PCM Newsletter
Our quarterly newsletter provides market commentary, portfolio updates, and insights into our investment thinking. Browse the archives below.
December 2009
+
December 3, 2009
In November our collective performance was +1.7% and the S&P 500 was +5.7%. For the year PCM is +10.9% and the S&P 500 is +21.3%. The range of returns was -1.93% - +6.09%.
DITTO OCTOBER'S VOLATLITY COMMENT
I feel like I could simply repeat about 75% of last month's comments, beginning with the volatility in several of our small cap names and the inability to hedge them. Of our top six positions, only the gold ETF ("GLD") provided a competitive return in November (+12%). Among the other five, only one delivered a positive return (+3%), two were flat, and two were negative, (-5% and -11%). I remain excited about these names and based on what I know today, don't anticipate selling them.
In addition, we own several large money center banks, which I have mentioned a few times, and they have been flat the past few months. The ongoing concern about the banks' ability to withstand another round of material writeoffs, this time from commercial real estate loans, seems to be the issue holding down bank shares. We have exposure to Wells Fargo ("WFC"), JP Morgan ("JPM") and Bank of America ("BAC"), and may do some trimming here.
And my decision, which I discussed last month, to hold cash unless I had a very strong conviction hasn't helped so far, as our significant cash positions also impeded relative performance last month.
BUILDING POSITIONS
During November I added significantly to our KVH Industries ("KVHI") holdings. This microcap ($150mm) is transforming itself from being a seller of antennae used in leisure products such as boating and RVs to selling a more sophisticated, state-of-the-art mobile communications system to the commercial maritime industry via a new product called Tracphone v7. What's really exciting in this transformation is that KVHI is now also selling the satellite services required to use these antennae on a monthly subscription basis. So in addition to the one-time hardware sale, KVHI will also generate approximately $24,000 annually on a recurring basis in subscription fees per unit sold. KVH's product is smaller, lighter, and far cheaper to use than the incumbent Inmarsat system.
By itself the mobile satellite system and attendant subscription business would be interesting, but there is a second product as well, a fiber optic gyroscope, (FOG) which is used for maintaining stability and guidance. Presently this product is being used in military applications, but it also can be used for stabilizing cameras, oil and gas exploration, aerial mapping, and robotics, for example. Orders for this product reached $8mm in Q3.
The company will be spending a little more money in the next couple quarters on the final piece of it's global communications network and to expand production facilities for FOGs, but then is essentially done with the bulk of its capital spending requirements. KVH has a smidgeon of debt, nearly $3 per share in cash and was profitable in Q3, although I expect it to lose around 10 cents in 2009. In 2010, things could really get interesting, as these two products could see exciting growth and the legacy business will no longer mask that. (Note: Thor Industries, the world's largest RV manufacturer, just reported an 18% increase in RV sales). KVHI could earn $2-$3 in a few years, and if that's the case the shares won't trade at $12.
I also bought some Heinz ("HNZ"), a stock that has gone sideways for about a decade, although there was a little excitement in 2006. I like the steady and consistently increasing dividend, now yielding ~4%, and I like the global reach and utility of the products and built-in currency hedge it provides as roughly 60% of revenues are from overseas, a quarter of which are from the emerging markets. HNZ trades at roughly 15x forward estimates vs. a historic range of 12-22x. A number of PCM's positions are small and micro cap names, (depending on the client) and, in addition to providing a little balance in terms of size, HNZ addresses a couple of macro themes, and generates income, which is particularly suitable for a few accounts who are retired and concerned about low returns in the fixed income markets.
There are plenty more reasons to own both these stocks and I welcome questions or comments if anyone wants more detail.
GOLD UPDATE: NO, NOT A BUBBLE
As I write this, (12/2), gold has closed higher for something like 18 of the past 22 sessions. The speed of this rise makes me nervous, but my guess is that the drivers are still in place for further price appreciation. Gold is a hedge against all kinds of uncertainty, and is a safe haven alternative to fiat money. As the US Federal Reserve, and a number of other central banks as well, continue to print (well, more likely click to create) paper money, the purchasing power of that money steadily declines. There doesn't appear to be an end to this currency debasement cycle, particularly in the US, which is facing deficits as far as the eye can see. Who knows whether the next 20% move in gold prices is up or down, but my beleif is that the longer term trends for gold are in place. Here are a few data points:
First, while western governments have significant gold reserves relative to their overall foreign exchange reserves (examples: US 77%, Bundesbank 69%, France 71%) Asian central banks have very little. China, for example, has a 1.6% ratio, Russia, 4.9%, Japan 2.7%, and India 7.5%. In the current Grant's Interest Rate Observer, there is an interesting table, which quantifies how much more gold several Asian central banks would have to own to achieve a 10% or 25% weighting. China, for example, would have to raise their reserves fivefold to get to 10%, and nearly 15 fold to get to 25%. Japan threefold and eightfold, respectively. It's not hard to see why central banks have become net buyers rather than sellers, and this is taking place while supply growth is flat.
Second, 2009 has been a big year for many commodities, but gold's 35% gain lags far behind several others: copper +125%, lumber +45%, palladium +92%, silver +64% and unleaded gas +98%. (Source: Richard Russell December 1, 2009)
Third, from a broader perspective, Ian McAvity provided this historical context: "Gold is about 52% higher than the peak weekly average price of January, 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P 500 is 892% higher. I don't think it untoward to suggest gold is badly lagging....." (Source Richard Russell November 27, 2009)
It's very hard to buy into a market that's moved so much but for a few accounts that don't have as much exposure to gold as I would like I am considering adding more Sprott Resources ("SCP.TO"), or Central Fund of Canada ("CEF") or initiating a position in Central Gold Trust ("GTU"). Ideally I will get a chance to do so on a pullback, but there's an old saying, which goes something like "bull markets don't let you in and bear markets don't let you out".
In conclusion, December is usually a market-friendly month, and, having failed to take the market down with the "Dubai debacle" my guess is the bears will have to wait until January for their next good opportunity. Regardless, I am excited about many names we own and am looking ahead optimistically.
In November our collective performance was +1.7% and the S&P 500 was +5.7%. For the year PCM is +10.9% and the S&P 500 is +21.3%. The range of returns was -1.93% - +6.09%.
DITTO OCTOBER'S VOLATLITY COMMENT
I feel like I could simply repeat about 75% of last month's comments, beginning with the volatility in several of our small cap names and the inability to hedge them. Of our top six positions, only the gold ETF ("GLD") provided a competitive return in November (+12%). Among the other five, only one delivered a positive return (+3%), two were flat, and two were negative, (-5% and -11%). I remain excited about these names and based on what I know today, don't anticipate selling them.
In addition, we own several large money center banks, which I have mentioned a few times, and they have been flat the past few months. The ongoing concern about the banks' ability to withstand another round of material writeoffs, this time from commercial real estate loans, seems to be the issue holding down bank shares. We have exposure to Wells Fargo ("WFC"), JP Morgan ("JPM") and Bank of America ("BAC"), and may do some trimming here.
And my decision, which I discussed last month, to hold cash unless I had a very strong conviction hasn't helped so far, as our significant cash positions also impeded relative performance last month.
BUILDING POSITIONS
During November I added significantly to our KVH Industries ("KVHI") holdings. This microcap ($150mm) is transforming itself from being a seller of antennae used in leisure products such as boating and RVs to selling a more sophisticated, state-of-the-art mobile communications system to the commercial maritime industry via a new product called Tracphone v7. What's really exciting in this transformation is that KVHI is now also selling the satellite services required to use these antennae on a monthly subscription basis. So in addition to the one-time hardware sale, KVHI will also generate approximately $24,000 annually on a recurring basis in subscription fees per unit sold. KVH's product is smaller, lighter, and far cheaper to use than the incumbent Inmarsat system.
By itself the mobile satellite system and attendant subscription business would be interesting, but there is a second product as well, a fiber optic gyroscope, (FOG) which is used for maintaining stability and guidance. Presently this product is being used in military applications, but it also can be used for stabilizing cameras, oil and gas exploration, aerial mapping, and robotics, for example. Orders for this product reached $8mm in Q3.
The company will be spending a little more money in the next couple quarters on the final piece of it's global communications network and to expand production facilities for FOGs, but then is essentially done with the bulk of its capital spending requirements. KVH has a smidgeon of debt, nearly $3 per share in cash and was profitable in Q3, although I expect it to lose around 10 cents in 2009. In 2010, things could really get interesting, as these two products could see exciting growth and the legacy business will no longer mask that. (Note: Thor Industries, the world's largest RV manufacturer, just reported an 18% increase in RV sales). KVHI could earn $2-$3 in a few years, and if that's the case the shares won't trade at $12.
I also bought some Heinz ("HNZ"), a stock that has gone sideways for about a decade, although there was a little excitement in 2006. I like the steady and consistently increasing dividend, now yielding ~4%, and I like the global reach and utility of the products and built-in currency hedge it provides as roughly 60% of revenues are from overseas, a quarter of which are from the emerging markets. HNZ trades at roughly 15x forward estimates vs. a historic range of 12-22x. A number of PCM's positions are small and micro cap names, (depending on the client) and, in addition to providing a little balance in terms of size, HNZ addresses a couple of macro themes, and generates income, which is particularly suitable for a few accounts who are retired and concerned about low returns in the fixed income markets.
There are plenty more reasons to own both these stocks and I welcome questions or comments if anyone wants more detail.
GOLD UPDATE: NO, NOT A BUBBLE
As I write this, (12/2), gold has closed higher for something like 18 of the past 22 sessions. The speed of this rise makes me nervous, but my guess is that the drivers are still in place for further price appreciation. Gold is a hedge against all kinds of uncertainty, and is a safe haven alternative to fiat money. As the US Federal Reserve, and a number of other central banks as well, continue to print (well, more likely click to create) paper money, the purchasing power of that money steadily declines. There doesn't appear to be an end to this currency debasement cycle, particularly in the US, which is facing deficits as far as the eye can see. Who knows whether the next 20% move in gold prices is up or down, but my beleif is that the longer term trends for gold are in place. Here are a few data points:
First, while western governments have significant gold reserves relative to their overall foreign exchange reserves (examples: US 77%, Bundesbank 69%, France 71%) Asian central banks have very little. China, for example, has a 1.6% ratio, Russia, 4.9%, Japan 2.7%, and India 7.5%. In the current Grant's Interest Rate Observer, there is an interesting table, which quantifies how much more gold several Asian central banks would have to own to achieve a 10% or 25% weighting. China, for example, would have to raise their reserves fivefold to get to 10%, and nearly 15 fold to get to 25%. Japan threefold and eightfold, respectively. It's not hard to see why central banks have become net buyers rather than sellers, and this is taking place while supply growth is flat.
Second, 2009 has been a big year for many commodities, but gold's 35% gain lags far behind several others: copper +125%, lumber +45%, palladium +92%, silver +64% and unleaded gas +98%. (Source: Richard Russell December 1, 2009)
Third, from a broader perspective, Ian McAvity provided this historical context: "Gold is about 52% higher than the peak weekly average price of January, 1980. The US CPI is 177% higher, US M-2 Money Supply is 464% higher, and the S&P 500 is 892% higher. I don't think it untoward to suggest gold is badly lagging....." (Source Richard Russell November 27, 2009)
It's very hard to buy into a market that's moved so much but for a few accounts that don't have as much exposure to gold as I would like I am considering adding more Sprott Resources ("SCP.TO"), or Central Fund of Canada ("CEF") or initiating a position in Central Gold Trust ("GTU"). Ideally I will get a chance to do so on a pullback, but there's an old saying, which goes something like "bull markets don't let you in and bear markets don't let you out".
In conclusion, December is usually a market-friendly month, and, having failed to take the market down with the "Dubai debacle" my guess is the bears will have to wait until January for their next good opportunity. Regardless, I am excited about many names we own and am looking ahead optimistically.
November 2009
+
November 4, 2009
In October we returned -3.3% with a range of -1.6% to-15.3%. The S&P returned -2.0%. For the year, PCM collectively has returned +9.1% and the S&P 500 has returned +14.8%. The last few days of October were brutal as our energy and gold names were hit hard in the sell off, wiping out solid gains. BYD Co, a core holding, was off 23% in the last couple days of the month alone.
HARD TO HEDGE
Four of our six largest positions are small/microcap names which are impossible to hedge as there are typically no shares to borrow and no index which is correllated nor puts to buy. So we will likely suffer inordinately during periods of volatility. However, it is self evident that I really like what's going on at these companies and expect that they will continue to provide terrific returns to us.
GOLD AND ENERGY
Speaking of gold, yesterday's announcement that India had made a significant purchase of gold from the IMF triggered another leg up in gold shares. My favorite way to play this is to own the gold itself, however, as that is too impractical we own instead Central Fund of Canada (CEF) which owns gold and silver bullion, the gold ETF (GLD) and Sprott Resources (SCP.TO). We bought Sprott several months ago when it was trading at a severe discount to the value of the gold and silver on it's balance sheet, and it is up ~50% since then. Recently it was touted at a value conference and also Marc Faber mentioned it as one of his favorite stocks, and so while I continue to like it very much the discount is gone and for the time being it will probably trade in line with gold. Also of note: the world's largest gold producer, Barrick Gold, recently took off all it's hedges.
As for energy, there continues to be an abundance of both oil and gas available, but the big picture is that more and more of the world's population will be using products powered by oil and the supplies of it are (debatably) limited. So I continue to believe that we should have some kind of exposure to oil. Supplies of natural gas in the US are at peak storage levels, but the rig count has been cut in half and historically this has been a precursor to a drop in supply and subsequently higher prices. I took some profits in some natural gas positions, but I am keeping a close eye on the industry. Several large producers have begun hedging production with the recent spike in the spot price from below $3 to ~$5. However Chesapeake Energy, one of the top producers in the US, stated unequivocably in it's recent conference call that it was too early to hedge as prices would be higher in the next few weeks and months.
So we've got the world's largest gold producer and one of the top natural gas producers totally exposed to the price of the underlying asset. I guess somebody thinks the weak dollar/strong commodity cycle has a ways to go.
THE ECONOMY
The markets seem to really like the recent GDP numbers, but it's hard to dismiss the skeptics who point out that about half the gain is attributable to the cash for clunkers program, another 0.6% from new residential construction, and an additional 0.9% from an involuntary inventory buildup, (Source: Alan Abelson, November 2 Barron's) meaning that without Government stimulus the number was barely positive. And David Rosenberg (formerly of Merrill Lynch and now with Gluskin Sheff in Toronto) mentioned in a recent memo that despite the bounce in the ISM, something like seven of the nine regions were negative. He also mentions valuation, which can be measured in a number of ways but none of them suggest bear market lows and the onset of a bull market such as in 1982 when stocks were in high single digits on a P/E basis (by his estimate now 26x), 6% on a dividend yield basis (currently 2%) and the market traded at roughly book value, vs over two times book now, according to Rosenberg.
My guess is that The Fed will leave the targeted Fed Funds rate at 0-.25% for the time being. It just seems unlikely that in the face of still rising unemployment, a completely tapped out consumer, and an unproven economy that they will see fit to make borrowing more expensive. And a soft dollar will help in a couple ways (not so a collapsing dollar). What is harder to know is how the market will respond when the Fed does decide it's time to begin raising, but my guess is that that is an issue for sometime in 2010.
Overall, I continue to take some profits and am hesitant to redeploy cash unless I have a very high conviction about a particular name or situation, as I broadly believe that, while there may still be some upside to this market, the risks outweigh the rewards. So I will likely underperform the market if it pushes upwards. That being said, for most (not all) my clients I see my primary duty as making sure they are never poor, and so, on a client by client basis, I am content to focus only on my highest conviction names, even if it means sitting with piles of cash in a rising market.
On an administrative note, if I have set things up properly, you are reading this on a new format as I have done some work branding Peattie Capital Management, including registering the tag line "Invested in the Individual." Hopefully this all came out correctly, but in the event it didn't you might see another version of this note shortly.
In October we returned -3.3% with a range of -1.6% to-15.3%. The S&P returned -2.0%. For the year, PCM collectively has returned +9.1% and the S&P 500 has returned +14.8%. The last few days of October were brutal as our energy and gold names were hit hard in the sell off, wiping out solid gains. BYD Co, a core holding, was off 23% in the last couple days of the month alone.
HARD TO HEDGE
Four of our six largest positions are small/microcap names which are impossible to hedge as there are typically no shares to borrow and no index which is correllated nor puts to buy. So we will likely suffer inordinately during periods of volatility. However, it is self evident that I really like what's going on at these companies and expect that they will continue to provide terrific returns to us.
GOLD AND ENERGY
Speaking of gold, yesterday's announcement that India had made a significant purchase of gold from the IMF triggered another leg up in gold shares. My favorite way to play this is to own the gold itself, however, as that is too impractical we own instead Central Fund of Canada (CEF) which owns gold and silver bullion, the gold ETF (GLD) and Sprott Resources (SCP.TO). We bought Sprott several months ago when it was trading at a severe discount to the value of the gold and silver on it's balance sheet, and it is up ~50% since then. Recently it was touted at a value conference and also Marc Faber mentioned it as one of his favorite stocks, and so while I continue to like it very much the discount is gone and for the time being it will probably trade in line with gold. Also of note: the world's largest gold producer, Barrick Gold, recently took off all it's hedges.
