This note was originally published at 8am on February 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The macro is so bad everywhere. In America, our political leadership is doing nothing to help us get out of the current situation. Worldwide, Europe is just in a state of financial collapse. I think we are in plenty of trouble and have to watch ourselves closely.”
-Julian Robertson on CNBC, September 13th, 2011
While Julian Robertson is retired from managing other people’s money, prior to his retirement he established probably the best long term record of any money manager with a reported annual return of north of 30% from 1980 to 1998. More impressive to me has been his ability to mentor, train, and seed successful money managers after retiring from the business himself.
I’ve had the pleasure of meeting Mr. Robertson a number of times. The most notable for me was while I was attending Columbia Business School and took a class called, “The Analyst’s Edge”, which was taught by John Griffin, founder of Blue Ridge Capital and the former President of Tiger Management. This class offered me, and my fellow students, a crash course in analyzing companies from the practitioner’s perspective. In lieu of a final exam, our final grade was based on pitching a stock to Julian Robertson in the Tiger Management boardroom.
Not only was the situation itself intimidating, but the company I had spent the semester researching was Ace Aviation, more commonly known as Air Canada. As background, in 1999, the year that Tiger Management dramatically underperformed the SP500 and eventually shut its doors, U.S. Airways was purportedly Tiger’s largest equity holding and a key reason for the underperformance. So, yes, I was pitching an airline to Mr. Robertson, even though it was the industry that had burned him a few short years before.
Shockingly, despite my somewhat sweaty palms, the pitch actually went relatively well. Mr. Robertson was very thoughtful in his questions as it related to my thesis, which was primarily based on a sum-of-the-parts analysis, and seemed very intrigued by the idea. Now, of course, he may have just been trying to be polite, but I think the better answer is that a key reason he was, and remains, one of the world’s great investors, is his ability to have an open mind and change opinion. In effect, he showed incredible mental flexibility.
I highlighted the quote above to flag the simple fact that Mr. Robertson went on CNBC to emphasize how negative the macro was at the literal 2011 bottom of the stock market. In fact, since September 13th, 2011 the SP500 is up more than 15% and the Euro Stoxx 100 is up more than 23%. On an annualized basis, those moves would equate to some of the best annual equity index returns in the last hundred years. So, was Julian Robertson wrong based on his dour September 13th, 2011 macro outlook? Well, that ultimately depends how his portfolio was positioned for the last four months. My guess is that Mr. Robertson and his protégées managed the environment quite effectively and kept their feet moving.
Interestingly, on September 13th our CEO Keith McCullough (he is on the road today in Boston) wrote the Early Look and while we shared an eerily similar fundamental view as Mr. Robertson, Keith wrote the following that morning:
“Great short sellers in this game have one thing in common – they know when to cover . . . I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.”
In hindsight, making the aggressive short covering call on September 12th of last year was the correct call. Some might call it luck, but for us it was born out of our global macro process. Now, arguably, we probably should have gotten even more aggressively long. As always though, the first step in the stock market business is to not lose money.
Coming into 2012 we were as bullish as we’ve been in awhile. One of our key 2012 macro themes was that the rate of global growth slowing would bottom. In our macro models, marginal rates of change in growth are critical, but as critical is monetary policy, which influences growth. On January 25th of 2012, the FOMC released the policy statement post their December meeting, with the key line being:
“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
So, in one fatal swoop, The Bernank extended the Federal Reserve’s depression level monetary policy out another year. Monetary policy influences our outlook on inflation, which influences our outlook on growth and equity returns. Hence, we reversed course following the FOMC policy statement noted above. Now, maybe that’s Bad Macro, or maybe it’s smart macro. The data suggests it’s the latter.
In the Chart of the Day, we’ve attached an analysis that looks at inflation versus the price to earnings ratio of U.S. equities from 1978 to 2008. The r squared between CPI, the proxy for inflation, and P/E is very highly correlated at 0.76. As the curve demonstrates, inflation is bad for equities. That’s not a guess, that’s a fact based on the data and underscores our shift in outlook post the FOMC statement in January. Some call this mental flexibility, for us it is process. So far, by the way, we’ve been wrong on U.S. equities in the shorter term duration. That said, fighting the Fed worked in 2011.
While I am on the topic of Julian Robertson this morning, I would like to give him credit for more than being one of the best money managers of our time and an incredible mentor of young money managers. I would also like to acknowledge his leadership in philanthropy. As Albert Einstein said:
“The value of a man resides in what he gives and not in what he is capable of receiving.”
Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now 1717 – 1761, 113.42 – 118.27, 1.31 – 1.33, 78.51 – 78.94, and 1330 – 1360, respectively.
Keep your head up and your stick on the ice,
Daryl G. Jones
Director of Research