The Major Trend Index slipped another notch to -3 in the week ended October 20th, thanks to a two-point breakdown in the Technical category. All four of the MTI’s factor groupings are now negative, supporting a defensive stance toward the stock market.
Leuthold tactical portfolios—including the Core Fund, Core private accounts, Core ETF, and Global Fund—are all positioned with net equity exposure of 43%.
On a short-term basis, it’s troubling that a market setback as internally deep as the current one hasn’t resulted in more improvement in the Sentiment work. The “wall of worry” accompanying much of the 2023 market action has morphed into a “slope of hope.”
On a long-term basis, it’s worrisome that S&P 500 valuation measures still look so high, despite the index having gone nowhere in the last 29 months. But there’s a silver lining to this year’s incredibly narrow market action: The “average stock” in our Leuthold 3000 universe has sunk to even lower valuation levels than seen at last October’s bear market lows.
Across the 40 inputs to the Technical category, there were zero upgrades and nine downgrades.

It feels like there are two dominant retail investment strategies:

1. Buy and hold index funds, or
2. Actively trade individual stocks and, while you’re at it, maybe options or crypto.

Many ordinary people do not want to think about their investments much, and modern finance has designed a product that is ideally suited for them. It is the index fund (or index exchange-traded fund), whose essential thesis is that thinking about investments is unnecessary and in fact bad, and you should just buy the market and save on costs.
Other people, though, do want to think about their investments, and they want to think about investments that are fun to think about: stocks (or options or crypto) that are volatile, stocks of companies that do fun or interesting or world-changing things, stocks of companies with charismatic and entertaining chief executive officers, meme stocks.
There is not much in between. In particular, the whole industry of active mutual fund management is built on the idea that, if you don’t want to manage your investments, you can pay someone else to do it for you. But that idea feels passé in 2023. These days, if you don’t want to manage your investments, the accepted approach is to pay someone else almost nothing to almost not manage them for you: An index fund will do almost no managing and charge almost no fees, and that is widely considered the optimal approach. And if you want to manage your investments, you want to manage your investments; you want to pick fun stocks, not hire a star mutual fund manager to do the stock picking for you.[1]
Where does that leave the active mutual fund managers? Bloomberg’s Silla Brush and Loukia Gyftopoulou report that things are bad for them:

Across the $100 trillion asset-management industry, money managers have confronted a tectonic shift in investor appetite for cheaper, passive strategies over the past decade. Now they’re facing something even more dire: The unprecedented run of bull markets that buoyed their investments and masked life-threatening vulnerabilities may be a thing of the past.
About 90% of additional revenue taken in by money managers since 2006 is simply from rising markets, and not from any ability to attract new client money, according to Boston Consulting Group. Many senior executives and consultants now warn that it won’t take much to turn the industry's slow decline into a cliff-edge moment: One more bear market, and many of these firms will find themselves beyond repair. …
More than $600 billion of client cash has headed for the exits since 2018 from investment funds at T. Rowe, Franklin, Abrdn, Janus Henderson Group Plc and Invesco Ltd. That’s more than all the money overseen by Abrdn, one of the UK’s largest standalone asset managers. Take these five firms as a proxy for the vast middle of the industry, which, after hemorrhaging client cash for the past decade, is trying to justify itself in a world that’s no longer buying what it’s selling. …
“It’s a slow but surely declining trajectory,” said Markus Habbel, head of Bain & Co.’s global wealth- and asset-management practice. “There is a scenario for many of these players to survive for a few years while their assets and revenues decline until they die. This is the trend in the majority of the industry.”

Cheery! What do you do about this? One approach is to get into some adjacent business that does not rely on stock-picking; Abrdn “cut the business into three parts: a mutual fund business, a wealth unit that also serves retail investors and a platform for financial advisers — a strategy that has yet to prove it’s working.”
The other approach is for active managers to get out of liquid easily indexed public markets and into something else. Abrdn has also “largely abandoned competing in large-cap equity funds, choosing instead to emphasize small-cap and emerging-market strategies.” And of course there is private credit:

For many other firms, private markets — and, specifically, the private-credit craze — are now the latest perceived savior. Almost everyone, from small to giant stock-and-bond houses, is piling into the asset class, often for the first time. In the past year and a half, a surge in M&A in the space has been driven by such houses, including Franklin, that are eager to offer clients the increasingly popular strategies, which typically charge higher fees. Others have been poaching teams or announcing plans to enter the space.
“I think that’s a big driver for many of these firms — they look at their own financials and think about what’s going to keep us afloat over the next few years,” Amanda Nelson, principal at Casey Quirk asset-management consultancy at Deloitte, said in an interview.

