Complacent hope remains, even while the ‘disconnects’ grow
Over the last four weeks, since the last edition of Strategy Thoughts, equity markets have bounced, and not surprisingly these bounces have been accompanied by a growing sense of confidence and hope. Last month I concluded with the following; “frequently heard cries of the worst being over should be seen as a warning sign, and certainly not an indication of the all clear having been sounded.” Such calls are now being heard not only for the stock market, but also for the outlook of the virus and for the economy as a whole. These are not the opinions usually heard after a bear market has run it course and a new bull market has begun, they are, however, frequently evident throughout bear market rallies, or ‘dead cat bounces’.
This edition of Strategy Thoughts will examine the remarkable disconnects that are emerging between equity market valuations and the very long term damage that has already taken place, the prevalence of the misplaced ‘hope’ that the worst (on many fronts) is now over, and explore what may need to be seen for an important low to have been recorded.
Strategy Thoughts (part 2)
The Slope of Hope is alive and well!
Expect more ‘Dead Cat Bounces’
In the previous edition of Strategy Thoughts, I included the following in the conclusion;
What is important now is to maintain an investment discipline that will allow one to avoid getting swept up in what will, in all likelihood, be many moments of excitement and enthusiasm that a bottom has been made. One such moment has probably just passed, there will be many more on the way to the final low.
That was only a little over a week ago, and since then markets have rallied dramatically, apparently encouraged by signs that the curve of the virus spread may be flattening. There is now an almost overwhelming belief amongst market commentators and participants that with this apparent flattening things will get back to normal and so the current rally has been widely embraced. With this attitudes have flipped, as one commentator on CNBC put it, clients have switched form asking ‘where can I get a gun to protect my family’ to ‘what should I buy now we’re off to the races’! Unfortunately, ‘normal’ is what we had previously become accustomed to in the most extended bull market in history, there really is no such thing as normal in investing. This is particularly so at extremes. This rapid reversal and eagerness to get back in are all symptoms of what I was warning about in the last edition. They are not in any way encouraging signs.
In the last edition I gave several examples of historic market bottoms to illustrate just what it feels like when a great buying opportunity is presented, and what the next great opportunity may feel like. Given what has happened since, and the caution expressed previously regarding ‘moments of excitement and enthusiasm that a bottom has been made’, it is probably instructive to explore just what ‘dead cat bounces’ feel like.
Strategy Thoughts: April 2020
It’s STILL, and always has been, all about Expectations
And the next Bottom will likely feel as bad, or worse than those of the past
A little over a week ago, in the last edition of Strategy Thoughts, I concluded with the following;
Equity markets are a long way from being cheap, at some point a reflex rally will undoubtedly occur, one that will almost certainly be hailed as a sign that things are on the improve. If that happens it will be an indication that it is just a ‘dead cat’ (albeit a volatile one) bounce that should be sold into. A meaningful long term buying opportunity lies some way off in time and a substantial amount further down in terms of price, and new bull markets are always dismissed for an extraordinarily long time.
Since then we have seen that ‘reflex’ rally and many are hailing it as being either THE bottom to a painful and fast bear market, or at least a point at which investors should be starting to buy. In this edition of Strategy Thoughts, I discuss the possibility that this first reflex rally may be in the early stages of rolling over, but more importantly I will try to illustrate how this may all end by looking back at a number of other historic buying opportunities.
Strategy Thoughts:March 2020
It’s STILL, and always has been, all about Expectations
It is six months since I last wrote an edition of Strategy Thoughts, this hiatus was initially due to a planned trip to Europe, but also, and more importantly, due to the fact that I had just about run out of ways of illustrating just how stretched expectations were and the dangers that any, even minor, disappointment could bring about. In the intervening months things have certainly changed, but worryingly expectations remain far removed from those that typically accompany a major buying opportunity.
In this edition of Strategy Thoughts in addition to reviewing what has been already endured I will discuss what needs to be seen for a great buying opportunity to be close.
Strategy Thoughts: October 2019
The importance of Long Term Valuation
It’s all about Expectations
Valuation is frequently discussed, both about individual stocks and markets as a whole, however, it is rarely used in a way that is useful to investors over a meaningful time span. Valuation is a very useful indication of where aggregate expectations lie and so, over very long time frames, can be indicative of where the greatest surprises or disappointment are likely. This month’s Strategy Thoughts reviews the ‘value’ of valuation, how it can be meaningfully used, and highlights a number of areas where warning signs are clear. This month’s edition also updates the expectational backdrop in both gold and sterling, and illustrates how useful this approach has been over the last couple of months and finally I make my third attempt in more than seven years to pick the end of the long term bull market in treasury bonds.
Strategy Thoughts: September 2019
The clearly absurd continues!
And expectations have only become even more stretched
Over the last month longer term interest rates have risen, unwinding the much discussed inverted yield curve, risk appetites have been renewed and equity markets have rallied. As a result, expectations have once again become stretched despite growth prospects continuing to slow and the absurdities discussed last month continuing. In this month’s edition of Strategy Thoughts, I question the possibility that a recession risk has passed, review the sustainability of the current rally, and the stretched expectations on the upside for gold and the downside for the UK and Sterling.
Strategy Thoughts: August 2019
When the clearly absurd is rationalised,
things rarely end well!
Over the last two months equity markets as a whole have been range bound. This can best be seen in the MSCI all country world index which is currently at the same level it was at in early June. It was also at the same level in March of this year, October of last year, March of last year and December of 2017. The same cannot be said for fixed income markets where yields have continued to slide.
Having spent most of the last two months in the UK and Europe this month’s Strategy Thoughts will probably have more of a European flavour. This is probably timely, and undoubtedly appropriate, given some of the absurdities that are now being seen in that region. One of these absurdities, the explosion in negative yielding debt, and the possibility that Europe as a whole may be the ‘canary in the coal mine’ for the next major market and economic setback, are explored in this month’s Strategy Thoughts. In addition, this edition also reviews where a major surprise may soon be approaching and the disappointment that the recent interest rate cut in the US has so far delivered.
Strategy Thoughts: June 2019
Has the Melt Down begun?
Be Careful What You Wish For!
The last month has been mostly ugly for equity market investors. The major US markets are down sharply with the NASDAQ down 10% at its recent low, European markets down 5% or more and the major Asian markets of Japan, China and Hong Kong having all fallen between 7% and 11%. Despite this, expectations remain positive and the media is full of comforting messages. Investors undoubtedly, and understandably, welcome these messages; however, no comfort should be taken, I have often written that comfort and success in investing rarely travel together. This month’s Strategy Thoughts highlights just how difficult the economic outlook is becoming, and also the degree to which these messages are being ignored. It also demonstrates just how little comfort anyone should take from the most widely promulgated ‘comforting message’, that the Fed will ride to the rescue with a rate cut.
Strategy Thoughts: May 2019
If this was the ‘Melt Up’ then fear the melt down!
Pay attention to expectations and don’t CHASE YIELD
Over the last few weeks there has been a growing chorus amongst prominent market commentators stating that the biggest risk facing the stock market currently is that of a ‘Melt Up’. This is after US markets have risen more than 25% in four and a half months from their lows late last year, European indices more than 20% and Asian indices 15% to 35% (in the case of China). In some ways the current ‘Melt Up’ calls are an eerie echo of similar extrapolations that were being heard in late 2017, early 2018, again after a wonderfully rewarding preceding rise. Those extrapolations delivered nothing but multiple disappointments and were only useful in that they served as a great barometer of just how elevated expectations had become. The same is probably true now. In this month’s edition of Strategy Thoughts, in addition to looking at these ‘Melt Up’ calls I once again examine the danger of chasing yield, no matter how tempting it may be, and also illustrate, once again, the value of taking an expectational approach to markets using oil’s recent volatility as an example.
Strategy Thoughts: April 2019
Expectations have become more elevated, and
Europe is once again ‘The Canary in the Coal Mine’
Over the last few weeks equity markets have continued to rise while longer term bond yields have continued to trend lower as concern over further Federal Reserve tightening has diminished. The result of all of this has been that expectations for even further gains have risen, fear has evaporated, levels of complacency have grown and speculation has arguably become rampant. All of these things can continue; however, it is important that all investors realise that such a combination is invariably seen very close to the end of a bull market, not at a time when sustainable long term healthy returns can be expected. It is also a concern that European markets continue to dramatically lag those of the US, a trend that has seemingly inexorably grown over the last nine years. Whilst this may be an indication that relative outperformance could be expected from Europe, it in no way means that European markets should rally. Rather, European weakness may merely reflect the deteriorating fundamentals within Europe and this deterioration may eventually be looked back upon as having been the ‘Canary in the Coal Mine’ for a deeper and more troubling global economic and stock market malaise.
