By Brian Nelson, CFA
I was up late last night watching the 10-year Treasury fall below 2%, crude oil drop below $28 (and now below $27) per barrel, and the Dow futures collapse more than 500 points. Asset correlations are going to 1 — so much for modern portfolio theory, right? The benefits of diversification are sometimes absent at the very time you need them the most. If market observers didn’t learn this during the Great Depression, certainly they must have learned it during the Financial Crisis of 2008-2009. That’s why we like cash so much at times. We have a 35%+ cash weighting in both newsletter portfolios.
The Dow Jones Industrial Average (DIA) is now down ~400 points (-2.5%), the S&P 500 (SPY) is off ~45 points (-2.4%), and the Nasdaq (QQQ) is off ~80 points (-1.8%). For individuals being told that being fully-invested in the equity markets at all times (because you may “miss out”) is the only way to invest, we don’t know what to say to comfort you (are you paying lots of fees?). We care – we want you to do well, but we’re not financial advisors. We can never tell you what to do, but it probably goes without saying that anytime someone says you’re going to “miss out,” a healthy degree of skepticism should be in order. Please use your best judgment.
Remember: long-term investing is not holding stocks at all times over the long haul, akin to “buy and hold (pray).” Long-term investing is being engaged in the stock market for a long period of time, making conscious equity selection and capital allocation decisions, selling overpriced equities at times, buying underpriced equities at times, to achieve long-term goals. Holding an index fund (VOO) over the “long haul,” while it has “worked” over long-enough time horizons in the past, may not be the best answer for every investor with a finite holding period going forward (unlike institutions, which have infinite time horizons). Never in history has a 20-year or 30-year forward time period, or the average savings horizon prior to retirement, started with a federal funds rate at 0% like today. In 1980, for example, it was ~20%.
We’ve been saying for some time that a downward move in the equity markets for 2016 is likely, if not probable, and we’ve been positioning the newsletter portfolios as such. Much like we’ve gotten you ahead of the collapse in the mortgage REIT space–American Capital (AGNC) and Annaly (NLY)–and SeaDrill (SDRL) and Kinder Morgan (KMI) and Teekay LNG (TGP) and the master limited partnership (AMLP, AMZ), and the list goes on, we want to keep working hard to help you save your hard-earned money. The value of a service does not only rest in the ideas it generates, but also in the ones it helps readers shy away from. We think we may be the best at the latter. Remember Warren Buffett’s rule No. 1: Never lose money.
Have you seen the iShares Mortgage Real Estate ETF (REM)? It is simply in shambles. We’ve saved advisors millions and millions in this space (you know who you are) – read this piece about the mortgage REIT space how we strive to be the ‘Gold Standard.’ Have you seen the Alerian MLP ETF? It’s down big. We’ve saved investors billions in the MLP space this past year. Have you seen the BDC sector (BDCL)? It’s getting crushed. You may not have even heard of these industries and business models that have collapsed, but trust me, the very illogical and free “research” on these groups has exploded in the blogosphere, and many investors have been hurt as a result. Free research can cost you dearly — it’s just not worth it. Don’t buy it.
The crux behind our ‘5 Concerns About Impending Rate Hikes’ piece continues to play out. For one, the flight into US Treasuries (risk-free assets) and the drop in the 10-year yield suggests global investors are flocking into US-dollar assets, which by extension, has driven the price of the US dollar higher and therefore, as outlined in the ‘5 Concerns’ piece, may further punish dollar-denominated commodities from crude oil (USO) to iron ore and beyond. At the moment, emerging market currencies are falling (the South African Rand has effectively collapsed), and crude oil prices remain under tremendous pressure for the many reasons we have listed in previous pieces. IBM’s (IBM) fourth-quarter results, released January 19, revealed that multinationals may continue to face earnings pressure as a result of currency headwinds. This, too, remains consistent with the ‘5 Concerns’ piece.
We continue to expect tough sledding in the equity markets ahead, and we continue to be very patient. Income investors that have been “lured” into financially-engineered dividends and/or distributions are now paying the price of listening to “free” research in a big way, and those that are currently ignoring the information contained in market prices could potentially be watching permanent capital impairment occur within their stock portfolios. Though we’re not rushing to add to equities exposure in the newsletter portfolios just yet, we plan to put together a comprehensive “watch list” of companies that we may add to the newsletter portfolios in the event of further market pain, but in most cases the very best ideas are already in the portfolios.
Stay tuned! Once last thing, if you’re being talked into adding gold (GLD) to your portfolio, please read here and here. Please understand why gold is different than economic-producing assets… the yellow metal comes with unique risks, even if it is catching a bid during today’s market weakness.