It’s the Earnings, Stupid: “Atrocious” Q3 Turns Josh Brown Cautious
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Josh Brown won't make any big calls on the outcome of the presidential election. Brown, the author of widely read "The Reformed Broker" blog and a vice president at asset management firm Fusion Analytics, says market reaction to the next president will be "huge" and some people will be rewarded handsomely for their bets. Hospital REITs could see a 10% pop if Obama wins, Brown believes, while a Romney victory means a boost for traditional pharmaceutical stocks.
But that momentum will fade and investors will redirect their attention to the looming crisis in Washington: the convergence of massive automatic tax increases and spending cuts — more commonly referred to as the "fiscal cliff." These concerns, coupled with decelerating corporate earnings, have convinced Brown to reduce exposure to equities and take a cautious investing approach as the year comes to a close.
"This third quarter earnings season was just atrocious and the guidance was not that much better," Brown says in an interview with The Daily Ticker. "The top line is slowing noticeably and no one is immune to what's going on overseas."
Fusion Analytics sent a letter to clients at the end of October explaining the bearish tone:
"We are seeing increasing signs that the cyclical bull market that began in March 2009 may be -- finally -- coming towards its end. In light of this, we have cut back on some major holdings, and raised our cash levels to 25% in the asset allocation models. We removed half of our energy positions, and eliminated our emerging markets exposure. We never know for sure when a cycle ends, but when we see early warning signs that put us on alert, we take proactive steps to protect capital and manage risk. We always make gradual and infrequent moves, highly cognizant of the possibility we will be wrong. A move above the September highs will cause us to rethink this defensiveness."
Brown says the firm still has exposure to the market but he's moved a larger portion of clients' money into cash. The only sector he continues to view positively is healthcare, but that's because other areas of the market are underperforming.
"Healthcare is not a bull market but it's the best acting group," he says. "You can't have a whole portfolio in one sector. There needs to be more leadership."
Brown and his team have also cut the firm's energy assets in half, eliminated emerging markets exposure and slashed its S&P 500 dividend allocation by 50%. Stocks like Johnson & Johnson (JNJ), Merck (MRK), and Visa (V) are some of the firm's largest holdings because they're safe harbors if the U.S. economy falls back into recession -- which Brown puts the odds of happening at 60% in the next 18 months.
"We'd love for us to stay fully long and look at this from a 20-year perspective but the reality is the earnings picture is very dire and seems to be getting worse," he says.
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