by ilene - August 23rd, 2016 2:59 pm
Courtesy of Joshua M Brown
Last fall, financial advisors Anthony and Dina Isola came into our firm to talk shop one afternoon. We were blown away by their passion for saving the retirement portfolios of their clients, many of whom are teachers and professors who are inundated almost daily with bad product pitches at their schools.
Within a few weeks, we were talking about hiring them. It’s one of the best decisions we’ve made so far – an absolute grand slam from a culture perspective.
Tony’s background as a trader-turned-educator-turned-Certified Financial Planner makes him a highly unique animal in our menagerie. He comes to work ready to crush it every day, and he’s armed to the teeth with knowledge about how the machine takes advantage of the investor class at every turn. Dina’s detail-oriented work assures a smooth client experience for all who come to them for help.
Tony’s also got a great blog, called A Teachable Moment. When we set it up for him, we had no idea how consistently good his stuff would be each week.
For example, this bit about the application of history lessons is so crucial:
How can investors act as applied historians and use this skill set to create wealth?
There are several minefields that could easily be avoided with some knowledge of the past:
- Most market corrections don’t turn into bear markets.
- Using leverage to boost investment returns often ends badly.
- The president has very little control over the global economy.
- Buying new financial products at market peaks is a poor idea.
- Bull markets last much longer than bear markets.
- Stocks are six times more likely to be up 20% than down the same amount. (Michael Batnick)
- Uncertainty is always present and it is not a wise choice to use it as an excuse not to invest.
- Stocks will do the best job of protecting future purchasing power over long periods of time.
- Investing in the fastest growing world economies will not guarantee higher investment returns.
by ilene - August 22nd, 2016 3:39 pm
Courtesy of Wade of Investing Caffeine
Like Goldilocks searching for the “just right” porridge, chair size, and bed, so too are investors searching for the Goldilocks stock market that is not too hot or too cold. Many are aptly calling this the “most hated” bull market in recent history as Goldilock investors have decided to stay home rather than look for an investment prize. What many investors don’t quite realize is that waiting too long for an elusive, perfect Goldilocks scenario will only lead to your portfolio getting eaten by unhappy bears.
Waiting on the sidelines for a perfect buy signal is a hopeless endeavor (see also Getting Off the Market Timing Treadmill). The evidence for extreme risk aversion is extensive. From a corporate standpoint, it’s clear executives and board members have been scarred by the 2008-2009 financial crisis. Management teams have been quick to cut expenses and slow to invest and hire. And speaking of hiring, the post-crisis expansion has led to the slowest job recovery since World War II.
In the face of all the investor pessimism, the economy has been adding a few million jobs per year on average, resulting in a unemployment level below 5%; corporate profits at/near record levels; and trillions of dollars of cash piling up on corporate balance sheets. Rather than accelerate investments, companies have by and large chosen to spend that mountain of cash into trillions of rising dividends and share buybacks.
Risk aversion is evident at the individual level as well. Part of the explanation of why corporations have increased dividends to record levels is due to 76 million Baby Boomers approaching or entering retirement. Boomers need more income just as interest rates are rapidly approaching 0%, and in many cases negative interest rates, which effectively means they are earning $0 on their bank savings and losing to inflation.
Collecting fatter dividend checks from stocks actually sounds pretty attractive when individual investors are scared silly about geopolitics, terrorism, elections, Zika virus, and other horror story headlines of the day. Fortunately, it’s profits, interest rates, valuations, and contrarian sentiment indicators that control the stock market (see Follow the Stool), and not Fox, CNN, ABC, NBC, and internet bloggers (myself included).
by ilene - August 21st, 2016 11:32 am
Courtesy of John Mauldin, Outside the Box
There has been a monster debate going on in economic circles as we try to assess the reasons for Brexit/Trump/Sanders and the developed world’s rejection of the directions in which the establishment wants to take us. There are many explanations, which try to spin answers to fit the authors’ own economic or political views; but it all goes back to my thesis that the benefits of globalization, like the future, are unevenly distributed. Those who have been on the short end of the distribution curve are pushing back.
In today’s Outside the Box, Stephen Roach, former chairman and chief economist of Morgan Stanley Asia and now a senior fellow at Yale University's Jackson Institute of Global Affairs, tackles the issue of widespread and growing public dissatisfaction – and not just in the US – with globalization.
Roach distinguishes between Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late 19th and early 20th centuries – and version 2.0. Roach notes that “In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services.”
Not only the scope but also the means and the speed of globalization are now far different than they were for most of the 20th century. But sadly, the economics profession and policy makers have failed to keep up with the sweeping global changes that have displaced so many workers here and abroad. I’ll be addressing this key issue in some depth in my upcoming book, but today let’s focus on Roach’s suggestions for improvement.
I don’t have much to say on the personal front today, and not even much time to say it. My computer crashed in Montana on Monday morning, and it is only this afternoon that I have more than an iPad to work on. New downloads and drivers are taking many hours to install, and there seems to be a constant stream of new ones needed. But we are getting there.
by ilene - August 20th, 2016 2:38 pm
Courtesy of Dana Lyons
Near-term volatility expectations are currently on a stretch of unprecedentedly low levels.
