Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Bill Miller Commentary

Bill Miller Commentary

Ratings: (0)|Views: 444|Likes:
Published by eric695

More info:

Published by: eric695 on Dec 16, 2010
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





Legg MasonCapitalManagementMarketCommentaryNovember2010
The 70% solution
 “…we have involved ourselves in a colossal muddle,having blundered in the control o a delicate machine,the working o which we do not understand.”
J.M. Keynes, “The Great Slump of 1930” 
 …i we consistently act on the optimistic hypothesis,this hypothesis will tend to be realised; whilst byacting on the pessimistic hypothesis we can keepourselves or ever in the pit o want.
J.M. Keynes, “Essays in Persuasion” 
The diering approaches being taken to the economicproblems arising rom the fnancial crisis o 2008, andthe debates between those avoring greater stimulusand those advocating austerity, show that Keynes’words are as true today as they were 80 years ago. Brit-ain is slashing government spending while the FederalReserve Board is about to embark on another round ounconventional stimuli via asset purchases. Both policieshave engendered vigorous debate about their eective-ness and their consequences, and the advocates andtheir opposites are equally adamant that they are right.“Certitude is not the test o certainty. We have been cock-sure o many things that were not so,” as Justice Holmeswisely noted.
Batterymarch • Brandywine Global • ClearBridge Advisors •Legg Mason Capital Management • Legg Mason Global Equities GroupPermal • Private Capital Management • Royce & Associates • Western Asset Management
Bill Miller, CFAChairman, Chief Investment Ofcer and Portfolio Manager 
Past performance is no guarantee of future results. All investments involve risk, including possible loss of principal. Investments in equity securities are subject to price uctuation and possible loss of principal.
Legg Mason Perspectives
 |Market CommentaryWe all may have views on what the governmentshould do, but as investors we are better served byocusing on what they will or are likely to do, andhow those actions may aect the capital markets.This is no easy task, as the markets are continuous-ly revising asset prices as new inormation arrivesor probabilities change.Just now, as the Fed embarks on a second roundo quantitative easing, there’s a lot o noise anduncertainty about whether the announced $600 bil-lion is enough, how big the asset purchases mightultimately become, whether the program is alreadydiscounted in prices, whether it will engender toomuch ination, and so on. Lots o questions.The answer is, nobody knows. This is an experi-ment being perormed on a tightly coupled, highlyinterdependent, complex adaptive system, “adelicate machine the working o which we do notunderstand.” I we did understand it, we would notnow be in the present predicament. So, as withmost things involving markets, a good deal o hu-mility is called or, but is not much in evidence.I think it’s helpul to recall what is prompting QE2.The Fed employs monetary policy in pursuit o adual mandate: ull employment and price stability,neither o which is currently being achieved. Thenormal tool or this, the ederal unds rate
, can’tgo lower, so they are driven to try other methods,in this case asset purchases. The important pointis that they will continue to purchase assets, injectliquidity into the system, and grow their balancesheet until they are convinced their objectives areon the way to being met. QE2 will last as long andbe as big as necessary to do that.The transmission mechanism, the way this is sup-posed to work, is through higher asset prices, par-ticularly stock prices. The Fed wants the stock mar-ket to go up, and they will do what’s necessary toget it to whatever level it takes or the wealth eecto higher stock prices to stimulate growth, hiring,and ination expectations o around 2%. WhenChairman Bernanke signaled this in late August, ittook the market a ew days to digest it, then stocksbegan a rally that took us up around 10% goinginto the election and the FOMC
meeting. Ater theelection and the President’s signaling a willing-ness to extend the Bush tax cuts or everyone, andonce the Fed made clear what the QE2 policy was,we’ve had another spurt higher. In an editorial inthe Washington Post, Chairman Bernanke wroteexplicitly o the desire to get asset prices, bothstocks and bonds, higher. There is a lot more to goin the next twelve months, in my opinion, in stocksi not in bonds. That’s 12 months, not 12 days or12 weeks. I think the market can be up another15% in the next year, and perhaps more, depend-ing on how the economy does.
The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at theFederal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day.
The FOMC is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economicgrowth, full employment, stable prices, and a sustainable pattern of international trade and payments.
Legg Mason Perspectives
 |Market CommentaryStock prices today have just recovered to where they were two weeks ater Lehman collapsed, when theworld was alling apart. As the table below shows, most measures o fnancial health have returned to lev-els prevailing beore the demise o Lehman, but not stocks. The economy is expanding, liquidity is ample,ination is under control, profts are growing rapidly and are set to pass their all time high, nominal GDP
 is at its all time high and real GDP will have ully recovered to its all time high within a quarter-two at themost, proft margins are at record levels, and corporate balance sheets are the best they’ve ever been, yetstocks languish below where they were in late August 2008, and that was hardly a bull market.One o the most remarkable things about the investing world is how (correctly) venerated WarrenBuett is and how completely people ignore his investing advice. Since Mr. Buett has made moremoney than anyone in the history o the planet solely through investing, one would think that whenhe says quite clearly what to invest in, people would pay attention. I guess they do pay attention,they just do the opposite. In 1974, near the bottom o the market, he said stocks were so cheap heelt like an over-sexed guy in a harem. In 1999, near the top, he opined that stocks would see returnsway below those experienced in the bull market up to that time. From the time o his comments inNovember 1999 to the end o October 2008, stocks ell over 2% per year. In October 2008, again nearthe bottom, Buett published an op-ed in The New York Times entitled, “Buy American. I Am.” tellingpeople to buy American stocks. They promptly accelerated their selling. On October 5th o this year,he said the ollowing: “It is quite clear stocks are cheaper than bonds. I can’t imagine anybody hav-ing bonds in their portolio when they can own equities.The result: people pour their money intobond unds in record amounts, and sell their holdings in unds that invest in U.S. stocks. Why inves-tors persist in doing the opposite o what the greatest investor o all time does, is a greater mysterythan the problem o consciousness, or the origin o lie, or ree will and determinism. Those at leastare hard problems.What will bring the public back to stocks? The same thing that always does: higher prices. People likebonds not because they have careully considered the risks and rewards o owning them, but becausethey have gone up so much over the past several decades. Stocks are the long duration asset, andtheir level reects people’s optimism about the uture and their attitude toward risk. The objectiveo QE2 is to raise asset values, increase confdence, and stimulate spending and hiring. It will work,because they will continue it, or its successors, until it does. This is not an endorsement o the policy,just a statement that I think the Fed has the tools to change the aggregate portolio preerences towardriskier assets, and that it intends to use them.
Gross Domestic Product (“GDP”) is the market value of all nal goods and services produced within a country in a given period of time.Pre-LehmanAugust 29, 2008Peak of credit spreadsNovember 28, 2008Stock market bottomMarch 9, 2009November 12, 2010S&P 5001,2838966771,199Credit Spreads (bps)High-yield7941,8331,684561Investment grade304607542164LIBOR-OIS7817810511Dollar Index77878978VIX21555021
Past performance is no guarantee of future results.
This table is for illustrative purposes only. Please note an investor cannot directlyinvest in an index.

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->