#he raised them fed them built a safe strategic home for them

[billehrman]

The Other Side

The Other Side

Who would have thought that we would be talking about the potential for an overheating economy at this juncture?  Well, we are.  Investors have been caught on the wrong foot, holding record levels of cash and bonds while being underweight in equities.

What has changed so quickly? Vaccines that are safe and wildly effective beyond anyone's expectation are here. The only remaining question is how quickly they can be rolled out across America and the rest of the world. We know that there will be around 70 million doses available before year-end that will build exponentially as we move through the winter into spring. It is expected that there will be enough availability here such that all of us could be vaccinated before late spring and that the whole world could potentially be vaccinated before the end of 2021. While Pfizer and Moderna are first out of the gate, we expect to hear from J & J and several others in 2021 with potentially only one dose needed to be effective and/or oral delivery systems rather than shots. All of this is simply miraculous with tremendous investment implications as we return to life as we once lived.  However, there will be some permanent changes that we will need to consider when investing. For instance, some work at home will be permanent, as will increased online utilization for shopping, business, and other services that were once done in-person.

While we expect a difficult few month ahead as the number of cases and deaths rise here and abroad, yet it is time to focus on the other side in just a few months when the weather warms, vaccines are rolled out, openings are accelerated, and pent-up demand is slowly filled. Life will partially revert to how it was before the virus but clearly with some permanent changes. Add to that multiple stimulus plans pushed by a Biden administration and finally an all-in Fed. We expect the Fed to remain all-in for at least for another 18-24 months until we think they will be on the horns of a dilemma. They will face inflation above 2% on a sustained basis with higher-than-expected unemployment, as corporations have learned to do more with less. What will they do?

The stock market has had a marvelous few weeks as optimism built regarding vaccines along with a Biden win. It is generally accepted that the economy will slow during the winter but then begin a rapid and sustainable recovery by the spring running at least through 2022, which is as far out as we are comfortable forecasting at this time. A great deal will hinge on fiscal, monetary, and trade policy decisions down the road.

We still believe that the markets have far more to run as we expect earnings and cash flow to be much stronger than the consensus for 2021 and 2022 as we see a meaningful increase in operating margins ahead as corporations have learned a lot from the pandemic, including a sharper focus on their strategic objectives. Quite frankly, we are amazed at how much operating progress has been made already with plans to do significantly more in the years ahead. We expect record operating margins, profits, and cash flow in 2021 and 2022 with along with an accommodative Fed trying to cap rates, will lead to higher stock prices. But not all stocks will perform. There will be a continued rotation out of the pandemic beneficiaries, especially the defensive stocks, to companies with positive operating leverage benefitting from an economic recovery here and abroad. You need to maintain some exposure to technology as the long-term fundamentals remain unparalleled, but price does determine value.

We no longer have to wonder about a potential vaccine. The news will only get better as we hear from other companies in the months ahead. Availability will only get more plentiful too. We are optimistic that distribution can be done in an orderly and effective way such that we all can get vaccinated before the summer here and worldwide before late fall. We and the world will be open for business once again!

The second most important thing to focus on as investors is a Biden administration. We have always admired Janet Yellen, so her selection as Treasury Secretary is fine by us. It supports our belief that Biden will work both sides of the aisle fostering deals to get things done, unlike Trump. Let's see if he is successful in brokering a more moderate, near-term stimulus bill at less than one trillion through Congress before year-end. That would be a positive sign and very good for all of us. It remains clear that Biden/Democrats have big spending proposals on the horizon that will support those most in need and have growth initiatives like for infrastructure. Clearly, Biden would need to control the Senate to pass extensive spending programs and tax hikes to pay for them, so we will have to wait to see the outcome of the Georgia run-off.  One way or another, we expect many stimulus plans in 2021, which will only add fuel to an already recovering economy.

We are also closely watching Biden's foreign policy moves. While he will attempt to be a consensus builder on many major issues abroad, self-interest will dominate. For instance, the ECB, especially Germany, is unlikely to come down hard on China's policies as China is their largest market. Notwithstanding, we expect global trade to pick up meaningfully in 2021 and 2022, adding to world growth and higher inflation, especially as supply constraints exist. Look at copper prices.

