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Time To Some Jazz

Summertime, and the livin' is easy

We are currently living under very hot weather with wild fires out of control in several countries around the globe, parched fields here and flush floods there, igniting discussions about climate change. Let’s not complain, the next winter is around the corner. For us, it is time to move our deck chair to the shade in our Pomona orchard, indulge in the classics and take stock.

Fish are jumpin' and the cotton is high

Sluggish growth has finally been overcome, with the US economy growing at 4.1 per cent. This was achieved after the rate had been deflated to take account of the statisticians’ estimate of 3 per cent inflation — meaning nominal growth exceeding a whopping 7 per cent (!).

Moreover, Corporate America could celebrate a boom in profits, which have once again grown more than 20 per cent, year on year. Despite the imposition of tariffs on imported goods by the US and China and the threat of further tariffs, global equities held up well. Robust economic data in the US and first signs that Europe is leaving the soft patch behind supported markets.

Oh, your daddy's rich and your ma is good-lookin'

We have profited in recent years by keeping our investment focus on economic reality rather than political headlines. The biggest economic news over the past month has been the strong jobs report in the US, which has helped propel US equities to a six-month high. This has also had a ripple effect on consumer spending where we are seeing a solid increase this year. The American population feel richer and are looking forward. The high yield bond market is overvalued and has become a high risk, low reward marketplace with limited liquidity and excessive complacency. There is still no alternative to the equity market, for now.

We saw the headline grabbing cataclysmic loss of confidence in social media stocks. Facebook suffered the biggest one-day loss of market value in US history, dropping almost USD 120bn. We should remember, though, that Facebook stock had rallied from USD 155 when the Cambridge Analytics scandal broke to more than USD 200 before dropping back to USD 175. Investor still made USD 20 per share in just the past 5 months. And yet the broader stock market remains fine. It may just be a short-term correction of tech stocks which could present a buying opportunity for the long-term investor.

So, hush, little baby, don't you cry

Put all of this together, and things are going according to plan. This business cycle looks ever more like a normal one, which is a fantastic and welcome development after an epochal crisis and then a decade of doldrums. Some of these factors could reverse, of course. The retreat from QE has a lot further to go, and the sugar rush, which was administered when the economy appeared in no need of stimulus, could eventually be followed by a hangover.

Volatility is likely to stay high with the debate on tariffs intensifying over the summer. This could be a could time to sell some calls or puts.

For now, it is really hot. Enjoy the summer and if you have any comments and suggestions, we are happy to hear from you.

Switzerland, August 1st, 2018

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