Jeremy Grantham.. WARNING FOR VALUE MANAGERS LOOKING FOR MEAN REVERSION!!

0
Jeremy Grantham.. WARNING FOR VALUE MANAGERS LOOKING FOR MEAN REVERSION!!

GMO’s latest letter – Grantham on the Increased Monopoly Power  and what it means for Margins.

He notes PE’s have not reverted below trend really for 25 years – oscillating around a higher PE

Moving away from 4 most dangerous words “This time is different” .. to “it can be very dangerous indeed to assume that things are never different

Khrom Capital killed it during the first quarter, continuing its strong track record; here are their favorite stocks

Khrom Capital was up 32.5% gross and 24.5% net for the first quarter, outperforming the Russell 2000's 21.2% gain and the S&P 500's 6.2% increase. The fund has an annualized return of 21.6% gross and 16.5% net since inception. The total gross return since inception is 1,194%. Q1 2021 hedge fund letters, conferences and more Read More


What’s changed over the years – PE’s and US profit margins re-based higher .. interest rates re-based lower.. Population growth/ageing, globalisation, indicators of monopoly, income inequality, below-trend GDP, productivity VERY VERY DIFFERENT

Thinks main driver of HIGHER US PROFIT MARGINS ARE LOWER RATES AND MORE GEARING

BUT Unlikely to normalise quickly as – Increased globalisation means US has better brands/brand strength, Increasing Corporate Power, Lack of action from Justice Department, Slight decline in capital spending, increased monopoly power of US corporations..

SO STOCK PRICES HELD UP BY ABNORMAL PROFIT MARGINS which are in turn produced mainly by lower real rates, the benefits of which are not competed away because of increased monopoly power etc

He can’t see interest rates rising a lot anytime soon..

Therefore doesn’t expect PE ratios to revert to pre 1997 levels

ALSO 3 FACTORS WHICH WILL HELP US MARGINS THIS YEAR – Commodity prices bottomed, Trump likely gets moderate reduction in tax rates this year, and benefits of lower taxes will be stickier due to increased monopoly power and US regulation removal will lower corporate costs in short term

NET NET – UNLESS SOME SUBSTANTIAL UNEXPECTED NEGATIVES..  US COPORATE MARGINS WILL BE UP MEANING LIKELY UP YEAR IN MARKET AT LEAST UNTIL LATE IN YEAR

Regular bear market of 15-20% can always occur for any one of many reasons.

——————————————————

Note from Ben Inker titled “Up at Night”.. basically about thinking about risk in a portfolio

Interesting chart showing how expensive it is to protect a portfolio with S&P Puts – in fact a strategy of selling puts returns the same as S&P500 since 2017.. while buying puts massively underperforms … suggest reducing weight in risky assets likely to be superior to buying insurance [obviously timing everything!]

Suggests trying to take advantage of correlations to try and get cheap insurance

GMO think emerging markets cheap and likely outperform developed markets by 5%pa.. but KEY RISK is USD rally induced by US border tax .. USING KOREAN WON as hedge . see note for details..
other risk they see is higher inflation hurting equities and long bonds – hold TIPS and alternates to hedge

gmo-quarterly-letterQ12017

No posts to display