LATEST MEMO FROM OUR CHAIRMAN, HOWARD MARKS
Memo to: Oaktree Clients
From: Howard Marks
Re: The Lessons of Oil December 20,2014 © 2007-2014 Oaktree Capital Management, L.P. All Rights Reserved.(excerpts)
"Over the last year or so, while continuing to feel that U.S. economic growth will be slow and unsteady in the next year or two,
I came to the conclusion that any surprises
we're most likely to be to the upside. And my best candidate for a favorable development has been the possibility that the U.S. would sharply increase its production of oil and gas. This would make the U.S. oil-independent, making it a net exporter of oil and giving it a cost advantage in energy–based oncheap production from fracking and shale–
and thus a cost advantage in manufacturing. Now the availability of cheap oil all around the world threatens those advantages. So much for macro
forecasting!
There’s a great deal to be said about the price change itself.
A well-known quote from economist
Rudiger Dornbusch goes as follows:
“In economics things take longer to happen than you
think they will, and then they happen faster than you thought they could.”
I don’t know if
many people were thinking about whether the price of oil would change, but the decline of 40%-plus must have happened much faster than anyone thought possible.
On the other hand
–and in investing there’s always another hand–high levels of confidence,
complacency and composure on the part of investors have in good measure given way to disarray and doubt, making many markets much more to our liking
.
For the last few years, interest rates on the safest securities–
brought low by central banks
–have been coercing investors to move out the risk
curve. Sometimes they’ve made that journey without cognizance of the risks they were taking, and without thoroughly understanding the investments they undertook. Now they
find themselves questioning
many of their actions, and it feels like risk tolerance is being replaced by risk aversion.
This paragraph describes a process through which investors are made to feel pain, but also one that makes markets much safer and potentially more bargain-laden.
http://www.oaktreecapital.com/MemoTree/The Lessons of Oil.pdf
Elsewhere; A look at the commodity bubble in the 2000-08 period.Just an observance of the past for me personally.I have no opinion on his bullish outlook for oil. Article from Seeking Alpha.
Lawrence Fuller, Fuller Asset Management Dec. 20, 2014 2:55 PM ET
The Oil Price Plunge - Fiction, Reality And Opportunity (excerpts)
"Shortly after the tech bubble burst in 2000, institutions began to allocate billions of dollars into commodities through the futures markets in an effort to capitalize on growth in the developing world. Commodities became a new financial asset class. The continual and escalating flow of funds into a buy-and-hold strategy of a basket of commodities with no sensitivity to price led to a parabolic move upwards in prices prior to the financial crisis in 2008.
The regulatory body for the futures exchanges (CFTC) exacerbated the volatility by exempting Wall Street banks from the limits under which traditional speculators operate. As a result, a hedge fund can use a Wall Street bank as a counter-party to speculate on commodity prices for financial gain with no limitations. It is important to recognize that the vast majority of oil futures contract holders never take delivery of a single barrel of oil-they simply roll over the contracts. As a result of these changes in market structure, futures prices now dictate spot prices.
There was no greater evidence of commodity prices divorcing from fundamentals than the surge in oil to $147/barrel during the summer of 2008. That parabolic move occurred six months into what we now call the Great Recession. There were no lines at the gas pump. There was no outcry from oil-importing nations that they were unable to obtain the oil that they needed. That move was fueled by speculative investment flows into oil futures contracts in a herd mentality. The herd was being steered (over a cliff) in part by deluded research reports from Morgan Stanley and Goldman Sachs that were forecasting prices of $150 and $200/barrel, respectfully. Just a few months later the price had collapsed to less than $60/barrel, but not because of a commensurate decline in demand or increase in supply. Institutional investors and speculators were being forced to deleverage and unwind long positions in the throes of the financial crisis and stock market meltdown"
http://seekingalpha.com/article/2770205-the-oil-price-plunge-fiction-reality-and-opportunity?ifp=0

FYI:
Regards,
Ted
WSJ Slant: http://www.wsj.com/articles/u-s-stock-futures-up-buoyed-by-liquidity-1418995477
Bloomberg Slant: http://www.bloomberg.com/news/print/2014-12-19/u-s-stock-index-futures-pare-gains-after-s-p-500-two-day-rally.html
Reuters Slant: http://www.reuters.com/assets/print?aid=USKBN0JX19J20141219
MarketWatch Slant: http://www.marketwatch.com/story/us-stocks-end-with-biggest-weekly-gain-since-october-2014-12-19/print
Sector Tracker: http://www.sectorspdr.com/sectorspdr/tools/sector-tracker
Market At A Glance: http://markets.wsj.com/us

FYI:
Regards,
Ted
WSJ Slant: http://www.wsj.com/articles/u-s-stock-futures-soar-in-wake-of-feds-stance-on-rates-1418908752?mod=WSJ_hp_LEFTTopStories
Bloomberg Slant: http://www.bloomberg.com/news/print/2014-12-17/asian-futures-rise-amid-s-p-500-jump-dollar-holds-gains.html
Reuters Slant: http://www.reuters.com/assets/print?aid=USKBN0JV1BU20141218
MarketWatch Slant: http://www.marketwatch.com/story/us-stocks-score-biggest-gains-in-years-2014-12-18/print
Markets At A Glance: http://markets.wsj.com/us
Sector Tracker: http://www.sectorspdr.com/sectorspdr/tools/sector-tracker

Hi Derf,
Thanks for asking …
The spiff that you might be referring to is the one I put in place back in October. And, yes as I write I am up about 7% with the S&P 500 Index price reading at about 2040. The more recent dip that I was referring to was the December price decline that I did not take a position in. Perhaps a better wording of the title would have been "Anybody Buy the Recent December Dip in the S&P 500 Index?"
Now, I did start opening positions, a while back, for diverficiation purposes within my portfolio in a commodities fund, JCRAX and a gold fund, SGGDX. Currently, I am a little underwater in these positions, combined, by about four percent. I most likely will wait until the middle of January before I do any buying as I want to see what happens the first couple of weeks in the New Year. And, I also, want to see how my portfolio's asset allocation bubbles at year end.
Hope this helps … and, answers your question.
Old_Skeet
Additional Comment ...
For those that would like reference, I have copied and pasted my post of October 14th comment under a thread started by Junskter titled "Catching Falling Knives." Below is what I wrote ...
Hi Junkster,
Nice to see you posting again. About catching falling knifes ... I don't look at my current special strategy in that light. But, one that uses market money to make new purchases at discount prices. Below is my thinking, my strategy, what I am doing and my anticipated outcome.
I am hoping the 2100 comes to be for a year end close for the S&P 500 Index as forecasted by Birinyi. This would equate to just short of a 12% gain from current levels of 1878. Which is indeed possible should forward earnings estimates materialize as anticipated.
Anyway, I now have my marker on the bet line that it will as I bought again today. With this I have recently bought at the 1970's, the 1920's and the 1870's. My next buy step is the 1820's and then beyond that at the 1770's should we reach these levels on the Index.
Keep in mind that year end mutual fund capital gain distributions are expected to be on the heavy side this year. Since, I take all my distributions in cash I have decided to put these anticipated distributions to work early and use the forth coming distributions to restore the cash position within my portfolio used to make these purchases.
With my average cost on amount invested currently at about 1920 and should the Index reach the forecasted 2100 year end closing mark then this will equal about a 8.5% gain. Should I buy again at the 1820's then this will lower my cost on amount invested to about 1895 and increase the gain to 10.8% should the 2100 mark be reached. With another buy at the 1770's and if the 2100 year end closing mark be reached then this would equate to about a 12.3% gain.
For me it is risk on for the traditional fall stock market rally. After all, the way I look at this is that I am using market money derived from investment distributions to make more market investments which from my thinking is kind of clever by using market products that generated the cash that will, in the end, fund these special purchases.
Should my strategy not play out by year end; I believe it will over time and besides the funds I invested in have a history of paying out good distributions.
Since this is being played in a tax deferred account there are no taxes to pay until withdrawals are made and I am investing in funds that are nav purchases for me.
Old_Skeet
Note ... For tracking purposes my actual average cost on the October spiff equals a reading of about 1905 on the S&P 500 Index. Since, the recent December dip did not reach back of my average cost, I did nothing.

