"You can't cheat an honest man" - 1939 Film by W. C. Fields.
"The secret of success is sincerity. Once you can fake that you've got it made." Jean Giraudoux
We have seen a series of big rises and scary falls in the last year. Since the April 2015 highs, the market has gone nowhere, but very fast.
As the market continues its most recent ascent, participants are getting increasingly nervous. As the chart below shows, Fund Managers have been hoarding cash, and according to Bank of America's regular client survey, so-called "smart money" have been net sellers for 17 consecutive weeks ![Up Date: According to Lipper Fund Flow data, the selling continues, especially of equities:
"As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones" -Donald Rumsfeld 12/2/2002.
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so"- Mark Twain
"The difficulty lies not so much in developing new ideas as in escaping from old ones." - John Maynard Keynes…
In theory there is no difference between theory and practice. In practice there is.– Yogi Berra
There has been increasing talk recently about the advent of "Helicopter Money" (HM). Even mainstream academics and economists are now starting to advocate it's use to arrest the continued slump in demand, most recently noted here. But what is it, what does it do and does it work? …
"I would rather have questions that can't be answered than answers that can't be questioned" -Richard Feynman, Physicist.
The markets currently present somewhat of a paradox - since the low point in February, the MSCI World Index has risen 13% (as has the S&P 500), becoming on one metric the most overbought since 2009, whilst at the same time seeing NYSE Short Interestreaching the same levels as 2008 (see charts below). This is a Schrödinger market - both bullish and bearish at the same time.
“Capitalism requires a structure and value system that people believe in and can depend upon.” – John C. Bogle
It is commonly supposed that the Dinosaurs were wiped out by the Chiucxlub asteroid that landed in Mexico around 65 million years ago, but it is possible that the die had already been cast- they had been declining in numbers and diversity over several million years, and the Asteroid may well have been akin to the knock-out punch that floored an already wobbly boxer. So may it be with Hedge Funds- there have been a number of high profile "blow-ups' recently, which has caused even the mainstream media to wonder aloud why Investors still use them.
[Up-date: This morning,(18/4) Pepsi announced results: by the magic of Accounting, it managed to convert an $0.64 EPS number into a non-GAAP EPS of $0.89 on a non-GAAP basis. Voila, a $0.25 improvement, with only a little effort required !! ]
“Never attempt to win by force what can be won by deception.” ― Niccolò Machiavelli, The Prince…
“Truly, the real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; rather it is about a foreseeable event that is considered remote. The vast majority of market participants fail to expect what should be, in reality, perfectly expected events.” Mark Spitnagel, The Dao of Capital.
This applies equally well to ALL assets, not just stocks.
Some of the most malign consequences of QE, ZIRP, NIRPand so on have fallen on savers. It is now practically impossible to live off the interest from savings (unless you are Donald Trump, in which case you're a bit busy at the moment), which forces Investors to "Reach For Yield", with potentially dangerous implications. However, they are not the only victims- Pension Funds are under assault on two fronts, one more technical, one very practical.
A new phenomenon of the 2000s and beyond has been the rise of Financial Television. As the markets have soared, so has interest in them, to the point where even Channel 4 news (not an outlet known for its pro-capitalist views), now feel compelled to announce how stock markets have done that day. Meanwhile, at Bloomberg TV, CNBC, Fox Business News etc, they maintain a hectic pace, often spending as long as 3 minutes covering in depth the latest news stories of the day (hour?), and discussing economic issues with all the gravitas they can muster. One of the first casualties in all this is thought, which they replace with cliches of varying vacuity. Below are some of the best (or worst, depending on your view).
1): "China will have a Hard/Soft landing".
It is by no means clear how a country can get airborne in the first place.
[We intend to repeat this exercise (hopefully, in a more timely fashion), every year. The next up-date will be in January 2017. This will be in addition to the regular Quarterly Review].
Review of 2015:
We at EBI thought it might be useful for Advisors to have an overview of the last year to help them show clients how our Portfolios performed, and more importantly, why they did what they did. Of course, one year is of little relevance in ascertaining the effectiveness or otherwise of a particular strategy, but it is important to understand the drivers of returns so that we can make any adjustments should the Investment landscape change. Below is an overview of what happened to our Portfolios and a brief discussion of the factors behind this performance.
"If you want to know what God thinks about money, just look at the people He gives it to." - Dorothy Parker
[This post was prompted by a discussion with an Oil- industry employed client, who was speculating on the motivations behind the Saudi policy on production etc. and what it meant for the future price of oil. We thought it worth weighing in on the subject, as the oil market is still one of the most important cost inputs into economic decision-making, and thus growth]
The oil market continues to confound expectations. Since the low point in mid-February, it has risen nearly 40%, leading some to call the oil bear market over. This may prove to be premature however.
There is nothing permanent except change– Heraclitus
In the early 1990's Fama and French demonstrated that Company Size and Price-to-Book (Value) explained the majority of investment returns, in what was dubbed the Three Factor model. This was the addition of two factors to the market risk (Beta), that the CAPM stated was the cause of stock returns. These have since expanded to 5 (operating profitability and investment policy), and more recently to 6, as investors have judged Momentum to be a "factor". It is the last of these that has had the most influence on market behaviour over the past few years, in both directions.…
[Update: in a further sign of the Elite trying to "steer" opinion, the British Chambers of Commerce have announced the suspension of it's former Director General, John Longworth after he voiced pro Leave views. The Government have denied putting pressure on the BCC to remove him. When an official denies something, it is normally a sign that it is true].
Your imagination is your preview of life's coming attractions.
Monkey killing monkey, killing monkey
Over pieces of the ground.
Silly Monkeys, give them thumbs
They make a club and beat their brother down.
"Right in Two"- Tool
Things appear to be hotting up in the Middle East once again. The European refugee crisis has focussed attention on the on-going civil war raging in Syria, and the potential for escalation in fighting if the Turks and the Saudi's get drawn into the battle for control of the country.
Last week's imposition (taking effect this week) of the Bank of Japan's negative interest rate policy, could represent the last throw of the dice for central banks. The premise is that savers are to be so heavily punished for so doing that they feel compelled to spend money to avoid paying interest on their savings. Central banks appear to have run out of ideas, and are resorting to one that cannot work. If one is living off savings, and rates are negative, one will be more likely to save yet more, to avoid future impoverishment. Of course, this policy has been in operation for a while in Europe and one has to wonder for whom this policy is being enacted. One economics professor thinks he knows; the chart below may also provide a clue:
[Disclaimer: I have always wanted an excuse to show this chart]
The markets are starting to exhibit signs of economic stress: from oil to stocks across the globe, investors appear to be in full "risk off" mode.
One portfolio manager described the situation thus:
"Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field...in the fixed income market, we wouldn't touch low-grade credit at present [nor would we - only in our case it would be full stop]. Once credit spreads widen sharply, the default cycle tends to kick in several quarters later. The present situation is much like what we observed in early 2008, when we argued that it was impossible for financial companies to simply “come clean” about bad debts, because then as now, the bulk of the defaults were still to come."
Everyone has a plan ‘til they get punched in the mouth.– Mike Tyson
Analysts have got off to an inauspicious start in 2016: "The current stock market level is disconcertingly well below not just the Wall Street forecasts for 2016 (made a couple months ago), but also below those made for 2015... or for even 2014!" (via Zero Hedge).
All investors, including those in EBI Portfolios, have taken a bit of a beating recently. Nearly everything has fallen sharply in the last six weeks, and equity market correlations are once again approaching one, as the table below highlights. …
The last month or so has seen a gut-wrenching fall in oil prices (and most asset prices in general). Declines so far have been (relatively) orderly - a 5% move for oil for example is par for the course - but some strange things have been happening in ETFs and ETNs . They should trade at fair value - that is, at a zero premium to the value of their assets. If they didn't, there would be an opportunity for risk-free profits (known as arbitrage). But, as this Barron's article relates, this has not been happening.
First, let's remind ourselves what an ETF is and what it does…
Value Investors have had a hard time in recent years - what was cheap has remained so for what seems like an age. Does it still exist, or like the Betamax, Walkmans and the Lib Dems has it become a relic of a bygone era?