Manager’s Letter 2015 Q4

January 28, 2016


Sargon Y. Zia, CFA

Chief Investment Officer, Portfolio Manager

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The stock market is as much a study in human behavior as it is a study of fundamental trends. Neither changes very much over time. As we started the new year, I reflected on how often some things stay the same. My favorite philosopher Yogi Berra might say, “It’s déjà vu all over again.”

Since ringing in the new year, the market has been wringing out some over-valuation. But by my measure this correction started in September 2014. Markets top like aircraft carriers turn, changing course quietly over time. In contrast they bottom abruptly amid the clamor of volatility and anguish. Markets are human nature on display.

Declining Forward Earnings Estimates

The chart below shows a consistent down-trend all last year in the S&P 500 Index’s 2015 operating earnings growth estimates. This has not changed for the better, not yet anyway. Earnings growth has dropped by more than 18% over 12 months, from an optimistic 12% to a negative 6%. Analyst had been calling for growth to turn positive by about year end. Those estimates have been pushed forward a bit. I guess “the future ain’t what it used to be.”

Source: S&P Dow Jones Indices, us.spindices.com December 31, 2015
Source: S&P Dow Jones Indices, us.spindices.com December 31, 2015

The Market Looks Ahead

The market looks forward, weighing risk against return. Growth estimates have trended excessively optimistic for many quarters. The next chart marks the S&P’s correction from September 2014, ahead of the downturn in earnings. I’ve catalogued my concerns in several quarterly letters. What’s ailing the market is fundamental.

Source: Stockcharts.com January 27, 2016
Source: Stockcharts.com January 27, 2016

Dry Powder

We began raising cash levels in July. At this time one-third of our portfolio strategy equity allocations are in cash. We will raise equity levels when we see market action that signals a more confident turn. With this much dry powder, we don’t have to be exactly right, but if you aim small, you miss small. Or, “You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.” Perhaps Yogi should have been a portfolio manager.

One thing has changed…

Tom Pietrack and I are delighted to announce the start of our own RIA firm. We invite you to visit our website and read our article “Why Coherent”. Your financial well-being is our unyielding focus. We honor your trust and thank you for allowing us to take care of you. We feel privileged to serve you.

 
Warm Regards,
Sargon Zia, CFA
January 27, 2016

Published quarterly, the Manager’s Letter series primarily communicates the author and Chief Investment Officer’s personal opinion on the markets and other topics of interest to our clients.


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