Tuesday, August 10, 2010

Whitney Tilson Becomes More Bearish on Economic Prospects of the U.S.

Hedge fund manager Whitney Tilson of T2 Partners - well known to viewers of financial entertainment TV (CNBC) - has his monthly note out.  While I am not that interested in his stock specific views since he is a deep value "buy and hold" type of investor (not that there is anything wrong with that, just a completely different style) - I was struck by his commentary on the economy.  It is starting to fall in line with my views.

He lays out 3 scenarios and was leaning to the muddle through outcome (#2) but now appears to be tilting more to #2 or #3.  Those would be my own 2 outcomes as well due to the structural imbalances in the country and nature of globalization on the labor force that have been papered over for a decade or two.  The only difference between the 2 outcomes will be how much money the federal government and central bank apply to the economy to create an illusion.  Judging from their performance in the past 24 months the answer seems "limitless".  So perhaps the "nirvana" of outcome #2 can continue as we kick the proverbial can ever more.  Which is exactly what we've been doing thus far - placing a mountain of manipulation inside of a recession to create a statistical "recovery"....

From Tilson:

In general, we believe that in the aftermath of the bursting of the biggest asset bubble in history, we are in uncharted waters and there is a very wide range of possible outcomes over the next 2-7 years. Broadly speaking, they fall into three scenarios:

1) A V-shaped economic recovery with strong GDP growth (3-5%), a falling unemployment rate, and reduced government deficits. Under this scenario, the stock market would likely compound at 7-10%.

2) A “muddle-through” economy with weak GDP growth (1-2%), unemployment remaining high (7-9%), and continued government deficits. Under this scenario, the stock market would likely compound at 2-5%.

3) A double- (and triple-, and quadruple-) dip recession where periods of growth are followed by periods of contraction, with no overall GDP growth, unemployment around 10% (with the actual level higher due to people giving up looking for work), and large deficits as the government tries to stimulate the economy (but with little impact). Under this scenario, which looks like what Japan has gone through for more than two decades, the stock market would be flat to down.

Both as investors and as Americans, we’re of course hoping for 1), but fear that this is the least likely of these scenarios. A few months ago, we would have guessed (and it’s no more than an educated guess) that the odds were 25%, 50% and 25%, respectively, but in light of recent weak economic indicators, the odds have shifted unfavorably. Hence, we are positioning our portfolio more conservatively, trimming some of our longs, adding to our short book, and increasingly shifting our long portfolio into big-cap, strong-balance-sheet, dominant-market-position blue chips like Berkshire Hathaway, AB InBev and Microsoft, as well as short-duration, special situation investments like BP and Liberty Acquisition Corp. warrants.

Full letter below - hit full screen for an easier read


Hat tip ZeroHedge

[Nov 4, 2009: Whitney Tilson T2 Partners October 2009 Investor Letter; Housing Recovery Still Has Long Way to go]

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