outwardly appear almost identical. Their landing systems will match, too. Both use the same sort of autonomous, rocket-powered “sky crane” platform that previously lowered Curiosity on cables to a gentle, pinpoint touchdown on the Martian surface.

While similar in appearance to Curiosity, under the hood, Perseverance is a vastly different beast. The rover has benefited from a number of upgrades, including an improved, more precise landing system and hardened wheels to better cope with the rough Martian terrain. And whereas Curiosity’s tools were suited to assessing the habitability of Mars, Perseverance will be more focused on the hunt for evidence of life itself.

“We’re seeking signs of life, and that motivates a different suite of instruments,” says Ken Farley, project scientist for Perseverance at NASA’s Jet Propulsion Laboratory. “On the robotic arm, we have an instrument called PIXL, which measures the elemental distribution in a postage-stamp-sized area of rock. In that same area, we can take visual imagery with an instrument called WATSON. And we can measure the distribution of organic matter with an instrument called SHERLOC. These things together provide the most compelling way to find evidence of the kind of simple life that might have existed on Mars.”

That evidence could include signs of fossilized microbial life hidden in Jezero’s substantial deposits of carbonate rocks. On Earth, such environments have preserved ancient stromatolites, moundlike layered structures formed by primitive microorganisms. “Those could be left in the rock record as macro-sized fossils that we might be able to see,” says Kirsten Siebach, a Mars-focused geologist at Rice University. “That’s pretty ambitious. It would be a strong claim to say we expect that. But those are the kinds of things we’re looking for.” Such evidence will be examined using SHERLOC’s ultraviolet Raman spectrometer, the first of its kind on Mars. Doing so will allow the composition of rocks to be measured without first vaporizing them with laser beams (the more destructive technique employed by Curiosity).

Perseverance alone might not be able to understand this evidence, however. One of the rover’s key objectives is to collect samples of potential astrobiological significance and then store them in small caches on the Martian surface. The plan is for a future sample-return mission to land, pick up the caches and launch back to Earth in about a decade. The exact logistics of that mission are not clear, but it will likely be an international effort involving NASA and the European Space Agency that will arrive around 2028 and bring the samples to our planet in 2031. “Ultimately to really confirm the presence of biosignatures, the samples are going to have to be returned to Earth,” says Frances Rivera-Hernandez, a planetary geologist at Dartmouth College.

Perseverance has a few more tricks up its sleeve, too. An instrument called MEDA will monitor the Martian weather, while MOXIE will practice producing oxygen from carbon dioxide in the Martian air—which could be a critical tool for future human missions. The RIMFAX instrument will be the first ground-penetrating radar landed on Mars, able to detect water and ice to depths of 10 meters. And a variety of onboard cameras will reveal the rover’s surroundings in unprecedented visual clarity, producing videos of the surface, as well as detailed footage of the landing itself.

If that was not enough, the rover even has a “helicopter” named Ingenuity tucked into its belly. Weighing just shy of two kilograms, Ingenuity will be deployed and operated in the first 90 days of the mission. And it will constitute the first attempt at aerial flight on another world. “The helicopter is unlike anything we’ve ever really built before,” says Matt Wallace, deputy project manager of Perseverance at NASA’s Jet Propulsion Laboratory. Although mostly just a technology demonstration, Ingenuity will also attempt to take images of Mars from the air, including pictures of the rover that carried it to the surface.

Following the landing, Perseverance will spend its two-Earth-year primary mission exploring Jezero Crater, studying and collecting signs of life. After this task, the rover could be driven out of the crater to explore another nearby region, called Midway, that is rich in carbonate rocks. “People believe it is another habitable environment,” Farley says. Some house-sized rocks there could also be pieces of the planet’s mantle thrown out by the impact that formed Jezero—intriguing targets of study that could potentially yield new insights into the Martian subsurface.

Joining Perseverance at Mars will be Hope and Tianwen-1. The former is an orbiter designed to study the atmosphere of the world. Over the course of a Martian year, it will also examine the planet’s climate—including massive dust storms, one of which led to the demise of NASA’s Opportunity rover in 2018. Aside from its science goals, however, Hope is intended to signal the United Arab Emirates’ shift from an oil-driven economy to one focused on science and engineering. “Our space program and Mars mission is a means for a much bigger goal,” says Omran Sharaf, Hope’s project lead. “It’s about the future of the U.A.E.”

