News

Right Said Fred Forecasting

You couldn’t do a little turn on the catwalk in the 1990s without hearing Right Said Fred’s song about the tail wagging the dog.  “I’m Too Sexy” lampooned fashion’s focus on the model rather than the clothes.  More and more it seems that financial pundits are performing Right Said Fred Forecasting rather than providing any realistic or actionable information.  “Smart Beta” firm Research Affiliates recently put out a study that is summarized by Bloomberg in the article “The Next 10 Years Will Be Ugly for Your 401(k)“.  Their prediction tells us more about the forecasters than it does about the future. The Research Affiliates study gives investors a 0% chance of earning 5% annually for the next ten years with a portfolio of 60% stocks / 40% bonds.  This is a great way to catch investors’ attention.  We know that negative outlooks carry more weight with people than positive outlooks.  A…


Eight Years Ago

Eight years ago, we were in the midst of financial crisis.  Warren Buffett penned an op-ed in the New York Times encouraging investors to “Buy American, I Am”.  So did you buy American?  Too many investors were scrambling to do the opposite. On the front page of the New York Times from that day is a big picture of Joe the Plumber and a chart of oil prices shooting up to $140/barrel and then down to $70.  Inside, economist Paul Krugman lambasted the Federal Reserve and predicted a nasty, brutish, and long economic slump.  Who in their right mind would buy stocks in that environment? The S&P 500 fell another 30%, hitting bottom on March 9th, 2009.  Had Warren Buffett lost his touch?  No.  Since October 17, 2008, the S&P 500 has gained over 150% (over 13%, annualized).  The S&P 500 is up over 250% (over 18%, annualized) since the…


Harvard’s Endowment

Fairway’s third quarter commentary has been published.  Keeping up with the Joneses has distracted Harvard’s endowment from its true mission.  Here is some background on what happened: First, the actual endowment report.  Harvard lost 2% over the last year, driven into the ground by what I call conspicuous sophistication. The Harvard Crimson leads the charge on reporting the results here. There is a pile-on by the WSJ (some good reporting here), NYT, and CNBC among others. Then the students weigh in via the school newspaper.  If there’s one constant Harvard’s endowment can count on, it’s that the students will be vocal critics no matter what.  The horror of their $36 billion endowment lagging peers “is unacceptable”.  When the endowment was blowing the doors off of its peers, students felt that management was getting paid too much.  Now that performance is lagging, students are re-thinking this – maybe it makes sense…


Weekend Reading

Some articles for your down time this weekend.  Don’t forget the Northeast Ohio PKD walk is this weekend! Man clocked doing 88mph in DeLorean Liz Ann Sonders – “The media, more than most, persistently look for a narrative to explain every daily move in the market. It’s rarely that simple.” Why flush your money down your toilet when you can flush your money down the neighbors’ toilet? Update on the Buffet-Hedge fund bet.  Crazy thing is that the collateral outperformed both parties. A good takedown on end-of-the-world ads that run on AM radio by Larry Swedroe. Morgan Housel with some perspective – “Being born in America in 1900 gave you a 79% chance of living for five years. Today, the five-year survival rate for non-Hodgkin’s lymphoma is 82%. So just being a kid 1900 was riskier than having lymphoma is today.”   Photo by Lummi Photography


He Called It

He called 5 market crashes and now has three more dates for you to worry about.  Technical analyst Sandy Jadeja is predicting financial devastation on three dates.  Well, now that I read the article, he doesn’t really say that at all, only that there will be sharp market movements in the future.  He names three dates, but doesn’t really attach any importance to them, only saying to “watch” them.  I hope this sounds fishy to you because this sounds shady as hell to me.  So I did some digging. Who is this guy?  Google Sandy Jadeja and you don’t really find much other than the recent Business Insider articles written about him.  I couldn’t find any education credentials, but I found a video of him speaking with a British accent so he’s probably really smart.  They don’t hand out those accents to just anyone. How does he make these predictions?…


Fed Minutes

On Wednesday, the Federal Reserve released the minutes from its latest meeting.  The minutes of these meetings are basically a form letter now with the Fed relaying its thoughts on the economy and rates via tweaks in the vocabulary used.  Changing “modestly strong” to “strong” can move markets.  There is a cottage industry of folks who live to parse the Fed minutes.  There are hedge funds using computer algorithms to receive, read, and trade on the Fed minutes faster than it takes you to hit reload on the Federal Reserve’s website.  They are obviously a big deal. Here’s what the Fed minutes mean to you: Nothing. Should you be scrambling to reposition your portfolio ahead of the next Fed meeting?  No.  Should you be scrambling to reposition your portfolio in reaction to a Fed meeting?  No. The great Federal Reserve word hunt is the latest in a long line of…


Stripped

It’s been five years since the United States was stripped of its AAA credit rating by Standard and Poors.  Reports of the downgrade were filled with an array of worst case scenarios. There was worry that this would push up borrowing costs.  The 10-year was at 2.33% in 2011.  It is 1.56% today. There was worry that foreign debt buyers would sell US debt en mass.  Instead, we’ve seen a flight to safety as the world continues to snap up US Treasury securities.  At 1.5%-ish, our 10-year is one of the highest yielding government securities as Germany, Japan, and Switzerland flirt with negative rates. The ten year Treasury is a financial standard, often used as the basis for a hypothetical risk-free rate in financial models.  Downgrading the foundation of these models was a very big deal.  However, the S&P 500 is up over 100% since the downgrade, including dividends.  Think about that…


Fire hose

My last post was about uncertainty and volatility and how even in a low vol environment like today, marketers will magnify feelings of uncertainty to sell the product of the month.  Regardless of the statistical fact that volatility is historically low, we as humans seem to be as pessimistic as ever about the future. It is not uncommon to feel reluctance to implement a financial plan due to fears about what’s happening in the world right now.  It is easier to say we’ll wait until the world is less scary before putting money to work.  So when was the world less scary?  30 years ago when the threat of nuclear war was a legitimate concern?  20 years ago when the internet was certain to destroy brick and mortar stores?  10 years ago when the Middle East was in turmoil (ok, turmoil is the only constant in that region)?  There has…


Uncertainty

90% of the email pitches I have gotten this year lament increased uncertainty or volatility in the markets.  That leaves me scratching my head. The idea that this year’s volatility has been problematic is laughable.  The VIX is at 12.16 (as of 7/29/2016), which is actually abnormally low.  This measure of stock market volatility generally spikes during market selloffs or in the wake of macroeconomic events that traders perceive to be negative.  It was over 40 during the drawdown in the third quarter of 2015 and hit about 28 during the lows in February of this year.  After the Brexit vote, it jumped to almost 26.  The VIX averages around 20.  So if we’re using the VIX as a proxy for uncertainty, the world is actually about as certain as it ever gets about the future. The VIX is not a perfect proxy for uncertainty, though.  What about headlines?  Brexit, the Middle…


Brexit

Freaking out about the Brexit?  Keep calm and carry on.  Investors should control what they can control.  Events like the referendum vote or the upcoming US Presidential election fall outside of that realm. Today’s market tantrum is not in reaction to any fundamental change. It is an emotional reaction to the unexpected.  Consensus expert opinion (and bookmaker odds) are suddenly fallible, a revelation to our self-appointed betters (and bettors) who predict doom at every turn.  When I went to bed last night around 1am, futures indicated a 700 point drop in the Dow Jones Industrial Average, or almost 4%.  Why was I awake at 1am?  I was fascinated that right along with my favorite personalities on Twitter, former child-star Lindsay Lohan was live tweeting the referendum results.  This was a strong indicator of the level of hyperbole I expected today.  I was not disappointed. So let’s get the madness out…