Trapeze Asset Management Q2 letter to shareholders.

The news from the world’s largest economies is mixed and the outcomes are not clearly predictable. With the major indexes at highs—for example, stocks in the S&P 500, at 15x next 12-months earnings, are at their multi-decade historical average—equity investors need to seek out undervalued assets and be patient until these neglected opportunities get recognized. Selected stocks, those with either outsized growth or those trading at discounts to their fair value, can still provide potentially high rewards.

No, we’re not being lewd. We are suggesting that with all the conflicting macroeconomic news, some good, some not, and with the S&P 500 and the Dow at new highs while many sectors languish, it is preferable to focus on the little picture not the big one. The big one may currently be more unpredictable than the small one, being bottom up investment in undervalued securities. Those may currently be less popular, but we value investors are naturally driven to buy investments low, that are neglected and unpopular, with the view of selling them high when their popularity is enhanced. Buy low and sell high. Not buy high and sell higher as is now in vogue.

The Big Picture
The news from the world’s largest economies is mixed and the outcomes are not clearly predictable. Our proprietary TEC™ and TRIM™ work, which is designed to alert of significant economic and market downturns, is not forecasting anything dire ahead that would warrant undue caution. But whether growth accelerates or continues at its current sluggish pace is unclear.
In the U.S., the world’s largest economy, some recent news has been good. Q2 GDP at a 1.7% annual rate was better than expected but still below historic rates, and while consumers kept spending and business investment was somewhat higher, GDP was probably pushed higher from rising inventories and a smaller June trade deficit. Still, GDP growth remains the slowest of any expansion since 1948.
U.S. factories in July had their best month in 2 years as the ISM index jumped to 55.4 from 50.9 in June, the biggest 1-month jump since 1996. New orders were at a 2-year high from the recovering housing market and the demand for autos, auto sales being the strongest since late 2007. But with higher mortgage rates making consumers more cautious, U.S. consumer sentiment declined in August from a 6-year high in July.

TAMI Q2 2013