Bern Factor. Weekly Letters

by Mark Bern, CFA Estimates Rising The range of forecasts for Q2 (quarter 2) GDP growth is huge.   The lowest forecast found by the Wall Street Journal Quarterly Forecasting Survey this June was 2.9% and the highest was 4.2%, with the average at 3.58%.   But forecasts have moved higher recently because of a shrinking trade deficit and higher than expected consumer spending.   As of June 27 th, Macroeconomic Advisors, said to be provide the most detailed forecast on Wall Street, predicted an increase of 5.3%.   GDPNow, provided by the Atlanta FED, is predicting 4.5% and the NY FED’s NowCast is calling for only 2.9% growth.   Q3 and Q4 forecasts range broadly by the averages were about 3.05% and 2.9%, respectively.   These forecasts are likely to be raised as well.   But if those older predictions turn out to be close and the more modest rate of 3.6% for Q2 becomes reality the average for the full year will be about 2.94%, which would be the...

By Mark Bern, CFA First, I want to disclose a relationship that I have with another firm, Friedrich Global Research (FGR).   FGR runs a subscription service in the Marketplace on Seeking Alpha.   In it we have developed model portfolios for our subscribers similar to what I plan to develop for clients of Bern Factor.   FGR uses the Friedrich algorithm to make stock selections, primarily for potential growth, based upon analysis of free cash flow.   Next I want to illustrate why selectivity is so important to investor success.   While this week has been a roller coaster for equity investors, those who are investing with the Friedrich algorithm are happy.   The two main model portfolios, the Friedrich Final Four and the Chicago Bulls Aggressive Growth, have outperformed their respective benchmark (NYSE Composite Index, NYA) and the S&P 500 Index since their inceptions.   Their performance is charted below (our model portfolios are represented b...

By Mark Bern, CFA I was sent a link to an interesting video clip this week of an interview of François Trahan by Consuelo Mack of Wealthtrack. And, by the way, I appreciate receiving such links from my highly informed readers.   I highly recommend you take the 26 minutes to watch.   Here is the link . The gist of the interview was that growth companies are in short supply relative to both the whole market and from a historical perspective and that this situation translates into a very high probability that growth companies will continue to outperform the rest of the market.   Demand for growth remains very strong from investors and we are past the cyclical peak for industrial growth.   That means, according to Mr. Trahan, that cyclicals and value will probably lag the overall market for the next couple of years, or possibly longer.   The economy is still expanding but the rate of growth in the expansion has slowed.   He attributes this to the medioc...

By Mark Bern, CFA There are several ways to hedge against a major correction in stocks.   I will provide a little explanation here on the four strategies that I sometimes use, depending on where the market is in its cycle.   For more elaboration you may need to read some of my older articles on Seeking Alpha. Using Put Options My favorite method of hedging is to buy put options on stocks that tend to perform the worst during recessions.   I have written extensively, including a series on the subject that is still in progress.   But I only use this method when I believe we are nearing a top in the markets based upon several factors such as weak internals, inverting of the yield curve, or a lack of momentum in the markets with extremely high valuations (to name a few).   I try to identify companies in industries that tend to fall more precipitously that the market in general during recessions, such as travel related, industrial or consumer discretionary ...

By Mark Bern, CFA The formation of a new government in Italy has everyone guessing, especially those within the Eurozone (EZ).   The two parties that gained the most seats in Parliament represent two very different factions but both are euro sceptics in that they have no love for those calling the shots in Brussels.   There is a lot of uncertainty about Italy at the moment and, by extension, the future of the EZ.   The spread between the German and Italian 10-year bonds widened to 2.9% at one point this week but narrowed back to 2.3% by Friday.   In April that spread was a mere 1.1%.   That is a relatively large move in such a short time for a 10-year bond yield.   What it means is that there is much uncertainty surrounding the political direction of the next Italian government.   Until that is settled, uncertainty could lead to further volatility. According to polls many Italian people blame Brussels for the austerity measured that were foiste...