I hope you will forgive me for bragging about the performance of the US stocks we picked for our portfolios over the past 6 months, and year to date ending March31/21.

                
 

                             Investment performance of US Stock Picks
                                3 months to March31/21        6 months to March 31/21
High Income fund                 27.18%                                       35.60%      
Global Fund                            26.01%                                       33.34%
S & P 500 Index                     6.10%                                         19.07%

The US stock returns on all the assets we manage outperformed the market by a wide margin. Of course, past performance may not be repeated but our investment process is repeatable and we intend to improve going forward.

Many investment gurus have been preaching doom and gloom and warning of a major market correction because among other things, the P/E ratio is historically high.

The P/E ratio is high because over half the companies on the market are losing money or earnings are severely depressed. The economy is currently growing rapidly out of the pandemic.

There is good reason to be bullish because of the massive global stimulus and the earnings of many companies are recovering more rapidly than anticipated. The stocks in our portfolios were selected because their earnings and other factors are strongly supportive of higher stock prices.

We expect our portfolio returns to continue to perform well as we participate in impact of additional massive stimulus globally.

The consensus until recently was worried about the impact of deflation. This outlook was wrong and inflation is accelerating, interest rates are rising and gold is no longer the darling of the market.

Inflation and GDP growth are accelerating. These twin events are very positive for the stock markets but negative for bonds and interest sensitive companies such as utilities and REITS . The headline Producer Price Index accelerated 140 basis points sequentially to 4.2% year over year. The fastest pace of acceleration since the index was created. Goods inflation has ramped -up  7% Y/Y.

House prices in the US have increased by 26% Y/Y as a shortage of housing unfolds. The inventory of houses for sale is down to less than half normal levels.

Lumber prices have increased drastically and gained 32% over the past month alone.

It’s difficult to be impressed by the posture of the Federal Reserve in the US as they have been behind the curve for some time. In addition, some of their statements are not confirmed by their actions.

It’s useful to understand the position of the markets. One indicator we consider is which side options contracts are positioned. The latest measure indicated that there is a preponderance of short contracts (46,282) and the number is growing. The hedge funds and other large investors are considerably short the market both in options and equity positions and they are holding high exposure to bonds.

Clearly, they are losing heavily with their negative posture and as the market continues to escalate to all-time highs, they will be forced to cover their short positions. They are being squeezed and this always causes markets to escalate.

The so called smartest investors in the world are on the wrong side of the markets.

Most of the indicators support the view that markets are going higher and we are positioned to participate.

GDP growth is expected to be around 11% for the early part of the year but gradually decline to around 5% as the year progresses. Slower  GDP growth and inflation will require us to adjust our asset mix to Hedgeye’s Quad 4 phase.
Quad 4 is more difficult for the markets because inflation declines and GDP growth slows .In that phase, the best performing assets are interest sensitive companies, gold and utilities. Playing defense will be the best course to lock in gains and prepare for the next growth phase.

This note is longer than usual and dwells on the position of investors and the outlook for the financial markets rather than the economic outlook.

Please email or call me if you would like more information.

Sincerely,
Bruce Sansom
Global Wealth Builders Ltd.