WALL STREET JUST GOT PLAYED
During these past two months the headline fear that possessed nearly every class of investor caused an irrationality in decision making that has created a misallocation in assets into riskless propositions, such as fixed income and cash. The type of misallocation we have experienced must be corrected, especially as we enter a seasonably favorable period during which a vast majority of portfolio managers are greatly underperforming their respective benchmark. These portfolio managers possess the same tendency towards self-preservation and procreation that all of us do. As a result they desire employment from which they can derive the various necessities to facilitate self-preservation and procreation. This wide-sweeping generality very simply equates to a portfolio manager class that will be interested in proving their worth to investors by creating a portfolio that, at the very least, attempts to emulate the S&P 500. Very simply put, investors will be taking on more risk through equity exposure into year end. These swash buckling captains of mediocrity are now coming face to face with the stark reality of deceit at the hands of the market. What they saw just one month ago doesn't at all match what they are opening their eyes to today. One month ago we didn't know about the future of Fed policy. One month ago we thought commodities and emerging markets were on a hand basket to hell. One month ago technology and financial earnings were being questioned incessantly. One month ago we thought Chinese woes would engulf developed economies in flames. All headline fears that have created the wall of worry necessary for the next upleg of the bull market to get underway. The reality of the situation one month later is that commodity prices have stabilized. Emerging markets are now surging. Technology is being led by its greatest tandem: The SOX (Semiconductor Index) and key technology leaders, such as Google, Amazon and Facebook. Major financials are virtually riskless propositions as earnings begin to shed light on the sector. The Fed is no longer a threat due to the recent jobs report. All the meanwhile, interest rates have fallen and continue to remain low. The inevitability of every semi-competent asset manager that is interested in self-preservation realizing that they have very simply been played over the past couple months has no other outcome but to cause a surge in equity prices as these asset managers correct their errors....
SEPTEMBER CLIENT LETTER: DEFENSIVELY OPTIMISTIC, A GAME OF RISK OBFUSCATION
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Defensively Optimistic We are at a point in the bull market cycle where macro fears are at a level that has not been experienced since the entirety of the developed world thought that the global economy was headed towards a Fred Flintstone period of stone wheels and wooly mammoth vacuum cleaners. Fortunately, we managed to avoid such a dreadful fate, returning to prosperity post-2009 much more persistently than most would have expected. The persistence of this new cycle of prosperity has managed to catch the stewards of capital across our global economy somewhat flatfooted. As a result, we are now witnessing a reallocation of capital away from asset classes such as commodities and emerging markets. The instability created from this reallocation of assets is effecting emerging market economies, such as China and Brazil, with the vibrations from those shocks creating the illusion of instability in the U.S. economy. While we are certainly experiencing a contraction in revenue/earnings growth, Wall Street analysts have a tendency to overreact on the downside. That overreaction sets the markets up for generally positive surprises from companies that are less weighted towards global industrial exposure. Those surprises to the upside should come from financials and technology, which I expect to lead the markets out of this correction beginning in October. It is important to remain defensively optimistic in the face of such unjustified pessimism during what has been one of the strongest secular bull markets on record. Defensively optimistic means that there is a controlled tendency towards long positions, as opposed to a leveraged, let it ride mentality that leads so many investors astray. Skilled stock picking alongside generally rudimentary risk control practices goes a long ways towards stabilizing a portfolio within such an environment. The tendency towards excessive hedges and an overabundance of cash in a portfolio at this juncture of the bull market is a conventional stance that will invariably lead to conventional results. Those who participate in this type of fear based investing that is curve fitted around seemingly relevant fundamental data points will very simply be left in a cloud of dust, as they have been during the entirety of this bull market. Being defensively optimistic as opposed to chronically defensive continues to separate the outperforming portfolios from the rest of the bunch. A Game Of Risk Obfuscation For all the resources and time spent on obtaining the pedigree necessary to thrive on Wall Street, the true professional after years of perfecting their craft does not become a master of interpreting company fundamentals,...