winding down for the year

For professional equity investors the final two weeks of the calendar year are perhaps the only time when they can truly rest.  Two reasons:

–virtually every professional is evaluated and compensated on performance over periods–usually one year, sometimes one and three, sometimes one, three and five or other longer time frames–that conclude on December 31st.  As a result, by mid-December one’s personal financial fate is pretty well sealed.  Even those who are very close to thresholds where pay can go way up or way down may elect to remain on the sidelines with fingers crossed.  That’s because the short-term direction of prices is notoriously hard to predict–in fact, academic research argues that fluctuations over, say, a week or two are purely random.  This means yearend tweaks are just as likely to backfire as they are to make performance better.

This is the only time of the year when professionals feel completely safe in taking their hands off the tiller and resting.  It would be crazy not to take the opportunity. Trading volume for the S&P 500 yesterday was about 20% below average, for example, marketing, I think, the start of the yearend lull.

–accountants for asset managers like the books to close neatly.  They don’t want to have trades that have been agreed to in December not settle before yearend, instead hanging over into the following year.  Although every stock exchange has rules about how many days after being agreed to trades are supposed to settle, not all do.

As a result, most asset management companies “request” that their portfolio managers not enter into new bargains during, say, the last two weeks of the year.  Adminstrators take a huge risk if they order PMs to take their hands off the money:  PMs have a fiduciary obligation to do what’s best for their clients, not what’s best for the accounting department.  And there are those poor few who are hoping to rescue their year through a flash of Christmas brilliance.  Still, everyone understands what they’re being asked to do.  And almost everyone jumps at the chance to comply.

Advice for you and me:  watch prices anyway. Sometimes weird price fluctuations happen during the last couple of trading days of the year.  The fact that almost every professional is away from work can cause last-minute buy or sell orders have an unusually large impact on prices.  This can be a great chance to take the other side of the trade, since most of us don’t really care that our trade will settle in the first week of January.

the FT: America’s reading problem

I like Gillian Tett, the US managing editor for the Financial Times.  It’s partly because she has a PhD in Anthropology, partly because she has a wide breadth of interests that allow her to write much more interesting columns than the average journalist.

Her latest is about “America’s Reading Problem,” an article that contains the results of Department of Education research documenting the fact that ” 14 per cent of the adult population (or 32 million people) cannot read properly, while 21 per cent read below a level required in the fifth grade. And 19 per cent of high-school graduates cannot read.”

Hartnell College, a community college in Salinas, CA has a powerpoint online that contains a more detailed version of the same information.

Ms. Tett points out that this reading deficit, which has persisted in the US for a long time, tends to reinforce the distinction between haves and have-nots.

I have two thoughts:

–if government economic policy is reliant totally on monetary measures and not on education reform, no wonder 0% interest rates + quantitative easing for a long time have been necessary to  provide the (low skill) jobs that will shrink the unemployment rate.  Imagine what those jobs must be like.  It also seems to me very likely that higher rates will make jobs for the illiterate disappear very quickly.

–I’ve been unable to find the original government source document referred to, although the results are in the Tett article and in many others that pop up through an online search.   The only Department of Education report I can find says simply that literacy rates in the US are similar to those elsewhere in the OECD.

How odd.

I normally search government websites several times a week, so that’s maybe a thousand instances.  This is the first time something like this has happened.


a reply to a reader comment

I spent a lot of time over the weekend thinking about how to reply to a comment from an astute regular reader about my post on Friday.

Here it is (edited slightly):

Thanks for your comment, Chris.

I agree completely with most of what you say. I think the US stayed with easy money for far too long.  As you point out, we’ll find out how damaging the speculative excess this has spawned has been as rates begin to rise. At the same time, the internet has changed the dynamics of ownership of physical assets. The aging of the population plus the unwillingness/inability of homeowners to use the equity in their houses to fund current spending will also be drags on consumption in the US. And, despite our warts, we’ve come out of the big recession in better shape than the rest of the developed world. So we now face a complex, slow-growth world with lots of challenges for stock and bond markets.

