READING RECOMMENDATIONS (ii)

I wanted to document a few good reads.

First, I reread a few times a few weeks old John Mauldin’s Outside the Box with Dr. Lacy Hunt of Hoisington Investment Management. If you are going to read a single piece on macro this year this one qualifies quite well. It is a very powerful reminder on where we currently stand – protracted deleveraging; and on the trend direction of treasury rates – down. Consumers are spending their savings and are taking more debt – this does not spell well on growth prospects. There are plenty of graphs and non-noise insights.

Second, I recommend always reading Jeremy Grantham’s quarterly missives. His latest one resonates well with my thinking about individual investor’s edge – it is simply absent, at least in terms of thinking of a professional investment manager.

A few interesting thoughts from the letter: 

“You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things.” 

“…: there have been several recent decades in which the BTU equivalent price of natural gas did, at least for a second, reach parity with oil. But now it is at just 14% of BTU equivalency, the lowest in 50 years. Everyone who has a brain should be thinking of how to make money on this in the longer term.” 

Jeremy Grantham made an interesting twist on S&P fair market value. He is saying that top quality quarter of S&P is fairly priced (5.5% real annual returns for next 7 years), while the poor quality 75% is moderately overpriced and will deliver negative returns over the next 7 years. At current price GMO projects 1% real annual return for S&P 500 for the next 7 years.

I believe that he still thinks that FMV of S&P should be close to 950 – 1,000. Therefore, S&P at 1,370 clearly warrants a fully hedged position. I think that IWO (Russell 2000 Growth) could be the most convenient hedge – it is volatile and @ 93 has only 0.65% yield (if you have no time to identify the most mispriced poor quality stocks).

Interestingly, J. Grantham and L. Hunt views differ on long duration treasury rates. The first believes that long duration bonds is almost the most risky investment at the moment. The second projects that 30Y Bond will go down to 2% (now ~3.1%). Maybe they do not contradict each other because interest rates may go down first before jumping up.