The overdue market correction analysts and pundits have been waiting for may have arrived with the breakdown of the S&P. It has been a two stage process, with Japan breaking first and the U.S. and the rest of the world following suit. One of the interesting aspects of this correction is that bond yields are moving higher as stock prices have been moving lower. In Japan the focus has been on a bond yield rising in a nation with very high debt levels. In the U.S. yields have been going up too, and the buzz has been that the Federal Reserve may start “tapering” down their $85 billion bond buying spree (known as QE Infinity).
I have been on the road quite a bit recently, appearing at several professional conferences around the country. One fellow speaker at a conference in San Diego was Dr. Christopher Geczy, a finance professor at the Wharton School and the new academic director of the Wharton Wealth Management Initiative. His impressive resume features a B.A. in economics from the University of Pennsylvania and a Ph.D. in finance and econometrics from the Graduate School of Business at the University of Chicago. Professor Geczy’s talk was both much anticipated and well received.
There is an entire school of investing that would have you screening for stocks that are making new lows in price on the assumption that the best values can be found in that group. I recently wrote about the strange psychological wiring of value investors who believe that they can outsmart Mr. Market and find investment ideas that are mispriced by the crowd. They are supported in their belief by the study of momentum and crowd psychology which shows that investors often over react to bad news and sell securities at prices well below their intrinsic value. With steely nerves and an ability to see value that the rest of the market doesn’t see, value investors are the heroes of the professional investment universe (foremost among them, of course, is Warren Buffett).
The last two days in gold have been downright nasty, as it has lost roughly 13% of its value in that time. That is clearly not what one would have expected in a so called “safe haven” asset class. As always in markets, with a huge move comes big media attention when everyone gets to weigh in on why gold has plummeted over the past few days. Some say large hedge funds have been forced to liquidate, some think the safe haven trade is over, and some believe the great rotation might be a commodity rotation into equity.
The way we explain our process for managing portfolios has significantly changed over the past few years. It seems that both retail and institutional investors want to hear more about how ‘the sausage is made’ than they did a decade ago. And why not? The financial markets have been difficult to navigate since the market topped in the year 2000 and good consumers want to know how we might fare if the markets remain challenging in the future. While I appreciate the work that has gone into fine-tuning our message, one aspect of our investment process is just as relevant as it was when we started tactically and actively managing portfolios in October 2002: We try to find investment opportunities that have a great story.
For U.S. investors, foreign currency fluctuations can be a critically important – but much overlooked — factor to consider when investing in international stock or bond fund. If a foreign currency is appreciating relative to the U.S. dollar, it can provide a boost to returns, but if the currency is weakening, it can detract from them.
One of the hot investment phrases streaming through the investment media lately is “currency wars.” This refers to the idea that governments around the globe are fostering weak currency policies in order to export their way to prosperity at a time when world aggregate demand is weak. Japan is the latest country to weaken its currency, as new leadership has recently diluted the value of the Yen materially in an attempt to jumpstart their way out of deflation. So with all these countries racing their currencies to the bottom, shouldn’t gold be the store of value that we can all depend on? One look at the chart below tells you that gold has not received the memo.
Every now and then I scan various Exchange Traded Fund (ETF) options to find out what is working to determine if new trends are emerging. During this scanning process I recently came across a very interesting industry that looked quite promising to me. It has been wise for investment professionals to ignore this industry over the past six years, but this year could be different. Fair warning: Before I proceed, you need to leave your opinion at the door.
We’re three weeks into the football season so it’s time to break out the tired sports metaphors. Today’s column is titled, “Blocking and Tackling,” which I’m using as a new and interesting way to announce that this is a good time to review the fundamentals of Pinnacle’s investment philosophy. With luck, we’ll soon have an opportunity to write about how to invest without being “blind-sided,” how avoiding a bear market allows us to not have to “drop back ten yards and punt,” and how looking at trailing returns is an exercise in “Monday morning quarterbacking.” But for now, let’s concentrate on blocking and tackling.