As for energy, there continues to be an abundance of both oil and gas available, but the big picture is that more and more of the world's population will be using products powered by oil and the supplies of it are (debatably) limited. So I continue to believe that we should have some kind of exposure to oil. Supplies of natural gas in the US are at peak storage levels, but the rig count has been cut in half and historically this has been a precursor to a drop in supply and subsequently higher prices. I took some profits in some natural gas positions, but I am keeping a close eye on the industry. Several large producers have begun hedging production with the recent spike in the spot price from below $3 to ~$5. However Chesapeake Energy, one of the top producers in the US, stated unequivocably in it's recent conference call that it was too early to hedge as prices would be higher in the next few weeks and months.
So we've got the world's largest gold producer and one of the top natural gas producers totally exposed to the price of the underlying asset. I guess somebody thinks the weak dollar/strong commodity cycle has a ways to go.
THE ECONOMY
The markets seem to really like the recent GDP numbers, but it's hard to dismiss the skeptics who point out that about half the gain is attributable to the cash for clunkers program, another 0.6% from new residential construction, and an additional 0.9% from an involuntary inventory buildup, (Source: Alan Abelson, November 2 Barron's) meaning that without Government stimulus the number was barely positive. And David Rosenberg (formerly of Merrill Lynch and now with Gluskin Sheff in Toronto) mentioned in a recent memo that despite the bounce in the ISM, something like seven of the nine regions were negative. He also mentions valuation, which can be measured in a number of ways but none of them suggest bear market lows and the onset of a bull market such as in 1982 when stocks were in high single digits on a P/E basis (by his estimate now 26x), 6% on a dividend yield basis (currently 2%) and the market traded at roughly book value, vs over two times book now, according to Rosenberg.
My guess is that The Fed will leave the targeted Fed Funds rate at 0-.25% for the time being. It just seems unlikely that in the face of still rising unemployment, a completely tapped out consumer, and an unproven economy that they will see fit to make borrowing more expensive. And a soft dollar will help in a couple ways (not so a collapsing dollar). What is harder to know is how the market will respond when the Fed does decide it's time to begin raising, but my guess is that that is an issue for sometime in 2010.
Overall, I continue to take some profits and am hesitant to redeploy cash unless I have a very high conviction about a particular name or situation, as I broadly believe that, while there may still be some upside to this market, the risks outweigh the rewards. So I will likely underperform the market if it pushes upwards. That being said, for most (not all) my clients I see my primary duty as making sure they are never poor, and so, on a client by client basis, I am content to focus only on my highest conviction names, even if it means sitting with piles of cash in a rising market.
On an administrative note, if I have set things up properly, you are reading this on a new format as I have done some work branding Peattie Capital Management, including registering the tag line "Invested in the Individual." Hopefully this all came out correctly, but in the event it didn't you might see another version of this note shortly.
October 2009
+
October 6, 2009
In September Peattie Capital�s aggregate return was +6.0% and the range of returns was +3.2% - +12.1%. The S&P 500 returned +3.5% in September. For the year, PCM�s return is +12.7% and the S&P�s is +17.0%.
At the end of August�s commentary I mentioned a few positions that I was hoping to add to on a pullback. I guess I should�ve added to them then as one, KVHI, gained 32% in September, and another, BYD Company, gained 30%. I don�t expect similar performance in October but I continue to like these names and expect to add to them on a pullback. We also had several other positions which were up mid-teens.
A DIFFERENT MESSAGE FROM THE BOND MARKETS
I also mentioned gold, which I own in every account, and still like very much, especially mid-long term. However at the moment there seem to be an abundance of deflationary signs which is probably a negative for gold, or maybe better to say that it is less of a positive than inflation would be. But with several commodities looking a little toppy (copper and oil, for example), I am wondering if perhaps the inflation story is being delayed. It is noteworthy to me that the bond market has been rallying, and I would expect higher yields, not lower, if the bond market saw a true economic rebound and/or inflation.
It might be worth pointing out that the past few times that bonds and stocks have diverged, it has been the bond market that was proved correct. Examples: summer of 1987, fall of 1994, summer of 1998, winter of 2000, and summer of 2007. (Source: David Rosenberg �Breakfast with Dave� 9/30/09)
So I have lightened up my overall equity exposure, and also boxed some GLD, although again, every client has different goals and for those who are measuring me vs. the S&P 500 I am still roughly 90% long as of month end. For others, the cash position ranges from 12%-35%, and I sprinkled in some hedges in addition to the boxed GLD shares. I also like income, and most accounts have several names with generous yields, something in the 7-10% range. Furthermore, I have come across a few names that look very cheap, and might start nibbling on them as well.
NOW WHAT?
I think the next few days are pretty important. No one knows if the slight weakness at month end, followed by more weakness in early October is yet another �buy-the-dip� opportunity or whether the highs we saw on the heels of the Sept. 23 Fed meeting might be THE highs for a while. (And it�s interesting that we saw a sell off on that good news, which is the first �sell good news� response we�ve had in the markets since the rally began). I am not ruling out another leg up in equities, despite my concerns about the US economy.
In addition to the bond market divergence I am also concerned about what happens as Government stimulation is withdrawn. (Look at the drop in car sales now that �Cash for Clunkers� is over, for example). Unemployment continues to rise, (granted it is considered a lagging indicator) and perhaps even more important than the unemployment rate is the expanding length of time it takes to find another job. And while it appears from recent Case-Schiller numbers that house prices may be stabilizing, there is a very large �shadow� inventory of homes that are about to enter or are in the early stages of the foreclosure process, bringing the number of homes that are/will be on the market to 7 million units, or two years supply. (Source: David Rosenberg, �Breakfast with Dave� 9/29/09). Lastly, it�s worth mentioning that despite the 51% annualized growth rate in the monetary base, M1 has grown less than 3% and M2 is down 4% in the same period. (Source: Rosenberg, 9/30/09). Numbers like these make me wonder if the Fed might be pushing on a string.
