As we enter a new decade and prepare to navigate the financial markets, it would be helpful and prudent to list the lessons we have learned from the past 10 years so we may be better prepared for the next 10. Below is a brief but important list of those lessons which have taught us the most.
1) The Federal Reserve has more power and influence on capital markets than we ever thought possible.
2) The Federal Reserve is capable of being out of touch with reality for extended periods of time - "what housing bubble" or "the sub-prime crisis is contained."
3) Poor political leadership and decision making can have an adverse impact on an economy in a relativity short period of time.
4) Members of Congress are more dysfunctional and partisan than ever and have lost perspective of what is important to the American people.
5) Non-traditional asset classes can be great investments for extended periods of time - think gold, commodities, and high yielding currencies.
6) Volatile markets can last longer and can be more violent than previously observed in market history. The past decade saw two multi-year declines leading to a negative 10 year cumulative return in stocks.
7) Developed countries, such as the U.S. are well past their prime compared to developing markets.
We believe the next decade will have its own share of ups and downs. Taking into account the lessons from the past decade, we believe there will be many opportunities in non-traditional asset classes as well as non-standard tactical allocation strategies.
Friday, January 29, 2010
Friday, January 22, 2010
China Growth Beats Expectations
Gross domestic product in China rose 10.7% from a year before, according to a statistics bureau report from Beijing. For the full year, GDP gained 8.7%.
The report has stoked speculation the central bank will begin a interest rate campaign on its benchmark interest rate and tighten restrictions on the nation’s lenders. According to reports, minutes after the release, the People’s Bank of China guided three-month bill yields higher, essentially raising interest rates.
The world may again this year count on China as the biggest engine of growth, with the International Monetary Fund projecting it to expand 9 percent, compared with 1.3 percent for developed economies.
Retail sales in China rose 16.9 percent after adjusting for consumer price changes, the bureau said. The government stated the gain was the biggest since 1986.
Fourth-quarter economic growth was driven by an unprecedented $586 billion stimulus package, subsidies for consumer purchases and a credit-fueled investment boom. The property market has rebounded and a 13-month slump in exports ended last month.
China’s 2009 GDP growth rate was down from 9.6% in 2008. The statistics bureau revised its estimate of growth in the third quarter of 2009 to 9.1 percent from 8.9 percent. It changed the first-quarter figure to 6.2 percent from 6.1 percent.
Friday, January 15, 2010
Smart / Dumb Money Confidence
We have not reviewed the Smart/Dumb Money Confidence chart in some time (although we do look at them every day), so we thought it would be a good idea to take a look at the most recent chart to see how confidence is shaping up at the beginning of the year. The chart comes from Sentimentrader.com, a site that provides us with various sentiment indicators.
As a refresher, the Confidence indices are presented on a scale of 0% to 100%. When the Smart Money Confidence is at 100%, it means that those most correct on market direction are 100% confident of a rising market, and we want to follow their direction. When it is at 0%, it means that the Smart Money are 0% confident in a rally, and we want to be more defensive and hold more cash.
We can use the Dumb Money Confidence in a similar, but opposite, manner. For example, if the Dumb Money Confidence is at 100%, then that means that the Dumb Money investors are supremely confident in a market rally. And history suggests that when these investors are most confident, we should exercise extreme caution. When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be concentrating on the long side, expecting these traders to be wrong again and the market to rally.
In practice, the Confidence Index numbers rarely get below 30% or above 70%. Usually, they stay between 40% and 60%. When they move outside of these levels, it’s usually time to pay attention.
As you can see by the chart above, the Smart Money confidence has recently dropped below 40%, or below the first band of 40% to 60%. The Dumb Money confidence has recently risen to 75%. This reading is above both the 40% to 60% band and above the rare band of 70%. Again, this doesn't mean that markets will decline immediately and the markets could actually continue to move higher in the short-term. However, the risk/reward equation is definitely not in our favor and the probability of a decline in the markets increases the higher this number becomes, especially if the Smart Money Confidence moves toward the 30% level. This confidence index coupled with the Investors Intelligence survey numbers from last week suggests that investors are becoming very comfortable with the markets continuing to rise; which should make us a bit cautious.
As a refresher, the Confidence indices are presented on a scale of 0% to 100%. When the Smart Money Confidence is at 100%, it means that those most correct on market direction are 100% confident of a rising market, and we want to follow their direction. When it is at 0%, it means that the Smart Money are 0% confident in a rally, and we want to be more defensive and hold more cash.
We can use the Dumb Money Confidence in a similar, but opposite, manner. For example, if the Dumb Money Confidence is at 100%, then that means that the Dumb Money investors are supremely confident in a market rally. And history suggests that when these investors are most confident, we should exercise extreme caution. When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be concentrating on the long side, expecting these traders to be wrong again and the market to rally.
In practice, the Confidence Index numbers rarely get below 30% or above 70%. Usually, they stay between 40% and 60%. When they move outside of these levels, it’s usually time to pay attention.
As you can see by the chart above, the Smart Money confidence has recently dropped below 40%, or below the first band of 40% to 60%. The Dumb Money confidence has recently risen to 75%. This reading is above both the 40% to 60% band and above the rare band of 70%. Again, this doesn't mean that markets will decline immediately and the markets could actually continue to move higher in the short-term. However, the risk/reward equation is definitely not in our favor and the probability of a decline in the markets increases the higher this number becomes, especially if the Smart Money Confidence moves toward the 30% level. This confidence index coupled with the Investors Intelligence survey numbers from last week suggests that investors are becoming very comfortable with the markets continuing to rise; which should make us a bit cautious.
Friday, January 8, 2010
Sentiment Reaching Extremes
Greetings and welcome to a new decade! 2010 should prove to be an interesting year for the both the economy and capital markets. Our first update on the year focuses in on market sentiment.
Each week the Investors Intelligence service conducts a survey of some 150 financial newsletter writers to determine whether they are leaning bullish or bearish in their opinions to subscribers. The resulting Investors Intelligence Survey compiles the data to arrive at a weekly percentage of bulls vs. bears. The Survey is considered a contrarian indicator, since extremes in either direction are sometimes signals of reversal of the market’s current trend, even if only in the short-term. We like to monitor this survey as it tends to be a fairly reliable indicator. Below is a current chart of bearish sentiment followed by a chart of bullish sentiment.
While current bullish sentiment has not yet reached an extreme reading compared to the past five years at a level of 51.6%, the current bearish sentiment reading of 15.6% is the lowest level in the past five years and has even dropped below the low reading recorded at the market peak in the Fall of 2007. Of course, this doesn't mean the markets are headed into a steep decline in the near term. While this outcome is certainly possible, the readings tell us that now is not the time to be overly enthusiastic as the risk/reward profile is skewed more towards the downside and odds favor a pull back or correction. If a pull back does happen, we should expect these numbers to reverse direction with bullish sentiment decreasing and bearish sentiment increasing, creating better risk/reward opportunities as investors become less bullish and more bearish.
Each week the Investors Intelligence service conducts a survey of some 150 financial newsletter writers to determine whether they are leaning bullish or bearish in their opinions to subscribers. The resulting Investors Intelligence Survey compiles the data to arrive at a weekly percentage of bulls vs. bears. The Survey is considered a contrarian indicator, since extremes in either direction are sometimes signals of reversal of the market’s current trend, even if only in the short-term. We like to monitor this survey as it tends to be a fairly reliable indicator. Below is a current chart of bearish sentiment followed by a chart of bullish sentiment.
While current bullish sentiment has not yet reached an extreme reading compared to the past five years at a level of 51.6%, the current bearish sentiment reading of 15.6% is the lowest level in the past five years and has even dropped below the low reading recorded at the market peak in the Fall of 2007. Of course, this doesn't mean the markets are headed into a steep decline in the near term. While this outcome is certainly possible, the readings tell us that now is not the time to be overly enthusiastic as the risk/reward profile is skewed more towards the downside and odds favor a pull back or correction. If a pull back does happen, we should expect these numbers to reverse direction with bullish sentiment decreasing and bearish sentiment increasing, creating better risk/reward opportunities as investors become less bullish and more bearish.
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