“Just buy all the stocks” is a cheap and easy investing strategy that is also endorsed by academic research, but “just make private loans to all the buyouts” sort of obviously doesn’t work. So there is room for investment selection, and fees, there.
Meanwhile at the Wall Street Journal, Hannah Miao reports that actually retail stock-picking works great:

Wall Street has long derided amateur investors as unsophisticated market participants, prone to buying high and selling low. But the typical individual investor’s long-term mindset and penchant for risk-taking has proved fruitful in the technology-driven market of the past decade, defying the “dumb money” caricature.
The average individual-investor stock portfolio has risen about 150% since the beginning of 2014, according to investment research firm Vanda Research, which began tracking the data nine years ago. That beats the S&P 500’s roughly 140% during the same period.

Some of this is about stock selection: Recent years have been good for the stocks that retail investors tend to like.

The typical small investor holds an outsize position in megacap tech companies. Apple, Tesla and Nvidia alone make up about 40% of the average individual’s stock portfolio, according to Vanda. Although big tech stocks plunged last year, those investments have dominated the market for most of the past decade and have helped fuel the S&P 500’s 10% advance this year.

But some of it is apparently behavioral: Individual investors can be more contrarian than professionals can.

One advantage small investors have over professionals: They don’t have to worry about reporting performance to clients. That helps some individuals feel comfortable riding out market downturns. …
Everyday investors are known to buy the dip, piling into markets during weak periods. Many jumped into stocks in March 2020 when the market plunged at the onset of the Covid-19 pandemic, and rode the high as shares rebounded.

Crudely speaking, if index funds offer market performance, and retail investors on average outperform the market, then professional investors on average will underperform the market: “Over the past decade, about 86% of all large-cap U.S. equity funds have underperformed the S&P 500, according to S&P Dow Jones Indices.”
This seems bad for the big asset managers? They are squeezed from both sides: There is the rise of indexing, but there’s also the pretty good performance of individual investors who pick their own stocks. For a long time now, one argument for active management has been along the lines of “sure index funds look good in a rising market, but wait until the market goes down; then people will see the value of active stock selection.” But in fact people have seen the value of owning a lot of Apple and Tesla, which they can just do on their own. The real argument for active management surely has to be something like “sure index funds and also individual stock trading look good in a market dominated by the biggest names, but wait until Tesla and Apple underperform and the way to make money is by buying stocks that retail investors have never heard of.” Which is a harder pitch.

@racqueteer
To be clearer, and to support my statement, FPACX has done better 3y, 1y, and ytd.
Cumulative. I do not look at, care about, or judge by single years.
That's all. Don't own any of them currently, but wish I had for the last decade.
>> ... can’t see a good reason to prefer it over the other two.
Again, as I said, whether UI matters. (Also the matter of availability.)

