Sunday, December 20, 2015

There Were Some Winners Last Week


For me, this last week encapsulated a lot of cross-trends that produced a different than expected outcome. Allow me to give a brief summary. Monday I met with a group of semi-retired senior securities analysts and portfolio managers, I was the only one who saw significant future gains. After that meeting my wife Ruth and I went to the dinner that awarded the George Washington Prize to Lin-Manuel Miranda, the playwright and star of the hit musical “Hamilton.” It was a fun evening which gave us a chance to catch up with a number of senior investment executives. (Ruth is one of the supporters of George Washington’s Mount Vernon, one of the sponsors of the dinner. The other sponsors were Washington College and The Gilder Lehrman Institute of American History.)

The comparisons of the leadership abilities of George Washington and Alexander Hamilton to the current global political leaders is striking. The political world that the founders of the US worked was every bit as nasty as the current environment. There are two big differences however. The first is both George Washington and Alexander Hamilton were able to negotiate compromises that did not violate their basic beliefs. The second is that portions of the population accepted and actively supported these views. The leaders had followers.

Turning to today I find it difficult to find any really popular political leaders or campaigners. The best that can be said about any is that some are better than the others. This lack of deep enthusiasm is translating into the current investment scene. If one listens to most of the media commentators they drone on that 2015 is essentially a flat year, which is a reflection of the popular averages and how they are constructed. In truth most of the gains in the averages were driven by a very limited number of large securities. While it is too early to be definitive for 2015, I would be surprised if only 10% of the stocks in the S&P500 will be up for the year. This is an example of the failure of the followers to believe that the market leadership is leading in the right direction. This attitude seems also to be represented today in voters’ attitudes.

There Was News Last Week

While the Federal Reserve’s series of interest rate hikes finally occurred, it wasn’t news but a confirmation. What wasn’t addressed by the headline producers was that the bond market adjusted, and selected equities rose.

Since the rate increases were expected one is not surprised to see the relative unpopularity of bonds. According to Barron’s the yields on the best quality bonds are now 4.25%, 30 basis points higher than a year ago at 3.95% and intermediate credits yields rose over the same 12 months by 56 basis points to 5.16%. (I believe eventually the appropriate level of interest to attract retirement savings is in the 4%+ range.) What is surprising is that the media focused on the $15.4 Billion net redemptions in bond funds, including ETFs, but not that the redemption in aggregate was only 0.71% of the total net assets in bond funds. While this is slightly less than 3X the withdrawal rate for equity funds, in neither case is it likely that mutual funds will be the main contributor to dumping securities on the market.

Most investors would not be surprised to learn that the average US Diversified Equity fund declined -0.97% for the week ending December 17.  They would be surprised to learn that there were several ways to gain 1%, as shown by the table below:

Real Estate
Global Real Estate

The reason to show these specialty and sector weekly winners is to show the diversity of types of mutual fund investing, therefore accounts that restrict themselves to diversified funds may be missing some opportunities.

Longer Term Thoughts

The interest rate increases lower the actuarial level of under-funding for many pension funds. According to SEI currently the range of earnings assumptions for these plans are between 5.52 to 8.25%, with the average in the 7% area, which ties with the single digit gain expected by Wall Street.

JPMorgan is more favorably disposed to Europe and Japan than either the US or emerging markets. I am intrigued that the current return on equity in Europe is felt to be 11.1% compared with 15.5% in the US which is essentially flat for 10 years whereas the European number is 2.4% below its ten year average. Thus there may be some real leverage in European earnings. 

Merry Christmas to all and I hope you don’t get or have too much cold.
Did you miss my blog last week?  Click here  to read.

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