The stock market has moved towards new highs on the backs of the new leaders—the economically sensitive stocks. It’s not that the global economy has improved that much but it is that these companies have retooled to do better in a weaker environment. Expectations have been brought so far down and the stocks got so cheap that it has been easy to beat expectations with first quarter results. The market likes it when companies exceed expectations. Commodity prices, the bell weather for cyclicals, are increasing too, benefiting from a weaker dollar, which has now hit a multi-month low for reasons discussed in prior blogs and a somewhat stronger China. There has clearly been a mindset shift away from the old leaders towards the new and unless you recognize this shift, your performance will continue to lag behind the averages. Fortunately for our investors, we made these changes months ago beginning with covering our energy shorts, increasing our exposure to economically sensitive (especially commodity) stocks that are financially strong. We also are over-weighted banks and financials as discussed previously as a win/win proposition regardless of the economy. The best part about this change in leadership is that future earnings comparisons get easier for them as the year progresses as their results turned down dramatically beginning with the second quarter of 2015. Secondly, a weaker than expected dollar for 2016 has caused management to lift forecasts for this year. We made the shift in investment emphasis months ago aided in good part by utilizing our Rules #3 and #4 for investing. After looking at managements and strategies, we look for companies with rising incremental rates of returns and margins. In addition we are always searching for companies nearing their inflection point for earnings. Companies increasing their returns and margins are potential long investments as it tends to boost valuation and stock prices over time and it’s the reverse for the shorts. In addition, companies nearing an inflection point in earnings from negative to positive or visa versa as additional tools for investing. Anticipating with accuracy the inflection point as well as changes in incremental rates of returns are two of my time-tested rules for investing. These stocks tend to rise on a wall of worry or decline on a wall of exuberance… all the way to the bank. Patience is needed to let them unfold. None of these rules work in a vacuum. A successful investor needs a systematic approach combining a global macro-view for the proper asset allocation and risk controls with a bottom-up selection of each investment, which requires first hand research and and in-depth testing. While I agree with Warren Buffett that hedge funds have unperformed as a group over the last few years. It would be unwise to paint all managers with the same brush. A handful, who really understand what it takes to be a global investor today and abide by their time-tested methodologies, have done quite well and are worth every penny that they earn. Paix et Prospérité is one of them. Let’s take a quick look at the data points from last week and see if there were any changes in our core beliefs, asset allocation, risk controls and stock selection: The United States reported first quarter GNP increasing at an annual rate at 0.5% as we predicted down from a gain of 1.4% in the fourth quarter. Consumer spending led the way with a gain of 1.9% in the quarter down from 2.4% in the prior quarter; service spending rose by a healthier 2.7%; the trade gap widened reducing GNP by 0.34%; housing rose at a 14.8% rate; nonresidential fixed investment fell 5.9% and the GDP price index increased by only 0.7%. It was important to note that disposable income accelerated to a 2.9% gain in the quarter from 2.3% in the fourth quarter and the savings rate rose to 5.2% from 5.0% in the prior quarter. Growth in employment and wages combined with low inflation will result in more consumer discretionary income, which will support continued growth in consumer spending and the economy in 2016. The Fed also met last week and there was no surprise that the Fed policy was left unchanged. It is obvious why the Fed remains on hold: the U.S. economy weakened in the most recent quarter; inflation remains well below the 2% Fed target; problems abound abroad and finally fear of the ramifications of Britain potentially leaving as a member of the Eurozone. Economic activity and employment accelerated in the Eurozone in the first quarter with a gain of 0.6% from the fourth quarter and up 1.6% from a year ago. It was important to note that consumer prices reported for April were 0.2% below the prior despite all the actions of the ECB. Expect no changes in monetary and fiscal policies until after the Brexit vote at the end of June. China’s official manufacturers index was reported yesterday at 50.1 down from 50.2 the prior month. A number above 50 signals that the economy continued to expand after seven months of contraction. New factory orders and the production sub-index both fell slightly but also remain over 50 indicating continued expansion too. I remain confident that China will expand by at least 6-6.5% this year bolstering world growth. Japan remains the trouble spot amongst all major industrialized countries. The BOJ met and maintained its policies; the yen strengthened as investors sold risk assets and the stock market fell dramatically. Etsuro Honda, an advisor to Prime Minister Abe, raised concerns that monetary policy alone cannot lift the economy however the country’s debt situation precludes much stimulus. I remain cautious on Japan. Let’s wrap up. Events of the last week reinforced many of our core beliefs. One of my key beliefs, “This is a market of stocks, not a stock market”, was bolstered this week by a combination of disparate earnings reports and commentary by companies across a wide spectrum of industries but also by the clear shift in mindset from old leadership to new. This doesn’t mean that an Amazon, Facebook, Alibaba or a LinkedIn cannot still stand out, but I am suggesting that you need to recognize the changes occurring and invest stock-specific rather than by groups, regions or industries. In closing, review the facts, and then pause to reflect on proper asset allocation, risk tools, mindset changes by investors and managements. Lastly, do in-depth research on each investment… and invest accordingly!