Posts Tagged ‘Boom’
Wednesday, July 4th, 2012
Marc Faber, publisher of the Gloom, Boom and Doom Report, spoke with Bloomberg Television’s Betty Liu this morning and said that, “If I were running Germany, I would have abandoned the eurozone last week.”
Faber went on to say, “In the case of Greece, one should have kicked out Greece three years ago. It would have been much cheaper.”
Link if video does not play: Faber on Europe
Faber on the eurozone crisis:
“If you put one or 100 sick banks in a union, it does not change the fact that they’re sick. In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher. I think that combined with seasonal strength in July, the rally has carried on somewhat. But it is another cosmetic fix, a quick fix that does not solve the long-term fundamental problem of over investment in the euro zone. And what it does, basically, it forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.”
“If I were the Germans, if I were running Germany, I would have abandoned the eurozone last week…It is a costly decision, but losses are there and somewhere, somehow, the losses have to be taken. The first loss is the banks. In the case of Greece, one should have kicked out Greece three years ago. It would have been much cheaper.”
On whether he’s picking up European equities:
“Yes. In Portugal, Spain, Italy, and France, the markets are either at the lows of March 2009, or lower. Along with bad companies and the banks, there are also reasonably good companies. Stellar companies, but they have been dragged down. I see value in equities, regardless of whether the eurozone stays or is abandoned.”
“[I’m buying] anything that has a high yield, or what I perceive to have a relatively safe dividend. In other words, I do not expect the dividends to be slashed by 90%…I am not buying banks, but maybe they could rally. I am just not buying them because I think there will be a lot of equity dilution and recapitalization. I’m not that keen on banks.”
Tags: Bloomberg Television, Boom, Costly Decision, Disastrous News, Divi, Dividend, Doom, Euro Zone, European Equities, Fundamental Problem, Germans, Gloom Boom And Doom Report, high yield, Italy And France, Italy France, Liu, Losses, Lows, Marc Faber, Portugal Spain
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Thursday, May 10th, 2012
The quote of the day goes to Marc Faber, publisher of the Gloom, Boom & Doom report. Faber says “I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses.”
Marc Faber spoke with Bloomberg TV’s Betty Liu also stated “The market will have difficulties to move up strongly unless we have a massive QE3 and if it moves and makes the high above 1422, the second half of the year could witness a crash, like in 1987.”
Link if video does not play: Marc Faber on U.S. Equities, Economy, Euro Zone
Faber on whether he still thinks that profit margins will shrink and record profits seen will be no more for U.S. corporations:
“Yes, if you look at the statements by corporations, it is very clear. Earlier on, you had a commentator who said the exports to Europe from the U.S. are irrelevant. I agree with that. What is relevant are the businesses of American corporations in Europe and the earnings they derive from these businesses. That is definitely slowing down. The revenue growth is slowing down and, in my view, you will have more and more corporations that report earnings that are actually good but they do not exceed expectations…The bottom line is I think the market will have difficulty moving up strongly on less we have a massive QE3 and if it moves here and makes the high above 1422, the second half of the year could witness a crash.”
“A crash, like in 1987…because the market would become technically very weak. I would expect the market making a new high. If it happens, it would be a new high with very few stocks pushing up and the majority of stocks have already rolled over. The earnings outlook is not particularly good because most economies in the world are slowing down. People focus on Greece but Greece is completely irrelevant. What is relevant are two countries — China and India — 2.5 billion people combined. They are a huge market for goods and these economies are slowing down massively at the present time.”
On whether more Fed stimulus will put a floor on the S&P 500 this year:
“Yes, I think we had a rally that began March 2009 at 666 on the S&P. We made an orthodox pop a year ago on May 2, 2011 at 1370. Then we made a new high on April 2 of this year. The new high was not confirmed by the majority of shares and many shares are already down 20% or so and every day, there are shares that are breaking down or they no longer go on good news which is a bad sign. I think maybe we have seen the high from the year unless you get a huge QE3. That may not be forthcoming.”
On whether the Fed will issue QE3:
“I think that QE3 will come, but it depends on asset markets. If the S&P dropped here another 100-150 points, I think that QE3 will occur. But if the S&P bounces back and we are above 1400, I think the Fed will essentially be waiting to see how the economy develops. The economy in the U.S. consists of different economies, some of it is very strong. I was in southern California and there the economy is doing fine. In other places, it is not doing fine. It is not universally bad. Compared to other countries, it is actually doing relatively well.”
On whether Greece will exit the euro:
“There is a very good chance they will exit the euro and it would have been desirable if the euro countries had kicked out Greece three years ago. It would have saved a lot of agony. As a result of the bailout, the problem has become bigger and bigger and bigger.”
On whether policymakers can manage the exit properly:
“I think it would be much better for Greece and the entire euro area if Greece were kicked out. Spain kicked out. Italy out and even France should be out. At the end you just have Germany with the euro. The other countries can have their own currencies and still trade and use the euro as an international currency.”
“The bureaucrats in Brussels and the media are brainwashing everybody that if Greece exited the euro, it would be a disaster. My view is the best would be to dissolve the whole euro zone and that the countries would go back to their own currencies and still use the euro as an international currency the way you travel through Latin America and with a dollar you can pay anywhere you with. In my view, that would be the best. These countries that have financial difficulties, you will have to write off their debts and make it difficult for them to access the capital market in the future. Just to keep bailing them out will increase the problem. It will not solve the problem.”
On how economic catastrophe can be avoided if the euro is dissolved:
“Explain to me why there would be an economic catastrophe. Many countries have pegged currencies have given up the peg to another currency and it was not a catastrophe. The public has been brainwashed that the breakup of the euro would be a complete disaster when in fact, it may be the solution.”
On whether there will be a race to the bottom among various countries to devalue their own currencies if the euro is dissolved:
“I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses. The bureaucrats in Brussels are completely useless functionaries and they want to maintain their power. They always talk about austerity being bad but if you look at the government expenditures of the EU, in 2000, it was 44% of GDP. Since then, it has grown by 76% under the influence of the Keynesian clowns and now it is 49% of GDP. That is the problem of Europe — too much government spending and lack of fiscal discipline.”
On whether it’s a mistake to short the euro:
“I want to make this very clear — the investment markets may move in different directions than the economic reality because if you print money. That’s why in the Bloomberg poll, Mr. Bernanke is viewed so favorably because fund managers and analysts and strategists, they are only interested in having stocks up so their earnings increase and their bonus pool increases. But in reality, the economy can go downhill and stocks can go up just because of money printing and in Europe, the ECB has proven now that they are very good money printers.”
On where to invest in Europe:
“Actually, usually when socialists come in or there is a crisis such as we have in Greece, it occurs usually near market lows. If someone really wanted to take speculative positions, he should look at quality non- financial stocks in countries like Spain, Italy, France, and Greece. I think rebound is coming. The market on a short-term basis is oversold. But if you look at the market action — first of all, we made a low on the S&P last October at 1074. We went to 1422. The market is down from 1422 to less than 1360. The whole world is screaming we’re in a bear market. This is a minor correction. I think it may become a more serious correction as the technical picture of the market has deteriorated very badly and as the S&P made a new high this year on April 2nd, all the European markets are lower than they were a year ago.”
Tags: American Corporations, Bloomberg Tv, Boom, Bottom Line, Brussels, Bureaucrats, Commentator, Crash, Doom, Euro Zone, Geniuses, Gloom, Liu, Marc Faber, Profit Margins, Qe3, Quote Of The Day, Report Earnings, S Corporations, Second Half
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Friday, April 27th, 2012
by William Smead, Smead Capital Management
Jeremy Grantham is a brilliant asset allocator, writer and thinker. He works for an organization (GMO) of great people in those disciplines. He released his quarterly letter to the public recently entitled “My Sister’s Pension Assets and Agency Problems”. In the process of describing the “career risk” of being a contrarian value investor in the asset allocation world, he left out a more important discussion about what we consider “real” career risk. At Smead Capital Management (SCM), we have been subject in our own careers to the career risk that Grantham described. We think that avoiding the career risk he left out is more important to today’s professional investors.
I come from a small town in the state of Washington. There are approximately 14,000 residents. Let’s assume there are three plumbing and heating businesses in town which employ 20 plumbers in their business. We will also assume that something causes a boom in the plumbing business in my home town and 100 plumbers move there. Seven of those 100 are the type of person who start their own plumbing company. You now have 10 firms employing 120 plumbers. The first thing that happens, even if the boom continues, is the existing pool of business gets divided and diluted. The second thing that happens is whatever caused the boom eventually disappears and those 120 plumbers are left to make a living in a town which only supported 20 plumbers in normal times.
