#$bhp

5 Trade ideas excerpted from the detailed analysis and plan for premium subscribers:

BHP Group, Ticker: $BHP

BHP Group, $BHP, comes into the week touching at 3 month support. The RSI is falling and bearish with the MACD negative. Look for a break of support to participate…..

CF Industries, Ticker: $CF

CF Industries, $CF, comes into the week falling near a 2 month low. The RSI is dropping in the bearish zone and the MACD is negative and falling. Look for continuation to participate…..

Enphase Energy, Ticker: $ENPH

Enphase Energy, $ENPH, comes into the week at support. The RSI is falling with the MACD crossed down and dropping. Look for a drop through support to participate…..

Johnson & Johnson, Ticker: $JNJ

Johnson & Johnson, $JNJ, comes into the week pressing against resistance. The RSI is rising over the midline with the MACD climbing. Look for a push through resistance to participate…..

LPL Financial, Ticker: $LPLA

LPL Financial, $LPLA, comes into the week pulling back to support. The RSI is dropping through the midline with the MACD falling. Look for a drop through support to participate…..

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After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which with one week of trading left in the 3rd Quarter, saw equity markets continue to get pummeled as they re-approach the lows of the year following the September FOMC meeting.

Elsewhere look for Gold to continue its downtrend while Crude Oil continues lower as well. The US Dollar Index continues to push to the upside while US Treasuries pullback in their downtrend. The Shanghai Composite looks to continue the trend lower while the Emerging Markets downtrend persists.

5 Trade ideas excerpted from the detailed analysis and plan for premium subscribers:

BHP, Ticker: $BHP

BHP, $BHP, dropped out of consolidation to a low 2 weeks ago. It comes into the week at resistance from the gap down with the RSI rising and the MACD turning to cross up. Look for a break into the gap to participate…..

CIT, Ticker: $CIT

CIT, $CIT, comes into the week pressing on the highs. It has a RSI rising in the bullish zone with the MACD rising after avoiding a cross. Look for a push over resistance to participate…..

Olin, Ticker: $OLN

Olin, $OLN, comes into the week approaching the prior high. It has a RSI rising in the bullish zone with the MACD positive and climbing. Look for a push over resistance to participate…..

ON Semiconductor, Ticker: $ON

ON Semiconductor, $ON, comes into the week at the all-time high with the RSI rising in the bullish zone and the MACD crossing up and positive. Look for a new high to participate…..

Charles Schwab, Ticker: $SCHW

Charles Schwab, $SCHW, comes into the week back at the all-time high with the RSI rising in the bullish zone and the MACD rising and positive. Look for a push to a new high to participate…..

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After reviewing over 1,000 charts, I have found some good setups for the week. This week’s list contains the first five below to get you started early.  These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which with the last full week of August in the books, saw equity markets showed strength with aggressive moves higher and all-time highs.

Elsewhere look for Gold to continue its push out of long term consolidation higher while Crude Oil may also be resuming the uptrend. The US Dollar Index looks on the edge of breaking the long downtrend the while US Treasuries pause in their uptrend. The Shanghai Composite looks to continue in broad consolidation while Emerging Markets continue to be biased to move lower.

BHP Group, $BHP, ran from a low in October to a top in early March. It pulled back from there, retracing 38.2% of the rise, and found support at the 100 day SMA. It reversed from there and moved higher. It comes into the new week consolidating under resistance. The Bollinger Bands® are shifted and opening higher with the RSI on the edge of a move into the bullish zone. 

The MACD is rising and positive. There is resistance at 75 and 76.50 then 80 and 81. Support lower comes at 71.75 and 69.50 then 67.35. Short interest is low at 1%. The stock pays a dividend with an annual yield of 5.92% and has been trading ex-dividend since March 4th. The company is expected to report earnings next in August. 

The May options chain shows open interest big from 75 down to 55, biggest at 67.50 on the put side. On the call side it is focused from 72.50 to 85 and bigger, biggest at 80. In the June chain there is minimal open interest on the put side, but the call side has big size at 80 and 90. In the August options open interest is spread from 82.50 down to 47.50 on the put side. On the call side it is spread from 65 to 100 and bigger.

BHP Group, Ticker: $BHP

Trade Idea 1: Buy the stock on a move over 75 with a stop at 72.

Trade Idea 2: Buy the stock on a move over 75 and add a May 72.50 Put ($1.20) while selling an August 85 Call ($1.20).

Trade Idea 3: Buy the May/August 80 Call Calendar ($2.40) and sell the June 67.50 Put ($0.75).

Trade Idea 4: Buy the August 67.50/75/80 Call Spread Risk Reversal (65 cents).

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After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which with one week left in April sees the weather is turning warmer and equity markets getting a spring in their step.

Elsewhere look for Gold to continue its short term move higher while Crude Oil consolidates in a tight range. The US Dollar Index continues to move to the downside while US Treasuries bounce in their downtrend in their uptrend. The Shanghai Composite looks to continue broad consolidation while Emerging Markets consolidate in the uptrend.

It’s amazing how fast sentiment shifts. The pundits went from wildly bullish to pessimistic in a matter of days as they looked through the rear view mirror at a few stats that are most likely misleading and/or off the mark.

Seasonal adjustments as well as tax reform have played havoc with January stats and will continue with first quarter economic statistics. Change is in the air. 2018 is setting up as a sensational year economically both here and abroad. 2019, too!

Tax reform will certainly act as a shot in the arm for the U.S. economy with millions of people receiving one-time bonuses, which will mostly likely be spent boosting first and second quarter growth. Corporate earnings and cash flow boosted by lower tax rates and repatriation of foreign cash will kick in more and more as the year progresses and beyond. Will the economy expand by over 5% in first the quarter as the Atlanta Fed predicts? Not likely but it will be over 3% for sure with further above average gains for the rest of the year and 2019. Not too shabby!

Opportunity knocks for investors.

The employment data reported last week was solid with the U.S. economy adding over 200,000 jobs and the unemployment rate holding steady at 4.1%. However, the financial markets panicked Friday after seeing that average hourly earnings rose 0.3% from the prior month and are up 2.9% from a year ago. Bond yields jumped as fears of rising cost push inflation trickled through the marketplace. However the average hourly earnings number was boosted by a decline in the workweek to 34.3 hours (bad weather) and tax reform bonuses. One-time bonuses are not permanent and should not be built into the longer-term corporate cost structure or inflationary expectations. It is not as if companies raised base pay 3%.  So, don’t worry. Global competition and the disruptors will keep a lid on future inflation.

Notwithstanding, hourly wages are set to rise in 2018, as corporations are more confident in future growth than at any time over the past few years. Wage hikes will be offset by higher operating rates and additional efficiencies. Managements are not that stupid. It does not hurt that tax reform will reduce their tax bill giving them more money to spend to further automate, but it really is much more than that. It’s all about Trump’s pro-growth, pro-business agenda. Real economic growth is accelerating everywhere. Competition for employees is clearly rising while slack in the workplace is declining as both domestic and foreign companies are expanding in the states rather than abroad. Consumers will have more money in their pockets to spend. This is a great problem for America to have. Thank you President Trump!

Will there be margin pressure as many fears of employment costs rise? Not likely! Unfortunately, historic measures of productivity just don’t seem to work. The market got spooked last week when it was announced that productivity fell 0.2% in the fourth quarter (up 1.7% for the year) as unit labor costs rose 2%. It was interesting to note that manufacturing productivity actually rose 5.7% in the fourth quarter. It is almost impossible to measure productivity in the service sector. Benefits of tax reform and economic growth will more than offset any wage pressures. We still forecast S&P earnings will increase over 15% in 2018 and 10% in 2019. Nothing has changed.

Bond markets got clobbered last week with the yield curve steepening big time here and abroad due to concerns over an overheating U.S. economy, accelerating growth overseas, rising inflationary expectations due to wage pressure/poor productivity and finally the expanding financing needs of the U.S. government as tax reform is front loaded. It does not help that the Fed is winding down its balance sheet. But the $3 trillion in repatriated cash and rising income will be a partial offset. It has to go somewhere. The 10-year treasury ended the week over 2.8%, the 10-year bund at 0.76% and the 10-year Japanese bond at 0.07%. The dollar strengthened throughout the week.

We have not altered our view that the Fed will raise rates at least 3 times this year, the yield curve will steepen and the 10-year Treasury bond will hit 3.25% by year-end. The bond markets have clearly been overly complacent up until last week. We still expect all monetary bodies to remain one step behind until inflation approaches 2% as fear of stepping on the brakes too soon impeding growth is of greater concern right now to all of them than rising inflation. Did last week’s interest rate move enough to stop the stock market? No, as earnings growth will more than offset a decline in multiple as rates rise but not all markets or all stocks are alike.

Rising rates and steepening yield curves caused by accelerating global growth is good news. Remember everyone’s concern about an inverted yield curve. That fear evaporated fast. We would get concerned if the 10-year Treasury approached 4% this year. For now opportunity knocks for investors.