I do think it's pretty cool that airline companies/stocks are finally figuring it out.
Only took greatest destruction of capital in free world for what...20-30 years?

if it is not in retirement account...
one would think you want to compare after tax performance of the etf vs the mutual fund you are looking at. assuming they have similar risk.
I would think the one main disadvantage is when you sell mf, if there was any appreciation, the sale will result in you paying capital gains on the sale to buy something else.
vanguard has a comparison feature on their site.
the general advantage of etf's you can buy and sell them make frequent reading without penalties.

Here's my concern about the oil industry. Really big producer Russia and significant producers Iran, Venezuela and Iraq can't balance their budgets on low oil prices but they also can't cut back on production because they need cash. Saudi Arabia, another very large producer, is defending its market share and isn't unhappy to inflict pain on Russia, Iran and the fracking industry for different reasons but nonetheless they don't have a big incentive to cut back on production.
The US, another very large producer nowadays, has made significant capital investments that won't just get turned off. The projects that will get slowed down or turned off will have an impact years from now because the current price creates an incentive for some of the already large producers to keep producing in order to service their own national interests as well as debt .
I don't disagree with most of what's been said here- averaging in is far more reliable than trying to pick the bottom, there will be opportunities, some of the associated stocks that have been pulled down without a strong economic connection are probably already opportunities. I'm just not sure with the considerable economic AND importantly political headwinds, that its time yet to be committing additional capital to energy investments even on an averaging in basis.

Perkins Mid Cap Value Fund (JMCVX) - is closed according to all the filings I can find, is closed at Fidelity, but M* says is open, and E*Trade says it will sell the fund to new investors.
Perkins Small Cap Value Fund (JSCVX) - will reopen Jan 1, per SEC filing
Why this matters.
Estimated distributions this week for these funds are around 20%. This is more than the appreciation of nearly every owner's shares since they purchased them. (For JSCVX, unless one purchased shares around 2008-2009, you'd have to go back to the last millennium to find shares that cost less than the ex-div price of these shares will be.)
So, one may be better off liquidating, recognizing the smaller (long term) capital gains in the share price than taking the (larger) distribution, some of which may be taxed as ordinary income (unknown). Because these funds are (or will shortly be) available to new shareholders, it's not as important to retain a position.
I'm not saying that these are bad or good investments. Just that from a tax perspective, this is one of those rare opportunities where selling around a dividend (sell, repurchase ex-div if one wants to stay with the fund) works for a lot of people. Often when that's the situation, it's because people have been selling off in droves, leaving the stragglers to split the fund's distributions among fewer shares.

Hi Maurice,
I really enjoyed reading your well thought out and written blurb. I am not sure what the best strategy is try to catch a falling knife, so to speak, or trying to pick a bottom. Here is how I do it. Basically, there are eleven broad sectors in Morningstar Instant Xray analysis. I break these into major and minor sectors with energy being a major. On an even distribution basis each sector would carry about a 9% weighting. I strive to hold at least a five percent allocation in a minor sector (like materials) and ten percent in a major sector (like energy). Thus far, this has worked well as it has kept me form becoming underweight in a sector when it moves from an in vogue sector to an out of favor sector. Currently, I am also holding a little better than a five percent allocation in the materials sector.
By keeping at least ten percent of my allocation to energy … Well, when it becomes an in favor sector once again then I will have some good upward momentum movement within my portfolio. And, the ten percent allocation could grow upwards to about fifteen percent through capital appreciation and perhaps a little buying on the rebound.
Not saying what I do is right for everyone; but, this is just how I do it.
My best to you and yours,
Old_Skeet

If concerned Mike, remember TRP has Saturday hours, so you could call. I'm actually updating my records this morning and TRP's quote of $25.60 on PRWCX appears correct.
I like Marketwatch's tracker which also shows $25.60 for PRWCX.
http://www.marketwatch.com/investing/Fund/PRWCX?countrycode=US
The X-Dividend is always confusing. Has to do with Fed tax compliance regulations imposed on mutual funds. So they're required to do it. Most often, they drop the NAV by a certain amount and than pay that back to shareholders "of record" on the following day (usually in the form of additional shares of the fund). If you're reinvesting dividends & cap gains and if you're in a tax-sheltered account, they have little bearing on when you buy or sell. I recall once I had the opposite situation - sold a fund the day the dividend was declared and there was a big drop or gain in the markets that day. They sorted it out just fine and there were no unusual consequences.

