The U.S. Open and the Current Economic Environment
June 19, 2012
This past weekend, the 112th U.S. Open was played on the Lake Course at Olympic Club in San Francisco, California. The United States Golf Association (USGA) considers the U.S. Open as the toughest test in golf. Over the four-day tournament, crowds and viewers watched golf’s best struggle against a course that ultimately won out as no player in the field was able to post a four-day score under par. The winner, Webb Simpson, posted a final score of 281 — one shot over par for the tournament. I enjoyed watching the world’s best grind through each shot. But as I watched it all unfold, the Lake Course reminded me of the current stock market — tough, but fair.
The top finishers in the U.S. Open were the ones who kept the ball in play, got up and down around the green, and played the course conservatively. The longest most aggressive players struggled on this course as there was trouble at every turn and the penalty for missing in the wrong spot was great. There was an incredible premium offered to those who kept the ball out of the rough and who could find the fairway.
As we look at the current state of the markets, the Fed is begging investors to take on additional risk with their low rate environment and the accelerating inflationary policies. While many may be enticed to fall into this trap, we believe the way to win in the current environment is to play it safe and ensure you can play another round. In other words, in order to win, you must first make the cut. That’s why we have employed strategies such as the covered call stock stock strategy that provides an income yield against the underlying security. It’s also why we have increased our cash position periodically since April and why we continue to hold at least one or two short positions within our portfolios.
Since 2008, the winners are not the aggressive risk takers, but rather the methodical calculated investors who can side-step the land mines and overlook the failed Fed policy that hasn’t worked and rather focus on the fundamentals and macro environment that truly illustrates the future direction of the U.S. economy. Currently, economic data is suggesting that growth continues to slow and the market is in a confirmed correction. Therefore, we will be disciplined to not chase yield or go for a shot that offers little reward with a lot of risk. While our approach may lag in the short-term as a result of big government intervention (QE 4), we should be well-positioned once the band-aid wears off and the free markets begin to interpret the true economic data.
We’ll continue to keep the ball in play and ensure our misses leave us in a position to make our next shot easier. We’ll live to play another day and to beat the markets’ greatest test — Fed intervention.