Was the first week of October the Bull Market?

 Introduction

When everything was falling in price in August, I suggested that one should start to place orders to buy some of the "falling knives" which had the biggest declines, around -20%. These items included commodities and commodity related investments as well as TIPS. My view was that off a bottom there is often roughly a ten percent "relief rally" and this was the easiest money to earn in a new bull market.

In the period from October 1 - 8 , 2015, the following six out of 96 equity oriented mutual fund classifications' investment objectives produced double digit returns:

Natural Resource funds	+ 14.34%
Precious Metals funds	+  13.58
Global Natural Resources funds	+  13.32
Equity Leverage funds	+  12.04
Energy MLP funds	+  11.18
Basic Materials funds	+  10.76

As we know the price of crude oil rose 9% during the week, but there was more to these gains than the oil price pop. While there was undoubtedly a rush to cover various short positions, there were some participants that were sensing the potential for future inflation. More will be needed for the investors in these funds to break even for the year. Even after the double digit gains for the week, five out of the six groups shown above were still down double digits. (Equity Leverage funds were down -9.72% for the year to date.)

Smaller gains were made in the week by 93 out of 96 investment objectives tracked by my old firm now part of ThomsonReuters. Only few of these were able to show gains for the year. These tended to be large growth funds often with meaningful positions in the much politically derided Health/Biotech group. At least Moody's is concerned that we have not seen the bottom of oil prices, they have lowered the credit ratings on five US regional banks which have substantial energy loans outstanding. Being a contrarian I would watch these for an entry point, as I am convinced that in time the underlying collateral will be good on balance.

Even though we are not traders (as we invest for lengthy periods) we need to be aware of others in the marketplace. The risk for the trader is that the double digit that some funds enjoyed fulfilled "the easy 10%" pop expected after the sharpness of the summer declines. Now the trading question becomes whether the August lows will need to be tested in order to put in the low for the year, if we are going to have a meaningful recovery before the US presidential election year.

We Don't Care

As long-term investors we are not very excited by this year's performance unless it has significance in terms of the implications of meeting our clients’ longer term payments needs of their distant beneficiaries. Why am I so relaxed at the moment? First, I believe last week's move was in recognition of some changing attitudes beyond the "oil patch." As is often is the case, I look to the fixed income world for guidance. Domestically, taxable bond fund classifications showed gains, albeit small. These for the most part were funds that trafficked in lower credit rated paper. For people to bid these up they could not be very concerned about a meaningful recession. The other message that I perceived was that the poorly performing TIPS funds gained while other US Government Bond funds showed minor losses.

Foreign Signals

Emerging Market Bond funds, in local currencies, produced the best returns among fixed income types by a wide margin last week, +4.44%; in contrast with Emerging Markets Debt hard currency issues +1.84%. Bond funds which invested in more developed countries gained +1.3%.  My interpretation of these results is, at least for the week, that market participants were suggesting the meteoritic rise in the dollar was at least peaking.

Volatility

The investing public that is glued to the media is fearful of triple digit price changes in the Dow Jones Industrial Average. Using the somewhat less volatile S&P 500 since 1928 according to Factset/StockCharts, the days with a 1% (Up or Down) occurs every four or five days. As a matter of fact I set my computer alerts to only inform me when prices move at least 2% and don't consider action below 3-5%. The New York  Federal Reserve Bank is somewhat addressing these concerns in the corporate bond market that has had bank trading capital reduced by 75%. They maintain that there is ample liquidity to absorb sudden shifts in prices. (Interestingly enough, they did not address what in theory is the deepest fixed income market in the world, the market for US Treasuries. Because of rapid global trading of these instruments through computer interfaces by non-bank dealers and investors, I am worried. During hectic periods of unwinding "carry trades" when treasuries are collateral for borrowings in more exotic paper, I am concerned by the chance for some indigestion.) 

Question of the Week: How are you addressing this market, did this week mean anything?

_________   

Did you miss my blog last week?  Click here to read.

Comment or email me a question to MikeLipper@Gmail.com.

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com 

Copyright © 2008 - 2015

A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Investment Policies for Investment Personalities

INTRODUCTION

One of the basic tenets of my book MONEY WISE is that one's personality will shape how one invests. In Chapter 14, I briefly identified ten investment personalities as shown below:



* Absolute

* Confident

* Uncertain

* Relative

* Fiduciary

* “Star”

* Bored

* Guilty

* Financial Death Wish

* Paralytic



Actually each of us is likely to be some combination of these personalities and some of us will change personalities in the future due to life circumstance changes. Nevertheless, this framework is a good place to start to evolve one's investment policies. Most of my clients invest with us in various selected funds, but the same principles could be used with individual stocks and bonds as long as there is appropriate diversification.

At this time of the year the press is full of economic, financial, and market predictions. Most of these predictions are for the current period, meaning up to one year. For the most part, the fund investor leaves individual security selection and timing to the funds' managers, so they are not primarily focused on periods as short as one year. For the investors that we serve, our approach is to look to the longest term that the account will permit. For me, that is the rest of my life and to the extent that I am dealing with my heirs, both individual and charitable, to the rest of their lives. To put this into practice, I will focus at looking into the next ten years by reviewing the past ten. Bear in mind no one can truly foretell the future, and based upon the past, we have every reason to believe new discoveries, new industries, new laws and certainly new taxes, will impact us in this ever-changing geopolitical world.

The ten year data by my old firm (now known as Lipper, Inc.) is shown for groups of funds sliced into various categories. Depending on the availability of data, I use fund averages or established fund indexes.


Ten Year Compound Growth Rates
as of December 31st, 2009

FIXED INCOME FUNDS

Emerging Market Debt 11.09%
US TIPS 6.77%
General Bond 6.59%
US Treasuries 6.24%
Corporate Bonds BBB 6.11%
High Current Yield 4.80%
Balanced 2.79%
Money Market 2.60%

EQUITY FUNDS

Global Natural Resources 14.57%
Emerging Markets 9.40%
Small Company Value 8.73%
Global Flexible 5.63%
Small Company Core 5.24%
US Diversified 1.13%
Small Company Growth -0.63%
S&P 500 Index -1.19%
Growth -4.51%


CONCLUSIONS

In looking at these ten year results, one can reach a number of conclusions:

1. Emerging market debt benefited from a material increase in the perception of its credit quality and in some cases an improved currency.



2. Inflation while declining, had a real impact.



3. Higher credit quality was not penalized.



4. Being risk adverse still produced positive results.



5. The world appears to be running short of natural resources at current costs of production.



6. For the total period, bond investors did better than stock investors in the emerging markets.



7. The willingness to combine bonds with stocks worked.



8. US diversified equity funds' putrid returns were still better than the S&P 500 index funds.



9. Smaller companies did better than large ones particularly of the growth variety.

Being something of a contrarian, I am willing to bet that a number of these trends in the next ten years will not be as strong as they were in the last "lost" ten years, or will be reversed. In setting their investment policies in early 2010, different investment personalities will view both the past data and the odds of reversals differently. The following are my initial suggestions to the investment personalities listed above. These suggestions would be modified in individual discussions with each as accounts:

The Absolute Investor, with her fear of significant loss and willingness to accept more limited gain, might opt for some fixed-income laddering, but would be wise to include some TIPS.

The Confident Investor, believing that he has timing skills at least equal to the market, would be attracted to the global natural resources area as well as emerging markets, with heavy emphasis on the so-called "BRIC" countries.

The Uncertain Investor would feel less anxious with a portfolio of money market instruments, TIPS, as well as exposure to a global flexible fund.

The Fiduciary Investor would be similar to the Absolute Investor, but would add one or two index funds.

An investor who wants to boast about his current successes (the "Star" Investor), would be attracted to the narrowly-based exchange traded funds and similar products that are invested in specific industrial segments or specific emerging countries.

Regarding the Bored Investor: Boring is as boring does, with a combination of S&P 500 index funds and money market funds.

The Guilty Investor, who needs to be punished because of some unidentified sin, will load with larger growth funds because of their recent poor record and could well be punished most severely by having a very successful portfolio. Woe is me.

A cousin of the Guilty Investor, but who is more manic, is the Financial Death Wish Investor, who is likely to be attracted to what is currently doing spectacularly well due to leverage and will be attracted to funds investing in high current yield ("junk bonds").

The Paralytic Investor, often the result of a diverse investment committee, will diversify unhappily into index funds, money market funds and global flexible funds.

Next week I am inclined to describe what policies I would like to follow in some of my own accounts.

Further, I would welcome anyone's thoughts as to what I have suggested in this blog.