Peter Schiff, CEO of Euro Pacific Capital, maintained that “the Fed just doesn’t want to acknowledge that its monetary medicine didn’t work. The patient is sicker than ever. So, it wants to maintain the pretense that it is going to raise rates, but it doesn’t want to actually do it because everybody will realize how weak the economy is.” He explained: “it doesn’t serve the Fed’s purpose to actually raise rates. What serves their purpose is to pretend they can raise rates.” According to Schiff, the Fed is stuck because the economy is in a bubble and “the air is coming out.” He said, “the market is going to want another dose of quantitative easing, and that is exactly what Janet Yellen is going to deliver, to the detriment of the real economy.” To those who disagree, Schiff responds: “It’s not the first time I’ve been against consensus and it won’t be the last. And I’m usually right.”
“Superforecasting” – When Making Predictions “How” You Think is More Important than “What” You Think
Jason Zweig of The Wall Street Journal discusses Philip Tetlock’s new book, “Superforecasting: The Art and Science of Prediction”. Zweig thinks the book “is the most important book on decision making since” Daniel Kahneman’s “Thinking, Fast and Slow.”” The underlying data used for much of the book comes from 20,000 amateurs who made predictions on a wide array of areas. The accuracy of these predictions were then compared to experts. The results showed that “the amateurs won — hands down.” The “Superforecasters”, those in the top 2%, performed 30% better in making accurate predictions than experts with access to key and classified information. “What you think is much less important than how you think,” says Prof. Tetlock; superforecasters regard their views “as hypotheses to be tested, not treasures to be guarded.” According to Zweig, investors can improve how they go about thinking of future events by looking at the historical evidence and probabilities and trying to take those things into consideration within their thought process.
Acadian Asset Management (part of OM Asset Management) identifies inefficiencies in the pricing of securities to guide its investment decisions. “Investors make certain systemic behavioral errors in the way they make investment decisions,” Acadian CIO John Chisholm explains, “[w]e measure . . . the payoff associated with that error.” For example, a stretch of strong earnings tends to drive up stock price even when continued growth is unlikely. This is one reason that cheap companies (in terms of price-to-earnings) tend to generate higher returns over time than more expensive companies. Acadian uses this and other “factors” of a stock to predict the return associate with a stock in the near future.
The process involves an aggregation of common metrics (like price-to-book ratio) into a “price to intrinsic value” factor. The raw value is compared to peers to produce a standard-deviation-based score, which is then evaluated over time to provide both historical and forward-looking data. For each firm, Acadian feeds in the various factor scores to produce “the forward-looking piece: How do we expect these different characteristics to do in the future?” From there, the data goes into an optimizer that trades off attractiveness versus transition costs and risk. Chisholm explains, “That’s ultimate how we determine what to buy and sell in portfolios we manage.”
It appears the approach has worked. The firm’s largest fund, the Emerging Markets Equity strategy, returned 2% over its benchmark annually from 1994 through June 30, 2015. It’s $1 billion Global All-Country Equity strategy has returned 1% over benchmark from 2003 to June 30, 2015.
How much international equity exposure investors should have is an age-old question that is often debated. According to this article by Robert Stepleman, the data suggests that carefully investing in foreign stocks can be a good strategy over time as the non-US exposure can help improve long term returns. Over the last 24 years, U.S. and international stocks have outperformed each other about half the time and in roughly alternating periods.
Based on data from Morningstar, from 1970 to 2015, the S&P returned 10.4% annually, while a portfolio of 60% S&P and 40% Morgan Stanley International Europe, Australia, and Far East Index returned 11% annually with about 3% less volatility. From 2000 to 2008, a portfolio broadly representing the U.S. stock market would have lost 0.4% annually, while a portfolio of 50% U.S. and 50% broad international stock would have gained 0.9% annually.
Based on data from investment firm GersteinFisher, over the period 1997 to 2012, an equity portfolio of 64% U.S. stocks, 23% developed-market stocks, and 13% emerging-market stocks outperformed a U.S.-only portfolio 100% of the time over rolling 10-year periods with an average outperformance of 2% annually. Over three year rolling periods, the mixed portfolio outperformed the U.S.-only portfolio 68% of the time.
Stephen Blyth, the new CEO of the nonprofit Harvard Management Co. that manages Harvard’s endowment, recently voiced concerns over private equity valuations and future returns. In Harvard’s annual endowment letter, Blyth highlighted concerns of “potentially frothy markets,” noting the “environment is likely to result in lower future returns than in the recent past.” The University’s hired hedge-funds are growing their cash positions in response and the endowment is becoming more discriminating in underwriting and return assumptions. Harvard wants to partner with managers astute at “both the long and short sides of the market.” For the past fiscal year, Harvard posted a 5.8% return, beating its internal benchmarks.
Steven Goldberg, columnist for Kiplinger’s, offers some historical perspective on bear markets and suggests, “I think we’re due for a garden-variety bear market – if indeed we fall into a bear market.” Defining a bear market as a fall of at least 20% in the S&P on a total return basis (without an intervening rally of at least 30%), he notes that there have been seven since World War II, with the 2007-09 triggering the worst since the Great Depression. The recent market slump (down 12.4% on August 25 from a May 21 high), qualifies as a mild correction. There have been 20 corrections since World War II, Goldberg notes. “Corrections can often be a pause that refreshes,” he writes, by making price-to-earnings ratios and other measures more reasonable. When they occur, bear markets last an average of 11 months and, for an investor entering at market top, would require about 42 months to break even. Nearly all bear markets produce losses of more than 50% of gains in the preceding bull market. Goldberg remains relatively optimistic, however, noting “valuations are only a bit above average today, and there’s no sign of a recession on the horizon.”
Abby Joseph Cohen, president of Goldman Sachs Group’s Global Markets Institute, says investors should not read the Fed decision to leave rates unchanged as a sign to pursue stocks paying the highest dividends. She said investors should look for blue-chip companies with potential to boost cash flow and return on equity. Cohen does not see reason to be concerned about U.S. stocks, a view reflected in Goldman Sachs’ global markets view, which was not adjusted in response to the Fed decision. “Far more important is the outlook for economic growth and earnings,” said Cohen, explaining that she’s looking for “companies with good exposure to the United States [that] are selective in terms of where they do business overseas.”