With the final numbers in, the 3rd quarter looks like a decent one for investors. On a comparative basis it was a good quarter for most Cadinha & Co. clients. In fact, on a risk-adjusted basis, it appears to have been an excellent quarter as many portfolios are showing market returns with only a fraction of the risk. The reason…large blue chip growth companies have outperformed almost every other asset class for three months. For nearly four years, these large blue chips have lagged their smaller brethren, as well as emerging foreign markets, commodity related companies, and deep cyclicals. Obviously, three months doesn’t make a meaningful trend, but it’s a good start. Most of these great American companies have record earnings and cash flows with outstanding market positions secured by recognized brand names. Their shares, however, can still be bought at prices that are well below those posted six to eight years ago. The one characteristic that portfolio managers like, however, is the consistency of results posted by these companies, regardless of whether the economy is “booming or busting”. When professional investors are frightened, they reach for the sure thing and, if any of those savvy types are not yet frightened, they either just got up from a long nap or are just plain ignorant.
After 17 interest rate increases, the Federal Reserve has joined the crowd becoming concerned about the most publicized bubble ever…housing. Why then the chokehold on credit while inflation numbers seemingly continue to ignore the run-up on oil, gold, copper, etc.? In fact, the most recent numbers reflect little inflation and perhaps even a decline in the trend.
The housing crisis, combined with dropping commodity prices, have reignited deflation fears. The surprisingly strong dollar has created a mini-stampede for Treasuries and dollar-based blue chips. It’s all quite logical, but it took a long time for investors to “see the light”. For those still trapped in yesterday’s winners, it could be more of a bumpy ride as they await confirmation that the economy is continuing to expand and that housing will not crash. We frankly think things will turn out O.K., but will continue to stay right where we are–thank you.
After all, as the market continues to contend with the prospect of a hard or soft landing for the economy, and “nukes” in Iran and North Korea, we can expect periodic jitters to be commonplace. Additionally, the national election next month promises to be pivotal and will shed some light on the economic picture going forward.
For any still-dozing Rip Van Winkles in our society, the next surprise could be the survival of the Republican Party. We suspect that the most publicized “Democratic Sweep” in history will prove to be somewhat illusory. The breaking news surrounding U.S. Representative Foley, however, could be the damaging blow that sends the House Republicans to the trash heap of history; but, only time will tell. With all due respect to those prone to prose or theatre who make their societal contributions either through Hollywood or the media, we won’t believe everything we see or hear during this election season. Perhaps, a little dose of skepticism isn’t all that bad.