Super-Rich buying Gold, Commodities, Reducing Hedge Fund Exposure

Monday, November 16th, 2009

Steve Lodge, FT.com, reports that the super-rich are opting for gold and commodities, and cash, and reducing hedge funds exposure.

The investment preferences of the world’s wealthiest families have shifted significantly in favour of gold and other commodities and away from hedge funds in the wake of the financial crisis, according to a survey of family offices and advisers of the super-rich.

Two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, said that super-rich families are now more likely to invest in gold and other commodities. They are also more interested in bond investments and in holding higher amounts of cash as part of an “instinctive retreat to ultra-safe asset classes”.

Read the whole article here.

Tags: Advertisement, Asset Classes, Bond Investments, Buying Gold, Commodities, Favour, Financial Crisis, Gold, Gold Commodities, Gold Fund, Hedge Fund, Hedge Funds, Invest In Gold, Investment Preferences, Respondents, Rich Families, Two Thirds, Wealthiest Families
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Jeremy Seigel: Stocks for the Long Run (Still Alive)

Friday, October 9th, 2009

Jeremy Siegel, Wharton School Professor, has recently published an op-ed in FT.com, arguing in favour of his  “Stocks for the Long Run” thesis, which has been challenged in recent times as a result of the ‘lost decade’ in equity markets.

Here is an excerpt:

A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches. Since 1871, the three worst 10-year returns for stocks have ended in the years 1920, 1974 and 1978.

These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over the next 10 years.

In fact for the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.

Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average.

Stocks also swamp the returns on fixed-income assets over the long run. Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871. And over 20-year periods, stocks bested Treasuries in all but about 5 per cent of the cases.

Read the whole article here.

Tags: 10 Years, Bear Market, Bottom Quartile, Excerpt, Favour, Fixed Income, Future Returns, Government Bonds, inflation, Jeremy Seigel, Jeremy Siegel, Periods, Rough Patches, School Professor, Stock Returns, Stocks, Stretches, Treasuries, Treasury Bonds, Wharton School
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Stocks vs. Bonds: What’s Next?

Friday, October 9th, 2009

A very interesting chart from Leuthold Group points out that this would be the third time since the 1920s that we have emerged from a period in which bonds have outperformed stocks.

In the periods following this re-emergence from bond superiority, stocks enjoyed massive outperformance. The first of the three periods outlined in the chart, was the 1930s bust, the second was 1949 thru 1955.

Jeremy Siegel, too, offers the following argument in favour of “stocks for the long run,” from his recent op-ed in FT.com (worth reading):

A look at history shows that the recent experience is not uncommon and excellent returns are available to those who survive rough patches. Since 1871, the three worst 10-year returns for stocks have ended in the years 1920, 1974 and 1978.

These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over the next 10 years.

In fact for the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.

Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average.

Both Leuthold and Siegel make a notable case for the future of stocks, though Leuthold focuses on 5 year periods and Siegel on 10 year periods.

Earlier this year, we featured Robert Arnott’s thesis on Bonds for the Very Long Run (Bonds: Reversion Cuts Both Ways); Arnott focuses on the past 40 years:

For four decades, from time to time, we hear this question: Why bother with bonds at all? Bond skeptics generally point out that stocks have beaten bonds by 5 percentage points a year for many decades, and that stock returns mean-revert, so that the true long-term investor enjoys that higher return with little additional risks in 20-year and longer annualized returns.

Recent events provide a powerful reminder that the risk premium is unreliable and that mean reversion cuts both ways; indeed, those 5 percent excess returns, earned in the auspicious circumstances of rising price-to-earnings ratios and rising bond yields, are a fast-fading memory, to which too many investors cling, in the face of starkly contradictory evidence. Most observers, whether bond skeptics or advocates, would be shocked to learn that the 40-year excess return for stocks, relative to holding and rolling ordinary 20-year Treasury bonds, is not even zero.

Bill Gross, PIMCO’s Bond King, Chief Card Counter and Handicapper, has been exchanging high-grade corporate bonds for longer-dated government bonds, out of concern for deflation.

Is it possible they are all right? Bonds are forecasting deflation and stocks are forecasting reflation. The track record of the bond market, however, as a forecasting tool has proven to be more accurate historically. Pragmatic Capitalist says:

Bond investors (who tend to have a longer time horizon) are forecasting a long battle with deflation.  Equity investors (who tend not to think much farther than one quarter into the future), on the other hand, are putting their money on the line in the hopes that the reflation trade is alive and well.

Unfortunately for equity investors, they have a poor record of forecasting the future when compared to bond investors.   There have been 4 famous cases of such bond and stock divergences in the last 20 years.  The most famous is the summer of 1987.  We all know what occurred then.  The other three cases were fall ‘94, summer ‘98 and winter 2000.   All three preceded declines in the market.  Of all 4 instances, three of them preceded 15% declines in the S&P 500.

The strongest case for equities today seems to rest on the sheer amount of cash sitting on the sidelines; $10-trillion in the US and $1-trillion in Canada. Its a weak argument - investors do not invest simply because they have the cash, and these days investors aren’t exactly inspired.

James Bianco, of Bianco Research, however, (via WSJ), is skeptical of this simplistic theme:

“If you look at the mutual-fund flows there is a record amount going into bond funds. Forty-two billion dollars went into bond funds in August, which is an all-time monthly record. In fact, the all-time monthly record, I believe, for stock funds was $55 billion back in February of 2000. So it’s pretty close to the stock-fund record. But when you break it down, what you’ll find is that short-term muni funds, and short-term corporate funds, those are the funds that are getting huge, huge inflows.

The short-term corporate funds are up 12% this year. And as we talk right now, the S&P 500 is up around 16% this year and the Dow is up about 11% this year. That’s including dividends. So my conclusion was, “Yes, there’s a lot of money that’s built up in the cash on the sidelines. Yes, it is going to come out of that zero interest rate funds. And its going into short-term bond funds, which by the way are performing pretty much in line with the stock market. So don’t hold your breath. You’re going to be waiting a long time before you see that money ever matriculate into the stock market.””

And,

“Now a couple things about that. The first one is I hate when they say, “There’s $3.5 trillion on the sidelines and that’s a whole lot of money.” It implies that all of that money should be put in investments like the stock market. That’s not true. The vast, vast majority is in transactional balances.

It’s money that is going to be needed in a very short period of time, like, within a year. It’s going to be spent on something. They’re almost like checking accounts, if you want to think of it that way. It’s like somebody saying, “You’ve got $10,000 dollars in your checking account, why don’t you $10,000 worth of stocks?” And the answer is, “Well because I’ve got to pay my credit card bill and my rent.”

The strongest case for the bond market is coming out of PIMCO’s thesis, which calls for a ‘New Normal,” a future of De-Leveraging, De-Globalization, and Re-Regulation. The three elements combine as a recipe that ultimately results in stable and stronger dollar outcome as debt repayment repatriates cash from abroad as well as domestically into the credit and bond markets. A strong dollar on this basis results in falling prices, thus the case for deflation.

Bottom line: This may be time to use the equity market’s strength to rebalance out of equities in favour of government bond and money market allocations.

Tags: 10 Years, 1920s, 1930s, Bottom Quartile, Bust, Canada, Emergence, Favour, Future Returns, Government Bonds, inflation, Jeremy Siegel, Periods, Robert Arnott, Rough Patches, Skeptics, Stock Returns, Stocks, Stocks Bonds, Stretches, Superiority, Thesis, Third Time
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Marc Faber: Stocks Will Rise On Weakening Dollar

Monday, September 14th, 2009

Marc Faber says that stocks will rise on the weakening dollar, in an interview with Bloomberg Radio’s Pimm Fox. But isn’t the weak dollar a sign that things are not so good in the US, and how is that good for stocks? On the surface this seems like just the sort of statement I’d expect to hear from Marc Faber, author of Gloom Boom Doom. Faber is often painted with the same brush as many other Doomsayers, when in reality, Faber has predominantly been forecasting the eventual decline of America’s hegemoney.

Faber is, after all, based in Hong Kong, so he has many years on us  in terms of witnessing an Asia in the midst of an economic transformation not seen since the industrial revolution that reshaped the global economy  in the eighteenth and nineteenth centuries.

This school of thought falls into a similar basket as Bill Gross’ ‘New Normal,’ where the hallmarks of today’s global economy are Delevering, Deglobalization, and Reregulation - the DDRs.

It is in fact, delevering and de-risking, i.e. selling assets in favour of cash, which fortified the US dollar before March, while the market was in liquidation, and it is now the chase back into the risk trade out of cash that is weakening the dollar. As the momentum picks up for stocks and risky investments, the dollar suffers.

Which comes first, the weakening dollar or the stronger equity market? Doesn’t matter, in fact the two go hand-in-hand.

Click play to listen to the Faber interview here:

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Bottom Line:  A rising dollar may indicate flight to safety, and a falling dollar may be good indication of a return to risk. Basically, zero-interest rates are driving investors back to the market, because as Faber says, retirees can’t live on zero interest, and that is why the dollar has gone down. Investments made in anything other  than cash (e.g. municipal bonds) will result in a weaker dollar.

On days when stocks are strong, the dollar is weak, and vice versa. To answer my earlier question, Faber says the stronger equity market follows the weakening dollar, and a weaker market follows strengthening of the dollar.

Faber is always interesting to listen to. He coins himself a depressive optimist.

He is depressive that the same people who brought us the Nasdaq bubble, then the Housing, Credit and Refinancing bubble, and the economic bounces in between are the result the so-called Greenspan and Bernanke ‘puts.’ This idea that the economy can be managed by policymakers, and that big recessions are a thing of the past are most troubling and Faber believes that the same people are doing it all over again; i.e. creating yet another bubble, and not really taking care of the real problems of the economy other than to pass the bag, and leave middle class Americans holding it.

On the upside, Faber is optimistic and says that despite David Rosenberg saying the market’s rally is built on quicksand, he sees a lot of breakout moves on individual stocks, on strong volume from bases they formed during the last 6-9 months, and that, he has to respect.

“Its not the type of bull market that I like, that is based on sound fundamentals,” he said. Though he feels equity markets could go higher, he also believes that valuations are not that attractive anymore. In other words it is a strong market based on policies that crowd the market out of the dollar, and as long as the economy is weak, interest rates will remain closer to zero.

David Rosenberg says equity valuations are at risk, if earnings do not live up to economic expectations. In the end, Faber is less than optimistic about the economy, and feels that Bernanke’s policies could still lead to depression.

On another note, if a rebalancing of the dollar is due, to maintain global stability, then stocks could correct if you follow this line  of thinking.

Source: Bloomberg on the Economy, September 10, 2009, Pimm Fox Interviews Marc Faber.

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Tags: Bill Gross, Bloomberg Radio, Ddrs, Decline Of America, Doomsayers, Economic Transformation, Eventual Decline, Favour, Global Economy, Gloom Boom Doom, Hallmarks, Hege, Industrial Revolution, Marc Faber, Midst, Municipal Bonds, Nineteenth Centuries, Optimist, Pimm, Risky Investments, School Of Thought, Weak Dollar
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10-year bonds may provide early warning

Thursday, September 3rd, 2009

The 10-year US treasury is indicating a substantial change in asset allocations in favour of bonds, as yields have returned to May ‘09 levels. This again has been a period where bonds and stocks have been rising together, and provides an early warning there may be trouble ahead for the economy and equities, as large investors are rotating  away from “risk” trades, in the midst of stronger equity market liquidity.

Chart: ZeroHedge

Tags: 10 Year Bonds, Ahead, Asset Allocations, Economy, Equity Market, Favour, Investors, Market Liquidity, Midst, Risk Trades, Stocks, Substantial Change, Us Treasury
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Hugh Hendry: Commodities Stocks to Remain Weak?

Tuesday, December 16th, 2008

Hugh Hendry, the eloquent and outspoken CIO, Eclectica Asset Management, in an appearance on CNBC’s PowerLunch (Dec. 10) shares his thoughts on agriculture commodities stocks such as Potash, and Syngenta.

Among other things, Hendry makes a forthright confession that he was wrong earlier this year to make the call to be long commodities stocks. He continues on to say that when he realized he was wrong, he promptly sold them too. Hendry runs a long-only Agriculture fund, as well as his primary hedge fund, and has been controversial in some of his choices to oppose his funds’  mandates at times in favour of cash or government securities.

His main quid pro quo is his caution that although commodity stocks  could revisit highs, we could be waiting as many as 10 years for it. Its a must watch.

In a 7-minute segment earlier the same day, Hendry discussed the idea that as the financial crisis deepens, civil liberties are curtailed by governments eager to put an end to falls in share prices and economies. This is an insightful discussion, a must-watch.

“The government has gone to war, it is an economic war. And in a war the government takes a larger and larger role in the society. That’s fine, you have to accept that,” Hendry said. “What is concerning is the erosion of civil liberties.”

The ban on short-selling financial securities in the UK is one example of erosion of civil liberties, another is a statement made in parliament last week which opens the way to silencing the press during financial crises.

The Treasury Select Committee said that it will look at the role of the media in financial stability and whether financial journalists “should operate under any form of reporting restrictions during banking crises”.

“We’re only a year into this and suddenly, already, our liberties are being brought back, brought in,” Hendry said.

Tags: 10 Years, Agriculture Commodities, Array, Asset Management, Caution, Choices, Civil Liberties, Cnbc, Commodity Stocks, Confession, Economic War, Erosion, Favour, Financial Crises, Financial Crisis, Financial Journalists, Financial Securities, Financial Stability, government securities, Hedge Fund, Hugh Hendry, Mandates, Minute Segment, Potash, Powerlunch, Role Of The Media, Share Prices, Syngenta, Treasury Select Committee
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