The Energy Report: In a recent research report, you looked at the macroeconomic picture through the lens of value investing. You call the macro view “complex” and “historically unusual.” In the context of certain uncertainty, could you please provide us with three principles that guide your investment decisions in today’s market?
Randall Abramson: The reality of the day is that we have historically low interest rates and a number of crosscurrents moving through the economy. At Trapeze Asset Management we’ve developed tools, some of which we have systematized since the big downturn in 2008–2009, to cope with periods like this. We use our valuation model from a bottom-up perspective to tell us where the individual bargains are, and from a top-down perspective to tell us, in general, whether the markets or sectors are overvalued, undervalued or fairly valued. Today, our work tells us that the market has been hugging fair value pretty closely for about a year, which is unusual. That one tool helps us establish where the markets are and where they ought to be heading.
The second thing that guides us is the macroeconomic overlay. We have an economic composite and a momentum indicator, both of which are designed to predict whether there is a recession coming and/or a market debacle—not a typical correction but one of those 20% or more doozies. At the moment, our economic composite is showing smooth sailing, not just in the U.S. but also in other global economies. Our momentum indicators show relatively smooth sailing too, though a few countries, including Russia, Brazil and Peru, have negatively triggered.
And, finally, we try to determine which way the world is going. Disinflationary pressures and the ascent of the U.S. dollar …read more