Posts tagged ‘Nouriel Roubini’

Arm Wrestling the Economy & Tariffs

 

Financial markets have been battling back and forth like a championship arm-wrestling match as economic and political forces continue to collide. Despite these clashing dynamics, capitalism won the arm wrestling match this month as investors saw the winning results of the Dow Jones Industrial Average adding +4.7% and the S&P 500 index advancing +3.6%.

Fueling the strength this month was U.S. economic activity, which registered robust 2nd quarter growth of +4.1% – the highest rate of growth achieved in four years (see below).

The job market is on fire too with U.S. jobless claims hitting their lowest level in 48 years (see chart below). This chart shows the lowest number of people in a generation are waiting in line to collect unemployment checks.

Source: Dr. Ed’s Blog

If that isn’t enough, so far, the record corporate profits being reported for Q2 are up a jaw-dropping +23.5% from a year ago. What can possibly be wrong?

Excess Supply of Concern

While the economic backdrop is largely positive, there is never a shortage of things to worry about – even during decade-long bull market of appreciation. More specifically, investors have witnessed the S&P 500 index more than quadruple from a March 2009 low of 666 to 2,816 today (+322%). Despite the massive gains achieved over the last decade, there have been plenty of volatility and geopolitics to worry about. Have you already forgotten about the Flash Crash, Arab Spring, Occupy Wall Street, Government Shutdowns, Sequestration, Taper Tantrum, Ebola, Iranian nuclear threat, plunging oil prices, skyrocketing oil prices, Brexit, China scares, Elections, and now tariffs, trade, and the Federal Reserve monetary policy?

Today, tariffs, trade, Federal Reserve monetary policy, and inflation are top-of-mind investor concerns, but history insures there will be new issues to worry about tomorrow. Ever since the bull market began a decade ago, there have been numerous perma-bears incorrectly calling for a deathly market collapse, and I have written a substantial amount about these prognosticators’ foggy crystal balls (see Emperor Schiff Has No Clothes [2009] & Clashing Views with Dr. Roubin [2009]. While these doomsdayers get a lot less attention today, similar bears like John Hussman, who like a broken record, has erroneously called for a market crash every year for the last seven years (click chart link).

Although many investment accounts are up over the last 10 years, many people quickly forget it has not been all rainbows and unicorns. While the stock market has more than quadrupled in value since 2009, we have lived through about a dozen alarming corrections, including the worrisome -12% pullback we experienced in February. If we encounter another -5 -10% correction this year, this is perfectly healthy, normal, and should not be surprising. More often than not, these temporary drops provide opportunistic openings to scoop up valued bargains.

Longtime readers and followers of Sidoxia’s investment philosophy and Investing Caffeine understand the majority of these economic predictions and political headlines are useless noise. Social media, addiction to smart phones, and the 24/7 news cycle create imaginary, scary mountains out of harmless molehills. As I have preached for years, the stock market does not care about politics and opinions – the stock market cares about 1) corporate profits (at record levels) – see chart below; 2) interest rates (rising, but still near historically low levels); 3) the price of the stock market/valuation (which is getting cheaper as profits soar from tax cuts); and 4) sentiment (a favorable contrarian indicator until euphoria kicks in).

Source: Dr. Ed’s Blog

Famed investor manager, Peter Lynch, who earned +29% annually from 1977-1990 also urged investors to ignore attempts of predicting the direction of the economy. Lynch stated, “I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”

I pay more attention to successful long-term investors, like Warren Buffett (the greatest investor of all-time), who remains optimistic about the stock market. As I’ve noted before, although we remain constructive on the markets over the intermediate to long-term periods, nobody has been able to consistently prophesize about the short-term direction of financial markets.

At Sidoxia, rather than hopelessly try to predict every twist and turn in the market, or react to every meaningless molehill, we objectively analyze the available data without getting emotional, and then take advantage of the opportunities presented to us in the marketplace. Certain asset classes, stocks, and bonds, will constantly move in and out of favor, which allows us to continually find new opportunities. A contentious arm wrestling struggle between uncertain tariffs/rising interest rates and stimulative tax cuts/strong economy is presently transpiring. As always, we will continually monitor the evolving data, but for the time being, the economy is flexing its muscle and winning the battle.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

August 1, 2018 at 2:41 pm Leave a comment

Predictions – A Fool’s Errand

Making bold predictions is a fool’s errand. I think Yogi Berra summed it up best when he spoke about the challenges of making predictions:

“It’s tough to make predictions, especially about the future.”

 

While making predictions might seem like a pleasurable endeavor, the reality is nobody has been able to consistently predict the future (remember the 2012 Mayan Doomsday?), besides perhaps palm readers and Nostradamus. The typical observed pattern consists of a group of well-known forecasters bunched in a herd coupled with a few extreme outliers who try to make a big splash and draw attention to themselves. Due to the law of large numbers, a few of these extreme outlier forecasters eventually strike gold and become Wall Street darlings…until their next forecasts fail miserably.

Like a broken clock, these radical forecasters can be right twice per day but are wrong most of the time. Here are a few examples:

Peter Schiff: The former stockbroker and President of Euro Pacific Capital has been peddling doom for decades (see Emperor Schiff Has No Clothes). You can get a sense of his impartial perspective via Schiff’s reading list (The Real Crash: America’s Coming Bankruptcy, Financial Armageddon, Conquer the Crash, Crash Proof – America’s Great Depression, The Biggest Con: How the Government is Fleecing You, Manias Panics and Crashes, Meltdown, Greenspan’s Bubbles, The Dollar Crisis, America’s Bubble Economy, and other doom-instilled titles.

Meredith Whitney: She made an incredible bearish call on Citigroup Inc. (C) during the fall of 2007, alongside her accurate call of Citi’s dividend suspension. Unfortunately, her subsequent bearish calls on the municipal market and the stock market were completely wrong (see also Meredith Whitney’s Cloudy Crystal Ball).

John Mauldin: This former print shop professional turned perma-bear investment strategist has built a living incorrectly calling for a stock market crash. Like perma-bears before him, he will eventually be right when the next recession hits, but unfortunately, the massive appreciation will have been missed. Any eventual temporary setback will likely pale in comparison to the lost gains from being out of the market. I profiled the false forecaster in my article, The Man Who Cries Bear.

Nouriel Roubini: This renowned New York University economist and professor is better known as “Dr. Doom” and as one of the people who predicted the housing bubble and 2008-2009 financial crisis. Like most of the perma-bears who preceded him, Dr. Doom remained too doom-ful as the stock market more than tripled from the 2009 lows (see also Pinning Down Roubini).

Alan Greenspan: The graveyard of erroneous forecasters is so large that a proper summary would require multiple books. However, a few more of my favorites include Federal Reserve Chairman Alan Greenspan’s infamous “Irrational Exuberance” speech in 1996 when he warned of a technology bubble. Although directionally correct, the NASDAQ index proceeded to more than triple in value (from about 1,300 to over 5,000) over the next three years. – today the NASDAQ is hovering around 6,100.

Robert Merton & Myron Scholes: As I chronicled in Investing Caffeine (see When Genius Failed), another doozy is the story of the Long Term Capital Management hedge fund, which was run in tandem with Nobel Prize winning economists, Robert Merton and Myron Scholes. What started as $1.3 billion fund in early 1994 managed to peak at around $140 billion before eventually crumbling to a capital level of less than $1 billion. Regrettably, becoming a Nobel Prize winner doesn’t make you a great predictor.

Words From the Wise

Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners like Billy Beane (minority owner of the Oakland Athletics and subject of Michael Lewis’s book, Moneyball), who stated the following:

“The crime is not being unable to predict something. The crime is thinking that you are able to predict something.”

 

Other great quotes regarding the art of predictions, include these ones:

“I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

-Peter Lynch

“Many more investors claim the ability to foresee the market’s direction than actually possess the ability. (I myself have not met a single one.) Those of us who know that we cannot accurately forecast security prices are well advised to consider value investing, a safe and successful strategy in all investment environments.”

–Seth Klarman

 “No matter how much research you do, you can neither predict nor control the future.”

John Templeton

 “Stop trying to predict the direction of the stock market, the economy or the elections.”

–Warren Buffett

“In the business world, the rearview mirror is always clearer than the windshield.”

–Warren Buffett

In the global financial markets, Wall Street is littered with strategists and economists who have flamed out after brief bouts of fame. Celebrated author Mark Twain captured the essence of speculation when he properly identified, “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.” Instead of attempting to predict the future, investors will avoid a fool’s errand by simply seizing opportunities as they present themselves in an ever-changing world.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 20, 2017 at 10:46 pm 2 comments

Dow 20,000 – Braking News or Breaking News?

Signature:2a0f6d0366f291694bd9cc422bff24b12e1d3afd88bc0ed09c9a8814df3c0837

Investors from around the globe excitedly witnessed the Dow Jones Industrial Average index break the much-anticipated 20,000 level and set a new all-time record high this week. The question now becomes, is this new threshold braking news (time to be concerned) or breaking news (time to be enthused)? The true answer is neither. While the record 20,000 achievement is a beautifully round number and is responsible for a bevy of headlines splashing around the world, the reality is this artificial 20,000 level is completely arbitrary.

Time will tell whether this random numeric value will trigger the animal spirits of dispirited investors, but given all the attention, it is likely to jolt the attention span of distracted, ill-prepared savers. Unfortunately, the median family has only saved a meager $5,000 for retirement. For some years now, I have highlighted that this is the most hated bull market (see The Most Hated Bull Market Ever), and Gallup’s 2016 survey shows record low stock ownership, which also supports my view (chart below). Trillions of dollars coming out of stock funds is additional evidence of investors’ sour mood (see fund outflow data).

gallup-poll-2016

While investors have been selling stocks for years, record corporate profits, trillions in share buybacks, and trillions of mergers and acquisitions (in the face of a weak IPO market) have continually grinded stock prices to new record highs.

Pessimism Sells

The maligned press (deservedly so in many instances) has been quick to highlight a perpetual list of dread du jour. The daily panic-related topics do however actually change. Some days it’s geopolitical concerns in the Middle East, Russia, South China Sea, North Korea, and Iran and other days there are economic cries of demise in China, Brazil, Venezuela, or collapse in the Euro. And even when the economy is doing fine (unemployment rate chopped in half from 10%, near full employment), the media and talking heads often supply plenty of airtime to impending spikes of crippling inflation or Fed-induced string of choking interest rate increases.

I fondly look back on my articles from 2009, and 2010 when I profiled schlocks like Peter Schiff (see Emperor Schiff Has No Clothes) who recklessly peddled catastrophe to the masses. I guess Schiff didn’t do so well when he called for the NASDAQ to collapse to 500 (5,660 today) and the Dow to reach 2,000 (20,000 today).

Or how about the great forecaster John Mauldin who also piled onto death and destruction near the bottom in 2009 (see The Man Who Cries Wolf ). Here’s what Mauldin had to say:

“All in all, the next few years are going to be a very difficult environment for corporate earnings. To think we are headed back to the halcyon years of 2004-06 is not very realistic. And if you expect a major bull market to develop in this climate, you are not paying attention.” … “We are going to pay for that with a likely dip back into a recession.”

 

At S&P 856 (2,295 today) Mauldin added:

“This rally has all the earmarks of a major short squeeze…When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.”

 

Nouriel Roubini a.k.a. “Dr Doom” was another talking head who plastered the airwaves with negativity after the 2008-2009 financial crisis that I also profiled (see Pinning Down Roubini). For example, in early 2009, here’s what Roubini said:

“We are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.”

