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“Actually, if a chef were to concoct a gourmet investment recipe, he would likely blend a teaspoon of intelligence with a tablespoon of common sense.” Bill Gross

I’ve seen many articles and commentaries comment that the U.S. debt loads aren’t like that of Greece so we have nothing to worry about. To me, that is like saying your cholesterol level isn’t 1000 so you don’t have to worry.

A Closer Look at Debt

So, it is now over two years since the “Great Recession” began. It was debt that got us into trouble. Has anything changed for the better? Apparently not! The following information is from some recent comments from the managers at First Pacific Advisors. These are all people I know personally:

The consumer is not as well as the stock market would like us to believe. Consumers still have record levels of debt. The amount of household debt went from $7 trillion in 2000 to close to $14 trillion in 2008 or north of 120% of disposable income. This doubling in household debt is severely limiting households’ ability to maneuver. As consumers are trying to overcome record levels of debt, high unemployment levels, and severe hits to their wealth, they will get hit by the largest tax increase ever in 2011.

As of the fourth quarter of 2009, total U.S. Credit Market Debt was $52.42 trillion, down 0.21% year over year. That amount represents about 375% of GDP, which well eclipses the previous high of 260% recorded during the Great Depression.

No worries mate!!! We aren’t as bad off as Greece!

So what about the problems in Europe, the emerging countries are growing fast.

 The following is from today’s report from David Rosenberg:

 With between 40-50% of U.S. profits coming from overseas and about one-quarter of that being derived from Europe, coupled with the rising headwind from the stronger U.S. dollar, you can see why it is likely that the recent trend towards rising analyst earnings estimates is about to be broken.

The missing ingredient in investing; common sense

Bill Gross made the following comments in his May Investment Outlook:

Still, there’s never been a book called “Common Sense for Dummies,” which would be required reading in my investment class if either existed.

Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Tom Atteberry, the manager of FPA New Income

As you know, there are very few mutual fund managers I trust. I trust the managers at FPA and I have known them personally going back 25 years. I also trust Bill Gross at Pimco and have quoted him often. The rest of the mutual fund managers… they suck! That’s all I have to say about them. Remember the disaster called the Janus Funds right here in Denver?

My friend Mark provided me with the following Morningstar interview of Tom Atteberry. There are three short videos. If you listen to them you will understand that he has a good understanding of the current environment. This is what I am used to and why I have spent so much time with the managers at FPA.

http://www.morningstar.com/Cover/videoCenter.aspx?id=337521

Common sense investing

The U.S. stock market is not priced appropriately for the risks and the slowdown that the U.S. economy faces. I will find a better time to invest in the future. Unlike almost all other investment managers, I am willing to wait. It served us all very well the last decade and I expect it to serve us well in this decade. We’ll get the prices we want and the prices that make sense. Yes, we will actually use common sense.

William Mason CFA

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