Still Bearish in 2007

Yesterday, we asked the question, “Are We Too Bearish?”  Today, we’ll explore The Broyhill Letter’s track record in 2007, which admittedly, would not have left the “buy and hold” crowd feeling warm and fuzzy about their overly aggressive equity allocations.  We all know how this one played out.  But rather than point figures at the local bear, investors would have been well served by shifting a portion of their sacramental equity allocation toward a few of the investments we were quite bullish on during the year.  Let’s have a look:

Our first letter of the year described our bullish thesis on the Japanese Yen as the market had gotten “carried” away to the downside.  In it, we explained that, “Fundamentally, the yen provides us with an opportunity to purchase a severely undervalued asset that should also provide us with insurance should the carry trade begin to unwind further pressuring global equity markets. Experience tells us that when market movements begin with such a flurry, the tendency is to call it over too soon and to underestimate the follow-on magnitude.”

For the record, JPY bottomed in June 2007 at 123.89 and was one of a very select group of assets that rose in 2008, gaining nearly 23% in a year when many global equity markets were chopped in half. The Yen ultimately went on to rally roughly 60% to 75.82, until recent commentary from newly elected Japanese officials have indicated a desire and a commitment to weaken the currency.  The resulting shift in trend has been very sharp and quite dramatic, as shown below.  More on this next week.

In the second quarter of 2007, we cautioned investors of More Trouble Ahead and encouraged all to Reduce Risk.  Okay, some might say that this one was pretty bearish.  But, come on!  It was Q2-07 and we were staring at one of the worst global financial crises in history.  A stern and strongly-worded warning seemed very appropriate to get this message across.  Here’s a brief excerpt from that piece:

“This month, Bear Stearns became the first swimmer exposed in what appears to be a receding tide of easy money. It probably won’t be the last. Investors continue to be willing to accept risk for very little incremental reward. In this environment, any event that causes investors to focus more on downside risks can have an outsized impact, especially when markets are as frothy, and investors are as complacent, as we find them today. Liquidity will tighten, credit spreads will widen, risk premiums will increase.”

Don’t say we didn’t warn you!

Friends that know me well, also know that gold has been my single best investment idea every year since joining Broyhill in 2005.  I suppose others might say that I am quite predictable or possibly incapable of saying anything new.  But why stray from what works?  Oddly enough, I really hadn’t considered gold as an investment alternative prior to joining Broyhill, since it was very much considered a barbarous relic by former employer until just a few years ago, as far as I can tell.

So naturally, the third edition of The Broyhill Letter reviewed our bullish investment thesis on gold, which has not changed since then.  In fact, gold was also the first post ever written at View from the Blue Ridge, here.  Back in 2007, we said:

“We have long held strong views on gold and have positioned portfolios accordingly over the last several years. Unfortunately, we now live in a world where geopolitical risks are unlikely to drift lower for any extended period of time. As fiduciaries entrusted with our clients’ wealth, we remain very comfortable holding a material position in precious metals allowing for a surge of safe haven demand at any time.”

That safe haven demand arrived right on time.  In 2007, gold was trading around $600 per ounce.  It has since rallied to $1900 before consolidating recently.  I’d venture to say that this is the only chart that moves directly from the lower left, to the upper right corner over this time period.  Most importantly, it has gained every year including 2008, when  the precious metal gained roughly 5% amidst a steep fall in all risk assets.  As it’s been over five years since we last dedicated a letter to our “single best investment idea,” expect to see an update from us in the near future.

Our final letter of 2007 argued for a long (i.e. bullish) position in the Almighty Dollar.  In short, “We think the dollar, for the time being, is oversold and approaching a bottom. Sentiment could hardly be worse for the greenback. It is cheap, unusually cheap against many of the currencies in which we transact.”  The dollar went on to rally about 5% in 2008, including a 24% surge at the peak of the crisis.

I imagine that the great majority of investment strategists on “the street” regret the advice they sold to their clients in the years leading up to Lehman’s failure.

Looking at the world through rose-colored glasses is an excellent way to provide your family with job security, to keep your investment bank or brokerage boss happy and, generally speaking, to sound right more often than not.  But it is NOT a prudent means of handling your own investments or those of your clients. 

We are quite proud of The Broyhill Letter’s track record in 2007.  We’d argue that our Q2-07 letter – the one with the big, bad bearish tilt – was sound advice.  And by our count, three out of four “bullish” recommendations is pretty strong.  That’s even better than Meatloaf’s math, who calculates that Two Out of Three Ain’t Bad.