 

For long-term investors, they understand the never-ending doom and gloom headlines are meaningless noise. Legendary investor Peter Lynch pointed on on numerous occasions:

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”

 

(see also Peter Lynch video)

The good news is all the media pessimism and investor skepticism creates opportunities for shrewd investors focusing on key drivers of stock price appreciation (corporate earnings, interest rates, valuations, and sentiment).

While the eternally, half-glass full media is quick to highlight the negatives, it’s interesting that it takes an irrelevant, arbitrary level to finally create a positive headline for a new all-time record high of Dow 20,000. Frustratingly, the new all-time record highs reached by the Dow in 2013, 2014, 2015, and 2016 were almost completely ignored (see chart below):

Source: Barchart.com

Source: Barchart.com

What happens next? Nobody knows for certain. What is certain however is that using the breaking news headlines of Dow 20,000 to make critical investment decisions is not an intelligent long-term strategy. If you, like many investors, have difficulty in sticking to a long-term strategy, then find a trusted professional to help you create a systematic, disciplined investment strategy. Now, that is some real breaking news.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 29, 2017 at 2:34 am Leave a comment

Airbag Protection from Pundit Backseat Drivers

Backseat Driver

Giving advice to a driver from the backseat of a car is quite easy and enjoyable for some, but whether that individual is actually qualified to give advice is another subject. In the financial blogosphere and media there is an unending mass of backseat drivers recklessly directing investors off cliffs and into walls, but unfortunately there are no consequences for these blabbers. It’s the investors who are driving their personal portfolios that ultimately suffer from crashed financial dreams.

Unlike drivers who mandatorily require a license to drive to the local grocery store, bloggers, journalists, economists, analysts, strategists (aka “pundits”), and any other charismatic or articulate individual can emphatically counsel investors without any credentials, education, or licenses. More importantly than a piece of paper or letters on a business card, many of these self-proclaimed experts have little or no experience of investing real money…the exact topic the pundits are using to direct peoples’ precious and indispensable lifesavings.

It’s easy for bearish pundits like Peter Schiff, Nouriel Roubini, John Mauldin, and David Rosenberg (see also The Fed Ate My Homework) to throw economic hand grenades with their outlandishly gloomy predictions and fear mongering. However, more important than selling valuable advice, the pundit’s #1 priority is selling a convincing story, whether the story is grounded in reality or not. The pundit’s story is usually constructed by looking into the rearview mirror by creatively connecting current event dots in a way that may seem reasonable on the surface.

Crusty investors who have invested through various investment cycles know better than to pay attention to these opinions. As the saying goes, “Opinions are like ***holes. Everybody has one.” Stated differently, the great growth investor William O’Neil said the following:

“I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable.”

 

Successful long-time investors like Warren Buffett rarely make predictions about the short-term directions of the market. Long-term investors know the only certainty in the market is uncertainty. At the core, investing is a game of probabilities. The objective of the game is to place your bets on those investments that establish the odds in your favor. As in many professions, however, the right process can have a negative outcome in the short-run. Those talented investors who have experience consistently applying a probabilistic approach generally do quite well in the long-run.

There is an endless multitude of investing advice, regardless of whether you choose to consume it over the TV, in newspapers, or through blogs. That’s why it’s so important to be discerning in your financial media consumption by focusing on experience…experience is the key. If you were to undergo a heart surgery, would you want a nurse or experienced doctor who had performed 2,000 successful heart surgeries? When you fly cross-country, do you want a flight attendant to fly the plane or a 20-year veteran pilot? I think you get the point.

The other factor to consider when comparing advice from a media pundit vs. experienced investor is skin in the game. Investment advisers who have their personal dollars at stake typically have spent a significantly larger amount of time formulating an investment thesis or strategy as compared to a loose-cannon TV journalist or inexperienced, maverick blogger.

