Letter - April 2016

 

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Was It All Just a Bad Dream?

Six weeks down, six weeks up, finish unchanged. How else can we characterize the first quarter but as just a bad dream? After a similar sell-off and rally in September-December of 2015, the New Year’s renewed sharp decline raised possibility of another 2009-like panic. While the major indices were down about 10%, it felt much worse. Many stocks declined 20%-30%. Fear was palpable.

The bogeyman under the bed was the fear of imminent recession. Growth over the eight years since the end of the Great Recession in 2009 had been historically tepid at 2%-2.5%. The Fed’s policy of ultra low interest rates was just barely keeping the economy moving forward. There was little room to stimulate the economy with yet further interest rate cuts. The Fed was pushing on a string. Corporate earnings were expected to fall, hit by the collapse in the oil price and a strong dollar. The stock market, to be generous, was fully valued and had failed to make a new high at year-end after the autumn sell-off. Surely this was the beginning of a recession and bear market.

On February 11, Chair of the Federal Reserve, Janet Yellen, in a news conference after a Fed meeting indicated that the Fed did not see recession as imminent, but was sensitive to market turmoil and would thereby raise interest rates at a more leisurely pace than expected. This set off a six week rally in the market, recouping just about all its losses by the end of the quarter.

While we welcome the rally (client accounts are up handsomely as of quarter-end), when we slip under the covers at night, we continue to be disturbed by events. Fundamentally, little has changed since year-end. The economy continues to limp along at a sub-par rate. Corporate earnings are weak. Bond yields continue at historic lows suggesting the economy remains weak. Adjusted for inflation, some bonds have negative yields. (Investors have to pay for the privilege of lending to the government!) Stock prices remain fully priced, at best. Gold has had its best three months in more than a decade, signaling a certain amount of stress in the economic and political system. China, ISIS, presidential politics…little seems to be moving in the right direction (with the possible exception of the dollar, which has stabilized, for reasons we find hard to explain).

It remains unclear whether or not the bull market is dead, though after seven years of rising prices, it is late in the cycle. Our strategy going forward remains the same: maintain above average cash balances; selectively buy on market weakness as we did in the first quarter; continue to have exposure to gold as a hedge which worked so well over the last three months; be willing to take profits. While bad dreams reflect our anxieties and concerns, well founded or not, they tend to reoccur over time. We take them seriously.


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As a Registered Investment Advisor regulated by the Securities and Exchange Commission, P.R. Herzig & Co. is required to offer clients copies of our form ADV Part 2. This form describes in plain English our business and how we operate. The form can be found on our website, www.prherzig.com. Hard copies are available upon request. There have been no material changes in the past year.

 

Tom Herzig


 

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