How Can Being Wrong Feel So Right?
November 1, 2010
It is beginning to appear that our decision to unload some stocks in August was…less than brilliant. Oh well, those we retained are doing well and our clients’ high exposure to income producing assets has kept portfolio values firm. Let’s address equities, first: As clients know, and anyone who cares to read previous postings can see, I became frightened of the “double dip” this past Summer, and given some false technical signals, sold off a few stocks. We are long term value investors, so selling is nearly as difficult a decision as buying for us, and in this case, the decision appears to have been overly cautious. We’ve spent much of the past four weeks re-entering equities, with good results so far, although our cash position remains above normal. Seasonal trends are for a strong stock market in the next few months. Further, earnings for virtually all our holdings have at least met, if not exceeded expectations. Our decision to increase exposure to gold (via a gold Exchange traded fund) has been most rewarding as well. Still, I derive a lot of satisfaction from our clients’ cash cows…..
As a result of our decision to buy heavily into fixed income investments during the dark days of the financial panic running from 2007 to 2009, cash flow into accounts is significant. Good deals in bonds are getting harder to find, especially if one dislikes “junk”. I like it when my clients are receiving checks, not just promises of future glory. Sure, I wish I’d bought Netflix, or Amazon or Google a year ago. But none of these companies share the wealth in the form of C-A-S-H.
Today,Bloomberg ran an article quoting some of the world’s savviest fixed income managers who reflected optimism that bonds (and by inference, preferreds) should continue to work as attractive investments for some time to come. You can access the article yourself at the link below. As client’s know, I get a bit uncomfortable when too many people like the same thing. In this case, however, there are plenty of economists on the other side, wringing their hands about the flood of money creation about to be re-released by the U.S. Federal Reserve and its ominous implications for inflation. When inflation trends upwards, the “Bond Vigilantes”, a term coined by economist Ed Yardeni, are expected to sell fixed income investments and or demand higher interest rates as enticement to buy. This, in turn, pressures the resale value of the existing stock of bonds and preferreds. Yet, high unemployment and a distinct trend among Westerners to reduce their debt levels may delay the return of inflation longer than the Vigilantes assume. Further, by keeping short interest rates low, the Fed appears to be driving large amounts of money (previously parked in CD’s?) into longer term bonds. This is good for our clients’ holdings, many of which have maturies of 15 years to infinity (the latter being preferred stocks).
Finally, it is my opinion that after tomorrow’s election a more polarized Congress will find it more difficult to approve any significant increase in government spending. Government spending is meaningful factor in the current growth of our economy, sluggish though it is. It is highly possible that paralysis in Congress will lead to less available Federal largesse, suggesting a return to recession, which is counter-inflationary. In other words, I’m not seeing any warning signs that would lead me to want to sell client bonds, which, in any case, were purchased as long term cash generators, not speculative vehicles.
Here’s a link to that Bloomberg article should you care to review it:
