Fisher Investments Press announced this week the release of its latest sector guide in the Fisher Investments On series: Fisher Investments on Utilities. This guide takes an informative look at the industries and sub-industries that comprise the Utilities Sector, along with the macroeconomic drivers that may impact it, and unique challenges facing the Utilities companies. Read more about the sector guide here: Fisher Investments on Utilities Released.
Tuesday’s WSJ Review and Outlook asks, “Whatever Happened to IPOs?” The editorial correctly highlights the problems of today’s regulatory environment and how they mitigate what free markets would otherwise do. (We’re looking right at you, Sarbanes-Oxley.)
I wouldn’t go so far as to say onerous regulation is the sole culprit of lesser IPO activity—these things wax and wane through time, and eventually folks will want to tap the equity markets again (probably when it’s less cheap to simply borrow at low ultra low rates or tap private capital with the snap of a finger).
As mentioned in my book review on Fisher Investments MarketMinder last July, this world is vastly more regulated now than bygone days. Yet, much of the intelligentsia believes in some mythical “age of deregulation” starting with the Reagan presidency. The confusion lies in a mix up between actual regulation (i.e., rules) and an era of privatization. Indeed, the last 30 years have been a global era of privatization—a tremendous thing, not just for stocks, but for society. But we’ve piled on more and more rules at avalanche rate.
We can dither a bit about the dissolution of Glass-Steagall and Gramm-Leach-Bliley, but otherwise, I’m not going there—finding a corner of the economy, let alone financial industry, that isn’t more regulated today than it was, say, 25 or 30 years ago, is a tough task indeed.
Ah ha! So, the government feels it must pay up for certain employees for “talent retention,” while justifying layoffs or furloughs of ostensibly less valuable human capital: Cities Find Cash for Managers’ Raises.
And yet, private industry is consistently and constantly vilified for such practices.
People say finance has become too complex. This is probably the only industry anyone could ever say that about with a straight face. Increasing interconnection and complexity are what dynamic, free economies are all about. Are Apple and its hugely creative products too complex? What about any sort of software engineer? FedEx logistics? How about information security folks like EMC? Or the products of defense contractors like Lockheed Martin? How about robotics maker Fanuc?
Of course not—any and all of those are creating value via increasing complexity. But in finance, for some reason, increasing complexity is a villainous thing—oh, those CDOs, those CDSs! Folks said the same thing about mutual funds, credit cards, derivatives, junk debt, ETFs, LBOs, and so on. Everything new in finance seems to go through this phase of perceived villainy because it’s complex.
Nope. All these are fine and good things—finance tends toward greater complexity just like many other things in this world. Plus, I don’t know that any of those evil complex products got sold to the average person—CDOs and MBS are not the purview of the average investor, or specifically the average real estate investor.
Don’t be afraid of this stuff, just know that new financial innovations also tend to be viewed as panaceas at first, then become overwrought, then eventually take their rightful place among all the other choices.
This burgeoning concept of “risk on/risk off” trading is nonsense—it’s the notion that when markets are down, XYZ falls the most because it’s “riskier”; when markets are up, the same XYZ will be up more for the same reason. Whenever I hear this logic I envision an expansive floor of traders pulling levers “risk” or “risk off” on their Rube Goldberg machines, making trades like automatons all day.
One of many problems with this concept is defining what “risk” and “risk off” actually is. For instance, ostensibly last week was a “risk off” week tied to down markets on major geopolitical events (Middle East unrest and the Earthquake in Japan ). Of course, Japan was down more than just about any other country. So I guess that means it’s a “risk” asset. But since when was Japan considered riskier than, say, Europe ? And what about those PIIGS? Those are clearly “risk,” right? Nope. They largely held up fine last week, which I guess makes them “risk off?”
And then there’s the US . You know, the epicenter of financial crisis? That’s pretty much officially “risk off” too at this moment, but used to be major mondo “risky”, from what I’m told. And US Treasuries? Those are still more or less seen as “risk off”, but I find that ponderous considering the historically low yield environment—isn’t the risk substantial that rates pop up in the intermediate term and crush prices? I’d hate to be holding on to a bunch of 10 years with high convexity on the notion that bonds are “risk off.”
If all this seems confusing, it should be. Because risk on/risk off is a myth. This is all really about an assessment of relative fundamentals at any given time, not some (seemingly) arbitrary category assignment. Fact is, what’s considered risky and less risky can change, and rather abruptly and violently.
Here’s a much better explanation about how trade activity might often work: Herds on the Street. (If you haven’t read much Johah Lehrer yet, you should.)
Fisher Investments Employee Offers Market Perspective: Six mistakes investors are likely to make this year
You will likely make mistakes this year. Many already have, and if you haven’t yet you’re overwhelmingly likely to soon. As a Fisher Investments employee, I believe this because that’s what typically happens in investing.
Years at Fisher Investments have taught me the absolute best investors are wrong quite a lot (one reason to believe in the amazing and rejuvenating powers of proper diversification), but being wrong often doesn’t mean you can’t beat the markets consistently, or at the very least achieve your investing goals.
This is one of those perverse features of being in this business the wider world gets upside-down-wrong-way-round constantly: it’s not about being a genius (because even those are wrong a lot too), it’s about avoiding the mistakes others routinely make. If you can do that, you can be a success—no geniuses need apply.
Fisher Investments believes investing is a discipline, pure and simple and foremost. Just look at any investing periodical or website here and now or any time past: Folks perpetually search for genius stock picks, they constantly exhibit huge overconfidence in their own great ideas, and display continuous belief they somehow have insights the rest of the world hasn’t thought of. Uh-uh. No way. Just about everything you’ve ever thought of has also been thought of by someone else, and by the time you even think of acting on it someone else probably has.
I don’t mean to say markets are pure form efficient—they simply can’t be to my view. And anyway, if I did believe that I wouldn’t be working at Fisher Investments. But highly liquid equity markets are astoundingly good at reflecting widely believed information via the mechanism of prices. Which means it’s not impossible to beat the market but instead really super tough to do consistently over time.
2011 is a year where ultimately both bulls and bears are likely to be frustrated. This is market water treading time in my view—a period where larger disparity in returns between categories should roll up into what appears a fairly stagnant market. A classic pause period on the way to the latter stages of a bull market. Which means there are opportunities, and also pitfalls.
My experience at Fisher Investments leads me to believe you or someone you know will be tempted to make one of the following mistakes this year.
1. Investors remember the last two years: In a classic extrapolation of the recent past, many will believe the “all clear” bell has sounded, and markets can keep rocketing upward and place big bets on high returns. It’s my opinion investors should avoid stuff like high strike options and other contracts that can bleed you out via transaction costs. Now’s the time to start owning stocks you believe will benefit toward the end of a bull market (likely to come in the years ahead).
2. They won’t forget the two before the bull: Fisher Investments finds many can’t shake the past—still jittery and quivery about the carnage that was 2008. They thus believe the massive rally beginning in March 2009 (two years ago!) is some sort of counter-trend rally amidst a larger “secular” bear market. Secular market thinking is nonsensical and lacks discipline and got you pretty well steamrolled in the last 24 months. Anyway, if you get even just one of these so-called 20 year super-cycles wrong, you’ve basically cooked your investing goose for good. The simple, beautiful power of compounding is the thing that ultimately makes most folks rich via investing, and missing 20 years worth of a bull market would be beyond insurmountable to recover from.
3. Believe the Japanese earthquake changes things: The devastating, heinous tragedy that befell the Japanese people should not sway your investing thinking this year. Natural disasters are not a new thing, and never that I’ve ever been able to study have they derailed markets for good. My advice: don’t panic sell, or try to get too cute in times like now. By the time 2011 is over, markets most likely will have moved on.
4. Fall in love with covered call strategies: Some investors who agree with Fisher Investments’ assessment that this will likely be a flattish year may fall in love with covered call strategies. Don’t do it—over time numerous studies (and, well, general horse sense) has shown these things feel right but ultimately don’t work very often, limit your upside (another classic thing most don’t realize: markets more often run away upward from folks than down) and end up costing you a bunch in transaction fees.
5. Panic about inflation: First, based on Fisher Investments’ research, inflation isn’t yet a widespread problem in the world—in some small pockets it’s starting to show Frankenstein-ian signs of life, but that’s it. Inflation doesn’t spontaneously appear from nowhere on a global basis—there’s this metaphor stuck in our collective psyche that inflation happens like a powder keg near a spark. No. Inflation tends to gain steam like a freight train. Yes, money supply growth globally has been huge lately, but also bank lending, employment, wages, and capacity utilization are all still pretty slacked out at the moment. If inflation becomes an issue, 2011 ain’t the year to gerrymander your portfolio over it if you ask me.
