Jerry, in his post "How I interpreted the suggested strategy in David's June commentary...", notes that David's June commentary is not optimistic, to say the least. JohnChisum agrees that "There was indeed a lot of caution in David's commentary." Hank, in another thread, advises "Please don't read it! Too depressing."
As those of us who value Scott's contributions to MFO are well aware, he has been saying for a long time that "this is going to end badly (again)". So I found it just a bit unnerving to see David posit this: "The question is: why are folks hanging around when they know this is going to end badly (again)?"
David's observations are followed in the June commentary by those of Edward Studzinski, who says nothing to improve the atmosphere.
I'd really like to see an extensive discussion from other MFO contributors, both as to either agreement or disagreement with the above, or if in agreement, what might be a good strategy at this point in the market cycle. What be the sense of this esteemed body?
Comments
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.
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.htm
That 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.
Regards,
Ted
I'm still waiting for your summary of the monthly commentaries. I can't wade through all that stuff about college and college students.
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.
To say that I'm wary of this market is an understatement, and if I was to give advice it might be to go with some of those defensive funds noted by David (PVFIX for a great example). Take your normal stock allocation to those funds and let them decide when to allocate the cash reserves. As for bonds, I still see RSIVX as doing what it said it would do. Little movement in the NAV, nice yield.
"FWIW, Warren Buffett's equity allocation has been creeping higher"
Since this chart is being expressed in overall percentages of the the three part of Warren's portfolio, could much of the change in percentage be due to the performance of the three components rather than a reallocation? Basically what I'm saying is he's holdings haven't changed, but the performance of the holding have and this maybe impacting the percentages. Warren Buffet thinks/invests in decades, not quarters.
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?
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
For ease of scoring your survey, I’ll give a single word answer, and I’ll explain later: Nothing. I plan no immediate action.
My “just stand there, do nothing” approach is grounded in several dimensions.
For decades, both studies and practical experience have demonstrated that “Forecasters can’t forecast”. The marketplace should be tightly coupled to the economy. Yet even eminent economists constantly can’t get it right. In late 1929, Irving Fischer predicted that stocks had reached a high “permanent plateau”. He, along with John Maynard Keynes, lost a fortune in the marketplace. Fischer was destroyed, Keynes recovered later. Economist’s dismal forecasting record matches ours. It’s not pretty.
As Keynes remarked: “Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market”. These are both error prone assignments. T. Rowe Price noted that “No one can see ahead three years, let alone five or ten”. I pass on the forecasting job.
Our esteemed MFO principals did not really make a forecast. A proper forecast requires a defined timescale and a magnitude estimate. Our team leaders merely hinted that the warning flags are flying high. Given the length of the current Bull market these flags have been raised for a long time now. As cycle time increases and as prices escalate, downturn risk must also increase.
I have no idea if we are in ninth inning of the present Bull or in the seventh inning. But I suspect we are somewhere in the late innings. That’s merely my opinion, and surely not a fact. The fact that institutional professionals are heavily on the side of at least a short-term continuation of the Bull market is somewhat worrisome.
Lastly, I am a very senior long-term investor. I react slowly and in incremental steps. Before the release of the MFO June report, I planned to not make a portfolio adjustment until mid-December. Both my wife and I will execute our Required Minimum Distributions at that time. The June Commentary did not inspire me to alter that plan. Certainly other exogenous events could do so. Mostly because of age, our plan is to reduce equity positions in favor of more income secure holdings. That’s obviously not for everyone.
Old Joe, your post has successfully solicited superior replies. Thank you, and thank everyone for their excellent participation.
Best Wishes.
Not so much, at least 1987 not at all. Look at SP500 and FCNTX. For 7y ago, yes, this week right now was the very week of turn. Not much of a trend prior, spring 08.
I see zero reason to think we are in for a nasty bear absent some external shock. From what I read, not in the lay or popular press but internal Goldman memoranda and thinktank economists and the like, some already cited here, the worst you can say is that things are on the pricy side, that's all. Not an original thought, but not very apocalyptic. I did like Tillinghast talking about our bad selves. But some sudden plunge soon, don't believe there is reason.
A few positive thoughts:
If there is a meltdown in the bond market, your liquidity problem would probably disappear quickly. Low prices bring out buyers. If bonds declined to the point where their payouts equaled say 10%, a lot of that cash sitting in short term treasuries would shift to the long end. There is a lot of wealth in this country that can solve liquidity problems. We saw that during the real estate crash. Pundits thought that the real estate market wouldn’t recover for decades because of all of the unsold inventory, foreclosures, tight credit, etc. But a funny thing happened: thousands of investors started buying those homes with all cash deals. Anyone who tried to buy a foreclosed home on the cheap was confronted with aggressive overbids.
Another worry that we hear often on cable channels is that stocks are going up only because of stock buybacks--financial engineering that is supposedly unhealthy. But the other side of that equation, as you know, is that the corporations that buy their own shares have less shares outstanding, and so we shareholders own a larger percentage of the business. [If they paid out the money in dividends, many shareholders would simply reinvest the dividends, so the result is basically the same.] And many of these companies still have a ton of cash.
Yeah, I’m worried. But then all that worrying seems to feed the next rally.
I have enough cash to pay my expenses for probably ten years. So if I have to suffer through another crash, I’ve got the resources to pay my bills and increase my fund holdings. And I feel fairly comfortable that my conservative funds, many great owl funds, will do a fairly good job of minimizing the fall [though I still remember how a few of my former funds, like Longleaf Partners, failed miserably the last time we went over the edge, and I felt like I wanted to vomit.]
Regards,
Ted
Now that Ted has come out from behind the Linkster curtain and proclaimed that there will be no bear market this year, we should all feel relieved. (Not)
I also remember 1987. There was a number of volatile trading days that led up to Monday. @Vert makes the point that the old WSW talked about it that Friday before. Martin Zweig was spot on in his forecast. He was more bearish than usual.
Edited to correct the right first name of Zweig.
Regards,
Ted
Sent from my iPhone 6.
At the 1987 crash, Dow was up like 18% for the year --- started around 1900, by 16Oct 2250 approx; Aug high (=year high( was 2640, sure. So off its Aug highs, yes. But just look at a graph. I was looking at growth of 10k, but not a lot of difference for that.
2008: by 1 June down (only) 3-4% for the year, starting the decline. This is 10k growth, my favored way to look at things in hindsight. More slow decline to Aug 1. And if your start point is then, decline to the 28th is another 4%. And then the real drop.
(This assumes I am doing the math right.)
I dare any of your geniuses prove me wrong......
Amen to foolishness predicting .......tb
http://www.surfingtheapocalypse.net/forum/images/uploaded/20130415061342516be0e6cf4c7.jpg
In 1987, I worked for Salomon Brothers in their IT department. They layed off about 20% of the firm in the Summer of 1987 (well before the crash) because of massive losses in the bond market.