The Fed is in a Catch-22 as it wants to see the economy fully recover and have gone out of their way to say that they will let the economy run hot with inflation running above 2% for a sustained period. While their policy was always to pre-empt unwanted inflationary pressures, that is not the case now, so what happens when/if inflation raises its unwelcome head for a sustained period? Remember that there are multiple trillions of excess liquidity sloshing around in the financial system looking for a home. Stocks and industrial commodities are our asset classes of choice. Continue to sell bonds.

Investment Conclusions

Global growth is on the cusp of a sharp acceleration as we get our arms around the pandemic. Just take a look at the rapid recovery in China since their cases/deaths peaked months ago. We fully expect a synchronist global recovery that will accelerate throughout 2021 into 2022. While interest rates have bottomed for the cycle, the market will increase further, driven by higher-than-expected earnings growth, dividend increases, corporate buybacks, and lots of M & A.

We have positioned our portfolios accordingly, emphasizing global industrials and capital goods, commodities, transportation, and special situations. Our technology and new norm beneficiaries, which was the source of our significance outperformance this year, has declined to a slightly less than a market weight as we diversified into new areas. And we own no bonds.

Our investment webinar will be held on Monday, December 7th, at 8:30 AM EST. You can join the webinar by entering https://zoom.us/j/9179217852 into your browser or calling [phone] and entering the password 9279217852.

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

[billehrman]

The Other Side

Who would have thought that we would be talking about the potential for an overheating economy at this juncture?  Well, we are.  Investors have been caught on the wrong foot, holding record levels of cash and bonds while being underweight in equities.

What has changed so quickly? Vaccines that are safe and wildly effective beyond anyone's expectation are here. The only remaining question is how quickly they can be rolled out across America and the rest of the world. We know that there will be around 70 million doses available before year-end that will build exponentially as we move through the winter into spring. It is expected that there will be enough availability here such that all of us could be vaccinated before late spring and that the whole world could potentially be vaccinated before the end of 2021. While Pfizer and Moderna are first out of the gate, we expect to hear from J & J and several others in 2021 with potentially only one dose needed to be effective and/or oral delivery systems rather than shots. All of this is simply miraculous with tremendous investment implications as we return to life as we once lived.  However, there will be some permanent changes that we will need to consider when investing. For instance, some work at home will be permanent, as will increased online utilization for shopping, business, and other services that were once done in-person.

While we expect a difficult few month ahead as the number of cases and deaths rise here and abroad, yet it is time to focus on the other side in just a few months when the weather warms, vaccines are rolled out, openings are accelerated, and pent-up demand is slowly filled. Life will partially revert to how it was before the virus but clearly with some permanent changes. Add to that multiple stimulus plans pushed by a Biden administration and finally an all-in Fed. We expect the Fed to remain all-in for at least for another 18-24 months until we think they will be on the horns of a dilemma. They will face inflation above 2% on a sustained basis with higher-than-expected unemployment, as corporations have learned to do more with less. What will they do?

The stock market has had a marvelous few weeks as optimism built regarding vaccines along with a Biden win. It is generally accepted that the economy will slow during the winter but then begin a rapid and sustainable recovery by the spring running at least through 2022, which is as far out as we are comfortable forecasting at this time. A great deal will hinge on fiscal, monetary, and trade policy decisions down the road.

We still believe that the markets have far more to run as we expect earnings and cash flow to be much stronger than the consensus for 2021 and 2022 as we see a meaningful increase in operating margins ahead as corporations have learned a lot from the pandemic, including a sharper focus on their strategic objectives. Quite frankly, we are amazed at how much operating progress has been made already with plans to do significantly more in the years ahead. We expect record operating margins, profits, and cash flow in 2021 and 2022 with along with an accommodative Fed trying to cap rates, will lead to higher stock prices. But not all stocks will perform. There will be a continued rotation out of the pandemic beneficiaries, especially the defensive stocks, to companies with positive operating leverage benefitting from an economic recovery here and abroad. You need to maintain some exposure to technology as the long-term fundamentals remain unparalleled, but price does determine value.

