I have just now ended a conversation with a long-time client and Limited Partner (LP) of our Fortune’s Favor I, LP, (FFI) fund. As I hang up the phone I begin to write. Our healthy dialogue crystallized some thoughts that demand sharing.
To begin, a review of the investment strategy that guides FFI may be in order. You may witness our approach in its entirety @ http://www.rosenthalcapital.com/. However, for a quick overview allow me to illustrate: We believe precious metals offer the best opportunity for return of capital as well as return on capital. The rest of our portfolio is currently deployed in a defensive manner and can be viewed under the ‘Letters& Articles’ page on our website.
LP asks: Why are you not buying ATT (T) shares at a 6.75% yield?
We answer: ATT’s profit margins are down 20% in the last 12 months along with revenue and EPS declines. Meanwhile, debt has ballooned 50% over the last 2 years with debt to equity standing at about 63%. As always, there is a reason the dividend yield looks enticing, one must get paid to take on the increased risk of a dividend cut. However, these issues are just the tip of the proverbial iceberg. 2010 has ushered in a new round of credit constriction (Please see the Feb. 18th post for more detail). $7.3 billion of corporate debt issuance was pulled from the European market in the last 30 days. $2 billion have poured out of high yield bond funds in the U.S. over the last 2 weeks. These are clear early warning signs that a credit crisis is building again; that is not an environment conducive to investments like ATT.
LP asks: Your penchant to preserve capital held you back last year. Why not be more upbeat and aggressive this year? Isn’t it time to be less “hunkered down”?
We answer: True, our priority (as outlined by our investment philosophy) is to preserve capital. We are somewhat surprised we must defend that obvious and essential creed. As of Dec. 31st, 2009 the value of FFI was higher than it was at the start of 2008. Moreover, while the S&P 500 suffered dramatic volatility over the last 2 years, dropping 53% at one point, our fund avoided gut-wrenching swings, never experiencing a single month of double digit losses.
We would love to be more upbeat and aggressive, but the investment environment simply does not lend itself to such a stance. We can’t determine our investment philosophy simply by wishing on a star. Last year the equity markets were supported by overwhelming government intervention. As that support begins to wane reality will return with a vengeance. January’s 5% decline in the S&P 500 is a testament to that theory as are the following two stories:
Consumer Confidence Plunges From 56.5 To 46.0, Consensus At 55.0, Present Situation Index Lowest Since February 1983
The Conference Board’s Consumer Confidence Index fell drastically to 46.0 in February from a revised figure of 56.5 (previously 55.9).
The reported consumer confidence index for February was much lower than our forecast for a reading of 54.0.
The Bloomberg market consensus estimate was 55.0 with individual estimates in a range from 50.9 to 59.0.
In February, the two main components of the consumer confidence index were as follows:
February Present Situation: 19.4 versus 25.2 in January (prev. 25.0)
February Expectations: 63.8 versus 77.39 in January (prev. 76.5)
Home Prices Double Dip Validated As Unadjusted Case-Shiller Numbers Indicate Third Sequential MoM Decline- Zero Hedge
After a third sequential decline in unadjusted Case-Shiller housing prices, is it ok to come out of a contrarian shell and proclaim the government-subsidized home price appreciation rally dead? Afdter the unadjusted Composite-20 reading peaked at 146.7 in September, the index has slowly declined for 3 months in a row and is now at 145.9. The only good thing one can say is that the rate of decline has not accelerated. However, with just over a month left on MBS QE, we are not very hopeful for a second V-recovery to appear in home prices any time soon.
So, in conclusion, we are not “hunkered down”. We have deployed our assets in a manner we feel most appropriate for the environment we are experiencing. Meanwhile, we continue to conduct research and build a stable of quality high-growth investments ready to be saddled at the first opportunity.
Never forget, over 30% of FFI assets are Rosenthal family funds. You can rest assured we will treat the management of the fund with the greatest of care.