Despite the weekly doomsday headlines (this week is from filmmaker Michael Moore - we do not recommend taking investment advice from fimmakers, ever), Billionaire hedge fund manager David Tepper called comparisons of today's market with the tech bubble of 1999 'ridiculous' and we wholeheartedly agree. Tepper who runs Appaloosa Management says that the market run doesn't translate into over the top valuations in equities.
Last Friday on CNBC, former Fed Chairman Alan Greenspan said that it's fair to characterize the current bond bubble as an "irrational exuberance" type of forecast. He did hedge the statement by saying that he has "no time frame on the forecast." Also note that he started making this bond bubble call in 2015.
Happy birthday to our Founder/Chairman (and my dad) Sam Wang!
Berkshire Hathaway is close to a milestone that Warren Buffett doesn't want to achieve. On Friday, the company reported that it held $99.7 billion in cash at the end of the second quarter. Thanks to a collection of businesses that generate lots of cash, Berkshire's cash has been growing steadily in recent years. Because the company doesn't pay a dividend and rarely buys back its own stock, Buffett is on the hook to find ways to invest those funds. The huge cash hoard shouldn't be taken as a pure bearish signal. Remember he didn't sell assets to raise cash. In fact, he would love to spend some and he said "I hate cash" earlier this year. However, he is having trouble getting the right company at the right price.
Strategist Jim Paulsen just said the perfect quote to be scoffed at on social media. Of course he doesn't believe this but it makes for the headline of the day for CNBC. Gotta love it. In the past, you would probably say that this signals a market top but if you look below the headline, his bullish case is much like ours. He just said the quote to gain more views and mission accomplished on that.
The International Monetary Fund (IMF) has revised its China's GDP growth forecast for 2017 and 2018 to 6.7% and 6.4% respectively. This is up from an upgrade made in April to 6.6% and 6.2%. China's growth is expected to continue to be a key driver for a firming recovery of the global economy.
I just read an interview with retired fund manager Bob Rodriguez who managed award winning FPA mutual funds in stocks and bonds. Like us, Rodriguez believes in owning cash when there is a storm on the horizon and he held significant amounts of cash (30-40%) in 2000 and 2008 in his actively managed stock mutual fund. He is now retired but he is seeing a perfect storm developing thanks to the huge shift into passive management where there are NO cash holdings. When the next downturn hits, many of those invested strictly in passive instruments will likely be hit extremely hard and their timing will be poor to hit the sell button. Here are his insights on the coming storm:
The first half of the year has come and gone. The S&P 500 ground its way higher and finished the first half up 9.3%. Unsurprisingly it has been robust S&P earnings that drove the markets to new all-time highs. Reported earnings were up 18% year over year. Despite the new administration's failure to pass new tax policy so far, analysts weren't expecting much movement in 2017 so earnings estimates haven't disappointed in the least. In fact, companies have continued to beat expectations on the top and bottom line and we expect more of the same in the second half. This has the Runnymede investment team optimistic heading into the second half of the year. As the market continues to hit new highs, there seems to be a guru warning of the next crash on a weekly basis. Just ignore the noise for now.
I recently went to see a local production of "The Emperor's New Clothes" which is based off a short story by Hans Christian Anderson where two weavers promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid or incompetent. When the emperor parades before his subjects in his new clothes, no one dares to say that they don't see anything for fear that they will be seen as unfit or stupid. Finally a child cries out, "But he isn't wearing anything at all!" and the weavers are exposed for the frauds that they are. Sadly this happens in real life and market gurus who get airtime on popular financial TV programs are there for entertainment, not for actual substance. Make sure that you know the difference.
I usually reserve Friday blog posts for lighter topics but with the FOMC meeting this week, I think it is important to touch on the Fed's plan to shrink its $4.5 trillion balance sheet. While the announcement was widely expected, it spelled out in greater detail plans to slowly unwind the Fed's sizable bond holdings. We believe that this step is very positive alongside interest rate hikes. The economy is doing well enough that the Fed can step back from its emergency measures, thus saving ammo for the next recession. We do not believe that this will cause a spike in long term rates but will monitor the situation closely.
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