David's June Commentary Hmmm ... I blew a job interview once with a particularly weak answer to the request to "describe a hard decision you've made and how you went about making it." I'd spent much of my professional life making really consequential decisions about people's careers, the direction of my college and so on. After a while, it struck me that I was tripped up by the word "hard." In my mind, "hard" decisions are consequential decisions you're forced to make without having enough understanding to make them well. Because I tend to obsess about advance planning, very few of my decisions felt hard though many of them were profoundly painful.
That's where I am now on the market. I'm not particularly concerned with corrections or bears because, though I can't predict them, I understand them and can plan around them: Adjust your savings and withdrawal rates, shift asset allocations at least at the margin, ignore your portfolio whenever you feel the urge to do something brilliant, and be very comfortable with your managers. Meh, no biggie.
The thing that has me worried is the argument that I've heard now from several managers that the system itself might be broken. That's manifested in the liquidity arguments that I've been writing about. "Highly liquid" assets are, by definition, easily valued and easily traded; Treasuries are the paradigm case. We buy investments with the assumption that we can also sell them. Those sales happen through the good offices of intermediaries, sometimes called "market makers." Those folks maintain pools of tens, perhaps hundreds, of billions of capital. They buy your shares, using their money, at a fraction of a penny per share below the last price. Sometime later, maybe minutes, maybe hours, they sell it someone else for a fraction of a penny markup.
So, three parties to the trade: seller, market maker, buyer. We traditionally worry that high valuations will eventually make buyers scarce. That is, no "greater fool" is available and you have to sell your holdings at a discount. Buyer/seller mismatch. "Correction" occurs.
But what happens if the problem isn't between buyer and seller but between seller and market maker? That is, what if the conveyor belt that normally, quietly, profitably, invisibly moves shares between sellers and buyers isn't working? I'd like to sell $100 million in a bond and you'd like to buy them for $95 million but there's nobody capable of coming up with the initial capital to move them from me to you? At base, my bond would become unsellable, illiquid. That's the liquidity crunch.
Why might that occur? There have been a bunch of shifts in the financial services industry, some occasioned by good-spirited reforms imposed after the last two crises (two of the three worst market crises in a century occurred within eight years of one another, wonder if that's significant?), which have fundamentally impaired the number and size of intermediaries.
David Sherman and others have pointed out that that's already happening in some corners of the market: people are finding it almost impossible to sell very large blocks of bonds, people are finding it hard to sell stocks at mid-day and so on. And that's occurring in the good times. What happens if large, highly-leverage investors get spooked and try to unwind, say, a half trillion at the same time and find that they simply can't? Do you get an October '87 repricing (down 23% in an afternoon)? Do you get a fundamental change in the willingness of international capital to underwrite us because we're no longer "safe"? Do you get an October '08 freeze (where even the shortest term, most liquid paper couldn't be traded and volumes dropped 75%)? Do you get employers who can't honor their payroll obligations because they can't tap the paper markets? How might you react if your employer that they were hoping to be able to pay you sometime in the next week or so, at least part of your normal pay, but they weren't able to give a time or amount?
And is the fact that the smartest of the smart money people - that top 1% of institutional and private investors - are worrying about their own ability to "get out the door" independently significant? When guys who manage money for the really rich tell me that they're "standing outside the theater, shouting 'fire,' but nobody's listening," should I write them off as simply alarmist?
Here's what I got for answers: dunno, dunno, dunno, dunno, dunno, dunno, dunno and dunno.
Which I really dislike.
So, yeah, I think the markets are pricey but that's not really the thing that's nibbling the most at my brain.
For what that's worth,
David
David's June Commentary The problem is most of us are still twitchy from the 2008 crash. Our commitment to buy quality funds and hold them for the long-term was severely tested.
I think David’s philosophy of holding 50% of his investments in stocks (funds) through thick and thin is the sound approach. But whatever your approach, don’t deviate from it because of predictions of doom.
