September 6, 2013
By Steve Blumenthal
This week, I share the following relevant research:
- Seventh Inning Stretch – PIMCO’s Bill Gross
- Peak Earnings Equals Peak Valuations – a telling chart
- The Behavior Gap – Blumenthal Viewpoint
- How to Make Risk Your Friend – Deepak Chopra, M.D.
Seventh Inning Stretch – Bill Gross
“Life’s ballgame ended several decades ago for Hyman Minsky, author of “Stabilizing an Unstable Economy” and proponent of the notion that capitalism is inherently unstable, in part because of the short-term financing of long-term capital assets such as bonds, buildings, plant and equipment. His stabilizing solution was for Big Bank and Big Government to intercede with monetary and fiscal pump priming, confident in the notion that if the priming was large enough and the pumping fast enough, that stability could at least be temporarily achieved. Yet Minsky played ball in another era, before steroids and corked bats. He legitimately could not foresee the time when what he labeled “Big Bank” and “Big Government” became so large and stimulation so excessive that even temporary stability of a closed or an evolving global economy would be difficult to attain.
In short, and in too-abbreviated summation, debt-laden economies with near-zero-bound interest rates became victims of their own excess, a condition that was more difficult to stabilize cyclically because Big Government and Big Bank had reached limits, and private market investors with huge portfolios of their own began to leave the ballpark early. Why stick around if your team is down by seven runs with only a few innings left? Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?
The rush for the exit seems to have been hastened recently not only by the increasingly obvious limitations of Big Government and Big Bank but by the additional knock-on effects of Big Investor and Big Regulation.” (emphasis mine)
Gross expands and concludes with “So what to do here, Folks?” He hits baseball pretty hard. Personally, I’m a big baseball fan and found a way to make it to the meat of his macro position. It is well worth the read. Here is the link to the full piece: http://www.pimco.com/EN/Insights/Pages/Seventh-Inning-Stretch.aspx
Peak Earnings = Peak Valuations
Earnings and profits mean-revert back to trend. This is part of the behavior of every business cycle. Investors buying an expensive market need to keep the following chart in mind. Note how the Reported EPS (blue line) and the Corporate Profits/Share (red line) mean-revert back to long-term growth trends (dotted lines) over time. Actually, they tend to over-react. By all measures both are well above long-term trends. Today’s cyclical bull market is aged. Add this chart to your watch list.
My two cents remains that there are cracks in the dam and the cracks are getting bigger. Unfortunately, current data shows that investors are flocking back into equities. Why now I wonder? Mark up prices and investors flood the store to buy. Mark down prices and the store empties. They should be doing the exact opposite.
For now, and perhaps fortunately for your current business model, investor education is up to you via your ongoing counsel with your clients. It is a bull market for the experienced advisor who embraces a broad portfolio construction approach with a focus on risk control. I believe a recession and major correction remains ahead in the not too distant future. Here is the link to the story behind the chart: http://www.zerohedge.com/news/2013-09-02/guest-post-corporate-profits-what-jeremy-siegel-missing
With an eye towards the repetitive display of poor investment behavior I share with you the next two pieces. Please feel free to share this material with your clients if you feel it both helpful and appropriate.
Behavior Gap – Blumenthal Viewpoint
Below are a few highlights from the piece on investor behavior I sent out several weeks ago. A link to the full article is provided below.
“Ask your client if he is an investor or a speculator. Investing is about broad risk diversification; speculating is about taking targeted bets. Both approaches are ok. Which one is he?”
“While keeping your client educated is important; keeping him on plan is vital. Here is some data to share:
The S&P 500 Index is up 20% year-to-date; however, no broadly diversified portfolio is up 20%:
- a Global 60/40 portfolio is up approximately 7%,
- a U.S. 60/40 portfolio is up approximately 10% and
- while U.S. equities are the world’s best asset class, the U.S. bond market is down close to 5% (take 60% of +20% and 40% of -5% and you get approximately 10%).
From May 22 to June 24, 2013, the S&P 500 lost 5.6%, MSCI EAFE lost 10.1%, MSCI Emerging Markets fell 15.3%, the Dow Jones/UBS Commodity index fell 4.5%, the U.S. 10-year T-Note fell 4.4%, and the Barclays U.S. TIPS index fell 7.1%. For good measure, the J.P. Morgan Emerging Debt Global index fell 10.8%, the German 10- year Bund fell 5.2%, the UK 10-year Gilt fell 3.4%, and the Australian 10-year bond fell 6.5%. Equity markets have made a fairly sharp recovery since then, with the S&P 500 actually hitting new highs, but lots of other asset classes are still licking their wounds. Source: Ben Inker www.gmo.com
Emerging markets are down over 10%, Biotech is up more than 40%. The Market Vectors Gold Miners ETF is down over 35%, the SPDR Gold Shares is down 18%, the SPDR Regional Banking ETF is up over 32%, the Vanguard REIT ETF is flat, Health Care is up over 25% and the Vanguard Total World Stock Market ETF is up 11%. Forget the comparison to the S&P; give me Biotech at +40%. (Data through July 2013) Investor or speculator?”
Here is the link to the full piece: http://www.cmgwealth.com/ri/the-blumenthal-viewpoint-behavior-gap-2/
How to Make Risk Your Friend – Chopra
“In a competitive society, success is all but impossible without taking risks. There are few cushions or guarantees in the corporate workplace, but looking at the larger picture, all of us face decisions that could turn out badly. We take leaps of faith, large and small. We place trust in others. We count upon predictions and trends that could reverse at any moment. Risk is simply another word for uncertainty and it has been shown many times that uncertainty increases stress. Therefore, how you handle risk will be vitally important to your comfort, your stress level and ultimately your success.
Psychologists have shown that it is impossible to remove emotions from decision making. (emphasis mine) Therefore, to handle risk well, you must consider your psychological reaction to it. If you know yourself well enough, you can make risk your friend. Here are the guidelines:
1. Know your anxiety level and be honest about it.
2. Be patient with your emotional reactions.
3. Be rational, but don’t be fooled that reason can defeat risk.
4. Gather as much useful information as possible.
5. Take in other points of view.
6. Don’t trust the crowd.
7. Don’t believe that trends are the same as certainty.
The psychological downfall of those who misjudged risk is writ large in the 2008 debacle. Look in yourself to see the factors that even the most prominent figures feel prey to:
1. Denying that there was a problem with their decisions.
2. Freezing in the face of crisis.
3. Inability to deal with anxiety.
4. Fixation on profits, which blinded them to process – the end justified the means.
5. Competitiveness – refusing to lose, no matter what it took.
6. Over-attachment, making the crisis personal.
7. Over-controlling, focusing on details while losing sight of the big picture.
At the risk of over-simplifying, these psychological blind spots (emphasis mine) can be overcome by asking every day, “How am I doing?” I don’t mean this in the sense of how you are performing but rather how do you feel? Are you in your comfort zone? Do you detect signs of stress or anxiety? If so, what are you doing about it? We’re not talking about psychoanalyzing yourself. We’re talking about being in touch with yourself. The psyche is constantly dynamic. This is a huge benefit if you want to keep up with the shifting scene at work or in the markets. When you are flexible, open, and alert, you are becoming the master of risk.
In the end, risk becomes your friend when you have enough self-awareness to be comfortable with change, uncertainty and unpredictability. These are inescapable aspects of life. It’s up to you whether they create stress inside or the very opposite – out of uncertainty can come creativity, new solutions, discovery and the fulfillment of your inner potential.”
Here is the link to the full article: http://www.linkedin.com/today/post/article/20130901180353-75054000-how-to-make-risk-your-friend
Lots of soccer on the agenda this weekend as the fall season is in full swing for the five little guys. Well, they are not so little anymore. They flock to the kitchen and seem to inhale food. No “how was your day?” It’s “When are we eating? What’s for dinner?”
I’m enjoying the journey. They are a lot of fun. Wishing you and your family an outstanding weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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