Wednesday, April 21, 2010

A Charlie Brown Forecast

Our investment committee met yesterday at the dreaded time of 1PM which means that everyone is trying to stay awake after lunch. The investment team did their usual stellar job of putting together an interesting and thorough presentation for the committee, and I’m happy to say that everyone seemed to stay awake. Towards the end of the presentation, my long-time partner, Dwight Mikulis, commented that we were making a “Charlie Brown investment forecast.” I suppose he could have meant that the after-lunch timing of the meeting reduced his understanding of the material to “Wa wa wa. Wa wa wa wa wa wa.” Or, he could have meant that our current market forecast is so wimpy that it reminded him of Lucy taking the football away from Charlie Brown right when he was about to kick it.

I’m actually sympathetic to either view of the Charlie Brown analogy. In fact, Pinnacle remains somewhat skeptical of the fundamentals underlying the current market rally. It is somewhat disturbing to see the list of problems that have not been resolved, including the high rate of unemployment, the structural problems with the length of unemployment and the number of potential employees who have given up looking for jobs, the record high amount of unemployed on government benefits, the number of problem Alt-A and Option ARM mortgages that are still sitting on bank balance sheets, the unwillingness of banks to lend and the subsequent fall in the velocity of money in the economy, the possibility of sovereign debt defaults in the EU, China’s potential property bubble and the potential for a sickening bubble-busting event, the continued fall of new housing prices, etc. Not to mention the structural problems of too much debt, higher taxes, higher regulations, and on and on and on.

These concerns are countered by the fact that the economy is now clearly expanding with GDP growth numbers confirming that the recession (in the consensus opinion) ended last summer. Inventories are being restocked, new unemployment claims are falling, and profits are surprising to the upside for the fourth quarter in a row accompanied by increasing revenues. The market remains amazingly resilient as even last week’s news of the SEC suit against Goldman Sachs failed to significantly derail the bull market. There is plenty of pessimism around to support the wall of worry needed for all bull markets. So our forecast is for the market to drift higher with the caveat that there are lots of reasons to worry. So call it a Charlie Brown forecast if you must. I still don’t think it is appropriate to be wildly bullish or bearish in the current market environment.