Remember When We Said Economic Prognosticators Were Off Their Rockers?
From the September 2012 edition of our Best Ideas Newsletter (see page 2), released September 15, 2012:
“Could you imagine if you had listened to bond-king Bill Gross (please note he is not the equity king), Marc Faber (author of the Gloom, Boom & Doom report) or the Economic Cycle Research Institute (ECRI), which called for a recession in September 2011 – some 30% in the S&P 500 ago (yes, 30%!). Aside from being incorrect, bearish economic prognosticators fully admit that their expectations have little to do with what may happen to the equity markets in the future (as Bernanke’s unlimited QE has shown). Still, such admissions do not stop many intelligent investors from rushing to the exits at the first out-cry of a recession possibility. We continue to encourage investors to keep a level head, and we reiterate that those that place too much emphasis on economic prognostications can be left behind as the market pushes ahead (as it has for the past several months). We think long-term equity prices are driven by expectations of the discounted (risk-adjusted) future free cash flows and earnings of companies through all aspects of the economic cycle (both upturns and downturns). It’s also very important to note that, despite the constant media fear-mongering by perma-bears, the equity markets have now fully-recovered from the Great Recession. What a ride it has been.”
Here’s the GDP News Today
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.1 percent in the third quarter of 2012 [much better than economists thought] (that is, from the second quarter to the third quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.” Click to read the full press release from the Department of Commerce >>
What Do We Think Now
From the December 2012 edition of our Best Ideas Newsletter (see page 1, 5), released December 15, 2012:
The next few weeks will be interesting…to say the least. The equity markets are staring down the “fiscal cliff,” a set of laws that, if implemented January 1, 2013, as planned, will choke off the current economic recovery and likely send stocks tumbling as valuations are reset for lower potential growth. The resolve of Republican leader and Speaker of the US House of Representatives John Boehner to broader the tax base (and not raise tax rates) is unshakable, while President Barack Obama and fellow Democrats continue to view his re-election as a mandate to raise tax rates on the American people. The impasse is not likely to change anytime soon, and it is very improbable that Congress will ditch Santa Claus for a resolution in such a short time frame.
[Update: Obama will veto Boehner’s “Plan B” bill, as we had warned: click here]
Still, we’re not worried. Our Best Ideas portfolio is well-positioned for outperformance regardless of what happens on Capital Hill in the next few weeks. Should the US economy be sent off the “fiscal cliff,” our outsize cash position (roughly 30% of our portfolio value) will enable us to scoop up potential bargains and position our portfolio for even greater outperformance (as any potential downside price overreaction is inevitably retraced). However, the most likely outcome is that Congress will delay any permanent policy changes (move the ‘cliff’ not mountains, the latter we use to describe the miracle needed to reach a deal in such a short time), in which case, we would expect the steady build of outperformance generated by portfolio constituents to continue uninterrupted.
Earnings growth from S&P 500 companies should continue into the fourth quarter, and the current forward price-to-earnings ratio of S&P 500 companies of 12.6 remains well below the 10-year average (14.2), so we like the overall market valuation. Emerging market growth, though slowing, remains strong, with third-quarter GDP in China north of 7% (a breakneck pace). The US housing and automotive markets should continue their recovery, and the US banking system remains on solid footing.
Importantly, we reiterate the view that equity markets can still move significantly higher despite the potential for lower economic growth, given central bank easing across the globe. This fact is (in part) what allowed us to capture significant outperformance in our portfolio this year, while economic prognosticators sat idly on the sidelines, watching the markets move ever higher (nearly 87% of hedge funds are trailing the S&P 500 this year). We’re pleased to have widened the gap of our portfolio outperformance during 2012, and we expect to do so again in 2013.
We’re honored to have you on this journey with us!