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Guest Post: Heads Or Tails - The 2013 Coin Toss
Via Lance Roberts of Street Talk Live blog,
In money management long term success lies not in garnering short term returns but avoiding the pitfalls that lead to large losses of invested capital. While it is not popular in the media to point out the headwinds that face investors in the months ahead - it is also naive to only focus on the positives. While it is true that markets rise more often than not, unfortunately, it is when markets don't that investors are critically set back from their long term goals. It is not just the loss of capital that is devastating to the compounding effect of returns but, more importantly, it is the loss of "time" which is truly limited and never recoverable.
Therefore, as we look forward into 2013, I want to review three reasons to be bullish about investing in the months to come but also review three risks that could derail the markets along the way.
Bull Point 1: Interest Rates To Remain Low, Yield Chase Remains
The Federal Reserve has committed to keeping interest rates suppressed until at least 2015 if not longer. This low interest rate environment will continue to weigh on the ever increasing number of individuals heading into retirement who feel an urgency to generate an income stream to supplement retirement benefits. Therefore, the chase for income, or yield, is set to continue in the coming year as the low interest rate environment continues to push more individuals out of cash and into more risky investments. While "yield chases" have always ended badly in the current macro environment such an outcome is a low probability event in 2013.
Bull Point 2: Technical Trend Remains Bullish
The "trend is your friend - until it isn't" is an age old traders axiom. Yet it is a sage piece of advice. There was a time in history when investors actually invested in stocks for the "long term," however, with the advent of the internet, online investment access and high speed trading, those days are gone. The rise of ETF's and "program trading" has led to a market where the bulk of the daily price action in stocks is driven by the direction of the overall market.
In such an environment investors are generally better served understanding, and investing, with the trend, or direction, of the overall market rather than "hoping" their investments will work out. Currently, as the chart below shows, the markets are still in a well-defined bullish trend. While the historical peaks of the market are still providing some potential resistance to the current advance - the trend is remains positive suggesting that exposure to risk should maintained.
Bull Point 3: $85 Billion Per Month
Of course, one of the most bullish catalysts in 2013 is the Federal Reserve and the two simultaneous large scale asset purchase programs (Quantitative Easing or QE) totaling $85 billion a month. The liquidity that is pushed into the financial system by these programs has boosted asset prices historically. While each program has had a dimenishing rate of return the programs do provide support for the bullish invesment theme.
The chart below shows the current Federal Reserve stimulus induced market rally as compared to the "Mortgage ATM" liquidity boosted rally from 2004-2008. If this market continues to play out the same pattern the markets could yet see a fairly bullish advance in the months to come as QE3/4 push assets prices higher.
Bear Point 1: Debt Ceiling Debate
With the "fiscal cliff" resolution behind the next big hurdle for the market will be the debt ceiling debate. In 2011 the debate over the debt ceiling led to a credit downgrade by Standard & Poors and a 10% stock market loss in a three week span.
The obvious risk is that once again the debate reaches a fevered pitch and rattles the markets. One caveat, however, is that market participants are more aware about the fact that the U.S. will not actually default on its debt so any negative impact to the financial markets will likely not be as severe as seen previously. Furthermore, as opposed to the summer of 2011 when QE2 had already ended, the markets are currently supported by QE3 and 4.
However, with increased taxes already set to provide roughly a 1.5% drag on economic growth any resolution of the debt ceiling debate which leads to larger than expected spending cuts could negatively impact the markets to some degree in the coming year.
Bear Point 2: Earnings
It is currently estimated that corporate earnings, as we addressed in our 2013 outlook, could reach an all-time higher of $105.88 a share this year. This would represent an increase of $8.10 a share over current levels.
Currently, 2013 reported earnings are currently set at $100.71 for the S&P 500 by Standard & Poors. This would represent a rise of 14% in the coming year from the current levels of $87.1. The risk to that bullish outlook comes from a couple of areas: 1) the Eurozone recession is set to continue through the rest of this year putting a drag on exports which currently makes up roughly 40% of domestic corporate profits and more than 13% of GDP, and; 2) Corporate earnings have already begun to show early signs of weakness amid slower economic growth. The impact of higher taxes and potential spending cuts will further impact earnings in 2013.
The ability for corporations to continue keeping profit margins intact by cutting costs has likely come to an end. The recent price increases in the markets have led to an expansion of multiples as earnings have declined. Historically, price expansions, without an underlying increase in earnings, are not sustainable. Therefore, any further deterioration in corporate earnings in the coming year will likely lead to a recoupling of prices to earnings.
Bear Point 3: Slow Growth Economy
As stated above the impact from rising taxes, potential cuts in spending, and slower economic growth from the Eurozone is likely to further weigh on the domestic economy. With the economy already growing at a sub-par rate there isn't much wiggle room between growth and contraction.
One thing that has been overlooked on many fronts is that Obama had control of the House, and the Senate, when he first entered office in 2009. This control lead to the passing of ObamaCare, successive bailout programs for housing, automobiles, and the financial industry which flooded the economy, and financial markets, with dollars - a lot of dollars. Those injections, combined with a massively bombed out economy from the financial crisis, led to a sharp rebound in economic growth which was almost entirely centered around inventory restocking and a resumption of exported goods and services.
However, in 2010, Obama lost control of the House to the Republicans which has led to two subsequent years of political gridlock. That gridlock has resulted in very little progress in providing the fiscal policies necessary to support economic growth.
This lack of progress has clouded the planning ability for small businesses and reduced the need for continued buildup of inventories as the exportation of goods and services has slowed. The chart below shows exports, and imports, post the recessionary bottom as stimulus programs impacted the economy and the subsequent fade as economic strength has waned.
The problem of a sub-par growth economy is that lack of "escape velocity" required to start organic growth. Current employment gains, and growth in GDP, has been little more than what would be expected from normal population growth and inflation. However, the problem is that such an environment does not foster higher levels of wage growth, higher levels of corporate profitability or economic prosperity.
Risk Management Makes The Difference
While the list could obviously be much longer the point is that for every bullish point that can be made there is an offsetting risk. The reality is that no one knows for sure where the markets will end this year. While it is true that "bull markets are more fun than bear markets" the damage to investment portfolios by not managing the risks can be catastrophic. A measured approach to optimism, where the relevant risks are given due weight, will always lead to longer term portfolio success.
This is why we manage portfolios from a risk managed approach – greater returns are generated from the management of “risks” rather than the attempt to create returns. Our philosophy was well defined by Robert Rubin, former Secretary of the Treasury, when he said;
“As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.
Most people are in denial about uncertainty. They assume they're lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it's a terrible way to deal with uncertainty. If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.”
It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin's approach, and ours, go beyond that. For starters, although it may seem contradictory, embracing uncertainty reduces risk while denial increases it. Another benefit of acknowledged uncertainty is it keeps you honest.
“A healthy respect for uncertainty and focus on probability drives you never to be satisfied with your conclusions. It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.”
The mistake that most investors make is assuming that portfolios are treated like a light switch. However, good portfolio management, as stated, requires a strategy that manages portfolio risk like a rheostat. When the overall market trends are positive the allocation of risk is dialed up. Conversely, when data trends become negative - risk is reduced. The management of risk is what has always separated successful investors from the rest.
Chasing markets higher is fun - until it isn't.
The reality is that we can't control outcomes; the most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time.
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Funny you should mention the loss of time considering the Status Quo is intent on stealing it from the rest of the world to pay for their misdeeds.
Love me some Lance!
:D
My ammo has more than doubled in price in the past few months. There's a bull market for you.
