Ramblings of a Portfolio Manager

Street Signs

Our apologies to the folks at CNBC for borrowing the name of their daily segment as our tag- line. It just seems to fit so well with the events that transpired last week. We claim no affiliation, imagined or real, with CNBC or its affiliates but if they wish to sue they know how to find us.

We were going to start this piece with “It was a dark and stormy week…” but that seemed a little cliché and a lot Bram Stoker. Instead, we thought we would share some of our observations, which we believe signal that pessimism has reached a fever pitch and, therefore, perhaps a market bottom has been reached. So here, in no particular order but with some subjective commentary, are the top 10 contrary signs we witnessed from Wall Street last week:

1. CNBC ran a weekly segment entitled “anything but stocks.” It covered potential asset classes from Gold, to fine art, to classic cars. The message: stocks are out, collectibles are in. By the way, the illiquidity, the bid/ask spread, and the unregulated fee/commission structure on these “assets” would make a congressman cringe, however, we didn’t hear any indignant Senators grilling Sotheby’s for selling a Picasso with a 20% seller’s discount and a 10% buyer’s premium, plus a listing fee, or for knowingly shorting a ’71 Hemi ‘Cuda Convertible (35% Bondo) for $2mm to a supposedly “sophisticated” buyer bidding from the complimentary bar.

2. More Greek rioting was splashed across the TV (minus the goat, which we are now sure became Gyros for the rioters). The effect on the capital markets was much, much more muted that the first round. Obviously, the Market is becoming desensitized to such media spectacles.

3. Nouriel Roubini was dragged out, after a year of hibernation, to proclaim that stocks could drop another 20%. Why? Because “they’ve gone up so much.” Now there’s some sophisticated analysis for you. The “broken clock” method always seems to work at least once in a lifetime.

4. Meredith Whitney was also put on screen to admonish us “not to touch any financials.” We’re not sure how Multinational Money Center Banks exposed to EU debt share the same risk profiles as regional banks, private mortgage insurers or consumer finance companies. But Meredith had the right call in 2008 and if the broken clock approach worked for Nouriel, why not also for Meredith. Besides, she is a lot prettier.

5. The volatility index, or VIX, spiked upward around to around 45. For the VIX to stay there would mean that the market’s expectation is for very large changes over an extended time frame. In the 15 years leading up to the VIX’s creation in 2003, price changes of 5% or more in either direction occurred only eight times. It is also interesting that the VIX behaved similarly in 1997, hitting a high of 48.64 during the height of the Asian Contagion. Thus far into the European Contagion, the VIX has hit a high of 45.79.

6. Gary Kaminsky, of CNBC’s fast money, officially declared “the death of buy and hold.” He, and many others, said the same back in March, 2009.

7. Jim Cramer is back to his “buy the accidental high yielders” strategy. He pursued this philosophy all the way to the bottom in March and abandoned it only near the top, when the yields were no longer as high. While that might make sense, he never issued a “sell” recommendation so most of his followers probably still hold the stocks he recommended when they were at high yields; while the yields are now lower, investors are still earning the same (if not higher) dividend stream. Unfortunately, they missed the rapid appreciation of some of the lower yield growth stocks on the way up. Chances are they are smart enough not do so again.

8. At least one prominent analyst admonished eschewing stocks while there was “oil in the water and blood on the streets, which is what we have now.” Warren Buffett tells us those are the best times to start buying. We like Warren.

9. The annual SkyBridge Alternatives (SALT) conference of the “smartest guys on Wall Street” took place in Las Vegas amid heavy media coverage. Mass “group think” ensued, as it often does in these conferences (which is why we avoid them), and fed upon itself, with the emergent consensus being that the world was coming to an end and we all must “de-risk.” That is exactly what all the smartest guys did publicly Thursday on CNBC, as they picked up the phones and called in their sell orders. We note that the heaviest selling and biggest drop in the markets came on that day.

10. A public opinion poll showed that Goldman Sachs and Wall Street enjoy a lower approval rating than Congress. Perhaps Bernie Madoff will replace Lloyd Blankfein and Ted Bundy will replace Nancy Pelosi (the latter certainly being a trade up).

11. OK, we said 10 but we couldn’t resist this one. London pawn shops and bullion dealers reported that they are out of gold to sell. ebay is listing gold coins and ingots at 15-20% premiums over spot prices of the metal (by the way, that’s better than the commission those Good Fellas on TV will charge you) and an ingenious entrepreneur just installed several ATM machines to dispense gold ingots instead of currency. We’re not sure how to buy a Big Mac and Fries with an ingot but when we do we’ll be sure to let you know.

We think you get where we are going with all this. Sentiment is very bad, stocks are down and no one is paying attention to fundamentals, which happen to be good. More often than not, this signals a good time to buy stocks and while it is almost impossible to call the bottom, certainly we must be closer to it now than we were three weeks ago.

Frequent bear and always smart guy Doug Kass turned positive on stocks on Friday. Said Mr. Kass,” The market has every reason to lose steam this afternoon, but it's hanging in there. I think that the action today is bullish and we might have seen a bottom for some time to come.” Doug was right in calling the bottom on March 6^th, 2009 but wrong by calling a top at S&P 1020. If his recent track record is only 50%, why do we even bother mentioning him? Well, to start, he correctly called the mortgage crisis of 2008 back in ’07, well before anyone saw it coming, he declared Fannie Mae and Freddie Mac technically insolvent in 2008, enduring derision, and he correctly picked the stock market bottom in March 2009. Secondly, unlike the broken clocks, he is willing to change his opinion as the facts change and he is willing to admit when he was wrong. His picks now: retailers, private mortgage insurers and China. Coincidentally, that happens to be how our portfolio is positioned. Though it isn’t working well at this moment, we expect Kass to be correct and for significant outperformance to lie ahead.