This week has been a reminder that all is not well with the US economy or the World at large.
Employment data was a bust as economists missed the number by a wide margin. Estimates were for a loss of 175,000 jobs when in fact the reality was 263000 job losses. Hence the Consumer in the US remains a headwind rather than a tailwind.
If you happened to watch the Chris Mathews Show early this week you saw a frightening analysis the Israeli – Iran situation. Both analysts concurred that Israel could take preemptive action within three months. We have scanned portfolios for stocks that could be unusually sensitive should war break out. We’ve sold our position in Internet Gold (IGLD) an Israeli based Internet Service provider. It remains an inexpensive growth name but the risk reward is just not in our favor with this present standoff.
This is not to say that only certain stocks would be vulnerable should a war start in the Middle East. All stocks would be vulnerable should a war erupt as the threat of Iran halting oil exports or Middle East exports in general be prevented would create a spike in oil prices that would place our shallow economic expansion in jeopardy. Massive strength would be seen in Oil and Gold. A lesser hedge wild card could be Alternative Energy / Solar stocks.
While we’re still Bullish…….we’re just not the Red Bulls of the Spring. Short of an all out war in the Middle East we expect any selloff to be shallow and short lived. However the rate and delta of the rally is expected to moderate now that we’re no longer in recession. Thus we continue to slowly reduce our exposure to equities, as we no longer believe the rewards warrant 80% to 100% exposure.
Last night before heading off to bed I checked the overnight futures market to see we were down 10 on the SP 500. This made sense given the new and potentially increasing trade war with China. (Gee ya think a trade war with China is a good thing since we need the kindness of strangers to buy our Treasuries?)
If this market were in true Bear mode we’d probably have added to the loss of 10 points, given the news. If you went to bed Short or in cash you’d be sleeping smugly……but don’t look now as we’re actually up 5. What Chinese Trade selloff?
Look, there are lots and loads and bunches of reasons to hate this market. Baskets of reasons to say: “We’ve run too far too fast” or “the market has disconnected from our reality” and I wouldn’t disagree with you. In fact, the Bearish reasons always sound more intelligent and thought out than astandard Bullish argument which always has a tendency to sound either insane (A Bull Market Birther: Show me the birth certificate for this Bull Market) or SweetSallySunshine.
Whats undeniable is that Central Bankers round the world are putting massive amounts of cash into their systems, and while banks may not be lending that doesn’t mean they’re not investing. Managers that I have enormous respect for are getting poked in the eye each time they lay out a new series of Shorts. I just have to wonder if they might actually enjoy the pain so self inflicted?
My point is….as I usually do have a conclusive point: The market at this point in time is eerily similar to other periods of economic transition such as 2003, major selloffs are not to be found. My most optimistic guess from this Spring was no major weakness till the first quarter of 2010. Until proven otherwise….that might be the correct path to assume.
On a side note: There is a flip side that’s not so endearing to years of forest fire prevention and trimming: Mountain Pine Beetles. I have hundreds of trees on my land and this year will lose at least a dozen old Lodgepole and Ponderosa Pines. It breaks your heart to see a 150 or 250 year old tree that is doomed and must be cut down. Somehow you always wonder by cutting it down in an effort to save the surrounding trees are you doing the right thing? Without a doubt the answer is always yes. The MPB seems to be natures way of saying “if you’re not going to allow fires and harvesting to take out your old trees I’ll give you a bug of mass destruction.”
There’s a good reason the sound is off on my tv the channel is tuned to CNBC during the day. While I find the daily debates painful to listen to, along with countless “professionals” who are always certain of the future but never held responsible, you will hear opinions quoted as fact that are just flat out wrong. Sure, there may be a pile of money on the sidelines but that pile has been growing for a few years and didn’t stop the debacle of 2008.
Here’s a gem of a quote:
“There’s a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when ‘cheerful sentiment is more firmly intrenched.’ Economists point out that banks and insurance companies ‘never before had so much money lying idle.'”– Wall Street Journal, August 28, 1930
We’re a small private investment manager of the traditional variety. By saying we’re Traditional I mean that we don’t use shift the responsibility of investment management to mutual funds or other third party investment management firms, which add on extra layers of fees. By Traditional we mean that we actually do our own security analysis and portfolio trading and allocation with Charles Schwab as our primary custodian of client assets, we don’t take custody of assets. This was how most investment managers practiced when I first broke into the business in 1982 but with the emergence of Financial Planning and Mutual Funds the layers of fees and responsibilities created greater distance from the manager to the portfolio.