China’s Tianwen-1 mission is similarly a statement. The nation has already showcased its cosmic aspirations by launching humans to space, developing a space station and conducting lunar missions, including the first ever landing on the far side of the moon. Now, with Tianwen-1, it aims to prove it is an interplanetary space power, too. “It would bring a lot of prestige,” says Andrew Jones, a journalist that covers spaceflight in China. “Only NASA has been able to land and operate on Mars.”

Tianwen-1 will be slightly unusual, however. After arriving at the planet in February 2021, it will linger in orbit for months before it deploys its lander and rover and attempts a landing—perhaps in Utopia Planitia, not far from the Viking 2 lander. The rover will then drive off its landing platform and study its environs with its six instruments—including a radar device to study ice and water under the surface and a laser tool to measure rock compositions. Its intended lifetime will be three Earth months.

Hope and Tianwen-1 are worthy efforts in their own right. But it is Perseverance that will likely take center stage in this next act of Mars exploration. It is a jack-of-all-trades machine, almost comically overstuffed in its mission ambitions. Perseverance will fly a helicopter on Mars, produce Martian weather reports and even make oxygen out of thin air. Its greatest trick of all, however, is just how close it will bring us to knowing if we are truly not alone in this universe. “We’re entirely on new ground,” says Thomas Zurbuchen, associate administrator of the Science Mission Directorate at NASA. “That’s what makes it so exciting.”

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billehrman · 4 years

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Navigating the Years Ahead

Powell’s speech at Jackson Hole entitled “Navigating the Decade Ahead” was pivotal for investors as he presented the Fed’s revised view of the inter-relationship between employment and inflation on Fed policy. Powell/the Fed basically acknowledged that the Philips curve was dead (something that we wrote about several years ago). The Fed will remain all in for years permitting the economy to expand and inflation to increase beyond where it once would have begun to raise rates and reduce liquidity. Notwithstanding, we believe that long term inflationary pressures will stay muted due to the competitive effect of globalization, technological advancements, disruptors, and rising productivity such that the Fed has little to fear. We totally agree with this new Fed policy.

Powell and the Fed has committed to keeping the funds' rate near zero while providing all the liquidity needed by the economy for several more years without worrying whether inflation rises over 2%, their historic benchmark. The simple truth is that the Fed is concerned more about a persistently weak economy and deflationary pressures just like their ECB and BOJ counterparts. Since we are now even more convinced than ever that the Fed will provide wind to our backs for several more years which is our number one core belief, we, therefore, remain favorably inclined toward the stock market, industrial commodities, and gold. On the other hand, we would continue to avoid bonds of all durations.

Our favorable investment outlook is supported by our belief that we will have vaccines before year-end; more effective therapeutics/cocktails and procedures to further minimize the death rate shortly; and quick response testing before the end of September such that opening can accelerate as we move into 2021. We expect the economy to improve sequentially but not return to pre-pandemic levels until we all can be vaccinated which won’t happen until sometime in 2022. Unfortunately, there is no agreement on a supplemental stimulus program to replace the Cares Act which expired on July 31st. Hopefully, they come to their senses soon as we can already see changes/reductions in food purchases by those most affected.

Since the Fed policy shift is really a game-changer, we want to discuss it a little more. The Fed unanimously agreed to change a practice that it had followed for three decades, that of preemptively lifting interest rates to head off higher inflation. Powell acknowledged that “a robust job market can be sustained without causing an outbreak in inflation”. The policy shift is that the Fed will wait to see a surge in inflation before acting rather than anticipating an increase in inflation as unemployment dropped beneath a certain level, historically 4.5%. While the Fed still wants inflation to run around 2% over time, it is now willing to let it stay above that level for an extended period of time just like it has run beneath 2% for the last few years. Powell concluded that the “persistent undershoot of inflation from our 2% longer-run objective is a cause of concern.” The implications are that the Fed will let the economy run further even when inflationary pressures are increasing before tapping the brakes. Right now, we do NOT see the Fed altering its policy until the economy has been on firm footing above pre-pandemic levels for several quarters which will not occur until the end of 2022. Net-net: zero federal funds rate for 2 plus years plus immense liquidity creation which will continue to force investors further out on the risk curve favoring equities, industrial commodities, and gold.

