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Opportunities in the Bad News?
August 30, 2010
There’s been plenty of bleak news coming out of the equity markets and the U.S. economy as a whole. Are there opportunities hidden within that bad news? Are we now in one of those “blood in the streets” scenarios that Rothschild (and many investors after him) found so appealing?
If you believe in the cyclical nature of markets, the chart from Stifel Nicolaus may be of interest. This chart shows the 10-year rolling return of the S&P Stock Market Composite going back nearly two centuries—current performance (inside the circled area) is at low levels only seen during the Great Depression.
The negative news flow keeps many investors on the sidelines waiting for sunnier days, while those who believe that what goes down eventually comes back up may see an opportunity to snap up equities at bargain prices.
A similar story line may be created for the next chart, which was produced by Old Mutual insurance company. The MSCI World Index is a measure of stock market performance across the world (including the U.S.).
The chart shows how the growth rate can swing wildly based on global events, but what’s clear is that the negative rolling 10-year growth since 2008 is unmatched in the past four decades. Markets have always bounced back, and as you can see on both charts, the best gains tend to be posted early in the turnaround.
One more data point—over the past decade, Treasury bonds have outperformed U.S. equities by nearly 90 percent. This is the widest margin of such outperformance over a rolling 10-year period in more than a century.
J.P. Morgan points out that history shows equities eventually reversing that trend, and when they do, they on average climb more than 250 percent over 10 years—a compounded annual growth rate of 13.6 percent.
The persistent bad macroeconomic news makes another round of “quantitative easing” (i.e., money injection) by the Federal Reserve increasingly likely. This could be good for equities by lowering long-term interest rates, stimulating the economy and boosting valuations.
It’s often said that hope is not an investment strategy, and that’s certainly true. It’s also true that hopelessness is also not an investment strategy. History and cycles are not perfect predictors, but it’s worthwhile to pay attention to these indicators.
The S&P Stock Market Composite is a combination of major market indices used to gauge overall equity performance dating back to the earliest days of the market. Diversification does not protect an investor from market risks and does not assure a profit. The MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
Risk-Taking: It’s Personal
August 26, 2010
Whether we like it or not, biases affect how we make decisions. The personal experiences we have with races, cultures and even brands can have a large effect on what we like and what we don’t.
These biases also impact investment decisions. A study from the University of California and Stanford showed that, when it comes to risk-taking, personal experience carries far more weight than knowledge of market events.
For instance, someone who lost money when the tech bubble burst a decade ago may completely avoid the tech sector - once bitten, twice shy.
The risk-taking study found that people who grew up during the 1970s market doldrums were less likely to buy stocks than those who remembered the 1950s and 1960s boom years. For many, this meant they missed out on the great bull market of the 1980s and 1990s.
We’re seeing a similar scenario play out today as investors hurt in the 2008-09 stock market collapse continue to pour money into Treasury bonds to avoid risk even though Treasury yields are near historic lows.
This chart from Stifel Nicolaus shows the 10-year rolling return of the S&P Stock Market Composite going back nearly two centuries – current performance (inside the circled area) is at low levels only seen during the Great Depression.
The data keeps many investors on the sidelines, while others see an opportunity to snap up equities at bargain prices.
Building and maintaining a portfolio isn’t easy. To help educate investors on the benefits of commodity-linked investments, we’ve scheduled a webcast on September 9 with asset allocation guru Roger Gibson. Roger wrote the definitive guidebook on long-term investing, Asset Allocation: Balancing Financial Risk*, and will be sharing his 25 years of educational experience with investors.
Click here to register and to find out more information about the event.
*By clicking the link above, you will be directed to Amazon.com. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The S&P Stock Market Composite is a combination of major market indices used to gauge overall equity performance dating back to the earliest days of the market. Diversification does not protect an investor from market risks and does not assure a profit.
Another ETF Eye-opener
July 29, 2010
Billions of dollars are pouring into exchange-traded funds (ETFs), but it seems there is still much for investors to learn about how these funds work.
We’ve written in the past about ETF liquidity issues that hurt investors during the May 6 “flash crash,” the trading costs that can drain away real returns for investors and the impact on investors when ETFs trade at a premium or a discount to their underlying net asset value.
This week’s cover story in Bloomberg Businessweek presents another eye-opener about ETFs. The story urges readers to steer clear of commodity ETFs, calling them “America’s worst investment.”
That could be something of an overstatement, but the article does bring up good points about the risks of investing in ETFs that invest in commodity futures.
One of these risks is “contango,” which is when the future delivery contracts for a particular commodity cost more than the near-term contracts. The ETFs don’t want to take physical delivery of commodities, so they sell their futures contracts before they expire and use the proceeds to buy more futures with more distant expiration dates.
Businessweek cites a contango example for crude oil futures affecting ETFs – in May, they sold June contracts with an average price of about $76 per barrel and bought July contracts with an average price of about $80 per barrel. The upshot is that the ETFs had to pay $4 per barrel more to replace the same merchandise – this represents an immediate loss to investors.
The crude oil market is still in contango: at midday today, the near-month September contract was $78, the October contract was $78.45 and the November contract was priced at $79.14. If contango is maintained, the ETFs that buy and sell crude oil futures are likely looking at more losses ahead.
Businessweek also points out professional traders know this weakness of these commodity ETFs and make a lot of money exploiting it.
ETFs can have a place in many investment strategies, but they are still not well understood by investors and that’s a big risk. Before buying, investors need to know what they are getting into so they can make the best decisions consistent with their investment goals.
Stuck in a Turnaround
July 09, 2010
Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?
Remember this scene in Austin Powers when the world’s wittiest spy couldn’t manage to get his cart turned around without getting stuck?It seems today’s world leaders and central bankers are having the same problem. Despite their best efforts, the global economy is caught between recession and recovery, and it’s not clear which direction will prevail.
Pessimists can point to last week’s poor employment report, continued weakness in housing—in the U.S., China and elsewhere—and a slowdown in global manufacturing as indications things will get worse before they get better.
Optimists take heart in the International Monetary Fund’s (IMF) new forecast that the global economy will grow 4.6 percent this year and 4.3 percent in 2011. The 2010 forecast reflects stronger-than-expected growth in Asia. China is expected to lead the way with 10.5 percent growth this year and 9.6 percent next. The other BRIC nations (India, Russia and Brazil) are also expected see growth between 4 percent to 9 percent.
What about the EU’s debt problems spreading to the rest of the world? The IMF played down the idea of contagion—“contagion to other regions is assumed to be limited and the disruption in capital flows to emerging and developing economies to be temporary.”
But it says high public debt levels, unemployment and constrained bank lending amplify any downside risks.
Sovereign debt and slow growth isn’t a big issue in emerging nations. For that and other reasons, we think the BRIC nations and other key markets like Turkey, Indonesia and even Chile and Colombia (Latin America’s best-performing market year-to-date) will continue to provide good opportunities for active managers.
Common Sense from Marc Faber
July 08, 2010
Dr. Marc Faber, the economist, investor and long-time member of the prestigious Barron's Roundtable, offers up some good perspective on investing in his latest Monthly Market Commentary newsletter.
The title of the commentary is “One of the First Duties of the Investment Advisor is Educating the Masses not to Speculate,” and it’s worth grabbing out a few of his key points.
I feel that most investors take far too many risks – often with borrowed money – and fail to diversify sufficiently. They also have little patience, very short-term time horizons and no tolerance for losses. Finally, their expectations about investment returns are completely unrealistic… Most investors buy a stock or make an investment with the view that within a month the return should be between 10% and 20%.
A real return of around 4% per annum is about what an investor (exclusive of costs, and without making the mistake to buy “high” and sell “low”) could expect to achieve over longer periods of time… If you can achieve an annual average real return of just 3% on all your assets (inflation adjusted), you will leave a huge fortune to your children.
For the average investor like myself, I prefer diversification and no leverage. I have seen time and again investors (including myself) be right about an asset class’ future performance but fail to convert those views into any capital gains… All I wish to say to my readers who are not managing risk on a daily basis is that the prime consideration should always be capital preservation and avoiding large losses.
Behavioral finance research has identified many emotion-driven tendencies of investors that lead to suboptimal returns – overconfidence, chasing the herd, holding onto investments too long or holding onto them not long enough, and many more.
Marc’s points above are common-sense basics that investors should be reminded of every so often to help them make better long-term decisions.
Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change