Let’s take a quick look at our core beliefs to see if there are any changes that would alter our investment strategy:

Global economic activity is clearly accelerating. German economic growth accelerated to a six-year high despite a strong Euro, China is humming along above 6.7% and Japan’s economy led by exports is strong as well as the emerging market economies. Check!

Inflationary pressures are muted but are clearly picking up as global growth accelerates.  We do expect wage rates to rise finally but margin pressure will be limited as utilization rates rise and efficiencies increase. Notwithstanding global competition and the disruptors are powerful offsets to rising inflationary pressures.  Rising inflation, albeit small, due to accelerating growth is good news.And what if Amazon, JP Morgan and Berkshire Hathaway find a way to curb health care inflation?  It’s going to come one way or another and the long-term benefits will be huge. Check!

Global interest rates remain remarkably low relative to inflation. We firmly believe that all monetary bodies will stay one step behind for fear of putting a lid on global economic growth and prosperity just as growth is taking off. We do not expect the BOJ and ECB to alter their policies further until 2019. Draghi will let his successor take that next step. Not him. And we expect Powell’s Fed to go slow permitting the U.S. economy to meaningfully accelerate. Trump would not have nominated him otherwise. We expect global yield curves will continue to steepen for the right reasons - growth and no longer fearing deflation. Check!

We see no reason to alter our view that S&P earnings will exceed $150 per share in 2018 and $165 per share in 2019. Check!

Capital spending plans have already begun to accelerate and will meaningfully contribute to economic growth in the second half of 2018 and beyond. Trump’s infrastructure program is likely to pass in some form this year. Notwithstanding, his administration will move quickly on accelerating the regulatory process permitting infrastructure projects on the books to move forward this year. Check!

M&A has already begun to accelerate as evidenced by the billions of dollars of deals announced last week. Expect a good portion of the $3 trillion repatriated to be used for M&A. Watch the industrial, healthcare, consumer and tech spaces in particular. A new round of consolidation is coming and the prices paid will put a bottom in the stock market. Check!

Financial regulatory relief is a fact of life both here and abroad aiding the financial sector, which provides the fuel for the global economy. The Fed’s action against Wells Fargo will benefit BAC, C and JPM in particular. Check!

Industrial commodity prices will benefit longer term from growth in demand and rising utilization rates. We do expect Trump to announce further trade sanctions boosting U.S. steel and aluminum prices. Energy prices should do just fine. Don’t expect a return to $50 per barrel in the near term. And take a look at the lithium producers, as supply will be limited for the next few years. Electric cars have a great future. Check!

Stock markets remain undervalued based on $150 in S & P earnings this year and a 3.25% 10-year treasury but not all markets, sectors or companies are alike. We remain short bonds. Check!

The rapid shift in sentiment creates an opportunity for investors with a one to two year time frame. The pundits have consistently been wrong, always looking in the rear view mirror and never looking through the windshield.

Let me say categorically that GROWTH IS GOOD!

I find it ironic that the market is concerned with a 3% or even 3.5% 10-year bond rates. We finally have a positively sloping yield for all the right reasons. The real fear always was an inverted yield curve. Do you really expect the monetary authorities to take the punch bowl away so soon when lack of growth and fears of deflation were their main concerns for years?

Opportunity knocks for investors with a one to two year time frame at least. Global growth is accelerating; inflationary pressures remain muted although increasing; real interest rates remain low and negative in many areas; monetary authorizes will remain one step behind for fear of slowing growth; and earnings are taking off.

We will take this opportunity to add to positions of favored stocks while maintaining excess liquidity. We continue to emphasize global industrials and capital goods companies; financials, especially money center banks, low cost industrial commodity companies; technology at a fair price and special situations. We only want to own the best of the best with great managements and strong financials.

Remember to review all the facts; pause, reflect and consider mindset shifts; analyze your asset composition and risk controls; do in-depth independent research and...

Invest Accordingly!

Paix et Prospérité has significantly outperformed all averages and ran circles around the Hedge Fund Index. Naturally, it would be easy to take our chips off the table, call it a day and protect our gains but is that the right strategy to pursue as we enter 2018? Not that simple!

The economic and financial backdrop is just too good:

1.     Accelerating global growth with muted inflationary pressures

2.     Incredibly low interest rates due in part to continuing QE in the ECB and Japan putting downward pressure on interest rates here

3.     A pro-growth, pro business administration in the U.S. that has enacted tax and regulatory reform which will force other countries, for competitive reasons, to follow suit bolstering global growth and corporate profits

4.     Rising capital and liquidity ratios at financial institutions reducing systematic risk

5.     Close to $3 trillion dollars being repatriated to the United States that will be used to reduce debt, grow capital expenditures, hire new employees, used to fund M & A, raise dividends and finally, buy back even more stock. Corporations’ stock buybacks have reduced the supply/float of common stock while boosting earnings per share and prices.

