Monday, April 28, 2008

Jeremy Grantham Quarterly Letter

I have been eagerly waiting Jermey's latest letter. In general I find my thought patterns in overall theme recognition investing pursuing value in those themes closest to him. Jeremy has been bearish for years but he is arguably the most respected bear on the street. Even if you are a raging bull you need to know what Jeremy is saying.

This letter he completely blasts Greenspan. Sheez I have not seen anyone so bold in his overall distaste for Greenspan's polices. He also praises Paul Volcker. As a side note if you have never read Changing Fortunes by Paul Volcker you need to. It is an absolutely amazing book and a great understanding for how the financial world goes around. Not surprisingly he is still bearish talking about Mr. Hyde (the equity market) and Dr. Jekyll (the fixed income market) and how it will take time for the animal spirits of the equity market to disappear. He also discusses what primarily makes me bearish and that is the absurd earnings expectations. Also he believes the emerging markets are still the place to be and headed for a bubble. Finally as always he talks about the presidential cycles which in general I don't find very useful. Either way I think for all investors Jeremy's quarterly letter is a must read, enjoy.

The animal spirits of the stock market have been nurtured by strong fundamentals and generous credit globally and fertilized by increasing quantities of moral hazard since 1982. Stocks refuse to worry that this is indeed the end of an era, as we believe, and apparently as much of the fixed income market believes.

Look at the amazing earnings estimates for the S&P 500! On January 1 the first quarter estimate was +12%. It is now -8%. Was the credit crisis still hiding on January 1? Even now the forecast for this year is +15%. Plus 15%! What is going on? With denial skills of this magnitude it is surely not a surprise that subtleties within the equity market such as quality versus junk have been misjudged.

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