About a month ago, we began to take note of investor complacency creeping into the stock market. At the time, the major averages had recently broken out to all-time highs amidst strong breadth readings and favorable seasonality. Thus, such complacency, or optimism, was arguably warranted. As such, our take was that the positive price action and participation was certainly enough to override the budding excessive bullishness. We have seen that, in such circumstances, sentiment extremes can persist for an extended period of time before any negative consequences unfold. Indeed, the markets have continued to creep higher ever since, along with investors’ optimism. At this point, however, sentiment is getting to the point where it is a legitimate red flag, in our view. In fact, by one measure, the market has never witnessed a stretch of such investor complacency.
The measure to which we are referring is the same as that noted in the late July post above, and pertains to investors’ volatility expectations. As we wrote:
One way of using volatility to measure the extent of investor nervousness is by comparing near-term volatility expectations versus those farther out. For example, the VIX is actually the 1-month S&P 500 volatility index. Meanwhile, the VXV is the 3-month volatility index. Typically, the VIX will be lower than the VXV as there is less time in the near-term for volatility rises to occur. When investors get especially nervous (usually during a selloff), near-term volatility expectations can actually rise above those farther out, i.e., the VIX/VXV ratio rises above 1.00. Conversely, during times of complacency, the VIX will drop to relatively low levels versus the VXV; historically, under 0.80 may be considered complacent.
At the time, the VIX/VXV ratio had actually dropped below 0.78, a level it had only reached on 14 prior days since the inception of the VXV in late 2007. As we noted, such complacency can persist for a short while, especially amidst positive developments elsewhere in the equity markets. However, at this point complacency has extended beyond any historical precedent. Specifically, while just 14 days in the past 9 years (prior to July) had ever seen VIX/VXV
by ilene - August 19th, 2016 3:16 pm
Courtesy of John Mauldin
The last 20 years have brought great wealth to a few while most of the population was lucky to break even.
Whether you’re a member of the elite/protected class or one of the unprotected, it’s hard to deny this reality.
Household income is going nowhere.
Here’s an update of Doug Short’s household income chart:
Inflation-adjusted household income (blue line) in the US has gone nowhere in the last 16 years. Notice also that it kept dropping even after we came out of the last recession (gray shaded area).
Keep in mind, this is the median, not the average. Half of households earn even less than this amount. Worse, the inflation adjustment is based on the Consumer Price Index, which we know has understated the real cost of living for most people.
Is income flat because the economy hasn’t grown? Let’s take a look.
In the next chart, we have nominal and real (inflation-adjusted) GDP for the same period. Notice that in simple dollar terms the economy has roughly doubled in the past 18 years.
Not bad given two recessions, except for this fact. After you take out inflation, the economy has grown just a little more than 30%. This is roughly in line with 2%-a-year real GDP growth.
But wait, you say, the previous chart showed median income slightly down since 2000. As Master Po on the TV series Kung Fu would say, “Ah, Grasshopper, you must look deeper.”
If you do, you’ll see that GDP growth on a per capita basis (which accounts for population growth) is less than 17% since 2000. And it’s less than 2% since the beginning of the Great Recession.
In chained 2009 dollars, per capita GDP was $43,935 in Q1 2000 vs. $51,090 in Q1 2016. So the economy grew over 16% in total, but most households saw little or no income growth.
Average household income has taken off for the top 10%
Here’s another chart, from Sydney-based Minack Advisors.
by ilene - August 18th, 2016 9:20 pm
The simple chart below from the American Enterprise Institute beautifully illustrates the absurd inflation of college tuition and textbooks over the past 20 years. In real terms, the cost of college has effectively doubled over that time period. Now what would cause such massive inflation? Could it be our government tripping over itself to provide cheap student loans for children to spend on vacations, iPads and kegs (i.e. "college"; see "What Student Loans Are Used For: Vacations, iPads, Kegs, Entertainment"). Or, per the Daily Caller, perhaps the issue is administrative bloat at our institutions of higher education:
The exact reason prices have increased so much has been hotly debated, but one critical factor at most schools is administrative bloat. While student to faculty ratios have remained relatively steady over time, the number of administrators and other non-teaching staff has exploded at schools across the country.
But we don't want to stress out our young Millennials too much. We're quite sure the debt burden associated with your $200,000 anthro degree will be socialized very soon.
by ilene - August 17th, 2016 10:40 pm
While the pending subprime auto loan bubble pop is nothing new for our readers, it may be a shocking revelation for the average American who would fall victim of these scams. British comedian John Oliver has prepared a video that places in evidence the rampant fraud that currently takes place in the auto lending sector. The similarities between this industry and the mortgage industry pre-2007 are striking.
The video compiles some of the current TV ads for the segment, including one from Viers Auto Sales, that should strike fear down your spine. Even a clown can get approved.
While the Obama administration has created the Consumer Financial Protection Bureau, we have yet to see any action from them or other social justice warriors like Elizabeth Warren on cracking down on these predatory practices.
Some of the video highlights include:
- A woman asking for a maximum $3,000 car loan ends up on the hook for a $13,000 loan (paying ~30% interest).