The most money I’ve “lost” over the years was from selling because I was certain the market was about to take a dive. Even in this bear market I’ve been scared out of holdings (I bought Disney, for example, from $18 to $28, and then started selling, for what seemed like good reasons at the time, from $35 to $65, when the last shares were sold. Now I cringe when I see it cross the ticker.)
The only time I didn’t run for the exits in total fear, was 1987 crash. And the only reason I didn’t bail was that I couldn’t get through on the jammed phones lines to sell. In 1988, my holdings of Mutual Series went up about 30% (thank you Michael Price).
Look at a long-term chart of the market (like 100 years) and hold your best funds for dear life. After all, isn’t it the job of our chosen fund managers to do the worrying for us?
David Snowball's June Commentary Has Arrived With apologies to OJ, Jerry and the others, Ted was the first to note that David's June Commentary was posted. I'm afraid my initial tongue-in-cheek remark may have been inappropriate or misinterpreted. It was intended to induce others to read this excellent commentary.
I'm a bit surprised at the seeming surprise David's cautionary market outlook seems to have generated. Regular readers of his monthly commentaries know that he has long voiced skepticism (I think well founded) ) about the durability of the bull market and valuations in general. If you also read Ed Studzinski's regular comments, he makes David look like a lotus eating optimist. (As most here know, Ed co-managed the Oakmark Equity and Income Fund for many years, turning out impressive results.)
I don't think MFO participants have been completely "in the dark" on the valuation issue or to the fact that stock markets can and sometimes do drop precipitously (25+% overnight) or flounder for incredibly long periods, as measured in years or decades. That's the risk you take for being in equities. If you read JohnChism's thread about "Bullish or Bearish" you'll find some of the same concerns David has recently raised - though certainly not as thoroughly explored or eloquently stated as only David can do.
To refresh readers' memories, I've clipped a few morsels from some of David's Commentaries dating back to November, 2013. Please read the commentaries in full, as they are easily retrievable on the MFO website. Apologies to David if, in pulling these out of context, I altered the meaning, omitted pertinent context, or changed the emphasis of any. There was no intent to do so.
Regards
-
November 1, 2013: "... a market that tacks on 29% in a year makes it easy to think of investing as fun and funny again. Now if only that popular sentiment could be reconciled with the fact that a bunch of very disciplined, very successful managers are quietly selling down their stocks and building their cash reserves again."
December 1, 2013: "Small investors and great institutions alike are partaking in one of the market’s perennial ceremonies: placing your investments atop an ever-taller pile of dried kindling and split logs. All of the folks who hated stocks when they were cheap are desperate to buy them now that they’re expensive...We have one word for you: Don’t."
January 1, 2014: If you’re looking for a shortcut to finding absolute value investors today, it’s a safe bet you’ll find them atop the “%age portfolio (invested in) cash” list ...They are, in short, the guys you’re now railing against"
February 1, 2014: "It makes you wonder how ready we are for the inevitable sharp correction that many are predicting and few are expecting."
March 1, 2014: "It’s not a question of whether it’s coming. It’s just a question of whether you’ve been preparing intelligently."
April 1, 2014: "Some (money managers) ... are calling the alarm; others stoically endure that leaden feeling in the pit of their stomachs that comes from knowing they’ve seen this show before and it never ends well."
June 1, 2014: ... all of this risk-chasing means that it’s Time to Worry About Stock Market Bubbles."
September 1, 2014: "Somewhere in the background, Putin threatens war, the market threatens a swoon, horrible diseases spread, politicians debate who among them is the most dysfunctional ..."
February 1, 2015: "The good folks at Leuthold foresee a market decline of 30%, likely some time in 2015 or 2016 and likely sooner rather than later. Professor Studzinski suspects that they’re starry-eyed optimists."
April 1, 2015: "(Sooner) ... Or later. That is, the stock market is going to crash. I don’t really know when. Okay, fine: I haven’t got an earthly clue. Then again, neither does anyone else."
May 1, 2015: "For investors too summer holds promise, for days away and for markets unhinged. Perhaps thinking a bit ahead while the hinges remain intact might be a prudent course ..."
David's June Commentary Don't bear markets usually start either when the economy peaks and begins to tip into recession, or when interest rates rise either sharply or extensively? A
10% correction or so can happen any time, but a full-fledged bear market? I don't see it. And these hedge fund guys David cites haven't been great market-timers on average, many of them have been calling for hyperinflation for years now.
FWIW, Warren Buffett's equity allocation has been creeping higher:
http://charlessizemore.com/warren-buffetts-asset-allocation/And here's Jeffrey Saut, who I've found pretty good over the last 8-9 years, also calling for this bull to continue a while longer:
http://www.raymondjames.com/inv_strat.htmThat said, I do have more cash (about
10% vs my normal 5%) than I usually do, but obviously that's not much and I'll get hammered if the market indeed crashes.
And none of this detracts from my respect and gratitude for David! He may convince me yet.
Nice summary above and agree Jeff Saut has always seemed to have his act together. This is the sickest market I have seen in quite a while from all the divergences between the major averages to the new highs/lows index. It's almost too obvious and that is making this bear suspicious. Everyone sees the same thing and it's unusual to see so many wary with many of the markets still near historic highs. Even the Wall Street strategists are bearish per one of Ted links as evidenced by their lighter than normal allocation to stocks. They are normally a good contrarian indicator. Treasury bonds though do appear to be in a bear market. However, I never found cash to be a very prudent way to compound your wealth so as long as the bull continues (junk bonds have made historic highs the past few days per the H0A0) will continue to be
100% invested (with of course my usual tight mental stop) Right now in bondland RIMOX and OSTIX have my attention and may move some there.
David's June Commentary I've been a fan of Cam Hui's analysis (
Humble Student of the Markets) for a while, and he has a good piece up on OJ's question. Short version: a
10-20% equity downdraft is likely in the near to intermediate term, but it needs a trigger to get going, and a real bear isn't very likely right away.
David's June Commentary Don't bear markets usually start either when the economy peaks and begins to tip into recession, or when interest rates rise either sharply or extensively? A
10% correction or so can happen any time, but a full-fledged bear market? I don't see it. And these hedge fund guys David cites haven't been great market-timers on average, many of them have been calling for hyperinflation for years now.
FWIW, Warren Buffett's equity allocation has been creeping higher:
http://charlessizemore.com/warren-buffetts-asset-allocation/And here's Jeffrey Saut, who I've found pretty good over the last 8-9 years, also calling for this bull to continue a while longer:
http://www.raymondjames.com/inv_strat.htmThat said, I do have more cash (about
10% vs my normal 5%) than I usually do, but obviously that's not much and I'll get hammered if the market indeed crashes.
And none of this detracts from my respect and gratitude for David! He may convince me yet.
Artisan Developing World Fund Summary Prospectus
Cancer Immunotherapy ETF Is On The Way
Biotech: Upside From Here? FYI: Biotech shares outperformed the overall U.S. market by a wide margin in 20
14, with the Nasdaq Biotechnology Index rising nearly 35%, versus
13.69% for the S&P 500® Index. That trend continued in the first quarter of 20
15, when the biotech index rose
13% while the S&P 500® Index gained a mere 0.95%.
Can biotech maintain its momentum? Or is this a bubble waiting to burst?
Regards,
Ted
https://www.fidelity.com/viewpoints/investing-ideas/biotech-stocks
David's June Commentary This market has been going up due in part to the buyback scheme noted in another thread. It is not normal and especially at the volume of buy backs we are seeing. I note the Bloomberg study talked about in another thread in which the SP500 companies are using all but 2% of their profits to buy back shares.
http://www.bloomberg.com/news/articles/2014-10-06/s-p-500-companies-spend-almost-all-profits-on-buybacks-payouts Thanks to
@LewisBraham for the link.
It has the making for an implosion.
In my reading again of the June commentary, it is my perception that David made it as clear as possible that down days are coming. Now I don't think his crystal ball is better than anyone else's here but this market is not behaving normally. AAPL's excellent quarterly report is rewarded with lower share prices as one example. The liquidity issue in the markets is another sword of Damocles hanging over investors. It could be said that the U.S. economy is also artificially pumped. Throw in the bond market as well.
If one doesn't have a plan, they should start. Buy and holders will do what they always do. In the long term, this could be a nice buying opportunity. At my age though, I'll play it safe.
How I interpreted the suggested strategy in David's June commentary I thought there was a strategy @linter, I would not sell healthcare if you have large gains. If you have multiple funds, select those that need pruning from the portfolio. Good time to get rid of any under performers. If we get a good
10-20% correction then you would have buying opportunity.
I believe healthcare would recover quickly from any down draft.
How I interpreted the suggested strategy in David's June commentary I thought there was a strategy Do NOT be fully invested regardless of your ability to handle risk and have a strong risk tolerance
If you wish to Invest new money in equities(even in your 401k) use moderate or conservative allocation funds
In Taxable accounts reinvest dividends in money market or short term bond funds to gradually reduce risk.
Don't buy the dips till a bear market type drop.
Don't sell your Sequoia Fund, FPA Crescent or similar
Did I miss anything significant or misinterpret?
Who Wins ‘Passive vs. Active’ Institutional Debate? : U.S. Large Cap Growth: Part 2. Hi Kaspa,
I completely agree with your comments.
The reported study is flawed by design and is flawed by the reporting of its findings.
By not considering fund survivorship bias and by only including lower cost institutional shares, the study is tilting the odds towards actively managed products. By only reporting top performers, it ignores the asymmetric distribution of all active funds, especially the lower ranked losers.
An investor would expect Index funds to be near the middle of any ranking, surely not at the top performing positions. The construction of the study screening criteria reach a ridiculous extreme in the Large Cap Growth category when only a single Index fund satisfies the screening criteria.
The referenced studies have little value for MFOers. Vanguard has recently done much more comprehensive and honest research in this arena.
Best Wishes.
Edit: I have referenced the Vanguard 20
14 study on earlier posts. For completeness, here it is once again:
https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_Index_Fund_Investing_4.9.2014.pdf
Who Wins ‘Passive vs. Active’ Institutional Debate? : U.S. Large Cap Growth: Part 2. While I like to use to active funds vs. index funds in general, I am not sure if the author is correctly analyzing data. He is just looking at the top 10 or top 20 funds. He needs to look in the aggregate. For example, what about the bottom 10 or bottom 20 funds?
David Snowball's June Commentary Has Arrived
Top US Fund Managers Attack Regulators
Top US Fund Managers Attack Regulators
Who Wins ‘Passive vs. Active’ Institutional Debate? : U.S. Large Cap Growth: Part 2.
Vanguard Alternative Strategies Fund registration filing
Vanguard Alternative Strategies Fund registration filing "The Fund is expected to utilize leverage in an attempt to match the expected risk profile of each individual strategy to a targeted level. "
"The advisor may also engage in this strategy [L/S equity] through futures, forwards, or swaps."
"Absolute return investing is complex and may involve greater risk than investing in a traditional portfolio of stocks, bonds, and cash. "
"The Fund has the ability to obtain commodity exposure by investing directly in commodity-linked investments or investing indirectly in those investments through a wholly owned subsidiary organized under the laws of the Cayman Islands. [...] the subsidiary will not be organized as a mutual fund that is registered under any federal or state securities laws, including the Investment Company Act of 1940. "
Doesn't have the feel of a Vanguard fund to me. The more things change.... the more they DON'T stay the same?