There is a lot to consider as you maneuver your investment portfolio through volatile markets. With all the dangerous advice out there from backseat drivers, make sure you have experienced investment advice installed as protective airbags because listening to inexperienced air bags (pundits) could crash your portfolio into a wall.

 

Related Content: Financial Blogging Interview on Charlie Rose w/ Joe Weisenthal, Josh Brown, Felix Salmon, and Megan Murphy

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 22, 2014 at 11:12 am Leave a comment

Get Out of Stocks!*

Signature:1aa0edd3f00ecb0adc8aa215f572f8061f81f2bd7ee14d34f53c48d50acdcb69

Get out of stocks!* Why the asterisk mark (*)? The short answer is there is a certain population of people who are looking at alluring record equity prices, but are better off not touching stocks – I like to call these individuals the “sideliners”. The sideliners are a group of investors who may have owned stocks during the 2006-2008 timeframe, but due to the subsequent recession, capitulated out of stocks into gold, cash, and/or bonds.

The risk for the sideliners getting back into stocks now is straightforward. Sideliners have a history of being too emotional (see Controlling the Investment Lizard Brain), which leads to disastrous financial decisions. So, even if stocks outperform in the coming months and years, the sideliners will most likely be slow in getting back in, and wrongfully knee-jerk sell at the hint of an accelerated taper, rate-hike, or geopolitical sneeze. Rather than chase a stock market at all-time record highs, the sideliners would be better served by clipping coupons, saving, and/or finish that bunker digging project.

The fact is, if you can’t stomach a -20% decline in the stock market, you shouldn’t be investing in stocks. In a recent presentation, Barry Ritholtz, editor of The Big Picture and CIO of Ritholtz Wealth Management, beautifully displayed the 20 times over the last 85 years that the stocks have declined -20% or more (see chart below). This equates to a large decline every four or so years.

20 Percent Corrections 1928 - 2008

Strategist Dr. Ed Yardeni hammers home a similar point over a shorter duration (2008-2014) by also highlighting the inherent volatility of stocks (see chart below).

Corrections 2008-2014

Stated differently, if you can’t handle the heat in the stock kitchen, it’s probably best to keep out.

It’s a Balancing Act

For the rest of us, the vast majority of investors, the question should not be whether to get out of stocks, it should revolve around what percentage of your portfolio allocation should remain in stocks. Despite record low yields and record high bond prices (see Bubblicious Bonds and Weak Competition, it is perfectly rational for a Baby-Boomer or retiree to periodically ring their stock-profit cash register, and reallocate more dollars toward bonds. Even if you forget about the 30%+ stock return achieved last year and the ~6% return this year, becoming more conservative in (or near) retirement with a larger bond allocation still makes sense.  For some of our clients, buying and holding individual bonds until maturity reduces the risky outcome associated with a potential of interest rates spiking.

With all of that said, our current stance at Sidoxia doesn’t mean stocks don’t offer good value today (see Buy in May). For those readers who have followed Investing Caffeine for a while, they will understand I have been relatively sanguine about the prospects of equities for some time, even through a host of scary periods. Whether it was my attack of bears Peter Schiff, Nouriel Roubini, or John Mauldin in 2009-2010, or optimistic articles written during the summer crash of 2011 when the S&P 500 index declined -22% (see Stocks Get No Respect or Rubber Band Stretching), our positioning did not waver. However, as stock values have virtually tripled in value from the 2009 lows, more recently I have consistently stated the game has gotten a lot tougher with the low-hanging fruit having already been picked (earnings have recovered from the recession and P/E multiples have expanded). In other words, the trajectory of the last five years is unsustainable.

Fortunately for us, at Sidoxia we’re not hostage to the upward or downward direction of a narrow universe of large cap U.S. domestic stock market indices. We can scour the globe across geographies and capital structure. What does that mean? That means we are investing client assets (and my personal assets) into innovative companies covering various growth themes (robotics, alternative energy, mobile devices, nanotechnology, oil sands, electric cars, medical devices, e-commerce, 3-D printing, smart grid, obesity, globalization, and others) along with various other asset classes and capital structures, including real estate, MLPs, municipal bonds, commodities, emerging markets, high-yield, preferred securities, convertible bonds, private equity, floating rate bonds, and TIPs as well. Therefore, if various markets are imploding, we have the nimble ability to mitigate or avoid that volatility by identifying appropriate individual companies and alternative asset classes.