I guess there might be some good in the fact that the yield on the long bond has dropped to 4%; that there are piles of cash still on the sidelines; and, if there is genuine revenue growth in upcoming earnings, that would be a plus as well. And, I still believe that many money managers need to post a good year this year and if I�m right about that there will be a supportive bid in the market. You could also throw in the possibility (granted I am speaking out of both sides of my mouth here) that the reason for the bond market�s strong performance is the flow of funds going into fixed income mutual funds (something on the order of six times what is going into equity funds) and so the public is, once again, chasing something higher and will be wrong when things turn.
In sum I believe the market has gotten ahead of itself, which is not to say it can�t go higher. So I expect to maintain a long position in names where fundamentals and valuation still make sense and where I have my highest conviction. Most importantly, I believe that a number of our positions have outstanding growth opportunities in front of them and that we will be well rewarded for owning the shares, much like the two names mentioned above.
In September Peattie Capital�s aggregate return was +6.0% and the range of returns was +3.2% - +12.1%. The S&P 500 returned +3.5% in September. For the year, PCM�s return is +12.7% and the S&P�s is +17.0%.
At the end of August�s commentary I mentioned a few positions that I was hoping to add to on a pullback. I guess I should�ve added to them then as one, KVHI, gained 32% in September, and another, BYD Company, gained 30%. I don�t expect similar performance in October but I continue to like these names and expect to add to them on a pullback. We also had several other positions which were up mid-teens.
A DIFFERENT MESSAGE FROM THE BOND MARKETS
I also mentioned gold, which I own in every account, and still like very much, especially mid-long term. However at the moment there seem to be an abundance of deflationary signs which is probably a negative for gold, or maybe better to say that it is less of a positive than inflation would be. But with several commodities looking a little toppy (copper and oil, for example), I am wondering if perhaps the inflation story is being delayed. It is noteworthy to me that the bond market has been rallying, and I would expect higher yields, not lower, if the bond market saw a true economic rebound and/or inflation.
It might be worth pointing out that the past few times that bonds and stocks have diverged, it has been the bond market that was proved correct. Examples: summer of 1987, fall of 1994, summer of 1998, winter of 2000, and summer of 2007. (Source: David Rosenberg �Breakfast with Dave� 9/30/09)
So I have lightened up my overall equity exposure, and also boxed some GLD, although again, every client has different goals and for those who are measuring me vs. the S&P 500 I am still roughly 90% long as of month end. For others, the cash position ranges from 12%-35%, and I sprinkled in some hedges in addition to the boxed GLD shares. I also like income, and most accounts have several names with generous yields, something in the 7-10% range. Furthermore, I have come across a few names that look very cheap, and might start nibbling on them as well.
NOW WHAT?
I think the next few days are pretty important. No one knows if the slight weakness at month end, followed by more weakness in early October is yet another �buy-the-dip� opportunity or whether the highs we saw on the heels of the Sept. 23 Fed meeting might be THE highs for a while. (And it�s interesting that we saw a sell off on that good news, which is the first �sell good news� response we�ve had in the markets since the rally began). I am not ruling out another leg up in equities, despite my concerns about the US economy.
In addition to the bond market divergence I am also concerned about what happens as Government stimulation is withdrawn. (Look at the drop in car sales now that �Cash for Clunkers� is over, for example). Unemployment continues to rise, (granted it is considered a lagging indicator) and perhaps even more important than the unemployment rate is the expanding length of time it takes to find another job. And while it appears from recent Case-Schiller numbers that house prices may be stabilizing, there is a very large �shadow� inventory of homes that are about to enter or are in the early stages of the foreclosure process, bringing the number of homes that are/will be on the market to 7 million units, or two years supply. (Source: David Rosenberg, �Breakfast with Dave� 9/29/09). Lastly, it�s worth mentioning that despite the 51% annualized growth rate in the monetary base, M1 has grown less than 3% and M2 is down 4% in the same period. (Source: Rosenberg, 9/30/09). Numbers like these make me wonder if the Fed might be pushing on a string.
I guess there might be some good in the fact that the yield on the long bond has dropped to 4%; that there are piles of cash still on the sidelines; and, if there is genuine revenue growth in upcoming earnings, that would be a plus as well. And, I still believe that many money managers need to post a good year this year and if I�m right about that there will be a supportive bid in the market. You could also throw in the possibility (granted I am speaking out of both sides of my mouth here) that the reason for the bond market�s strong performance is the flow of funds going into fixed income mutual funds (something on the order of six times what is going into equity funds) and so the public is, once again, chasing something higher and will be wrong when things turn.
In sum I believe the market has gotten ahead of itself, which is not to say it can�t go higher. So I expect to maintain a long position in names where fundamentals and valuation still make sense and where I have my highest conviction. Most importantly, I believe that a number of our positions have outstanding growth opportunities in front of them and that we will be well rewarded for owning the shares, much like the two names mentioned above.
September 2009
+
September 4, 2009
In August our portfolios collectively returned +2.3% and the S&P 500 returned +3.3%. For the year, those numbers are 6.4% and 13% respectively.
PEATTIE CAPITAL BACKGROUND
By way of reminder, Peattie Capital Management, LLC (PCM) manages separate accounts, and individual portfolio returns can vary from the group�s return. In August, the range of returns was +0.54% to +6.48%. Additionally, most accounts are for individuals, whose primary goal is to maintain their wealth. Said another way, a short-term divergence below the S&P 500 is not a material concern to most my clients, provided that over time their wealth is protected and they are generating good returns. Overall, I have been cautious since I began managing money in May, 2000, which has led me to keep a somewhat high cash position in most accounts. This viewpoint has largely been borne out, given the -26% total return (includes dividends) of the S&P 500 since that date, but it means that I will probably under perform relative to the S&P 500 during sharp upwards moves, like what we�ve seen since March. Generally speaking, client accounts have performed significantly better than that. So overall my thinking has been good and the strategy has been a successful one.