We no longer have to wonder about a potential vaccine. The news will only get better as we hear from other companies in the months ahead. Availability will only get more plentiful too. We are optimistic that distribution can be done in an orderly and effective way such that we all can get vaccinated before the summer here and worldwide before late fall. We and the world will be open for business once again!

The second most important thing to focus on as investors is a Biden administration. We have always admired Janet Yellen, so her selection as Treasury Secretary is fine by us. It supports our belief that Biden will work both sides of the aisle fostering deals to get things done, unlike Trump. Let's see if he is successful in brokering a more moderate, near-term stimulus bill at less than one trillion through Congress before year-end. That would be a positive sign and very good for all of us. It remains clear that Biden/Democrats have big spending proposals on the horizon that will support those most in need and have growth initiatives like for infrastructure. Clearly, Biden would need to control the Senate to pass extensive spending programs and tax hikes to pay for them, so we will have to wait to see the outcome of the Georgia run-off.  One way or another, we expect many stimulus plans in 2021, which will only add fuel to an already recovering economy.

We are also closely watching Biden's foreign policy moves. While he will attempt to be a consensus builder on many major issues abroad, self-interest will dominate. For instance, the ECB, especially Germany, is unlikely to come down hard on China's policies as China is their largest market. Notwithstanding, we expect global trade to pick up meaningfully in 2021 and 2022, adding to world growth and higher inflation, especially as supply constraints exist. Look at copper prices.

The Fed is in a Catch-22 as it wants to see the economy fully recover and have gone out of their way to say that they will let the economy run hot with inflation running above 2% for a sustained period. While their policy was always to pre-empt unwanted inflationary pressures, that is not the case now, so what happens when/if inflation raises its unwelcome head for a sustained period? Remember that there are multiple trillions of excess liquidity sloshing around in the financial system looking for a home. Stocks and industrial commodities are our asset classes of choice. Continue to sell bonds.

Investment Conclusions

Global growth is on the cusp of a sharp acceleration as we get our arms around the pandemic. Just take a look at the rapid recovery in China since their cases/deaths peaked months ago. We fully expect a synchronist global recovery that will accelerate throughout 2021 into 2022. While interest rates have bottomed for the cycle, the market will increase further, driven by higher-than-expected earnings growth, dividend increases, corporate buybacks, and lots of M & A.

We have positioned our portfolios accordingly, emphasizing global industrials and capital goods, commodities, transportation, and special situations. Our technology and new norm beneficiaries, which was the source of our significance outperformance this year, has declined to a slightly less than a market weight as we diversified into new areas. And we own no bonds.

Our investment webinar will be held on Monday, December 7th, at 8:30 AM EST. You can join the webinar by entering https://zoom.us/j/9179217852 into your browser or calling [phone] and entering the password 9279217852.

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

[billehrman]

Focus on 2021 and 2022

Turn off your cable news networks. They will have you thinking short term because most of them do.

Our view remains that economic growth will accelerate in 2021 into 2022.  Rapid response coronavirus tests will roll out, permitting faster and safer openings.  Coronavirus vaccinations will accelerate in the second half of 2021 into 2022.  The Fed and all monetary bodies will remain all in forcing investors further out on the risk curve. We will have several demand-focused stimulus programs and global trade will rebound.  

While the economy will not return to pre-pandemic levels until mid-2022, corporate profits, operating margins, and cash flow will exceed peak levels early in 2021 led by the financially strong well-capitalized industrials, commodity, and transportation companies. We have continued to take advantage of market weakness to add more economic sensitivity to our portfolios consistent with our outlook.  Technology remains a significant portion of our portfolios due to their sensational long-term prospects selling at reasonable valuations with discount rates so low.

The stock market remained under pressure last week due to the failure of our government to reach a much-needed new stimulus package; a substantial increase in cases in Europe which has pushed the Euro down as governments consider new shutdown measures; the Republicans' push to appoint a new Supreme Court Judge further damaging relations with the Democrats; and Biden maintaining his lead in the polls. U.S stocks had their third-largest outflow last week with the money going into bonds and precious metals. Interestingly, gold continues under pressure too.