DO NOT BUY PHYSICAL GOLD OR SILVER.............let me instead.......YOU can buy it later when I sell it at 10K
Don't have to point out the bear case...sentiment or "human" wise I think bearishness is in fact "normal." Bear's point out the obvious while Bulls are left "driving Ms Daisy" as they ponder the wonder of it all. These are not good times for "the folks" and so I think the well spring of hope comes from the fact that we are all already down already. So at best the bull can do "hope realized" whereas the bear having seen the futility of trying to begin with can exclaim "see I told you so." Hence to me the importance of "being a writer" and trying to imagine all the other points of view other than your own. I mean I really don't care what Chris Christie has to say. I want him and the others to crawl out of the cave for five seconds and show some UNDERSTANDING for a moment that "out Government is broke right now" and so doing this stuff "ain't easy." it would come as a surprise would it not? But enough of yet another rant from "formerly private all of us" right?
and there's this sorta freakishnish.. what to make of these SPX TNX rendezvous?
http://fiatflaws.blogspot.com/
You want some certainty? Here is some certainty...1) Their agenda doesn't align with ours and the will do what is in their best interest. 2) The "market" will return what the Bernank wants it to. 3) When they are ready they will pull the plug on the whole system. If you don't have physical assets when that happens you are screwed.
Bull Point #4: People are dumb, and trending dumber.
I know the sentiment gets fairly negative around here, but the bull case still seems to win. That's obviously because of the expanding global balance sheet, but until something rattles it, long equities doesn't seem that bad. You're not gaining anything broadly in terms of gold, but you're not losing much either. At some point those of you buying SPY puts are going to hit that hardway bet, but goddamn.
I'd rather sell covered calls on the way up than get burned on those long puts.
The general thought here isn't bullish or bearish; if there is one, is that there is no real hedge. Apart from the more general considerations of what that means (etc., we all die eventually, humanity will eventually be extinct, the universe will eventually suffer entropy death), what it means in the more near term is that all investments are eventually 100% shit, so the trick for those of us taking the long view is to limit or eliminate our exposure to investments that may be in more immediate peril of death. Given the trajectory we're on, the only thing that really makes any sense is to "cash out and get the fuck out" of debt based holdings (such as credit cards, mortgages, Federal Reserve Notes) and into durable/practical goods (hammers/saws, iron skillets, bullets, food storage, liquor) and stores of wealth (land, physical PM's).
That's basically the thesis. It's a pretty good one.
Sam: Whenever there is any doubt, there is no doubt. That's the first thing they teach you.
Vincent: Who taught you?
Sam: I don't remember. That's the second thing they teach you.
The only point that matters is that the illusion continues on and until the slves wake up to that fact AND do something about it-- the rich get richer (read markets are in a bull trend).
"In money management long term success lies not in garnering short term returns but avoiding the pitfalls that lead to large losses of invested capital."
No, long term success lies in getting yourself the best line to the best insider information. There is simply no other way.....
Big risk of 2013 : start of a civil war over the gun issue.
Heads or tails?
Heads! I win!
What should I do congressman?
oh how stupid of me. Of course I'll punt.
Since I'm not in 'the club' I won't be doing any 'investing' in US 'markets' any time soon.
The Equity market can only advance on printed dollars and $2t Fed deficts. Given this premise, when the inflationary effects hit, it will be quickly and with a vengeance.
Things will spin out of control regardless what the cardboard cutouts on CNBC tell you.
The MSM is preaching constantly yhe "benefuits" of defict spending while even floating insane ideas regarding "the platinum coin". Is Boehner going to come out and call for Fed spending cuts in trade for debt ceiling increase?
MSM will skewer him.
Robert Rubin's babble is only a long worded excuse for him not taking the blame for the disastrous decisions he made.
While point one and two are true, number three is already half a lie (you could also decide to do nothing).|
And the last point is pure bullshit. We might need to judge the decider also on the circumstances, but a bad decision doesn't become a good one because of the environment it was made in.
The citation of such crap pulls the whole post down.