Ok I must confess I don’t have a tie in for “Derek” other than being a great fan of Eric Clapton, so I’m thinking of Dominoes today with the effect of GDP to Corporate Earnings to Stock Valuations. So much for the Gloom and Deflation from this past Summer.
The U.S. economy is clearly accelerating regardless of the weakness in Europe so the recent rise in equity prices is justified IMO. In fact, I do believe that 1200 on the SPX will be surpassed and will become the next support level by this December. While I’m gratified for having nailed the recent market stop with our sales in ETF’s, that top may prove to be a momentary top along the road higher.
RMHI model portfolios have actually exceeded the peak from a month ago and are on their way to an above average year. Since the model is about being “above average” I’m not surprised just gratified. Taking a look at the fund performance list on www.socialfunds.com the top of the heap appears to be the Calvert Capital Accumulation fund which was up approximately 15% at the end of October. Our portfolios have moved almost in sync for the past 3 months and I hope this will rank RMHI as close to the top of the heap as 2007.
Otherwise:
This morning Goldman Sachs raised estimates for real U.S. GDP:
2011 GDP goes from 2.0% to 2.7% and 2012 goes to an estimate of 3.6%.
With that kind of growth, where’s the love for bonds now? If investors want to recoup losses from past years they must adjust for the resurgence of growth in the U.S. and dispense with the “fear trade” of bonds over equities. Bond investors, especially those owning Treasuries will find that there is a very high price for the concept of “safety” and that the perception of safety is a myth to begin with when you find that your pursuit is enjoined with the masses. Safety can most often be found with high investor negativity when the urge to sell is at its peak, no when its the overwhelming trend.
On the Green Investment / Socially Responsible Investment ledger our models are identifying a class of equities that appear to have our favored combination of Value plus Momentum: In particular are Battery Manufacturers and China based waste to energy plays.
Be careful out there
Brad
No Positions
Overnight Chevron has made a bid for Atlas Energy which to my way of thinking confirms that natural gas has real potential to be a bridge fuel, a transition away from gasoline for the nations trucks and autos. While it has been believed by many that our President was loathe to get behind natural gas and is a supporter of the fuel of Dickens, coal. This purchase of Atlas may indicate that natural gas and not coal could come to the forefront if the US intends to wean itself off gasoline.
Green Investors should understand that the weaning process away from petro based gasoline fuels will be a piecemeal process, sometimes moving glacially slow and very dependent upon political support. The purchase of Atlas by Chevron marks the second major purchase in recent years followed by Exxon’s purchase of XTO Energy. Do we see a trend emerging?
RMHI has had a substantial position in Atlas subsidiary Atlas Pipeline Holdings for several months. While the search for more glamorous alternative energy investments can be enticing for green investors, we’ve preferred a more conservative position with investing the eventual transition from gasoline fuels to natural gas to ??.
Long AHD
Brad
Whats the painful and sometimes brutal truth about being a socially responsible investor or any investor for that matter? Its hard work.
When we were kids, what did we want to be when we were growing up? We all know what we ideally wanted to be as kids, a star athlete, a musician, pro poker player, actor or actress, model etc…but what kid in their right mind wants to be a professional investor? Well, I was one of those unusual types who should have been guided to counseling early on because I did want to be a professional investor. The graphs and stock tables in the Wall Street Journal fascinated me early on and that fascination remains to this day. But this is not an article about a childhood gone awry but a glimpse into the single minded vision that it takes to be good at most anything, including investing.
To excel at investing means to devote oneself to the prospect of focusing day in and day out on the investment process. What am I doing right? What am I doing wrong, and why? Its an internal process of identifying internal strengths and weaknesses as much as it the search for the undervalued asset. We all make mistakes at one time or another, including major mistakes but in the long run did we accept them as mistakes and learn from them, or do we remain in denial and continue as business as usual?
We probably all know investors who have this continual habit of buying near the top when their confidence is high and selling at or near the bottom when their confidence is in panic. For this reason alone one should really be looking into the mirror of themselves and determining whether they should be managing a portfolio for themselves.
For individuals and organizations who conduct their own investing, they must realize they’re in competition with others who have a single minded devotion to excelling in investing and are happily, even gleefully devoted to their profession.
Any investor, be it a pro or an do-it-yourselfer can run a hot hand for a limited period of time and delude themselves into being the new Master of the Universe. But what will it take for the successful investor to transcend short term progress to long term success? Its really simple as are most things in life, it boils down to limitless learning and plain hard work. When we were 20 something years old, we thought we knew it all. Nowadays for each nugget of knowledge I realized there remains a mountain of educational boulders waiting to be tapped.
To be continued……….
Be careful out there
Brad
No positions
Green and SRI investors along with investing professionals are always asked to make the best decisions under pressure, and the most common one we face today is should “Socially Responsible Investors abandon stocks in favor of bonds?”
It is my opinion based on close to thirty years of trading that the best trades are those done when you’re in the minority not the majority opinion, otherwise who’s left to buy or sell?
