Next week the FOMC will likely offer more color on the widely anticipated second round of Quantitative Easing aka QE2. When such events are so widely anticipated markets generally react by moving in the opposite direction of the previous trend as in “buy the rumor and sell the news”. For this reason and with the expectation that the economy might limp along a bit faster in 2011, I intend to begin liquidating our position in the “FLAT” which is an ETF designed to capitalize on the flattening yield curve. My belief is that while the effect of QE2 could be muted, the economy could limp faster which could cause a widening of the yield curve as “Reversion to the Mean” sets in.
Be careful out there
Brad
Long FLAT
This morning I was interviewed by SmartMoney magazine on Socially Responsible Mutual Funds (the magazine name must remain confidential for the time being at their request) the following are the major points of the interview:
1. Why are there so few Value oriented mutual funds within the SRI industry? Despite the tendency for the mutual fund industry as a whole to come forth with products that reflect recent success, there has been little or no movement towards Value oriented funds despite their relative success over the past 10 years.
2. Why are most Socially Responsible Mutual Funds composed of with similar holdings? The KLD screening universe follows approximately 500 companies with a high percentage included in the S&P 500 Index. 500 is not that many considering there are over 5000 equities to choose from. Medium, Small and Micro caps get virtually no coverage outside of private portfolio managers.
3. In years past SRI funds made an attempt to avoid the worst offenders to their screening policy. However this was frequently not the case as highlighted by investigative reports by Businessweek Magazine and recent SEC enforcements. BP was owned by many of the larger SRI funds dating back over a decade as it was consider the “best of the lot”. Many firms, including RMHI do not participate in shareholder advocacy to create change since it can create a conflict of interest should the stock disappoint and considered for sale.
In recent years there has been a shift to owning significant offenders with the hope of creating change from within. Is it too cynical to wonder if the efforts to create change are sincere, since the odds are very low for success?
In addition, many “Green” funds including Alternative Energy Exchange Traded Funds own shares of mining companies. Does extractive industries like mining contradict the purpose of Green Investing?
4. Most importantly, have Socially Responsible Funds prepared for the potential of another Lost Decade for stocks? Our thesis is that should our coming decade be as fruitless as the last have SRI funds implemented strategies that worked despite the low return of the S&P 500? In other words, Value over Growth?
Brad Pappas
No positions
Too few individual investors how to use Investor Sentiment to their advantage. Last week when the New York Times ran a front page story regarding individual investors fleeing equity mutual funds in favor of bond mutual funds, it should have made any long term Socially Responsible Investor giddy with glee.
Why?
Extreme negative sentiment as depicted in the NY Times should be used as an inverse barometer of when to invest. However, more often group think sets in and investor is intimidated by being the lone wolf buying shares while the herd is stampeding in the other direction.
Right now, sentiment as expressed by the American Association of Individual Investors is getting extremely negative….and thats a good thing. Who’s left to sell when only 21% of members polled are positive on the markets? 21% happens to be one of the lowest polls recorded in the past 15 years. You may be right in your views of why you want to sell…….but, and this is the tricky part that the majority of investors never learn to master: You may be right in your thesis but if you’re in the majority with your views, chances are your opinions have already been absorbed by the markets.
Using data supplied by www.sentimentrader.com:
Since 1987, there have been 47 instances where AAII sentiment fell to 21% or below. The results are:
3 months later: the average return was 5.8% for the S&P 500 with 98% of the 47 instances positive.
6 months later: the average return was 10.9% for the S&P 500 with 91% of the 47 instances positive.
In conclusion, many investors think they can manage their assets completely on their own but unfortunately do not know how to interpret sentiment data. Going against the herd is never easy but you must be able to master your emotions in order to be a successful investor, otherwise you might consider hiring an adviser who’s weathered a great many storms in their career.
More chatter about the Double Dip recession this morning, despite the building proof that the DD is not a likely outcome. Apparently Mr. Market has not taken his Wellbutrin this morning, so we sell off.
This morning Credit Suisse published a research note between the differences in our economy at present versus Japan in the late 80’s and 90’s.
The U.S. is not Japan 15 years ago. We find many more differences than similarities between the U.S. today and Japan 15 years ago:
- The U.S. has had far more proactive fiscal/monetary policy. (Japanese monetary conditions were tight until 1995. Unlike the U.S. today, Japan fiscal easing was small.)
- Japan had falling wages since 1997 and negative inflation expectations since 1993. (U.S. wage growth and inflation expectations are >2%.) Falling wages creates sustained deflation.
- Asset deflation was more acute in Japan, with house prices declining by almost 80% in the big cities.
- The U.S. moved to recapitalize banks quickly and has already written down 85% of their estimated losses (Japan needed 13 years.)
- Japan was very slow to deregulate, and hence the price of labor fell as opposes to the quantity. With companies having little incentive to maximize return on equity, the return on capital is one-third that of the U.S.
- Deflation became economically and politically acceptable because Japanese households have net financial assets of 41% of GDP, so they benefit from deflation.
If this remains the case, its quite bullish for equities although the road will likely be bumpy and a potential for a major bubble in US bonds, especially Treasuries.
No Positions
Brad Pappas
Congrats kiddo on your first day at the University of Colorado!
Lotsa love,
Dad aka The Checkbook
It wasn’t supposed to be this way, the Double Dip Recession and inevitable Deflation were a sure thing, but today’s Industrial Production figures of growth of 1% in July versus the consensus of .7% make want to give you pause if you’re loading up on Treasuries. The figures were led by a big 9.9% surge in motor vehicles, the trend in vehicle production is the most since 1984 while year to year PPI growth is the greatest since 1998.
While this data is very good news for equities its quite bearish for Treasury bonds which are probably leaning too much to the side of buying exuberance.
Consider the following charts from SentimenTrader.com, all three show far too much bullish sentiment to make a potential investment profitable. Investment profits are very seldom made when sentiment is so extreme as the data suggests it’s likely wiser to be a seller rather than a buyer.
These remain very uncertain times but we feel its in error to chase strength, let any market correct itself where you can make your buys on your terms not the market’s.
Allow me to put this another way: With the yield on the 10-year Treasury now at 2.58% it has a P/E (Price divided by Earnings) of 38.7 which is quite close to the bubble era for the NASDAQ in 1999. The current P/E of the S&P 500 is now 12.
Be careful out there
Brad Pappas
