A Look Into 2016

Currently, my ‘inbox’ is working overtime while I’m sleeping. Dozens of reports titled ‘outlook for stocks 2016’ or ‘market perspectives 2016’ make their way into my box overnight.

The right strategy for 2016 is probably in mind of many investors, so this ‘outlooks’ and ‘perspectives’ are just in time.

Before we start to take a look into the markets for 2016, I suggest you consider just this point.

A new year is often an impulse for humans for a personal change: stop smoking or trying to loose weight – we try to make a fresh start in many cases as of January 1st.

Stocks, corporate-profits and the economy are not celebrating the revelion and therefore don’t know such thing as a new year. A change in a trend can and will happen on any trading day throughout the year.

Still, the quiet period around Xmas and the revelion is giving some time to contemplate, what really matters in stocks.
When you made up your mind, you can start investing. On 1 January, on February 28 or any other day.

So, what really matters, when it comes to stock-investing?

I’m a supporter of the KISS-principle (keep it simple, stupid!), that’s why I take 3 factors into account only:

• Interest rates
• Earnings
• Valuation

Interest rates:
We can pretty much assume that interest rates in the Eurozone will remain low in 2016 (and beyond), while the US will see a rise.
One effect is a stronger USD/weaker EUR. This could be an advantage for european exporters like BMW. With regard to european consumers, the low rates could help stocks like Carrefour or Telefonica. If you like it more riskier and decide to bet on a stronger, job creating economy in the eurozone, the world’s largest staffing company, Adecco, is your choice.

Across the pond, the increase of the Federal Funds will have as a first effect, that it becomes more expensive for banks to borrow money from the Fed. Banks will compensate this by charging more for customers to borrow money or on their credit card debts.
Bottom line: Consumer spending that accounts for 75% of the total US-economy is most likely decreasing in 2016. The effect on stocks is different, some retailers will suffer, but strong brands as Nike or Walt Disney and defensive shares from the likes of Eli Lilly, Bristol-Myers or Merck in pharma, Kraft-Heinz (food) and Altria (tobacco) should shrug off a weaker consumer sentiment.

While consumer weakness is first ‘only’ affecting the top line, another effect of the interest hike in the US – the rising cost of capital – goes directly into the bottom line – the net earnings.
Which stocks can still deliver quality or higher than expected earnings? Besides the above mentioned corporations, I would add Netflix and Wells Fargo from the US. In Europe, I have Siemens, Unilever, Vivendi and UBS on my watch list.

A final thought on earnings. The measurement for investors is not the overall amount a company makes, but the earnings per share (eps). This figure moves stocks.

But over the last years, the eps-figure has been steered, not to say manipulated. Companies were very active in buyback their own shares. Thereby the amount of shares in free float is reduced. A part of these buybacks is perfectly justified, because a lot of companies pay their managers in options or stocks and really need these shares to buy.

But the big rest is more or less earning-cosmetics. Apple for instance bought back 10% of the outstanding shares back in the last two years. Result: If Apple delivers today the exact same earning in Dollar as in 2013, the market-moving eps would be 10% higher regardless of identical earnings from the business.
And this trend may continue, not only at Apple, especially since the annual bonus for top-management is often linked to the eps-figure.

The valuation of a company is based on the stock price in relation to the earnings per share. This figure is called Price/Earning Ratio or P/E.
The lower this number, the lower the valuation. IBM could be seen as a stock with a low valuation right now.
When it comes to valuation, Warren Buffett is the undisputed master and he’s holding IBM too.
To invest in Buffett’s own company, Berkshire Hathaway, is always a wise choice but be aware – the current price for 1 share of the a-class is round about 200’000 USD. Investors with a smaller budget may purchase the b-class with less voting rights. The ‘baby berkshires’ are traded around 135 USD.

On the other side of the P/E spectrum is Amazon, that would make Amazon the most expensive stock. But in the case of Amazon, it makes more sense to take the cash flow after capital expenditures into account. And this makes Amazon much more attractive regarding future earnings.

But I have to admit, I’m a fan of Amazon as a customer and investor and I stick with the stock for 2016 regardless the current valuation.

From time to time, I check a 4th factor to become an idea what’s going on. This factor is called insider-buying/selling.
Top managers, as mentioned in the buyback-section, usually get paid their salary or bonus not cash only, but to a big part in stocks of their company.

When we assume, these guys know first hand the current state and the perspective for the company they work for, the data from insider-selling/buying is worth to look into.

In November 2015, these insiders were selling stocks of their own company to the tune of almost 500 million USD – per day. This is the highest number since May 2011.

Does it mean, they sell, because they know the stock will tank over the next months? Well, that’s possible in some cases and selling into a relative strong market ahead of an interest hike is not the baddest of ideas.
But the motives for this selling
are often personal – to pay taxes, for a new house, a bigger boat, a costly divorce or jewelry for the mistress – to keep her quiet and avoid a costly divorce.

Still, the fact, that the November figures for insider-selling are the highest in more than 4 years, could indicate a rough ride for stocks and a challenge for investors.

That brings us back to our 3 basics factors. The stocks who could perform better than the rest in 2016 are those who can shrug off the interest rate hike, deliver strong earnings and have an attractive valuation.

Even McDonald’s or Starbucks started small once. Their history has a remarkable similarity and is proof, that almost anybody can start a successful business. You don’t need a lot of money or a perfect strategy. An inspiration – if you plan to start your own business – coming up in the next chapter: http://www.theleader.ro/secrets-of-success/

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