Ready To Take Off Your Shirt?

There’s too much liquidity and optimism to be short and not enough fundamental, constructive traction to be long. I’m glad not to ever think that I could time markets. We are always fully invested, but the profile of our buy-to-hold portfolio morphs over time, driven by changing fundamentals and relative valuations. Our average holding period is 4 years, so change happens deliberately.

The recent up-tick in consumer spending was puzzling. The possible conclusions are that it is a single datum and not too meaningful, or that it is important and signals a sea-change. Maybe it means that the consumer still can’t wean himself from years of habitual spending? Maybe it means something much more important that surely evades me?

In the early morning quiet of my office, I am unable to disregard the remarkable deficit and scope of government obligations. Organic expansion seems a long-time away. I try to think about the implications of an overheated China, under-heated Greece, determined healthcare reform, unsustainable entitlement programs, earnings improvements, low interest rates, and a steep yield curve. All of our conclusions will be validated or invalidated in time.

Our conclusion is that headwinds are sufficient to demand caution. Our defensive posture may lag during exuberant rallies and feel awful. We keep weighing bullish and bearish indicators to try to divine the inevitable recovery. Remaining open to all outcomes and refusing to be wed to a particular outcome is one of the tougher things managers do. It is why a dogged investment discipline is essential; you need structure and rules to defend against the always buffeting emotional winds.

Last week as the thermometer read 60 degrees, I saw a shirtless college student wearing flip-flops and throwing a Frisbee. He was understandably desperate for spring. We completely understand the desperation for economic recovery and a rebound in jobs, but think it premature to be doffing our shirts until the thermometer moves higher.

Economically sensitive sectors have already had a huge run off of the bottom. The easy money has probably been made. Less economically sensitive sectors (e.g. healthcare and staples) have underperformed. This leaves relative valuations quite attractive, especially given the fact that there is a lot of uncertainty out there. Our relative performance has been quite strong (email us for our audited performance), and we continue to overweight these areas.

Don’t expect much change from the Federal Open Market Committee’s meeting today. I will be on CNBC tomorrow afternoon live with Maria Bartiromo at 4pm. Maria is awesome. Please watch. If you missed Squawk On The Street yesterday with Vince Farrell, it’s not too late: http://www.cnbc.com/id/15840232?video=1441502096&play=1

Hang in there.

Peace,

Michael