Another game-changer was the news that Abbott’s $5 COVID-19 rapid antigen test got emergency use status from the FDA. This low-cost rapid response test can be administered in a doctor’s office or school nurse’s office and uses technology similar to home pregnancy tests. It returns results in about 15 minutes and is about 97% accurate. The company expects to ship over 50 million tests in October and far more by the end of the year. The government alone is contracting for 150 million tests to be distributed nationwide. Use of tests such as this will broaden out and be used by companies, airlines, hotels, restaurants, etc., throughout 2021 which will permit a faster, safer opening of America which bodes well for our economy.

The government commented that it expected a vaccine produced by Astra Zeneca to be available by November. We remain optimistic that Moderna and Pfizer will successfully conclude Phase 3 testing before November, too. The Regeneron cocktail is being shown to be a very effective treatment of the coronavirus. Additional comments from Merck last week support our view that they, along with J&J, will have the most efficacious vaccines by mid-2021 along with several billion doses available to distribute worldwide.

The one near-term fly in the ointment is the failure of our government to agree to a supplemental stimulus plan but we expect pressure to build exponentially over the next few weeks such that a plan will be agreed to before the end of the benefits provided by executive order. If not for that, we would be raising our economic outlook for 2021 now as the rapid response test is a near-term game changer.

It is interesting to note the differences between the Democratic and Republican virtual conventions. The Democrats were all about the difference in personalities while the Republicans focused on substance/programs. We are socially liberal but fiscally conservative like most of our friends. We wish that there was a viable independent candidate who shared our views. We expect the election to get closer by the week as so much will depend on the virus, the economy, and social unrest. We found it interesting that Pelosi and many Democrats do not want any debates about substantive topics.

Investment Conclusions: Navigating the Years Ahead

Our positive outlook for Fed policy, vaccines, therapeutics, and testing has only been reinforced by the events of the week. On the other hand, we remain so disappointed by the failure of our government to represent the people over politics. Notwithstanding, we expect an additional stimulus bill, even a slimmed-down version, to be agreed upon by the end of September pressured by the growing needs of individuals and small/medium size companies for support just to survive.

We know for a fact that the Fed is “all in” for at least another two years meaning virtually zero cost of short-term funds plus all the liquidity needed to bridge to and go beyond the other side. While we see the yield curve steepening as our economy, as well as that of the rest of the world, improves in 2021, we do not see inflation rising anywhere near 2% on a sustained basis until sometime late in 2022 after we all have the ability to be vaccinated and the economy is finally above pre-pandemic levels.

Low interest rates, which is the discounting factor for valuation, for an extended time plus excess liquidity/strong banks capital ratios translates into a stock market multiple averaging around 25 for the next few years. We have long argued that pure growth companies whose earnings have grown throughout this period and will only get stronger on the other side deserve to at least maintain their relative multiple premiums while value companies, whose earnings won’t return to pre-pandemic levels until early 2022, justifiably sell at discount to the market.

While we do not agree with much of Biden’s economic program, we doubt, regardless of what he says, that he would raise taxes until the economy is on firm footing which won’t be until sometime in 2022. We do expect, however, Biden or Trump will attempt to pass several demand stimuli bills in 2021 to boost the economy and increase employment.

Our portfolios continue to be concentrated in the new normal winners. As Marc Benioff, head of Salesforce, said “the era of digitalization has accelerated by several years” which only adds to our conviction in those companies tied to the internet. Fortunately, Salesforce is one of our largest holdings. Its stock advanced nearly 30% last Wednesday after its surprisingly strong earnings and outlook. Its best days remain ahead. The same can be said for all of our new normal winners.

