Tuesday, February 15, 2011

Trend…Counter Trend

I am reminded of the classic Saturday Night Live skits where Dan Aykroyd and Jane Curtain faced off in their news update, Point/Counterpoint. Jane would take one side of an issue and then Dan would start off his comments with the famous words, “Jane, you ignorant slut.” Delivering all of this with a straight face was the perfect parody of weekend television anchors opining on various topics of the day. So, in this blog, I present Trend, Counter Trend, where it becomes clear that the current investment environment is….unclear.

Trend: The S&P 500 Index has doubled in value from its March 2009 low. The market is overbought and its time to take your profits and run.

Counter trend: Forget the usual metrics. Based on forward earnings the market is still cheap. Value investors who get out too early are going to get crushed as momentum carries the markets all the way back to their 2007 highs.

Trend: Emerging economies around the world have taken a drubbing recently. Everyone is screaming about reducing allocations to emerging markets and rotating to the U.S. If you haven’t sold you haven’t been paying attention.

Counter trend: China is battling a property bubble and food inflation with tighter interest rate policy. The property bubble is exaggerated and the food inflation is a short-term problem. Buy the dip. This is the buying opportunity of a lifetime.

Trend: Commodity prices, especially food commodities like wheat, soybeans, and corn, have been skyrocketing. With this year’s unusual weather limiting global food supplies, expect even higher prices to come.

Counter trend: Food inflation is transitory. Most of the supply issues are already in the price. Now that commodity inflation is making headlines, it’s time to sell. Get out of commodities now.

Trend: Everyone knows that interest rates have to go significantly higher. Bond vigilantes are going to ignore Ben Bernanke and move rates higher with him or without him. Higher rates are a headwind for the current stock market rally.

Counter trend: Bonds are cheap. If rates get back to 4% on the 10-year Treasury you should back up the truck and buy. The U.S. financial system is still a mess as is evidenced by the broken money multiplier. There is too much slack in the U.S. economy to be bearish on bonds.

I wonder how Dan and Jane would have delivered this material. We actually have these discussions every day in the investment team. Now that I think of it, it really doesn’t get a lot of laughs.