Legendary investor Sir John Templeton has a famous quote that still rings true:
“Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria.”
I have a new wrinkle. For today’s hyper-media-inundate-you-with-data-all-day-every-day era, somewhere between skepticism and optimism comes fatigue. And it’s bullish.
Stories have recently asked why CNBC’s ratings have tanked. In my view, you watch CNBC for two reasons:
1. You’re terrified of seeing what bad thing will happen to your investments next, but you can’t look away. Like a train wreck. (Hello, Financial crisis and Eurozone meltdown.)
2. You’re euphoric, and want to see how much your account will rise today. (Hello, tech boom, housing boom, etc.)
Investors aren’t any of these things right now. I think they’re just…fatigued. Fatigued of Middle East fears, Fed QE fears, of US debt/deficit fears, of Eurozone ills, of all of it. These things have been around for years now, and have lost much of their bluster power. Many aren’t so bullish, they’re just tired of spending so much energy worrying.
In my opinion, fatigue in this environment is bullish. It means there’s plenty of room for markets to rise and most still haven’t appreciated record earnings, and other meaningful positives out there.
…the world gets a cold.
I’ve read some version of this notion off and on in the financial media for the last week. Which reminds me of decades past where folks would speculate that if the US didn’t do well economically then the rest of the world wouldn’t either. We seem to be getting a new version of that with China now.
Don’t let it fool you. China continues to contribute nicely to global growth and that’ll help prop equity prices. From MarketMinder this week:
“…slower growth” is something of a misnomer. Yes, if China hits the full-year target, in percentage terms, growth will be slower than 2012’s 7.8%. But in dollar terms, it will accelerate—a $339 billion increase, compared with 2012’s $327 billion rise. Should China match the target for the next few years, the dollar-based gains get bigger and bigger—and higher than the dollar gains seen when the growth rate exceeded 10%. The slower growth rate isn’t a sign of weakness. It just means China’s growing off a much bigger base. In fact, China could miss the target and still add significant value to the global economy and be a key source of revenue for developed-world companies—what ultimately matters for stocks.” – Cracks in the China?
Through most of the last decade, I answered an interminable number of investor questions about whether the weak dollar would destroy the very foundation of our world. (I exaggerate, if only slightly). Now that the dollar is showing some ballast, we get this: P&G to Apple Hurt by Strong Dollar Keep S&P 500 Profits in Check.
Look, I don’t care which way you fall but someone needs to cry foul when we perceive both a strong and weak dollar to be bad. In reality, we’ve had plenty of bull and bear markets in both strong and weak dollar environments, and in my view dollar direction doesn’t generally tell you much about what stocks are likely to do.
Currencies matter. A lot. But don’t get too far lost in this quagmire when it comes to judging the stock market.
I admit—freely—often my biggest hang-up with Ms. Rand was that she’s too pure, too idealistic, advocating a worldview not possible in this world. Charles Johnson’s recent IBD piece puts such anxiety to rest.
“My personal life is a postscript to my novels,” she wrote in the afterword to “Atlas Shrugged.” “It consists of the sentence: ‘And I mean it.’ I have always lived by the philosophy I present in my books — and it has worked for me, as it works for my characters.”
Markets adapt, and long-term profits approach zero for high-speed trading. The winners are market participants, who benefit from higher liquidity and smaller bid/ask spreads. The part most folks miss about the flash crash is the market self-corrected as fast as it sank.
Regulator, Go Slow on Reining in High-Speed Trading: Algorithm-driven trading appears to be self-correcting. That’s good—the hyper-fast world needs it.
Much has been made recently on the movement of swaps to futures markets as a result of Dodd-Frank.
The Dodd-Frank regulatory overhaul sought to reduce risk in the swaps market in part by having as many as possible trade on an exchange where prices and volumes are posted, as well as having trades settled by central clearinghouses that guarantee payments. The CFTC began writing new rules after Dodd-Frank passed in 2010. The rule that took effect in October requires that any entity trading more than $8 billion of swaps a year—whether a financial company like a bank or a hedge fund, or a “commercial user” like an airline or a shipping company—be considered a swaps dealer and be subject to government audits and higher capital levels.
That prospect didn’t sit well with many market participants, including those who were buying and selling swaps on an electronic trading platform run by the IntercontinentalExchange (ICE). Prompted by its customers, ICE took all the energy swaps that had been trading on its electronic marketplace—more than 900 contracts—and used them to create futures contracts that could trade on its futures exchange. So now, instead of creating a customized swap with another trader, an airline that wanted to lock in the price of 1 million gallons of jet fuel at a certain date would buy jet fuel futures contracts created and managed by ICE.
