When a guy beats the market for 15 years in a row, it is in all our interest to listen to what he says.
"The equity sell-off on October 19 was precipitated by the market's reaction to the earnings of two stalwarts of the commodities cabal, Caterpillar (CAT) and Schlumberger (SLB), both of which surprised their fans by issuing less than stellar guidance. Cat went so far as to opine that the US might be in recession already; its earnings gains were solely due to non-US growth.
If credit is becoming harder to come by, if spreads are widening, if growth is slowing, then it seems to me the leadership is about to change. The same strategies that led when the global economy was emerging from fears of deflation and entering a period of accelerating growth and synchronized recovery are very low probability bets to lead if the global economy is peaking, the US is slowing appreciably, and credit spreads are widening, not narrowing.
Where will the new leadership come from? The same place it usually does: the old laggards. I think the new leadership will be US, large-cap, dollar-based, and grow to encompass what no one wants to own today, especially financials and consumer. I also think so-called growth stocks will continue to do fine. When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable.
More particularly, just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next 5 years will be made in those securities people are panicked about today. For specific names, consult the 52-week new low list."
52 Week low financial? Washington Mutual (WM), Citigroup (C), Wachovia (WB), Bank of America (BAC), Wells Fargo (WFC) Merill Lynch (MER) and every homebuilder.
We have been buying Citigroup, Wachovia and Goldman Sachs since the late summer and financials now make up almost 60% of the portfolio. Like Miller, I am expecting big gains over the next several years out of this group. I also expect some short term pain and hey, no pain no gain, right?
Read Miller's full letter here: