Tag Archives: financial advice

If Trees Don’t Grow To The Sky: The Next 6 Years

rolling 6 year numbersMy Comments: You’ve read my earlier comments about whether the world we now live in is a different world. The details have changed, but the fundamentals have not. The following article will cause you to think twice if have not made plans for your money to be protected going forward.

Charlie Bilello, Pension Partners, Mar. 18, 2015

Summary
• The last six years have been one of the strongest periods in history for U.S. equities.
• Investors need to lower their expectations for the next six years.
• This is quite possibly the worst starting point (looking ahead six years) for a 60/40 portfolio in history.

The Bull Market turned six last week and what an incredible six years it has been. From the depths of despair in March 2009, the S&P 500 (NYSEARCA:SPY) has more than tripled in one of the greatest six year bull market runs in history.

The Next 6 Years

There is a growing contingent of market participants today that seem to believe 20% annualized returns are the “new normal,” and the next six years will mirror the last. The crux of their argument is as follows: with central banks around the world engaging in unprecedented easing, there is no limit to how high a multiple the S&P 500 can fetch. In short, the narrative is that in the new central bank era, historical norms can be safely discarded as trees can grow to the sky.

While anything is possible, we should also consider a world where trees do not grow to the sky and mean reversion still exists. In that world, the “old normal,” a repeat performance is unlikely for the following reasons:

1) The average annualized return for the S&P 500 since 1928 is 9.3%. To expect the market to more than double this return for another six years is to expect the greatest bubble in the history of markets, far surpassing the dot-com bubble that peaked in 2000.

2) The long-term price-to-earnings ratio (CAPE or Shiller P/E) of 28 is now higher than all prior periods since 1871 with the exception of 1929 and the dot-com bubble which peaked in 2000.

3) While a terrible short-term predictor, there is a strong inverse relationship between longer-term returns and beginning price-to-earnings ratios, particularly at extremes. The worst decile of Shiller P/E values in the past (levels >26.3) have shown the worst average forward returns at 1.7%.

4) The gains of the past six years have not been lost on investors, who are about as bullish as they have ever been. The 45% spread between bulls and bears today stands in stark contrast to the -20% spread six years ago. The strongest gains in equity markets are built on a wall of worry and there is no such wall to speak of anymore.

While these factors may certainly be ignored in the short-run, they will be harder to ignore over a six-year period. At the very least, they suggest that the odds of above-average returns from here are low.

Borrowing From the Future if Trees Don’t Grow to the Sky

In the end, what the Fed has accomplished through the most expansionary monetary policy in history is not a new paradigm but simply a shift in the natural order of returns. In search of a “wealth effect,” they have borrowed returns from the future to satisfy the whims of today. They did so with the hope that the American people would borrow and spend more money and economic growth would accelerate because of short-term gains in the stock market.

Unfortunately, after six years, this “wealth effect” has failed to materialize, as this has been the slowest growth recovery in history in terms of real GDP and real wage growth. What we are left with is a boom only in the stock market, not in the real economy.

If trees don’t grow to the sky, then, future returns will have to suffer because past returns have been so strong. There is no other way unless you believe that multiples can continue to expand to infinity without reverting back to historical norms.

For anyone still saving and adding to their investments without having sold a single share, this has not been a gift from the Fed but a tremendous burden. The net savers have been forced to add money to stocks at propped-up levels, which will ultimately lower their long-term returns. The savers would have been far better off with a more moderate price advance with declines along the way which would have enabled them to buy in at lower prices and increase long-term returns. This is a mathematical truism.

In the bond market, math is also working against investors as the Fed has suppressed interest rates for over six years now. At the current level of 2.1%, the U.S. 10-year Treasury yield suggests that bond returns (NYSEARCA:AGG) are likely to be far below average in the years to come.

