As most of you already know, I am not a fan of hedge funds. Absurdly high fees, poor tax efficiency and lack of disclosure to investors are a few of the reasons. Click here to read a very recent article about hedge fund manager pay. It is a real eye opener.
Continuing with our fast food theme...
Naturally, investors will be asking the same question to the Trump Administration on the heels of the failure to pass the American Health Care Act last week. The market rally underway since election day, now referred to as the "Trump Bump", has been supported by expectations for health care and tax reform. Now that expectations for health care reform have not met with reality, the future of the Trump agenda will be called into question- at least in the short term. Markets do not like uncertainty, and with less certainty of the expected political and economic policies, the Trump Bump may flatten out a little bit. Going forward, investors will be looking to bite into more beef, and less big, fluffy bun.
According to recent reports, it looks as if the Trump tax reform package could include a border adjustment tax. So, what is a border adjustment tax? In short, in this scenario, imports are taxed, thereby encouraging exports (and create jobs). However, the major issue with this tax is that it could very well lead to higher prices passed on to consumers from those companies that rely on imports. Even many exporters rely on imported components to produce their exported goods (automakers are a good example). If companies are forced to absorb higher costs for imports in order to produce their goods, we could see the opposite happen. Workers will be fired, not hired, in order to trim costs and maintain profits. We shall see. Maybe, as far as tax reform goes, the Trump administration should...
This past Friday marked 11 consecutive record highs for the Dow Jones Industrial Average. This has not happened since 1987.
Another noteworthy event happened in 1987.
Here is a story of an investor, Barry Badluck. Barry made his first investment of $6,000 in 1973, prior to the 48% dive in the S&P 500. Then Barry invested another $46,000 in 1987 prior to the 34% crash. That's enough to make anybody cash out and run for the hills, right? Not Barry. He then invested another $68,000 in 2000 (tech bubble) and $64,000 in 2007(mortgage meltdown). You guessed it, both investments were perfectly ill-timed.
How did Barry's investments turn out after 42 years? He made a $980,000 profit on his original investment of $184,000! Thanks to the magic of compound interest (and a little patience!).
Take a look at this index card written by University of Chicago professor Harold Pollack. Who said this stuff should be complicated?
ZIRP. Zero Interest Rate Policy. As defined by Wikipedia: ZIRP is a macroeconomic concept describing conditions with a very low interest rate such as those in contemporary Japan and, since December 16, 2008, in the United States. It can be associated with slow economic growth.
Spurred by the financial crisis, central banks around the world have followed all means necessary to stabilize and jump start their economies. Such active involvement by central banks is not without its risks. Federal Reserve Chairman Alan Greenspan's aggressive interest rate easing inflated the 1990's tech bubble, and the housing bubble soon after. Ben Bernanke, his successor, was know for his "Bernanke Put", a virtual floor that supported the market created by his quantitative easing, or QE.
The same QE programs in Europe are creating bubbles there as well. According to Moody's Analytics, since 2010 the average home price in Norway has skyrocketed 30%. Germany and the UK have followed suit with increases of 25% and 15% respectively. Low rates have made it difficult for investors to find good opportunities to allocate their capital. Other markets are seeing this trend, too. Just recently, a Van Gogh and a Picasso were sold for record prices.
Just this past Wednesday, we saw first hand how Fed policy influences the markets. When NY Fed Chief Dudley stated that a September rate increase looked "less compelling", the S&P 500 surged over 4%. The biggest increase in the index since 2011. With the economy in far better condition than it was in back 2008, it is time for the Fed to begin normalizing rates again. Pardon me, but could you please stop ZIRPing?
Sing it Babs. So true. A major reason for the volatility in the markets is due to computerized trading. Computers communicating with other computers via HFT (high frequency trading) and algorithms. Don't get me wrong- I love technology. But I think it is best utilized in the hands of capable human beings. Over 50% of the trades the first few minutes of trading this past Monday were odd lot trades (small and/or uneven number of shares, like 1 share or 751 shares). This was a telltale sign of trading algorithms at work. Humans like round numbers, or round lots, like 50 or 200 shares. Read this from a floor trader on the NYSE.
"Don't blame traders. This market force isn't human
When the market goes into a frenzied selloff like it did on Monday, so many market pundits try to make it about the individual investor or the trader — but it's not. It's about the algorithms.
The U.S. equity market is an institutional market, controlled by the very institutions that are now screaming about market volatility. These, by the way, are some of the very institutions that wanted to do away with humans, wanted completely automated markets, wanted to let the computers and "high frequency" market makers step in and take over, wanted massive market fragmentation to make the U.S. capital markets "more competitive." (Currently there are 10 exchanges and 60+ alternative venues that do nothing but add to the chaos).
