First and foremost, I want to send wishes to you and yours for the very best of the Holiday Season. Be safe, enjoy family and friends and may your New Year be truly blessed.
I am grateful for being able to be of service and truly appreciate the opportunity.
At the end of the calendar year, it is always more fun to be discussing gains but alas, this year those were pretty tough to come by. Our data suggest that is about to change though – so patience is still a part of the game.
Collectively, our confidence should be high partly because so many feel down and concerned.
Put simply – there are massive growth waves coming our way. Think of the late 70’s early 80’s and how that transition felt for many then.
Then recall what happened afterward. And then, hang on for the ride.
These Things are Certain
You know how things go. The experts all get together and a bell curve forms filled with “obvious” things.
They are so obvious that they form some sort of mind altering drug, nullifying free thinking and making us almost follow like robots.
That, my friends, is where contrary thinking comes in.
Let’s play a little game with ourselves and review the obvious things we should expect in 2016 according to experts.
And then, afterward, I discuss below the far more likely outcomes we should be prepared for instead. It’s always fun to look back at these things a year from now to see who was “right”.
……and away they all flew like the down of a thistle:
The Obvious: Energy….it’s all bad. What possible intelligence could be uttered at this stage on the topic? Debt defaults in the energy world are going to trickle down, explode in our faces and destroy us all. Cheap oil is to be feared as it somehow is now terrible for all of us – even the manufacturers that use it to make stuff. We are in peril. Where are the days of $147 oil when you need them?
The Not so obvious – but more likely: Alas, I suspect we will find that cheap gas is a good thing after all. Yes, there will be defaults – but most energy bonds are in private hands and not banks. Indeed the banks have never been healthier but they cannot run as businesses until we get a new administration that actually cares for business and repeals layers and layers of headwinds. It is far more likely that most energy companies find ways to adjust – rebuild and become accustom to cheaper oil prices. They will learn to be more productive, more cost conscious and will do so more carefully. Technology already has them profitable in the high 30’s…expect that to become the high 20’s by the end of 2016. In another decade or two – maybe far sooner, it will become clear that 3-digit oil is a thing of the past. And the world will not end because of it.
The Obvious: Commodity Plunge. In a sister disaster to the energy collapse, the commodity guys have been slaughtered. So much so that the experts are now certain that everything is going to zero. Perilous events are sure to be on our doorstep – that is only if the energy “disaster” does not destroy us all first.
The Not so obvious – but more likely: The world will still build things using copper, steel, iron, plastics – and we will need/use more food everyday. Hence, now that commodities are all “worthless” according to the experts, I suspect we should instead think of it this way: Commodity companies will restructure, they will learn to cut down supply to better balance the markets and they will become more productive in what they put out the door. Costs will slowly fall and investment will be more balanced. A year or two from now – these companies will have “adjusted” and learned to be profitable “at perilously low commodity prices”. While the stocks are stinkers now – those buying them in 2016 will likely be heavily rewarded 5 to 10 years from now if they can be patient. Oh yes…and the world will do just fine with cheaper commodity costs.
The Obvious: Deflation is here to stay. Yes, the combination of the events above has birthed an entirely new wave of deflation experts. I am sorry, gold goes up in deflation how? Oh wait – that is another problem. Anyway, yes, we have been feeling the effects of deflation. Yes, that is a risk. Here to stay? Not.
The Not so obvious – but more likely: Years ago during the QE1 and QE2 frenzies, the experts were telling us that inflation was going to consume us all. Money would be worthless and the “printing presses would destroy the US”. Instead we suggested then, “while the whole world is now focused on experts and their scary inflation warnings, what we should really be concerned about is deflation. Be assured it has a far worse effect than its ugly duckling brother – inflation.” Alas, deflation is now the obvious….and, well, it is time to look the other way again.
Now, we suspect many will be “surprised” to find later in 2016 that “inflationary pressures” will come out of left field. They won’t be terrible mind you – likely close to the 2% target the Fed has voiced. Here is the deal though – when it does come about – we will be told it is terrible for us. A And we will be best served to ignore the experts again.
The Obvious: Corporate Profits Plunging in 2016. Yes, as the story goes, the dollar will skyrocket, profits will plunge, commodity costs will plummet leading to further losses and the spiraling effect will take hold, throwing us all into darkness. Uh, not.
The Not so obvious – but more likely: Corporate profits were up over 5% this year – ex energy. Cash flows are at records. Buybacks too. M&A as well–we told you to expect that last year as we edged closer to the end of Obama in DC. Expect more of the same next year as the next wave of productivity gains is unleashed on many tired entities. Technology and new thinking from GenY management teams will slowly begin to form the new waves of the future. Profits have already felt the worst of the energy comedown as well as the launch of the dollar. It is the relative change year over year that we want to focus on. As such, we will begin to round-trip some of the worst quarterly setbacks felt this year for many companies. Expect those numbers to see “surprising improvement” from analysts by the end of Q3 in 2016 as the round trip effect begins to take hold. By 2017 we will have forgotten “the impact of lower crude prices and the stronger dollar” as the bulk of companies will have adjusted to same by then.
