Tuesday, December 08, 2009

Home At Last

By Vahan Janjigian - I'm finally back from the 16th Forbes Cruise for Investors. I got off the ship in Aruba on Sunday and took a long flight home. The Internet connection on the ship was not always reliable, so I did not get a chance until now to post my comments about Jack Ablin's presentation.

Jack is the Chief Investment Officer at Harris Private Bank. We first met in 1996 when I was on the faculty at Northeastern University. I signed up for a course to prepare for the Level II Chartered Financial Analyst exam and Jack was one of my instructors. He was an excellent lecturer.

It was nice to see that he hasn't lost his presentation skills. Jack is a quantitative analyst. One of his comments should give college students majoring in business something to think about. He said he only hires people with strong quantitative skills. He especially likes engineering majors. This is because he finds it easier to teach an engineer how to do finance than to teach a business major how to do quantitative analysis.

Jack is fond of using a momentum approach to investing. There are plenty of investors who are skeptical of this approach, but it really does work. Sheridan Titman, now a professor at the University of Texas, was one of the first to document that stocks exhibit momentum. One approach Jack relies on is to compare an index or sector to its moving average. In general, he avoids buying stocks until they start moving up. He is happy to miss the opportunity to buy at the bottom until he is confident that an upward trend has begun.

Jack believes the market is currently at a fair to full valuation. He thinks inflation will eventually become a problem, but says we will have about two to three years to prepare for it. He expects the Fed to sit tight through much of 2010. He mentioned two ETFs he currently likes: The S&P International Small Cap (GWX) and the WisdomTree International Small Cap Dividend (DLS).

Jack recently authored a book: Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace. He gave a copy to all attendees. I am putting it on my reading list.

Thursday, December 03, 2009

Visiting St. Bart's

By Vahan Janjigian - We took two days day off from our seminars to enjoy the cruise. We also got off the ship at a couple of ports. I went on a five-mile hike today in St. Bart’s. Nonetheless, I also managed to hold a number of impromptu discussions with several attendees about the economy and markets. Most of these people are retired and have a high net worth. Many are sophisticated investors. Yet I have not spoken with anyone who I would call bullish. They are all cautious about the economy and extremely skeptical about the strength of the recent rally in stocks. They are also worried that the government’s efforts to revive the economy will ultimately fail, especially since there is so much talk about increasing both taxes and spending.

I was thrilled to meet Ed Breen, CEO of Tyco International (pictured above left). Ed and I had an interesting discussion about the interaction between equity research analysts and corporate managements. We agreed that since the SEC promulgated Reg FD, there is little value to one-on-one meetings between these two parties. Corporations are disclosing a lot more information these days in their SEC filings. I personally find that my research is much more objective if I do not meet the management team. Unlike Warren Buffett, I am not trying to marry good companies. I am just trying to buy good stocks. Nonetheless, I am glad I had the opportunity to meet Ed personally. He is doing an excellent job of bringing Tyco back from the disgrace it suffered several years ago.

Also pictured above (right) is Barry Ritholtz. He always manages to provide an original point of view on the markets. One of my friends went to law school with Barry some years ago. She claims he was one of the smartest students in the class. I can believe it.

Tuesday, December 01, 2009

The Voyage Continues

By Vahan Janjigian - Gary Shilling gave his talk today while we continued our voyage toward St. Croix. Gary said we will not have a V-shaped recovery as many economists expect. He talked about how household net worth has plummeted due largely to the sell-offs in stocks and residential real estate. Gary also explained that corporations are cutting wages and forcing employees to take unpaid furloughs. He says this is the first time since the 1930s that this has happened on such a large scale. Furthermore, not only has unemployment risen, but it has also become much more difficult to find a new job. Gary expects slow economic growth for several years. He projects annual growth of 2.1% for the decade ending in 2018. However, he claims that 3.3% annual growth is needed just to keep the unemployment rate constant. As a result, he expects to see the government taking much more aggressive actions in order to try to create jobs. He advised investors to stick to Treasury securities and dividend paying stocks.

There was some discussion about whether investors needed to worry more about deflation or inflation. Both Gary and I relied on the same graph that showed how capacity utilization has fallen to explain why the Fed is not worried about inflation. You do not typically see much inflation when capacity utilization is so low. Nonetheless, in my presentation, I argued that the Fed should start raising interest rates right away. A quarter-point increase in the fed funds rate will not do anything to slow economic growth, but it would send a strong signal to investors that the Fed actually believes its claim that the economy is getting better. It would also help strengthen the dollar and turn investors away from commodities such as gold and oil. By keeping rates so low, the Fed is creating another bubble in commodities.