There are three classic problems that you might encounter if you try to use Bitcoin to pay for goods and services. The first problem is that your Bitcoins might go astray: Bitcoin transactions are irreversible and involve sending money to long complicated addresses, and people are constantly trying to steal them. So if you send someone Bitcoin to pay for something, there will probably be a typo in the address and the person won’t get it and you’ll have to send it again and your first payment will just be permanently lost.
The second problem is that Bitcoin is very volatile, and even people who accept payment in Bitcoin tend not to denominate it in Bitcoin. So if you send someone $100 worth of Bitcoin to buy a $100 thing, the price of Bitcoin might drop 10% while you’re sending it, and then they’ll say “you only sent me $90” and you’ll have to top them up with more Bitcoin.
The third classic problem is that, if you are using Bitcoin to pay for goods and services, there is a good chance that you are paying for something illegal, and Bitcoin payments are traceable. So if you send someone $16,000 worth of Bitcoin to buy a $16,000 thing, (1) some of your money will go missing in transit, (2) the Bitcoins you send won’t be worth $16,000 and you’ll have to send some more, and (3) the $16,000 thing was a murder and now you are in prison.
James Wan knows these problems well:
On April 18, 2022, while in the Northern District of Georgia, Wan accessed a dark web marketplace from his cellular telephone and submitted an order to have a hitman murder his girlfriend. The order included the victim’s name, address, Facebook account, license plate, and car description. In the order, Wan stated: “Can take wallet phone and car. Shoot and go. Or take car.” Wan then electronically transferred a 50% downpayment of approximately $8,000 worth of Bitcoin to the dark web marketplace.
Two days later, Wan messaged the marketplace’s administrator, stating that the transferred Bitcoin did not show up in his escrow account on the site. The next day, the marketplace administrator asked Wan for the Bitcoin address to which Wan had sent the payment. In response, Wan identified the Bitcoin wallet address and provided a screenshot of the transaction. When the administrator said that the address Wan provided was not in their system, Wan replied, “Damn. I guess I lost $8k. I’m sending $8k to escrow now.” Wan then electronically transferred an additional Bitcoin payment worth approximately $8,000 to the marketplace. …
About a week later, on April 29, 2022, Wan electronically transferred another payment of approximately $8,000 worth of Bitcoin to the dark web marketplace to ensure his escrow account contained the total required to complete the order. ...
On May 10, 2022, after the value of Bitcoin dropped, Wan electronically transferred another payment of approximately $1,200 worth of Bitcoin to the marketplace to ensure his escrow account still contained the total required to complete the order.
Wan pleaded guilty this week. “After speaking with FBI agents, Wan canceled the order on the dark web marketplace,” terrific. I wonder how many murder-for-hire contracts had to be repriced when crypto prices collapsed last year. Not zero!

Elsewhere in crypto crime
I suppose if you are a law enforcement officer and a guy calls 911 and says “someone stole my Bitcoins,” you could just go to his house and arrest him? Or at least show up and ask him questions like “where did you last see your Bitcoins?” and “do you have any enemies?” and “is there any chance you acquired these Bitcoins by hacking a dark-web drug marketplace?”
Here is a CNBC story about a guy named Jimmy Zhong, who called 911 because someone stole his Bitcoins, and the cops showed up and were like “okay but who did you steal the Bitcoins from,” and he was like “oh Silk Road” and they arrested him. No, I’m kidding, I’m condensing the timeline, and he didn’t actually say that, but that is where he stole the Bitcoins from, and they did ultimately arrest him for it. The scorecard here is:
The guy who stole hundreds of thousands of dollars’ worth of Zhong’s Bitcoins was never caught.
Zhong was sentenced to a year in prison for stealing billions of dollars’ worth of Silk Road’s Bitcoins.
The guy who ran Silk Road was sentenced to life in prison, mostly for running a marketplace selling drugs for Bitcoins though also for trying to use Bitcoins to hire hitmen to do some murders.
The lesson might be that if you are going to do crypto crime, stealing from people who steal from people who run crypto drug marketplaces is a better bet than running the marketplaces yourself. This is not any sort of advice at all.
Three other funny points from the CNBC story. One is that US law enforcement seized the Bitcoins that Zhong stole from Silk Road (except for the ones that were stolen from him) and very cleverly offered to return them to their rightful owners, opening “a process that allowed victims of the hack to apply to get their bitcoin back.” Again this is not legal advice, but do not fill out that application! Nobody did:
Nobody came forward to claim the loot. That’s not surprising, given that users of Silk Road in 2012 were largely drug dealers and their customers.
Two, the government then “sold off the stolen bitcoin and will keep the proceeds.” Zhong’s lawyers make the sensible point that, by stealing these Bitcoins from Silk Road and handing them over to the government years later, Zhong actually made the government a lot of money:
“If Jimmy had not stolen the coins and the government had in fact seized them from [Silk Road operator Ross Ulbricht] they would have sold them two years later in 2014 as they did with other coins.”
At that point, the government “would have gotten $320 a coin or made somewhere about $14 million,” Bachner said. “Now, as a result of Jimmy having them, the government has gotten a $3 billion profit.”
Over the last few years, a lot of people have made arguments with the essential form “I am an investing genius because I held Bitcoin from 2014 through 2021,” but this particular one struck me as novel.
Three, here’s how BlockTrace cyberintelligence investigator Shaun MaGruder knew that Zhong was the hacker:
MaGruder said Zhong’s level of sophistication was apparent.
“He was navigating that keyboard like I’ve never seen someone navigate a keyboard,” MaGruder said. “He didn’t have to use a mouse because he knew all the hotkeys.”
Watch out, investment banking analysts.

It would be interesting to back test his allocation for the past 10 years.