Mike, can you confirm which price you got? Don't they declare distributions at the closing price?
Edit: That didn't come out the way I wanted. Of course they declare on the closing price. I think you are okay as long as you bought the fund at the distribution price. Otherwise you will pay taxes on gains you never had.
If this is in tax deferred then no issue unless you bought pre-distribution. Then you have a bit of a hole to come out of.

Just wanted to repost the Barron's interview here and point out the new 5-star rating by Morningstar on Dec. 8, 2014
Manager's Bio
Name: James Dondero
Age: 51
Title: Co-founder, president, portfolio manager
Scouring the Globe for Cheap Stocks and Bonds
Jim Dondero of the Highland Global Allocation Fund had a banner 2013. Here's what he's buying now.
Jim Dondero is a hunter who knows that you can't hit your target every time.
But Dondero and Mark Okada, who co-founded Highland Capital Management, a Dallas asset manager known for investing in distressed debt, shot a bull's-eye last year—a 30% return—in the Highland Global Allocation Fund (ticker: HCOAX).
That's a neat trick for a fund that is about 60% stocks, 40% bonds. Thanks in part to a big position in American Airlines Group stock (AAL), which tripled, as well as some of its debt holdings, the fund's performance was three times that of other funds in Morningstar's moderate risk "world allocation" category.
Dondero and his team of managers can hunt the globe, bundling their fixed-income expertise with stock picks across industries. The fund strategy was more equity-focused until 2013, and that especially smarted in 2008, when the fund sank 33%, or about 10 points worse than comparable funds. Willingness to take risks in turnaround stories has paid off recently, but Dondero does play defense: He can short stocks, and has been known to hold a significant cash position.
As a firm, Highland took its lumps during the financial crisis, shuttering two hedge funds as investors ran for the hills. Today, Highland has roughly $19 billion in assets under management, and a focus on collateralized loan obligations (CLOs) and alternative strategies in hedge funds, mutual funds and other portfolios.
Excerpts of our conversation with Dondero follow: He is eyeing Puerto Rico debt, he thinks Europe investments have had their run and suggests other areas where investors might take profits.
You can read the rest of the article here: http://online.barrons.com/articles/SB50001424053111904628504579423100003089692

FYI: Passive investing is hugely popular, and 2015 is shaping up to be a transitional year for capital markets, which may bring significant uncertainty and volatility. Therefore, the coming year could be a great time to take a close look at the best Vanguard funds.
Regards,
Ted
http://investorplace.com/2014/12/best-vanguard-funds-for-2015/print

@mrdarcey, A lot of questions unanswered as Matthews has not been very transparent in this whole issue. There is supposed to be a report out this month I think and whether there is a better explanation of what happened remains to be seen. If anything has bothered some of us, it is this.

Agreed. The earlier explanation seemed to be that the sale of PFICs generated capital losses/gains that were taxed at some bizarre rate. That seemed pretty straightforward to me.
This explanation seems to be that PFICs are taxed at a higher rate specifically because they are passthrough income, and that the sales have nothing to do with it.
Again, devil in the details, but those are two different explanations as I read it, which is pretty maddening.
Beyond that, though, if a substantial portion of your income is being used just to pay taxes on certain holdings, what is the total return potential?

@expatsp, I have had no problems with MAPIX and the returns. In recent months it has pared back quite a bit from its high. Most Asia funds have had their struggles as talks of slowdown in China are on the increase. I have been in it for some time now and still have good gains.
But it is still on a short leash for me.