“Real” career risk is too many people doing what you do for a living. Grantham’s problem is that every day three million brilliant people get up and spend most of their waking hours trying to practice wide asset allocation. Most of those three million brilliant people have incredibly strong backgrounds in economics and lean on their ability to make macroeconomic predictions. Too many people are doing the same thing at the same time for a living. Therefore, much like the plumbers who moved to my hometown, they need to either move to another town or wait patiently for most of the other bright people to take up another profession.
To understand how we got here you have to understand where we came from. A booming stock market from 1982-1999 in the US culminated in the tech bubble. By 1998, most financial professionals either picked stocks directly for folks or guided their clients to stock pickers via mutual funds and separately managed accounts. This reached a pinnacle of concentration in US equities which the world will probably never see again. Most of the great tech firms of that era were US companies, so capital came from around the world to get at the boom. The way to get the most out of the boom was to pick stocks and to concentrate your assets. In 1999, virtually every other asset class was starved for capital except US large cap equity. Returns of 20% compounded were realized in that category and quickly became expected. Three million brilliant financial professionals got up every day to think like George Gilder and figure out the next revolutionary technology and the company which was going to make you rich from it.
When the 2000-2002 bear market in US stocks stripped 80% of the value of the Tech-Heavy NASDAQ stock index and 45% out of the S&P 500 index, the financial professionals suffered “real” career risk. Nobody wanted them to do what they did for a living any more. They recognized the sin of concentration very quickly and between 2003 and 2007 morphed themselves into the world of wide asset allocation. Everybody wanted to be David Swensen or Jeremy Grantham and execute something similar to the Yale-Endowment model. Since the other asset classes were starved for capital, this created a multi-year bull market in everything from gold to oil and emerging markets to international bonds. It spawned the urge to reduce your equity risk through employing hedge funds. It caused institutional folks to move heavily into alternatives like commodity indexes and private equity funds (where prices aren’t printed in the newspaper every day).
As if the early decade bear market wasn’t enough to get the lesson, the financial meltdown of 2007-2009 reinforced the wide asset allocation urge and motivated those who do it to use a heavy dose of economic analysis. It was official. As an institutional or individual investor you had to practice wide asset allocation and employ some of the greatest macroeconomic thinkers in the world in the process.
Today, if you walk into the office of any financial advisory firm in any small town in the US, you are likely to get a similar set of macro-economically steeped advice and shepherded through the same kind of asset allocation which you would get from a brilliant man like GMO’s Ben Inker. My friends, in my opinion, there are too many wide asset allocation plumbers and it has ruined the forward returns of effective wide asset allocation. If you’ve been around 32 years like me, you can read the frustration in Jeremy Grantham and Ben Inker’s letter. “We (GMO) are going to play for mean reversion sooner rather than later”. They are avoiding risk because there is very little value to add by taking any in the late stages of a boom in your profession. There are too many smart people attempting to do the same thing that GMO does for a living!
In a recent piece called “Diversification Remains Difficult”, Richard Bernstein makes our argument in a slightly different way. He explains that US Treasury bonds are the only “uncorrelated” asset class. He included a chart that shows back in 2002, real estate, gold, commodities, high grade and municipal bonds were inversely correlated with US equities and today they move in tandem with them. Here is how he explains the current situation: “In particular, we remain quite concerned that investors appear grossly under-diversified,” he writes. “Diversification is not dependent on the number of asset classes, but rather it depends on the correlations among those asset classes.” By everyone in the institutional and individual investor world becoming closet economists and wide asset allocators, most of the ways to actually diversify have disappeared.
At our firm we are guessing that this is a very good time to be a long-duration stock picker or to employ good long-duration stock picking in your asset allocation process. We don’t believe there are even three thousand brilliant people who wake up each day in our profession and attempt to compete with us. In that way, we believe we are avoiding the “real” career risk.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.