So, how's that working for you?
You see, current market structure does not allow for fair and orderly trading when the sh*t hits the fan — oh, no. Algorithms and computers make assessments and place orders well outside of the last sale in multiple market centers in times of distress – as the computers makes decisions based on what it perceives to be fair value at that moment.
On Monday, we saw some stocks — American blue chips — open 10 percent to 15 percent lower than their last sale, causing sellers to scream bloody murder. But who can they blame? The brokers? NO. The specialists? NO! (Specialists no longer exist — you see they made them all go away.) And so, you ask, what about all those electronic market makers that were going to fill in the gaps?
Those are exactly the people who abandoned the system when they were needed the most. Unlike the market makers on the New York Stock Exchange, the off-floor electronic market makers have NO obligation to do anything and so they chose to sit it out and see how it all shook out. And when the market had suffered enough, they come running in like gangbusters to scoop up the bargains, while the sellers, who are now exhausted, leave a void in the marketplace, causing prices to rally to almost unchanged.
Since those electronic market makers weren't there to buy stock on the way down, they are not there to sell stock on the way back up — and so, you have a market that appears to be more volatile than it should be."
Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities.
Check out this chart showing the S&P 500 after a weekly drop of 5% or more. The index is pretty flat the following week, then up about 1.65% over the next 4 weeks, and up almost 5% over the next 12 weeks. In the week following the decline, the index moved higher about 60% of the time.
Source: Bespoke Investment Group; Bloomberg
I think we got punched in the mouth this past week. We have just experienced the 28th 10% correction since WWII. Here are some sayings that you have certainly seen or heard floating around.
Stay the course.
Remember to buy stocks with good balance sheets and high dividend yields.
Avoid emerging markets until the dust settles.
We’re using this correction as a buying opportunity.
It could be worse, at least I don’t own…
I’ll sell when I’m back to even…
There’s still a ton of cash on the sidelines.
Don’t try to catch a falling knife.
We’ve decided to lower our year-end market target.
Um, what’s going on here?
Where is the Fed when you need them?
I knew I should have sold last week.
Here’s what you need to do RGHT NOW with your portfolio.
We’re constructive on the markets long-term but see more near-term volatility.
Something’s gotta give here…
Like I was saying a few weeks ago…
Don’t say I didn’t warn you…
Is it time to panic?
Should I go with the 1987, 1929 or 1999 analogy today?
We’re seeing a lot of buying opportunities down here.
The carnage is not even close to being over.
I’ll buy when…
Buy when there’s blood in the streets.
Cut your losses quickly.
The babies are being thrown out with the bath water. Now is the time to pounce.
Some of the statements are useless, and others are actually quite useful. Regardless, any advice is worthless when not viewed in the context of well-defined plan or strategy. Attempting to create a plan with bits and pieces of advice and ideas will often make things worse, not better. Having a well thought out plan in place, with reasonable goals and expectations, will allow you to stay focused and filter out the good ideas from the bad ones.
Sure, you might lose a few teeth, but your chances are good that you will be the one standing when the bell rings.
I had a flashback while I watched the market slide last week and this morning. It was 1995 and I was sitting in my training class at what is now the largest brokerage firm in the nation by some metric. It was on a day when the market closed down quite a bit-over 200 points on the Dow if I recall correctly.
We were packed in a little room, and in walks our instructor. He proceeded to hand out a miniature brick to each of us. The brick was about an inch long. On the side of the brick read " 1 in 4- ask me why?" Then the instructor explained that, on average, the market experiences a down year every 4 years. When that happens, your clients will want to throw a brick through your window, so make sure they throw this brick. I still have the brick. Just let me know if you want to borrow it...
So, will 2015 be the "1 in 4- ask me why?" year? Maybe. Maybe not. My guess is as good as the next guy. Surely, we do have a lot if issues with which to contend... interest rate policy, a slowdown in China, sliding oil prices, and an election next year just to name a few. However, if you go back, practically any period that you choose had a laundry list of issues highlighting why you shouldn't invest. In fact, usually the worst looking environment ended up, in retrospect, looking far, far better.
Am I worried that the market is now negative for the year? Sure. I worry about everything. It's my job. But now, a little over 20 years after that training class, I look at things a lot differently. While we can't control the market, we can control your plan. Market swings provide opportunities. Should we revisit your risk tolerance? Your goals? Is your portfolio reflective of what you want to accomplish? This market correction is an opportunity for us to sharpen our focus and concentrate on what is really important to you.
Even if it is just throwing a brick through my window (risk tolerance)...