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Grantham - Oh, Those Silly Markets...

Jeremy Grantham has come out with his latest newsletter, and most devotees have by now probably parsed the document and have drunk their fill from the well.  As always, Grantham mixes his grumpy humor with enough facts to tickle the engaged mind.  He's also done us the service of highlighting and underlining his key points.  I for one find it engaging enough to read without skimming.  

My take:

The message is largely the same.  S&P fair value he still labels around 860, Greenspan is still someone favorably compared to Mephisto, and he is still cursed with being a value investor, and has again cursed himself roundly for missing the recent 'junk' rally.

A 'cursory' glance at the performance of the various GMO funds would substantiate his self-deprecation - only the fixed-income category soundly beat benchmarks, and US equity-based funds performed very poorly relatively.  It does seem he largely missed the rally in the US.  A saving grace of course is that he largely missed the decline last year as well (a 10% overall decline I believe)- the 'curse' does work both ways.

I *still* do not know what he deems to be 'quality' US stocks, outside of his general description regarding dividends, low debt, and high, stable returns.  I should know by now that he is simply not going to issue a list.

Some money quotes:

"The good news is that we have not fallen off into another Great Depression. With the degree of stimulus there seemed little chance of that, and we have consistently expected a global economic recovery by late this year or early next year. The operating ratio for industrial production reached its lowest level in decades. It should bounce back and, if it moves up from 68 to 80 over three to five years, will provide a good kicker to that part of the economy. Inventories, I believe, will also recover. In short, the normal tendency of an economy to recover is nearly irresistible and needs coordinated incompetence to offset it – like the 1930 Smoot-Hawley Tariff Act, which helped to precipitate a global trade war. But this does not mean that everything is fine longer term. It still seems a safe bet that seven lean years await us."

"The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought, which is a high hurdle because we have respected their power for years."

"With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1100.  It can certainly happen."

"Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well informed guess, I hope) that before next year is out, the market will drop painfully from current levels. “Painfully” is arbitrarily deemed by me to start at -15%."

"The irony may well be that just as nine months of weak economic data this year has been accompanied by a very strong market, so the strong economic data next year is likely to be accompanied by a weak stock market."

A couple final thoughts:

1) Grantham has had an uncanny ability to actually predict market directions with a high degree of accuracy with respect to both timing and severity, so I place a premium upon his pronouncements, much more than most other punters or speculators.

2) I highly recommend that if you have not read it yet, to go to his website and read the full article (sans the parts on endowment and redesigning the financial system - also, try not to be turned off by his introductory 2-page rant - I promise it gets better).  Registration is free: