Posts tagged ‘Peter Schiff’
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.
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.
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.
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.
Dow 20,000 – Braking News or Breaking News?
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).
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
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.
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 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.
Airbag Protection from Pundit Backseat Drivers
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
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.
Get Out of Stocks!*
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.
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).
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.
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.
The Central Bank Dog Ate My Homework
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.
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.
Risk of “Double-Rip” on the Rise
Okay, you heard it here first. I’m officially anointing my first new 2013 economic term of the year: “Double-Rip!” No, the biggest risk of 2013 is not a “double-dip” (the risk of the economy falling back into recession), but instead, the larger risk is of a double-rip – a sustained expansion of GDP after multiple quarters of recovery. I know, this sounds like heresy, given we’ve had to listen to perma-bears like Nouriel Roubini, Peter Schiff, John Mauldin, Mohamed El-Erian, Bill Gross, et al shovel their consistently wrong pessimism for the last 14 quarters. However, those readers who have followed me for the last four years of this bull market know where I’ve stood relative to these unwavering doomsday-ers. Rather than endlessly rehash the erroneous gospel spewed by this cautious clan, you can decide for yourself how accurate they’ve been by reviewing the links below and named links above:
Roubini calling for double-dip in 2012
Roubini calling for double-dip in 2011
Roubini calling for double-dip in 2010
Roubini calling for double-dip in 2009
If we switch from past to present, Bill Gross has already dug himself into a deep hole just two weeks into the year by tweeting equity markets will return less than 5% in 2013. Hmmm, I wonder if he’d predict the same thing now that the market is up about +4.5% during the first 18 days of the year?
Why Double-Rip Over Double-Dip?
How can stocks rip if economic growth is so sluggish? If forced to equate our private sector to a car, opinions would vary widely. We could probably agree the U.S. economy is no Ferrari. Faster growing countries like China, which recently reported 4th quarter growth of +7.9% (up from +7.4% in 3rd quarter), have lapped us complacent, right-lane driving Americans in recent years. But speed alone should not be investors’ only key objective. If speed was the number one priority, the only places investors would be placing their money would be in countries like Rwanda, Turkmenistan, and Libya (see Business Insider article). However, freedom, rule of law, and entrepreneurial spirit are other important investment factors to be considered. The U.S. market is more like a Toyota Camry – not very flashy, but it will reliably get you from point A to point B in an efficient and safe manner.
Beyond lackluster economic growth, corporate profit growth has slowed remarkably. In fact, with about 10% of the S&P 500 index companies reporting 4th quarter earnings thus far, earnings growth is expected to rise a measly 2.5% from a year ago (from a previous estimate of 3.0% growth). With this being the case, how can stock prices go up? Shrewd investors understand the stock market is a discounting mechanism of future fundamentals, and therefore stocks will move in advance of future growth. It makes sense that before a turn in the economy, the brakes will often be activated before accelerating into another fast moving straight-away.
In addition, valuation acts like shock absorbers. With generational low interest rates and a below-average forward 12-month P/E (Price-Earnings) ratio of 13x’s, this stock market car can absorb a significant amount of fundamental challenges. The oft quoted message that “In the short run, the market is a voting machine but in the long run it is a weighing machine,” from value icon Benjamin Graham holds as true today as it did a century ago. The recent market advance may be attributed to the voters, but long-term movements are ultimately tied to the sustainable scales of sales, earnings, and cash flows.
If that’s the case, how can someone be optimistic in the face of the slowing growth challenges of this year? What 2013 will not have is the drag of election uncertainty, the fiscal cliff, Superstorm Sandy, and an end-of-the-world Mayan calendar concern. This is setting the stage for improved fundamentals as we progress deeper into the year. Certainly there will be other puts and takes, but the absence of these factors should provide some wind under the economy’s sails.
What’s more, history shows us that indeed stock prices can go up quite dramatically (more than +325% during the 1990s) when consensus earnings forecasts continually get trimmed. We have seen this same dynamic since mid-2012 – earnings forecasts have come down and stock prices have gone up. Strategist Ed Yardeni captures this point beautifully in a recent post on his Dr. Ed’s Blog (see charts below).
CLICK TO ENLARGE – Source: Dr. Ed’s Blog
What Will Make Me Bearish?
Am I a perma-bull, incessantly wearing rose-colored glasses that I refuse to take off? I’ll let you come to your own conclusion. When I see a combination of the following, I will become bearish:
#1. I see the trillions of dollars parked in near-0% cash start coming outside to play.
#2. See Pimco’s Bill Gross and Mohammed El-Erian on CNBC fewer than 10 times per week.
#3. See money flow stop flooding into sub-3% bonds (Scott Grannis) and actually reverse.
#4. Observe a sustained reversal in hemorrhaging of equity investments (Scott Grannis).
#5. Yield curve flattens dramatically or inverts.
#6. Nouriel and his bear buds become bullish and call for a “triple-rip” turn in the equity markets.
#7. Smarter, more-experienced investors than I, á la Warren Buffett, become more cautious. I arrogantly believe that will occur in conjunction with some of the previously listed items.
Despite my firm beliefs, it is evident the bears won’t go down without a fight. If you are getting tired of drinking the double-dip Kool-Aid, then perhaps it’s time to expand your bullish horizons. If not, just wait 12 months after a market rally, and buy yourself a fresh copy of the Merriam-Webster dictionary. There you can locate and learn about a new definition…double-rip!
Read Also: Double-Dip Guesses are “Probably Wrong”
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 Fiat, Toyota, or 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.
Happy Birthday Bull Market!
Birthdays are always fun, but they are always more fun when more people come to the party. The birthday of the current bull market started on March 9, 2009, and as many bears point out, volume has been low, with a relatively small number of investors joining the party with hats and horns. This skepticism is not unusual in typical bull markets because the psychological scars from the previous bear market are still fresh in investors’ minds. How can investors get excited about investing when we are surrounded by record deficits, political gridlock, a crumbling European Union, slowing China, and peak corporate margins?
Bears Receive Party Invite but Stay Home
Perma-bears like Peter Schiff, Nouriel Roubini, John Mauldin, Mohamed El-Erian, and David Rosenberg have been consistently wrong over the last three years with their advice, but in some instances can sound smart shoveling it out to unassuming investors.
While nervous investors and bears have missed the 125%+ rally (see table below) over the last three years (mitigated by upward but underperforming gold prices), what many observers have not realized is that the so-called “Lost Decade” (see also Can the Lost Decade Strike Twice?) has actually been pretty spectacular for shrewd investors. Even if you purchased small and mid cap stocks at the peak of the market in March 2000, that large swath of stocks is up over +100%…yes, that’s right, more than doubled over the last 12 years. If you consider dividends, the numbers look significantly better.
Doubters of the equity market rally also ignore the three-year +135% advance in the NASDAQ (see also Ugly Stepchild) in part because the 11-year highs being registered still lag the peak levels reached in March 2000. Even though the NASDAQ increased 9-fold in the 1990s, if you bought the NASDAQ index in the first half of 1999, you would have still outperformed the S&P 500 index through the 2012 year-to-date period. Irrespective of how anyone looks at the performance of the NASDAQ index, it still has outperformed the S&P 500 index by more than +200% over the last 25 years, even if you include the bursting of the 2000 technology bubble.
CLICK TO ENLARGE
The point of all these statistics is to show that if you didn’t buy technology stocks at the climax of late 1999 or early 2000 prices, then the amount and type of available opportunities have been plentiful. The table above does not include emerging markets like Brazil, Mexico, and India (to name a few) that have also about doubled in price from the 2000 timeframe to 2012.
Heartburn can Accompany Sweet Treats
Being Pollyannaish after a doubling in market prices is never a wise decision. After three years of massive appreciation, those participating in the bull market run have eaten a lot of tasty cake. Now the question becomes, will investors also get some ice cream and a gift bag to go before the party ends? With the sweetness of the cake still being digested, there are still plenty of scenarios that can create investor heartburn. Obviously, the sovereign debt pig still needs to work its way through the European snake, and that could still take some time. In addition, although macroeconomic data (including employment data) generally have been improving, the trajectory of corporate profits has been decelerating – due in part to near record profit margins getting pressured by rising input costs. Domestically, structural debt and deficit issues have not gone away, and perpetual neglect will only exacerbate the current problems. On the psychology front, even though investors remain skittish, those still in the game are getting more complacent as evidenced by the VIX index now falling to the teens (a negative contrarian indicator).
