An Unrewarded Earnings Season by BlackRock provides a comprehensive view of the current situation.
Key points
- Uncertainty over the sustainability of earnings growth is fueling equity weakness, reinforcing our call for boosting resilience in equity portfolios.
- Global equities fell amid elevated market volatility. Government bonds and the U.S. dollar rallied, while oil prices declined.
- This week’s U.S. employment and inflation data may provide clues about the future path of Federal Reserve rate increases.
Here's another view:
Another interesting take on causes for the declines is presented here. It's all about yield curves.
Predicting market performance is difficult at best. I have found that it is wise to heed the pedigrees of prognosticators and their motives. Most act in the interest of themselves and their organizations. For example, inmates from the professional investment industry are loathe to broadcast doubts about the state of the market for understandable reasons: better to advocate the continuation of good times or the doctrine of holding fast for better times during market corrections.
It makes better sense to read widely and think in a considered way and to arrive at your own conclusions. As a result of doing so, I started to lighten up my position in equities in August 2018 for a variety of reasons:
- concern about the possibility of a major correction in the markets (I have written about this in previous posts.)
- the absence of compelling ideas for new investments and the sense that some investments had run their course for the short to intermediate term
- a desire to have a stash of cash to invest once the market correction had run its course
- a conviction that tax considerations are often over emphasized to the exclusion of other matters when it comes to managing one's portfolios over the longer term
- the luxury of having an income stream which allows me to sit on the sidelines if I decide to trim some expenses
Some portfolios are now more than 70 percent in cash.
My thinking in this matter has been influenced most by the writings of Howard Marks.
His most recent book, Mastering the Market Cycle, is masterful - a collection of his accumulated wisdom. I have written about this book in an earlier post. It is one of top 5 "must reads" on thing financial.
It is difficult to know "where" we are in economic cycles as Howard Marks has taken great pains to note. However, it is possible to detect general trends and take action.
Here is a great article penned in July 2017 by David Rosenberg:
David Rosenberg: Here are 10 tips for investing late (very late) in the business cycle
I am going to quote his tips directly:
So how to invest?
Answer: Be aware of where we are in the cycle and act appropriately by having an optimal portfolio for this part of the business cycle:
1. Raise some cash — sometimes a 1 per cent yield on a three-month T-bill will have to suffice.
2. Reduce domestic cyclical exposure.
3. Focus on companies with strong balance sheets; low refinancing risks.
4. Cut the overall beta of the equity portfolio.
5. Screen more heavily on earnings quality and predictability.
6. Protect the equity portfolio by writing call options or buying puts.
7. Diversify geographically into markets that are in an earlier part of the cycle (many parts of Europe, Asia).
8. Step up investments in dividend growth/yield and in less economically sensitive parts of the market.
9. Credit hedge funds with attention paid to better quality should help preserve capital and provide a recurring cash flow.
10. Long-term bond yields (even zero coupon) never rise during a recession so no matter how low they are, then can indeed go even lower unless this game goes to extra innings.
I wrote to the man, stating that it was one of the best articles I had read that year on things financial.
Here is another take.
Could the “Barbell Strategy” Whip Your Portfolio Into Shape?
We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.
As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:
If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.
https://www.marketslant.com/article/black-swan-author-just-issued-powerful-warning-about-global-debt
My Take
It is difficult to know "where" we are in economic cycles as Howard Marks has taken great pains to note. However, it is possible to detect general trends and take action.
Here is a great article penned in July 2017 by David Rosenberg:
David Rosenberg: Here are 10 tips for investing late (very late) in the business cycle
I am going to quote his tips directly:
So how to invest?
Answer: Be aware of where we are in the cycle and act appropriately by having an optimal portfolio for this part of the business cycle:
1. Raise some cash — sometimes a 1 per cent yield on a three-month T-bill will have to suffice.
2. Reduce domestic cyclical exposure.
3. Focus on companies with strong balance sheets; low refinancing risks.
4. Cut the overall beta of the equity portfolio.
5. Screen more heavily on earnings quality and predictability.
6. Protect the equity portfolio by writing call options or buying puts.
7. Diversify geographically into markets that are in an earlier part of the cycle (many parts of Europe, Asia).
8. Step up investments in dividend growth/yield and in less economically sensitive parts of the market.
9. Credit hedge funds with attention paid to better quality should help preserve capital and provide a recurring cash flow.
10. Long-term bond yields (even zero coupon) never rise during a recession so no matter how low they are, then can indeed go even lower unless this game goes to extra innings.
I wrote to the man, stating that it was one of the best articles I had read that year on things financial.
Here is another take.
Could the “Barbell Strategy” Whip Your Portfolio Into Shape?
We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.
As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:
If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.
https://www.marketslant.com/article/black-swan-author-just-issued-powerful-warning-about-global-debt
My Take
- You never get poor by taking profits or by failing to remember Herr Buffet's first and second rules of investing - not to lose money and not to forget the first rule.
- It's always difficult to predict market cycles or even know where you are in a cycle. It's akin to the "boiling frog" syndrome (Google it if you don't know the term) but with the difference that a point is reached sometimes where a sudden event disrupts the gradual process e.g. the frog is extracted from the pot and eaten. This said, there are clues which can point to where we are in the cycle. Howard Marks provides guidance.
- I have trimmed the portfolios considerably, leaving what I consider are resilient stocks and holdings which might might do well in market uncertainty and potential inflation scenarios.
- I will explore the potential to adopt some of the strategies noted above with a view to protecting my stash.
- I will busy myself in the search for compelling investments with the thought that the market cycle will eventually present investors with some compelling investment possibilities. The process may take a few years but I feel that patience will be rewarded. This is not to say that I won't hesitate to invest at any time if attractive opportunities arise.
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