Corrections can happen at any time and for any reason but cyclical tops occur when alternative investments, which may include cash, are more favorable to own than stocks. Liquidity trends need to turn negative, too, but not now nor soon.

Where would you rather have your money invested today:

1.     Cash which still earns next to nothing?

2.     Bonds where the 10-year treasury yield is beneath 2.5% in the United States and much lower elsewhere?

3.     Commercial and office real estate where prices are way up, yields down and usage is changing (would you want to own a mall with box stores as key tenants)?

4.     Commodity prices which have room to run? (We do like the space and have invested in those companies with superior management, low cost positions and strong balance sheets.)

5.     Private equity where prices are through the roof and too much money is chasing too few investments?

6.     Stocks where earnings growth is accelerating, the multiple is still fair relative to bond yields (especially after factoring in tax reform) and supply is shrinking?

The answer is pretty obvious to us. Remember that the trend is your friend and the pendulum has clearly begun to swing back globally from an excessively restrictive financial, regulatory and political (budgetary) environment to one that is less so supporting economic growth.

The big surprise has been the failure of inflation to pick up moving closer to that magical 2% level after billions of QE, economic growth far stronger than anticipated and unemployment declining meaningfully without a real increase in wages. We have discussed this phenomenon for months now including the failure of the Philips curve. Global competition and the disruptors have put a lid on inflationary expectations. Whether the “Inflation Genie” comes out of the bottle by the end of 2018 is one of the big questions we face. We are watching this closely but all clear for now.

What other areas are we monitoring closely which may lead us to shift our positive bias?

Geopolitical risks are ever present as well as a potential shift in the political winds. Right now we are focused on North Korea as well as the Middle East. It is next to impossible to factor either one into your asset allocation other than maintaining excess liquidity at all times. We are also watching to see if the Democrats can finally present a decent alternative vision for the United States other than anti-Trump. Right now it does not exist but clearly we are concerned about the 2018 elections and a change in the now Republican-controlled Congress.

We are also keeping an eye on how China and Russia are trying to improve their status/power overseas filling a void created by Trump’s foreign and trade policies. Big changes are occurring in global relationships that need close monitoring. I want to reiterate that the U.S runs huge trade deficits especially with China, Germany and Japan who run huge trade surpluses so who has most to gain and who has most to lose by shifts in trade patterns? I expect a surge in new plants being built in the U.S. due to Trump’s tax, regulatory and trade policies.

Our major investment themes that will benefit from these afore-mentioned trends include:

1.     Financials that will benefit from accelerating loan growth, a steepening yield curve and regulatory relief

2.     Global industrials and capital goods companies that will benefit from acceleration in capital spending, “America First” and an infrastructure bill that I expect to pass this year.

3.     Industrial commodities that will benefit from higher prices as demand increases faster than supply over the next year coupled with China’s policies to reduce pollution and zombie companies.

4.     Technology at a fair price as growth will only strengthen for all the obvious reasons. Change is everywhere due to technology and that won’t change anytime soon. Disruptors are popping up everywhere changing the dynamics of so many industries while putting downward pressure on prices.

5.     Special situations have always been a meaningful percentage of our portfolio as corporate managements with board support make strategic changes that alter future growth, returns and stock valuations.

A successful investor must always look to the future and be willing to change his/her investment view if warranted. We are always looking for the proverbial hole in our thesis while being patient to let events unfold as long as they are consistent with our belief system. We tend to be very early in identifying new trends and also we tend to sell early as others catch up to us. Tax reform was a perfect example.  We positioned our portfolio months ago with the simple thesis that the Republicans had to unify behind it or run the risk of losing the elections big time in 2018. Right now the Democrats have no real platform and are considered the obstructionists. I expect a major infrastructure bill this year. We are positioned for that, too.

Trump’s pro-growth, pro-business agenda turned investment psychology upside down in 2017. Give him and the Republicans credit where it is due even if you don’t like him as a person.

The bottom line is to stay the course, as there is more room to run. The party is not over. At least not yet!

We wish you all a very Happy, Healthy and Prosperous New Year!

Remember to review all the facts; pause, reflect and consider mindset shifts; analyze your asset composition along with risk controls; do independent fundamental research and…

Invest Accordingly!

