Still Hanging in There

March 9, 2011

Very tough times to run performance money! Rumors about the doings of a madman in the Middle East swing oil and the S&P and can make you look like an idiot in a nanosecond. However, the core difficulty is that the so-called intelligent investor can make an equally rational case for this roller coaster being either a bull or a bear. I’ve still got a lot of risk on, but I’m apprehensive. Warren Buffett early last week said he saw big opportunities, and he had an “itchy” trigger finger on his elephant gun. I’ve got an itchy finger on my eject button.

The bull case is that the U.S., European, and even the sickly Japanese economies are enjoying an impressive broadening and deepening recovery that is rapidly transitioning from a snap-back to a true expansion. Global PMIs show that both the industrial and service sectors are booming and that confidence, capital spending, and hiring are rising. Earnings estimates are still being increased, and based on the I/B/E/S consensus numbers (which are probably low), the U.S. is at 13.4× 12-month forward estimates, 2.3× book, and with yields at almost 2%. The same numbers for Europe are 11×, 1.4×, and 3.3%, and for the emerging markets, it’s 10.9×, 2.0×, and 2.2%. Sounds okay to me.

Where else are you going to put your money? Fixed income yields are close to historic lows, and with higher inflation at some point almost a certainty, the capital loss risk is high. Farmland? Looks as though a bubble is brewing. ...

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