Irrespective of my shaky short-term forecasting abilities, I am confident people will continue to ask me my opinion about the direction of the stock market. My best advice remains to get out of stocks*…for the “sideliners”. However, the asterisk still signifies there are plenty of opportunities for attractive returns to be had for the rest of us investors, as long as you can stomach the inevitable volatility.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 7, 2014 at 9:40 pm 3 comments

2014: Here Comes the Dumb Money!

Funny Face

Before this year’s gigantic rally, I wrote about the unexpected risk of a Double Rip. At that time, all the talk and concern was over the likelihood of a “Double Dip” recession due to the sequestration, tax increases, Obamacare, and an endless list of other politically charged worries.

Perma-bear Nouriel Roubini has already incorrectly forecasted a double-dip in 2009, 2010, 2011, and 2012, and bond maven Bill Gross at PIMCO has fallen flat on his face with his “2013 Fearless Forecasts”: 1) Stocks & bonds return less than 5%. 2) Unemployment stays at 7.5% or higher 3) Gold goes up.

Bill Gross 2013 Prediction

Well at least Bill was correct on 1 of his 4 predictions that bonds would suck wind, although achieving a 25% success rate would have earned him an “F” at Duke. The bears’ worst nightmares have come to reality in 2013 with the S&P up +25% and the NASDAQ climbing +33%, but there still are 11 trading days left in the year and a Hail Mary taper-driven collapse is in bears’ dreams.

Source: Scott Grannis

Source: Scott Grannis

For bulls, the year has brought a double dosage of GDP and job expansion, topped with a cherry of multiple expansion on corporate profit growth. As we head into 2014, at historically reasonable price-earnings valuations (P/E of ~16x – see chart above), the new risk is no longer about Double-Dip/Rip, but rather the arrival of the “dumb money.” You know, the trillions of fear capital (see chart below) parked in low-yielding, inflation-losing accounts such as savings accounts, CDs, and Treasuries that has missed out on the more than doubling and tripling of the S&P and NASDAQ, respectively (from the 2009 lows).

Source: Scott Grannis

Source: Scott Grannis

The fear money was emboldened in 2009-2012 because fixed income performed admirably under the umbrella of declining interest rates, albeit less robustly than stocks. The panic trade wasn’t rewarded in 2013, and the dumb money trade may prove challenging for the bears in 2014 as well.

Despite the call for the “great rotation” out of bonds into stocks earlier this year, the reality is it never happened. I will however concede, a “great toe-dip” did occur, as investor panic turned to merely investor skepticism. If you consider the domestic fund flows data from ICI (see chart below), the modest +$28 billion inflow this year is a drop in the bucket vis-à-vis the hemorrhaging of -$613 billion out of equities from 2007-2012.

ICI Fund Flows 12-14-13

Will I be talking about the multi-year great rotation finally coming to an end in 2018? Perhaps, but despite an impressive stock rally over the previous five years in the face of a wall of worry, I wonder what  a half trillion dollar rotation out of bonds into stocks would mean for the major indexes? While a period of multi-year stock buying would likely be good for retirement portfolios, people always find it much easier to imagine potentially scary downside scenarios.

It’s true that once the taper begins, the economy gains more steam, and interest rates begin rising to a more sustainable level, the pace of this stock market recovery is likely to lose steam.  The multiple expansion we’ve enjoyed over the last few years will eventually peak, and future market returns will be more reliant on the lifeblood of stock-price appreciation…earnings growth (a metric near and dear to my heart).

