I wanted to check in with you, since market sentiment has turned as ugly as it was at our last discussion. In looking over your holdings, I am reviewing any smaller positions, as well as any European and Global stock positions. As bad as things are here, you no doubt are hearing stories from friends and family that the rest of the world is doing worse. The thesis is this: since the U.S. led everyone into the recession, the U.S. will be the first to snap out of it. While our political class is doing some big spending, they also are at least acting quickly, a stark contrast to the in-fighting among countries in Europe over what to do. Thus the rally in the U.S.$ and short term Treasury securities.
What I’m trying to do is continue to allocate to areas that should be viewed as very strong companies with strong balance sheets and earnings, and to allocate to companies and sectors that should do very well once we get a whiff of relief. I’m currently doing mostly email to cover the most ground; I do want to talk or meet with you to go over any of this if you prefer.
Here are some thoughts on valuation and market sentiment.
We are fast-reaching a bottom and eventually a clearing price will be reached where buyers actually buy. Historically speaking investors tend to make bad decisions using emotion at bottoms, and then miss the upside when mass psychology turns favorable. This environment is awful, which to the contrarian mind is a good place to make investments in high quality companies-- exactly when no one wants to own them. This is the exact reverse of 1999, when everything “felt good” and prices were exorbitantly priced; now everything “feels bad” and prices are selling beneath the intrinsic values of companies. Just look at GE, which was trading at 40x earnings in 1999 and is now selling at 4.5x earnings in 2009. The environment is getting pretty ridiculous out there in terms of sentiment. If I had prognosticated in 1999 that GE would go from 40x earnings to 4.5x earnings, people would have thought I was crazy. So now here we are with GE at 4.5x earnings, and this is one of many situations I would consider purchasing at these levels. It is precisely times like this when long term investments make the most sense, since the price paid for the security is being determined by an inefficient, emotional market. There has been indiscriminate selling; first it was the hedge funds, then mutual funds, exchange traded funds, and now we’re getting back to the basic building blocks of which all of these investment vehicles contain: common stocks.
You continue to own high quality companies, and I will continue to do the best job possible for you in this very difficult environment.
Thursday, March 12, 2009
Recent Market Action, sent in mid Feb 2009
Based upon recent market action, I thought I should provide some more perspective on what is happening today. Today the market looks to be re-testing the 7500 level on the Dow which was reached in November. While we could go lower, I do believe that we're likely in a broad trading range between 7500-9500 for at least the next year.
Economic concerns are overwhelming the headlines, and today's signing of the "stimulus" bill, which is comprised of 65% government spending, and 35% tax "rebates" (extremely short term) also concerns the markets, as the U.S. current account deficit is now massive. The concern with our deficit is reaching a tipping point, since we have tremendous future obligations in the form of government pension funds, Medicare, and Social Security benefits. When the deficit is 4% of GDP, it is "ok", but we have now exceeded that number. I recently read a 2002 speech by Ben Bernanke in which he discussed how to fight deflation; he is now running this exact playbook to re-flate our economy. This will eventually mean a devaluation of our currency and/or higher inflation. Did you know that the dollar's value has been devalued by over 90% since the U.S. went off the gold standard? We've seen this movie, and we've been living this movie for some time. Scary as this sounds, it is instructive to think about, and then make conclusions as to what types of assets can compete effectively with inflation, which we had contained for some time. Let's take a look:
Short term Treasury securities paying .48% per year. No.
Cash under your mattress paying nothing. No.
Money market funds paying .4% per year. No. The safest assets short term are the riskiest asset long term, because their value will be eroded by inflation or devaluation.
High quality companies that pay 4-6% dividends, that are currently valued pessimistically. Yes. Long term growth plus dividend yield beats inflation long term, especially at these prices.
Treasury Inflation Protection Securities. Yes. These bonds re-set annually to account for inflation, thus maintaining purchasing power.
Commodity-related companies. Yes. Commodities are priced in dollars; if the dollar goes down, commodity prices rise, earnings rise.