- A [woman] who leaves her baby in the car, and then gets her car repossessed with said baby inside.
- A 2003 Kia Optima car that gets loaned and repossessed at least 8 times, each times valued at 2-3x its previous estimate.
- Approximately 31% of subprime auto loans are currently non-performing
Evidently, we have learned nothing from the 2008 crisis.
by ilene - August 17th, 2016 3:39 am
Summary: Since February, US equities have risen more than 20%. Equities outside the US have risen 16%. A tailwind for this rally has been the bearish positioning of investors, with fund managers' cash in February at the highest level since 2001. Similarly, their equity allocations in February had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.
Remarkably, allocations to cash in July were even higher than in February, and fund managers became underweight equities for the first time in 4 years. Investors dove into the safety of bonds, with allocations rising to a 3 1/2 year high in June and July.
Now in August, cash allocations are only slightly lower than in February and allocations to equities only slightly higher. Both are about one standard deviation away from their long term mean. Overall, fund managers' defensive positioning supports higher equity prices in the month(s) ahead.
Allocations to US equities had been near 8-year lows over the past year and half, during which the US has outperformed most of the world. That has now changed: exposure to the US is at a 20-month high. There is room for exposure to move higher, but the tailwind for the US due to excessive bearish sentiment has mostly passed. That's also the case for emerging markets which have been the best performing equity region so far in 2016. European equity markets, which have been the consensus overweight and also the world's worst performing region, are now the contrarian long trade within equities.
* * *
Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).…
by ilene - August 16th, 2016 2:02 am
Courtesy of Michael Batnick
This weekend on Masters In Business Barry had on (for the second time) one of my favorite thinkers, Michael Mauboussin. Early on in the interview, while they were discussing quantitative models, Mauboussin brought up an interesting point – what happens when you combine the power of a machine with the power of the human brain?
Kasparov loses to deep blue in 1997 and so machine beats man, fine. But shortly thereafter what emerges is something called free-style chess. That means you and I are playing a match but we can avail ourselves of whatever aides we want. So we can run computer programs, you can call your lifeline, your grand master buddy or whatever it is. And it turns out these free-style teams are better than the programs by themselves or of course any man or person. So man plus machine beats man or machine…..This to me is a very intriguing model to say are there cases, where most of the time you default to the quantitative approach or the program, but every now and then if you have a good feel for the game you can step in and do something a little bit different that adds value. Now that’s an open question, whether that’s true in investing but to me that’s a really intriguing model for thinking about where humans and quantitative techniques may emerge in the future.
The idea of combining man and model was tested a few years ago by Joel Greenblatt. Here’s Tobias Carlisle and Wesley Gray From Quantitative Value (emphasis mine):
In 2012, Greenblatt conducted a study into the performance of retail investors using the Magic Formula over the period May 1, 2009, to April 30, 2011. Greenblatt’s firm offers two choices for retail investors wishing to use the Magic Formula, a “self-managed” account, and a “professionally managed” account….What happened? The self-managed accounts, where clients could choose their own stocks from the preapproved list and then exercise discretion about the timing of the trades, slightly underperformed the market….The aggregated professionally managed accounts returned 84.1 percent after all expenses over the same
by ilene - August 15th, 2016 8:09 pm
Courtesy of Wade of Investing Caffeine
Before the Brexit, 28 countries joined the European Union since its inception in 1957, without a single country leaving. The story is similar if you look at the World Trade Organization (WTO), which has witnessed more than 160 countries unite, without one country exiting since it began in 1948. Are the leaders of these countries idiots and blind to the benefits of trade and globalization? I think not.
For centuries, the advantages of free trade and globalization have lifted the standards of living for billions of people. However, pinpointing the timing or attributing the precise actions leading to these tremendous economic advantages is difficult to do because most trade benefits are often invisible to the naked eye.
Today, populist sentiment on both sides of the political aisle has demonized trade, whether referring to TPP (Trans-Pacific Partnership), NAFTA (North America Free Trade Agreement), trade with China, or announcements by corporations to manufacture goods internationally.
Although it would be naïve to adopt a stance that there are no negative consequences to globalization (e.g., lost American jobs due to offshoring), myopically focusing on job displacement is only half the equation.
While I can attempt to articulate the economic costs and benefits of free trade, and I’ve tried (see Productivity & Trade), Dan Ikenson of the Cato Institute explains it much better than I can. Here is a more eloquent synopsis of free trade (hat-tip: Scott Grannis):
“The case for free trade is not obvious. The benefits of trade are dispersed and accrue over time, while the adjustment costs tend to be concentrated and immediate. To synthesize Schumpeter and Bastiat, the “destruction” caused by trade is “seen,” while the “creation” of its benefits goes “unseen.” We note and lament the effects of the clothing factory that shutters because it couldn’t compete with lower-priced imports. The lost factory jobs, the nearby businesses on Main Street that fail, and the blighted landscape are all obvious. What is not so easily noticed is the increased spending power of the divorced mother who has to feed and clothe her three children. Not only can she buy cheaper clothing, but she has more