Tags: Asset Allocation, Asset Allocator, Boom, Brilliant People, Capital Management, Disciplines, Gmo, Jeremy Grantham, Pension Assets, Plumbers, Plumbing And Heating, Plumbing Business, Plumbing Company, Professional Investors, Quarterly Letter, Smead, State Of Washington, Thinker, Value Investor, Waking Hours
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Friday, February 3rd, 2012
World Economic and Equity Markets Outlook – Week 5, February 2012
Goldman’s Jim O’Neill chairman of Goldman Sachs Asset Management, told CNBC, “we came into the year with people fearing 08 if not worse and the evidence from all over the place is that it is nothing like 08, at the core of the euro zone is that Germany appears to be accelerating.”
Marc Faber says Stocks may” disappoint” after a” strong open,” in the first half of this year, Marc Faber, publisher of the Gloom, Boom and Doom report, said in a Bloomberg television interview…
Jeremy Siegel, Wharton School professor of finance, discusses why sees this market as a historic buying opportunity for investors
David Dreman, well known contrarian investor, says that stocks are the cheapest they’ve been since 1982, the best he’s seen in 30 years.
Tags: Bloomberg Television, Boom, Cnbc, Contrarian Investment Strategies, Contrarian Investor, David Dreman, Doom, Euro Zone, Forbes, Fvn, Gloom Boom And Doom Report, Goldman Sachs, Goldman Sachs Asset Management, Jeremy Siegel, Marc Faber, Nbsp, O Neill, School Professor, Stocks, Television Interview, Wharton School
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Thursday, January 26th, 2012
Our discussions (here, here, and here) of the dispersion of deleveraging efforts across developed nations, from the McKinsey report last week, raised a number of questions on the timeliness of the deflationary deleveraging process. David Rosenberg, of Gluskin Sheff, notes that the multi-decade debt boom will take years to mean revert and agrees with our views that we are still in the early stages of the global deleveraging cycle.
He adds that while many believe last year’s extreme volatility was an aberration, he wonders if in fact the opposite is true and that what we saw in 2009-2010 – a double in the S&P 500 from the low to nearby high – was the aberration and market’s demands for more and more QE/easing becomes the volatility-inducing swings of dysphoric reality mixed with euphoric money printing salvation. In his words, perhaps the entire three years of angst turned to euphoria turned to angst (and back to euphoria in the first three weeks of 2012?) is the new normal.
After all we had angst from 1929 to 1932 then ebullience from 1933 to 1936 and then back to despair in 1937-1938. Without the central banks of the world constantly teasing markets with more and more liquidity, the new baseline normal is dramatically lower than many believe and as such the former’s impacts will need to be greater and greater to maintain the mirage of the old normal.
From David Rosenberg, Gluskin Sheff:
Meet The New Paradigm, Same As The Old Paradigm
Tying It All Together.
The people I speak to tell me that the extreme volatility and general market weakness last year was the aberration. The normal was the bounce we saw in 2009 and extension into 2010 — even though that extension was in dire need of a late-year round of QE2 intervention.
I’m actually wondering if it isn’t the opposite. That last year was normal and what we saw in 2009 and 2010 — a double in the S&P 500 from the low to the nearby high —was the aberration.
Or maybe, just maybe, the entire three years of angst turned to euphoria turned back to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all, we had market angst from 1929 to 1932 then ebullience from 1933 to 1936 and back to despair in 1937-38.
If there is one thing to take away from the McKinsey report, it is that we are into a completely different set of post-recession realities than what we were accustomed to through the post-WWII era. The prior 10 recessions before the epic 2007-09 downturn were nothing more than brief and small corrections in real GDP in the context of what was a generational secular credit expansion — an expansion that went asymptotic from 2002 to 2007. But make no mistake — this was a multi-decade debt boom and will take years to mean revert. As the McKinsey report concluded, we are still in the early stages of the global deleveraging cycle, and once it starts in the government sector, absent a notable upturn in private sector spending, recession risks will remain acute, if not a reality.
This is the lens from which we have to assess the economic base-case scenario, understanding that the range of outcomes are extremely wide, but the probabilities still skewed more towards the downside. What is to be considered “normal” should not be through the prism of the post-WWII period, when the secular credit expansion ensured that recessions were short and shallow and expansions long and strong—to the extent that central banks started to believe their own press that they had managed to defeat the business cycle and with that in mind, coined their own term of success: “The Great Moderation”.
