Julien B. Booth

Principal & Portfolio Manager

jbooth@forestcapital.net

Dana Christner

Operations Manager

dchristner@forestcapital.net

 

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Concord, NC 28027

(704) 750-8000

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Charlotte, NC 28227

(704) 847-0101

(704) 849-0535

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When Math Mattered - Part Deux Amended

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Preference for Wisdom (math) vs. Emotion (hope)

February 9, 2016

Financial markets are purging the excesses of intentional asset inflation (QE). The macro themes that are dominating ALL financial markets include:

  1. Without the methadone of (QE) the asset markets know not what to do = stocks GO DOWN, (remember: QE was used to inflate asset values);

  2. Commodities continue to plumb new, and often historic lows = not a good growth indicator = stocks GO DOWN;

  3. Global growth is rapidly slowing; trade is crawling;

  4. S&P Stock revenues/sales and earnings are contracting-receding, (Stocks should go down - it is the earnings silly!);

  5. Credit availability tightens making the issuance of new credit (lifeblood of economy) more scarce;

  6. The strength of the US $ vs. other currencies perpetuates deflationary forces for US based consumers - NOT so good when you have to import goods (i.e.

    Japan, Canada et al.).

  7. And the loop continues, see #1 above.

The BOND MARKET has been screaming these macroeconomic warnings since the Federal Reserve (attempted) to raise rates (see chart attached) - what they got was yields crashing to new-historic lows, a flattening curve (indicates slower growth), and a surging US$ dollar. The bond market always leads (bond prices are up substantially) the more emotional stock market - but they (stocks) always reconcile.

 

Brokers and banks have been selling a "rising rate" fear trade for 7+ years. The only thing investors have lost is LOW RISK INCOME RETURNS. If nothing else, please consider using a fiduciary that invests alongside their clients. The brokers practice legal larceny-always pushing stocks.

 

Quality bond prices are up - municipal bonds, mortgages, and preferred securities remain the safest mechanism for generating yield + protecting capital @ this juncture. Closed end funds that own these assets are very attractive-but do have substantial price (but not NAV) volatility. At some level stock prices will become very attractive. Bonds may be boring; but they are working.

 

A primer from a very wise man: http://www.cnbc.com/2016/01/20/bridgewaters-dalio-feds-next-move-toward-qe-not-tightening.html

 

Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead. Howard Marks 2016 - https://www.oaktreecapital.com/insights/howard-marks-memos 

 

As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at jbooth@forestcapital.net.

 

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