Should we buy the dip?

Last Wednesday we saw a broad sell off in global equity markets. We had not seen this degree of a sell off for quite some time. For instance, the most widely used ETF (QQQ US) of the NASDAQ 100 Composite Index fell 2.54%. The next day QQQ rose by 0.87%, and on Friday it rose again by 0.42% – closing at a level that was just 0.87% away from recent highs.

Our foremost mission is to safeguard our clients’ capital. Therefore, when faced with drawdowns of a significant amplitude, we must decide whether fight or flight is the most appropriate response. In other words, should we be selling, or should we buy the dip?

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A Great Profile on Brookfield Asset Management

I have been following Brookfield Asset Management for the past 15 years. It is a wonderful company that eschews short term market noise and stands fast and strikes when others lack the desire and/or capital to do so. They are among the most long-term orientated investors out there. Brookfield is one of our top holdings and we will keep on buying it on any price weakness for the foreseeable future.

Here is chart of Brookfield’s performance over the past 15 years versus the S&P 500 index:

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We Have Been Selling

In our January commentary (LINK): Our January Results), we said the following:

Looking at the broader market, all major US stock indices are at all-time highs. On the other hand, the Volatility Index (VIX), which expresses anticipated market volatility, is at historical lows. Although we have been taking profits on some of our high-flying stocks, we do not intend to try to time the market by selling stocks that we like in the hope of buying them back more cheaply in the future. This is called being ‘cute’. ‘Cuteness’ is the domain of babies and puppies, not investment managers.

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OUR APRIL RESULTS

Our weighted average return in April was +2.23% bringing our YTD return to +7.43% (net of all fees).

Earnings season has started and most of the companies in our portfolios that reported their earnings in April traded up strongly – most notably Amazon Inc. and Alphabet Inc. Both are currently trading at all-time highs, as are the major US stock market indices. We sold Amazon after earnings and thus increased our cash holdings. We might have to buy Amazon shares back at higher prices, but at the time being we prefer to err on the side of caution.

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German Business Climate is Getting Better and Better

The business climate in Germany continues to improve. This is good for stocks.

Just like the sun warms the ground in spring and lets farmers plant their crops, so too does optimism lead to heightened investment and economic growth. Think of the liquidity provided by the ECB as seeds. Having seeds is great, but you can not make actual use of them if your fields are frozen. It looks like the fields have finally thawed, and the sun (business and consumer confidence) is shining. This is the critical element that the European economy has been lacking.

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Merci Macron!

Three weeks ago we explained our rationale for investing in European banks:

LINK: European Banks

The results of the first round of the French presidential elections sent this trade into high gear.

Here is the chart on the iShares MSCI Europe Financials ETF (+5.77% yesterday):

And here is the chart of UniCredit (UCG IM):

UniCredit rallied 13.77% yesterday. You would have to hold a German Bund for a life-time to receive a that sort of net return.

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This Is Not Just A Trump Rally…

People often fall prey to over-simplifying things.

A poignant example of this tendency is the that market rally since the US presidential elections has been dubbed the “Trump Rally”. This oversimplification does not give credit to the fact that many of the drivers of this current market environment were set in motion before the elections. Here is a list of important charts that evidence this point:

LINK: Market Not All About Trump

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