Today’s “normal” is seen through the prism of the McKinsey report — what life looks like after a post-credit bubble collapse. And so far, what we have seen in the markets and the macro economic data—an initial sharp bounce, then a stalling out, wide fluctuations, ultra-low policy rates and bond yields, endless signs of economic fragility and recurring double-dip risk — is indeed quite normal in this context.
This by no means suggests that investment themes have vanished and that you can’t make money and preserve capital in this sort of environment. There were plenty of ways to generate returns in 2011 —they just didn’t really exist that much within the equity market universe. But let’s go through where to prudently put money to work in the current and prospective backdrop, since we have to face up to the reality that you will not build up wealth or savings in T-bills, bank deposits or money market funds at today’s near-zero percent interest rate environment:
1. Market volatility is part and parcel of every post-bubble deleveraging cycle. This means an ongoing focus on long-short relative value strategies that have little directional exposure with the overall market but take advantage of the inherent mispricing across sectors during these periods of heightened volatility.
2. Deflation trumps inflation as the primary trend in a deleveraging cycle. This means an emphasis on defensive sectors with earnings stability and predictability characteristics. It also means a focus on squeezing as much income as possible out of the portfolio. This is why “income equity” strategies make so much sense.
3. Balance sheet quality becomes so much more important in cycles like these. Already, we have seen the amount of AAA-rated government paper plunge 70% in the past three years from $19 trillion to $6 trillion. As such, emphasis on good quality corporate bonds in noncyclical sectors, attractive spreads, high net free cash flow yields, low debt ratios, high liquidity ratios and light refinancing calendars make prudent sense. Our good friend and top-ranked credit analyst Marty Fridson told me yesterday that even in the high-yield space, spreads off of government bonds have more than 100 basis points of tightening potential based on the current set of fundamentals.
4. Always be on the lookout for assets priced for recession. Not only are wide swaths of the credit market priced for such, but so are parts of the commodity complex and segments of the ex-North American equity market where P/E ratios are in single-digits and PEG (P/E to growth) ratios below unity.
5. In this post-bubble environment, policy rates will remain near the floor for years. As such, the risks of any sustainable bear market in bonds are very low since the cost of carry is so vitally important to the fixed-income markets, especially for longer duration product (keeping in mind that yield curves are still steep by historical standards).
6. Keeping policy rates low means that real rates will remain negative. Even if the CPI turns negative, the central banks around the world will de facto ease policy by printing money. In this sense, the secular bull market in gold bullion remains intact and, as such, dips should be bought (especially dips below the moving averages).
7. Global deleveraging cycles almost invariably bring on heightened geo-political tensions. This is why the oil price has such a high floor established underneath it. Protectionism will continue to emerge as a new normal, as part of the globalization trend gets reversed. Exposure to crude oil and materials makes good sense from a strategic point of view.
8. Populist policies win the roost in these types of cycles. The 99% extract their pound of flesh from the 1%. Conservatives like Newt end up sounding like Krugman when debating the likes of Romney. Luxury retailing, or any other fashion that benefits from the spending trend of the upper class, is probably a good shorting opportunity.
Tags: Aberration, Amp, Baseline, Boom, Central Banks Of The World, David Rosenberg, Developed Nations, Dispersion, Ebullience, Euphoria, Extreme Volatility, liquidity, Market Weakness, Mckinsey Report, Mirage, Money Printing, New Paradigm, Qe, Swings, Timeliness
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Friday, January 20th, 2012
Jan. 20 (Bloomberg) — Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the outlook for stocks versus bonds and his investment strategy. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)
Faber said in the interview, that given the choice between U.S. Treasurys and European bonds, he would choose the U.S. Treasurys; given the choice between equities, real estate, bonds and precious metals, he would choose precious metals and equities.
Eric Schatzker calls Faber out on his bearish 2009 call on U.S. Treasurys, and laughably, Faber admits that David Rosenberg was right, and he owes him a bottle of whiskey.
Length: 5:34 mins
Tags: Amp, Bloomberg Television, Bonds Investment, Boom, David Rosenberg, Doom, Eisen, Eric, Global Stocks, Gloom, Gloom Boom Doom, Insidetrack, Investment Strategy, Marc Faber, Outlook, precious metals, Publisher, Real Estate, Sara, Stocks Bonds, Treasurys, Whiskey
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Thursday, December 29th, 2011
In the video clips below, a number of commentators give short comments on topical economic and investment issues.
