Money and Finance

Steve Romick's Q4 Commentary

Link to: Steve Romick's Q4 Commentary

Forgive us if we bring you up to date this year, in part, through the lens of the distant past.

We can’t help but think that the creators of Greek tragedies – those of the ancient variety, not the ongoing, modern ones – would have relished watching the Fed and the stock market the past couple of years and envisioned all kinds of morals to the story.

For instance, it was another year of single-digit earnings growth but double-digit gains in multiples. What’s more, our oracles – we call them economists now – failed at the beginning of 2013 to accurately predict what would occur for that year: The U.S. economy grew more slowly than expected and S&P 500 earnings were lower than anticipated and yet the stock market rocketed to its best showing since 1997.

Overseas, things weren’t that different. Our increasingly global view includes the performance of foreign stock markets, which generally didn’t fare quite as well as the U.S., with the exception of Japan. The U.S. stock market’s relatively strong showing speaks to the Federal Reserve’s continued aggressively dovish policy stance and that our economy missed estimates by less than most other developed economies.

…..

Like those mythological Greek characters, we live in a windy world but we’re in the habit of leaning into it. We tend to buy with the wind in our face, and sell with it at our backs. Right now, there’s more of the latter so, as you’d expect, our equity exposure declined during 2013. The favorable market allowed us to sell sixteen long equity positions during the year, at an average gain of 64% from cost, with just one generating a loss. We initiated nine new positions. The byproduct of this – unfortunate if the market continues to rally – is that our net equity exposure declined to 51.8%, down from 61.3% a year ago. We will let valuation and risk/reward guide our exposure, not the stock market. If the market gives us tomorrow’s prices today and the risk/reward becomes unattractive, then we are unsurprisingly net sellers.

Things aren’t cheap. Equity values, as a percentage of GDP, are near their peaks. The only time they were higher was at the apex of the dot com bubble.

And, on a Price/Earnings ratio basis, public securities are far from on sale.

We see ideas thrown at us every day but, like a baseball batter, we’re particular to the pace, movement, and location before we swing. Right now, we’re seeing too many ideas coming at us with a lot of speed and then curving high and outside – in other words, generally not priced to our satisfaction with some questions as to business quality. While we wait, though, we keep adding companies to our library that, at some point, we expect to check out, update and invest in.

- Links
Peter Bernstein on risk (video) [H/T The Big Picture] (LINK) Related book: Against the Gods: The Remarkable Story of RiskSafal Niveshak: How to Be Happy and Get Rich (some lessons from a re-reading of Poor Charlie’s Almanack) (LINK) Nathaniel...

- Hussman Weekly Market Comment: Pushing Luck
Link to: Pushing LuckThe latest data from the NYSE shows equity margin debt at a new all-time high. Relative to GDP, the current 2.6% level was eclipsed only once – at the March 2000 market peak. In the context of the most extreme bullish sentiment...

- John Mauldin: Forecast 2014: The Capes Of Hope
Link to: Forecast 2014: The CAPEs of HopeLast week's letter focused on my 2014 outlook for the US stock market and highlighted an important, but controversial, measure for long-term valuations: Robert Shiller's cyclically adjusted price-to-earnings...

- Broyhill Asset Management On Coca-cola Hellenic (cch)
An investment in CCH represents a compelling opportunity to own a high quality business characterized by high customer captivity with significant economies of scale at a substantial discount to intrinsic value. Shares have been dragged down by the...

- First Pick In Wmd Portfolio - Coca Cola
The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I am launching a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying...

Money and Finance