We added last week to our holdings in economically sensitive stocks as we see sequential gains in the economy as vaccines successfully pass Phase 3 testing, become available in the fall, and fast response tests are rolled out across the country within two months. Each of these companies have navigated successfully through the pandemic; are financially strong; continued to invest while generating substantial free cash flow; will come out winners on the other side; sell at a substantial discount to the market; and yield around 3%.

We recommend a portfolio of defensive growth companies yielding above 3% instead of bonds. These companies are growing earnings and dividends between 8 and 12 percent a year; generate substantial free cash flow and offer 12-15% total annual returns.

Our weekly investment webinar will be held on Monday, August 31st at 8:30 am EST. You can join by entering https://zoom.us/j/9179217852 into your browser or dialing +646 558 8656 and entering the password 9179217852,

Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; turn off your business news; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prospérité LLC

917-951-4139

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billehrman · 3 years

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Growth versus Value

Growth Versus Value

We continue to focus on the virus, monetary and fiscal policy, and current economic data points to see if the recovery is unfolding as predicted and has legs.

Investment Conclusions

Invest Accordingly!

Bill Ehrman

Paix et Prosperite LLC

[email protected]

917-951-4139

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billehrman · 4 years

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The Cyclical and Secular Case

It is clear that we are going to have a strong cyclical recovery beginning in a few months as the weather warms, the number of cases/deaths peak, vaccines are readily available, and the economy reopens.

Listening to Starbuck's and Disney's Investor Days shifted our attention to a powerful secular story evolving in the new normal that will positively impact long-term valuations and stock prices. The key matrix will be whether management is up to the task, recognizes the need to change, implement the right strategies, and finally, executes. You must think and be patient, as an investor, as none of this will occur overnight. But the longer-term positive implications on growth, operating margins, profitability, and cash flow are powerful forces that will lead to higher valuations. Firsthand independent research will play a major role in the decision-making process, which is our forte. You've got to do the work.

Our primary concern is government. It appears that success is a bad thing in their eyes. The case against Facebook is a joke (we read the complaint), as is the one against Google. You can't rewrite history. What’s more, creativity is not being stymied, as evidenced by the record level of new issues and monies raised this year for startups. There have never been more new companies/disruptors started than right now. One of the reasons that a vaccine was found so quickly was that project "warp speed" cut a lot of red tape along the way. Do we really want to go back to more regulations? Of course, we need to be careful and diligent, but too much regulation stifles progress and growth unnecessarily.

Both parties want an additional stimulus bill before year-end, have agreed on an amount, but can't close the deal, which jeopardizes needlessly those most in need. The same goes for politicians in Europe who have had years to complete a Brexit deal. It's nuts that politicians continue to get in the way of doing what is right for the people that they represent. It's time to work together and get things done.

Notwithstanding, we still expect several additional stimulus bills in the trillions next year focused first on assisting those most in need and then, secondarily, creating jobs/promoting growth. The magnitude of the bills will depend on the Senate vote in Georgia early next month. The Dems want to spend more and the Republicans less.

The FDA panel endorsed Pfizer and BioNTech SE vaccine Thursday evening, clearing the FDA's way to grant emergency authorization for those over 16 years old. We would expect Moderna to get approval next week. This truly is great news, and we fully expect sufficient doses to be available by late spring such that all in the U.S. can be vaccinated. We remain very optimistic that J & J's vaccine, which is one dose rather than two, will get approval by February and be the vaccine of choice. There will be enough doses available by late fall such that everyone in the world who wants to get vaccinated can be.

Life here will begin to return to some sense of normalcy before the summer, but certain changes, will be permanent, like utilizing the internet for purchasing from home; using Zoom for meetings rather than traveling (permanently impacting airlines, hotels, and restaurants); more work will be done from home, etc. In the new normal there will be a new set of cyclical/secular winners.

Disney and Time Warner's announcement of streaming first-run movies is another example of a huge shift. Disney reached its 5-year goal of having 89 million subscribers in year one (wow!); raised its 5-year forecast for subscribers threefold; raised prices; doubled its investment in content; and shifted its long-term business strategies accordingly. Clearly streaming is their primary focus ala Netflix.

