Reboot

If you are reading this, you probably got here by way of my page at Seeking Alpha. A bit of explanation of what is before you, or a click or two away, is in order. This post will do that, and then conclude with a brief prognosis of Mr. Market’s current emotional state.

The first thing that you should notice is that a very long time has elapsed since the previous post. The answer to”Why’d you stop?” begins with “Why I started.” It was the prospect of imminent inadvertent retirement, which came pass in January 2009. Though retrospectively it was very much a blessing, at the time I felt impelled (putting it mildly) to get busy doing what I knew how to do. All this is explained somewhere in High Road Value Research. What caused me to walk away was not just the deep suspicion that hardly anyone is reading more than 140 characters at a time any more, and the rest of us are have a hard time remembering what we read more than a few hours ago. No, it was more about the way a rising tide and few astute picks had so improved my financial position. That and having lived through one more tough scrape brought me to a place where I lost the thing that seemed to have been my prime motivation for working as hard as I did all those years. When for the first time in your life you are not at least a little scared and hungry, it gets hard to show up and work. At least for a while.

So, content to just be a private investor (though there are presently two parties who pay me a fee each quarter, each for one of two different facets of what passes for “expertise”), I have disdained from scratching the journalistic itch. But when a “story that simply had to told” (the telling of which having been one of the best parts of my days as a sell-side analyst) about one of my investments presented itself, I wrote it up and submitted it to Seeking Alpha. This venue had not really occurred to me before, as my sense of it was colored by a quick look at it years ago, and that most of what I see on it I don’t consider worth reading. (To be fair, in 30+ years I have developed a rather narrowly defined approach which would preclude most of the content of any channel.) It turned out to be such a fun experience that I feel a renewed desire to show up and write. So I will be publishing ideas to Seeking Alpha, but will also try and post to Market Musings once or twice a month, probably make some changes to the High Road site, and see where it goes.

The next thing I would ask you to notice is that as of this post, I have left the High Road site untouched from almost fifteen months ago. This really only matters with respect to the Companies We Follow page. What you see there is like right out of a time capsule. A few of the Also of Interest stocks are no longer of interest. One of the Top Ten, Cymer, is no more, having just been acquired by ASML for $20 plus 1.16 shares. (I am keeping enough ASML to hold my attention to the very exciting prospects it has over the next several years.) WDC is a top ten holding (top five actually, as my HDD bet has grown to about 25% of my liquid net worth.) A few stocks came and went for me since then, like Timet (acquired by PCP), a few others would be there if I stuck with this format. But presenting “stocks we follow” in this format is not the bright idea I thought it was when I launched HRVR. (There was a certain logic to it that broke down in the face of evolving price and circumstance.) Finally, if updated today, the “cash & equivalents” would show about 16%, but this is distorted by my being about two-thirds of the way through a massive and protracted home renovation.

So I will be doing Market Musings, and writing about stocks and companies I know or get to know. I might tweak the HRVR site, or revamp it, or just not go there anymore. I do have a better schema in mind for presenting and categorizing ideas (working title: Two Buckets and a Can). Sometime in the weeks and months ahead, the wax museum display that is Companies We Follow, March 2012, will close down, and something might take its place.

In the mean time, count me one nervous Bull. By the reckoning of What Time is it?, we are certainly due for some kind of meaningful interlude of a temperament opposite what has been in play since mid November. (Think trough to peaks, like Aug 82 to Aug 87, Dec 87 to Aug 90 and March 03 to July 07.) But as I was saying a couple of years ago, March 2003 is looking more and more “once in a generation” as in July 1932 or December 1974 (or August 1982, if inflation is taken into account), and this matters. The momentum we are enjoying lately got some of its impetus from a tide of sentiment being very, very out in March 2009. In the 4 1/4 years since that low tide began its turn, we have had only one correction worthy the name. Nasty as it was, even Q3 11 turned out, from the vantage of two years later, to have been a fine opportunity to “buy the dips”.

“Buying the dips” has kept the Market on its skyward trajectory, as has that “clamor for yield” that I wrote so much about back then. Retirement plans made when CD rates were within hailing distance of 5% (not so long ago!) have had to come up with a new game plan, and that has meant buying stocks. (For me, it meant that some “bond substitute” stocks like IP, MRK, VZ & WMT produced unexpectedly good returns, so good that the calls I wrote proved to be not quite as “out of the money” as I would later wish, but that was a high class problem to have with “steady total return” bucket in my portfolio.) This clamor for yield will continue to cause investors at the margin to decide that they aren’t as risk averse as they thought they were (either that or dial down the lifestyle and tell the kids to start paying rent) and pile into what is shaping up to be the almost-only-game-in-town (bonds being grossly overvalued, commodities having proved as treacherous as they really are, and real estate offering mixed prospects). This won’t stop the Market from eventually having a correction, or even keep it from being a Q3 11 sort of affair, but it is definitely nourishing a Bull that by any other measure is due for a rest.

The one other factor that I think has cheered Mr. Market is on the political front. It matters that a chief executive with no demonstrable executive capacity, an Administration indelibly steeped in the Chicago Way, and the minions who do their bidding,that 2MM strong claque of unionized government workers, are in ways not apparent only a month or so ago very much on the defensive. Governments at their best struggle to avoid doing more harm than good to the enterprises which nourish and sustain them. This one has shown every inclination to favor its cronies and do damage to everyone else. That inclination has been stymied by the recent revelations that are no surprise to those of us who study history and human nature deeply and know that the lust for power is even more pervasive and corrupting than the lust for money. My sense is that the Market understands that ill-considered unaccountable intrusion by putatively omniscient government apparatchiks invariably does more harm than good, and that it has been celebrating what amounts to a turn in this particularly noxious tide.

I hope to keep finding things worth showing up and writing about. Summer will of course be punctuated by a few adventures out in the wild parts of this great big beautiful country we are blessed to live in, but there is enough percolating upstairs right now for me to show up and write from time to time. Stay tuned.

The Tao of Recovery

The run-up to our peculiar national holiday wherein much of the populace is compelled to pretend that it is Irish for a day finds us very pleased to be managing for absolute rather than relative returns. (An aside: I recently had the pleasure of reading the Confession, i.e. testimony, of that great saint who was Patrick, bishop of Ireland. Along with the one other document we have from him, his letter excoriating a corrupt official by the name of Coroticus, it provides a fascinating picture of a great man meeting and overcoming extraordinary difficulties in the twilight of an empire.) By this, I mean that it is good to have the luxury of raising cash into a Market that looks tactically vulnerable but strategically very exciting. In the past month or so, I have raised my cash position by another 5%, to about 16% of investable assets.

Tactically speaking, the Market looks vulnerable, up 30% or so in not quite six months. Gasoline prices have levitated to “sticker shock” levels, though one gets the sense that someone has alerted the Administration that a lot of voters are out of sorts about this. If so, we can expect desperate measures to try to restrain these prices, at least until after the election. The good news on job creation is being played up for all its worth, even if the figures are still pathetically anemic by past standards. Our election year skepticism is further aroused by Gallup data that indicates that employment is actually weakening (the difference being that Gallup does not make the same seasonal adjustments that the BLS makes). Then there is the fact that we are but a few weeks away from when all those articles about “Sell in May and Go Away” will make their appearance. This was pretty good advice in each of the past two years, as the middle months of both 2010 and 2011 saw sharp corrections of -17% and -20%. Even in 2009, it was pretty good advice, despite the Market being in its initial decompression stage.

I think that to make sense of why the economy seems to be all of a sudden outperforming and why there is a very good case that in its current bullish state the Market could be on to something that is too big for any of us to see, we need to consider the ancient Tao. It is noted that “Every extreme condition contains the seeds of it opposite.” Booms are born out of busts, and vice versa. In the moment, I think we are experiencing the fruition of “seeds” that started to be planted this time last year. From the time the price of sweet crude started to soar along with the Arab Spring, but in earnest when earthquake and tsunami did unknowable damage to who-knew-what links in the global supply chain (which caused legions of businesses to elect to err on the side of caution), the recovery got dicey. This spooked investors, but more importantly set them up for revulsion when the gruesome spectacle of Congress wrangling over a debt limit was visited upon us. I will never forget the heartbreak of seeing that underlying our “best minds” projections as to an eventual balancing of the US Budget was an assumption that the economy would grow at an average of 5%! That sense of doom and despair was not helped when September brought the prospect of another global supply chain disruption, this time in the form of monsoon rains and singularly inept flood control in Thailand. But then like so many other low moments we have lived through (albeit, low moments that cannot begin to compare with those met and overcome by the aforementioned St. Patrick), things just kind of stopped getting worse and then started to get a little better. A whole lot of buying and hiring that got put on hold while we lived through all that (Oh, and did I mention the unremitting headlines about the imminent collapse of the Euro project?) has started to happen. There is a whole lot of “hurry up and wait” in the economy. After a six or so month wait, it seems to want to hurry up right now.

The same Tao applies to what could over the next few years take the Market a whole lot higher than any of us are thinking right now. Extreme condition #1: After being extremely unkind to investors for half of the 1960s and all of the 1970s, the Market was very good to investors in the 1980s and 90s. This set the stage for the past decade-plus. Analogous to the “celebration” of unemployment ticking down to 8.3% four-plus off the bottom, we find ourselves this week celebrating the NASDAQ closing above 3000, only forty percent below where it was twelve years ago. With respect to the American investing public, the tide is very, very out right now. Now couple that with Extreme condition #2: the taxation and regulatory environment. As noted in the prior Musings, there are no doubt millions of business decisions that have been put on hold because of the added uncertainties attendant with an intrusive, redistributive government. There is a whole lot of potential investing and hiring that is waiting for an outcome in November. A new Administration, one that understands business and economics at a higher level than comic books and Cliff notes, will unleash this activity, along with a good bit of M&A activity that has been similarly set aside. The Market acts as if it is buying into this actually coming to pass. As someone old enough to remember how in March 1980 “Reagan Trails Ford, Carter”, I am inclined to read into the Market’s newfound ebullience the expectation that the business climate of the US will improve dramatically in 2013. Throw in echos of 1997 around the reception of a new crop of IPOs (predominately Tech, but then there’s Spanx), a willingness on the part of at least some investors to open their mouths, close their eyes and believe the executive summary of the Prospectus, and a raging Bull Market becomes a real possibility.

Even if this scenario of economic recovery finding its way past first gear in 2013 plays out, it seems unlikely that the Market can go up another 20% without first seeing another correction on the order of what the past two summers wrought. 1980 was a watershed election for capital if ever there was one, but two years later we were still wondering if things would ever get better, and two years after that the Bond Market’s reassessment of future inflation was barely getting started. We don’t have Dr. Volcker’s medicine to swallow this time, but we do have a vast number of government programs, which are indeed economic activities in the schema of GDP = C+I+G, that will fail to pass the new boss’ “Is this worth borrowing money from China to keep doing?” test. My sense at the moment is that Market returns for the next five years will be such that being 80% or even 70% invested most of the time will yield a better return than being 100% invested did for you over the past ten years.