If trees don’t grow to the sky, the next six years will look nothing like the previous six and investors are likely to face a much more challenging environment. But don’t just take my word for it. I’ll leave you with a quote from Clifford Asness of AQR who had this to say in a recent interview with Barry Ritholtz:

“We find the 60/40 portfolio is about as bad as it’s ever been, prospectively” – Cliff Asness, February 21, 2015

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Note: here is the URL from which I took this article to share with you: http://seekingalpha.com/article/3010966-if-trees-dont-grow-to-the-sky-the-next-6-years?ifp=0

Euro: Parity Like It’s 1999

My Comments: The writer featured here provides, in my judgment, the most insightful reflections on what is happening economically across the globe. It appears here without his permission, but unless and until I’m told not to share them with you, I plan to continue.

March 20, 2015 / Commentary by Scott Minerd, Guggenheim Partners

Europe stands to benefit as the euro nears parity with the U.S. dollar – the Fed knows the U.S. economy faces a winter soft patch – the outlook for equities and fixed income remains fundamentally strong.

When the euro was introduced as an accounting currency on Jan. 1, 1999, it declined quickly, depreciating by 14.7 percent by Dec. 31 and hitting parity with the dollar early in 2000 before plunging to $0.83 by October of the same year. The euro’s recent slide has been no less severe, falling by 21 percent against the dollar since July of last year. With parity once again within sight, it seems quite plausible that one euro will once again equate to one dollar, and could potentially head even lower.

Of course, the biggest beneficiary of the depreciating euro has been Europe itself. Economic data coming out of the euro zone has been decent of late, and economic sentiment in Germany remains at a high level. The ZEW index of economic expectations for Germany, although perhaps tempered slightly by concerns over Greece and the Ukraine, still rose to a reading of 54.8 for March, up from 53 the previous month and the highest level since February 2014. Meanwhile, European equities are being powered higher—on Monday, Germany’s DAX Index breeched the 12,000 barrier for the first time and is now trading at just above that level—and euro zone consumer confidence is at levels last seen in 2007.

In contrast to the party spirit emanating from Europe, the U.S. economy faces some tough sledding in the weeks ahead, although not so much that it prevented the Federal Reserve from removing the word “patient” from its March meeting statement, signaling that there is enough strength in the economy for the Fed to start raising rates, most likely in September. In the short-term, temporary seasonal factors will likely tarnish investors’ faith in the economy. This seasonal downturn is not lost on the Fed. In the Federal Open Market Committee’s March meeting statement, it changed its description of economic growth from “has been expanding at a solid pace” to “has moderated somewhat.”

While U.S. job growth has been impressive, retail sales were weaker than expected, with last week’s sales print again coming in below expectations. But weak, weather-distorted first-quarter data is nothing new, and should not be taken as a sign of lasting weakness. In the early months of 2014, key economic data points, such as housing, retail sales, and even employment, were negatively impacted by an extended winter cold snap. Indeed, the U.S. economy shrank by 2.1 percent in the first quarter of 2014 before promptly turning back around in the second quarter. I expect a similar scenario to play out in 2015 as a result of another severe winter season.

The most likely place where we will see the direct impact of weaker economic data is the bond markets. Yields on U.S. 10-year Treasuries could fall meaningfully from 1.93 percent, perhaps even making a run on the lows we saw in January, with investors likely to be spooked by weaker economic data as the current quarter progresses. Personally, I have a great deal of confidence that the U.S. economic recovery remains on track and I don’t see weather-related economic data distortions having a lasting impact on the real economy. The prospects for U.S. equities and credit remain strong this year and recent weakness represents a buying opportunity.

Tough Sledding: Winter Weather Could Weigh on Interest Rates
As it did last winter, recent economic data has surprised to the downside as a result of severe weather. Retail sales have fallen the past three months, housing starts plunged 17 percent in February, and consumer confidence has backed off its recent highs. With economic momentum temporarily slowing, the Fed signaling the possibility of a later rate hike, and capital continuing to pour in from overseas, U.S. Treasury yields could be headed lower in the near term.

Why Invest in Real Estate?

home mortgageMy Comments: This is a topic about which I know relatively little. But it’s real, people do make money, sometimes lots of it, and over the few years since the crash that started in 2008, some folks have made tons of money.

The dramatic opportunities are probably behind us for a while as after several years, life tends to move on. But I have clients who would like to allocate some of their money to real estate. This is a helpful introduction if this is you.

By John Miller, posted in Real Estate on 02/28/2015

Real estate is one of the most stable and wisest investments you can make for your personal finances. Unlike bonds and other non-material investments, land and homes are material products that don’t go away.

In fact, real estate values remain quite high, and their rates improve with time. Many people have become millionaires because of real estate investments.

It takes a lot of money and capital to start out in real estate. People with big real property investments usually start out with the profits they get from their own businesses, from the gains they get from the stock market, or from other sources of income.

Some people think that real estate investments are an easy way to make money. Some think that one can just sit back, relax, and watch the profits grow. On the contrary, real estate requires a lot of dedication, hard work, and patience. Real estate investments do not grow overnight; you need a lot of skill and dedication to make earn profits from a real estate investment.

Where to Get Real Estate Deals
Any property for sale that has land in it has a great potential to be a serious money maker. If you’re only starting out to invest in real estate, you would do well to consult with an experienced real estate broker or investor who can guide you through your first land purchases.

Books, magazines, and other print resources can help you greatly just in case you don’t know what you’re doing with your real estate investment. Like any investment, you shouldn’t put your hard-earned money on land that will not rake in good profits.

Keys to Success
The trick to making the most of real estate is to buy the best land at exactly the right place at exactly the right time. Remember that real estate purchases are relatively permanent. You should also consider how much you’re willing to spend. Land costs millions, and you don’t want to end up with a piece of real estate that doesn’t pay for itself very well.

This Too Shall Pass

moneyMy Comments: The daily grind of figuring out if you are going to make or lose money today can become tiresome. It’s the primary reason most of us turn the responsibility over to others. We tend to hope we made a good decision and leave it alone. It’s one reason I never subscribed to the Wall Street Journal; worring about what was happening today caused me to lose sight of the long term perspective, which is financial freedom, for my clients and for myself.

I really like the thoughts expressed weekly by Scott Minerd. Here are some more.

March 13, 2015 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners

Behavioral finance reminds us that ignoring daily volatility roiling the market is wise. Instead, investors should focus on the positive, fundamental outlook for equities and fixed income.

At Guggenheim, a key tenet of our investment process draws on the Nobel Prize-winning work of behavioral finance pioneer Daniel Kahneman. In his most recent book, Thinking Fast and Slow, Kahneman admonishes investors that “closely following daily fluctuations is a losing proposition.” I often honor this principle by reminding individuals that they would be better off checking their portfolios much less frequently (Kahneman recommends once a quarter, for example).

In the spirit of this Nobel laureate’s foundational work, investors closely following the recent daily convulsions in the financial markets could be prone to overreaction. It never ceases to amaze me how a few days of sell-off in the stock market—or a modest back-up in rates, for that matter—can have everybody talking about bear markets. Looking beyond the myopic churn and burn, the important macro indicators remain positive, and nothing has occurred to fundamentally alter our positive outlook for equities or credit.

In U.S. interest rates, generally speaking, the pattern since 2009 has been for Treasury yields to decline, only for a sell-off to ensue before conditions stabilize and rates test their previous lows. This is the pattern I believe we are witnessing play out now. The yield on the 10-year Treasury note declined in January by more than 50 basis points before rebounding in February. Today, with quantitative easing underway in the euro zone, the risk is that U.S. 10-year rates are headed back lower. Despite the recent back-up, and the incessant chatter around the Federal Reserve’s “patience,” or lack thereof, the near-term risk to U.S. rates is likely to the downside. Fixed-income investors would be wise to stay fully invested given the current backdrop.

