Thoughts

Dear Ladies and Gentlemen

Many thanks for your messages and for sharing some of your investment ideas and concerns with me. Bob, John, Tom, Roger and Peter thank you very much for your extensive messages!

Thoughts on Cash

The following thoughts I have shared in one way or the other with some of my readers. Given the circumstances and current market conditions, I genuinely think a certain level of cash does not hurt. Tom also let me know that he is building up cash by selling into the strength. If the market or individual stocks are going to correct, cash can help to acquire positions at compelling prices.

Thoughts on Market Timing

However, in general, investors should stay invested (there is tons of statistical data showing that long-term performance is becoming more attractive by staying invested than by trying to time markets). While the investment style may change according to the risk profile or whatever preferences an investor may have, investors should thus and according to statistics, stay invested at least partially. Now, this is fine for me, and it is what we are doing in our private clients‘ mandates.

Thoughts on Cash-Flow

However, I like positive cash-flows and companies that share positive cash-flows with their investors. Because if an investor can harvest dividends regularly and long term, the underlying price of the investment becomes somewhat less important. This, of course, given that the company’s future cash-flows will cover future dividends. Thus, to me, investing also means finding companies that will offer sustainable net free cash-flows even during difficult market conditions. Yet, because even stocks of such companies may suffer from setbacks during a crash, investors with cash have the opportunity to buy more of the same and hence harvest ever more dividends in the years after that. I very much like the effect of compounding positive cash flows in our private clients‘ mandates.

Thoughts on Bond Yields

I was asked why the 30-year treasuries‘ yields went down. Well, in the aftermath of the Fed meeting, yields rose at the short end and fell at the long end. This movement can be called a bearish flattening of the US yield curve and may be considered a leading indicator of a contracting US economy. Why is that? A flattening of the yield curve is consistent with the finding that interest rate movements at the long end are driven by economic conditions, which in turn are partly due to central bank actions. Which is what the market is currently pricing in. Because if the US central bank tightens the reins, i.e. QE reduction, interest rate hike (as market participants currently believe the Fed will do), and thus reduces liquidity, the probability of a weaker economic development in the future increases. A weaker economic development in the future causes interest rates to fall at the long end.

Please, Ladies and Gentlemen, let me know your thoughts!

… but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

Ladies and Gentlemen, I wish you an excellent start to the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth