THE WINTER LETTER
If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties.”
– Francis Bacon
Economic Perspective
“If what you’re selling is bullshit, then you need a shovel, and if what you’re selling is truth you really only need a teaspoon.” Wherever possible, we employ a teaspoon.
Non-defense durable goods orders at year end slipped significantly as lingering trade tensions with China impacted business activity. While US gross domestic product expanded at a 2.1% annual rate in the final quarter of 2019, on government spending fueled by deficit financing grew; consumer spending and business investment, the other components of GDP, fell noticeably.
As Davos participants repeated often while business confidence has improved, it remains to be seen if that translates into greater business investment in coming months. Only business investment can fuel an accelerated economic expansion and justify current elevated price-earnings multiples of stocks.
With European growth anemic and little stimulus from other parts of the world, the economic spillover of the coronavirus in China, sent a shudder through financial markets globally in late January.
Market Prospects
The stock market in 2019 surprised most analysts and registered the strongest advance of any year in the decade, climbing the fabled wall of worry. The first weeks of January followed suit only to run into fears of a coronavirus influenza pandemic.
In the near term, the spread of the coronavirus out of China will claim investors’ attention. Medium term, the Presidential election and still unresolved trade issues with China will probably put a damper on stock market advances.
The twin technology tsunamis of 5G wireless technology for digital cellular communications and the Cloud (offsite storage of massive quantities of data) facilitating Artificial Intelligence applications and other massive data analysis applications are driving major economic changes. Producers and users jointly benefit. Major cloud providers include Microsoft and Google. Beneficiaries of the 5G adoption include Verizon.
In an effort to navigate the treacherous market waters we emphasize sectors like: more resilient large cap names (Illinois Tool Works, Unilever); the out-of-favor pharmaceuticals and biotech (Bristol-Myers, Eli Lilly, Merck, and Gilead); entertainment (Liberty Media, Disney, Comcast); technology (Ansys, Palo Alto Networks, nVidia, Microsoft and Google), dividend plays like ONEOK Inc.; and specialty manufacturing (Hexcel, Reliance Steel, and Wabtec).
Privacy Policy Notice
Bache Capital Management, an independent investment advisory firm, is committed to safeguarding the confidential information of its clients. We hold all personal information provided to our firm in the strictest confidence. These records include all personal information that we collect from you or receive from other firms in connection with any of the financial services provided by Bache Capital Management. We also require other firms with whom we deal to restrict the use of your information. A complete privacy statement concerning our firm’s policy is available upon request. If you did not receive and return a confirmation of this policy, please contact us.
Stephen K. Bache, CFA
Sources: Bloomberg Businessweek, The Economist, New York Times, The Wall Street Journal; Tony Horwitz, Spying on the South
