Ramblings of a Portfolio Manager 11-9-2009

Ramblings of a Portfolio Manager or Hello Goldilocks?

It’s generally a sign that a writer has made the mainstream when his/her material appears on bathroom floors across America. We won’t be so conceited as to think that Ramblings would ever achieve that kind of pulp fiction status, however, we were more than a little amused to watch Jim Cramer prance about the sound stage last week holding a stuffed teddy, proclaiming “you just can’t win with a bear.” His blather went on to sound increasingly similar to the theme of last week’s Ramblings. Now, we don’t in any way mean to imply that Mr. Cramer found a copy of our weekly on the tiles of the CNBC executive washroom or, for that matter, would give it any credence if he had, which causes us to be a little scared that we actually may independently, at times, think likewise to the self-proclaimed “TV Madman.” By the way, Cramer turned bearish to bullish to bearish and then back to bullish on the markets all in the space of the last 6 trading days (we hope you were able to profitably trade on that good advice). He has yet to retract his statement that “we’ve seen the highs of the year in the markets and you can short just about anything…” Another 350 Dow points to the upside and we shall see about that. In the meantime, if we find ourselves in-line philosophically again with Mr. C. look for Ramblings to morph into a children’s pop-up book.

So far, the results for earnings season, and the market’s reaction, have generally fallen along the lines of our expectations. Technology stocks and others that have had good runs and for whom bullish sentiment and whisper numbers have re-emerged (high expectation stocks), generally fared poorly unless they were able to significantly “beat the Street.” Lower-expectation stocks did much better even on bad news and by the end of the last week we had seen a genuine shift in market sentiment, resulting in a sector rotation out of cyclical winners and into defensive laggards. October, once again, evaded its popular reputation and proved itself as the month in which markets typically “turn,” rather than “tank.” This fact was illustrated by a Dow that did virtually nothing for the month while the heretofore better-performing NASDAQ and Russell Small Cap indexes took a hit.

Now that an earnings season highlighted by markets that ignored both good news and bad is winding down, what can we expect for the remainder of the year? Perhaps mating the market’s behavior during earnings season with its performance last week can generate a prediction. As you recall, a better-than-expected ISM gave the markets a nice rally last week. We believe, however, that a good deal of that rally was based on simultaneous significant democratic gubernatorial losses around the country, which foreshadowed coming results of the 2010 mid-term congressional elections. Political gridlock is good for the markets and last week’s elections signaled to some that we may indeed get a Congress a year from now under which nothing will get done. The elections also signaled a waning of Obama’s rock star status, which encouraged bulls to believe his healthcare bill may be in peril or, at the least, due for significant revision. The House slim 5 vote margin over the weekend certainly indicated the diminution of Mr. Obama’s ability to lead via star power and the bill is expected to face greater challenges in the Senate later this year. By the end of last week, Friday’s weaker than expected employment data failed to sink the market—in fact the Dow eked out a small gain for the day. Synthesizing all this, we see a market that is more focused on next year than the last twelve months, and which is anticipating the removal of uncertainty. Markets hate uncertainty—so much so that we believe the market will rise whether Obama’s healthcare plan is passed or defeated and, later this year, whether Cap and Trade succeeds or fails. With the uncertainty of multiple policy risks behind us, regardless of outcome, companies may well begin to hire again and the market is beginning to see that. So with earnings season in the rear view mirror, political uncertainty beginning to wane, we may see further gains in this market. And if unemployment indeed begins to come down, we just might hear talk, as we did in the 90’s, of a Goldilocks economy—one that is neither too hot nor too cold.