Part 1: Where’s the U.S. economy headed?
Part 2: Will the U.S unemployment rate improve in 2012?
Part 3: Will the European Union survive 2012?
Part 4: Will China boom or bust?
Part 5: What’s the best safe haven in 2012?
Part 6: What’s the best investment idea for 2012?
Source: Bloomberg, December 23–27, 2011.
Tags: Bloomberg, Boom, Bust, China, Commentators, David Rosenberg, Economic Issues, Economy, European Union, Investment Idea, Investment Issues, Rosenberg, Safe Haven, Unemployment Rate, Video Clips
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Wednesday, October 12th, 2011
Marc Faber of the Gloom, Doom & Boom Report, shares his outlook on the global economy. “Despite of the fact the ECB and European governments will flood the markets with liquidity to bail themselves out, global liquidity is tightening,” he says. “It’s bad for asset prices but it’s good for the U.S. dollar.”
Source: CNBC, October 11, 2011.
Tags: Amp, Asset Prices, Boom, Cnbc, Dollar, ECB, European Governments, Global Economy, Global Liquidity, Gloom Doom, Marc Faber, October 11, Outlook, Shares, Stocks
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Friday, July 29th, 2011
Last week I sat down with Laura Mandaro from Marketwatch to discuss what’s currently driving commodity markets. One of the key drivers today is the robust economic activity and commodity demand taking place in Asia.
Frequent Frank Talk readers know there is something profound and significant happening in China—the building of a massive high speed rail network. It’s a $300 billion project that will connect more than 250 Chinese cities, span 18,461 miles and reach roughly 700 million people. This is going to create massive demand for commodities and a wave of investment into the sector. We believe that resource companies associated with coal, iron ore and steel are well positioned to benefit from China’s long-term sustainable bull market.
I also discuss a few individual stocks I think are structurally sound as well as talk about a market ready to take off and The Fear and Love Trade.
Tags: Asia, Boom, China, Chinese Cities, Coal, Commodities, Commodity Markets, Economic Activity, Fear, High Speed Rail, Iron Ore, Love, Marketwatch, Massive Demand, Resource Companies, Stocks
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Monday, July 11th, 2011
Full Interview Transcript:
Consuelo Mack WealthTrack – July 1, 2011
CONSUELO MACK: This week on WealthTrack, Great Investor Steven Romick shows why surfing where others fear to swim has placed him in the top one percent of money managers. FPA Crescent Fund’s contrarian value manager tells us which investment waves he is riding now, next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week we are catching up with Great Investor, Steven Romick, portfolio manager of the five star rated FPA Crescent Fund, a go anywhere, invest in anything fund he launched in 1993. A noted value-oriented contrarian, Romick was a finalist for Morningstar’s first ever Manager of the Decade Award for being one of the fund managers that “served investors the best during the most trying decade since the Great Depression.” His 11% plus annualized returns over the last ten years placed him in the top one percent of money managers.
What sets Great Investors apart? Having interviewed my fair share of them on WealthTrack over the last six years, I have come up with some essential traits: intensity about their work, attention to detail, disciplined investment process, independence of thought and deed, and the ability to withstand the passions of the moment and hold their ground even if it’s not good for business. FPA Crescent saw 90% of its assets leave the fund during 1998 and 1999 when Romick refused to buy into the escalating tech boom and vastly underperformed the then very tech-heavy market. Needless to say, had investors stayed with Romick, they would have been far ahead of the pack over the next three years. He aced the market and competition over that five year period.
In order to educate potential and current investors and avoid a similar exodus in the future, Romick and the team at FPA recently published “the FPA Contrarian Policy Statement,” outlining their goal: “…to provide, over the long-term, an equity-like return with less risk than the stock market,” which so far they have done. The Contrarian Statement also outlines their philosophy, including being “absolute value investors,” their “long-term focus,” saying they have to “accept short-term underperformance in exchange for long-term success” and their “downside protection and risk minimization.” It also lays out the process they follow, as they put it, to “seek the out-of-favor, unloved, or misunderstood…we are, in a word, ‘contrarian.’” We’ll have a link on our website, wealthtrack.com. I began the interview by asking Romick about another FPA philosophy, that macro matters, and to give us his view of the big picture.
