Beyond The Headlines

January 2017 Monthly Letter

January, 24th, 2017

 Highlights: Trump’s policies, strong labor market, markets flat but still at record highs

 Portfolio-specific commentary (12/15/2016-1/15/2017)

Energy & Financials

 We saw a reversal of an earlier rally in both sectors, both the broad market and our holdings. Our smaller-than-S&P 500 exposure to financials left us on the sidelines of the recent declines. Our mix in the energy sector (different from the overall markets) turned out to be also helpful. We notice that sectors started to trade less uniformly than before, with some stocks falling behind, some climbing higher. This more varied price reaction may create opportunities.

Gold

Our gold exposure allowed us to capture a recovery in gold prices since December low, which we had seen after a sell-off from mid-year highs.

 Big-picture commentary

 Trump’s plans

We don’t know the specifics or the timing of various new policies, but given the likely direction  — less regulation, lower taxes, and possible foreign cash repatriation – those should help businesses reinvest, hire and grow. What may be seen as negative is the uncertain direction of the trade policy. With a more protectionist approach, we may see winners and losers among businesses, and potentially higher prices for end consumers.

Businesses won’t prosper if the consumer doesn’t do well. What we find encouraging is the tax reform, which could leave more cash in people’s pockets. The pro-employment narrative of the current administration may help further improve labor market conditions. Of concern is the potential impact of healthcare reform: its timing, execution, and cost to businesses and consumers.

Strong labor market and climbing wages

The end of 2016 marked a solid performance for the U.S. labor market, with paychecks growing at the fastest pace since 2009 and with job gains above 2 million for a sixth year (2.2 million in 2016 vs. 2.7 million in 2015). This amounts to 75 consecutive months of job growth, a modern-day record, with the number of employed people at all-time high. Wages went up 4.7% year over year in December and joblessness rated ticked up to 4.7%. In 2016, wages were up 2.9% versus a 2.3% decline in 2015, and 2.1% decline in 2014. The four-week average jobless claims dropped to the lowest since 1973.

Know-nothing market

 After a post-election rally, since mid-December the Dow Jones Industrial Average has traded in the tightest range in its 120-year history. The CBOE Volatility Index has been dropping since November, and reached 11.50, which brushes against its historically lowest levels.

Markets at their record levels

Major US indices — the Dow, S&P 500, and Nasdaq — are all at record highs. Looking around the world, in local currency, the UK market and German markets are also at or near all-time highs. Even the Mexican stock market has reached new highs. Japans is also close to its 18-year high. China still happens to be substantially below its 2015 peak.

Strength in the dollar makes the picture more interesting. In dollar terms, the markets with the biggest drops from a 52-week high are Turkey, Malaysia, and Mexico. The declines range from 20% to almost 30%, with Turkey falling the furthest.

 Dollar a little weaker

After a spike to the 15-year high in December versus EUR, 30-year high versus GBP, and 10-year high versus JPY, the dollar lost some of the gains in January. As we discussed last month, US interest rates are expected to continue rising after a December Fed rate hike and further planned increases this year. This upward trend, along with hopes for stronger growth may continue to support the dollar’s strength for a while.

Looking for opportunities

We’re clear about what kind of companies we look for and what kind of prices we would like to pay. However, with current high market levels (in terms of both absolute prices and valuations) and few clear contrarian opportunities, we spend more time researching ideas rather than investing. In the long run, the market has the wonderful tendency to offer great buying opportunities for those who patiently wait for the right circumstances and price. Thus, we wait.

Yours truly,

François Sicart, Allen Huang & Bogumil Baranowski

Disclosure

This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.