Gravity Capital Partners

An interesting and perhaps volatile fourth quarter is upon us. We have elections and the fiscal cliff straight ahead. Markets dislike uncertainly, making asset prices potentially marginally lower.

We estimate there is a 15% to an upwards of 31% opportunity for some reasonable re-inflation to normal valuation to be had in emerging equity securities. It wouldnt be too aggressive to even call 60%. That would bring us to an implied P/E of only 15. I dont know if itll take six months or several years to accomplish this, but this was the logic I used in getting back into the international markets quickly after having correctly anticipating the start of the sovereign debt crisis. In retrospect, we came back a little early; but I believe this move will be very fruitful in the long run.

I believe that the market activity of the last two weeks of the 3rd quarter represents an acquiescence of leading financial institutions to the likelihood of a recession. A recession is probably two thirds priced into the stock market levels as of October 4th. Several indicators have turned south and the Federal Reserve is out of bullets. Operation Twist introduced in late September was met with a vote of no confidence from Wall Street as investors sold stocks.