One newsletter I read daily, or whenever it gets published, is from Jack Crooks. Yesterday's letter talked about something I have touched on quite a few times in the past. He talked about someone who said to him that he (Crooks) seemed unsure on his thesis that the dollar will go up in 2008.
Crooks proceeded to delve into how he spends a lot of time exploring any thesis for why he might be wrong. This is very important to understand for anyone who goes narrower than a three ETF lazy portfolio.
The way I think of it is that every portfolio is vulnerable to something (actually more than one thing) and it is important to know what you are vulnerable to and if or when your weak spot might hurt you and then what to do about it, if anything.
This is why I think people like Kudlow offer so little. As I have said before, there is no need to protect against the rosy scenario he kept espousing. But since the market does not go in one direction anyone interested protecting against down a lot must stay in touch with what threatens his portfolio or the overall market.
From the alternative assets file I found this article about freight futures on Alphaville. In the last couple of years, and I am sure over the next couple of years too, there have been products created to invest (or speculate) in all sorts of things that don't correlate directly with stocks.
Anyone buying into the idea that we will have to endure below normal returns in the equity markets might be curious to learn more about these products or maybe someone will list a kitchen sink fund that will own a whole bunch of these things like some Baltic Shipping Futures, Carbon Credit Futures, the Australian Meat fund (this is a real thing but not traded on the secondary market) and the Kazakhstan tengi. Couldn't that mix deliver an absolute return we could all live with? Obviously I no idea.
Yesterday's post was syndicated on Seeking Alpha and a reader there left a link to a PDF by Zvi Bodie that explores a 90/10 allocation as discussed yesterday. It was worthwhile to read a different, and very qualified, spin on the concept.
The first flaw that came to mind in Bodie's piece (I'm not casting stones, every exercise like this has flaws, anything I could possibly come up with would have flaws too) was the potential for incredibly low interest payments.
The paper was written in 2001. Since then we had short rates with a one handle for a long time and we might be on the way there again for a long time. Having 90% in t-bills yielding 1.5%, or even 2.5%, for any length of time seems problematic and chances are rates that low would have been considered an outlier of a possibility in 2001.
Early on the piece he talks about TIPS for some or all of the treasury portion so obviously the interest is even less which might not be so bad unless the deflation crowd turns out to be correct.
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7 comments:
Hi Roger, speaking of low interest rates, with most usa interest rates now below the current rate of inflation, ie. negative real yields, i know you often speak of what the text book says, does it say anything about what is the usual best of action in this situation of negative real yields? In particular as it relates to income. Do you go with shorter maturities? Longer? Shun utilities? Overweight gold/commodities etc. Thanks
i will answer this with Wednesday's post, it is a great questions.
Roger,
In line with jimidean's queries into "ye olde textbook", can you comment on today's PPI and consumer confidence numbers going in opposite directions?
The rating agencies affirmation of the monolines leaves me wholly unimpressed: by leaving those ratings in place, the rock (of rating agency methodology) is less likely to be turned over (as apparently evidenced by the Moody's share price today).
Fundamentally (and I'm curious whether my intuition comports with the textbook), I don't see how P/Es can be sustained if inputs are increasing in price even as demand is (presumably) softening (per today's consumer confidence, yesterday's existing home sales (which did beat estimates), and? tomorrow's new home sales and mortgage applications numbers).
Are all of these economic indicators so fully discounted as to support a longer term rally, or does your textbook suggest that this may be more of a relief rally as bull/bear technicals come back into balance?
Not seeking direct investment advice - just a sense of the textbook view.
Thanks,
Rick in NY
Rick,
Looking for a case for a rally is not what i am interested in because markets can easily decline when they shouldn't and easily go up when they shouldn't.
I am hardpressed to add anything to what Hussman says about PEs other than I don;t find them very predictive. Look at a chart of SPX on bigcharts with the PE as a lower indicator.
Hussman believes in them, me not so much (as a predictive tool for the market).
I may not be following your question about PEs sustaining, i am inclined to think that if anything estimates and so then reports would come down, making PEs higher or along with the estimate declines the market also drops.
what has been going over the last few days seems like the feel good rallies i talked about a few weeks ago, and really so far a mild feel good rally based on past bear markets--if you even think that is where we are.
not sure i answered your question though, sorry.
I have gone from roughly 75% invested to 50% invested today.
Personally I really like the way Hussman views P/E ratios. You have to remember he use peak earnings in his analysis not just earnings. That said the bear market continues and this rally will not last forever.
seg
Lots of good yields out there. MLPs, ETF's galore that capture significant cash, etc. Roger knows where to find them!
Roger,
My reference to P/Es was sloppy. The point I was trying to get to is reduced earnings.
I suppose I was wondering if your textbook would suggest that as the average "market P/E" resets as earnings decrease, will the multiple investors are willing to pay for those earnings itself decrease?
I suppose this is nothing more than the definition of a bear market.
You're right, this is Hussman's territory.
And since the earlier post, some of the retailers have released better than expected results, so it may be that seg has the right idea - at least until we leave the trading range (125/142 on SPY)(For US large caps, anyway.)
Rick
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