Founder & Chairman
The Lions are 3-0 and looking like true super bowl contenders, the Tigers are in the playoffs and have a good shot at a World Series title. And you thought the investment markets were crazy. Life is full of little ironies. Like a 700 point rout in the stock market in 2 days, AFTER the Fed announces a new stimulus program called TWIST. To be fair, the market wasn’t really reacting to the twist program itself, but rather the unfortunate language describing the global market with words like “significant downside risk” and “strains in the global financial markets”. Talk about killing the mood. Of course, we’ve been saying this all along, so it should come as no surprise to our clients and readers.
We have been cautiously optimistic that a modest rally would emerge before the end of the year. It is still possible, we’ve heard that the Feds have a nice little mortgage program in the wings that might win the market’s favor. We also have third quarter earnings season on deck, should still be pretty good. With any luck, Greece may get yet another stay of execution, all of which could help the markets move higher before year’s end. Of course, it could all get derailed along the way by any number of possible bombshells. For the record, we have repeatedly warned that the problems in Europe would last years, not months, so it should come as no surprise that debt and budget problems from across the pond are driving the markets today. We were a little early on the call, but the Euro has recently weakened substantially against the U.S. dollar, and in our view, most likely will continue to do so. From an economic stand point, we believe it will be very difficult for our European friends to mount any real significant GDP growth when sever austerity measures are fully implemented.
From a technical standpoint, the signals are still mixed. With short-term indicators more neutralish (I made that word up), intermediate and long-term indicators negative, in our view, it makes no sense to take on any more equity exposure right now. That’s not to say that we won’t be recommending any changes to the portfolio, we will. We are just not recommending additional equity exposure. The recent market volatility has been a high frequency trader’s dream, but sadly has done nothing but entrench us further into a fairly narrow trading range. If we had to handicap it right now, we would probably favor a breakout to the upside, but we’re not talking heavy odds. We believe the current environment no longer favors either health care investments or European equities. We have adjusted our portfolios accordingly. We have added a couple of new investments that we think will be better positioned to benefit from the global macro-economic trends that seem to be in place. With the 10 year U.S. Treasury bonds hitting almost 1.7%, to us, the smart play is the short side. We don’t see how intermediate to long-term Treasuries can get much lower, but they sure could go a lot higher. Time will tell, but again, we have updated our models to reflect our current thinking.
It’s important to remember that your emotions are not your friend, and often the appropriate course of action is counter-intuitive. Economists have predicted exactly zero of the last 9 recessions accurately, and by the time they figure it out, it’s generally way to late to act on. From an investment stand-point, we think the most important area to accurately assess is the macro (big picture) economic environment. In our view, that picture is getting worse not better. Even the best companies in the world take their lumps when the economy is reeling. We spend a tremendous amount of time, energy and money to accurately assess the big picture. We believe that if we do see a rally through the end of the year, it will not last long. We are looking to capture some of what the equity markets might offer to the upside over the next 1-3 months. Beyond that, we think 2012 is going to be a very rough year, with a confluence of negative trends that will have a profound impact on the markets. That view is data dependent and could change, but from where we sit today, it’s not looking pretty. Rest assured we are aware of the potential risks and have already set plans in place to prepare. We think you’ll be glad we’re on your team.
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