Fareed Zakaria GPS – CNN 10-25-15

Salient to Investors:

Fareed Zakaria said:

  • When politicians have been in power for a decade, voters usually want a change no matter how popular the leader is. The hallmark of populism is anger. Left-wing populism is mostly about economics. Right-wing populism is mostly about culture. Both hate the big city elites who they believe run the world.
  • Populism gets attention but rarely wins. The real democratic populists of the late 19th and early 20th century were agrarian reformists, anti-immigration activists, advocates of prohibition and ardent believers in the moral superiority of farms and small towns – but always lost the elections. The Democratic Party when it has been successful has never been about populism.
  • Ben Bernanke was the single individual responsible for preventing the financial crisis of 2008 from turning into something much worse.
  • Brazil is the biggest country in the entire Southern hemisphere, with the 6th largest population and 8th largest economy in the world, with a government with the lowest ever approval ratings according to Reuters.

Philip Tetlock at the University of Pennsylvania said:

  • The average expert in fields like politics is no better at making predictions than anyone making a random guess.
  • Many organizations, governments, and news media never truly evaluate the accuracy of their predictions.
  • Predicting is a skill that can be honed, and can be acquired with practice by anyone with a fair level of intelligence.
  • The best forecasters tend to be open-minded, consider information from many different sources, embrace nuance, qualifying their assertions carefully, and work well with those that disagree, without being disagreeable.

Ben Bernanke said:

  • You cannot have a collapse of the financial system and the rest of the economy emerges unscathed.
  • The US economy is recovering strongly, though not benefiting everybody. Globalization, huge technical and institutional changes have worked against the worker with the high school degree and little experience with technological change – a very long term problem that monetary policy can do little about.
  • Yellen has to decide if there is enough domestic momentum to keep us growing despite the drags from abroad.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript at http://transcripts.cnn.com/TRANSCRIPTS/1510/25/fzgps.01.html

Looking for the lifeboats – The Economist 09-19-15

Salient to Investors:

  • Both equities and government bonds are overvalued but are unlikely to fall in tandem. Long-term investors should ignore short-term market declines because over the long-term, asset prices rise – US equities overcame the dotcom bubble and 2008 financial crisis to reach record highs in 2015.
  • However, equities could be in for a long slow decline, a la Japan, the first rich country to fight deflation and zero interest rates. Japanese equities are still down 50% since the end of 1989, while bond yields have remained very low since the late 1990s. At least Japanese investors could have escaped into foreign assets, but that option is narrowing because all the developed world faces deflation, including emerging markets.
  • Robert Shiller at Yale said more investors fear US stocks are overvalued than at any time since 2000. Deutsche Bank says government bonds are the most expensive they have ever been.
  • AQR research found that:
    • In the 10 worst quarters for global equities between 1972 and 2014, equities lost more than 18% on average, bonds gained 4.8%, commodities and gold gained. Corporate bonds lost value, relative to government bonds.
    • In the 8 bad equity quarters since 1990, hedge funds lost and average of 5.2%, excluding trading costs and fees, but a combination of value, momentum, carry, defensive and trend-following strategies would have produced very good returns, excluding trading costs and fees.
    • In the 10 worst quarters for government bonds between 1972 and 2014, bonds lost 3.9% on average, while equities gained 3.5% on average thanks to a big gain in Q2, 2009, gaining in 6 of the 10, and commodities rose.
  • In the 10 worst quarters for government bonds, cash averaged a small gain.
  • Back-testing strategies is unsafe because there is no guarantee that they will be as successful in future.

Read the full article at http://www.economist.com/news/finance-and-economics/21665026-which-investments-work-best-when-markets-decline-looking-lifeboats

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Panic Now! Avoid The Rush – David Stockman’s Contra Corner 09-02-15

Salient to Investors:

Lee Adler writes:

  • We are in the first leg of a bear market.
  • Markets are neither crazy nor sane, but measure and reflect liquidity.
  • The two official rules are a) the trend is your friend, and b) don’t fight the Fed.
  • Be positive in your coverage of Wall Street or be fired is the veiled threat that is the core of the financial media majors, who promulgate the “don’t panic, it’s just a correction” advice, which assumes that the market will never go lower than it is right now.

Read the full article at http://davidstockmanscontracorner.com/panic-now-avoid-the-rush/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Thursday

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Is A Bear Market Starting? Prepare To Be Mauled, Down And Up – Seeking Alpha 08-24-15

Salient to Investors:

Miles Hoffman writes:

  • Expect at least a 20% move down, and a seasonally bearish Fall.
  • Bear markets have two phases, and can move down and up sharply. The first is where the leading sector of the prior bull market goes into a bear market, while other sectors hold up or perform well. Some sectors perform better in bull markets, others in bear markets. The second phase is capitulation where everything declines.
  • There are long-term secular bull and bear markets and shorter-term cyclical bull and bear markets. Secular bear markets are very volatile, but secular bull markets are usually less volatile and are mostly straight up. A cyclical bear market within a secular bull market, or correction, is not very volatile, excepting 1987.
  • Investors should study behavioral finance.
  • Long-term returns from buying high PE multiples are miniscule.
  • Keynes said that markets can remain irrational a lot longer than you and I can remain solvent.
  • The biggest cyclical bull market move up was in the 1930s bear market.
  • Almost everyone reading Seeking Alpha are not buy and hold investors.
  • Investors put twice as much emphasis on losses.
  • Making money in a bear market is difficult and emotionally draining. There were 9 moves of 20+% in the 1930s bear market that occurred in 27 months. It makes more sense to try to make money on the downside by using inverse ETFs, if you can handle the volatility. You can go short in an IRA with an inverse ETF.
  • The reason that in bear markets some sectors crash while others soar is because professional money managers have to be invested. Clients dislike paying a fee for being in cash. Cash levels are usually 5% or less – the most I have seen is 15%, which took as much explaining to clients as losing stocks.
  • Almost all professional money managers are closet indexers and keep their sector weighting fairly close to those of the S&P 500.
  • Staples, healthcare, and utilities are leading sectors going into a bear market because even in a poor economy, people have to eat and heat.
  • Recession depresses cyclical industry revenues and earnings and drives the stocks to low valuations.
  • The 2000 market top was the last “honest” top, a single sector led bull with a blow off top, driven by the internet and a booming economy.
  • The 2007 market top was a dishonest top, driven by many sectors, and created by a shady Fed which lowered interest rates and diverted the “2000 winnings” into the housing market.
  • The current bull market has no foundation, like the internet revolution, just rot. It was not led by China, which crashed hard to a bottom in 2009, then bounced for a year, before going sideways, violently, for 5 years.
  • The market’s moving averages are sending warnings.
  • The Dow Industrials moves though its lows is being confirmed by the Dow Transports.
  • Bond market traders are smarter than equity traders, so the ratio of junk bonds relative to higher grade corporates is a valuable indicator.
  • High beta stocks relative to low beta stocks is bearish.
  • Small cap to large cap is bearish.
  • The ratio of stocks above and below their moving averages is bearish.

Read the full article at http://seekingalpha.com/article/3462356-is-a-bear-market-starting-prepare-to-be-mauled-down-and-up?ifp=0

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Advice After Stock Market Drop: Take Some Deep Breaths, and Don’t Do a Thing – The New York Times 08-21-15

Salient to Investors:

Stocks are most useful for long-term goals so it does not make sense to change your investment strategy based on a blip (sic) of market activity. There is absolutely nothing abnormal going on in the market. Research shows that long-term portfolio performance suffers badly by missing just a few days of the market’s biggest gains.

The fundamentals of capitalism have not changed, not should your confidence in very long-term ownership of equities. Few investments deliver the kinds of returns that stocks can without their own accompanying anxiety. It would take decades of systemic economic erosion to prove that stocks are not the most accessible route to earn the returns you will need to retire.

Read the full article at http://www.nytimes.com/2015/08/22/your-money/stocks-and-bonds/advice-after-stock-market-drop-take-some-deep-breaths-and-dont-do-a-thing.html

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Reassess Your Investments Before Next Panic – Wall Street Journal 08-14-15

Salient to Investors:

Jason Zweig of The Intelligent Investor writes:

  • Don’t join any panic. The market can fall by at least 50% but no one can predict when.
  • Studies show that over time, performance chasing reduces returns by an average of 1.5% per annum; a big bite in a market where the long-term inflation-adjusted return of 4% per annum might be hard to realize.

Read the full article at http://blogs.wsj.com/moneybeat/2015/08/14/reassess-your-investments-before-the-next-panic/

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Why the Stock Market Rally Is Bad News – Bloomberg 10-22-14

Salient to Investors:

  • Regular investors, especially those saving for retirement, have an advantage over the professionals because they can afford to be patient and buy extra when stocks drop – “Be fearful when others are greedy, and greedy when others are fearful” – Warren Buffett.
  • David Santschi at TrimTabs Investment Research said that did not seem to care much when stocks started to drop this month.
  • Stock declines do not always predict a recession but a strong stock market is a sign the economic recovery may still be on track.

Read the full article at http://www.bloomberg.com/news/2014-10-22/why-the-stock-market-rally-is-bad-news.html

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Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious – Business Insider 09-04-14

Salient to Investors:

James O’Shaughnessy of O’Shaughnessy Asset Mgmt said:

  • Fidelity found that their best performing accounts were those of people who forgot they had an account with them.
  • The shorter you hold a stock, the more likely you are to lose money.

Barry Ritholtz found that when families fought over inherited assets and did not touch those assets for say 10 or 20 years, those years were the best period of performance.

Richard Bernstein of Richard Bernstein Advisors found:

  • Over the period December 31, 1993 to December 31, 2013 the average mutual fund investor underperformed every investment asset class except Asian emerging market and Japanese equities, and even underperformed cash.
  • The average mutual fund investor would have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities.
  • The underperformance suggests the average mutual fund investor consistently bought assets that were overvalued and sold assets that were undervalued.
  • When chaos occurred, the average mutual fund investor ran away.

Read the full article at  http://www.businessinsider.com/forgetful-investors-performed-best-2014-9

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Yale vs. Penn: Where are stocks headed? – MarketWatch 08-22-14

Salient to Investors:

  • Robert Shiller at Yale said stocks and bonds are highly priced and may be joined by real estate.
  • Jeremy Siegel at Wharton expects the bull market to continue, possibly reaching Dow 18,000 or higher by the end of 2014. Siegel said bull markets climb the wall of worry in a world of uncertainty, and sells when there is no uncertainty.
  • Mitch Tuchman at Rebalance IRA said long-term investors are served by declining markets because steady buying during down cycles is a great way to build wealth over decades – a balanced, low-cost portfolio does not require you to guess correctly the direction of any investment.

Read the full article at http://www.marketwatch.com/story/yale-vs-penn-where-are-stocks-headed-2014-08-22

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REMINDER: You Are ‘Shockingly’ Terrible At Investing – Business Insider 08-12-14

Salient to Investors:

Richard Bernstein at Richard Bernstein Advisors found:

  • Over the period from December 31, 1993 to December 31,  2013, the average mutual fund investor underperformed every asset class and category, including cash, except Asian emerging market and Japanese equities.
  • The average investor would have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities.
  • Investors consistently bought overvalued assets and sold undervalued assets.
  • In periods of chaos, investors ran away.

Read the full article at  http://www.businessinsider.com/typical-investor-returns-20-years-2014-8

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