Investor Update: Note to Investors: Tuesday, October, 29, 2013

For some time I’ve been maintaining a defensive posture in the portfolios, manifested by higher than usual levels of cash, generally greater sector weightings in counter-cyclical sectors, mostly ‘indirect’ exposure to Emerging Markets via developed country companies that have > 50% of their revenue from those regions, and an emphasis on higher-dividend paying assets such as utilities and selective reits.  I’ve also exited fixed income exposure some time ago as the risk/reward at these still low interest rate levels seemed unfavorable especially when the market has been so laser-focused on ‘tapering’.

In one of my recent missives, I noted the stocks and/or ETFs that were on my ‘shopping list’ should the market step back and hit more compelling valuations.  In some cases that’s happened so I’ve used those opportunities to put cash to work.  Still, however, cash levels are high, and with the recent earnings parade revealing solid earnings but uninspiring top-line revenues and even more uninspiring forward guidance, I’m not rushing to put all the cash to work, but rather being patient for better buying opportunities.

Globally, I think we are where we’ve been for a while: 

•   sluggish growth in the US, slowly (too slowly) improving labor market, housing continuing to climb off the bottom but plagued by fiscal crises at all levels of government which ought to remain a significant headwind, and as yet un-quantified consequences of the government shutdown, not to mention the ticking clock on facing the debt ceiling and budget issues yet again in early ’14.

• a stability at fragile and vulnerable levels in Europe that while keeping the word “crisis” out of the dialogue for now, does certainly seem ripe for some debt or fiscal austerity related trouble despite recent signs of life in some sectors of the economy, (I find it hard to ignore high levels of unemployment, in the case of youth, in some countries hitting levels close to 50%!), and

•  Asia where the Chinese bubbles remain contained for now, but again, ripe for bursting in a way that could cause significant ripple effects across the region.  That said, I do think that Asia is still a source of global growth, and many countries are benefiting from the increase in wages in China which is pushing manufacturing in many industries to other countries such as Taiwan, Indonesia, Thailand, etc.

From the perspective of investment ‘themes’ around which the strategies are positioned, one notable shift in recent months has been the move to lighten up on the ‘industrial infrastructure’ build-up of the emerging world and to shift more of an emphasis towards consumer discretionary and tech positions that stand to benefit from the emerging middle classes in EM countries. The former strategy is likely to continue to provide value, but much of the low-hanging fruit for companies such as Caterpillar (CAT) and Deere (DE) has probably been picked.  They also face more global competition for their products than before, and inventories of these durable, long-lasting goods are higher than they were several years ago.  By contrast, emerging middles classes in many EM countries are creating new buyers of discretionary items such as clothing, sneakers, fast-food, smart-phones, tablets and ‘phablets’ (combinations of smartphones and tablets), and the latest innovations in ‘wearables’!

So for now, the overall market appears to be in a choppy, and at times, quite volatile, sideways to slightly upward move.  I think that continues, but with meaningful risk to the downside based on over-valuations at these levels when faced with the various headwinds to earnings growth.  What would change this view to a more outright bullish or bearish tone?  Any meaningful change in US growth (up or down), some dramatic break (or lack thereof) on the US budget and debt ceiling issues, Europe’s growth picture (either continuing to improve robustly, or being set back by fiscal austerity and possible social unrest driven by heightened tensions caused by massive unemployment), and Asia’s overall growth scenario (with China as a key component).

While I remain on the lookout for any significant change in all of those issues, in addition to our ‘usual suspect’ geopolitical issues, I’ll continue to look for value opportunities within the various portfolio themes.

Will keep you posted.

Best,

Ed

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs, incl CAT and DE.  Positions may change at any time without notice.