Below are some notes regarding the conference call that we conducted with the team from MFS on March 28, 2017:

  • Theme of Global Reflation:
    • Core CPI still in check, but they are beginning to see this potentially on the rise.
    • Decrease in the price of oil was a large contributor to the headline CPI.  However, it is believed that oil has pretty much bottomed out at around $47.50.
    • Personal income does not seem to be keeping up with inflation.
      • This is a problem as personal consumption is also declining.
      • 70% of U.S. economy is based on consumption.
  • Theme of Potential Disappointment in Changes to Fiscal Policy:
    • High expectations for the three major changes to Fiscal Policy (Tax Reform, Health Care Reform, Re-Patriation of assets / Trade Reform).
    • Market has high hopes that need to be followed through on otherwise, we could see some pull back.
  • China Stimulus is Important for Global Growth
    • Seeing this having impact starting in 2018 as they begin to back off stimulus.
    • Pulling out of stimulus in China could significantly impact commodities, global growth, etc…
  • Should Investors Continue to Seek out Risk Assets?
    • We are in the 8th year of the business cycle and this is the 3rd longest that we have witnessed in history.
    • Valuations are rich according to CAPE and are moving higher.  This doesn’t mean that this trend can’t continue, but it is a word of caution.  The average CAPE is around 16.7x where as we are now trading around 29.3x.
    • Capital expenditures (CapEx) are moving higher, but still soft.  CapEx usually equates to greater amounts of employment.
    • Capacity Utilization for companies is low, so there is really no need at this point for them to increase CapEx.
    • From 2009 – 2016, free cash flow was extremely high.  We are however moving back to more longer term averages.
    • MFS is suggesting a word of caution, but still to remain invested while looking for assets with lower volatility and correlation to overall markets.  This plays right into the eNVESTOLOGY models of diversification amongst low correlated asset classes.
  • Where does MFS see Upside:
    • If fiscal stimulus is expedited or meets expectations.
    • If monetary policy from the Federal Reserve is delayed through either holding off on interest rate increases or delaying the repurchase of bonds acquired through the Quantitative Easing Program.
    • Markets appear to be attached to a story rather than facts at the moment.

Overall, this is some rather bearish commentary from the MFS team.  However, it should be noted that markets can stay elevated for long periods of time while earnings and revenue growth play catch up.  There hasn’t been too many times in history that corporations have had access to extremely cheap leverage while also having strong balance sheets.