PIMCO bond guru Bill Gross is reiterating his belief that zero-bound interest rates will become a major problem for the economy, and markets.
“Books such as ‘Stocks for the Long Run’ or articles such as ‘Dow 36,000′ captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory,” Gross writes in a football-analogy-heavy issue of his investment commentary, discussing the climate of falling interest rates and rising asset prices that has dominated the past few decades. “Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion.”
Gross says near-zero interest rates decrease household incomes and lower profit margins — and the yield spreads that drive credit expansion. That means deleveraging and slower growth, he says, which means investors should switch from offense to defense.
What is PIMCO’s defensive strategy? “Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible,” Gross says. And that means emphasizing “income we believe to be relatively reliable/safe”; de-emphasizing “derivative structures that are fully valued and potentially volatile”; and combining those two plans with “security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.”
Wells Capital Management’s James Paulsen thinks cyclical stocks will continue to outperform the broader market for some time. Paulsen tells Yahoo! Finance’s Breakout that cyclicals tend to outperform as long as unemployment claims are trending downward, and thinks it won’t be time to get more defensive until new claims for unemployment get down below the 300,000 per week range. He likes the financial sector, and he also discusses why he thinks dividend stocks may be overhyped right now.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.
As the 2012 Presidential election draws closer and closer, the usual rhetoric about one candidate being better than another for the stock market is, as always, a big issue in the press. But in a recent Washington Post column, Barry Ritholtz of FusionIQ and The Big Picture blog says it’s a lot of nonsense.
“Markets do not rally or sell off because one candidate or the other is more likely to win,” Ritholtz wrote. “This might strike some as a bit radical, but here it is: Markets don’t give a flying fig about any of this nonsense.”
One commonly cited but off-base contention, according to Ritholtz: that the fact that a particular candidate is polling well is the reason that the market is rising or falling. “Let’s consider what is driving day-to-day stock prices: It’s not expectations about changing capital gains taxes or broad shifts in health-care spending — issues that arguably can be game-changers in elections,” Ritholtz says. “Rather, large hedge funds and high-frequency traders are the biggest participants short-term. The machine-driven mathematical traders have no interest in politics; their stock purchases are held for milliseconds, and their buying is driven by quantitative formulas that have nothing to do with any candidate. Hedge-fund managers certainly are not making bets dependent on the outcome of elections 10 months hence. They are more concerned with monthly, weekly and even daily performance. The technical factors driving what they do are far removed from whatever is happening on the campaign trail.”
Ritholtz also says presidents get more credit and blame than they deserve for the economy and market. “Consider how the markets did under George W. Bush, the most recent ‘pro-business president,’” he says, wryly adding. “Then imagine how markets probably reacted to the anti-business socialist from Kenya.” He notes that stocks fell nearly 40% in Bush’s tenure, while they’ve risen about 50% during Obama’s, despite perceptions about their market-friendliness.
Lakshman Achuthan of the Economic Cycle Research Institute says that, despite all the positive economic reports we’ve seen recently, several key indicators show the economy is actually on the decline and headed into recession. Achuthan says GDP numbers, personal income growth, sales data, and industrial production have all been on the decline and paint a picture very similar to those that preceded past recessions.
Are Treasury bonds a good place to be, or quite dangerous? Two top strategists — Bill Gross and Leon Cooperman — have very different takes.
Hedge fund guru Cooperman tells Bloomberg that Treasurys will be the worst place to put their money for the next three years. He says the Federal Reserve is trying to bolster asset prices, and he thinks they’ll be successful, creating significant inflation in the next couple years. With yields so low, Treasury investors face a major erosion of their purchasing power if inflation rises. He likes equities and gold over Treasurys.
“Bond King” Gross, however, has 38% of the PIMCO Total Return Fund in Treasurys and other U.S. debt, Bloomberg reports. “If you have an environment in which interest rates aren’t going to change, and that’s the key, is Ben Bernanke good to his promise?” Gross said. “Yields are not going anywhere for the next two or three years.” He says investors who are substituting high-dividend stocks for Treasurys are taking on substantial amounts of additional risk.
Most of history’s best investors have made their hay by going against the crowd. And in his latest column for Forbes.com, Validea CEO John Reese takes a look at some intriguing new research that contrarian guru David Dreman has published, and a Dreman-inspired strategy that has a strong track record of beating the market.
“After more than a dozen years of studying history’s most successful investment strategies, one of the most important pieces of advice I can give you is this: Don’t follow the crowd,” Reese writes. “[And] when it comes to the field of contrarian investing, perhaps no one has provided as much insightful research as Forbes’ own David Dreman.” Reese notes that in Dreman’s new book, Contrarian Investment Strategies: The Psychological Edge, Dreman updates data he had previously published, showing that contrarian strategies continued to beat the market and post solid returns in the 2000s, despite the talk of new normals and new investment paradigms.