We get why investors are worried near term, but it does not alter our longer-term favorable view that the global economy, including the U.S, will improve sequentially as we move through 2021 into 2022 for all the reasons stated above.

Let's review each of our core beliefs.

Liquidity is what drives financial markets. The Fed and all monetary bodies will remain all in for several more years providing liquidity far above the economy's needs, pushing investors further out on the risk curve. Federal Reserve Chairman Powell testified before both the House and Senate Banking committees last week pleading for more fiscal stimulus as the Fed cannot go it alone. He mentioned that the Fed has many more arrows left in its quiver to support the economy through the pandemic. We take the Fed/Powell at their word that the Federal Funds rate will remain near zero for three more years, which plays right into the discount rate and valuation for the stock market. Stocks remain undervalued today!

While the government has not been able to agree on a bill to replace their latest stimulus program, Secretary of the Treasury Mnuchin, along with Powell, kept the pressure on the Democrats to come back to the table during their testimony before Congress. While there are no assurances of a deal before the election, especially with the Republican push to appoint a new Supreme Court judge, we remain confident that at least one and possibly many more government stimulus programs will be passed after the election, regardless of who wins, to not only support those most in need but also programs to create millions of new jobs. Again, if Biden were to win, we do not expect him to raise taxes until mid-2022 at the earliest after the economy has surpassed pre-pandemic levels. We were pleased to see Congress pass a continuing resolution last week, which prevents our government from shutting down. At least that is something.

There was lots of good news last week on vaccines and better therapeutics, significantly lowering death rates and time spent in the hospital. If there is a positive from the increase in the number of cases, it has permitted the pharmaceutical companies to significantly expand the number of people in Phase 3 testing, which could prove to be very beneficial. Rapid response tests remain the bridge to all of us potentially being vaccinated. We expect ample availability during the first quarter of 2021, which will permit a safe acceleration in openings and economic activity.  We have not altered our timeline and still expect that there will be vaccines available for all by the second half of 2021, which supports sequential gains in economic activity as we move into 2022. Over 100 great pharma companies are working on therapeutics, vaccines, and rapid response tests, which gives us a reason for optimism that we will win this war against the coronavirus.

Our economy has continued to improve as we move into the fall, led by the manufacturing sector. The U.S composite PMI output for September was 54.4; the services index at 54.6; the manufacturing PMI at 53.5, and output stood at 53.3, a 10-month high. It was commented that "U.S. business reported a strong end to the third quarter with demand growing at a steepening rate." Inventories throughout the economy continued to fall, placing the I/S ratio at a multiyear low, which supports our view that economic activity will continue to be positive in the fourth quarter even without another stimulus bill. It helps that consumer deposits are way above pre-pandemic levels, and credit card debt is down. By the way, the consumer comfort indices have fully recovered, too, with expectations of substantial spending gains ahead.  Again, we do expect additional stimulus bills after the election, if not earlier, which will boost economic activity in 2021 and 2022.

We see a similar economic outlook abroad. While consumer spending may slow from the recent pace as outbreaks increase, the manufacturing sector remains strong as exports are improving, especially to China. Inventory levels are depleted, necessitating an increase in operating rates to build inventories back to normal levels. We expect an acceleration in growth abroad next year into 2022 for all the same reasons as we see occurring here. It does help that all governments, including Germany, have passed major fiscal stimulus bills, which will support better days ahead, especially as rapid response tests roll out.

Investment Conclusions

While we are fully aware of the issues facing us today, we have not altered our favorable economic outlook for 2021 and 2022. It is a unique environment in so many ways as corporations make strategic moves due to the pandemic that will influence their futures. Change is in the air, which creates tremendous opportunities for us as we do firsthand in-depth fundamental research. We speak to at least three companies per day.

Our thesis of a Tale of Two Cities is playing out such that large, well-financed companies are increasing market penetration while reducing costs and capital spending. Therefore, we expect a significant increase in operating margins, operating earnings, and cash flow over the consensus as the economy improves 2021 and 2022. We expect to see a renewal of dividend increases and buybacks supported by large increases in free cash flow as we move forward, which will support higher stock prices. M & A will increase meaningfully too, as the cost to acquire makes most deals anti-dilutive, excluding any synergies. All of this is good for overall stock prices.

Our portfolios continue to evolve, taking advantage of market weakness and investor focus on the short term rather than looking out into 2021 and 2022. We continue to add to the industrial and commodity areas as we see production gains outstripping demand for at least another six months as inventories are built. We do not see much capacity growth ahead, which spells much higher operating rates, margins, profits, and cash flow than expected for several years. These stocks are not only undervalued on multiple bases but also sell well beneath intrinsic/replacement value.

Technology will remain over-weighted in our portfolios. There is no sector with better long-term fundamentals, growing multiples of GNP for years to come, with great operating margins and cash flow, and finally, sell at reasonable valuations with discount rates so low for so long. The new normal is a fact of life, and so is digitalization, software, smart devices, the cloud, 5G, more time spent at home, etc. How can you not be invested in this area?

The bottom line is that you need to focus on where we are going over the next two years rather than over the next two months. We see a meaningful improvement in economic activity and corporate profitability in 2021 and 2022 for all the reasons stated above. Accordingly, stocks are the place to be but remember that all stocks are not alike. Continue to sell bonds as we see the yield curve steepening as growth picks up.

Our weekly webinar will be held on Monday, August 28th, at 8:30, am EST. You can join by entering https://zoom.us/j/9179217852 in your browser or dialing [phone] and entering the password 91792177852.

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

[email protected]

917-951-4139

[billehrman]

Focus on 2021 and 2022

Turn off your cable news networks. They will have you thinking short term because most of them do.

Our view remains that economic growth will accelerate in 2021 into 2022.  Rapid response coronavirus tests will roll out, permitting faster and safer openings.  Coronavirus vaccinations will accelerate in the second half of 2021 into 2022.  The Fed and all monetary bodies will remain all in forcing investors further out on the risk curve. We will have several demand-focused stimulus programs and global trade will rebound.  

While the economy will not return to pre-pandemic levels until mid-2022, corporate profits, operating margins, and cash flow will exceed peak levels early in 2021 led by the financially strong well-capitalized industrials, commodity, and transportation companies. We have continued to take advantage of market weakness to add more economic sensitivity to our portfolios consistent with our outlook.  Technology remains a significant portion of our portfolios due to their sensational long-term prospects selling at reasonable valuations with discount rates so low.

The stock market remained under pressure last week due to the failure of our government to reach a much-needed new stimulus package; a substantial increase in cases in Europe which has pushed the Euro down as governments consider new shutdown measures; the Republicans' push to appoint a new Supreme Court Judge further damaging relations with the Democrats; and Biden maintaining his lead in the polls. U.S stocks had their third-largest outflow last week with the money going into bonds and precious metals. Interestingly, gold continues under pressure too.

We get why investors are worried near term, but it does not alter our longer-term favorable view that the global economy, including the U.S, will improve sequentially as we move through 2021 into 2022 for all the reasons stated above.

Let's review each of our core beliefs.

Liquidity is what drives financial markets. The Fed and all monetary bodies will remain all in for several more years providing liquidity far above the economy's needs, pushing investors further out on the risk curve. Federal Reserve Chairman Powell testified before both the House and Senate Banking committees last week pleading for more fiscal stimulus as the Fed cannot go it alone. He mentioned that the Fed has many more arrows left in its quiver to support the economy through the pandemic. We take the Fed/Powell at their word that the Federal Funds rate will remain near zero for three more years, which plays right into the discount rate and valuation for the stock market. Stocks remain undervalued today!

While the government has not been able to agree on a bill to replace their latest stimulus program, Secretary of the Treasury Mnuchin, along with Powell, kept the pressure on the Democrats to come back to the table during their testimony before Congress. While there are no assurances of a deal before the election, especially with the Republican push to appoint a new Supreme Court judge, we remain confident that at least one and possibly many more government stimulus programs will be passed after the election, regardless of who wins, to not only support those most in need but also programs to create millions of new jobs. Again, if Biden were to win, we do not expect him to raise taxes until mid-2022 at the earliest after the economy has surpassed pre-pandemic levels. We were pleased to see Congress pass a continuing resolution last week, which prevents our government from shutting down. At least that is something.

There was lots of good news last week on vaccines and better therapeutics, significantly lowering death rates and time spent in the hospital. If there is a positive from the increase in the number of cases, it has permitted the pharmaceutical companies to significantly expand the number of people in Phase 3 testing, which could prove to be very beneficial. Rapid response tests remain the bridge to all of us potentially being vaccinated. We expect ample availability during the first quarter of 2021, which will permit a safe acceleration in openings and economic activity.  We have not altered our timeline and still expect that there will be vaccines available for all by the second half of 2021, which supports sequential gains in economic activity as we move into 2022. Over 100 great pharma companies are working on therapeutics, vaccines, and rapid response tests, which gives us a reason for optimism that we will win this war against the coronavirus.

Our economy has continued to improve as we move into the fall, led by the manufacturing sector. The U.S composite PMI output for September was 54.4; the services index at 54.6; the manufacturing PMI at 53.5, and output stood at 53.3, a 10-month high. It was commented that "U.S. business reported a strong end to the third quarter with demand growing at a steepening rate." Inventories throughout the economy continued to fall, placing the I/S ratio at a multiyear low, which supports our view that economic activity will continue to be positive in the fourth quarter even without another stimulus bill. It helps that consumer deposits are way above pre-pandemic levels, and credit card debt is down. By the way, the consumer comfort indices have fully recovered, too, with expectations of substantial spending gains ahead.  Again, we do expect additional stimulus bills after the election, if not earlier, which will boost economic activity in 2021 and 2022.

We see a similar economic outlook abroad. While consumer spending may slow from the recent pace as outbreaks increase, the manufacturing sector remains strong as exports are improving, especially to China. Inventory levels are depleted, necessitating an increase in operating rates to build inventories back to normal levels. We expect an acceleration in growth abroad next year into 2022 for all the same reasons as we see occurring here. It does help that all governments, including Germany, have passed major fiscal stimulus bills, which will support better days ahead, especially as rapid response tests roll out.

Investment Conclusions

While we are fully aware of the issues facing us today, we have not altered our favorable economic outlook for 2021 and 2022. It is a unique environment in so many ways as corporations make strategic moves due to the pandemic that will influence their futures. Change is in the air, which creates tremendous opportunities for us as we do firsthand in-depth fundamental research. We speak to at least three companies per day.

Our thesis of a Tale of Two Cities is playing out such that large, well-financed companies are increasing market penetration while reducing costs and capital spending. Therefore, we expect a significant increase in operating margins, operating earnings, and cash flow over the consensus as the economy improves 2021 and 2022. We expect to see a renewal of dividend increases and buybacks supported by large increases in free cash flow as we move forward, which will support higher stock prices. M & A will increase meaningfully too, as the cost to acquire makes most deals anti-dilutive, excluding any synergies. All of this is good for overall stock prices.

Our portfolios continue to evolve, taking advantage of market weakness and investor focus on the short term rather than looking out into 2021 and 2022. We continue to add to the industrial and commodity areas as we see production gains outstripping demand for at least another six months as inventories are built. We do not see much capacity growth ahead, which spells much higher operating rates, margins, profits, and cash flow than expected for several years. These stocks are not only undervalued on multiple bases but also sell well beneath intrinsic/replacement value.

Technology will remain over-weighted in our portfolios. There is no sector with better long-term fundamentals, growing multiples of GNP for years to come, with great operating margins and cash flow, and finally, sell at reasonable valuations with discount rates so low for so long. The new normal is a fact of life, and so is digitalization, software, smart devices, the cloud, 5G, more time spent at home, etc. How can you not be invested in this area?

The bottom line is that you need to focus on where we are going over the next two years rather than over the next two months. We see a meaningful improvement in economic activity and corporate profitability in 2021 and 2022 for all the reasons stated above. Accordingly, stocks are the place to be but remember that all stocks are not alike. Continue to sell bonds as we see the yield curve steepening as growth picks up.

Our weekly webinar will be held on Monday, August 28th, at 8:30, am EST. You can join by entering https://zoom.us/j/9179217852 in your browser or dialing [phone] and entering the password 91792177852.

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

[email protected]

917-951-4139