Does This Make You Nervous?

I am a habitual worrier by nature.  I probably have my mother to thank for that.  Most of my time is spent worrying about what can go wrong.  At times, my sleep suffers from this wonderful behavioral trait, but I believe our investors are well served by it.  Investment management is in essence the management of risk.  The management of risk, unfortunately, requires folks like us to worry more than others.  Plainly, this USA Today Weekend Edition worries us!  So does this week’s Barron’s Cover Story which headlines, “Our panel of savvy Wall Street strategists expect stocks to rise 10% next year as an economic expansion takes hold.”

As a reminder, the last time we expressed similar concerns was when the S&P 500 first crossed 1200, in a post titled America’s Back! on April 23rd 2010.  Back then, we worried that:

Cover stories capture current consensus sentiment.  Some recent examples of recent sentiment: Numbers Point to a Recovery; Relax, We’ll be Fine; Dow 11,000 Is Only The Beginning; Hope At Last; America’s Back; The Hot Hand; and our hands-down favorite, Double Dip? Hell, No! They say a picture’s worth a thousand words, so we encourage friends that might not be interested in reading our full letter, to at least take a good look at the picture below!

The S&P 500 quickly retreated by nearly 20% from April to June under conditions very similar to those in place today – dollar strength, emerging market underperformance, widespread complacency, rising interest rates and spiking credit spreads are just a few.  With expectations still elevated, any unexpected developments should serve as a catalyst for a sell-off.  We can imagine plenty of triggers, ranging from Chinese Inflation and the European Debt Crisis to US Housing Deflation and Currency Wars.  As we discussed in our last Broyhill Letter, an abrupt decline that cleared overbought levels and  injected renewed fear into the psyche of speculators might provide a better base for the typical Third Year Boom. We expect to take advantage of a similar entry point in the near future to participate in the Third Year Boom. We are not there yet. Stay sober in your thinking and resist the temptation to drink from the funnel of excess liquidity.  This time will prove to be no different.  There will be better times to invest.