PCM believes in being flexible and opportunistic in its approach. Portfolios can �go anywhere�, that is they are not limited by industry, size, or location. Depending on the client�s goals and risk tolerance (among other factors) there may be several small and micro cap names in a portfolio, and also some of the world�s biggest companies. I like the smaller names because they tend to be more inefficient, although they can also be more volatile. In addition to being flexible with regards to investments, PCM also uses basic hedging techniques like shorting or writing covered calls if it is suitable for the client and with the client�s express permission, as well as raising cash. PCM is a registered investment advisor in Ct., and is regulated by the Ct. Dept. of Banking and FINRA (Financial Industry Regulatory Authority).
CURRENT EXPOSURE
PCM�s current biggest industry exposure is in the large money center banks, because I believe that the Federal Reserve will keep the Fed Funds rate at current levels for the time being, allowing banks to earn their way back to profitability via net interest margins and increased lending. In addition, one unintended (?) consequence of the Government bank bailout programs is to make the big banks even bigger, which means that the chances these banks are allowed to fail in the future are even more remote than they were prior to the crisis. Using normalized earnings, several of them are valued below historical multiples, even after the huge rally. So I expect to be staying with most these positions, and even adding on dips. One risk here is that there may be more write offs coming (there are large amounts of commercial real estate loans maturing over the next couple years which could be a problem, for example) which could delay the return of normalized earnings, in which case these positions will likely be market performers. But ultimately I believe we will look back and be very glad we were involved with the banks.
Gold is also a core holding, representing anything from 4% to 15% of each account. Gold is an eternal store of wealth, and tends to do well in periods of high uncertainty, and during inflation/dollar weakness. I would think any or all of these situations could exist given all that�s going on in the world today and so I expect to hold my GLD shares as well, and may possibly add more. I suspect gold doesn�t trade based on fundamental supply/demand characteristics, but nonetheless it is interesting to me that global production of gold has dropped from 2,590 metric tons in 2002 to 2,486 metric tons in the 12 months to June 30, 2009, according to the World Gold Council. In addition to GLD, the gold exchange traded fund, a few clients own a smattering of CEF, a mutual fund that owns gold and silver bullion, and Sprott Resources, a Canadian micro cap with significant gold and silver bullion holdings.
WHAT NOW?
It looks to me as if the markets are due for a pause, maybe something more than that. The first day of the month has been a good proxy for the month�s performance lately, up every first day since April, after having been down consistently prior to that. Tuesday, Sept. 1 the S&P 500 was down 2.2%, and according to Michael Hegarty (morning comments 9/3/09) volume was the highest since April. Sept. 1 was also a �90% down day�, with down volume 94.6% of total volume according to Richard Russell�s Sept. 2 comments. And the FT reported (9/2/09) that insider selling in August rose to its highest level since May, 2008, with the ratio of insider selling to buying a record 30.7 times.
Broadly speaking, it looks like the economy is stabilizing, but no one seems to be seeing any significant revenue growth, and cost cutting can only do so much. Most professionals I speak with characterize the markets as being relatively cheap back in March, but with an S&P 500 hovering around 1000 it is now either fairly or slightly overvalued relative to earnings. Finally, I am a bit concerned about China as I have seen several articles discussing the levels and quality of lending taking place there, and if China slows down odds are the rest of the world will too.
In light of these data, I have lightened up in a few areas and have nibbled at some hedges as well. However I remain very excited about many of our core holdings and would be adding to them on any significant weakness. So far that opportunity hasn�t presented itself, as several, such as BYD Company, the GLD shares, and KVHI have risen in September.
In August our portfolios collectively returned +2.3% and the S&P 500 returned +3.3%. For the year, those numbers are 6.4% and 13% respectively.
PEATTIE CAPITAL BACKGROUND
By way of reminder, Peattie Capital Management, LLC (PCM) manages separate accounts, and individual portfolio returns can vary from the group�s return. In August, the range of returns was +0.54% to +6.48%. Additionally, most accounts are for individuals, whose primary goal is to maintain their wealth. Said another way, a short-term divergence below the S&P 500 is not a material concern to most my clients, provided that over time their wealth is protected and they are generating good returns. Overall, I have been cautious since I began managing money in May, 2000, which has led me to keep a somewhat high cash position in most accounts. This viewpoint has largely been borne out, given the -26% total return (includes dividends) of the S&P 500 since that date, but it means that I will probably under perform relative to the S&P 500 during sharp upwards moves, like what we�ve seen since March. Generally speaking, client accounts have performed significantly better than that. So overall my thinking has been good and the strategy has been a successful one.
PCM believes in being flexible and opportunistic in its approach. Portfolios can �go anywhere�, that is they are not limited by industry, size, or location. Depending on the client�s goals and risk tolerance (among other factors) there may be several small and micro cap names in a portfolio, and also some of the world�s biggest companies. I like the smaller names because they tend to be more inefficient, although they can also be more volatile. In addition to being flexible with regards to investments, PCM also uses basic hedging techniques like shorting or writing covered calls if it is suitable for the client and with the client�s express permission, as well as raising cash. PCM is a registered investment advisor in Ct., and is regulated by the Ct. Dept. of Banking and FINRA (Financial Industry Regulatory Authority).
CURRENT EXPOSURE
PCM�s current biggest industry exposure is in the large money center banks, because I believe that the Federal Reserve will keep the Fed Funds rate at current levels for the time being, allowing banks to earn their way back to profitability via net interest margins and increased lending. In addition, one unintended (?) consequence of the Government bank bailout programs is to make the big banks even bigger, which means that the chances these banks are allowed to fail in the future are even more remote than they were prior to the crisis. Using normalized earnings, several of them are valued below historical multiples, even after the huge rally. So I expect to be staying with most these positions, and even adding on dips. One risk here is that there may be more write offs coming (there are large amounts of commercial real estate loans maturing over the next couple years which could be a problem, for example) which could delay the return of normalized earnings, in which case these positions will likely be market performers. But ultimately I believe we will look back and be very glad we were involved with the banks.
Gold is also a core holding, representing anything from 4% to 15% of each account. Gold is an eternal store of wealth, and tends to do well in periods of high uncertainty, and during inflation/dollar weakness. I would think any or all of these situations could exist given all that�s going on in the world today and so I expect to hold my GLD shares as well, and may possibly add more. I suspect gold doesn�t trade based on fundamental supply/demand characteristics, but nonetheless it is interesting to me that global production of gold has dropped from 2,590 metric tons in 2002 to 2,486 metric tons in the 12 months to June 30, 2009, according to the World Gold Council. In addition to GLD, the gold exchange traded fund, a few clients own a smattering of CEF, a mutual fund that owns gold and silver bullion, and Sprott Resources, a Canadian micro cap with significant gold and silver bullion holdings.
WHAT NOW?
It looks to me as if the markets are due for a pause, maybe something more than that. The first day of the month has been a good proxy for the month�s performance lately, up every first day since April, after having been down consistently prior to that. Tuesday, Sept. 1 the S&P 500 was down 2.2%, and according to Michael Hegarty (morning comments 9/3/09) volume was the highest since April. Sept. 1 was also a �90% down day�, with down volume 94.6% of total volume according to Richard Russell�s Sept. 2 comments. And the FT reported (9/2/09) that insider selling in August rose to its highest level since May, 2008, with the ratio of insider selling to buying a record 30.7 times.
Broadly speaking, it looks like the economy is stabilizing, but no one seems to be seeing any significant revenue growth, and cost cutting can only do so much. Most professionals I speak with characterize the markets as being relatively cheap back in March, but with an S&P 500 hovering around 1000 it is now either fairly or slightly overvalued relative to earnings. Finally, I am a bit concerned about China as I have seen several articles discussing the levels and quality of lending taking place there, and if China slows down odds are the rest of the world will too.
In light of these data, I have lightened up in a few areas and have nibbled at some hedges as well. However I remain very excited about many of our core holdings and would be adding to them on any significant weakness. So far that opportunity hasn�t presented itself, as several, such as BYD Company, the GLD shares, and KVHI have risen in September.
August 2009
+
August 5, 2009
In July our portfolios collectively returned +4.7% and the S&P 500 returned +7.4%. For the year those returns are +3.9% and +9.3% respectively.
10 REASONS TO STAY BULLISH�.FOR NOW
My best guess is that we have further to go on the upside, although by how much and for how long I have no idea. Here�s my thinking: 1)Very large pools of cash are still sitting in money market funds. Estimates vary, but in the past five days I�ve read $5 trillion (Barron�s-�Six Good Reasons to Like Stocks� 8/3/09) and $3 trillion (Don Hays-morning comments 8/3/09); 2)A number of professional money managers not only were hit very hard last year, but also missed the turn in March and as such will be desperate to generate gains and will likely buy any dips; 3)Forward estimates are 15-16x for the S&P 500, which in a low interest rate, non inflationary environment is reasonable; 4)A clear �Dow Theory� buy signal occurred in late July when both the Industrial and Transport averages took out preceding highs; 5)Market leadership is coming from technology (preferable to say, energy or commodities) and small and mid caps are beginning to outperform large cap names; 6)Credit market operations continue to improve and spreads are tightening; 7)From a granular perspective, 12 of the final 18 trading sessions in July had an S&P futures high after 2:15 pm (est), which demonstrates a steady demand for equities; 8)The first trading day in August was up, the 5th consecutive month with a positive first day�s performance, suggesting that large institutional funds are opting for equities (although I note that August�s first day had a strong opening and then mostly treaded water, which is less preferable than steady accumulation and a late day high); 9)Even though the market appears �overbought� whatever sell offs are happening are brief and shallow, which I take as a sign of strength; 10) One of the technicians I follow says that a 1/3rd to 2/3rd retracement is not uncommon after a big move. After falling 7,617 points from peak to trough (14,164 on 10/9/07 to 6,547 on 3/9/09) such a move would land the Dow between 9,083 and 11,619.
So at the moment I am staying with the long side and looking (carefully!) to put cash to work.
BUT�.
However, whether the economy is truly getting better in a sustainable way is debatable. Much has been made of the turn in the Case Shiller home price index, for example, but there are strong seasonal biases at this time of year and who knows whether that continues. Also, the recent GDP report, showing -1% growth for Q2, is being touted as an indicator of improvement, and I guess it is, considering Q1�s revision to -6.4%, but again, no one knows if that is sustainable or whether it is the result of some kind of temporary event, such as inventory restocking. I guess you�d have to say China�s economy is growing, given its recent +7.9% Q2 GDP figure, but there have been a number of articles suggesting that forced government lending will ultimately prove disastrous as loans are being made to unworthy borrowers (sound familiar?). And let�s not forget the incredible borrowing binge here in the U.S., or the spread of mortgage payments falling into arrears among prime borrowers in addition to sub prime borrowers. Also, debt maturities at REITs total $152 billion between now and 2013, which has to be repaid or refinanced (Source: WSJ 8/3/09), and unemployment is expected to continue rising and personal income is falling, which is a tough combination when the consumer accounts for ~70% of GDP.
In addition, more companies are forgoing extended earnings guidance, which makes me cautious about earnings growth in 2010.
WHAT IS PCM DOING?
Several of PCM�s biggest positions are micro caps which haven�t kept pace with the market. However, their fundamentals (mostly) are terrific, and I haven�t sold them. For all accounts I have added two names that looked oversold and came at an attractive valuation. In addition, for relative value accounts, (which measure themselves vs. the return of the S&P 500) I have added a variety of index funds as well. Each of these represents between 5% and 10% of the given portfolio, and also is very liquid and so I can sell them instantly if I choose (unlike 2008, when I couldn�t sell several key names quickly). Finally, for several accounts, either retirees or people who have a long term perspective, I haven�t done anything else after adding the two names mentioned above.