Meanwhile in the euro zone, central bankers commenced their commission to buy sovereign debt despite concerns over the fact that some bonds eligible for QE are trading at negative yields. If the program is successful, investors should see a weaker euro, improved growth, a sustained uptick in lending to the non-financial corporate and household sectors, and an increase in future inflation expectations. Early indications are that QE is working as the European Central Bank intends—bond yields are dropping and the euro continues to depreciate, which is stimulative to growth. In the United States, it’s very likely that we will see more demand for U.S. Treasury securities as a result of these record low rates in Europe, thus keeping a cap on U.S. rates.

In equities, instability in the U.S. market has caused the S&P 500 and the Dow Jones Industrial Average to lose the ground they gained thus far in 2015, but I believe this downward movement is just a momentary blip. Breadth remains strong. Seasonal factors are strong. The bottom line is that in the near term I see very little risk for stocks, and credit also remains a compelling proposition for investors. The recent turmoil is a quintessential call for the wisdom of behavioral finance and principled, long-term investing. To quote an old, sage scripture, “this too shall pass.”

Despite Recent Decline, Bull Market in Equities Should Remain Intact

Put into historical context, the recent move in U.S. equities appears normal. Since 1954, U.S. equities have rallied 12 out of 13 times in the 12-month period leading up to the first rate hike, with an average return of 18 percent. Despite a pickup in volatility recently, the underlying momentum for U.S. equities remains strong.

The Great Monetary Expansion

US economyMy Comments: Dozens of emails cross my desk daily, some promoting stuff that is clearly not relevant, many with a narrow focus that is largely self-serving, few of them truly informative. Those that come from Scott Minerd and Guggenheim Partners are usually worth paying attention to. They’re not too long, and they seem to have relevance for many of us. This is one of them.

March 05, 2015 by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners

While winter weather will likely distort first-quarter economic data, accommodative monetary policy around the world means the long-term outlook remains positive.

The European Central Bank will this month begin a program of full-scale quantitative easing to match what the central banks of Japan, the U.K., and the U.S. have been doing for some years now. The People’s Bank of China, by cutting its benchmark deposit and lending interest rates by 25 basis points last Saturday, provided further evidence—if any was needed—that the global economy will remain flush with liquidity for some time to come. The takeaway from this is that the great global monetary expansion is far from over and the outlook for stocks remains positive.

With regard to economic data here in the United States, we are potentially headed toward a period marred by winter distortions. This is nothing new. In the early months of 2014, key economic data points such as housing, retail sales, and even employment were negatively impacted by an extended winter cold snap. When the economy shrank by 2.1 percent in the first quarter of 2014, investors debated the fundamentals of the American economy. Of course, the economic soft patch of early 2014 proved temporary and the economy quickly regained momentum upon the arrival of the spring thaw. If similar factors are now at play, economic activity may be temporarily delayed, but not canceled.

If we do begin to witness a similar softening in economic data over the coming weeks, debate around the fundamentals of the U.S. economy will likely start afresh. Investors may even begin to question the Fed’s appetite for raising rates. However, I believe the underlying economy remains exceptionally strong and investors should not be panicked by seasonal setbacks. Indeed, considering the strength of the U.S. economy and the wave of liquidity emanating from various central banks around the world, the general investment environment should remain attractive.

A Stand-in For The Fiduciary Standard?

moneyMy Comments: I apologize for continuing to push this issue. But as a fiduciary, I’m bound to give advice that results in what is best for the client, legally, morally and ethically. That Wall Street firms resist this is not in your best interest.

Meanwhile, I received an angry call this week from a group that for now will remain nameless. The caller proceeded to rip me new one as I had borrowed an article that, according to him, belonged exclusively to his organization and I’d used it without specific permission. I was to take it off the web site immediately or face the consequences.

I have neither the time nor inclination to fight a losing battle, so I took it down. Never mind it was posted last October, attributed to the author, a prominent attorney and as coming from the organization in question. I was assailed for using other peoples ideas in my posts, never mind that they arrived unsolicited in my email inbox in the first place. My objective with this blog is to share what I consider good ideas and give credit to whomever is deserving.

