After a weak August (S&P 500 Index -2.90%), the markets staged a comeback after Fed Chairman Ben Bernanke surprised the market with the 9-1 decision in favor of not tapering in its last Federal Open Market Committee meeting.
As Chairman Bernanke and the Fed explained:
In the Committee’s assessment, the downside risks to growth have diminished, on net, over the past year, reflecting, among other factors, somewhat better economic and financial conditions in Europe and increased confidence on the part of household and firms in the staying power of the U.S. recovery.
However, the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market. In addition, federal fiscal policy continues to be an important restraint on growth and a source of downside risk.
Based on Fed policy, it appears we have entered into a quagmire where continuous quantitative easing programs are needed (five years and counting) in order to eke out any economic growth. The QE wealth effect through higher stock and housing prices is central to the Fed’s plan to increase economic activity and thereby jobs.
Given the slower-than-expected economic growth and dismal job market, it will likely take several more months before the Fed starts tapering. Stocks therefore should enjoy the tailwind of QE for the foreseeable future and buying (or holding) now seems reasonable in light of a growing (albeit slowly) economy and low inflation.
QE or no QE, we endeavor to tune out the pundit noise and focus on businesses whose intrinsic values are growing, preferably forever. Just as important, we prefer to buy these prince-like businesses at toad-like prices. Five years ago there were plenty, today only a scant. The Oracle of Omaha, Warren Buffett has recently stated that “stocks are more or less fairly priced” today. Nevertheless, we will keep a keen look-out for undervalued gems.
In the third quarter, we added two new equity positions in the wireless communications space and increased our position in mortgaged-backed related securities. Ctrip.com (CTRP) is now the largest equity holding of Prudent Value. CTRP is a one-stop travel service provider in and from China. CTRP specializes in discount hotel reservations, cheap airline tickets, package tours, and information for those looking to travel China.
As we head into the fourth quarter, I remain cautiously optimistic amid ongoing sequester and debt ceiling debates. Additionally, I will continue to add positions that I believe will be accretive to the portfolio in context of bearing reasonable risk. To learn more about Prudent Value portfolio, please click here.
The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