For this question of stocks sold off in favor of bonds, bad news has to be considered good news. Any good news on the economy will be treated negatively at this point in time for bonds. Today’s stock market strength and weakness in bonds is due to the better than expected August PMI report which came in at 56.3 versus the consensus of 52.9 and the August report is an improvement upon July’s 55.3. Adding fuel to the rally is survey from Investors Intelligence which shows that just 29% of newsletter writers are bullish which is the lowest percentage since the crash in 2008. Remember folks, the more extreme the consensus the greater chance of a reversal in market direction. A bull figure at just 29% might be enough to halt the decline at worst…..but its certainly in the range to mark the bottom where a new rally can emerge.
Good news is bad news for bonds. The 10 year Treasury has moved from 2.48% to 2.6% today while the 30 Year Treasury Bond has moved from 3.53% to 3.68%. Bond yields are now at levels seen in late 2008 and very early 2009 and we all know how productive it was to buy bonds in February of 2009.
The stampede into bonds has been nothing short of epic and the Consensus Survey of bond investors maxed out at approximately 80% recently. Rarely has such a consensus opinion been profitable. These are the kinds of surveys we frequently see at major market tops which begs to ask whether bonds are in a Bubble. Bubble talk has been pervasive in the media much just as talk of Deflation has been over commented upon.
Frankly there’s more contradictory information and confusion in the media to rival a Republican politician who wants to reduce the deficit while maintaining tax cuts. The bottom line is we do not have Deflation in the U.S. at present as Deflation is a very rare event here.
But are bonds really in a Bubble? My answer would be “not at present”. My definition of Bubble for the any investor including the Green Investor or the Socially Responsible Investing community is that for a Bubble to truly exist the risk of a significant and permanent loss of capital must be present. A Treasury bond will eventually pay off at par upon maturity, so while its very possible to lose 20% or more in a bond, the loss would be temporary if you were patient enough to wait till maturity. The reality is only a very few investors have that kind of patience. In addition, many of the investors who are retirees and have been buying Treasuries will not be around in time for their bonds to mature, so a loss could be taken.
With Consensus opinions at present in the range of 70% to 80% Bullish on Bond prices, should the tone of economic data change (I believe its starting to happen now) the rush to exit bonds could be swift and very dramatic, especially in this day of algorithmic and program trading.
A by product of the rise in bond prices and drop in yield is the relative valuation of bonds to stocks.
As the chart above highlights, the relative valuation of bonds to stocks is at extreme levels and the other two times in the past century this relationship was reached, buying bonds in lieu of equities was a significant mistake. Can we say that in the two past examples that bond investors lost money? No, not unless they held to maturity but they lost “opportunity” to be in equities as the mean relationship between stocks and bonds eventually asserted itself once more.
We’re faced with the challenge of “getting back to pre-crash levels” and by over allocating to bonds now is essentially giving up that goal at time when the odds are stacked against you.
To be a successful Green or Socially Responsible Investor sometimes means enduring pain and the pressure of the media, not to mention friends who offer their opinions in an effort to “help”. Diversification between bonds and equities is always a good thing and proper re-balancing when one asset class becomes overvalued is essential, but to join the mass entrance into bonds at this stage may very well lead to a mass exit when the weak patch of our economy passes and moderate growth re-emerges.
With the economy fluctuating between a glass half full one week and bone dry the next we continue to focus on Value and special situations based upon our equity model. For all practical purposes its impossible to predict where the economy will be in a year, but we do know that this period in our history corporations have rock solid with frequent over capitalized balance sheets (lots of cash, little debt) while the consumer continues to de-leverage from decades of over consumption (which will take years).
Value continues to be exploited in the markets as one of our long term holdings Sports Supply Group has been acquired by private equity firm ONCAP LP, shareholders will be receiving cash in lieu of stock. This marks the third holding of ours in 2010 that has either been acquired, subject of a hostile takeover or considering sale of the company. Asset rich companies make attractive targets since the cash on the books is quantifiable and frequently the underlying business can be acquired for little or nothing. Frequently these companies are the targets for Value investors who love nothing more than predictable and boring companies in sleepy industries with hairless balance sheets.
Present market weakness has pressured the price of Audiovox symbol VOXX to an excellent entry point here at $6.55. VOXX has approximately $330 million in current assets and $118 million in total liabilities which net to $212 million but the market value is $148 million. The $64 million dollar difference with 18.5 million shares outstanding or $3.45 per share is a rock solid Margin of Safety to the patient investor willing to wait for the value to move in excess of the balance sheet. The stock holds the potential for a 50% or more rate of return assuming the balance sheet remains intact.
VOXX has been around since 1965 and makes some of the coolest audio equipment in the world but it isn’t always profitable. Earning expectations for 2010 are in the .35 per share range but the estimate is from only one analyst.
Products are marketed under the Audiovox brand name along with other brands such as Acoustic Research, Advent, RCA, Jenson, Road Gear and Spikemaster.
One aspect that caught our eye was the list of investors who own significant stakes in VOXX: Seth Klarman of Baupost Group, George Soros and Irving Kahn.
We expect owning shares of VOXX to be a long term investment, investors should have a multiyear expectation. It is the type of stock that you could rest easy when you go on that multi-year sabbatical to the Amazon.
Others may want to wring their hands with the potential for deflation, however with investor angst so high at the moment reflects that much of the deflation debate may be baked in the cake of the market for the interim, hence the potential for significant values is quite good.
Be careful out there.
Brad Pappas
Long VOXX