Despite some of these cautionary signals, the good news is that many of these issues have been known for some time and have been reflected in valuations of the overall large cap indexes. Moreover, trillions of dollars remain idle in low yielding strategies as investors wait on the sidelines. Once prices move higher and there is more comfort surrounding the sustainability of an economic recovery, then capital will come pouring back into equity markets. In other words, investors will have to pay a premium cherry price if they wait for a comforting consensus to coalesce.
Limited Options
The other advantage working in investors’ favor is the lack of other attractive investment alternatives. Where are you going to invest these days when 10-year Treasuries and short-term CDs are yielding next to nothing? How about investing in risky, leveraged, illiquid real estate, just as banks unload massive numbers of foreclosures and process millions of short sales? If those investments don’t tickle your fancy, then how about pricey insurance and annuity products that nobody can understand? Cash was comforting in 2008-2009 and during volatility in recent summers, but with spiking food, energy, leisure, and medical costs, when does that cash comfort turn to cash pain?
Easy money and low interest rate policies being advocated by Federal Reserve Chairman Ben Bernanke and other global central bankers have sucked up available investment opportunities and compelled investors to look more closely at riskier assets like equities. With the large run in equities, I have been trimming back my winners and redeploying proceeds into higher dividend paying stocks and underperforming sectors of the market. Skepticism still abounds, and we may be ripe for a short-term pullback in the equity markets. For those rare birthday party attendees who are called long-term investors, opportunities still remain despite the large run in equities. The cake has been sweet so far, but if you are patient, some ice cream and a gift bag may be coming your way as well.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including emerging market, international, and bond/treasury ETFs), but at the time of publishing SCM had no direct position in VXX, MXY, or 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.
Bears Hibernate During Melt-Up
Source: Photobucket
Here we are 719 days from the market bottom of March 2009, and the S&P 500 has more than doubled from its index low value of 666 to 1343 today. Noticeably absent during the meteoric rise have been the hibernating bears, like economist Nouriel Roubini (aka “Dr. Doom”) or Peter Schiff (see Emperor Schiff Has No Clothes), who blanketed the airwaves in 2008-2009 when financial markets were spiraling downwards out of control. The mere fact that I am writing about this subject may be reason enough to expect a 5-10% correction, but with a +100% upward move in stock prices I am willing to put superstition aside and admire the egg on the face of the perma-bears.
Shape of Recovery
After it became clear that the world was not coming to an end, in late 2009 and throughout 2010, the discussion switched from the likelihood of a “Great Depression” to a debate over the shape of the alphabet letter economic recovery. Was the upturn going to be an L-shaped, V-shaped, square root-shaped, or what Roubini expected – a U-shaped (or bathtub-shaped) recovery? You be the judge — does six consecutive quarters of GDP expansion with unemployment declining look like a bathtub recovery to you?
Chart Source: Yahoo Finance
This picture above looks more like a “V” to me, and the recently reported Institute for Supply Management’s (ISM) manufacturing index figure of 60.8 in January (the highest reading in seven years) lends credence to a stronger resurgence in the economy. Apparently the PIMCO bear brothers, Mohamed El-Erian and Bill Gross, are upwardly adjusting their view of a “New Normal” environment as well. Just recently, the firm raised its 2011 GDP forecast by 40-50% to a growth rate of 3-3.5% in 2011.
The Bears’ Logic
Bears continually explain away the market melt-up as a phenomenon caused by excessive and artificial liquidity creation (i.e., QE2 money printing, and 0% interest rate policy) Bernanke has provided the economy. Similar logic could be used to describe the excessive and artificial debt creation generated by individuals, corporations, and governments during the 2008-2009 meltdown. Now that leveraged positions are beginning to unwind (banks recapitalizing, consumers increasing savings rate, state and government austerity and tax measures, etc.), the bears still offer little credit to these improving trends.
Are we likely to experience another +100% upward move in stock prices in the broader indexes over the next two years? Unlikely. Our structural government debt and deficits, coupled with elevated unemployment and fiercer foreign competition are all factors creating economic headwinds. Moreover, inflation is starting to heat up and a Federal Funds rate policy cannot stay at 0% forever.