From Bloomberg BusinessWeek’s: This Is What Unregulated Swaps Look Like
Unintended consequence alert! Knowing exactly how swaps would adapt around this kind of thing would be next to impossible; but knowing that they would in fact adapt was possible.
In an increasingly technocratic, “if I pull this lever the economy will do X” type of world, it pays more than ever to read the free market wisdom of Thomas Sowell. Now considered an economic classic, his Knowledge and Decisions is a must read. Known for his clarity of thought and cogency of words (Sowell is an accomplished writer), Knowledge is uncharacteristic of Sowell’s later works—often turgid, plodding, redundant, and overly long. This is more academic exuberance than pithy communication. But the gold is there, and a must read for those pondering how decisions will be made as the world of Dodd-Frank arrives.
“If politicians stopped meddling with things they don’t understand, there would be a more drastic reduction in the size of government than anyone in either party advocates.” – Thomas Sowell
I don’t always agree with Jim Cramer, but here is some good sense that’s been espoused on this page for some time now:
You know what didn’t work in 2012? Risk on, risk off. As hard as I tried to stamp out this ridiculous bit of hedge-fund-ese, I was not able to. There are too many commentators out there, and too many traders who want to succumb to this kind of non-rigorous, intellectually lazy thinking, and it’s impossible to shut them all down. But let 2012 be a lesson to you: It was revealed that you would have underperformed these people if you’d followed them. Notice I say “underperformed,” because one thing is for certain — none of these blowhards will let you see their returns after what I bet was a fiasco year for what I can only call an “alleged” strategy.
Let this be the death of risk on, risk off – Jim Cramer
Ken Fisher and Lara Hoffmans have published their layperson’s guide to building a basic wealth plan — I couldn’t recommend it more.
Much like his other books, Ken Fisher takes a route of empowering the average investor, being less didactic or preachy and offering usable perspectives in terms everyone can understand.
In my view, it’s one of the ultimate things a skilled expert can do for us: to give his knowledge back in a way all can participate in. Ken has seen it all, done it all, and been very good at it for very long time; it’s a pleasure to read about the fundamentals of wealth-building with all the signature wit and uncommon perspective he and Lara always bring.
If you’ve never read Leonard E. Read’s I, Pencil, it’s always a good time. A wonderful summation of free market principles, it’s also a document Milton Friedman referred to often. Here’s a parting lesson, straight from the pencil himself:
“The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”
Fisher Investments faithful Bill Shepherd recently opined on a number of topics. When experience like his speaks, I think we ought to listen. Here are a few thoughts:
Mutual funds were originally created to help achieve diversification—and are still helpful for those who don’t have a lot to invest, but would like a diverse portfolio. They can help investors get started in the markets, but can be expensive, due to trading and possible tax implications, and can lack the flexibility of a portfolio of stocks and fixed income. “While mutual funds make sense for some investors, it’s important to make sure you own them for a reason and/or haven’t out grown them,” says Bill Shepherd. “Meaning, you can achieve sometimes cheaper diversification buying multiple stocks than buying mutual funds—but it depends on your financial goals and what you can truly afford”, he continues. Here it’s helpful to have a money manager whose interests are aligned with yours to help guide you to optimal investing decisions in your portfolio.
Bill Shepherd recognizes there are many different avenues in the financial industry when it comes to choosing a money manager. “In general, I think one of the most important questions to ask yourself is, are my interests aligned with my financial professional’s? Said another way, will they do well if you do well?” asks Shepherd. “This may not be true in all facets of money management. Brokers, for example, may work on a commission system based on activity rather than a management fee based on the size of your portfolio like Fisher Investments. This structure allows us to align our interests with our clients. We utilize separate custodians to house client assets, so we don’t earn commissions on trades that are placed in your account, nor do we sell you products. So our answer to that question is this—absolutely—if you do well, then we do well.”
A big challenge in investing is the culture of emotional created largely, it seems, by the media—especially now that news is available 24/7 on the internet, TV, smartphones and tablets and constantly updates. “It’s very easy to let emotional reactions lead your investing decisions, and your understanding of economics,” says Bill Shepherd. “A good example of media spreading negative sentiment about markets right now is the fiscal cliff. However, Fisher Investments believes talk about the fiscal cliff’s impending disaster is likely a lot of hot air—which unfortunately sells more for the media,” continues Shepherd. More about Fisher Investments views on the fiscal cliff can be found on MarketMinder.com.