I’ve been doing it this way now for four years and this is the first time I’ve been called or contacted in a critical manner. I intend to keep sharing stuff with whomever reads this blog. If you choose not to read any of it, that’s OK. But I still think all of us in this business who interact personally with clients need to be held to a fiduciary standard.

Mar 03, 2015 | By Allen Greenberg

With sincerest apologies to Walt Whitman:

O Fiduciary! My Fiduciary! Our fearful trip is (nearly) done,
The rule has weather’d every attack, the prize we seek is within grasp,
A new standard is near, the lobbying I hear, the people all exulting.

I don’t know about you, but I’m certainly “exulting.” Not just because the regulatory sausage-making may soon be done but because, frankly, I’ve heard enough of the Department of Labor’s wait-for-it, it’s-coming-any-moment-now, soon-to-be-unveiled fiduciary standard to last a good, long while.

This intensified soon after since President Obama announced his endorsement of the DOL’s plans to unveil its newly crafted fiduciary rule last week. But it actually began last summer, as speculation started to build about just when the DOL would move forward.

Of course, most of America couldn’t tell you whether a fiduciary was a noun, verb or something that happens after you eat too much Italian food. According to a recent AB Global survey, even plan sponsors are “confused or misinformed” about the fact that they themselves are, in fact, fiduciaries (30 percent fail to realize this). The sad fact is that investors are confused, too.

A campaign to help investors identify true fiduciaries “committed to objectivity, transparency, and plain English communications.” As reported by Barron’s this week, a survey by Opinion Research Corp. in 2010 of 1,319 investors found that 60 percent wrongly assumed that stockbrokers were already held to a fiduciary standard.

Not surprisingly, 90 percent wanted their brokers held to the fiduciary standard after being told about the difference between the fiduciary standard and the “suitability” standard that brokers are supposed to meet.

The Institute for the Fiduciary Standard understands this very well, which is why it has come up with an 11-point plan for anyone hoping to behave like a fiduciary, instead of, you know, posing as one.

Here’s a link to the IFS’s best-practices proposal. As you’ll see, there are items about acting in good faith, keeping fees under control, avoiding conflicts of interest, steering clear of soft-dollar commissions and third-party payments and more.

If a lot of Wall Street and its allies come off as acquisitive in this debate, Knut Rostad, president of the IFS, is our story’s hero, an even-handed player interested in doing more to protect investors without crippling the brokers.

“We hope brokers look at them seriously,” he said recently in speaking about his group’s best practices. “They were crafted with an explicit objective of being open to having brokers meet the practices … without lowering the standards.”

The institute’s proposal will be open for public comment until Monday. The organization’s board is expected to give final approval over the summer.
By that point, the DOL could be in the midst of multiple hearings on its fiduciary standard. Months later, perhaps many months later, it might have something hammered out.

Somebody in Congress – perhaps someone as powerful at Sen. Orrin Hatch – could then throw the proverbial wrench into the works with legislation that would make the DOL’s efforts moot.

Oh, wait, Hatch’s Secure Annuities for Employee Retirement Act already includes a provision that would do just that.

So, what’s the bottom line? The chances of a broader DOL fiduciary rule any time soon seem slim. The IFS version lacks regulatory bite, but at least we’d be doing something and then can get on with the next voyage in our lives

Rate Hike Rally

USA EconomyMy Comments: Interest rates and where they are going is a relatively hot topic. For those of you with savings accounts and Certificates of Deposit know, the returns you get are anemic at best. But if you need to borrow money for whatever reason, low interest rates are good. Since there is an expectation that interest rates will soon rise, people are scurrying to start projects now, before they start upward.

But when the Fed finally triggers an increase in the Fed funds rate, what will happen to the economy? Many thanks to Guggenheim Partners for these insights.

