Tag Archives: financial advice

Strange Machinations

InvestMy Comments:There is an old adage about stock prices being a function of earnings, earnings, earnings. It’s similar to the adage about real estate prices being a function of location, location and location. You and I know there are other variables, but how to identify and quantify those variables is another matter.

Perhaps you’ve noticed a lot of pricing volatility in the world these days. This means there is more uncertainty than usual about stock prices, about interest rates, and about which countries across the world should be included in your mix of investments. As a result, the perception of risk, both for the short term and the long term plays a role in what you do today and your expectations. It also matters what you mean when you say “short term” and “long term”. (I once knew someone who traded stock positions daily across the world based on currency values. For him, a “long term” position was about 3 days!)

by Scott Minerd, Guggenheim Partners on May 15, 2015

What to make of markets that are no longer on speaking terms with their fundamentals.

I can’t recall in my career where I had such an accurate forecast on the economy, and then was so surprised by the market’s reaction. Weeks before first-quarter U.S. gross domestic product (GDP) was announced, we were forecasting extremely weak economic growth—near zero or even negative for the quarter. Market consensus was 1 percent, so the shock of just 0.2 percent GDP growth should have driven rates down. Since 2010, GDP disappointments like this have led 10-year Treasury yields to fall by 5.5 basis points on average in the two days following the release. This time around, the opposite occurred—yields rose by double that, and continued to rise.

Many have speculated about what caused this selloff because it was so out of line with what one would expect following a surprisingly weak GDP print. I think the reason had more to do with what was happening in Europe than what was going on in the U.S. economy. European bond market volatility has been extreme. The yield on the German bund has gone from a low of 8 basis points on April 20 to around 70 this week, a move of over 800 percent (by the way, if you purchased a bund at the bottom in yields, it would hypothetically take 65 years’ worth of yield to erase such losses). Violent convulsions like these are not based on fundamental changes but relate to technical factors resulting from market distortions created by quantitative easing and macroprudential policy. Similarly, the backup in U.S. rates is likely a result of market machinations. Call it a volatility overflow from Europe.

Ultimately, all of this unusual market behavior should prove to be just noise. We are likely to continue down the road we’ve been on, with a flood of liquidity coming into the system as foreign investors pursue relatively attractive yields in the United States. The reality though is that Europe cannot abort its quantitative easing program early. In fact, I expect the European Central Bank will soon confirm that it will stay the course until September 2016 as it seeks to calm the nerves of the market.

For the moment, given the rise in interest rates that we’ve had, the market has discounted a fair amount of risk and has repriced for that. On balance, we’re better positioned today in terms of value than we were two or three weeks ago. The risk-on trade remains intact, despite recent market irrationality, and the sensible reaction is to remain long equities and credit.

In equities, the old adage “Sell in May and go away” usually has a high statistical significance of working. This year, it may not. Since 1980, the average U.S. equity return through this point in the year is nearly 5 percent. So far, however, performance has been sluggish, with the market up just 3 percent. This may mean there is headroom for stocks heading into the summer months. This view is reinforced by the fact that stocks have historically performed well in the period leading up to the first Federal Reserve rate hike. The S&P 500 has historically gained on average more than 9 percent in the five months prior to tightening by the Fed, which I continue to believe will commence in September.

Remember Eric Snowdon?

My Comments: The more things stay the same, the more they change. Or at least I think that’s how the saying goes. I’ve had mixed feelings about Eric Snowdon from the beginning, wondering if what he did was not in our best interest as Americans who relish our freedoms. Our knee jerk reaction was to simply throw his ass in jail, assuming he could be caught.

A recent court ruling may not cause him to be exonerated, but will certainly put a different light on his having leaked classified documents to the world for publication.

May 12, 2015 by Elias Isquith

A few weeks ago, HBO broadcast a roundly celebrated interview between comedian John Oliver and Edward Snowden, the former CIA contractor who became a controversial and world-famous figure after leaking an unknown number of secret U.S. government documents to the press. The interview was funny and wide-ranging, but the overall gist of Oliver’s questions cum critiques was that the Snowden revelations may be historical but have failed to trickle down to the general public. Oliver’s question to Snowden was, rather ironically, whether he was sure anyone was even listening.

Snowden held his own in the Q&A, but now that the United States Court of Appeals for the 2nd Circuit has delivered a watershed ruling finding a key part of the Patriot Act not only unconstitutional but also illegal, one wonders if Snowden doesn’t wish the interview had been conducted just a few weeks later. Because while John Q. Public may still not have much of an idea of what “bulk collection” or “metadata” means, it’s clear that people in power — both in Congress and on the bench — are paying attention, and many of them have found Snowden’s revelations just as disturbing as he.

Recently, Salon spoke about the ruling over the phone with American University Washington College of Law Professor Stephen Vladeck, an expert on the law who focuses on issues involving national security, counterterrorism, the separation of powers and spying. In addition to discussing how the ruling affects Snowden’s legacy, our conversation also touched on the 2nd Circuit’s findings, the NSA reform movement and the likely near-future of the debate over privacy and mass surveillance. Our chat is below and has been edited for clarity and length.

How important is this ruling, really?

I think it’s important in a couple of different respects. I think one of the biggest reasons why it’s important is because up until this point, the phone records program had been repeatedly approved by the super-secret, one-sided Foreign Intelligence Surveillance Court (FISA). Now for the first time, adversarial litigation has prompted the courts to consider very carefully whether Congress really did mean back in 2001 to authorize such a sweeping collection of phone records; and the court unanimously says no. That’s a very big statement, and it’s very important. What happens going forward I think now depends on what Congress does in response.

Why is it that Congress is in the mix here? Why aren’t we going straight to the Supreme Court as the next step?
CONTINUE-READING

Dog Days of the U.S. Expansion

moneyMy Comments: How is your money growing? Is it growing? Do you care? Are you prepared for pain when it stops growing and shrinks, perhaps dramatically?

As a professional in this world, I’ve long since given up worrying about this. All anyone can do is pay attention, or pay someone to pay attention for you. But it’s NOT different this time, and some of us will get hammered and some of us not so much. Here’s a clue to follow.

The Kentucky Derby marks the beginning of summer, but ultimately investors must prepare for the coming winter.

May 08, 2015 Commentary by Scott Minerd, Chairman of Investments and Global CIO

Ever since I was a child, the Kentucky Derby has always been for me a symbol of the changing of seasons—winter is over, spring is in air, and, most importantly, summer is right around the corner. Back in 2009, at the time of the annual “Run for the Roses,” I wrote a memo to our clients using this analogy to explain where we are in the business cycle. The ravages of winter were over, I wrote, and we were headed for the warmth of summer with bright prospects for investors. Six years later, the summer sun continues to shine on credit and equities, but the question I am consistently asked—especially during times of heightened volatility, like this past week—is how much longer can it last?

I answered this question recently at the Milken Institute Global Conference. If the economic “summer solstice” was mid-2009, then today we are somewhere in “late-August.” The expansion is now over 70 months old and is entering its mature phase, having already exceeded the average length of prior cycles of 57 months. However, “late-August” means there still is time left in summer and room left in this expansion. The past three cycles have also been longer than normal, averaging 94 months. Additionally, growth has been abnormally sluggish in this recovery (which, as I’ve written, is a byproduct of macroprudential policy). Slower growth means the current expansion may have more headroom than is typically the case at this point in the cycle.

What can investors expect as summer draws to a close? Our view of the future is that the Federal Reserve will likely begin interest rate “liftoff” in September of this year, and will continue to tighten at a steady pace until it nears the terminal rate (or peak Fed funds rate) in the cycle. This will likely occur toward the end of 2017 or early 2018 in the range of 2.5 to 3 percent. Recent experience suggests that a recession typically occurs about a year after we reach the terminal rate. If this tightening cycle plays out as we suspect, the U.S, economy will face its next recession in late 2018 or early 2019.

While the best of the post-crisis returns are now behind us, the good news is that historically, until central banks remove the proverbial punch bowl of accommodative monetary policy, the party can continue for investors. As a matter of fact, our research shows that both the lead up to, and the first year after, the Federal Reserve begins a tightening cycle have been positive for both credit and equities. Historically, U.S. equities have returned close to 4.5 percent in the 12 months after a Fed tightening cycle begins, based on an average of the last 13 cycles, while bank loans returned an average 5.8 percent, high-yield bonds returned 3.9 percent, and investment-grade bonds returned 3.3 percent in the three cycles since 1994 (when the data for fixed-income asset classes became available). The 12 months prior to a Fed hike have proven even better for investors, with equities returning an average 16.4 percent, high-yield bonds returning 8 percent, and investment-grade bonds returning 9.9 percent.

I don’t want to sound overly bullish, however. My view is that it is prudent to start to recognize what stage of summer we are in, and to understand that long-term investors need to start planning for winter, even if winter is a couple of years away. This doesn’t mean there aren’t opportunities between here and there—the punch bowl is out, the party is still going on, and we should drink long and deep for as long as we can. The European Central Bank has told us that it won’t halt its quantitative easing program until September 2016 at the earliest, which is another positive for credit and equities, even as the Fed raises rates in the United States.

So let’s enjoy the end of this long summer party. There are still some golden, halcyon summer days ahead and it would be premature to put on our winter clothes just yet. Indeed, on the extreme end, the expansionary cycle of the early 1990s lasted over 118 months. However, when all is said and done, the easy money in this expansion has already been made and investors should be thinking about the winter to come.

Florida and Federal Money for Florida Citizens

health-is-wealthMy Comments: You may have read about this already. Or some version of it. I’m really not a fan of Rick Scott; I see him as a shill for the hospital industry who got himself elected governor. His ethics, values and focus are not consistent with mine. This was written by a Joan McCarter and appeared Wednesday, May 6th on an internet news feed I follow.

Florida Gov. Rick Scott is continuing his bizarre quest to get one kind of federal money because he doesn’t want any money that might have anything to do with Obamacare. So he’s not worried about federal government overreach, he’s worried about Obamacare cooties. He’s filed a lawsuit against the feds that will cost his state who knows how much money and on Wednesday traveled to Washington to meet with Health and Human Services Secretary Sylvia Mathews Burwell to try to convince her to give him the non-Obamacare money.

The governor wants the administration to extend $1 billion in low-income pool funds for hospitals that treat uninsured and Medicaid patients and the federal government wants Florida to expand Medicaid so more people have insurance under the Affordable Care Act.

Eight other states, including Texas, also receive the hospital funds and are closely watching the standoff between Florida and the federal government. Florida’s funds are the first to expire on June 30th.

In some of his harshest comments yet, Scott criticized the agency for not giving an answer and essentially blowing apart budget talks.

“Before the session, HHS knew our budget timeline and they did not act to keep the LIP program,” Scott said.

And before the session, Scott and the legislature knew that the LIP program was going to be cancelled in Florida—they were informed of that decision a year ago. If anybody has blown the budget talks apart, it’s Scott and House Republicans—backed by the Koch brothers—who have refused to consider the solution the state’s Republican Senate agreed upon, which is Medicaid expansion. For months, Scott sat out the debate. Then a few weeks ago he decided he had changed his mind about Medicaid expansion (he said he was for it when he was running for re-election last year) and became not just opposed to it, but unhinged about it.

Scott came out of the meeting talking tough. “I told her that we need federal action right now. The low-income families in our state cannot wait on the federal government any longer.” One hopes that Burwell replied that they’d already been waiting far too long for Medicaid.

Scott’s plea didn’t work.

Burwell said in a statement that Florida’s request for the $2.2 billion in federal funding “falls short of the key principles HHS will use in considering proposals regarding uncompensated care pool programs, and the size of the proposed LIP [Low Income Pool] appears larger than what matches the principles.”

She added that the LIP funding was not tied in any way to the state’s decision to not expand Medicaid. What she left unsaid was that it’s not her job to bail the state of Florida out of a budget crisis they made for themselves by rejecting the expansion.

Get Ready For The Biggest Margin Call In History

My Comments: Like a broken clock that is right twice every 24 hours, I’ve been talking about the probability of us having a severe market correction for the past 12 months or more. It’s obviously not happened yet.

But every time I turn around, there are new observations from people who understand this better than I do. Most of them agree it’s going to happen. Each of us in our own way, depending on where we are in life and what we expect to achieve with our savings and investments, need to pay attention. There are ways to protect yourself and it won’t cost an arm and a leg to make it happen.

Chris Martenson | Apr. 20, 2015

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind out of asset prices.

He recommends building cash and waiting to see how the coming storm – which he calls the “greatest margin call in history” – plays out:
0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed.

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it“.

What the Fed is saying is that we have unintended consequences of low interest rates. Money is chasing yield: it’s going to real estate making it over-valued, and flowing into the equity markets making them over-valued. And then the Fed says “Well, we have two choices. We can allow the market to run into a bubble, or we can burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is “lean up against the market”. To take some of the excess out of prices by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less. And we certainly would like to see that market become flat-lined for a while in terms of return.” Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly 0%.

Given this, at a bare minimum, I recommend taking the leverage out of your own portfolio so you sit with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return is 0% for the next couple of years.

Some time the best advice to anybody is to do nothing. And of course being, part of an online bank I’m not exactly popular with management for putting this advice out there. But I have to give the advice I believe in and share what I do myself; and I’m certainly reducing whatever equity I have in my portfolio to a minimum. So I’m scaling back to where I was in January last year.

I’ll put it another way. I’m advising a hedge fund in London, analyzing 10,500 stocks from the bottom up. How many do you think of these 10,500 world stocks are cheap? Only 23. Which means 98% of all stocks are either fairly-priced or expensive.

Click the link below to listen to Chris’ interview with Steen Jakobsen (40m:27s)

https://www.youtube.com/watch?v=fnp5ETnKylU

Rioting In The Streets Of Gainesville?

retirement_roadMy Comments: The blog post title above comes from me; the one that actually accompanied the article is Public Pensions Face New Challenges As We Live Longer. Huh?

As a financial planner, I try to make people aware of the existential threats we face as we all grow older. These threats are things that “might” happen, may not happen, but if they do can be devastating to individuals and families. If you are already dead, you can skip this blog post, but if not, then…

No one seems upset that modern medicine has resulted in more of us living longer lives than could have been expected when we were born. Along the way, many of us worked for organizations such as the State of Florida or somewhere in corporate America. Or maybe the City of Gainesville or the Sherrif’s Department. We participated in a pension plan that promised benefits based on our years of service and sometimes our level of pay.

The promise typically included a schedule of monthly payments for either our lifetime, a number of years, and might have included a contingency benefit to our spouse. All well and good. But the calculations to make those promises did not take into account the fact that our lives now end much later than they did in years past.

The net effect of this is a shrinking of the pool of money available to make those payments. I’m not talking about Social Security here, where there is an obvious parallel, but the pensions paid to the millions of Americans who toiled for years at large companies like General Motors and the hundreds of thousands of smaller places.

Non-public pension plans are grossly underfunded across this nation. Part of that is the very low interest rates that ‘safe’ investments earn and have earned for the past decade. And pension funds are required to invest their pools of money in ‘safe’ investments. Revenue is going to have to come from somewhere or there is likely to be rioting in the streets.

My personal opinion, having watched this growing problem for a number of years, is that the author is somewhat blind to the problem and suggesting there is no reason for alarm. Tell that to the elderly couple whose pension check from a local plumbers union somewhere in Ohio just got cut in half.

There are millions of people across these 50 states with situations like this and to pretend they don’t exist is a potential violation of the social contract all of us have as citizens of these United States. Unfortunately, too many of them rely on Fox News to help them interpret what is going on.

April 10, 2015  by Marlene Y. Satter

Certain mortality projections would increase life expectancy by 2.3 years and reduce the funded ratio of the nation’s public pension plans to 67 percent.

That’s according to a just-out brief from the Center for State and Local Government Excellence, “How Will Longer Lifespans Affect State and Local Pension Funding?” which concludes that, while the impact of longer lives is not exactly a positive for funds, there’s no imminent threat to pension funding levels.

It explores what public plan liabilities and funded ratios would look like under two alternative scenarios:

1. If public plans were required to use the new mortality tables designed for private sector plans; and

2. if public plans were required to go one step further and fully incorporate expected future mortality improvements.

The brief’s key findings include:
• Using the private-sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 percent to 72 percent.
• Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 percent to 67 percent.
Plans’ liabilities are affected, of course, by the longevity of their members, and the brief explores the degree to which liabilities are affected, calculating that “state and local pension plans would see their liabilities increase by 3.5 percent for each additional year of life expectancy.”

When the differences among longevity tables are factored in, it becomes clear that some plans, because of the way they calculate life expectancy, will be more greatly affected by a change from one table to another, while other plans will not see such drastic effects.

The public sector, the brief said, is going to great efforts to make sure its life expectancy assumptions are up to date. Reassuringly, the brief said, “The question underlying this analysis is whether outdated mortality assumptions are a serious problem among state and local plans. The answer appears to be ‘no.’

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