Howard Marks of Oaktree Capital is out with his latest memo entitled 'Open and Shut.' This refers to the credit cycle, one which Marks believes is the "most volatile of cycles and has the greatest impact." This is particularly interesting since many people don't seem to be focusing on the credit cycle these days. He takes a walk through his past commentary on the subject matter and provides investors with ample words of wisdom.
He then shifts his focus to quantitative easing and the Federal Reserve's actions. Simply put, he feels that such a low-rate environment has caused investors to reach for yield. And in a sense, Marks argues that many assets are overvalued. He writes that:
In 2006-07, the most appreciated assets were real estate, mortgages, and buyout companies. This year they're Treasury securities around the world, gold, commodities, currencies (versus the U.S. dollar) and real estate and stocks in emerging markets.
With many appreciated assets, where should investors put their money then? You'll recall that back in October, Marks advocated high quality, large cap stocks. It would be interesting to see if he still feels those assets are 'cheaper' than most other options.
Marks is leery of the return of risk. He points out that it was the time to buy in 2008 when Lehman Brothers had failed and asset sales abounded. Marks goes on to say that,
Today some assets are fairly priced and others are high, but there are no bargains like those of 2008. Capital and nerve can't hold the answers in such an environment. We're no longer in a high-return, low-risk market, especially in light of the inability to know how today's many macro uncertainties will be resolved. Instead of capital and nerve, then, the indispensable elements are now risk, control, selectivity, discernment, discipline and patience.
It's interesting that he notes there are no bargains like 2008. While maybe not yet reaching panic levels like 2008, the Municipal bond market sure has taken a beating lately and it'd be interesting to hear Marks' thoughts on that asset class. Since he did not mention them specifically, we'd assume he doesn't view them as 'on sale' quite yet.
Embedded below is the Q3 letter to investors from Oaktree Capital's Chairman, Howard Marks:
You can download a .pdf copy here.
As always, leave it to Howard Marks to provide us with a bevy of wisdom that will most likely be quoted years from now. For more of his commentary, we looked at his recommendation to buy high quality large-cap stocks. And for other market thoughts from fund managers, scroll through our collection of hedge fund letters.