You were quoted recently saying that we’re kind of at the respite between two crises right now. We know what the crisis was that we just came through, but what kind of a respite is this, and why do you think there is another crisis possibly that’s going to come down the road?
STEVEN ROMICK: Well, because sometimes the solution you use ends up just being a band-aid, and sometimes the medicine you’re taking can actually cause another illness. I mean, you try and kill cancer cells with chemotherapy, and chemotherapy taken to its extreme can certainly kill you. So when you look at the financial crisis, we have just doped up the system to such a great degree, how it’s going to come back and bite us in the butt is our big concern.
Debt continues to increase at the government level in the United States, and there has to be a day of reckoning there. And so we fear that day of reckoning, because as we continue to finance this growth and get lower and lower return for it, we fear the need to repay it in the future. And not only repay it, it’s going to come quicker than we think, because our debt rolls, almost half of it every two years. So we’re borrowing very short. About 44% of our national debt matures inside of two years.
CONSUELO MACK: So this is the huge cloud that you think is on the horizon. So in the meantime, let me you ask you how you’re investing, because when you were on WealthTrack in the spring of 2009, you came on and I basically asked you, what are you buying? And you went debt, debt, debt. And it was absolutely the right thing to do. You did extremely well with the debt that you had. What, 38% of your portfolio at one point?
STEVEN ROMICK: At one point, it was 34%.
CONSUELO MACK: Thirty-four percent of the portfolio was in corporate debt. So it’s now down to 7% of the FPA Crescent Fund? So why, number one, have you fled bonds? And what are you replacing them with? But first of all, why are you out of bonds?
STEVEN ROMICK: Well, it’s not that we fled so much as the fact that over the last few years, things have worked out and some of the bonds matured. But in March of ’09, our yield on our portfolio was about 23%. The yield on the portfolio is mid single digits now. And most of those bonds mature in a year, year and a half or so. So there’s just not a great yield spread. So the starting yield is low, and interest rates are low overall. So the spread doesn’t look so terrible. The high yield spreads are about 500 basis points more than treasuries, but we don’t want to get seduced just by the spread, because again, the starting yield’s so low. We just feel that we’re not getting paid to play.
CONSUELO MACK: Is that telling me that you view the bond market as very risky? That’s why you’re basically, you’re almost at cash equivalents.
STEVEN ROMICK: I feel we’re not getting paid to play. We’re in the business of trying to equity rates of return with less risk in the stock market. And if we’re going to go out and put up money at 6%, I think that we’re not necessarily going to get equity rates of return there, particularly for the risk that we’re assuming.
CONSUELO MACK: So what other areas are you avoiding at this point? And one of the goals is to avoid the permanent loss of capital. And I will quote the contrarian policy statement, “returns will be driven by not just what we own, but what we don’t own.” So what are you deliberately not owning in the FPA Crescent Fund?
STEVEN ROMICK: Well, you just stated one of them. We’re staying away from high yield bonds and distressed debt. We’re also staying away from smaller cap companies, because smaller caps- and this is a gross generalization, it doesn’t mean that all small cap stocks are expensive- but small cap stocks are about as expensive as they’ve been as a group, as compared to large cap stocks given the last 20 or 30 years, over the last 30 years, since the early 1980s.
CONSUELO MACK: So avoiding small caps. I mean, I know you’re also a bottoms up manager. Do you own any small caps at all?
STEVEN ROMICK: We have some, but our portfolio is tilted dramatically towards large cap stocks today.
CONSUELO MACK: All right. So why are large-cap stocks a place that you’re interested in?
STEVEN ROMICK: Large cap stocks offer a few things to us. One, I mean, there’s a misconception. One of the myths about small cap stocks is that they grow faster than large cap. And they certainly can, because these companies are more nimble, but that isn’t necessarily the case. In fact, if you look at the earnings on a trailing five year basis for the Russell 1000, a large cap index, versus the Russell 2000, a small cap index, in fact the Russell 1000 has outperformed, the large cap index has outperformed for the last 15 years consecutively.
CONSUELO MACK: So this is on earnings growth rates?
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