Strategy Thoughts: March 2019
The Dip has been bought, and the ‘Dead Cat’ has bounced!
But so too have expectations
Since late December stock markets around the world have rallied markedly and accompanying these rallies has been an increasing level of confidence and expectation on the part of investors and commentators. In this month’s Strategy Thoughts, I will firstly put the rallies that have been seen into a global context, examine how far both short and longer term expectations have moved and finally illustrate that it is always at times of extreme confidence that both bear markets, and then recessions begin.
Strategy Thoughts:January 2019
It’s like Deja Vu all over again!
The New Year has brought some relief to the gloom, that was growing in late December as markets the world over plunged, and with that relief has come a slew of prognostications that the worst has been seen and that the bull market will continue in 2019. Unfortunately, many of those same ‘experts’ were those calling for the never to materialise ‘melt up’ twelve months ago. These optimistic forecasts, and expectations for a renewal of the bull market remind me greatly of the mood that accompanied the close of 2007 and the start of 2008, hence this month’s title from the great Yogi Berra. In this month’s edition of Strategy Thoughts I review those similarities, explore just how unrewarding this so called ‘great bull market’ has been for many global investors, touch on the misguided comfort many bulls are currently taking in valuation measures and revisit both gold and oil.
Strategy Thoughts: December 2018
The Bear Market has begun
And the IMF do it again!
Through November and early December equity market volatility increased and on balance markets have trended lower recording lower lows and lower highs. At the recent lows the MSCI all country world index was down more than 20% from its early year high and the S&P500 had fallen 14% from its high recorded in September. Amidst this deteriorating backdrop the consensus still seems to be that whilst this ‘correction’ was probably overdue it should be seen as a ‘healthy correction’ and, perhaps even more worryingly, that growth forecasts continue to be healthy therefore there is no reason for alarm.
In this edition of Strategy Thoughts, I examine one of the sources of this misplaced economic comfort, the IMF, revisit the global narrowing between the performance of the US market and that of the rest of the world that was discussed in the October edition and also follow up on the dismal performance of the previously dominant, and highly sought after, FANG stocks.
Strategy Thoughts: October 2018
This is NOT the ‘Melted Up!
And the divergences grow
At the beginning of the year there was much talk in the financial media of the potential for a stock market ‘melt up’. This was after the US market had already risen 25% over the prior seven months and more than 70% over the previous two years. What followed was not a melt up. In fact, it was the reverse, but now, nine month later, the US market as measured by the Dow Jones Industrial Average has recovered just enough to be very marginally above where it was when the melt up was supposed to have started. What has been seen has not been a melt up and what should be of most concern to most investors is that the headline strength in some of the major US indices has not been replicated in the majority of stocks, as fewer and fewer have been following the market to new highs. It is also the case that the strength in the US market has not been seen throughout the rest of the world and these divergences should certainly trump any comfort that investors may be taking from headlines about new highs.
Strategy Thoughts:September 2018
Beware the call for yet another ‘Melt Up’, and
Do Dead Cats tell us anything?
Over the last few days the US stock market as measured by the S&P500 has recorded further new highs in what is now the longest bull market in history. This positive action has renewed calls, last heard at the beginning of this year, for a ‘melt up’ in the markets. Those previous ‘melt up’ calls were a clear sign that expectations were rampant but they rapidly fizzled out when markets the world over plunged from late January and into February. These latest calls for a ‘melt up’ maybe even more of a warning than those eight months ago. Back then most markets had been rising in unison whereas now many of the major markets of the world have failed to deliver a rally that could even be considered a ‘dead cat bounce’. In this month’s edition of Strategy Thoughts, I review these calls for a ‘melt up’, compare them with those last heard earlier this year, examine where expectations are now through the lens of consumer confidence and highlight the danger presented by the relative weakness seen in many of the major markets of the world.
Strategy Thoughts:August 2018
Don’t Fear a CRASH! Fear a Bear Market
Having been overseas for much of the last month and a half it has been fascinating to return and see the growing fear of a stock market CRASH. Much of this fear has been fuelled by widely reported comments from the French Stock market regulator in their annual report. Ambrose Evans Pritchard of the UK’s Daily Telegraph reported their concerns in an opinion piece with following opening sentence;
France’s market watchdog is bracing for a surge in global bond yields and a Wall Street crash as soon as this year, fearing that contagion will spread to Europe and snuff out the fragile recovery.
These increased fears of a crash reminded me of something I wrote almost two decades ago, when crash fears were similarly high. At the time, as I am now, I was far more concerned about a bear market and went to some lengths to point out the difference. In this edition of Strategy Thoughts, I will once again review those differences, particularly as they relate to investors rather than speculators, and once again highlight the very real danger of a bear market. I will review how changing expectations set up major turning points in markets using China’s recent experience as an example and highlight a couple of features that make a bear market a far larger threat to most investors than a crash. Finally, I recommend a couple of books I read in my travels.
Strategy Thoughts: May 2018
Where are expectations now?
Over the last six weeks most equity markets have rallied, and the volatility that characterised February and much of March has subsided. Despite this rally most markets are only back to where they were in early February and some, like the Eurostoxx50 and the Chinese market are still where they were almost three years ago. Given this back drop it is clear that the much anticipated ‘Melt Up’ that was so widely forecast in January has failed to materialise. This should not be a surprise. Widely anticipated moves are invariably simple extrapolations of trends already in place, and, by definition, if expectations are strongly one sided and therefore a move is widely anticipated the scope for further surprise is limited. This has not only been seen recently in the failure of the melt up to materialise but also in the failure of strong earnings in the US to meaningfully propel markets higher. It is the level of expectations, and the magnitude of subsequent surprises and disappointments that moves markets. In this month’s edition of Strategy Thoughts, I look at the extreme nature of expectations in the oil market, review where expectations are now in equities and also look at where longer term interest rates may still be heading and whether a second housing bubble in the US may have burst.
Strategy Thoughts:April 2018
The Slide Continues!
Technology and the Power of 6
Last month I concluded;
Unfortunately, the most rewarding market moves are never readily and broadly understood or accepted by the vast majority. The next bear market will not be over until the vast majority fully accept that things are only going to get worse and that what has up until then been suffered is only the beginning. Then all hope will have been expunged, the slope will have been slide down and a new wall of worry can begin to be climbed.
To date all the bounces that markets have delivered, whether they have come off so called technical levels such as the 200 day moving average or apparently resulted from supposedly improving fundamentals, have been warmly greeted and welcomed. They have been seen as a ‘return to normal’ rather than the ‘dead cat bounce’ that they are always dismissed as when real buying opportunities are at hand. It is clear that HOPE continues to be alive and well and that the slide down the ‘slope of hope’ will continue.
Strategy Thoughts: March 2018
The Slide down the ‘Slope of Hope’ has begun
January was the end, not the beginning, of the Melt Up!
Last month I concluded with;
From here there will eventually be a rally that will reinforce in the majority’s minds that they were right not to panic and that the anticipated melt up is back on track, but the first rally in a bear market eventually dashes that hope and fails to deliver a new high. As markets start delivering lower highs and lower lows, instead of the ever higher highs that investors had become accustomed to, the slide down the ‘slope of hope’ begins.
Over the last month the vast majority of markets around the world have followed a path remarkably similar to the ‘script’ I outlined last month. As a result investors generally feel that ‘things are getting back to normal’, that a correction has passed and expectations are once again rising. Now is not the time for renewed, or even new, enthusiasm. Selling rallies will prove a far more successful long term strategy than buying dips now that the wall of worry has morphed into the slope of hope.
Strategy Thoughts:February 2018
Where’s the Melt Up gone?
The last couple of weeks have witnessed a remarkable turnaround in equity markets the world over. Through the early weeks of 2018, as I discussed at length last month, there was a growing expectation that markets were set to accelerate even higher in what became known as a ‘melt up’. Clearly, at least for now, that melt up has gone into reverse. Now investors should be taking note of how the majority are reacting to the recent rout. The fact that there has been an almost universal recognition that what has been suffered was to be expected, is healthy and lays the groundwork for even greater advance, and that the down draft is largely irrelevant given the healthy economy and corporate earnings, not only misses what it actually is that drives markets but should also be a stark warning sign. Expectations were clearly through the roof prior to this sell off and it seems they still are.
Strategy Thoughts: January 2018
The Underestimation FLIP ahead of a MELT UP!
Last month I focussed upon the dangers of FOMO, fear of missing out, now it seems that there is a reason for FOMO if the general media is to be believed, markets are apparently on the verge of a Melt Up! This month I will look at what the rapid acceptance of a potential melt up may mean for expectations and also what it may mean for most investors. Not surprisingly I will highlight the danger of investing in the hope that one actually occurs. This melt up talk has also influenced the expectations of those ‘experts’ that routinely put out year ahead forecasts at this time of year for where the market will go. What is now occurring is a game of leap frog amongst them as each has to raise their forecasts as the markets rise and other’s forecasts rise. As a result we may be witnessing the flip from underestimation to possibly over estimation historically seen ahead of reversals. Expectations, as evidenced by the melt up talk, on the part of the majority of investors and commentators, are undoubtedly stretched and this is also a trait frequently seen ahead of important market reversals.
Strategy Thoughts: December 2017
A boom in FOMO is yet another warning sign?
I have never seen FOMO, or fear of missing out, so great as is now being manifested in Bitcoin. I have received more questions on this so called ‘crypto currency’ over the last month than anything else, ever, in my thirty six years of following investment markets. It is truly a wonder to behold and the mania driving it has now outstripped anything I have witnessed in my lifetime, or that I have read about historically. Someone I deeply respected during the tech boom of the nineties commented that attempting to jump off a run-away train could be harmful to your health (and wealth). This was certainly true, but, in the end, it was not as harmful to either when that run-away train finally was derailed. The same will be true for Bitcoin.
Apart from continued ‘extrapolation’ in prices little has changed over the last month, however, that price extrapolation has resulted in a further stretching in expectations. Dangerously, this leaves little room for surprise and great scope for disappointment.
Strategy Thoughts: November 2017
What do tops feel like, and what are credit markets forecasting
now that everyday it’s RISK ON
I concluded last month’s Strategy Thoughts with the comment that ‘the risk of something dysfunctional happening’ had continued to increase. Since then nothing dysfunctional has happened, the ‘benign’ grind higher has continued, but with this so too has the risk. Narrowing credit spreads, rising economic and earnings forecasts, dip buying and yield chasing are all signs of elevated and rising expectations, all of which raises the possibility of disappointment and so an important market top in many assets. In this month’s Strategy Thoughts I review the characteristics that are typically seen at market tops and conclude that many are already in place and raising the warning flags that most are only too happy and comfortable to ignore. Finally I examine the conundrum facing the majority of central bankers around the world, their impotence to break the deflationary spiral we have been in for years and actually drive up inflation.
Strategy Thoughts: September/ October 2017
The power of being an OUTLIER
Markets have continued to rise through the third quarter, accompanying this rise has been increased confidence and expectation with continued low volatility. On the surface this may seem to be the ideal investment environment; steady orderly gains with minimal volatility. Unfortunately, the outcome, as so often happens in investing, may well be something quite different than what the vast majority now hope for, and even expect.
This month’s Strategy Thoughts reviews many of the reasons currently being used to justify a continuation of the current benign investment environment and demonstrates why most should be seen as a warning sign, not a green flag. I also revisit the value and importance of daring to be different, or the power of being an outlier as the FT described it recently, and provide an update on the STA portfolios.
Strategy Thoughts: August 2017
It remains an Expectations Game!
And expectations are getting even further stretched
Having not published a Strategy Thoughts since May it is both frustrating and gratifying to see that my concluding remarks from three months ago still apply. On the 11th May I concluded with.
Naturally there are many things, particularly geopolitically, that investors could worry about if they chose to, but right now it seems they don’t, and therein lies the risk. The ‘wall of worry’ is not summited when there is nothing to worry about, it is summited when the vast majority choose not to worry, and markets don’t roll over because something bad suddenly happens, rather they peak because the news whilst good in an absolute sense it is not good enough to qualify as a positive surprise. From there the slide down the ‘slope of hope’ begins. Extended expectations, low levels of worry, record low volatility and weakening financial stocks are all hinting an important inflection point may be imminent.
Whilst it is apparent that all these comments still apply, particularly on the geopolitical front, it is frustrating that the hinted at inflection point has so far only been seen in selected indices, such as transports, small cap and selected European markets. Unfortunately, just because something that may have been feared hasn’t happened it doesn’t become less likely, yet in markets this is exactly the way in which the majority behave. As human beings we are expert at extrapolating the recent past way into the future and so the longer a bull market lasts the more confidence the majority has that it will last even longer. This is not a behaviour that any investor should take comfort in and yet that is exactly what is being seen currently, this makes the risk of a very important reversal in many markets even higher now than it was three months ago.
In this edition of Strategy Thoughts I’ll review; the North Korean ‘Wall of Worry’, the record low volatility, the super extended expectations for the future and the blind belief in the power of ‘economics’, and the performance of financial stocks.
Strategy Thoughts: May 2017
Buy the Rumour, Sell the News
It’s an Expectations Game!
Over the last few days there has been much discussion about the outcome of the French election and the ‘surprising’ weakness seen in the Euro in its immediate aftermath. The dominant conclusion has been that this is just another example of ‘buying the rumour and selling the news’. There is an element of truth in this, however, investors should take a slightly deeper look at this old adage and understand that the real driver of market movements is expectations. In this month’s Strategy Thoughts I review the importance of looking at news from an expectational standpoint, reflect upon Goldman Sachs and whether they are doing ‘God’s work’ or whether they are merely ‘human’, question what financial stocks and volatility may be hinting at for markets generally and present some expectations that may now be at an extreme.
Strategy Thoughts: April 2017
An ‘Existential Crossroads’ as Optimism soars!
On the 3rd of April the CFA Institute released a study based upon surveys conducted with more than 1,000 investment industry professionals. It was titled ‘The Future State of the Investment Profession’ and described the industry as being at an ‘existential crossroads’. Two of the pressures on the industry were pinpointed as an expectation of lower profit margins and a continuation of the growth of passive investment, at the obvious expense of higher margin active approaches. These are important trends, however, for the underlying investor the crossroads may be somewhat different. Passive versus active is an important question that all investors should consider but it is far from the most important driver of underlying investor returns. In this month’s Strategy Thoughts I examine just why it is that the majority of investors get far worse long term returns than even the simplest low cost funds would have delivered and describe a solution that would present an even larger ‘existential crossroads’ for the investment industry than contracting margins or the active versus passive debate. I also look at the extremes in sentiment that have become more extreme and revisit, again, the results of looking at Apple from an expectational basis.
Strategy Thoughts: March 2017
But now is not the time to fold
Over the last month US equities have rallied, European markets are up a similar few percent, Japanese equities are up less than one percent, as are China, Australia and New Zealand. This continued advance in equity markets since the US election should be a surprise to the vast majority given the rampant fear expressed widely by so many about the then unlikely prospect of a Trump victory. However, the reverse now seems to be true. As I write this edition of Strategy Thoughts the US Federal Reserve has just raised interest rates again and the broad consensus continues to grow, that the US economy is in good and improving shape and that further rate hikes lie in the near future. Whilst equity markets may have edged slightly higher the same cannot be said of commodities, particularly oil and gold. In this month’s Strategy Thoughts I examine how frustrating this recent market action has been, liken it to previous periods of frustration, and highlight the danger of the majority apparently understanding why a particular outcome is likely.
Strategy Thoughts: February 2017
Where are the extremes?
And the importance of Discipline
Last month I concluded that getting out of the market may feel as dangerous as jumping off a runaway train, particularly if the Trump ‘honeymoon’ continued, but that getting out was exactly what any investor interested in capital preservation should do. Since then, with only a brief hiatus, the runaway train has continued. Unfortunately this has only served to make the majority of investors even more comfortable that what has already been enjoyed will continue. Attitudes, and so expectations, across a number of asset classes have stretched to historically extreme levels. This doesn’t mean that an immediate reversal is certain, however, it should highlight to all investors that the risk of widespread disappointment has dramatically increased. This month’s Strategy Thoughts examines a number of these expectational extremes to highlight the increased risk of a reversal in both US equity markets and the oil market, and the possibility of a further bear market rally in US treasuries. Finally, this month’s Strategy Thoughts examines the importance of discipline for any investor, particularly in light of the currently raging active versus passive debate, and provides some further updates on the STA portfolio.
Strategy Thoughts: January 2017
Does a New Year Change Anything?