And profits….well, we suspect many more records ahead are in order – even if interrupted by slower paces of change and ramp-up at times.
That is what patient investing is all about.
So Now What?
This year admittedly stunk as we transitioned multiple waves of change through our economy. If you did not own 5 or 10 specific stock s, you went nowhere for gains.
It was that feeling of “walking in quicksand” we covered several times in your morning notes throughout the year.
We will look back a few years from now and this will become more clear as batons were being handed off in many areas of the economy. Until then, we must remain disciplined and not run from fearful setbacks.
The crowd will quickly exit stage left – we have been taught that repeatedly. Let’s use it to our advantage.
Pray for windows of setback so one can take advantage of wrong-minded experts.
Years like this are very often followed by surprising catch-up periods. The wild card next year is politics and a new administration – but anything we get will be better for business than the last 8 years have been – I hope : )
My outside bet is Bloomberg shows up right when no one expects. If he does…put cash to work.
I Will Stop Rambling
This one went on longer than I thought it would – sorry.
I leave you today with Holiday wishes and thanks – again.
Here are some words to ponder as we celebrate the Season and the start of a New Year:
“Same old fears and same old crimes, we haven’t changed since ancient times.”
The Sunscreen Song….enjoy:
Ladies and Gentlemen of the class of ’99 If I could offer you only one tip for the future, sunscreen would be it.
The long term benefits of sunscreen have been proved by scientists whereas the rest of my advice has no basis more reliable than my own meandering experience…I will dispense this advice now.
Enjoy the power and beauty of your youth; oh never mind; you will not understand the power and beauty of your youth until they have faded. But trust me, in 20 years you’ll look back at photos of yourself and recall in a way you can’t grasp now how much possibility lay before you and how fabulous you really looked….
You’re not as fat as you imagine.
Don’t worry about the future; or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubblegum.
The real troubles in your life are apt to be things that never crossed your worried mind; the kind that blindside you at 4pm on some idle Tuesday.
Do one thing everyday that scares you
Don’t be reckless with other people’s hearts, don’t put up with people who are reckless with yours.
Don’t waste your time on jealousy; sometimes you’re ahead, sometimes you’re behind…the race is long, and in the end, it’s only with yourself.
Remember the compliments you receive, forget the insults; if you succeed in doing this, tell me how.
Keep your old love letters, throw away your old bank statements.
Don’t feel guilty if you don’t know what you want to do with your life…the most interesting people I know didn’t know at 22 what they wanted to do with their lives, some of the most interesting 40 year old’s I know still don’t.
Get plenty of calcium.
Be kind to your knees, you’ll miss them when they’re gone.
Maybe you’ll marry, maybe you won’t, maybe you’ll have children,maybe you won’t, maybe you’ll divorce at 40, maybe you’ll dance the funky chicken on your 75th wedding anniversary…what ever you do, don’t congratulate yourself too much or berate yourself either – your
choices are half chance, so are everybody else’s.
Enjoy your body, use it every way you can…don’t be afraid of it, or what other people think of it, it’s the greatest instrument you’ll ever own.
Dance…even if you have nowhere to do it but in your own living room.
Read the directions, even if you don’t follow them.
Do NOT read beauty magazines, they will only make you feel ugly.
Get to know your parents, you never know when they’ll be gone for good.
Be nice to your siblings; they are the best link to your past and the people most likely to stick with you in the future.
Understand that friends come and go,but for the precious few you should hold on. Work hard to bridge the gaps in geography and lifestyle because the older you get, the more you need the people you knew when you were young.
Live in New York City once, but leave before it makes you hard; live in Norther n California once, but leave before it makes you soft.
Accept certain inalienable truths, prices will rise, politicians will philander, you too will get old, and when you do you’ll fantasize that when you were young prices were reasonable, politicians were noble and children respected their elders.
Respect your elders.
Don’t expect anyone else to support you. Maybe you have a trust fund, maybe you have a wealthy spouse; but you never know when either one might run out.
Don’t mess too much with your hair, or by the time you’re 40, it will look 85.
Be careful whose advice you buy, but, be patient with those who supply it. Advice is a form of nostalgia, dispensing it is a way of
fishing the past from the disposal, wiping it off, painting over the ugly parts and recycling it for more than it’s worth.
But trust me on the sunscreen…
Be well and safe.