Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”

— Seth Klarman

Every week I read Steve Blumenthal’s from CMG Capital Management’s letter On My Radar . It is an excellent source of insights and research that Steve’s puts out every week. I really admire Steve’s style, wit and ideas on the investing universe. This week he mentions a quote attributed to Seth Klarman. We read everything we see from or about Seth as he is an investing legend. The quote struck us this morning as we had conversations this week with two of our more aggressive clients. They are able to be aggressive because they push risk to the back of their minds and continue to push forward and focus on returns. They have both been very aggressive from the financial crisis in 2008 until this week. Coincidentally, both have backed off and are ready to take some risk off of the table. Anecdotal I know, but, I think that it does have some value as it seems that a wide swath of investors now see the market as fully valued. What does that mean? The second level of thinking tells us that the market, since the market has been able to hold an overvalued level it could have further to run. Investors have pulled some risk out waiting for markets to take a breather and give them a better entry point – which it has not. They may be pulled back in chasing prices higher. We believe the animal spirits still have control of this market. The Trump Trade is still moving forward. Could tax reform be the “sell the news” event?

Our biggest question outside a possible shutdown of the federal government is about inflation. No. Not North Korea. I think the media has pumped that one enough. Inflation is our focus as some reports indicate this week that wage inflation could be on the rise. Wage inflation here in the United States could keep the Fed raising rates even while the economy sputters. The yield curve continues to flatten which is not good news for the banks while oil seems to be holding below $50 a barrel. Neither is good news for the market and bad news for both sectors makes it harder for the overall market to rally. These are two huge sectors; percentage wise, for the market and their reluctance to rally makes it harder for the tide to lift other boats. It also makes the any rally narrower with the likes of Apple, Amazon and Google leading the charge.

French election results give the ECB and the Federal Reserve the green light to be more aggressive in tightening policy. Inflation is also a green light. The pressure is building on central banks to take away the punchbowl. North Korea has the media on edge but I am more worried about inflation and Congress shutting down the government. The market is counting on movement out of Washington on healthcare and tax reform. It is never a good idea to count on Washington.

Mario Gabelli made mention that a 1987 style event could happen again this year. We do not disagree. We believe the market structure is in place that could lead to a moment where markets collapse quickly and temporarily. We believe it will be an opportunity for courageous investors but it will also be quick as there is a still a lot of money sloshing around markets looking for a home. Market is still stuck in its range for now between 2330 – 2400 on the S&P 500. Our thesis since last October has been a Trump win followed by a 30% rally with an equivalent selloff in the fall of 2017 much like 1987. Markets are still following that script.

I  think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill


Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

Published in: on April 29, 2017 at 6:16 am  Leave a Comment  
Tags: , , , ,