NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients March 29.
The last six trading days have been characterized by a slow, mindless, grind higher. The S&P has tacked on 17 points on lackluster volume. NYSE Composite volume for the last six trading days (through Tuesday) averaged 3.7 billion shares – 19% below 2011’s average prior to that period.
Sir John Templeton famously said the time to buy is the point of “maximum pessimism”. I would suggest the current moment is closer to the point of maximum complacency.
One symbol of this was the invitation to Legg Mason’s Bill Miller to co-host CNBC’s Street Signs with Erin Burnett last Wednesday. Miller was one of the most successful investors of the great bull market beating the S&P for 15 consecutive years from 1991 through 2005 before imploding in 2007 and 2008 when his Legg Mason Value Trust (LMVTX) lost 75% from peak to trough. As a result, Miller has been a sort of “untouchable” since then. That it seemed timely to provide him with such a forum is an elegant testament to current sentiment.
Last Thursday morning, SeekingAlpha posted my “The Correction Is Not Over” on their front page. The overwhelmingly bullish sentiment of the comments caught my attention. Out of 10 or so expressing a market view, every single one disagreed with me and was bullish on the market. The following, from AndrewBaker, one of SeekingAlpha’s Top 50 commenters, is representative:
The correction we are going through is healthy: markets had got too far ahead of themselves, so with or without Libya, the Middle East, Japan, Portugal et al, we would have had a correction. This will establish a new and higher floor from where the markets will re-commence their upward move later.
Michael Ryan, UBS’s Head of Wealth Management – Americas, nicely encapsulated the bullish consensus in an interview on CNBC yesterday: the economy is improving, earnings are solid, and valuations undemanding. Policy tightening will slow growth but not jeopardize the expansion.
In a number of recent Client Notes, I have poked holes in this bullish consensus. In “Top Gun FP Client Note: Beware The Ides Of March” (originally sent March 1), I argued that stocks are not as cheap as the bulls would have you think. The mega-caps are cheap and posses all the value in the market while small caps and cyclicals are quite expensive.
Finally, I have repeatedly drawn the connection between the economy’s strength and the government’s unprecedented stimulus policies over the last couple of years (For a detailed analysis, see “Top Gun FP Client Note: The Wisdom Of George Soros”, September 22, 2009). With QE2 set to expire at the end of June, most of these policies are being unwound. The market is unconcerned, but some – such as Bill Gross who called June 30, 2011 “D-Day” (“Top Gun FP Client Note: The Charlie Sheen Market” – originally sent March 8th) – have a different perspective.
Synthesizing the various strands, I have constructed a divergent view from the bullish consensus. Ben Graham aptly said: In the short run, the market is a voting machine, but in the long run it is a weighing machine. Going forward, we will find out whose scales are more finely tuned.
NOW IS THE TIME TO INVEST WITH TOP GUN: If you have been thinking about investing with Top Gun, now is a good time to give me a call or shoot me an e-mail.