Print Friendly and PDF

China Reset

Brouwer & JanachowskiJanuary 8, 2016

And we’re off. The China stock market sucked the air out of the room this week. It’s a strange beast. The size of the market relative to GDP is around 58% compared to 150% for the U.S. But the free, or tradable, part is about one-third as small again. And it runs on high levels of retail margin. What we saw was pent up selling, circuit breakers kick in, the market close and then repeat for two more days. The authorities dumped the circuit breaker system and allowed the market to settle. This is what it looks like:

1 jan

So, yes, it’s noisy but investors are up on the year. That lower line is the S&P 500. And puts the recent U.S. correction into some context. One reason why we avoid highly volatile situations.

Talking of which…

Market leadership last year was more concentrated than we can remember in a long time. The so-called FANGs (Facebook, Amazon, Netflix and Google, now called Alphabet but why spoil a good acronym) were up 40% to 140% last year and selling on nosebleed multiples. They have since corrected, led by Amazon down 10% at one point. We’re seeing a very divided market with some stocks hit hard by sentiment. One which caught our eye was Greenbrier. We (and I) don't own it as we tend to use funds and ETFs more than individual stocks. But here’s a company that makes rail cars. It earned around $200m last year and its market capitalization is $700m. It's just one example, granted.  But much of the stock market is pretty unloved right now and that's when bargains come on offer. Most analysts are bullish on earnings for the year. We agree. But we will have to wait for some of the geo-political and macro noise to clear for market confidence to return.

We won’t go on about it…

Well, yes we will. One more time. We think the Fed blundered by hiking rates in December. It was a “close call” as some governors are wary about slow inflation as a sign of the ongoing not-so-great recovery. Two data points came out in the week. The first showed weaker ISM numbers. This is really a tale of two economies. Services good. Manufacturing bad. Which is a reverse of what we had in 2013.

2 jan

The other was the new jobs number, which came in at a cracking 292,000. But earnings were down and long-term unemployment rose. Call us picky.

Bottom Line: We’re very glad to have high quality bonds right now. They offer just the protection we need while we steer through the New Year, new policies and a mature bull market.

--Christian Thwaites, Brouwer & Janachowski, LLC

Please note that the discussion of the investments and investment strategy of Brouwer & Janachowski, LLC (“Advisor”) (including Advisor’s research and investment process) represent the investments and investment strategy of Advisor at the date of this commentary, and are subject to change without notice.  Advisor cannot assure that the type of investments mentioned in this commentary will outperform any other investment strategy in the future, nor can it guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. 

References to an individual security should not be construed as a recommendation to buy or sell that security.  In addition, the securities noted in this presentation are only several of the successful as well as unsuccessful investments by Advisor, and do not represent all of the securities Advisor has purchased, sold or recommended. 

Advisor cannot guarantee the accuracy or completeness of any statements or numerical data in this commentary.  Past performance is no indication of future results.