The Senate passed their version of tax reform Friday night. It set the stage for both bodies of Congress to reconcile tax reform into a final bill to be voted on again before being sent to the White House for the President’s signature. Clearly tax reform was the cornerstone of Trump’s pro-growth, pro-business agenda and he got virtually everything that he wanted. No doubt now that it will pass.

While the magnitude of the implications on our economy will be debated and the naysayers will nitpick many parts of it, clearly tax reform on the whole, was a necessity for the U.S. to compete and thrive in a global economy. There will be both short and long term consequences from the bill that will create investment opportunities from both the long and short sides of the markets. The implications stretch to foreign countries and companies too that will be impacted by this legislation as well. U.S. domiciled companies with U.S. plants will be the clear winners especially if they have high nominal tax rates as well as high capital spending plans. Besides reducing the corporate tax rate to 20%, the most important other feature was the immediate write-off of capital spending which is a huge benefit to cash flow and longer term returns on investment.

But don’t view tax reform in a vacuum, as it will effect Board decisions both here and abroad. This bill will also impact our trade balance over time, as there are incentives for foreign and some domestic companies who import from abroad to build plants here which will create jobs! Note the multiple benefits to our GNP: more capita spending, more jobs and a smaller trade deficit.

Lastly, there are the incentives in both tax plans for U.S. multinationals to repatriate the nearly $3 trillion in cash held abroad. How that will be used is debatable but it is clearly a positive at the margin.

I have focused my comments on corporate tax reform even though there are huge changes to individual taxes too. The reason is that individual tax reform won’t do much for our economy while corporate tax reform will. There will be more growth and jobs created in the U.S. by this bill which will benefit individuals more than their cut in taxes.

The bottom line is that this is a victory for Trump, the Republicans, our economy and the stock market.

As you know, we predicted many months ago that tax reform would become a reality by the end of 2017 or early 2018 and positioned our portfolios accordingly. We had a very simple thesis: the Republicans had to pass it or lose big time in 2018. Self interest rules in the end. And yes, I am cynical.

As it became apparent that the Senate would pass tax reform, the markets took off and hit major new highs this week despite Flynn making a plea bargain with Mueller. Our job is to anticipate these things; be positioned for them before it is obvious to all and benefit while watching others play catch up. That is what sets us apart and always has. Paix et Prospérité continues to outperform all averages. And for the right reasons!

It is our job to not rest on our laurels but to continue to look through the proverbial windshield for what’s next. Will the market peak soon anticipating all the benefits of tax reform? Or is there something new on the horizon that will give us another leg up? We wrote a few weeks ago that the Republicans’ would tackle infrastructure next. If you live in this country, it is clear that we need to rebuild our transportation system: our bridges, roads, airports and ports to make us more efficient, competitive and safer. Rebuilding our infrastructure is a huge undertaking and will cost well over a trillion dollars but this is a necessity that both parties acknowledge. I expect an infrastructure bill to emerge and be signed in 2018 before elections. Here again, U.S.-based manufacturers will stand to benefit most and don’t forget the job creation that will accompany it with decent pay.

As we enter the 2018 election season, the Republicans will have several notches on their belt to show the American public: tax reform, an infrastructure bill, and financial reform. All will add to growth over the next few years from what it would have otherwise been. The stock market has not been blind to this. The key is how long and how fast our economy will continue to expand; will inflationary pressures build and rise to the point where the Federal Reserve really tightens policy, becomes restrictive and hence the beginning of the end for the stock market?

What can the Democrats show the voting public, as they will most likely vote against all of this legislation although they know it is the right policy for America. What alternatives have they presented, not only over the last year, but also over the last 5 years, including a period when a Democrat was President? They will be considered obstructionists rather than a party with a vision for America to compete in the 21st century.

The pendulum continues to swing globally away from overly restrictive financial, regulatory, budgetary policies that have inhibited growth over the last several years. Growth is strong from the East to West without normal inflationary pressures that would have popped up in a different period. Core inflation in Japan and the Eurozone remains stubbornly low and is not expected to reach the BOJ and ECB 2% target for many more years. China is the only country that is tightening financial regulations, which will restrain growth from it otherwise might. Down cry for China as growth will still likely exceed 6% next year.

The OECD has raised its growth forecasts: 3.6% in 2017, 3.7% in 2018 and 3.6% in 2019. Inflation is not expected to reach 2% before the end of 2019. The monetary authorities still don’t get why inflationary pressures have not built as the unemployment rate has declined. The Phillips curve just is not working as in the past and for got reason: technological change is rapid, global competition is intense and disruptors are popping up everywhere. Expect interest rates to stay unusually low while corporate profits take off. That is not a bad recipe for higher stock prices. But again, not all markets or all stocks will share equally. Change is everywhere!

The bottom line is that the preconditions for a market top are still not present. The markets continue to rise on a wall of worry and most investors remain cautious and under invested. If I may paraphrase Janet Yellen “economies and markets don’t stop due to old age.”

If Trump and the Republican are successful at passing both tax reform and a major infrastructure program in 2018, it will be very difficult for the Democrats to take back control of Congress. I’d rather have a pro-business, pro-growth administration than not.

Paix et Prospérité continues to concentrate its portfolio on financials, mainly the largest banks; global industrials, low-cost industrial commodity producers including domestic aluminum and steel, technology at a fair price to growth, and special situations including DWDP, FMC, HUN, and PX.

So remember to review all the facts; step back, pause and consider mindset shifts; analyze your asset composition and risk controls constantlyl do independent research and…

Invest Accordingly!

Rather than a thoughtful discussion on ways to sustain the current renaissance of global economic growth, the leader of the IMF, Christine Lagarde, and leader of the World Bank, President Jim Yong Kim, plan to focus the next meeting of finance ministers and central bankers from 189 countries next week in DC on preparing for the next downturn. Reforms are needed to extend growth and mitigate against downturns rather than preparing how to respond when the next downturn occurs. They just don’t get it!

Barron’s lead article this weekend was titled “Melt Up Before The Storm” reflecting the continued skepticism by the pundits about the very foundation for the strong stock market performance. The experts clearly remain stuck in the past rather looking over the rainbow toward the future. They fail to recognize the positive implications of massive fundamental change everywhere.

Are you aware that the Fed is forecasting a high for the Federal Funds rate this cycle at 2.75% in a few years? Yep, a high! What does that say about their forecast for future inflationary pressures? Virtually all monetary bodies, including our Fed, fail to fully comprehend the massive impact of technology/disruptors and globalization that are putting downward pressures on all pricing.

Let me ask if you understand why global interest rates are so low, especially at this point in an economic cycle? The markets get it even if the monetary authorities do not! If bank liquidity and capital ratios are rising too, what does all this mean for the stock market multiple not only on next year’s earnings but also out 2 to 3 years? Why can’t the market sell at 24 times earnings with a 2.5% 10-year treasury and rising bank liquidity? And what if tax reform cuts corporate taxes by 10 to 15%, which increases S & P earnings to $150+ per share in a few short years. Now do you get why the market is performing so well? The market has a funny way of not letting people in who have failed to recognize the obvious which has been staring them in the face for so long and unfortunately continue to use the past to guide them rather than looking forward.

Since starting in 2013, Paix et Prospérité has had an exceptional few years correctly understanding the global political, economic and financial dynamics and inter-relationships. We have been tested at times and have had to make minor adjustments along the way but the key was sticking to our disciplines, successfully recognizing the longer-term trends, controlling risk and staying the course. That’s what George Soros taught me 30 years ago when I was CIO of the Quantum Fund. He was a great mentor, and I appreciate the 8 years that I was there before I started out on my own.

Let’s take a look at what was reported last week and whether it supports or detracts from our current view that non-inflationary growth is accelerating along with corporate profits while interest rates remain low by any historical measure at this point in an economic cycle:

Clearly some U.S. economic statistics are being influenced by the two hurricanes but the undertone is one of accelerating strength along with rising optimism that a tax reform bill will be passed over the next few months cutting corporate taxes, offering a tax holiday to repatriate overseas cash and a middle class tax cut: wholesale sales rose 1.7% in August and are up 7.2% year over year while August inventories rose only 0.9% month to month and 4.5% year over year which means that the inventory to sales ratio has declined setting the foundation for an acceleration in sales ahead; employment declined by 33,000 jobs in September greatly influenced by the hurricanes but the unemployment rate actually declined to 4.2% while the participation rate rose to 62.1% and hourly earnings increased 12 cents or are up 2.9% year over year which was greatly influenced by the storms most penalizing low wage earners; durable good orders increased 1.7% and shipments rose 0.3%; the trade deficit declined in August to $42.5 billion heavily influenced by the storms hurting the ports; the Merkit services index stood at a strong 55.3 while the price front showed some acceleration and the PMI Output Index fell to 54.8 - most likely influenced by the storms; auto sales accelerated to over a 17-million annual rate, the strongest level for the year, most likely benefiting from the storms as over 500,000 cars need to be replaced; the CNBC economic survey revealed consumer optimism at a 10-year high which bodes well for a strong holiday season and was fully reflected in the National Retail Federation increasing their forecast to near 4% growth this year and finally the ISM Manufacturers Index rose to 60.8, the employment index rose to 60.3, new orders rose to 64.6 and the production index rose to 62.2.

