Manager’s Letter

Margins drove outstanding earnings growth in 2018, and can choke it off in 2019. It may seem as if this correction is a bit overdone. But there is a major issue. Margins are at record highs and forecast to recede.

Star Trek’s Ferengi are a species whose culture is entirely based on commerce. Business is pleasure and money is everything. So how would a Ferengi invest in Earth’s stock market? What would their Blue Planet Portfolio look like?

While no investor who’s long the market enjoys a correction, negotiated properly, it can be turned to an advantage. At Coherent, we focus on proactively mitigating downside risks by actively managing our stock market exposure.

In the current stock market, irresistible forces for economic growth face seemingly insurmountable stock market barriers. GDP is finally spearheading economic growth. However, record operating margins stand a formidable shield against earnings growth.

Sector rotation has accelerated to a whipsawing pace. Mismanaging sector allocations can severely affect your portfolio’s risk-adjusted performance. Is it time for sector rotation strategies? If you like jumping from one moving roller coaster onto another, then yes.

Fifty years ago last month, NBC aired the first episode of Star Trek. In its preceding pilot, “The Cage”, the captain is held prisoner by aliens who have the power to project incredibly lifelike illusions. Concerning the financial markets, people readily create their own illusions without any assistance from aliens. At Coherent, we prefer sound reason over illusion.

Thomas Paine’s “Common Sense” spoke to the common American reasoning for independence from Great Britain. In an ironic turn, 240 years later, Britons voted for independence from the European Union just days before Americans celebrate their Independence Day.