The Shapes of Rebounds
To put the two-year equity market recovery in historical perspective, the Financial Times published a 75-year study which showed the current market resurgence (solid red line) only trailing the post-Great Depression rebound of 1935-1938.
Source: Financial Times
Although we are absolutely not out of the economic woods and contrarian sentiment indicators (i.e., Volatility Index and Put-Call ratio) are screaming for a pullback, the foundation of a sustainable global recovery has firmed despite the persisting chaos occurring in the Middle East. Fourth quarter 2010 corporate profits (and revenues) once again exceeded expectations, valuations remain attractive, and floods of itchy retail cash still remain on the sidelines just waiting to jump in and chase the upward march in equity prices. Although the trajectory of stock prices over the next two years is unlikely to look like the last two years, there is still room for optimism (as I outlined last year in Genesis of Cheap Stocks). The low-hanging equity fruit has been picked over the last few years, and I’m certain that bears like Roubini, Schiff, El-Erian, Gross, et.al. will eventually come out of hibernation. For those investors not fully invested, I believe it would be wise to wait for the inevitable growls of the bears to resurface, so you can take further advantage of attractive market opportunities.
Click Here for More on the PIMCO Downhill Marathon Machine
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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.
Historical Trampoline Cycles of Fear & Greed
What goes up, eventually comes down, and what goes down, eventually comes up. Like an adolescent jumping on a trampoline, emotions in the financial markets jump sky high before crashing down to earth…and then the process repeats itself. The underlying reasons behind every market gyration are different, but the emotions of fear and greed are similar. Since 1919, there have been 29 recessions, and 29 recoveries (pretty good recovery batting average). Over that 92 year period we have also witnessed the Dow Jones Industrial Average go from around 100 in 1919 to over 12,300 today – not too shabby.
The blood curdling panic experienced in 2008 and early 2009 has turned to ordinary fear among retail investors – although the doubling of the equity markets from two years ago has instilled a good dosage of animal spirits into professional traders and speculators. When trillions of low yielding cash and Treasuries ultimately come barreling into equity markets, thereby extending equity valuations, then I will become extra nervous. Until then, plenty of opportunities still exist – there just is not nearly as much low-hanging fruit as two years ago.
More of the Same
To make the point that “the more things change, the more things stay the same,” you can go all the way back to 1932 and read the words of Dean Witter – I also wrote about the history of panic in the 1970s (see Rhyming History).
Even some 80 years ago, Witter was keenly aware of the doomsday bears:
“People are deterred from buying good stocks and bonds now only because of an unwarranted terror…All sorts of bugaboos are paraded to destroy the last vestige of confidence. Stories of disaster which are incredible and untrue are told to foolish and credulous listeners, who appear willing to believe the worst.”
The bugaboo purveyors I called out in 2009 included Peter Schiff, Nouriel Roubini, Meredith Whitney, and Jimmy Rogers. I’m not sure who the next genius du jour(s) will be, but I am confident they will be prominently paraded over the media airwaves.
Cherry Price for Consensus
As firmer signs of an economic recovery finally take hold, investors slowly regain confidence about investing in risky assets. The only problem is that prices have skyrocketed! Witter captures this dynamic beautifully back in 1932:
“Some people say that they wish to await a clearer view of the future. When the future is again clear the present bargains will no longer be available. Does anyone think that present prices will continue when confidence has been fully restored? Such bargains exist only because of terror and distress.”
Herd Gets Slaughtered
History proves over and over again…the general investing public suffers the consequences of following the herd of fear and greed. Or as Witter states:
“It is easy to run with the crowd. The path of least resistance is to join in the wailings that are now so popular. The constructive policy, however, is to maintain your courage and your optimism, to have faith in the ultimate future of your country and to proclaim your faith and to recommend the purchase of good bonds and good stocks, which are inordinately depreciated.”
In the short-run, markets move up and down in an unpredictable fashion, like an irresponsible teenager jumping on a trampoline. In the long-run, investors can do themselves a favor by ignoring the masses, and sticking to a disciplined, systematic investment approach that includes controlled valuation metrics and contrarian sentiment factors. That way, you won’t fall off the investment trampoline and permanently break your portfolio.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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.
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