|TheStreet.com, Fall, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — The old Wall Street saw goes something like: buy on rumor, sell on news.
Ever since the Fiscal Cliff came into focus during the latter half of 2012, this old chestnut seems to have been perverted into something more like buy on rumor and sell on rumor too. The news part, or facts, seems to have gotten left out of the equation.
Fiscal cliff be damned. I’m a card-carrying bull for 2013. In fact, for the balance of the year, I’m ignoring all “Fiscal Cliff” news and headlines. This isn’t just a declaration of independence from the fourth estate. Since I actually run money for the GMG Defensive Beta Fund, it’s an actionable strategy.
Here’s what’s behind going long on equities heading into 2013.
New home construction. Privately owned housing starts in October were at a seasonally adjusted annual rate of 894,000. This is 3.6% above the revised September estimate of 863,000 and is 41.9% above the October 2011 rate of 630,000.
We’re so focused on housing leading the rest of the economy into the mire that we forget that it can lead the economy to new heights as well. New housing works backward into everything from utilities to durable goods to services.
The outlook remains promising. Building permits in October were at a seasonally adjusted annual rate of 866,000, below the September rate of 890,000, but 29.8% above the October 2011 estimate of 667,000 building permits issued.
China. The reports out of the east with China’s economy showing deceleration were chilling to the markets during 2012. To me, the whole notion that it has “slowed” to something like 7.5% GDP growth is silly: 7.5% is an awfully big number. If the U.S. economy was growing at this rate, “Helicopter Ben” Bernanke and the rest of the Federal Reserve would be looking for ways to slam the brakes on the economy.
There’s something else going on in China that comes to me from Howard Balloch, head of Canaccord Asia, which is the Asian arm of global investment bank Canaccord Genuity.
Balloch is the former ambassador to China for Canada, and has been on the ground there for 20 years. As he said in an October speech to institutional investors: “If you think of China as a $7.3 trillion economy right now, domestic consumption represents over $3 trillion in economic activity, roughly the size of the entire German economy . . . As if by stealth, China has slowly but substantially begun to rebalance its economy away from exports and fixed asset investment. The restructuring of the Chinese economy so many have been clamoring for is well underway.”
Stocks are cheap. The chart below, courtesy of Bloomberg tells the story.
Currently, the S&P 500 P/E ratio is about 14x. The forward P/E, i.e., the P/E ratio based on next year’s consensus earnings forecast is about 12.7x. Based on the historical average of 17.0x, stocks are cheap right now. If you are a “reversion to the mean” disciple the current pricing environment should give you a great deal of comfort about the value in stocks.
Under a P/E analysis, the materials and industrial sectors are very cheap. We like and own Deere (DE), Cliffs Natural Resources (CLF), Monsanto (MON) and Archer Daniels Midland (ADM).
Europe is stabilizing. European leaders have not only been proactive, but effective in solving their debt and economic issues. One of the biggest weights on global growth and stock markets has been worry about break up of the EU.
With recent events in Europe, I believe that worry is now effectively off the table. The events that give me confidence are 1) German agreement on a single regulator, in Brussels, to oversee bank capital rules, budgetary decisions and investments among other economic concerns; 2) German agreement on several provisions of the European Stability Mechanism (ESM), which is headquartered in Luxumbourg and oversees financial assistance to financial troubled EU members. 3) Fairly robust bond auctions for the PIGS nations.
The emergence of former prime minister Silvio Berlesconi is unfortunate, and Greece, though upward and onward if you squint very hard, will continue to rattle, but in 2013, the world is going to breathe much, much easier about the EU.
Finally, there will be a resolution to the Fiscal Cliff. You may not like it, mind you, but there will be an endpoint, and after the selloff that accompanies whatever compromise is reached — including no compromise at all — getting the Fiscal Cliff in the rear view mirror is going to be good for the markets in 2013.