2017 ended amid much hype and expectation for the stock market, at least in the US, in the wake of the rally following Donald Trump’s election victory. In late December a CNBC ‘investment expert’ forecast that the Dow would hit 20,000 in January and 30,000 in the next four or five years. More recently other commentators have come out with a selection of remarkably precise forecasts, one for 31,000 in two years, another for 38,820 as part of a ‘super boom, and there has even been a forecast for Dow 50,000. The last time such numbers were so publicly discussed was in the second half of 1999 after books proclaiming Dow targets of 36,000, 40,000 and 100,000 were published. Perhaps this time it will happen, but almost certainly it won’t. It is more likely that all these forecasts are just further expressions of the heightened level of expectations that are now priced into the US market. Unfortunately heightened expectations always result, eventually, in disappointment. This month’s Strategy Thoughts looks at some measures of those expectations, question whether the rest of the world can withstand a US bear market through the lens of history, revisits the still rising US dollar and explores what it is that allows an STA approach to deliver the long term returns that most investors not only want, but need.
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Strategy Thoughts: December 2016
The Trump Rally Continues!
But for how long?
The last month has seen the equity markets surge and not just in the US which has recorded multiple new all-time highs, all, apparently, on the back of Donald Trump winning the US election. In this month’s Strategy Thoughts I look at the continuation and extension of the remarkable reversal in attitudes and expectations that this historic election has brought about and raise the possibility that the heightened expectations now so apparent only increase the risk of disappointment. I also look at the effects this attitudinal shift has had on the US dollar and consumer confidence.
Finally this month I look at the danger of year ahead forecasts and take a look at the experience of the Philippines market through a period that has seen tremendous economic growth but disappointing equity market returns. All of which highlights the importance of understanding just what it is that really drives markets.
Strategy Thoughts: November 2016 –
Trump wins. Should we still be worried?
I was always going to title this edition of Strategy Thoughts ‘Should we still be worried?’ following on from last month’s title ‘I’ve been concerned for a few years’. However, in the wake of Donald Trump’s historic victory it seemed sensible to add ‘Trump wins’ to the question in the title, it is a very important question. This month’s Strategy Thoughts looks at where expectations were ahead of Trump’s upset victory, how they changed after and what his victory may lead to over both the near term and, far more importantly, over the longer term. Also this month I look into the probability of increasing volatility and what that may do to investors’ levels of worry and finally I reiterate the importance of discipline to help any investor deal with worry.
Strategy Thoughts: October/November 2016
“I HAVE BEEN CONCERNED FOR A FEW YEARS” – Carl Ichan on CNBC 17/10/16
When I read billionaire investor Carl Ichan’s comments they certainly struck a chord with me, he went on to imply that the more time passed the more concerned he became. This is the sensible and logical conclusion to come to; however, it is not the path that most investors follow. Unfortunately one of the many behavioural biases that best most humans is recency bias. This bias tends to result in the extrapolation of recent trends way into the future and to ignore the much longer term framework. The longer that trend continues the more convinced we become that the trend is valid and long lasting. In markets this results in investors becoming more confident that nothing bad will happen the longer that nothing bad has happened for. This then builds complacency and history has repeatedly shown that markets peak amid such complacency and that something bad tends to happen when the majority least expect it and are least prepared.
This month I examine how long it has been since anything really bad happened, I outline a number of the reasons why, like Carl Ichan, my levels of concern have continued to rise, and finally I provide an update to the All Season STA portfolio that I introduced last month and has attracted a lot of interest, and questions, since then.
Strategy Thoughts: September 2016
A World of Uber Complacency – The problem with ‘Other People’s Money’
“Every cycle in human history has ultimately come to an end. Credit-enhanced cycles come to worse ends than the normal kind.” Tad Rivelle, chief investment officer of fixed income at TCW Group
Over the last month most equity markets have been fairly quiet, this may be seasonal or it may hint at a growing level of complacency. This month’s Strategy Thoughts explores the world of ‘Uber Complacency’, a term coined by hedge fund manager Jeffrey Gundlach. It also looks at where expectations may currently be for an asset that hasn’t been so quiet recently, oil, and raises the possibility that a disappointment may be approaching.
Finally in this month’s edition I pick up on a topic I aimed to cover last month but ran out of time and space, ‘The Problem with ‘Other People’s Money’. An outstanding book that touches on a number of issues that should concern anyone involved in or with the fund management and investment business, a group that I should imagine would include most readers in one form or another.
Strategy Thoughts: August 2016
It is still all about Expectations – But what a two months!
For most of June and all of July we were travelling (and golfing) through France and England. It was fascinating to be there for the build up to, what will forever be remembered as, the ‘Brexit Referendum’, and almost more interesting to witness the aftermath. Understandably there was some extreme sensationalism both before and after the vote, and markets displayed the expected volatility. There has been an enormous amount of debate as to what the referendum result means for economies and markets going forward, this is understandable, however, my major concern is that this is just another illustration of the confusion between cause and effect that is repeatedly seen in markets. The decision to leave the EU on the part of the UK was an understandable outcome of the declining social mood that has been apparent throughout most of Europe and the UK for more than a decade. It will no doubt be seen as being a cause of whatever may happen next, I firmly believe that this is the wrong position for anyone, but particularly investors, to take.
In this edition of Strategy Thoughts I will review two topics at some length and bring one other to a close. Firstly I will review the Brexit decision, how it may fit into the longer term outlook for Europe and attempt to clarify the confusion over what may be cause and what is effect and between causation and correlation in markets. The second subject is one I have addressed in the past but is of particular importance now, the danger of chasing, or reaching for, yields. With long term yields still close to record lows, and negative yields becoming commonplace, it is understandable that investors are looking to junk and emerging bond markets for solutions but the recent action in the Japanese bond market and the extremes of optimism currently present in bond markets should be seen as cautionary flags for investors.
Finally I will bring my tracking of the price performance of Apple versus AT&T to a close. It has been a wonderful real time illustration of the value of looking at markets from an expectational point of view.
Strategy Thoughts: May 2016
How things have changed – The dollar, equity markets, Apple and the danger of Tina Fomo
Over the last few months expectations towards a number of markets have changed dramatically. Given that it is expectations which are reflected in markets and that it is surprises and disappointments driving markets these recent swings in expectation have laid the foundations for what may be some important reversals in markets. In this month’s Strategy Thoughts I re-examine the US dollar and the recent extreme negativity it has attracted and raise the possibility that the currency’s next bull leg has just begun. I also question whether the remarkable bounce back equity markets have enjoyed over the least four months is sustainable given the accompanying, and very rapid, bounce back in expectations towards global equities, and I revisit Apple. Over the last fourteen months I have been tracking the relative performance of Apple and the stock it replaced in the Dow, AT&T. Since that switch was made the underperformance of Apple has been enormous, however, now it seems that expectations may have begun to catch up with and match the deterioration that Apple has suffered.
Finally this month’s Strategy Thoughts looks at the danger of relying upon whatever may be obvious to everyone to support a market view. In the past this may have been liquidity or interest rates, now it is two acronyms; TINA and FOMO. There is no alternative and fear of missing out.
Strategy Thoughts: April 2016
The Slope of Hope
And why you should worry!
World equity markets rallied throughout most of the month of March, continuing the rally that had begun in mid February, and investors breathed a collective sigh of relief. After one of the worst starts to a year ever, something that no one it seems was anticipating, the mood of investors has been rapidly transformed from fear to hope. There is a growing feeling that ‘the worst is over’ and that now things can get back to more of what the majority think of as normal, rewarding bull markets.
Unfortunately the alacrity with which investor mood has swung through 180 degrees should be seen as a cautionary rather than an encouraging sign. In this month’s Strategy Thoughts this eagerness to become positive is looked at from the perspective of Chinese and the broader emerging markets, and also the US market where the situation now is an eerie echo of the hope seen in May 2008. Needless to say, the conclusion this month continues to be one of caution. Investors’ focus should continue to be on capital preservation rather than chasing the increasingly popular, and understandably comfortable, hope.
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Strategy Thoughts: March 2016
What have we learned in eight years?
Since last month’s Strategy Thoughts equity markets have stabilised and in many cases rallied, commodities have generally done the same thing and measures of volatility have fallen. This probably makes many investors feel somewhat more comfortable now that markets are once again ‘behaving’, and perhaps most worryingly, at least for me, is that the driver of the market seems to now be clearly understood, oil.
In this month’s Strategy thoughts I will examine the supposed relationship between oil and the stock market, look at how easily we humans forget lessons we learned, just when remembering them would be so valuable and take a look at a number of markets from a longer term, secular, perspective. But perhaps the most important message in this month Strategy Thoughts, and an answer to the question in this month’s title, is encapsulated in the famous quote from German philosopher Friedrich Hegel:
“The only thing we learn from history is that we learn nothing from history.”
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Strategy Thoughts: February 2016
The Challenge Continues
As the threat of Deflation grows!
