Specialization

Public Equity (stocks and options) Long and Short

We are cautiously optimistic about near-term opportunity in the stock market. The easiest money is made in the first innings of a new bull phase as apocalyptic fear recedes and temporarily depressed valuations expand. While our domestic market should benefit, commodity-driven emerging markets have extra potential due to explosive growth.

History cautions that after a huge fall, equity markets can take a long time to rally to new highs. One only has to look at a 100-year chart of the Dow Jones Industrial Average (DJIA) to gain perspective. Long periods of consolidation are the norm, not the exception. The DJIA took 26 years to break through the high set before the Market crash in 1929. In 1983, after 18 years of flat to lower, the DJIA finally eclipsed the level set in 1965. When the DJIA finally broke in 2007, it was coming off the longest bull run in history, jumping from DJIA 1000 to DJIA 14000 in a matter of only 24 years. Given the amplitude and duration of the preceding bull, a consolidating market trading in a range from 6500 to 14000 for the next twenty or more years is certainly within the realm of possibility.

If our Dow isn't enough evidence, consider this. Our own NASDAQ Index peaked in March 2000 at 5180. Nine years later we still sit at about 2000, 61% off the high-water mark. The S&P 500, A large company index, in October 2007 barely eclipsed its high set in March 2000, before falling to today's level. So an easy argument can be made that the current bear phase began in March of 2000.

Finally, if you really want an excuse to raid the liquor cabinet, imagine you had bought Japan's stock market, the Nikkei, in 1990 at 38000. Nineteen long years later you are still mired in a bear market. Nikkei 10500, down over 70% and no end in sight. Buy and hold anyone? We believe we are stuck in a range-bound “traders market” for the foreseeable future.

Public Debt (bonds) Long and Short

As of this writing in early August 2009, the debt markets have scored dramatic gains since the March lows. While the easy money has already been made on the long side, higher yield international and domestic bonds can offer an attractive alternative to equities in a slow growth environment. Perhaps the more exciting fixed income opportunity will present itself on the short side if and when the surge of inflation from massive government stimulus finally surfaces and interest rates move inexorably higher. When that wave crests (anybody remember 13% mortgages?) treasuries and high quality corporates will once again be attractive to own, offering massive capital gains as well as good current income to those who waited for the right time to buy.

Commodities

At least for now the economic crisis appears to have passed. What kind of recovery will we see? In order for our economy to see sustained growth, we need housing to recover. With the overhang of homes and tight credit, prices will take a very long time to recover in a normal market....maybe as long as a generation. The easiest way to quickly improve the value of homes is to lift the value of the raw materials that go into building them. A weaker dollar would help. While our leaders say they want a strong dollar, they really aren't doing anything that would prop it up. Not that they should, the currency would strengthen with higher interest rates and that is the last thing we need when you want a lower monthly payment on a mortgage. It is politically disastrous to openly push for a weaker currency. But for better or worse, especially if one wants to get re-elected and needs a stronger economy to further my case, I will let the dollar fall, improve home values and slow the foreclosures.

That was a long winded way of stating that we believe we are in the middle innings of a secular commodity bull market. These secular bulls traditionally last for about twenty years. The current one began in 2003. Another factor that may add fuel to the fire is that the barriers to commodity investing have eased. Previously, you either had to play the resource stocks, trade through an expensive commodity broker, or own a farm or mine. With the widespread availability of commodity ETFs, anyone that wants to own a barrel of oil, or a bar of gold, or a bushel of grain, can do so with a discount broker and a mouse click.

Alternate Investments

These might include other limited partnerships that specialize in areas such as; oil, gas, real estate, equipment leasing, or even other hedge funds that manage money in a manner that would compliment our investment style by providing diversification.

CAVEAT We make several assumptions and projections in the preceding paragraphs. These points of view evolve into an investment thesis. It is helpful to have an investment thesis because it helps a manager game plan for a likely outcome. That does not mean we will cling to our thesis to the detriment of common sense. In our opinion, the key to any sound investment strategy is flexibility. Will the above mentioned economic scenarios take place? Maybe so or maybe not. If they do, we have an idea of how to play. If not, we will just as readily take the other side. After all, we can't fight the market, we can only attempt to maximize the opportunity provided.

 

 

From discussing your concerns, to developing a portfolio tailored just for you, to daily oversight and management, to ongoing follow up and communication. We will be there when you need us.