The Dow Jones Industrial Average has fallen over 500 points (about 5.6%) in the past 8 or 9 trading days. Volatility is up about 10%. The Fed removed the deflation language from their post-meeting statement and affirmed their commitment to purchase up to 1.25 Trillion dollars of mostly mortgage-backed securities with a few hundred billion of Agency and Treasury debt thrown in for good measure. (This was not an increase in intended purchase amounts.) The dollar’s drop seems to be halted for now. Global GDP estimates were lowered by the World Bank. Sir Alan Stanford wants to be released to his own custody as he denies $6 Billion in fraud charges. Bernie Madoff’s lawyers are asking for a shorter sentence for good old Bernie because he’s “sincerely penitent.” And, South Carolina Governor Mark Sanford was apparently hiking a different trail than he’d originally indicated to his family and staff.
Lots of noise. Wall Street is a noisy place, chock full of scintillating distractions. The rule in the fish market is: Ignore the yelling, and pay attention to the price of fish! As we look at the price of fish, we think that we should probably switch to chicken. Stocks are not overly expensive, but few are overly cheap. The good news is that some of the most attractively priced strike us as some of the best longer-term, most defensive, stable companies that we have always favored for client accounts. The preponderance of the recent 40% rebound from the March 9th low came from those companies that were decimated during the drop. Financial stocks for instance, rebounded over 100%. Do you think that the balance sheets or future earnings outlook improved 100% for financial companies and banks? We don’t. We think that this has been something of a “Hey, they’re still breathing!” rebound, and investors appear somewhat over-enthusiastic.
I was chastised at a recent dinner for not coming clean in these weekly missives about my own investing practices. While somewhat shocked, I confess that I could not believe that the omission would create any lack of clarity for readers. But, for the record, my money and my family’s money are managed right alongside client money. We put our money where our mouth is everyday. We are privileged to invest for many individual and institutional clients according to the same research, reasoning, and discipline we employ for ourselves.
Currently, our cash position is about 10%. New equity accounts are being invested cautiously after the recent, sharp run-up. We trimmed a stock last week that looked ahead of itself and added a new name and added to an existing position. It’s a fairly simple formula that seems to work over long periods of time. We cut back on things that look expensive and unlikely to generate above average returns in the future and we add to names that are attractively priced. You might recognize this as some version of “Buy low, sell high”. We swapped a corporate bond at a substantial premium for a US Agency bond selling at a discount. (We will disclose the exact names later, but this is what our clients pay for.) Our equity composite remains well ahead of the S&P500 year-to-date. Hopefully this will remain true through the final four days of the quarter. We aren’t short-term focused but everyone in this business wants to put up good quarterly performance numbers, even if these short-term numbers are fairly irrelevant.
2nd Quarter earnings will start to be announced in a couple of weeks and we think that forecasts are too optimistic. Our guess is that as the news cycle moves past the earnings headlines, the summer doldrums will coax share prices lower. Our investment discipline completely ignores such fortune-telling and focuses on company fundamentals and balance sheets. We strive to find those combinations of strong numbers and management that will see us safely through periods of weak prices and allow us to enjoy growing strength as prices advance.
To close, I’m reminded of a favorite line from a favorite sappy poem, “And whether or not it is clear to you, no doubt the universe is unfolding as it should.”
Hang in there,