I ended last month’s edition of Strategy Thoughts with the observation that 2016 ‘may well prove to be a most challenging year’, and given what has already occurred this certainly seems to be the case. Equity markets throughout the world have trended lower; in Europe the Euro Stoxx 50 index has already lost 15% and is now down more than 25% from its high in April of last year, in the US the broad S&P500 has already slipped 10% this year and the small cap Russell 2000 index has lost 15% so far in 2016 and like the European index is down 25% from its 2015 high. In Japan the Nikkei has also fallen 25% from its high of last year and is already down 12% in 2016 and the Australian ASX index has lost 6% so far this year and nearly 20% over the last eleven months. Other asset classes have not fared well either with the high yield bond market extending its fall from last year with the ETF JNK falling 5% year to date on top of the 25% it lost in the second half of last year, and commodities have fared poorly too with the CRB index slipping 8% year to date and 28% over the last twelve months. Capturing just how miserably the year has started is the index that caught the attention of so many eight years ago through the GFC, the Baltic Dry Freight index. This index has so far fallen more than 35% and is down a staggering 75% since August of last year.
Remarkably, despite this widespread misery in markets, hope persists and so the slide down the ‘slope of hope’ looks set to continue.
In this month’s Strategy Thoughts I will examine the ‘slide’ and the ‘hope’, but perhaps more importantly I will revisit a subject that has concerned me for a number of years now, deflation.
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Strategy Thoughts: January 2016
The expectations game
In mid-December I concluded that month’s issue of Strategy Thoughts with the comment;
My real concern now is that the slow motion topping process, that has been unfolding for several years across asset classes and regions, will become a more homogeneous and damaging bear market.
Now, one month later, it seems that it has. After I wrote that concluding remark most markets rallied briefly before resuming their declines. Since the end of November junk bond indices have declined about 6%, the S&P500, Shanghai Composite and FTSE have all fallen 8%, the Hang Seng index 9%, the NASDAQ 10%, the Nikkei 11% and the German DAX 14%.
The blame for the decline seems to be once again being placed upon China. In this month’s Strategy Thoughts I’ll look at what has been the worst start to the year in decades and whether it is all about China, examine where the return, if any, has been over the last year, and then finally look at where expectations are currently and what this may mean for 2016.
The bottom line will be that preservation of capital, as I have been reiterating for a couple of years now, should remain the single most important investment goal for investors this year.
Strategy Thoughts: December 2015
A lost twelve months? Or, Risk Is Not a Knob
This month’s Strategy Thoughts spends no time discussing the subject that is currently dominating the investment media, the will the Fed or won’t the Fed raise interest rates this week. I believe this to be an irrelevance that will have little bearing on how markets behave over the coming weeks and months. Of far greater importance is that investors realise; just how much risk they may currently be taking (and that greater risk in no way guarantees higher returns), how much deterioration has already occurred across global markets, the extent of the deflationary pressures that continue grow and that ‘chasing yield’ has already proved dangerous and is likely to become more so.
Strategy Thoughts: November 2015
Cause, Effect, Risk and Deflation
This month’s Strategy Thoughts was originally going to be titled Cause, Effect and Risk, however, in the last few days I have studied the latest World Economic Outlook from the IMF and have become increasingly concerned regarding the global risk of DEFLATION. Interestingly I am not alone. The IMF’s chief economist just last week commented that he was worried about ‘deflation globally’. I have written about the risk of deflation many times over the years and it is clear that this risk has only grown, particularly given the extreme falls commodity markets have suffered.
Despite some selected larger equity markets, notably those large cap indices in the US, recovering all or nearly all of their August declines I continue to see the cracks that occurred in the same light that I did last month and that we are still only at the ‘end of the beginning’ of what will be the next global cyclical bear market.
Strategy Thoughts: October 2015
Was that it, or was it just the beginning?
Last month’s Strategy Thoughts finally got written, after a number of false starts as markets plunged, on the 25th August. This was almost exactly at the low point of the recent decline. At that time the MSCI world index was down a little over 20% from its late May peak, officially in bear market territory. Since then markets have recovered somewhat with the MSCI index rising about 10%. The question this raises is; was that it, or was it just the beginning?
In September of 2009 I paraphrased the great Winston Churchill by titling Strategy Conclusions “The Beginning of the End, or the End of the Beginning?” Then I was describing the new cyclical bull market that at the time was just six months old but had seen global markets rally substantially. I concluded that what had been enjoyed up until then was far from all I expected and that we were a long way from the beginning of the end. The situation now is almost the mirror image of what I described six years ago. A cyclical bear market began across various asset classes and regions of the world five or six months ago, and what has been seen to date, even including last month’s volatility, is likely just a beginning.
Now is the time to really focus upon capital preservation and avoid being tempted by the siren calls of TINA (there is no alternative). This will undoubtedly feel uncomfortable, but as the founder of investing giant Fidelity, Ed Johnson II, wrote years ago;
“When trading with the crowd exercise caution, when trading against the crowd be BOLD”
Now is the time for BOLDLY focussing upon capital preservation
Strategy Thoughts: September 2015
‘Healthy Correction’ or the early stages of a Bear Market?
For months I have continued to reiterate that preservation of capital should continue to be the single most important objective of all investors. Despite the seemingly easy money that could be made in some of the major equity markets, particularly in the US, I have consistently urged against chasing those gains. This continues to be my central message, and, despite what may happen over the next few days or weeks, during which time we will no doubt see how high a ‘dead cat’ will ‘bounce’, I continue to believe that yields should not be chased and risk should be avoided.
Strategy Thoughts: August 2015
Europe, China and Gold
For much of the last two months I have been travelling through Europe, the UK and Japan. Although this trip’s primary focus was golf it was certainly fascinating to watch the unravelling of the Chinese bubble and the repeated bouts of brinksmanship in Greece. It has also been interesting to witness the almost total give up now being displayed by the business media towards gold as the price has fallen almost 15% since mid May and now languishes at its lowest price in more than five years.
My overarching caution towards most investment assets has not altered since late May, in fact in many assets the action of the last two months has only served to reinforce that caution, however, gold may now present the best investment opportunity that has been seen for quite some time. In this month’s Strategy Thoughts I will review what has been happening in Greece, and compare it to previous Greek Exit scares, question what the bursting of the Chinese bubble might mean and also explore the investment case for gold.
Strategy Thoughts: June 2015
Time in, or Timing?
Earlier this month I received some literature from a local investment organisation urging me it was ‘time in not timing’ that matters in investment. Whilst this did not totally surprise me I was once again reminded how frequently history repeats itself, especially in investment markets, due to our collective inability to remember lessons that have been previously painfully learnt. I have attempted to counter the obsession for ‘time in’ twice over the last decade and a half, firstly as the turn in the millennium approached and then in 2006/7. It is fascinating, and understandable, that the doctrine for ‘time in’ or ‘buying and holding’ gets stronger and stronger the longer a bull market lasts. To some extent it is merely stating what has by then become obvious to everyone. Unfortunately, as I discussed last month, by the time something is obvious to everyone it is of very little investment value. I fear that the ‘time in’ urge this time will be as poorly ‘timed’ as it was on the last two occasions.
Strategy Thoughts: May 2015
Disappointment may seem an odd title, particularly given that many world equity indices are at or near all time highs, but this current elevation, in both equity markets and investor mood, needs to be put into some perspective. The MSCI All Country World Index is actually only 1 ½% above where it was back in late June of last year and has only risen at an annualised rate of slightly greater than 3% over the last seven years. The period a retail investor has been able to invest in the index directly via an ishare exchange traded fund. Obviously I have been selective in choosing the past high points in the index to make these calculations, they would look far more flattering if I measured returns from recent and long term lows (14% since last October and an annualised return of 17% from the March 2009 lows) but the problem is the vast majority of investors never get anything close to the best possible return, and many get something closer to the worst. In this month’s Strategy Thoughts I explore why this is and raise some possible solutions to this challenge. I also review the danger of elevated long term expectations and revisit the AT&T Apple substitution I discussed last month.
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Strategy Thoughts: April 2015
What everyone already knows doesn’t help! The Wonder of Apple?
Over the last couple of weeks two news items have dominated the business pages, the first was the Fed’s removal of the word ‘patient’ from their latest policy statement. This resulted in a surge in the Dow and a plunge in the dollar over the short term. I read very little into this, whilst the media and market machinations and gyrations before and after each Fed utterance is entertaining, and to some extent understandable, I don’t believe it is in anyway helpful to investors. My concern continues to be that a deflationary disappointment, for both the Fed and investors, lies ahead and therefore believe that a cautious outlook continues to be warranted. The second news item that so captured the media recently was the inclusion of Apple in the elite of the Dow Jones Industrial Average. In and of itself I don’t think that this story tells one anything about where markets may go, however, the history of changes in the Dow does tell an investor about what really drives markets. In this month’s Strategy Thoughts I will explore the history of the Dow, look for some surprises and then share some longer term perspectives, particularly for Australian readers.
Strategy Thoughts: March 2015
“A feeling of contentment or self-satisfaction, especially when coupled
with an unawareness of danger, trouble, or controversy.”
This month’s Strategy Thoughts was originally going to be titled ‘European Complacency’ as over the last month I have been amazed at how much has been published and broadcast that seems to totally dismiss there even being a problem in Europe, at least not one that should trouble investors. I then focussed my attention on what is undoubtedly a growing problem in Europe, deflation, but with the recent release of the January CPI number in the US it became apparent that the pernicious problem of deflation was spreading. But again, as with the broader problems facing the EU, the threat of a deflationary problem was broadly dismissed by the media. This was another very worrying sign of complacency. Finally, particularly in the US, with markets still battling higher, faith in behaviours such as ‘buying and holding’ and ‘dollar cost averaging’ have regained the pre-eminence that they held back in the mid 2000’s along with a belief in the ‘science’ of modern portfolio theory and the efficiency of markets. The many shortcomings of all these beliefs and behaviours that were so profoundly and painfully exposed through the Global Financial Crisis have seemingly been forgotten given the relative calm of the last few years. This is yet another sign of deep and worrying complacency, and so I simply shortened this month’s title to ‘Complacency’.
Strategy Thoughts: February 2015
More Extrapolation and Overestimation!
Last month I reintroduced and re-explored the tendency that market commentators and economists have for underestimation of the magnitude and durability of a move in a market; that is until it becomes firmly established and accepted, at that point extrapolation and so overestimation become the dominant traits. I described at some length the history of this behaviour in the oil market and the futility of attempting to forecast a move in oil based upon supply and demand, this month I will update that analysis and question whether sufficient over estimation of how low oil could go has been seen in the price of oil to allow for a significant bottom. But first I will highlight some dangers in the, until very recently, still high flying US equity market and highlight the possibility of some meaningful reversals in currency markets. Needless to say I continue to believe that a heightened state of caution is still absolutely warranted.
Strategy Thoughts: January 2015
It will Fluctuate! (J P Morgan when asked what the stock market will do)
The New Year invariably begins with supposedly ‘expert’ forecasts for what the next twelve months may bring, however, the blame for so many forecasts appearing should not be totally placed upon the forecasters. It is important to remember a couple of J K Galbraith’s famous quotes. Firstly he said that the only function of economic forecasts was to make astrology look respectable, and then, perhaps more profoundly particularly at this time of year, he pointed out that economists forecast not because they know, but because they are asked. J P Morgan’s famous quote, which I have employed as this month’s title, is perhaps the most honest assessment anyone can give for what markets may do.
The stock market is a wonderful illustration, and always has been, of man’s inability to learn from experience. The same mistakes made by investors now were made at many other times over the past few centuries, what is perhaps most surprising is that when lessons have been cruelly and painfully learned, such as through the GFC when markets fell fifty to eighty percent in value, is that such vivid lessons can be so rapidly forgotten. Despite the terrible track record of economic forecasters the same questions about what the next twelve months may hold are asked of the same or similar people at this time of year.
In this month’s Strategy Thoughts I will review a number of such forecasts and attempt to see if there are in fact any insights that can be gleaned by looking at them in a slightly different way. I will also revisit a number of topics that I have raised over the last couple of months, namely; Europe, oil and gold and finally I will update the messages being provided by my STA model and the progress that is being made on the STA portfolio product.
Strategy Thoughts : November 2014
Economics versus Sentiment, and Looming Opportunities in Oil?
This month’s Strategy Thoughts is about three weeks late, this is partly due to my three weeks spent travelling around Europe, partly due to there being little change to my overall view and largely due to the time I have been investing in the Strategy Thoughts Allocation Model. The October edition of Strategy Thoughts prompted easily the most feedback of any edition to date and I have been delighted with the level of interest so many readers have in investing in such a disciplined, rules based, investment product. I will keep you all updated on progress in the STA product and if any other readers would like to learn more about the ideas discussed at length last month then please let me know.
Despite little having changed in my overall view towards equity markets over the last six or seven weeks there have been a couple of sharp sell offs in two commodity markets that potentially present constructive opportunities; oil and gold. I discuss the set up for both, from a ‘sentiment’ rather than ‘economic’ standpoint, this month. Also in this month’s edition I review the ‘value’ that perma bull professor Jeremy Siegel, of Wharton and ‘Stocks for the Long Run’ fame, has provided investors over the last decade given the heightened media coverage that his comments are once again garnering. Finally I update some of my observations from last month regarding ‘turns’ that have been seen and finish with some comments on developments with the STA product.
Strategy Thoughts: October 2014
Has a Turn been seen? And an introduction to the Strategy Thoughts allocation (STA) Model
Over the last month many of the forces that I have long feared have begun to manifest themselves across a broad array of markets. In this month’s Strategy Thoughts I highlight some of the reversals, or turns, that have come about as a result of this and raise the possibility that what has been seen to date is only the beginning of what could well be a very damaging period for many investors. It should be clear that there have been no significant changes in my overall global investment outlook.
More importantly this month I will continue to share the very encouraging research that has now become something of an obsession for me. The pursuit of a disciplined rule based approach to investing. My thinking has moved on enormously since last month’s Strategy Thoughts and the results have, to put it quite bluntly, simply blown me away. I have always believed that discipline was the single most important characteristic shared by all successful investors, and I have also always believed that overcoming our enormous psychological behavioural biases was the major challenge most investors faced. Over the last month the ‘Rules’ I outlined in the September edition have been modified, or developed, further and I have applied them to substantially more markets than last month. I have dropped the awkward SAA+TAA+Bonds moniker I had employed for the model and replaced it with the Strategy Thoughts Allocation (STA) model. I am confident that readers will be as impressed and surprised as I was by the results of the STA. I appreciated all the encouraging feedback last month and would certainly welcome more this month as I believe the STA goes a long way to providing the average investor with the potential for very healthy long term returns with substantially less volatility. Particularly when compared to traditional peer focussed, relative performance obsessed economic model driven fund management.
Strategy Thoughts: September 2014
The Beginning of a Disciplined Solution
For a number of months now I have been reiterating the following mantra:
I continue to believe that preservation of capital will be the most important investment goal, not chasing further gains or higher yields, for most investors over the coming months.
This continues to be my firmly held conviction, in spite of, and also because of, the continued buoyancy that has been displayed by a number of global equity markets.
As my outlook has not changed over the last month I have spent a considerable amount of time exploring the idea that a rules based solution to the investment conundrum, as I proposed in last month’s Strategy Thoughts, should be possible and would be of immense value. In this month’s Strategy Thoughts I outline where my thinking has gone in this pursuit and the results of these endeavours thus far.
Finally, for the golfers and gamblers amongst you I also I have a recommendation, driven by the findings of my book, ‘Bulls, Birdies, Bogeys and Bears’ on the upcoming Ryder Cup.
Strategy Thoughts: August 2014
Last month I included in my concluding remarks with the following; I continue to believe that preservation of capital will be the most important investment goal, not chasing further gains or higher yields, for most investors over the coming months.
This very much continues to summarise my views. Over the last month we have seen a hint of the danger of chasing yields with the Barclays high yield bond ETF having fallen 4% on fairly heavy volume wiping out half of its gains of the last twelve months. At the same time most equity markets have also slipped with some small cap indices down 10% for the month and the US dollar has continued to strengthen slightly. Whether these one month moves mark the end of the cyclical bull market in stocks only time will tell but they do highlight some of the risks that are out there and how quickly things can change.
In this month’s Strategy Thoughts I provide further perspective on the absolute necessity of discipline when it comes to investing, review some of the investing rules of investment greats past and present that can help provide that discipline and then provide some insights that should assist readers to tie some of these rules together and build a simple, disciplined and workable investment approach.
Strategy Thoughts: July 2014
Avoiding the irrelevant crutch
Investors must have an opinion or a view upon what markets are likely to do and why, particularly if they have any interest in having their investments perform and especially if they want to avoid ‘permanent loss of capital’. It is therefore interesting to explore what the majority of investors base their views and forecasts upon, and why. Further, it is really interesting to examine whether there is any evidence that what the majority base their forecasts upon actually provide any insight whatsoever as to what may happen to markets.
In this month’s Strategy Thoughts I pick up on one of the topics that I discussed last month and attempt to add further clarity as to just what it is that drives markets, how this can be identified and then how it can be employed over multiple time frames. Before this I examine the usefulness, or otherwise, of those things that the majority attempt to forecast and upon which they build their investment view, namely; economics, interest rates and earnings.
Strategy Thoughts: June 2014
Will an economic outlook help this time?
There is a growing complacency that all is well in the US economy thanks to the release of some slightly improved economic indicators. This growing complacency should be of great concern to investors as history has repeatedly shown that complacent comfort on the part of the ‘crowd’, particularly based upon economic reports and extrapolations, has always been sadly misplaced when it comes to investment markets.
In this month’s Strategy Thoughts I explore several of those historic periods of ‘complacent comfort on the part of the crowd’ and review the ‘value’ that an economic outlook may have provided through those times. I also review the behaviour of the widely followed precious metals, the ten year government bond yield and the Japanese equity market recently.
Strategy Thoughts: May 2014
Beware the correlation and causation delusions
The seventh Minor Zurich Axiom
I began last month’s Strategy thoughts with the major Zurich axiom illustrating the difference between confidence and optimism in investing. It continues to be the case that understanding and appreciating that difference is essential for all investors, but it is also the case that the behaviour highlighted by the seventh minor axiom, mistaking correlation for causation, has, and continues to be, one of the primary drivers of the high levels of optimism that continues to be present in many equity markets.
Over the last month markets for most assets, from gold to copper through to global equities, have traded in a broad sideways manner with the only minor exception being longer term interest rates falling slightly. None of this has done anything to dampen my level of concern, I continue to fear that the next important cyclical move across most markets will be a bear market that will do far more damage than the 10% ‘healthy correction’ that the majority of commentators seem to fear as being the ‘worst case scenario’.
Strategy Thoughts: April 2014
Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic
The ninth major Zurich Axiom
I was intending to title this month’s Strategy Thoughts ‘No change, but what if I am wrong?’ and then I reread the classic of investing ‘The Zurich Axioms’ and thought that their ninth major axiom was highly appropriate in the current investment climate. Optimism is currently very high whilst at the same time little consideration is being given to how anyone will handle ‘the worst’. I have long feared the onset of ‘the worst’ in the form of another cyclical bear market such as most of the developed world’s markets suffered from 2000 to 2003 and 2007 to 2009. Some asset classes and a number of equity regions have been suffering cyclical bear markets for two years or more, however, a number of headline grabbing markets, particularly in the US, have so far not rolled over. This has led a growing number of commentators to describe the move upward since early 2009 as being merely the first stage of a new secular BULL market. Naturally I do not share that view, however, it is always a very healthy exercise when investing to consider the implications of one’s central view being wrong.
In this month’s Strategy Thoughts I review what such an outcome may imply and I also explore once again the level of ‘optimism’ that is invested in those markets that remain elevated and question how ‘confident’ those optimists should be. Finally I have included at the end of this month’s edition some extracts from the recent investor letter by the legendary value investor and Baupost hedge fund manager Seth Klarman.
Strategy Thoughts:March 2014
What Value, Value?
Despite my outlook not changing I have been struck by the enthusiasm and complacency of many commentators over the last month as markets have rallied. A summary of the views expressed, especially from US based commentators, is that given the majority do not see much capacity for price earnings multiple expansion then appreciation through the year as a whole will be more modest than last year and that markets are likely to ‘range trade’ for some time.
This sounds like a considered and measured view, one that may be taken as a source of comfort by many investors. Unfortunately, as is so often the case in investing, any such comfort is misplaced. Arguing that gains are likely to be less extravagant than those recorded in 2013 is almost stating the obvious. The US market had its best year in 2013 since the mid-nineties and one of its fifth or sixth best years since World War II. Stating that markets may be range bound also sounds considered whereas in fact it is just a simple extrapolation of what has been witnessed since October last year. Since then the Global Dow has risen or fallen only 3% and remains comfortably locked within that range. Sadly, simple extrapolation, whilst an easy and comfortable default position to slip into, is rarely helpful to investors.
What intrigued me about all the commentary I was reading was that no one appeared to be calling for price earnings multiple contraction with many continuing to claim that stock markets are fine places to be invested because valuations are fair or in some cases even cheap. This valuation ‘crutch’ is something I have attempted to knock out from under readers for several years and this month seems to be another sensible occasion to do some more ‘knocking’. My conclusion of this exercise will almost certainly be; firstly stocks are far from cheap, and secondly, and perhaps more importantly, valuation doesn’t tell investors anything over time frames that they are most interested in!
Strategy Thoughts:February 2014
Has a cyclical peak been seen?
On the 19th December, immediately after the US equity market had delivered a resoundingly positive response to Federal Reserve announcements regarding ‘tapering’ I distributed an interim report that firstly questioned whether the Federal Reserve really did ‘know’ what the economy was going to do, and secondly whether all that was then being interpreted as great news for the market had not in fact already been more than discounted by the market. On that day the Dow Jones Industrial Average closed up 360 points from its low point immediately after the tapering news was released. It then rallied for eight more trading sessions, amid ever more optimistic forecasts from economists and strategists, through to the final session of 2013. Since then all of those gains have been lost and the market, at the time of writing, sits at the same level as it was the day before the tapering news created such excitement and the risk that a new cyclical bear market has begun is high.
Strategy Thoughts: Interim Report for December 2013
Don’t rely on the Fed-Speculation continues to be dangerous!
Strategy Thoughts:December 2013
The ‘Dao’ of Capital – And the danger of speculation!
Understanding why any portfolio looks the way it does requires an appreciation of where markets lie over multiple time frames and requires a clear and articulated discipline. In this month’s Strategy Thoughts I outline what I believe is the most effective method of determining appropriate long term strategic asset allocations, how they should be managed and why chasing equity returns now is more akin to speculation than investment.
Strategy Thoughts: November 2013
Long Term Investing – The Opportunity in ‘Global Cooling’!
Over the last few weeks my views as to where markets are and what the coming months and years may hold have not changed. The recent stock market strength has almost entirely been born out of the supposed virtue of a weaker than expected economy and therefore the comfort that the Fed will not ‘taper’ anytime soon. This is a continuation of the ‘bad news is good news’ explanation that has accompanied much of the latter half of the current cyclical bull market and is an investment theme that I cannot urge investors strongly enough to ignore. The fact that it is seemingly gaining credibility, and an increasing following, almost daily should be seen as providing a warning, not a reason for increased comfort or complacency. Given that little has changed over the shorter term I have decided to revisit a far more important theme this month, long term investing, and hope to highlight what the majority will almost certainly see as a most controversial area for long term investing, Climate Change, but not warming, cooling!
Strategy Thoughts: October 2013
Has the ‘Wall of Worry’ already been climbed?
Over the last thirteen years I have referred to the old Wall Street adage that ‘Bull markets climb a wall of worry’ many times, it can provide a useful contrarian perspective. However, late in bull markets the expression becomes increasingly misused and that misuse ultimately, and highly frustratingly for the majority, only ends up proving the value of the adage when it is used correctly. It is now being severely misused, just as it was in the late nineties and again in late 2007. In this month’s Strategy Thoughts I will outline what I believe the old adage means and also how I think it should be used.
Not surprisingly I continue to conclude that globally risks remain very high and that a continued very cautious investment strategy is warranted.
Strategy Thoughts: September 2013
‘frustration’ and more questions, perhaps the slide has begun?
In this month’s Strategy Thoughts I will review just how frustrating the recent past has been and explore ways this frustration may get resolved. I will also examine a few of the most frequently heard questions regarding the current state of markets and finally I will highlight a, albeit early, sign that the current long running secular bear market is well past its midpoint and that the end may be insight, at least from a time standpoint if not from a price and valuation standpoint.
Strategy Thoughts-Interim Report: August 2013
This interim report should only be read by those Strategy Thoughts readers with an interest in Golf, The Gender Gap or Gambling. It concerns the upcoming female version of the Ryder Cup, the Solheim Cup.
Strategy Thoughts: August 2013
It’s never too early to think about a bottom!
I began last month’s Strategy Thoughts, ‘Don’t rely on central banks or even TINA!’, with comments about the worrying complacency that was emerging. The falls that many equity markets had suffered were amongst their most severe of the year, and yet there was an amazing calm amongst most investors. Apparently central bankers would always bail them out and anyway, what other alternatives were there to equities. Naturally these attitudes did not sit comfortably with me and I reiterated my extreme caution.