I think you might be interested in this. I think it is correct and you have time to adjust your portfolio.
http://www.forbes.com/sites/schifrin...dlach-king-me/
Here is the new bond king’s view of the world today:
The Fed may raise the federal funds rate for the wrong reasons.
“They don’t really need the rates to be higher, but they seem to want to reload the gun so they aren’t stuck at zero without any tools.”
Deflationary forces will accelerate if the Fed raises rates.
“With a tightening, the dollar is going to not just be strong, but it will run up like a scalded dog. If that happens, then commodity prices are going down, we will import deflation and you will see an episode of deflationary scare.”
The long end of the Treasury curve will stay put and possibly go down further.
“There’s a 30% chance that importing deflation creates a panic into Treasurys creating a ‘melt-up,’ moving rates to German Bund levels today of around 1%.
It’s not okay to own risk assets when the Fed starts hiking rates.
“What is fascinating is, if you sell junk bonds and buy Treasurys, the minute the Fed hikes the first time, going back to 1980, in every case you did well.”
Don’t be surprised to see the yield curve flatten and possibly invert.
“Long rates have done nothing but fall. That tells me the market is saying to the Fed, ‘Go ahead, make my day.’ The curve is going to invert when and if fed funds hit 2.5 to 3%.”
Be long the dollar, especially in emerging market bonds.
“We have been all dollar [denominated in our foreign bond holdings] since 2011. For a while it didn’t really matter, but now it matters a lot. If you are nondollar you are really in trouble.”
Stay away from homebuilders, TIPs and mortgage REITs, and oil will fall further.
“I am convinced the Saudis want the price of a barrel of oil to go to $70. They don’t care if they run a short-term deficit if it slows down U.S. fracking and turns the screws on countries in their region that mean them harm.”
As we get closer to 2020 interest rates and inflation (and taxes) could really start rising.
“We are in the calm right now before the hurricane. I’m talking about the aging of the great powers, which is undeniable and can’t be quickly reversed. The retiree-to-worker ratios, the size of labor forces globally. China will have no one in the labor force. Italy’s losing 39% of labor force in the next generation and a half. Japan has an implosion of working population and no immigration. Russia is facing one of the greatest demographic crisis in the history of the world, absent famine, war and disease. It’s pretty bad. Italy has no hope,” says Gundlach matter-of-factly.
“The Federal Reserve bought the bonds from the deficits of 2011, 2012 and 2013, and those will roll off increasingly over time. Come 2020 you are not just financing massive entitlements like Social Security and Medicare but also old debt. No one talks about that. It’s a big deal. China doesn’t have the demographics to buy that debt. Who’s going to buy it?”
The coming debt storm–which Gundlach says is too early to worry about tactically–will hit financial markets just as DoubleLine approaches its tenth anniversary in business.
Giant pension funds and endowments are typically plodding in the redeployment of assets because it often requires coordinating board meetings, soliciting bids from new firms, listening to presentations and gathering votes. But with tens of billions likely to shift out of PIMCO over the next few months, DoubleLine is buzzing with activity. The task at hand is proving to existing clients and to new ones that the drama days are over and DoubleLine is all grown up.

This is interesting. I have often wondered about the wisdom of rebalancing into a falling knife although I have sometimes done it. However, periodically clipping away at winners does make sense to me as a way to preserve some of the gains. I looked through the detailed paper and its comments about momentum but its too complicated for my relatively passive style. The main initial take away for me is to think harder about rebalancing into a still declining market even if the calendar says to do it. Delaying action in that case may be wiser.

Hi @kevindow
Not that M & A is not taking place in other sectors, too; but because of large capital outlays R & D in the bio/health area, I feel the M & A will continue to be stronger in this sector versus other areas. With this (M&A) supporting pricing going forward in the broad healthcare sector.
This is obviously just my opinion and viewpoint; and perhaps I am offbase with this view, but one of the overall reasons for our investments in "health".
Take care,
Catch

With many thanks to Charles for his help, the Capital Gains link (below) has been updated as of 12/10 to include Heartland Funds, Pinnacle Value Fund, Robeco Funds, and Westchester Capital Funds (i.e. Merger Fund), Janus (final estimates), Vanguard and Bogle. Viewers should check at the link below. With posters' contributions of links, they have alphabetized into the link below.
http://www.mutualfundobserver.com/resources/capital-gains/

@linter: Out of 224 (MCG) Funds CCAFX is ranked #120 by U.S. News & World Report.
Regards,
Ted
http://money.usnews.com/funds/mutual-funds/mid-cap-growth/calvert-capital-accumulation-fund/ccafx