It seems like geopolitical concerns have no impact on the direction of the stock market – Brexit, attempted coup in Turkey, truck terrorism in France, cops assassinated in Dallas and Baton Rouge – the list goes on and on.  In the past, any one of these incidents may have derailed the market.  Yet, the market continues to ignore these events and move forward with a sense of invulnerability and complacency.  It is at times like this that facts and fundamental analysis should rule investment decisions, not emotions.  Here are some facts to consider:

• S&P 500 revenue has declined 5 straight quarters (including 2^nd quarter 2016).  More and more companies are now presenting  financials on a more favorable “adjusted” earnings basis with only 26 companies in the S&P 500 reporting earnings on a GAAP (Generally Accepted Accounting Principles) basis.  And, the gap between adjusted earnings and GAAP earnings is the widest since 2002 and 2009 – both the bottom of two horrible bear markets.
• Analysts are projecting huge increases in earnings to justify current stock prices. Below is a chart showing how much analysts are projecting increases in company operating earnings from the second quarter of this year.   As you can see, they are expecting a gain of 21.1% in the 4^th quarter of this year and a 44.6% gain in the 4^th quarter of next year.   Could this happen?   Possibly, but increases at these levels when the economy is growing sub 2% annually seems unrealistic, to say the least.
• There are approximately $12 trillion in government bonds around the globe with negative yields (you pay the government money for the privilege of owning their debt).   This is an experiment by various governments to incentivize people to spend money rather than keep it in the bank.  However, it has had the opposite effect as people are hoarding their cash (same thing happened in the Great Depression).  One only has to look at what individuals are doing in Japan.  Demand for 10,000 yen notes (which now represents 92% of all yen notes) increased by 6.2% last year and cash in Japan is almost 100 trillion yen (20% of the economy) today.  Gold sales in Japan are up 30% for the first half of this year compared to last year.  That cash and gold has to be stored somewhere.   That explains why sales of safes have doubled in Japan over the last year.
• Because of Brexit, Europe will definitely experience changes. What those changes are, we don’t know yet.  Will the Brexit go smoothly or will the EU try to make an example of Britain to prevent other countries from leaving?  Will nationalism take hold in other countries because of Brexit and immigration?   Five years from now, Europe will look different than it does today.   It is too early to tell if those changes will be a positive or a negative.   Uncertainty will weigh on Europe for quite some time.

What does this mean for your portfolio:

We are making investment decisions based on facts and fundamental analysis.  The combination of falling company revenue, unrealistic operating earnings expectations and overvaluation is why we have the lowest exposure to US large company stocks in our 24 year history.    Japan and Europe’s desire to hoard cash and precious metals should boost precious metal prices higher.  It is why we have a position in precious metals.  No one knows how the negative yield experiment will end.  However, focusing on fundamentals and facts helps avoid overpaying for an asset.  We continue to be investors and not day traders.