Jeff Saut of Raymond James did some Q&A in his latest letter so I figured I’d barge in on his conversation and add my own thoughts as well:
1) Would you buy cyclical stocks or defensive stocks?
Jeff’s Answer: I would buy cyclicals because barring some major event I don’t embrace the view that we are going to see another recession in the U.S. for the near/intermediate future.
Cullen Roche: Beta or low beta? I think the market is ahead of itself right now which makes beta even riskier than usual….
2) 2011 was a “risk on/risk off” year, so is it a “top down” or “bottom up” strategy for 2012?
Answer: Last year you only had to get two things right. You had to raise cash in March/April and put it back to work during the bottoming sequence of August – October. I did that and think a similar strategy will work this year as well. That said, one always needs to employ a “bottom up” strategy combined with a “top down” view.
CR: Being a macro theorist/strategist I always work from the top down. If you can figure out which way the current is going you don’t need to be able to pick the right part of the river to swim in….That is, it’s always a top down world in my opinion….
3) Should we buy gold or gold stocks?
Answer: Both; but if I am forced to pick just one, I would buy gold stocks because they are well behind gold’s performance. Therefore, after the yellow metal’s consolidation is finished, gold stocks are likely to play catch up.
CR: I have liked gold for a while now as a hedge against the uncertainty in the Eurozone and the misinterpretation of the Fed’s actions. That said, gold should always be held as an insurance policy and not as a core portfolio holding. As I’ve previously explained, I prefer to invest in companies that innovate and benefit from the ingenuity of man. Not companies that dig rocks out of the ground and sell them to people who think they’re pretty. If you’re going to buy companies that dig things out of the ground I prefer the ones who are contributing to the innovative processes of our society and not just the fear and jewelry industry (sorry gold miners!).
4) Homebuilders or Home Depot?
Answer: We think our early-year buy ‘em recommendation on the homebuilders based on the “hope trade” is waning and therefore prefer Home Depot (HD/$48.10/Strong Buy) at this stage.
CR: Neither. If the market is overextended the housing stocks are well overextended up almost 25% this year already. And if the tide is about to come in then Home Depot is swimming naked….
5) QE3 or not?
Answer: My belief has been the economy is moving toward a self-sustaining recovery and consequently I don’t think QE3 will be needed. Nevertheless, if it looks like our economy is slipping back into recession, I do believe the Fed will use another QE (quantitative easing) to ameliorate the situation.
CR: I came into the year thinking QE3 was on for the June meeting, but that’s clearly not going to be the case since the economy has surpassed even my optimistic thinking so far and gasoline prices just continue to put upward pressure on prices. I don’t think the Fed can justify further stimulus without a serious economic dislocation which is looking increasingly unlikely this year….In fact, I am beginning to wonder if the Fed isn’t a bit behind the curve now with signs that the balance sheet recession is waning….
6) GDP this year, 1.5% or 3.5%?
Answer: Neither, but hereto if I have to pick one it would be the latter.
CR: My Latest Real GDP projection is still calling for sluggish growth of just 2% this year, but there’s upside risk in 2012 as the budget deficit remains large and credit expansion improves.
7) Treasury 10-year yields of 1.5% or 2.5% by year end?
CR: Bearish treasuries was one of my few conviction calls coming into the year (along with bullish energy related trades). I still think yields are going higher. We’re moving towards 2.5%….
8 ) Obama or Romney?
Answer: Unless gasoline goes to $5.00 per gallon, or there is some other economic/geopolitical event, I just don’t see who can beat President Obama.
CR: Several years ago I predicted that the unemployment rate would be over 8% and that it would bury Obama’s re-election odds. Boy was I wrong. It’s almost unbelievable that the Republicans couldn’t find a candidate that would just crush a President with an 8%+ unemployment rate. But that’s exactly what they’ve managed to do. Unless Romney can rally the nation in the coming months he’s certainly looking at an uphill battle….
9) Made in China, or made in the U.S.A.?
Answer: One of my themes is, and has been, is that at the margin manufacturing jobs are being moved back to the U.S. Combined with this belief is another theme, namely the re-industrialization of America.
CR: Why not both? Can we not have global arbitrage and a growing job base in the USA? Unfortunately, the problem in the USA currently is that we enjoy the cheap goods, but we’re not producing the same quality goods that we once did. So we need a serious boost to that USA side of the equation or we’ll grow increasingly noncompetitive which will certainly dampen the world that our children inherit in the form of potential living standards.
Answer: I don’t think Iran’s mullahs, who are the ones that really have the power, will let Ahmadinejad do anything in the Hormuz Strait because that would give the world an excuse to “pound” Iran, which might affect regime change.
CR: Like the madness of crowds, I have trouble predicting the madness of madmen!
PS – I’ve been considering doing a weekly Q&A to gauge questions that readers have. If that’s something you’d be interest then please let me know and I’ll start a Friday Q and a Monday A session on a regular basis.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Comments are closed.