“But some of the most intriguing parts of Dreman’s new book involve new research and analysis, particular as pertaining to investor psychology, as he gives powerful evidence as to why contrarian investing works,” Reese adds. “A big part of the explanation involves the concept of ‘Affect’ — essentially, the way that our minds automatically tag representations of objects or events with positive or negative feelings — and how numerous studies show how Affect often overrides the rational-analytic part of our brains (which should be making our investment decisions).”
Reese also discusses the “Guru Strategy” that he bases on Dreman’s earlier work, which has handily beaten the market since its 2003 inception. And he offers a handful of current picks from the model, including much-maligned oil and gas giant BP. “The London-based oil and gas giant’s name evokes a variety of negative emotions — disappointment, anger, and much worse — thanks to its role in the massive Gulf of Mexico oil spill in 2010,” Reese says. “But from an investor’s point of view, all of the negative feeling toward the company has driven its share price down well below where it should be given its fundamentals–and that’s just the sort of opportunity Dreman looks for.” To read the full article and see all the picks, click here.
Top strategist Bob Rodriguez of FPA Capital — one of the few to warn about the 2008 financial crisis in advance — says the window the U.S. has to confront its debt issues and avoid a Europe-esque crisis is narrowing.
In a speech given at an Institute for Private Investors gathering last week, Rodriguez said 2013 will be the most crucial year in 80 years in terms of getting the country on the right fiscal path before “budgetary financial pressures will explode” starting in 2018, Advisor One reports. According to Rodriguez, every year after 2013 that the U.S. goes without structural fiscal reform “increase(s) the size and scope of the necessary fiscal response”, with capital markets likely to react the way they are right now in Europe.
Rodriguez contends that the Great Recession of 2007 to 2009 was just the first phase of a larger period of trouble, Advisor One reports, and the U.S. must make significant structural changes to budgets, entitlement programs, and its tax system. If it doesn’t, he sees another, possibly greater, financial crisis down the line. “For starters, entitlement reform should include benefit cuts, an increasing of the age for qualifying, and means-testing,” Rodriguez said. “Congressional budgetary reform must include statutory controls that prevent a future Congress from overturning expenditure cuts enacted now but are to be implemented later.” He also called for the simplification of the tax code.
Blackrock’s Bob Doll says the longer-term picture for stocks is a good one, though there may be some “corrective action” in the shorter-term.
“Looking ahead, we believe the backdrop for risk assets remains a solid one,” Doll writes in his weekly commentary on Blackrock’s site. “The global economy is hardly experiencing boom conditions and remains subject to the hangover effects of the massive financial crisis, but improvements have been real and sustainable. Interest rates around the world are low, with little chance of moving higher any time soon. This backdrop, combined with at-least reasonable valuations, should help equities to continue to outperform.”
In the shorter term, however, Doll says that “the improvements we have seen in recent months do appear to have been absorbed by the markets, which explains the nearly uninterrupted move higher in stock prices we have recently experienced. As such, we would caution that stocks may be overdue for some sort of corrective action.” But, he adds, “our long-term view remains a constructive one.”
Doll says he expects U.S. growth in the first quarter to come in somewhere around last quarter’s 2.8% pace. He says he sees a soft landing for China, where growth is slowing. And he says that the risk of a massive run on European banks is decreasing due to the European Central Bank’s recent actions, and that the risk of a chaotic debt default for Greece is also decreasing, though Greece’s long-term prospects remain uncertain.
How much of our investment success or failure is a result of our genetic makeup? An intriguing new study attempts to answer just that question, The Wall Street Journal’s Jason Zweig notes on WSJ’s Total Return blog.
The study, performed by finance professors Henrik Cronqvist of Claremont McKenna College and Stephan Siegel of the W.P. Carey School of Business at Arizona State University, draws on “two sets of remarkable data” from Sweden, Zweig says. One data set is available because the Swedish government until recently collected data about each holding of taxpayers’ investment accounts, Zweig says, and the other is available because the Swedish government enters all twin births in a national registry. Cross-referencing the two data sets, the professors were able to track how similar or different twins’ investing behaviors were. They looked to see whether sets of twins demonstrated five main behavioral investing mistakes: inadequate diversification, excessive trading, reluctance to sell at a loss, chasing hot recent performance, and trying to get rich quick.
“Cronqvist and Siegel found, across the twins in their sample, that genetic variation explained between one-quarter and nearly one-half of the extent to which investors suffered from these biases,” Zweig reports. “Inadequate diversification scored the highest, with genetic effects explaining 45.3% of the variation across investors. At the low end, 25.7% of the degree to which investors traded too much was explained by their genetic variation.”
Zweig notes that there obviously is more to a person’s investing decisions than DNA. “But there’s good reason why Wall Street’s marketers invoke urgency, familiarity, temptation and a lottery mentality when they’re selling products and services,” he adds. “Millions of investors are probably born with the genetic predisposition to underdiversify, trade too much, chase hot returns and bet on longshots. … This new research hammers home how vital it is for us all to realize, in the immortal words of Benjamin Graham, that ‘the investor’s chief problem — and even his worst enemy — is likely to be himself.’”