Calyx Thoughts 2/29/2016

I am not happy about the market. I want to be where we were in 2013 and 2014.

I am not happy about the market. 

I want to be where we were in 2013 and 2014 – where we found sectors that were doing better than the growing market and we delivered for ourselves and our clients returns that were better than if our money was in the hands of the broker/advisors.   Not just better, but double the typical large broker/advisor or robo-investor.  Oh, don’t get me wrong, we ARE doing better today by moving our assets to cash (money market funds).  But it doesn’t feel right.  With each news item I am pulled to want to do something.  I’d like to see a way to do much, much better . . .

The Talking Heads are jawboning up GOLD, and they are excited about industrials and commodities, which have jumped this last week.  But I have been looking at the fundamentals and the technical indicators, some of which have over 80% correlation with real tops and bottoms.  No matter how hard I twist them they just won’t show the numbers that say that the all clear has sounded. 

So, I’m not happy about the market. 

I know that these times pass.  I know that the yields will return and the growth will happen.  Meanwhile, it is frustrating. 

Here’s the reality.

I just did a deep dive on the returns of various asset types relative to economic factors over the last 25 years since 1991.  For most of us that covers the majority of our working lives.  Here’s the conclusion: government actions have been the driver throughout the period.  Currencies, interest rates, tax law changes, arbitrary invasions of other countries and the dramatic increase in debt levels explain just about everything.  Today these macro factors are not in favorable conditions.

When comparing the current financial market situation to other periods when volatile markets turned upward into a new bull market, the trends are just not moving the same way.  The trends are not moving up, they’ve rolled over.  They can turn up, but in a down-trend we need to give the benefit of the doubt to conservative assets, just as in an uptrend like 2013-24 we give the benefit to risk assets like stocks. 

We investors are like the small animals living around a herd of elephants.  We don’t control the elephants; our most important behavior is to stay out from under their feet as they move around.  If the elephants are all moving in one direction, then maybe we have a chance to follow one or another that are moving faster than the others and make a bigger return.  We have tools to help us do just that, and they work.  But if they are just milling around, then what is most important is to be where they can’t step on us.  Right now they are milling around. 

Today we are hiding away from the elephants’ feet, and we are in a very safe place.  Today, we see lots of movement around us, and sometime we think we should follow one elephant only to have them be redirected by yet another elephant just as we are getting out of our safe place.  I communicate with other of us small animals that are out there on our behalf to see if there is information to help us learn when the elephants are starting to move somewhere else.  I have models that have been very helpful in previous elephant-milling-around episodes to understanding the movement of the herd.  So far they are at best mixed, and if accepted for what they say, negative.  The elephants are still milling around. 

I’ve researched these periods of milling around.  They take longer than us humans have patience.  We aren’t like elephants, we have a shorter fuse.  This is one of the problems with investing for the long term.  We know that we NEED our money to grow.  We can point to many periods in the past when markets did grow and we did or didn’t invest properly.  We want to get the best of what is available today in the investment world.  But sometimes, like now, the best is maybe a 1% bond that matures in a year.  But THAT doesn’t help me meet my goals, my dreams, my plan.  Hey, as I’ve said many times, Mother Nature is in charge, not us.  Don’t think that you, just because you NEED something, can make the elephants dance.  Obama can’t, Yellen Can’t, Abe can’t, Draghi can’t,  . . .  do I need to go on? 

The best learning from the gurus of investing is that we need to be patient and wait until there is “blood in the street” or an all clear signal.  Today there isn’t either – everyone is just talking.   So we wait for a sign that the elephants are actually moving and we can then follow them.  Meanwhile, they mill around and we wait.  The good news is that there have been several other periods of more than a year with flat and volatile markets.  In each case they resolved clearly and moved in one direction for more than two years afterward with double-digit returns (some up and some down).  This will end soon and the elephants will start to move.

This week we saw a run toward “risk assets” (stocks, emerging markets, commodities, and gold) and our emotions pull us to go there.  But they are moving in lock step with the price of oil – think about it, higher oil is NOT better for consumers or 80% of all businesses.  Yes, it helps the oil companies and banks, but they are NOT the majority of the economy.  The big fear is that the oil explorers go bankrupt, debt is defaulted, and money is lost.  I have to ask you a question: did you lend money to an oil company?  I didn’t think so.  So why do you care?  THEY care because they are pension plans, insurance companies and a boat load of private equity (read this as wealthy families) who are going to be on the hook.  Again, do you care?  I didn’t think so.  Oil oversupply has happened before.  In each case it took more than three years to work out.  We are in about the 3rd inning of an Oil Ball Game. 

Hang in there.  I’m still not happy about it.

God bless you,
Ed & Branson


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