Submitted by Lance Roberts of STA Wealth Management,
There was so many good things to read this past week that it was hard to narrow it down to a topic group. After a brief respite early this year, the markets are hitting new highs confirming the current bullish trend. As a money manager, this requires me to increase equity exposure back to full target weightings. After such an extended run in the markets, this seems somewhat counter-intuitive. It is, but as Bill Clinton once famously stated; “What is….is.”
However, while the current market “IS” within a bullish trend currently, it doesn’t mean that this will always be the case. This is why, as investors, we must modify Clinton’s line to: “What is…is…until it isn’t.” That thought is the foundation of this weekend’s “Things To Ponder.” In order to recognize when market dynamics have changed for the worse, we must be aware of the risks that are currently mounting.
1) Fisher Warns Fed’s Bond Buying Could Be Distorting Markets via Reuters
While this article falls in the “no s***” category, Dallas Fed President Richard Fisher points out areas that we should be paying closer attention to for signs of change.
“There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive,” he said of the asset purchases, which are sometimes called QE.
“I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis.”
Here are his main points:
1) QE was wasted over the last 5 years with the Government failing to use “easy money” to restructure debt, reform entitlements and regulations.
2) QE has driven investors to take risks that could destabilize financial markets.
3) Soaring margin debt is a problem.
4) Narrow spreads between corporate and Treasury debt are a concern.
5) Price-To-Projected Earnings, Price-To-Sales and Market Cap-To-GDP are all at “eye popping levels not seen since the dot-com boom.”
“We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again,”
In order to make it in professional sports, you have to be an elite athlete. What is amazing, is that among all of the elite athletes, there are always one or two that rise above all others. Players like Michael Jordon, Tiger Woods, Nolan Ryan and many others have elevated their game to inexplicable levels. In the investment game, there are a few individuals that have done the same. The follow three pieces are views from some of these men Howard Marks, Jeff Gundlach and Seth Klarman.
2) Howard Marks: In The End The Devil Usually Wins via Finanz Und Wirtschaft
“Our mantra at Oaktree Capital for the last few years has been: «move forward, but with caution». Although a lot has changed since then I think it’s still appropriate to keep the same mantra. Today, things are not cheap anymore. Rather I would describe the price of most assets as being on the high side of fair. We’re not in the low of the crisis like five years ago.”
“Let’s think about a pendulum: It swings from too rich to too cheap, but it never swings halfway and stops. And it never swings halfway and goes back to where it came from. As stocks do better, more people jump on board. And every year that stocks do well wins a few more converts until eventually the last person jumps on board. And that’s the top of the upswing.”
“But there actually are two risks in investing: One is to lose money and the other is to miss opportunity. You can eliminate either one, but you can’t eliminate both at the same time.”
“There are two main things to watch: valuation and behavior.”
3) Seth Klarman: Downplaying Risk Never Turns Out Well via Value Walk
““In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test,” he wrote. “What investors see in the inkblots says considerably more about them than it does about the market.”
“If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.”
“We can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences.”
“Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings?”
“There is a growing gap between the financial markets and the real economy,”
“Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth.”
“In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987,” he wrote. “A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does. Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?”
4) Jeff Gundlach & Howard Marks: Beware Of Junk Bonds via Pragmatic Capitalist
“There’s been some cautionary commentary in recent months from some bond market heavyweights. Most notably, Howards Marks and Jeff Gundlach. In a Bloomberg interview today, Marks said you need to be cautious about low quality issuers:
‘When things are rollicking and the market is permitting low-quality issuers to issue debt, that’s when you need a lot of caution,’
And just a few weeks before that Jeff Gundlach referred to junk bonds as the most overvalued they’ve ever been relative to Treasury Bonds.”
5) Bernanke Unleashed: What He Can Say Now That He Couldn’t Say Before via Zero Hedge
Now that Ben Bernanke is no longer the head of the Fed, he can finally tell the truth about what caused the financial crash. At least that’s what a packed auditorium of over 1000 people as part of the financial conference staged by National Bank of Abu Dhabi, the UAE’s largest bank, was hoping for earlier today when they paid an exorbitant amount of money to hear the former chairman talk.
“The United States became ‘overconfident’, he said of the period before the September 2008 collapse of U.S. investment bank Lehman Brothers. That triggered a crash from which parts of the world, including the U.S. economy, have not fully recovered.
‘This is going to sound very obvious but the first thing we learned is that the U.S. is not invulnerable to financial crises,’ Bernanke said.
“He also said he found it hard to find the right way to communicate with investors when every word was closely scrutinised. ‘That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can’t do that because the markets do not understand hypotheticals.‘
“The complexity though arises because in order to help the average person, you have to do things — very distasteful things — like try to prevent some large financial companies from collapsing. The result was there are still many people after the crisis who still feel that it was unfair that some companies got helped and small banks and small business and average families didn’t get direct help. It’s a hard perception to break.”
I guess the real question is now that the markets are once again over confident, over extended and excessively bullish – have we actually learned anything?
Have a great weekend.