Commentary by Scott Minerd, February 26, 2015

In her testimony before Congress this week, Federal Reserve Chair Janet Yellen was keen to escape the bonds of nuance and innuendo the market attaches to Fed language. Her emphasis was clear—the Fed will raise the federal funds rate when economic data support the move, a decision I foresee taking place during its Sept. 16-17 meeting. In the meantime, the period before the Federal Reserve raises rates is historically a great time to invest.

Over the past six tightening periods since 1980, the S&P 500 has returned 23.5 percent on average in the nine months prior to the first rate increase. Assuming the next tightening cycle begins at the Fed’s meeting in September, the nine-month period this time around began in mid-December. Since that time, the S&P 500 is already up more than 7 percent. Currently, a number of indicators, including my favorite, the New York Stock Exchange Cumulative Advance/Decline Line, show that the stock market is improving and can sustain its upward momentum.

The period prior to a rate hike has also been a favorable environment for corporate credit. High-yield bonds and bank loans have outperformed investment-grade bonds on average by 4.0 percent and 1.6 percent, respectively, in the nine months leading up to the start of the last three tightening cycles. Even after the Fed begins to raise rates, tightening of monetary policy does not necessarily lead to an immediate widening of credit spreads. During four of the last five tightening cycles (1983, 1986, 1994 and 2004), default rates continued to fall for nearly the entire tightening period and ultimately ended lower than they were when the Fed started to tighten. In the past four instances where the Fed began raising rates following an extended period of monetary accommodation, high-yield spreads tightened on three occasions. On average, high-yield spreads tightened for nine months after the first Fed rate hike in a cycle.

All of this, combined with positive historical performance prior to past rate hikes, leads me to believe that a positive environment for U.S. equities and credit will continue between now and the first Fed rate hike. Even after the Fed commences on what I expect will be a slow and steady march of tightening, fundamentals can remain constructive, especially for high yield, for some time.

Economic Data Releases
U.S. Home Sales Slow While Prices Accelerate
• January existing home sales fell 4.9 percent, to an annualized pace of 4.82 million homes, a nine-month low.
• New home sales were largely unchanged in January, ticking down from 482,000 homes to 481,000. Sales in the Northeast region plunged 51.6 percent, likely reflecting poor weather.
• The S&P/Case-Shiller 20-City Home Price Index showed a faster annual growth rate in December, rising to 4.46 percent year-over-year, the first acceleration in over a year.
• The FHFA House Price Index rose 0.8 percent in December, the largest gain since May 2013.
• The Conference Board Consumer Confidence Index fell to 96.4 from 103.8 in February, but remained above 2014 levels despite the decline.
• Durable goods orders beat expectations in January, up 2.8 percent. Nondefense capital goods excluding aircraft rose for the first time since August.
• Initial jobless claims increased by 31,000 for the week ending Feb. 21, to 313,000.
• The Consumer Price Index fell into deflation in January, with prices down 0.1 percent from a year ago. However, core prices were stronger than expected, rising 0.2 percent from December and 1.6 percent year over year.

Continued Improvement in Euro Zone, China PMI Expands
• Economic activity strengthened in the euro zone in February according to the preliminary Purchasing Managers Indexes. Manufacturing ticked up to 51.1 from 51.0, and the services PMI rose to the highest since last July at 53.9.
• Euro zone economic confidence rose to 102.1 in February, the highest since last July.
• Germany’s manufacturing PMI was flat in the February preliminary reading, remaining in expansion at 50.9. The services PMI rose to a five-month high of 55.5.
• Germany’s IFO Business Climate Index inched up in February to 106.8 from 106.7. Expectations rose slightly while the current assessment fell.
• Germany’s GfK Consumer Confidence Index increased from 9.3 to 9.7 in the March survey, the highest since 2005.
• February preliminary PMIs in France were mixed, with manufacturing unexpectedly falling to 47.7 from 49.2 and services jumping to the highest since 2011 at 53.4.
• U.K. retail sales were weaker than expected in January, falling 0.3 percent. Sales excluding autos were down 0.7 percent.
• China’s HSBC manufacturing PMI rose back into expansion in February, up to 50.1 from 49.7.