Monday, September 6, 2010

Reluctantly Preparing a Ten Year Market Outlook

The Yankees Win !!!!

Last week I broke one of the practical rules of blogging and will again this week. I promised last week I would discuss my market outlook in this post. One should never promise anything that you don’t believe you can easily deliver. While I had some preliminary thoughts, I certainly did not have a well thought out view. As often happens in life, I got bailed out by unexpected events. Tuesday morning Ruth and I were offered the use of two corporate seats for that afternoon at the new Yankee Stadium. Though it was approximately twenty years since the last time we went to a baseball game in the Bronx, we leapt at the chance to see the new stadium for ourselves after hearing so many favorable comments. Many years ago I discreetly became a Yankee fan after the Giants deserted New York. I should have been a Yankee fan, as professionally I believe the weight (power) of money more often than not wins. We had a good time and the Yankees won with their “patented” home run attack in a shut out.

The Problem Solvers

The Yankee organization, the City of New York, and the stadium’s bond holders had to solve a number of problems to make our visit a success. In the recent past for many of us occasional arm chair types, watching on television seemed better than fighting a large unruly crowd. Frankly, in many respects, it was a boring event to watch compared with our client, the National Football League/Players Association games. For many years in the 1980’s and early 1990’s the Yankees did not seem to be able to win when it counted, at least the American League championship if not the World Series. After all, this is New York.

The new stadium did not have any pillars blocking a clear view of the entire field. There were very large and smaller television screens spread throughout the stadium. These screens, aided by the public address announcer and various musical calls, led the crowd in cheers. NYPD’s finest, plus private security people were evident in the stadium as well as the parking areas and exit roads. Bottom line: the management of the Yankees solved many of the old problems that reduced the size of their gate. They were creative investors solving their problems. At this point, the bond holders do not have much to fear relative to their other holdings.

The significance of the Yankees solving their gate issues shows a typical American approach: we do solve problems, and therefore I believe we will solve the current problem of stock prices.

The Inputs to a 10 Year View:

The Market Measures

As many of our blog community members know, if you cut into an analyst a historian will bleed. So as they say on television, “Let’s go to the replay.” From 1839 through 2009 there were only four out of seventeen rolling ten year calendar periods when the stock market averages produced a zero or worse return. In terms of individual years, the count is nine out of seventy years. For the ten years ending this August, the S&P500 was down -1.81% on a compound basis. (The average S&P500 fund was off -2.30% and the average of the thirty largest of these funds showed a loss of -2.05%, exemplifying the additional costs of indexing.)

The Sectors

Over the same 10 year period, eleven out of the twenty US Diversified Equity fund averages were positive and two others declined less than the S&P 500. One of the better ways to characterize a period is to look at the leading and lagging sector funds. The double digit leaders on a compound growth rate basis were the Gold funds +22.24%, Latin American funds +15.12%, Global Natural Resource funds +10.91% and the Emerging Market (equity) funds +10.66%. There were only two double digit losing group averages over the ten year period, the Telecomm funds -10.41% and the Science & Technology funds -10.17%.

The Five Year Picture

I track the prices of ninety common stocks every day the US stock market is open. Most of these are financials and many are in a private hedge fund that I manage. Only seven of these stocks are up over the last five years.

How Bad is the Economic Picture?

Often one can get a better view of us through the eyes of others. The International Monetary Fund (IMF) has completed a formal study as to the odds that the US will default on its foreign debt sometime in the future. That they would even consider such an occurrence should shake some people up. What is perhaps worse is they put the odds at 50% of a default.

A Lost Generation of Investors

One of the great advantages that my generation had when we entered Wall Street was that there were very few people who were senior to us in age. Those that were older were within five years of retirement. Many of them were unequipped to handle the robust markets of the late fifties and early sixties. Under normal circumstances, the missing middle management would have come from the lost generation of investors who either lived through or were frightened by the Great Depression. Their fears would not allow them to look at the great values that we found. The values we found were augmented by unique career opportunities to advance within the investment structures.

Today many individuals can not completely withdraw from the ravages of fluctuating prices, as the bulk of their retirement money are tied up in 401(k) or similar plans. Further, the current level of interest rates does not provide an adequate return for building their retirement nest egg.

These are my inputs to a long term outlook. Due to the length of these thoughts, I will continue with the specifics of my ten year outlook next week.

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