The smart money has enjoyed another year of strong returns, but the party may not quite be over in 2014 (see Missing the Pre-Party). Taper is the talk of the day, but investors might pull out the hats and horns this New Year, especially if the dumb money comes to join the fun.

 

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

 

December 14, 2013 at 4:23 pm 4 comments

The Central Bank Dog Ate My Homework

Jack Russell Terrier Snarling

It’s been a painful four years for the bears, including Peter Schiff, Nouriel Roubini, John Mauldin, Jimmy Rogers, and let’s not forget David Rosenberg, among others. Rosenberg was recently on CNBC attempting to clarify his evolving bearish view by explaining how central banks around the globe have eaten his forecasting homework. In other words, Ben Bernanke is getting blamed for launching the stock market into the stratosphere thanks to his quantitative easing magic. According to Rosenberg, and the other world-enders, death and destruction would have prevailed without all the money printing.

In reality, the S&P 500 has climbed over +140% and is setting all-time record highs since the market bottomed in early 2009. Despite the large volume of erroneous predictions by Rosenberg and his bear buddies, that development has not slowed the pace of false forecasts. When you’re wrong, one could simply admit defeat, or one could get creative like Rosenberg and bend the truth. As you can tell from my David Rosenberg article from 2010 (Rams Butting Heads), he has been bearish for years calling for outcomes like a double-dip recession; a return to 11% unemployment; and a collapse in the market. So far, none of those predictions have come to fruition (in fact the S&P is up about +40% from that period, if you include dividends). After being incorrect for so long, Rosenberg has switched his mantra to be bullish on pullbacks on selective dividend-paying stocks. When pushed whether he has turned bullish, here’s what Rosenberg had to say,

“So it’s not about is somebody bearish or is somebody bullish or whether you’re agnostic, it’s really about understanding what the principle driver of this market is…it’s the mother of all liquidity-driven rallies that I’ve seen in my lifetime, and it’s continuing.”

 

Rosenberg isn’t the only bear blaming central banks for the unexpected rise in equity markets. As mentioned previously, fear and panic have virtually disappeared, but these emotions have matured into skepticism. Record profits, cash balances, and attractive valuations are dismissed as artificial byproducts of a Fed’s monetary Ponzi Scheme. The fact that Japan and other central banks are following Ben Bernanke’s money printing lead only serves to add more fuel to the bears’ proverbial fire.

Speculative bubbles are not easy to identify before-the-fact, however they typically involve a combination of excessive valuations and/or massive amounts of leverage. In hindsight we experienced these dynamics in the technology collapse of the late-1990s (tech companies traded at over 100x’s earnings) and the leverage-induced housing crisis of the mid-2000s ($100s of billions used to speculate on subprime mortgages and real estate).

I’m OK with the argument that there are trillions of dollars being used for speculative buying, but if I understand correctly, the trillions of dollars in global liquidity being injected by central banks across the world is not being used to buy securities in the stock market? Rather, all the artificial, pending-bubble discussions should migrate to the bond market…not the stock market. All credit markets, to some degree, are tied to the trillions of Treasuries and mortgage-backed securities purchased by central banks, yet many pundits (i.e., see El-Erian & Bill Gross) choose to focus on claims of speculative buying in stocks, and not bonds.

While bears point to the Shiller 10 Price-Earnings ratio as evidence of a richly priced stock market, more objective measurements through FactSet (below 10-year average) and Wall Street Journal indicate a forward P/E of around 14. A reasonable figure if you consider the multiples were twice as high in 2000, and interest rates are at a generational low (see also Shiller P/E critique).

The news hasn’t been great, volatility measurements (i.e., VIX) have been signaling complacency, and every man, woman, and child has been waiting for a “pullback” – myself included. The pace of the upward advance we have experienced over the last six months is not sustainable, but when we finally get a price retreat, do not listen to the bears like Rosenberg. Their credibility has been shot, ever since the central bank dog ate their homework.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 14, 2013 at 11:11 pm 8 comments

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