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Tales About The Demise of The Stock Market Are Greatly Exaggerated

After a week like last week, I immediately reviewed all of my core beliefs to see if there were any changes to alter my investment outlook.

I heard all the pundits warning after the fact about China, the Fed, the Emerging Markets and oil with negative implications for stock prices while positive for bond yields. The stock market felt like it was in the capitalization phase as investors sold across the board without any differentiation between industries and companies. For example, energy companies were sold with poor fundamentals as well as drug stocks, consumer staples and utilities stocks with stable earnings and high/safe dividends. Remember, interest rates were falling as the strength of the global economy was in doubt so these stocks should have rallied. I was fortunate to have been short the Japanese and German stock indices as I mentioned previously due to the devaluation of the yuan; some ridiculously over valued stocks whose multiples I can not compute; and the the energy complex as I remain bearish on the price of oil.

I also reduced my exposure to financials and long dollars midweek after it became apparent that the Fed was on hold. Therefore I expected the yield curve would flatten and the euro and yen would rally. My funds declined less than half the indexes last week. But I hate losing any money, ever. My goal as a hedge fund manager is to outperform down markets and perform equal or better in up markets therefore significantly outperforming over market cycles. As you’ve heard me say before, I have done this successfully for over three decades and counting.

After my review, I maintain a positive view primarily toward the U.S. equity markets in general and certain stocks specifically that were unfairly hit in last week’s broad market decline.

Let’s take a look at each region to see what data is emerging and then check that evidence against our core beliefs.

1. Concerns about China clearly are the number one issue facing investors worldwide. The general consensus is that the Chinese economy is in worse shape today than generally thought, which, the view goes, is the reason for the recent devaluation to stimulate exports and to stem capital outflows. As I mentioned last week, the Chinese political and monetary authorities are acting in the same manner as our Fed, BOJ and ECB did by increasing the money supply, devaluing their currencies to stimulate exports and lowering interest rates. Give China a break and anticipate positive change from these moves as we did elsewhere.

It was just announced that the People’s Bank of China would significantly add to the country’s banking system with new liquidity to boost lending by cutting the deposits banks are required to hold in reserves and lowering interest rates. Clearly, a plus longer term.

An interesting stat is that the Chinese yuan has appreciated 56% against its trading partners and 33%, inflation adjusted, against the dollar since 2005. Both the IMF and I applaud the move to a more flexible currency to reflect market conditions than be fixed.

Clearly it will take time for all the measures introduced...


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