Wednesday, April 6, 2011

Three Big Investment Thoughts from Chuck Clough

Chuck Clough spoke at the Boston Security Analysts Society yesterday.

Chuck was a top-notch strategist for Merrill Lynch for many years, and was ranked as the #1 Wall Street investment strategist for 12 straight years by Institutional Investor. He left Merrill about 10 years ago to start his own money management outfit, which has done very well.

I have been a big fan of Chuck's for many years. His modest, unassuming manner belies a very broad and deep intelligence about the capital markets. Like all strategists, he's not always perfect on timing (he was bearish too early on tech stocks in the late 1990's, for example, but was ultimately proved right) but I have always found Chuck to be worth a listen.

His presentation lasted for about 45 minutes, so I won't be able to do full justice to all of his thoughts, but I thought I would share some of the highlights.

1 Stocks: Chuck remains bullish on the stock market despite the strong gains already recorded. He noted that unlike in previous economic recovery cycles, corporate America is throwing off huge sums of cash.

Microsoft, for example, has a free cash flow yield of 13%, meaning that it will earn enough cash to equal its market capitalization in about 7 years.

Chuck was also positive on the automotive supply sector, noting that the last recession took out huge amounts of capacity that will not be coming back. This means that when auto sales improve (which they eventually will, given the average age of the U.S. cars) these companies will have huge pricing power.

2. Emerging Markets: Chuck remains very bullish on this area, and would use the most recent pullback in EM stocks as an opportunity to add to positions. He believes that the bearish commentary surrounding the Chinese financial sector is overblown, and ignores the fact that Chinese banks are largely owned by the government.

That said, Chuck would focus on the smaller and middle-sized companies in China, which have considerably better growth profiles than the larger companies.

3. Interest Rates: Chuck thinks that interest rates will stay long for a long period of time. He noted that private sector debt is nearly 3x US GDP, and this will need to at least partially repaid before significant credit demand returns. In addition, with so much debt outstanding, and rise in interest rates will have a significant impact on economic activity, and so in effect will be self-regulating.

Judging from the audience questions, there was not a lot of agreement with Chuck on this view. The consensus is still looking for interest rates to move higher, and for inflation to return, but Chuck does not agree.