The Republican-controlled House passed a $4.1 trillion budget last week, which was the first step toward tax reform as it leads next to a legislative process called reconciliation during which tax reform will take place and can pass the Senate by a simple majority. While we fully expect changes in the bill to occur, the odds of passage over the next six months continue to rise which the financial markets have clearly noticed. Secondly, the Treasury issued a report Friday revealing guidelines for loosening financial regulations to “encourage” growth in the capital markets to boost the economy. And finally, it is clear by statements of Fed members this week that the Fed will remain one step behind until inflation accelerates and after the benefits of any tax reform are seen if they are stimulating the economy.

Eurozone economic growth accelerated at the end of the third quarter as indicated by a final Eurozone composite output index of 56.7 and a business services activity index of 55.8, both up from the prior period. The ECB held meetings last week to discuss how to scale down its huge bond buying program while trying to understand the recent strength in the Euro and corresponding weakness in inflation. We expect the dollar to continue to strengthen as we said a few weeks ago as the odds of passage of Trump’s pro-growth, pro-business agenda improves which will go a long way to assist the ECB to curtail some of its aggressive easing policies.

Japan’s business confidence is at a 10-year high, which Prime Minister Abe is using to his benefit having called a snap election for October 22nd to increase his majority over the government to further his party's economic agenda.

China’s Central Bank announced targeted easing to boost small business loans without aggravating high corporate debt. Listen closely to what is said and comes out of the 19th National Congress of the Communist Party beginning October 18th and then the meeting between President Trump and President Xi Jinping in November. Don’t expect any trade moves by the Trump administration until after those meetings, if at all, as we expect negotiations between the leaders to resolve many of the issues. Also do not expect trouble with North Korea to escalate during this period, as it would embarrass the leader of China, which just won’t occur.

The World Bank raised its growth forecasts for developing East Asia and Pacific for this year and next to 6.2% and 6.1% respectively while raising the spectra of trade protection penalizing these numbers.

OPEC and Russia are clearly working to extend their production cuts well into 2018. Clearly the first-time visit of Saudi King Salman to Moscow to meet with President Putin says it all.

Let’s wrap this up.

While the majority of the pundits/hedge remain out of sync with the financial markets hoping for a correction to increase their exposure, the markets just won’t let them in. It is hard to imagine a better environment for investing as global growth is accelerating but not inflation; interest rates are staying low although the yield curve continues to steepen; earnings growth is accelerating; the probability of passage of tax reform and other parts of Trump’s pro-growth, pro-business agenda is rising; and Trump will be meeting with the head of China next month which should be a lid, at least temporarily, on an escalation of tensions with North Korea. I look for many positive developments from their face-to-face meetings that clearly are not discounted in the markets.

We continue to emphasize in our portfolios the large money center banks that will benefit from loan growth accelerating and a steepening yield curve; U.S. domiciled multinational industrials that will benefit from accelerating volume, tight cost controls and substantial gains in profits, cash flow and free cash flow; technology at a fair price to growth like Cisco, Microsoft and Oracle; the financially strongest and lowest cost industrial commodity stocks including domestic steel and aluminum including Alcoa and Nucor; and special situations like Dow-DuPont, Huntsman, FMC and Praxair.

One word of caution as we enter earnings season. There will be many anomalies as the hurricane will penalize many companies’ third-quarter earnings reports so look through that windshield rather than at the rear-view mirror and take advantage of any negative market reactions which are not deserved.

So remember to review all the facts; pause, reflect and consider mindset shifts; always look at your asset composition and risk controls; do in-depth independent research and …

Invest Accordingly!

Week after week we state that a successful investor must look forward through the windshield rather than back in the rear-view mirror. I came back to manage hedge funds in 2013 when the asset class was under tremendous pressure for underperforming for many years to prove that it was not the style of investing that was wrong but the inability of most managers to really synthesize the global financial, economic and political environment down to making profitable investment decisions.

Our views are documented back to February 2013 (on our website http://prosperitefund.com/) when we started expressing our global investment outlook. Paix et Prospérité has outperformed all indices by a tremendous amount running circles around the average hedge fund since we returned to the business after a successful 35-year run being Co-CIO of Century Capital with Byron Wien then the Quantum Fund and finally EGS, our own firm.

We have successfully run against the grain many times over the years and even more recently have stated that the path of least resistance was up while virtually all of the experts were calling for a top or at least a major correction. The past is NOT prologue for the future as change is everywhere for a multitude of reasons (such as the disruptors). But a successful investor needs patience and is able to look over the rainbow or into the valley, as change does not occur overnight.

Let’s take a look at what occurred last week that supports or detracts from our positive view of the financial markets: global economic growth is accelerating; inflation and interest rates remain low but the yield curve will steepen, earnings are rising, the dollar is bottoming after a large decline since winter; and Trump’s odds for passing parts of his pro-growth, pro-business agenda has risen.

U.S. economic statistics will be influenced by both hurricanes for the next year or so with most of the hit in the front months followed by benefits to growth thereafter. The latest forecast by the Atlanta Fed is that third-quarter growth will be about 2.3% down from an upward revised second-quarter growth of 3.1%. Various stats reported for the week included: PCE rose 0.1% in August while personal income was up 0.2%; U.S. families’ wealth and income hit new highs; housing inventory declined 6.5% from a year ago creating shortages and higher prices which hit a record in September; the Chicago business index hit a new high of 65.2 and consumer sentiment was 95.1, back to levels reached a year ago.

Trump’s team finally proposed its tax reform bill: the corporate tax rate would fall to 20% from 35% currently with a 5-year write off for capital investment; and individual tax rates would be set at 12%, 25% and 35% with an option for a fourth higher tax rate for the wealthiest Americans. The standard deduction would be doubled while the personal exemption would be eliminated. There is much more here - like a tax holiday for repatriation of foreign cash and no longer deducting state and local taxes. But all of this will be altered in a final bill, so why even discuss the particulars now? The bottom line is that we do expect some tax legislation to pass lowering both corporate and individual taxes which will be beneficial to longterm growth and our global competitive position. The Senate released the text of a fiscal 2018 Bridge Resolution on Friday, which will most likely lead to a vote on the tax proposals without the Democrats. We expect a huge infrastructure program to follow passage of tax reform along with continued deregulation.

Economic data points continue surprisingly good in the Eurozone as the sharp rise in the Euro year to date has not penalized exports/growth so far. In fact, German unemployment fell to a record low in September. The European Commission released economic sentiment numbers last week, which include both businesses and individuals, and it rose to a 10-year high of 113.0. Interestingly the survey revealed that businesses expect higher prices and costs over the next year although clearly not apparent now. It will be difficult for the ECB to start reducing its stimulus unless inflation begins to show some signs of increasing coupled with the Euro falling.

It was not surprising that China reported surprisingly strong economic statistics just before the start of the National People’s Congress in two weeks. China’s factories grew at the fastest pace since 2012: the official PMI increased to 52.4 in September with input price index at 68.4 vs. 65.3 in August while the Caixin/Market PMI actually fell slightly to 51.0. China will officially begin reducing steel and aluminum capacity October 1st to reduce pollution and cut global oversupply responding to trade charges from the U.S. and Europe.

The WTO has confirmed that global trade has picked up meaningfully this year with volume expected to increase 3.6% versus 1.3% in 2016. Their former forecast for 2017 was 2.1% made back in April. All regions are expected to show growth, which has not been seen for many years and reveals the strength and breath of the global pick up. At the same time, the IMF is warning all monetary bodies that weak wage growth continues and is of great concern so be careful when/if reducing monetary stimulus. We continue to believe that all monetary bodies will stay one step behind as growth accelerates which is good for financial assets.

Clearly the tenor of the stock markets has recently improved somewhat as the bears/pundits have lost so much credibility having been wrong for so very long. They are still looking through the rear-view mirror rather than through the windshield and over the rainbow.

I have rarely seen an environment as conducive for profitable investing as now with non- inflationary growth accelerating; interest rates so low for this stage in an economic recovery - although the yield curve will steepen further; financial risk declining as bank capital and liquidity ratios continue to risk and corporate earnings taking off as volume is finally growing after years of stagnation with costs under tight control.  It certainly does not hurt to finally have a pro-growth, pro-business administration in DC.

Let’s wrap this up: we continue to concentrate our portfolios on the strongest money center bank which will benefit from loan growth and a steepening yield curve; global multinational industrials benefiting from an acceleration in volume, margins, earnings and cash flow; technology at a fair price relative to growth; industrial commodity stocks benefiting from rising demand, declining inventories and higher margins/earnings and free cash flow including domestic steel and aluminum companies that will benefit from a substantial curtailment in Chinese capacity and dumping beginning Oct 1st; and special situations like DowDuPont, Huntsman, Praxair and FMC, a large lithium producer that goes into electric vehicles.

So remember to review all the facts; step back, pause, reflect and consider mindset shifts; analyze/adjust your asset composition and risk controls; do independent fundamental research… and

Invest Accordingly!