Matt McLennan: The Collision of Macroeconomic Tectonic Plates

September 21, 2012

Have the financial markets become more stable? Is a sense of equilibrium returning to the global financial system? Several widely followed measures would seem to indicate yes.

First of all, the stock markets have been on a roll. Year to date, the S&P 500 is up by double  digits. On closer inspection, one stock has had an outsized impact. Apple’s stock has been a huge contributor to the market’s success. Its stock has more than doubled this year. It now represents about 5% of the value of the entire S&P 500 index, and it is the world’s most valuable company. It is also the market’s third largest dividend -payer after Exxon Mobil and AT&T! So to a certain extent, the market is captive to Apple’s prospects.

A bigger influence is the overall outlook for earnings, and they are going in the wrong direction. According to Standard & Poor’s, analysts are trimming their earnings forecasts for this year and next, as are companies themselves. The Financial Times recently reported that companies were three times more likely to say they would miss analysts’ expectations than beat them during the recent earnings season.

There is one area however where a decline is welcomed by most: in market volatility. A chart of the Market Volatility Index or VIX tells that story. The VIX, which hit record highs during the financial crisis and has periodically come back to haunt investors since, has subsided this year. Do we dare breathe a sigh of relief? Look to Fed chief Ben Bernanke and European Central Bank President Mario Draghi for that answer. Recently their words and actions to boost world economies have had a calming effect here in the U.S. and in Europe, but for how long?

That is one of the questions we will put to this week’s guest. He is Matthew McLennan, head of First Eagle Funds’ Global Value team and since 2008 portfolio manager of the flagship First Eagle Global Fund, as well as its Overseas and U.S. Value mutual funds. First Eagle Global is five star rated by Morningstar because of its outstanding track record and focus on capital preservation. I began the interview by asking Matt why he is worried about what is below the seemingly placid financial surface, what he calls a “collision of macroeconomic tectonic plates.”

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WEALTHTRACK Episode #913; This program was originally broadcast on September 21, 2012.

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Matt McLennan #913

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Guest Info

Matthew McLennan
Portfolio Manager
First Eagle Funds

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Consuelo MackIs the Fed effect already wearing off? After last week’s market boosting announcement of more stimulus including an open ended commitment to buy mortgage-backed securities until the job market improves, stock markets are pulling back from their multi-year highs. After falling in three of the last four trading days, the S&P 500, which reached its highest level since 2007 last week, is up 16% on the year.

Apple’s stock has been a huge contributor to the market’s success. This week’s introduction of its new iPhone 5 certainly helped. (The Wall Street Journal’s tech guru, Walt Mossberg gave it a great review in Wednesday’s Journal) Apple’s stock has more than doubled this year. It now represents about 5% of the value of the entire S&P 500 index, and it is the world’s most valuable company. Amazingly, it is also the market’s third largest dividend payer after Exxon Mobil and AT&T!

A bigger influence is the overall outlook for earnings. And they are going in the wrong direction. According to Standard & Poor’s, analysts are trimming their earnings forecasts for this year and next as are companies themselves. According to the Financial Times, companies were three times more likely to say they would miss analysts’ expectations than beat them during the recent  earnings season.

There is one area however where a decline is welcomed by most- market volatility. The Chicago Board Options Exchange Volatility Index, known as the VIX, has declined about 40% this year, putting it near a five-year low.

Have the financial markets become more stable? Is the sense of equilibrium that seems to be returning to the global financial system justified?

That is one of the questions we will put to this week’s guest. He is Matthew McLennan, head of First Eagle Funds’ Global Value team and since 2008 portfolio manager of the flagship First Eagle Global Fund, as well as its Overseas and U.S. Value mutual funds. First Eagle Global is rated five-star by Morningstar because of its outstanding track record and focus on capital preservation. I’ll begin the interview by asking Matt why he is worried about what is below the seemingly placid financial surface- what he calls a “collision of macroeconomic tectonic plates.”

We have a new and improved feature on our website. In our WEALTHTRACKEXTRA section, we are asking our guests for more personal insights that we don’t have time to include on our investment focused program. This week, Matt McLennan talks about  techniques he uses to keep his mind fresh in his pressure cooker existence as a global money manager. I hope you enjoy these conversations as much as we do. And for those of you who would like to see our programs 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.

Have a great weekend and make the week ahead a profitable and a productive one!

Best regards,

Consuelo

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One Investment

THE ONE INVESTMENT

McLENNAN: DISCIPLINED MANAGEMENT

Microsoft Corp. (MSFT)
Price: $31.05 on 9/19/12
52-week range: $24.26 – $32.95

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“Well, a good example of a company that’s done all of that is a company that’s really going through its own Pepsi Challenge right now, which is Microsoft. People love to hate Microsoft. Yet, it’s a truly embedded company. If you think of the IT departments of most world companies, they’re based around supporting Microsoft software, be it office products, be it the email systems, be it the service. Microsoft powers not only the majority of operating systems in the world, but 75% of all servers in the world. So they’re truly embedded in the enterprise, and a lot of their revenues are recurring. And if you look at their EBIT stream, or their operating profit stream over the last decade, it looks more like a consumer staple than it does a tech company. So there’s a business that has a dominant position. That dominant position has translated through to its earnings power growing with the world nominal economy. It’s listed in the U.S., but it’s truly global. It’s not in a play in one part of the world economy. And during that period of time, they’ve shrunk their share account quite dramatically, so the intrinsic value is accreting on a per share basis, and you have a dividend yield that’s nearly twice that of the Treasury.”
– Matthew McLennan

Transcript

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Archive

#832- 2/3/12
Matthew McLennan, the hand-picked successor to legendary investor Jean Marie Eveillard, tells us where he is finding value with less volatility for the First Eagle funds now.

#725 on 12/17/10
A powerful financial duo! Goldman Sachs’ veteran investment strategist, Abby Joseph Cohen and First Eagle Fund’s global value manager Matthew McLennan, discuss the new world economic order and how investors can take advantage of it.

602 | 10-08-10
Consuelo will ask three investment pros how they intend to make money in the New Year in stocks, bonds and foreign markets. BlackRock’s Chief Equity Strategist Bob Doll runs three highly respected large cap funds; First Eagle Fund’s Matthew McLennan just took over the global investment helm from legendary value investor Jean-Marie Eveillard; and veteran bond manager Marilyn Cohen just published her new book ‘Bonds Now!’.

 


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