If you read the title of this week’s report and got excited to read all of my pontifications for the coming 12 months, SHAME ON YOU!
It’s certainly that time of year again, when pundits on TV and bloggers alike, trot out a slew of predictions for what is going to happen next year.
I can certainly understand that these predictions are great for debates and there is a certain entertainment value to them but please don’t confuse entertainment with information that is valuable and should be folded into your investment process.
Look Back or Look Forward?
The financial markets are a complex, dynamical system, similar to an ecosystem. In a parallel discipline, weather forecasting, is accurate out to a maximum of about 5-7 days.
So, while not exactly apples to apples, I think we can agree that the similarities between weather and the world economy is that both are extremely complex and hard to model. So, if weather can’t be accurately forecast beyond this Sunday, why do investors tend to give so much weight to forecasts, which purport to know what will happen 12 months from now?
I’ve discussed before how horribly wrong economists forecasts tend to be. In fact, economists and meteorologists are commonly the brunt of many forecasting jokes. And rightfully so.
I figured out early on in this game that one of the clearest edges you can procure for yourself against other market participants is to get really good at understanding what is happening RIGHT NOW.
Don’t focus on 2-month-old economic data just because it was released this week for the first time, and don’t spend your time trying to figure out what will happen in 6 months, or giving too much weight to someone else’s crystal ball.
100% = Nothing
Mark Twain once observed, “Whenever you find yourself on the side of the majority it is time to pause and reflect.”
The contrarian in me would add that if you find yourself positioned along with the crowd, it's time to flip and fade the crowd. Case in point, is an article from MarketWatch, back in April, entitled “100% of economists think yields will rise within 12 months.”
The article cites a Bloomberg survey of 67 economists who all expect rates to rise in the coming six months. This was up from the survey’s 95% in January who thought rates would rise, and 97% of economists thought we would have higher rates in both February and March, leading into the 100% mark in April’s survey.
The day the article came out, US 10-year yields closed at 2.726%. As of Friday, yields have declined 30% since then. Trading with the economists would have had your face ripped off, which frankly is the position that most hedge funds have been in, as they have been net short US Treasuries all of 2014 and as of the most recent positioning reports in Treasury futures, SHORT exposure is at a 3-year high. I guess even “smart money” can be dumb for long stretches of time.
Repeat Yourself til You’re Right
In addition to economists, there is the more typical brand of year-endpredictions by Wall Street execs, pundits and TV personalities. Every publication out there has a panel of experts call the closing price on the S&P 500 for the end of 2015, and other similarly outlandish and non-useful prognostications.
Most of these guys and gals are “perma” something. There are perma-bulls, perma-bears and even perma-the-world-as-we-know-it-is-about-to-end you should buy gold, ammo, canned food and build a bunker.
At some point in time, all of these perspectives might be right. This is the playbook that Jeffrey Rosenberg, Blackrock’s Chief Investment Strategist for Fixed Income, is using. At the end of 2013, Rosenberg went on the record that stocks would outperform bonds during 2014. He’s back again with the same exact forecast for 2015 in a CNBC article published last Thursday.
The article says that “By reasonable measures, equities indeed did beat fixed income in 2014, as Rosenberg had predicted.” Huh? What equity and fixed income markets was the writer looking at? Based on my back of the envelope calculation, as of Friday’s close US Equities (SPY), is up 12.3% year-to-date, while long dated US Treasuries (TLT) is up 26.4%. Fixed income has doubled the return of US equities.
The article goes on to say, “..in the year ahead, Rosenberg doesn't expect to see similar action in the bond market. ‘On the bond side, you're going to be hard-pressed to repeat those kind of bond returns,’ he said. ‘That's going to make it a lower hurdle for stocks, relative to bonds, to outperform in 2015.’”
For the Record
I use a multi-duration, multi-disciplinary process to manage my hedge fund and to manage all biases and trade ideas in The Whaley Report.
At the core of this process, is a philosophy and a focus on being present and better understanding what is happening right now. To that extent, I rely heavily on what the price action of various markets are trying to convey and also how the positioning of investors can and will influence said price action.
Despite all of the “experts” saying rates would rise and bonds would fall and despite the fact that the “smart money” has been net short US Treasuries all year long, TWR has faded that particular call through-out 2014.
Both fixed income markets I cover in the report, US investment grade corporate (LQD) and US Treasuries (TLT), held a LONG bias for 76% of the of this year’s 51 weeks. I was NEUTRAL those markets for 4 weeks this year and SHORT the remaining 8 weeks.
This time of year, for most folks, is when they reflect on what they have (or have not) accomplished during 2014 and they look ahead and start to plan for 2015. This week specifically I would encourage you to spend time thinking about being present.
Yes, being present is a critical piece of a successful and contrarian investment process but its also crucial to a high-quality of life, in most areas.
Enjoy time with your friends and family, be present. Next week, in the final report of the year, I’ll give you the guidelines to evaluate your own investment process and some thoughts on how to improve it as we enter 2015.