Starbucks has altered its long-term strategy as well by shifting its mix of new stores and locations, which lowered its cost structure and raised its profitability accordingly. SBUX raised its 5-year forecast meaningfully. Both Disney's and Starbuck's presentations were comprehensive and can be found on their websites. Besides cyclical improvements expected in the immediate futures for both, there are powerful secular trends occurring too, which will lead to higher earnings, returns, and valuations. Both stocks hit all-time highs this week.

Disney and Starbucks are just the tips of the iceberg. Mindset shits abound. While we have focused on the cyclical recovery, it is clear that the real story is the secular change occurring across the board due to the pandemic forcing managements to look inward at both their short- and long-term business plans/objectives. Again, we suggest reading the WSJ article about how Dave Farr, head of Emerson Electric, made strategic decisions during the pandemic. While he focused on the near term, he also focused on how EMR would come out stronger on the other side.

The powers to be in Europe and our Fed understand the near-term economic risks of the recent surge in coronavirus cases/deaths. The ECB raised its Q.E. program by 500 billion euros and extended the terms into 2022, while the European Union leaders are about to sign off on an additional $2.2 trillion stimulus package. We do not know whether there will be a Brexit deal before year-end or if it may be kicked down the road another few months. We are confident that Europe will have a cyclical recovery as the virus is controlled but are less certain about their secular trends unless substantial policy changes are made to make the region more competitive globally.

China and other countries in the Far East are well-positioned both cyclically and secularly as world trade improves. It is simply amazing how quickly these economies have recovered. Have you seen China's trade numbers? Incredible surpluses!

Investment Conclusions

While we have not altered our view that the cyclical recovery in 2021/2022 will be much stronger than generally perceived, we also feel that the secular outlook for many companies has improved considerably that is not currently understood by the street, which creates a unique investment opportunity for us to profit as long-term investors.

Financial markets are first and foremost driven by liquidity. It is clear that the Fed and all monetary bodies around the world will remain all in for at least another 18 months, which will continue to force investors further out on the risk curve. In addition, there are trillions of excess liquidity still in the system looking for a home. And it won't be bonds as we continue to see the yield curve steepening, albeit slowly, despite efforts by the Fed buying longer-term maturities.

It is clear that Biden and his administration would like to pass trillions of additional stimulus in 2021, which will supercharge the economy as we open up as the weather warms, openings accelerate, pent up demand is slowly met, inventories are built, and everyone who wants to gets vaccinated. Growth abroad is closely aligned, which means a synchronous recovery by the second half of the year, which we have not seen in a decade. Global trade should boom, benefitting China, especially.

The margin story is alive and well. Since corporations have learned to do more with less, unemployment will remain higher during the recovery than the Fed may expect, posing a dilemma for them as inflationary pressures build as utilization rates and hourly wages rise. Large productivity gains will offset higher wages to some degree. We expect the Fed to remain accommodative longer letting the economy run hot, which is part of our investment thesis.

The pandemic has forced management to do a total review of their business strategies (like Dave Farr), making needed changes to first survive through the pandemic while also focusing on the other side enhancing their competitive position, profitability, and returns. In other words, we see both cyclical and, more importantly, secular trends at play, which will lead to higher future valuations and stock prices. But not all companies are alike.

We see particular opportunities in global industrials/capital goods, industrial commodities, transportation, and many special situations whose valuations do not reflect changes in cyclical/secular trends. Technology remains a portion of our portfolio as these companies are the prime reason corporations can do more with less. Their secular trends are great but more or less fully reflected in their stock prices. Continue to reduce exposure to defensive stocks and sell all bonds.

Our investment webinar will be held on Monday, December 14th, at 8:30, am EST. You can join by entering https://zoom.us/j/9179217852 into your browser or calling +646 558 8656 and entering the password 9179217852.

Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prospérité LLC

917 951 4139

0 notes

billehrman · 4 years

Text

The Cyclical and Secular Case

Investment Conclusions

Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prospérité LLC

917 951 4139

0 notes

billehrman · 4 years

Text

Navigating the Years Ahead

Investment Conclusions: Navigating the Years Ahead

Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; turn off your business news; do independent research and …

Invest Accordingly!

Bill Ehrman

Paix et Prospérité LLC

917-951-4139

0 notes