Introduction
After
listening to amateur and professional investors for a lifetime, I have
concluded that I should largely disregard what most people say and write. What matters is
what they actually do.
At the moment, market volumes are low, people are not selling their tangible investments (including their homes and the artwork in their homes or in secure free port locations) en masse. We are not seeing smart, investor-focused companies liquidating. In other words “TINA” (There Is No Alternative) has been replaced by “FOMO” (Fear Of Missing Out). These are two arguments as to whether or not prices will be higher. There is some stroking of one’s intellectual chin as to when and how big a valley we must ride through to get our rewards.
At the moment, market volumes are low, people are not selling their tangible investments (including their homes and the artwork in their homes or in secure free port locations) en masse. We are not seeing smart, investor-focused companies liquidating. In other words “TINA” (There Is No Alternative) has been replaced by “FOMO” (Fear Of Missing Out). These are two arguments as to whether or not prices will be higher. There is some stroking of one’s intellectual chin as to when and how big a valley we must ride through to get our rewards.
Two
Arguments
The
favored ways of reaching these conclusions are (1) reliance on our faith that
the cyclical secular bull market that has existed in the US and elsewhere
for two generations will continue; or (2) like my fellow numbers oriented
addicts, they can pour over the current and future dispatches from the global
investment fronts. As is often the case, faith wins out in terms of our
emotional and psychological stability. As a continuing student of history,
particularly of unfulfilled predictions, I can not say this is a wrong
approach. However, in this era of microsecond overload of so-called facts and
figures, I can not escape my predilection for gathering and sorting almost
every morsel in the hope of finding at least temporary clarity. The rest of this
blog post is designed to help my fellow missionaries as they look deeply for
investment truth or at least a higher level of certainty.
The
US Stock Market
We
have now gone through what seems like a lifetime of not achieving a new
high. It has only been one year. I remind readers that it took the Dow
Jones Industrial Average sixteen years from the first time it hit 1000
until it finally surpassed that number in a meaningful way. Market analysts
characterize a long flat period as either one of accumulation or distribution.
If there is a sustained price rise going through the old high it is labeled
accumulation. Likewise if the range-bound price level is broken on the downside
it is labeled as a distribution.
In an oversimplification, market analysts attempt to characterize the flow of money from strong players to weaker ones. History suggests the weaker ones are largely driven by emotions (as the disappearing individual investors) and the strong players are felt to be the professionals.
In an oversimplification, market analysts attempt to characterize the flow of money from strong players to weaker ones. History suggests the weaker ones are largely driven by emotions (as the disappearing individual investors) and the strong players are felt to be the professionals.
The
Financial Services Sector
As
many know I follow financial services companies intently. Most publicly
traded brokerage firms with large retail business are not reporting
commission income gains. This is seconded by many mutual fund
management companies whose individual equity businesses are not growing.
Many institutional investors continue to experience positive net flows
from contributions and other sources. However, this is not just a two-sided
battle between long-term institutional investors and retail public investors.
In addition there is the trading community including hedge funds. As they can
be long and short, they tend to magnify the intra-day volatility because of
their leverage through margin and the use of derivatives.
My
View
As
with most who are gathered under the FOMO banner I believe that we
will see meaningful new highs. Notice I did not put a time tag on the prediction
or indicate how low the market may go before reaching a new
high.
Index
Funds, Revisited
Some
foolish investors believe the way to play this dichotomy is through Index
funds. The reason that it is foolish is not that it won’t participate in the
move. It is exactly that it will participate, but not optimally.
According
to one public survey some 71% of retail Index fund investors believe
they are taking less risk than in actively managed funds. They are
confusing the somewhat muted daily volatility of a broad based index with a concentrated fund portfolio. I believe this advantage is lost,
as over time market emphasis shifts and leadership changes. Further, Index
funds do not carry cash and rely solely on “approved participants” to
bring in or take out securities. (In our
managed mutual fund portfolios we use both passive Index or like Index
funds as well as concentrated funds.)
The
Real World
We
normally think of snow in terms of the winter. Gamblers often refer to a
stream of bad luck as snow. After recovering late in
the first quarter, the global economy hit snow in April. The first confirmation to me was a
luxury company that announced April sales were 15% behind a year ago. When the wealthy cut back they are sensing something. Globally, almost every company
that we follow experienced what I hope is only a hesitation. This is an April phenomenon as, according to ThomsonReuters,
73% of the 493 reporting companies in the S&P 500 beat
earnings estimates. (Normally the beat ratio is 63%.) What is more worrisome
to me is that only 52% beat the ratio in terms of revenue estimates, suggesting
some financial engineering is at work.
Are
Yields Heading Back Up?
The
fixed income marketplace is broad and deep and it is a bit unfair to use only
two yields to identify a trend that could be something of the canary in the
mine as a warning to equity investors. According to Barron’s the average yield
on a group of intermediate quality corporates last week rose to 4.93% from 4.58%
the week before, but still a little lower than the 5.09% a year ago. Minor
changes in yields for the highest quality corporates perhaps should calm us.
Money Market Deposit Accounts also bounced up.
In this case from 0.22% to 0.25%. This may indicate some tightening of
the available money for consumer lending.
Two
Former Morgan Stanley Thinkers Worth Reading
1. Byron Wien, now with Blackstone, for years
was reporting on his conversations
with an unnamed influence he dubbed the “Smartest Man in Europe.”
Unfortunately, the investor, Edgar de Picciotto, Chairman of Union Bancaire
Privée in Geneva, recently died.
Wien
recounted Picciotto’s numerous investment successes and his philosophies. He
clearly was early onto numerous investors that did very well. I believe he had
very concentrated investments. He foresaw opportunities that were considerably
less risky than they appeared to others who came in later. He used his mistakes
to improve his thinking. Contact Byron for a copy of his latest blog.
2. Steve Roach for Project Syndicate has once
again highlighted the US dependence
on China. (He headed Morgan Stanley’s Asian business after a career as its
global economist.) His view is that the US is growing by absorbing savings from
China. He is concerned that this source of support for the US will not
continue. Roach believes that the US needs to be generating sufficient savings to invest in its own
growth.
Other
Asian Views
Matthews
Asia, a Pacific oriented fund group is re-positioning one of its funds. The
Asian Science & Technology Fund is broadening
out to become the Asian Innovators Fund. Matthews Asia sees this new focus as a
much bigger mandate, as not all innovation is produced by technology. Many
commercial and financial activities are benefiting from non-tech innovation.
(We have been shareholders of the prior fund.)
Much
of the flows into and out of Exchange Traded Funds (ETFs) is caused
by shorter term traders. For example in the first four months of 2015,
$65.4 Billion went into Global/International funds. In the first four months of
this year net redemptions were $5.9 Billion. In only one of the four months was there was a net
inflow of $4.2 Billion. Not surprising in the first two months of the year $10
Billion exited. This kind of volatility was magnified by the thinness of most
overseas markets and particularly some of the Asian markets. Investors can use
this to their advantage if they counter-time their moves to the regional
headlines.
Patience
will be required as both “TINA” and “FOMO” are functioning, but one needs to be
prepared for temporary reverses.
Monday
is a Memorial Day holiday in the US, where we recognize all those who have
served their country in times of war and other troubles.
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