We have a deliberate bias for looking at small cap and micro cap investments for three primary reasons:
1. Small companies are more likely to be mispriced or undervalued relative to large cap peers. For example, Apple has at present 34 brokerage firm analysts following the company. Every bit of data produced by the firm is analyzed, frequently to the extreme. Its extremely difficult to maintain an edge under that type of scrutiny. However for the Small Cap companies we follow and invest in its not uncommon to have zero to 1 analyst following the firm. By following companies well below the analyst radar screens the scarcity of information can create opportunities we hope to exploit for our clients.
This is hardly a knock against investing in Large Cap companies as it is our desire to have some sort of advantage when investing. While Apple may continue to provide significant gains for its shareholders, the stock does sell at 29 times current earnings and the opportunity to have a competitive advantage over our peers is minimized by valuation and intense coverage.
2. The advantage of being small: Being that RMHI is a small investment management firm I deliberately decided to use our small size to our advantage. As investment firms get larger over time they’re forced to move up the scale with investments they consider. A firm that focused on Small Caps during their early years is forced to consider Mid to Large Caps as their assets expand over time.
Simply put, we can consider investment stakes in companies that larger firms cannot consider. This is especially important for the Socially Responsible Investor since many terrific Green Technology companies are $50 million to $200 million in capitalization, too small for most managers. Secondly, our small size allows us to still invest in Healthcare through benign service providers without resorting to Healtcare investments within the S&P 500 Index.
Our identification of RINO Intl. (RINO) before it even gained admission to NASDAQ while it was selling at just 4x 2009 earnings is a classic example. At the time of our spotting the stock at $4 a share the capitalization was just approximately $100 million and thus too small for most managers or even many mutual funds to consider.
Hello all, US markets are down sharply as I write this on a rumor……..an unsubstantiated rumor of an impending major bank failure. No idea if there is any validity to it whatsoever but that hasn’t prevented investors from selling first before they ask. If this turns out to be a false rumor then the snap back rally could be substantial as it would be a great entry point for those under-invested.
I’ve spent a great deal of time recently trying to discern whether this September will be as weak as its reputation. On one hand you have Doug Kass who has made some truly excellent calls recently while two data driven services with excellent reputations: Lowry’s and Ned Davis suggesting that a major top is not in place at this time. We can’t rule out a short term pullback as we’re always subject to that risk.
On a trading note, we are selling a portion our PFF which we bought in the Spring as an alternative to buying the common of the banks. The rebounding economy enhances the odds that the next major move for interest rates is higher and the PPF have no real maturity date, hence more volatile to a move higher in rates.
If you read reports about the smoke from the fires in LA are visible in Colorado, its not an exaggeration. Yesterday afternoon I noticed a haze surrounding the mountains near my home, a very eerie glow typical of fire smoke.
Be careful out there.
Its been a busy week with multiple market cross currents. One of my favorite Hedge Fund managers, Doug Kass is calling for the US stock market to make its annual high this week. As much as I admire his call of a lifetime last March, my guess is its a losing battle to fight the market highs at the moment. None of my analytical models are screaming “sell” in fact Lowry’s opinion is getting stronger for more upside momentum.
But its September and in the past 20 years only 40% of Septembers have been positive. Its debatable as to why September is the worst month of the year, it may have to do with the end of the fiscal year for the mutual fund industry. Funds tend to sell off their losing positions to offset and lower the capital gains obligations of their shareholders.
But we’re sticking to discipline and selling off previous mentioned RINO International RINO. RINO has fallen sharply in our proprietary ranking system to the point where we can no longer own it in portfolios. Green and Socially Responsible Investors often get maligned for looking at “Green” companies through rose colored glasses, but that is not the case with us as I have no qualms selling a holding with over 100% gain. Besides China is tightening monetary policy which makes me wonder the chances of their repeating the mistake the FDR administration made in 1938 by cutting back monetary stimulus before the economy could firmly stand on its own legs.
We’re adding to our domestic holdings including Atlantic TeleNetworks. This is an interesting undervalued cell phone service provider. Verizon and Vodaphone were forced to sell off holdings which was just the kind of windfall ATNI was waiting for. These lines were instantly accretive and revenues are expected to jump by approximately 250% and earnings by over 100%. Estimates at present are running at $5.76 for 2010, not bad for a stock that sells for 8x earnings despite the recent run.