Gold and gold miners. Yes. The oldest hedge on a falling dollar and inflation. I may be early, but would rather be early than late.
You will likely see some changes in your portfolio mix to account for the changing environment. Still, in looking at your accounts, you own strong companies with strong products and services, and many of these companies are quite defensive in nature. Most accounts contain huge doses of high quality health care companies, oil drilling, food, tobacco, alcohol, consumer products/staples. ACC Clients have the comfort that the companies invested in have a bright future, despite the short-term swing in prices.
One of the Warren Buffett maxims I try to adhere to is: own quality companies where we can sleep at night even if the stock exchange was closed for 5 years. Companies with solid balance sheets and big dividend payments look attractive, since there are many solid companies with dividends of 4-6% right now, which exceeds the yields on Treasury securities by a lot (granted not as "safe" as a Treasury, but still extremely attractive). With all the "flight to quality", many investors have flocked to money market and Treasury securities; this trade will eventually reverse as equity yields compete with bond yields. Select municipal bonds also offer good relative values at this time, especially relative to Treasury securities on a price and yield basis.
I know you have placed your trust in me, and I will continue to do the best job possible in this environment. Please give me a call or email if you'd like to discuss this.
Economic concerns are overwhelming the headlines, and today's signing of the "stimulus" bill, which is comprised of 65% government spending, and 35% tax "rebates" (extremely short term) also concerns the markets, as the U.S. current account deficit is now massive. The concern with our deficit is reaching a tipping point, since we have tremendous future obligations in the form of government pension funds, Medicare, and Social Security benefits. When the deficit is 4% of GDP, it is "ok", but we have now exceeded that number. I recently read a 2002 speech by Ben Bernanke in which he discussed how to fight deflation; he is now running this exact playbook to re-flate our economy. This will eventually mean a devaluation of our currency and/or higher inflation. Did you know that the dollar's value has been devalued by over 90% since the U.S. went off the gold standard? We've seen this movie, and we've been living this movie for some time. Scary as this sounds, it is instructive to think about, and then make conclusions as to what types of assets can compete effectively with inflation, which we had contained for some time. Let's take a look:
Short term Treasury securities paying .48% per year. No.
Cash under your mattress paying nothing. No.
Money market funds paying .4% per year. No. The safest assets short term are the riskiest asset long term, because their value will be eroded by inflation or devaluation.
High quality companies that pay 4-6% dividends, that are currently valued pessimistically. Yes. Long term growth plus dividend yield beats inflation long term, especially at these prices.
Treasury Inflation Protection Securities. Yes. These bonds re-set annually to account for inflation, thus maintaining purchasing power.
Commodity-related companies. Yes. Commodities are priced in dollars; if the dollar goes down, commodity prices rise, earnings rise.
Gold and gold miners. Yes. The oldest hedge on a falling dollar and inflation. I may be early, but would rather be early than late.
You will likely see some changes in your portfolio mix to account for the changing environment. Still, in looking at your accounts, you own strong companies with strong products and services, and many of these companies are quite defensive in nature. Most accounts contain huge doses of high quality health care companies, oil drilling, food, tobacco, alcohol, consumer products/staples. ACC Clients have the comfort that the companies invested in have a bright future, despite the short-term swing in prices.
One of the Warren Buffett maxims I try to adhere to is: own quality companies where we can sleep at night even if the stock exchange was closed for 5 years. Companies with solid balance sheets and big dividend payments look attractive, since there are many solid companies with dividends of 4-6% right now, which exceeds the yields on Treasury securities by a lot (granted not as "safe" as a Treasury, but still extremely attractive). With all the "flight to quality", many investors have flocked to money market and Treasury securities; this trade will eventually reverse as equity yields compete with bond yields. Select municipal bonds also offer good relative values at this time, especially relative to Treasury securities on a price and yield basis.
I know you have placed your trust in me, and I will continue to do the best job possible in this environment. Please give me a call or email if you'd like to discuss this.
Subscribe to:
Posts (Atom)
Posts
