JSB combines time-tested approaches to asset management that entail a rigorous analysis of the business cycle on the macro level and a solid fundamental analysis of each individual investment. These are backed up by a disciplined technical review of historical price action for guidance on momentum and sentiment issues that are not a part of company fundamentals but may provide guidance on actual entry and exit levels.
Stock valuation is largely dependent upon a company's future earnings and cash flow prospects, therefore the economic environment that is most likely to prevail over the coming year or so impacts each company's ability to prosper. Once the most probable economic scenario is determined, our investment approach is to emphasize ownership in those industries most likely to experience an economic "tail wind." One of the most reliable economic principles is known as the "business cycle," sometimes known as the "boom and bust" cycle. The pervasiveness of the cycle allows us to maintain our consistent approach.
The following graphic illustrates the ideal “business cycle”.
Sector Rotation: The guiding principle behind sector rotation as an investment philosophy involves the interrelationship between the business (growth) cycle and the individual components of the economy as they experience either a favorable or unfavorable economic environment. When the economy begins to measurably slow down (I), companies invest less in new plants and production so the demand for funds declines leading to a drop in interest rates. A declining interest rate environment favors most companies in the financial industry (sector) and the slowing economy favors that sector of the economy that provides the everyday staples people buy regardless of the economic state such as food, clothing and personal hygiene products.
A low interest rate environment ultimately begins to stimulate economic growth (II) and certain industries recover quickly, such as the technology and telecomm companies, the most favorable investments early in a recovery. As economic growth becomes more established, consumer spending on non-essential items increases measurably, leading to higher profits for industries such as the airlines, entertainment and retail providers.
When the economy is at its highest growth rate (III) companies that produce industrial products, capital goods and basic materials such as steel and aluminum are at their peak earnings capability. The strong economy induces companies to build new plants, increasing demand for funding and leading to rising interest rates. Inevitably this leads to over-production and interest rates that cannot be supported by the level of economic activity. The resultant economic decline (IV) favors sectors such as consumer staples, health care and energy (including utilities).
The Federal Reserve Board One of the original arguments for setting up a Federal Reserve Bank (FED) was to lessen the degree of the swings in the business cycle and thus even out the boom and bust. The mechanism for accomplishing this was the FED’s ability to manage interest rates through its regulatory control of banks and the use of the discount window to either supply liquidity or drain liquidity from the banking system as needed. Over the years, the FED has become more and more aggressive in its guidance of monetary policy to the point that it no longer merely influences policy. The FED is now dominating the business cycle. By the end of 2015 the FED balance sheet will be equal to roughly 24% of the Gross Domestic Product of the United States. Consequently, a large part of our macro analysis is focused on the activity and policies of the Federal Reserve Bank.