Over the last month that complacency seems to have been justified, most equity markets have risen a few percent and bond yields have also risen further. The unfortunate side effect of this is that complacency has intensified, as evidenced in the almost record low readings recorded recently in the CBOE volatility index (The VIX), and so the dangers to complacent investors have only increased. I remain as cautious, if not more so, than I was last month.
Strategy Thoughts: July 2013
Don’t rely on central banks or even TINA!
Over the last month many markets have suffered their most dramatic setbacks of the year. Severe falls have been seen in precious metals and selected emerging markets, bonds have also fallen sharply as yields have spiked and developed equity markets have also corrected. Amazingly these more turbulent times have been greeted with a high degree of calm, a complacent desire to ‘buy the dips’ and an almost religious belief that all is well in equity markets because 1) the Federal reserve won’t allow anything bad to happen, and 2) equities have to be bought because there is no alternative (TINA). All of this alarms me greatly.
Strategy Thoughts: June 2013
Are Equities Really Cheap?
If the broad media are to be believed then equities are the place to be invested, apparently we are currently still only in the early stages of a great (some even describe it as a secular) bull market. Regular readers will know that I do not believe that to be the case at all and have been urging extreme caution for more than the past year. Given that many equity markets have been rising over that period, and that some have recorded new recovery highs, it seems obvious that I have been wrong and in fact I have been receiving feedback from readers telling me just that. I appreciate all the comments that I receive and do attempt to reply as best I can; however, simply stating that I have been wrong because some markets have risen misses the point of what Strategy Thoughts has always been intended to do.
Strategy Thoughts: Interim Report:
In the May edition of Strategy Thoughts I mentioned that after the Socionomics Institute Mood Conference, that I addressed in Atlanta last month, their May edition of the “Socionomist” would feature a number of charts from my presentation. The Institute have kindly given me permission to distribute this months “Socionomist” to Strategy Thought subscribers. I have been a subscriber to the “Socionomist ” for many years, and highly recommend it.
Travel permitting the June edition of Strategy Thoughts will be distributed next week.
Strategy Thoughts: May 2013
The Social Mood Conference and New Bear Markets?
Last month I concluded Strategy thoughts with the following;
“For many months now I have not changed my view, now is a time for caution amid the increasingly optimistic media. Preservation of capital will be most important through the next cyclical downturn and the current environment is not unlike those seen at prior cyclical peaks. It was no surprise that the recent very brief sell off was seen as another opportunity to ‘buy the dips’. Don’t be surprised if a more serious sell off occurs and it is dismissed as just a ‘healthy correction’, all bear markets in their early stages are seen as this ‘oxymoron’.”
Since writing that I have spent the last four weeks in the United States. I played as much golf as I could but also addressed the Socionomic Institute’s Social Mood Conference in Atlanta. It was also clear over the lat month that a number of bear markets continued to unfold; including the acceleration down in gold and the continued unravelling of the previously golden Apple.
Strategy Thoughts: April 2013
How attitudes have changed since 2009!
Very little has changed over the last four weeks. Markets have not rolled over, as I have feared they would for many months now, but this does not reduce my level of anxiety, rather it heightens it. Now is not the time for comfortable complacency about the prospect for ever better returns, but that is what we are seeing to an ever increasing degree with each day that passes. It is vital that all investors recognise just how far attitudes and expectations have changed over the last four years.
Strategy Thoughts: March 2013
Last month I titled Strategy Thoughts ‘Comfortable Company or Anxious Isolation, which should an investor choose?’ I hope I gave a very clear indication that I strongly believed that the ‘comfort of company’ should be avoided at all costs and that ‘anxious isolation’ should be accepted as the only sensible medium term strategy. Since then it seems that the attraction of that ‘company’ has just grown too strong, and that the discomfort, or anxiety, associated with isolation has become too great. The result is that money is jumping into equity markets pushing them higher and fuelling ever higher expectations on the part of investors, all amid the clarion cry of this being a ‘liquidity driven market’. Despite this ever growing optimism, driven by liquidity arguments, now is not the time to become bullish.
Strategy Thoughts: February 2013
Comfortable Company or Anxious Isolation, Which should an investor choose?
I have frequently commented that ‘comfort and success rarely go hand in hand in investing’. This does not mean that one should always seek to do the opposite of what everyone else is doing, just to be uncomfortable and different for the sake of being different. Primarily this is because at no time will absolutely everyone else be doing the same thing, they can’t be, in any market for every buyer there always has to be a seller. However, at extremes of either optimism or pessimism it is vital that an investor recognise that extreme and be prepared to adopt a contrary, and by definition uncomfortable, position. By definition that will be uncomfortable, it will require going against whatever the then prevailing conventional wisdom may be and in a rising market will result in missed opportunities to pick up what the majority will be describing as ‘obvious’ and ‘easy’ returns. The reverse will be true as the troughs of bear markets approach and this discomfort will almost certainly endure for an extended period. This extended period will ‘test’ the resolve and intestinal fortitude of the contrarian that by then may be considering abandoning their ‘anxious isolation’ in favour of the alternative of ‘comfortable company’. This temptation to capitulate must be overcome if the investor is going to achieve true success, hence comfort and success not going hand in hand in investing.
Strategy Thoughts:January 2013
Don’t believe in ‘cause’ and ‘effect’ in ‘highly adaptive complex systems’
Through December most equity markets rallied, then slipped back before rallying at the end of the month and then finally sprinting higher on the back of the long awaited ‘fiscal cliff’ news. That sprint in the first trading days of 2013 pushed most markets to their highest levels of the prior twelve months although some, notably the major US indices, still lie below the highs they recorded earlier in 2012. Media coverage around the impending ‘fiscal cliff’ was incredible with CNBC regularly urging US legislators to ‘Rise Above’. It became a widely held view that should the legislators fail to ‘Rise Above’ and reach some sort of compromise agreement then the US would plunge back into recession and so markets would fall, and so, apparently, it was essential that an agreement was reached.
Strategy Thoughts:December 2012
Investors must know what they are paying for and Why one should be cautious!
Over the last month there has obviously been a lot of news, particularly in the US around the election and its result and the focus on the fiscal cliff negotiations that have followed. However, from an investor’s standpoint very little has changed.
Strategy Thoughts: November 2012
Confidence, Expectations and Markets!
Over the last month markets have broadly meandered sideways and in so doing they have continued to deliver the ‘frustration’ that I discussed at length three months ago. Bulls on both bonds and equities have had both some good days and some bad days, and the same has been true for bears, but on balance there has been no resolution as to whether the action of the last few months has been the cresting of a bear market rally or an extension of a now fairly aged cyclical bull market in equities.
Strategy Thoughts: October 2012
Can all the news be good for the market, whatever it is?
The most frequent feedback I have received over the last couple of months has been that markets have continued to rally, much to the frustration of the bears. However, it is worth digging below the surface of this observation.
Strategy Thoughts: September 2012
Don’t Chase Yield! And don’t believe in the ‘Music Man’!
Last month I likened the recent relative calm evidenced in investment markets as being the ‘eye of a storm’ and questioned how much longer the relatively benign ‘eye’ would linger over markets that had been frustrating to both bulls and bears. Well, the ‘eye’, and the frustration, has continued for at least another month. At the same time volatility measures remain at historically low levels implying that ‘fear’ is not currently the prevalent emotion amongst investors.
Strategy Thoughts: August 2012
Frustration, and the ‘eye’ of another storm!
In last month’s conclusion I wrote;
“The current cyclical decline, which has been seen in commodities as well as stock markets, probably has further to run. It will end with very depressed expectations, no sign of ‘hope’ from yet another summit, economists slashing forecasts for growth and a global recession probably imminent. By the time these things occur it will probably be the case that the recession (it will eventually be determined) had already started and with rampant gloom and dire forecasts abounding.”
Strategy Thoughts: July 2012
Should we Live in HOPE or Should we Sell The News?
This month’s Strategy Thoughts is the first edition to be written since I resigned from ANZ. For the last four and a half years I have been writing Strategy Thoughts for the ANZ Private Bank and its clients throughout Australia, New Zealand and Asia and prior to that, right back to the 2002 cyclical bear market trough, I wrote Strategy Thoughts for the New Zealand Private Bank.
Strategy Thoughts: June 2012
The ‘Slope’ gets slippery!
May 2012 will probably go down as a month that the majority of investors prefer to forget. It witnessed dramatic reversals in just about every asset class and came just as things seemed to be showing at least some signs of muddling through, just as so many had hoped, and it came when valuations were apparently supportive!