Since last fall, the market has been highly correlated, by which I mean pretty much all stocks were hammered from September through early March, and subsequently they all rallied, some more than others. With Q2 earnings there have been some distinctions, and going forward I would expect that to continue. For now I am more heavily invested than I have been for a while, with no shorts or hedges, but that can change and any account�s exposure can change very easily.
IN CONCLUSION
Consensus seems to be that the market is a bit frothy and that at any time we could see a 10%-15% correction, which should be bought. The only prognosticator I�m familiar with who has called for a retest of the March low is Felix Zulauf, who predicted in the January Barron�s roundtable a bounce to the 1050 area for the S&P starting in Q2 (OK, his timing was a bit off), followed by a 50% drop afterwards and a final bottom in 2011 in the 400s. In a March 9 Barron�s follow up article he reiterated that opinion, which is based on a multi-year global deleveraging process. Generally speaking I am not a top-down guy, but I believe it�s important to be aware of macro economic issues and the overall environment. I hope Zulauf is wrong, but I can�t dismiss him entirely. After all, the Dow dropped from a 1929 peak of 381 to 198, then rallied 52% to 294 in early 1930, and then collapsed.
In July our portfolios collectively returned +4.7% and the S&P 500 returned +7.4%. For the year those returns are +3.9% and +9.3% respectively.
10 REASONS TO STAY BULLISH�.FOR NOW
My best guess is that we have further to go on the upside, although by how much and for how long I have no idea. Here�s my thinking: 1)Very large pools of cash are still sitting in money market funds. Estimates vary, but in the past five days I�ve read $5 trillion (Barron�s-�Six Good Reasons to Like Stocks� 8/3/09) and $3 trillion (Don Hays-morning comments 8/3/09); 2)A number of professional money managers not only were hit very hard last year, but also missed the turn in March and as such will be desperate to generate gains and will likely buy any dips; 3)Forward estimates are 15-16x for the S&P 500, which in a low interest rate, non inflationary environment is reasonable; 4)A clear �Dow Theory� buy signal occurred in late July when both the Industrial and Transport averages took out preceding highs; 5)Market leadership is coming from technology (preferable to say, energy or commodities) and small and mid caps are beginning to outperform large cap names; 6)Credit market operations continue to improve and spreads are tightening; 7)From a granular perspective, 12 of the final 18 trading sessions in July had an S&P futures high after 2:15 pm (est), which demonstrates a steady demand for equities; 8)The first trading day in August was up, the 5th consecutive month with a positive first day�s performance, suggesting that large institutional funds are opting for equities (although I note that August�s first day had a strong opening and then mostly treaded water, which is less preferable than steady accumulation and a late day high); 9)Even though the market appears �overbought� whatever sell offs are happening are brief and shallow, which I take as a sign of strength; 10) One of the technicians I follow says that a 1/3rd to 2/3rd retracement is not uncommon after a big move. After falling 7,617 points from peak to trough (14,164 on 10/9/07 to 6,547 on 3/9/09) such a move would land the Dow between 9,083 and 11,619.
So at the moment I am staying with the long side and looking (carefully!) to put cash to work.
BUT�.
However, whether the economy is truly getting better in a sustainable way is debatable. Much has been made of the turn in the Case Shiller home price index, for example, but there are strong seasonal biases at this time of year and who knows whether that continues. Also, the recent GDP report, showing -1% growth for Q2, is being touted as an indicator of improvement, and I guess it is, considering Q1�s revision to -6.4%, but again, no one knows if that is sustainable or whether it is the result of some kind of temporary event, such as inventory restocking. I guess you�d have to say China�s economy is growing, given its recent +7.9% Q2 GDP figure, but there have been a number of articles suggesting that forced government lending will ultimately prove disastrous as loans are being made to unworthy borrowers (sound familiar?). And let�s not forget the incredible borrowing binge here in the U.S., or the spread of mortgage payments falling into arrears among prime borrowers in addition to sub prime borrowers. Also, debt maturities at REITs total $152 billion between now and 2013, which has to be repaid or refinanced (Source: WSJ 8/3/09), and unemployment is expected to continue rising and personal income is falling, which is a tough combination when the consumer accounts for ~70% of GDP.
In addition, more companies are forgoing extended earnings guidance, which makes me cautious about earnings growth in 2010.
WHAT IS PCM DOING?
Several of PCM�s biggest positions are micro caps which haven�t kept pace with the market. However, their fundamentals (mostly) are terrific, and I haven�t sold them. For all accounts I have added two names that looked oversold and came at an attractive valuation. In addition, for relative value accounts, (which measure themselves vs. the return of the S&P 500) I have added a variety of index funds as well. Each of these represents between 5% and 10% of the given portfolio, and also is very liquid and so I can sell them instantly if I choose (unlike 2008, when I couldn�t sell several key names quickly). Finally, for several accounts, either retirees or people who have a long term perspective, I haven�t done anything else after adding the two names mentioned above.
Since last fall, the market has been highly correlated, by which I mean pretty much all stocks were hammered from September through early March, and subsequently they all rallied, some more than others. With Q2 earnings there have been some distinctions, and going forward I would expect that to continue. For now I am more heavily invested than I have been for a while, with no shorts or hedges, but that can change and any account�s exposure can change very easily.
IN CONCLUSION
Consensus seems to be that the market is a bit frothy and that at any time we could see a 10%-15% correction, which should be bought. The only prognosticator I�m familiar with who has called for a retest of the March low is Felix Zulauf, who predicted in the January Barron�s roundtable a bounce to the 1050 area for the S&P starting in Q2 (OK, his timing was a bit off), followed by a 50% drop afterwards and a final bottom in 2011 in the 400s. In a March 9 Barron�s follow up article he reiterated that opinion, which is based on a multi-year global deleveraging process. Generally speaking I am not a top-down guy, but I believe it�s important to be aware of macro economic issues and the overall environment. I hope Zulauf is wrong, but I can�t dismiss him entirely. After all, the Dow dropped from a 1929 peak of 381 to 198, then rallied 52% to 294 in early 1930, and then collapsed.
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