As to mining commodities, though, I continue to think that they exist in their own boom-bust worlds whose main feature is that participants will add capacity, even though history has shown that this will destroy pricing, so long as they have positive cash flow and can get bank loans. Oil and gas are a little more complicated, but let’s ignore that. The ensuing slumps can last a decade or more. It’s the odd nature of these industries that they produce more when prices decline rather than less. I regard the current weakness in the prices of mining commodities as resulting from industry weirdness rather than a recession-induced falloff in demand.

Of course, this is an optimistic viewpoint and I’m an optimist, so I could easily be wrong.

Does it make a difference whether oil and iron ore price declines are harbingers of general economic weakness or are just playing out a new day in their Groundhog Day existences?

I think it does.

If I’m correct, then mining weakness–and the “lost decade” it seems to predict for countries radically dependent on mineral production, although important, is one of many entries to the list of transformational issues facing today’s world. That list includes:

–Millennials vs. Baby Boomers
–China’s emergence as the world’s biggest economy
–the disruptive power of the internet
–political reaction to the failure of the governments of the US, EU and Japan to enact appropriate fiscal policy, defending entrenched special interests (many of them on the wrong side of change) instead.

In the world I envision for 2016, stocks will go basically sideways.  It will be hard to make money by owning them, but with careful selection it’s possible.

If, on the other hand, if you’re right that mining commodity price weakness foreshadows global economic contraction that just hasn’t hit mainstream indicators yet, then my take is much too positive. Cash will be the best place to be.

oil …again

After a long period of the stock market thinking that lower oil prices are a good thing (for all sectors except Energy), the market now appears to have adopted the opposite view.

Over the past short while, when the spot price, a mere shadow of its June 2014 self, moves down, so too does the S&P 500.  Economically sensitive stocks get clunked more than the average equity.   And vice versa.

To me, this seems so obviously wrong   …and yet it’s happening.

This wouldn’t be the first time that the market got a crazy idea into its head and ran with it for a while.  Remember in 2009 when a number of prominent hedge fund managers proclaimed that the Fed’s decision to lower interest rates would quickly cause runaway inflation and that the only protection against this government folly was to stockpile gold?

Here we are six years later, with still no inflation to speak of.  Gold had an amazing two-year run, which had nothing to do with the Fed, and everything to do with demand for the yellow metal in India and China.  The gold price has since lost 40% of its value as new mine supplies have come into the market and as domestic developments in Indian and China have lessened their ardor for money-like stuff they can bury in the backyard.

It’s tempting to think that the reversal of view about oil is only occurring because most big market participants have closed their books for the year and are drinking egg nog on the sidelines.  But I think it’s a dangerous habit to cultivate–the idea that I’m right, the market’s wrong and it will soon come to its senses.  The reality is that I’m wrong maybe 40% of the time.  Also, it could be that soon is the operative word.

At times like this, I go through this mental checklist:

  1.  How dependent is my portfolio on this one idea?  The riskiest situation is one where my holdings end up being an all-or-nothing bet on a falling oil price being good, without my realizing it.
  2. How likely is it that, contrary to my view, the market turns out to be right?
  3. If I wanted to rearrange my holdings to neutralize the effect of lower oil–meaning, in this case, becoming more defensive–how would I do it?  Would these changes make any difference to my performance expectations?  If not, why don’t I make them?
  4. If I were managing professionally, I’d ask if I should do some of this in any event, to guard against falling behind my peers (and ultimately getting fired–even worse, maintaining a portfolio that would pay off spectacularly for my replacement).

Most often, when I go through this process I find something in my portfolio that I don’t like and change it.  Invariably the move improves my performance.  But most often it has nothing to do with my original worry.

As to the market’s current fixation on oil, I have three thoughts:

–for now I’m content with what I hold and hope to ride out the craziness,

–I think this latest market kerfluffle brings us closer to the day when we’ll want to add oil exposure, and

–downward pressure on the market in December will translate into somewhat higher returns in 2016.