I hope that you had a fabulous and safe Labor Day holiday. This morning Warren Buffett was on CNBC where he discussed the economy, interest rates, and the outlook for long-term investing in stocks. He made excellent points in that the U.S. economy has really not accelerated beyond the 2-2.25% level on a year over year basis, since emerging from the recession in 2009. Instead we have seen a slow but steady recovery. The job creation that we have seen has been fairly low quality overall, which is a big reason why wage growth has been lagging. For instance, losing high-paying energy jobs and replacing those with service-oriented jobs is not likely to generate wage growth. While the slow growth is disappointing, it is important to understand that we could easily see a much longer period of economic growth than we traditionally have when the U.S. has recovered with more veracity from past recessions. The Financial Crisis was the worst recession since the Great Depression and there is a long runway for growth. In addition, the excesses such as aggressive credit expansion and extreme optimism are not present except in various segments of the stock and bond market, none of which we at TTCM are exposed to. The Chinese stock market was an obvious bubble and the ensuing crash is far from surprising. While Chinese growth is clearly going to slow, the U.S. exports to China comprise tiny amount of overall U.S. GDP.
Buffett also talked briefly about interest rates. He and I would both be very surprised if the Fed raised in September but truthfully it really doesn’t mean a great deal. 25 bps is nothing in the big scheme of things unless you are a day trader, so while it may have a large impact on short-term volatility, long-term investors should look past that and into the value of their investments. Nobody expects interest rates to rise dramatically in the short-term and that makes equities at current valuations still very compelling compared to comparable asset classes. Now a stock like Netflix, which trades at almost 200 times earnings might still not be a value at 150 times earnings, but for most companies, low interest rates make their respective earnings yields very attractive.
Lastly, Buffet focused on the idea of long-term investing. Looking 5 and 10 years out, it is very likely that stocks will be materially higher. Selloffs should be looked at as buying opportunities, particularly given an adequately growing economy and reasonable valuations. The areas where we at TTCM are investing in are incredibly cheap from a historical perspective, and have dramatically improving fundamentals.
The stocks we are buying now particularly in the financial space will likely be paying tremendous streams of income to your portfolio via dividends, as the yields increase dramatically over the next several years based on excessive capital ratios and strong earnings. Like I’ve mentioned many times before, you won’t get a feel for where we stand with the options until they get close to expiration in January of 2016, but the impact will be material! This is the type of market which presents great opportunities for both value investing and the selling of cash-secured put options and the whole key is maintaining patience and letting things play out.
Thank you very much and as always if you have any questions or thoughts, don’t hesitate to contact me directly at 805-886-8140