Weekend thoughts on the market

Two recent Lance Roberts reports/letters are interesting.

(1)   This is the most recent one. I like these points he makes in this one:

I am buying this breakout because I have to. If I don’t, I suffer career risk, plain and simple.

But you don’t have to. If you are truly a long-term investor, this rally is just a rally. There is no confirmation fundamentally the bull market has yet resumed. Such leaves investors with a tremendous amount of downside risk relative to the reward that is currently being offered.

However, investor patience to remain conservatively invested while what seems like a “bull market” is in force is an extremely difficult thing for most to do.

(ii)  As shown below, the market is currently 3-standard deviations above its 50-day moving average. This is “rarefied air” in terms of price extensions and a pullback is now necessary to provide a better entry point for increasing equity allocations.

(2)    Read this report too from two weeks ago:

I liked this note from Doug Kass this week:

“I also reject the idea that stocks are ‘attractive’ because they’re cheap relative to bonds right now.

This is known as ‘T.I.N.A.’ — ‘There Is No Alternative’ to stocks — but I don’t buy it. If bonds are overvalued, where does that leave stocks?

Or how about another ‘relative’ notion — that U.S. stocks are the ‘best house in a bad neighbourhood’ when compared to foreign equities? If non-U.S. economies are problematic and their share prices vulnerable, I think that argument holds little water in our flat and interconnected global economy.”

His point is well made. Stocks DO NOT preserve capital, bonds do. Even if interest rates do reverse for some reason, while bond prices may fall, the corpus is still returned to the investor at maturity along with all interest payments along the way.  Such is not the case for equities.

Eventually, even the best house in a bad neighbourhood is eventually devalued. Global low to negative interest rates are not a function of financial market strength but rather global economic weakness.  There is only one way this ends which is badly.

But for now, the party rages on with little regard for the consequences of partying too long or too loudly. There are always a few who leave the party too early, but the consequences are substantially worse for those who stay too long.

“There is nothing riskier than the widespread perception that there is no risk.” – Howard Marks

I was old enough to understand the 1997-98 Asian crisis and the subsequent rally triggered by Greenspan rate cuts in 1998. Then, America was strong – dollar was strong, wages were growing well,  new technologies were emerging. There was some logic to the bubble although bubble valuations never have logic, esp. in the climatic phase.

Then, in 2006, in the middle of the global boom, a hawkish speech by Ben Bernanke, sent EM assets tumbling  25% to 30% between June and July of 2006. He never raised rates actually and the boom continued. Even for 2006-07 bubble, there was some justification. Global economy was booming; emerging economies were doing well; China was keeping costs down and profits were rising.

But, this time around in 2013-16, I find very little fundamental justification for the rally and the ensuing bubble. It seems predicated entirely on the liquidity, low interest rate support system. Of course, stock buybacks have played a very big role. Beyond that, there is nothing positive either in economics or in social developments to justify this rally. Workers and retirees are feeling miserable. There is political disquiet. Geopolitical risks are mounting and there is polarisation inside and among nations.

When this ends, it will end very, very badly than the other two.

Remember a few quotes:

(1)    Bill Gross some seven weeks ago:

I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk. [Link]

(2)    George Friedman of Stratfor wrote after Brexit happened :

Something dramatic needs to happen. It will, as the situation becomes increasingly untenable. In the end, the palace doors may be kicked in. Hopefully, it will be done more politely and without the viciousness of the falls of the Bourbons and Romanovs. [Link]


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