6. Jump in headfirst to Emerging Markets: Developing economies are the souped-up racecars of the world right now: these nations (most folks think of China and India, but you should also expand your awareness to Latin America and parts of Eastern Europe) are producing and demanding in huge growing numbers and bolstering the rest of the world’s growth. This has been going on for some years though, and stocks representing those regions have shown it. Of course, many investors are just now “feeling comfortable” about it and upping their allocations. Emerging Markets deserve a place in your portfolio, but at this point there’s a lot of high sentiment for the category and you need to be targeted and careful—don’t go overboard here. Many will.
These are just a taste of the mistakes many investors will be tempted to make in 2011. Potential errors are legion, and our error-prone natures know no bounds. Historically, stock markets offer the highest expected returns over time, and so also the highest expected volatility—which makes discipline all the more important. Hold on to your hat, and avoid these critical mistakes this year.
Here’s an excellent piece separating reality from hysteria tied to the nuclear reactor situation in Japan :
No one could have foreseen the massive earthquake and resulting tsunami that hit Japan last week. Massive loss of life, with entire towns washing away, and the rest of the world watching in horror. Here in California , the news hits especially close to home, as we all live with an understanding that someday the big one could hit for us, as well. While the events in Japan are tragic, and the short-term affects real, the intermediate to long-term global economic impact is probably minimal. Japan accounts for around 9% global GDP and the most severely impacted regions account for roughly 15% of Japanese GDP – thus the directly-affected region comprises something like 1.4% of global economic output. Moreover, lost Japanese output from the incident will likely be offset by rebuilding efforts. The Japanese government already has rebuilding plans in the works, and the Bank of Japan (BOJ) has substantially increased its liquidity operations and doubled its asset purchase program.
So, tragic destruction and subsequent rebuilding will result in winning and losing sectors/companies, and the broad economic impact should be minimal outside Japan . To wit, select industries and companies sold off severely on the news while others rallied sharply, even within Japan as of yesterday.
But in the midst of all this, let’s remember this is still a bad thing, it’s just not a super bad thing economically speaking. On more than one occasion the last couple of days I’ve read stories to the effect of: History Shows Rebuilding Spurs Economy. Wealth destruction does not create net wealth creation—it’s simply an example of the “fallacy of the broken window” harkening all the way back to Bastiat. Certainly, you’ll almost always find me on the side of “economies are more resilient than people think”, but one-time demand-side boosts and a residual boost on restocking do not a recovery make. Ultimately, the effort to rebuild broken stuff is productivity that could be better spent elsewhere.
The bull market turned two last Wednesday, and the financial world was acutely aware of it. This is what I saw that day when reading the front page of RealClearMarkets.com:
After 2 Years, Can Bull Market Maintain Pace? – Adam Shell , USA Today
Bull-Market Birthday Is No Reason to Invest – Chuck Jaffe, MarketWatch
Bull Market’s 3rd Year Could Lose Fizz – Jonathan Burton, MarketWatch
Three Big Reasons to Continue Riding This Bull – Seeking Alpha
Only Two Years Since Financial Crisis?!? – David Callaway, MarketWatch
What’s interesting was the diversity of opinion—will the market as a whole keep it up or plunge back down? People wondering in this way are likely to get stymied this year—2011 is probably a year for stock picking, not for the whole market to move hugely.
Either way, I believe this bull will go on: global fundamentals and earnings are too strong and equities can still run far in the time ahead (barring something truly bad that can stunt it all, but at this point Middle Eastern angst doesn’t seem to have the oomph, just like the PIIGS problems…we’ll just have to watch and see though).
For now, there’s reason to celebrate: For those who stuck these last two years out and reaped the recovery so far, as I said way back when on MarketMinder in The Greatest Redistribution back in June ‘09, this period would represent a redistribution of wealth bigger than any tax cut or rise ever. As I see it, so far, so good.
Let’s not say, as many contrarians are wont, that events of the last weeks are good. Turmoil in Middle East and oil price gyrations, continued PIIGS fears, a devastating earthquake in Japan —those aren’t good things and have a real human toll (though personally I cheer strides toward something like democracy for Northern Africa).
But from an investing standpoint, let’s see all this with clear eyes. Many folks feel the world is falling apart and the global economy is teetering again. That isn’t true. Fear of a false thing is always ultimately bullish, and to fear these events as market-busters is very likely false—even their sum isn’t enough to bring the global economy down. This cluster of unpredictable events might just be the thing that wipes out plenty of the bullish sentiment that’s been accumulating in the last six months. If so (and assuming key oil suppliers like Saudi Arabia and Kuwait remain stable), this could well turn out classic wall of worry fodder for a bigger run for stocks ahead.
As I noted a few days ago, there’s a lot of bulls AND bears out there. A tilt toward the bearish on false fears might just be bullish in the end.