About this time of the year, shortly after we took the training wheels off of young sons Matt’s and Marc’s bicycles we enjoyed taking trips around Westlake Lake. Sometimes we would stop at the bank, get some ice cream, and if Mom didn’t join us there was always time for fallen leaf fights. With a couple of their friends with us on one of our trips it felt great to be a kid again, until I noticed a pattern I did not want them to miss. I said, ‘Watch and tell me what you notice at the intersections.’ In no time at one corner the four compared notes assessing that when crossing the street pedestrians, bikers, and those on roller-blades or skate boards don’t look for anything but a green light. My next question was, ‘So what should we do when on the street?’ It was interesting listening to them solve the problem amongst themselves brilliantly. Their conclusion was we must be swivel heads at every driveway or intersection.
I had to smile listening to the 22 year old instructor last year at Spring Mountain Motorsports Ranch in Las Vegas tell forty adults more than twice his age who paid $1,000 for a two day program that before we could drive the owner’s new Corvettes on the racetrack we had to practice swiveling our heads in the classroom. As I am writing this piece with fond memories I am saddened to read New York Mayor Bill de Blasio called the vehicle attack in Lower Manhattan “an act of terror.”
It is difficult to imagine people on a street who don’t see a vehicle moving toward them on the opposite side of the street. But we lost son Marc age 25 in a motorcycle accident so I do understand life happens. The next day was Matt’s birthday. Two weeks later it was Christmas.
My whole point is for those of us who are in this game called life, the question that begs to be answered is, Are you willing to do what it takes to stay in the game? Since my answer is ‘yes!’ I will continue on behalf of everyone who intends to stay on this side of the grass. Speaking of patterns, I trust you can see that I look for situations you can well understand as bridges to recognize how the economy is working and prepare in advance for the good, the bad, and the unforeseen.
Let’s begin with a reminder of former Fed Chair Alan Greenspan’s warning of ‘irrational exuberance’ in his late 1996 speech. Some observers believed at that time Mr. Greenspan had lost his marbles, but it may be more accurate to notice he was about 39 months early, as a major drawdown occurred at the beginning of the decade in 2000-02. ‘The stock market’s valuation is back to the point where Greenspan warned,’ Jeff Cox at CNBC observed on Halloween, 2017. Cox noted, ‘The only time valuations were higher was around the time of the stock market crash and beginning of the Great Depression in 1929 and during the dot-com boom in the late 1990s,’ according to the model formulated by Nobel Prize winning economist Robert Shiller. The Shiller CAPE ratio is designed to compare stock prices with their earnings over a 10 year period. It stands “at 31.43, about where it was when then Fed Chairman Alan Greenspan gave his widely cited” talk, according to calculations by Nomura.
In the CNBC interview Shiller said he believes the U.S. market is expensive, but he didn’t encourage investors to be aggressive seller. He did suggest investors diversify into Russia.
“Change before you have to.” – Jack Welch
Just as I did my best to help young people look both ways twice before stepping off the curb, I encouraged children to recognize the location of Exit signs in theaters and concert venues. My point to you Dear Investor is to identify your risk asset exit strategies while everything appears to be going up.
I have asked you to keep your eye on the ball of the whole market as opposed to simply looking at the green arrows in the indexes.
“A quarter of the S&P 500’s blockbuster return this year is thanks just five tech companies: Apple, Microsoft, Facebook, Amazon, and Alphabet,” said Eshe Nelson, QUARTZ, 10/30/17.
Eshe Nelson, QUARTZ, October 30, 2017
Instead of believing you remember accurately, please do the math. Instead of trusting your memory or being blinded by the best stock market since 2013, in the opinion of Esche Nelson, Quartz, 10/30/17, go back to see exactly how well your home, stocks, and bonds held up in 2008. Because you know what happened before could happen again.
“Risk, is not knowing what you’re doing.” - Warren Buffett
I had the pleasure of getting to know and talk to Nathan Rowader, Senior Portfolio Manager at Salient. Nathan has managed bonds for 20 years. Today Nathan sees cracks in the bond side of things. His biggest issue is with a big draw down last year along with another one September of this year that he described on Halloween as two of the biggest in history. He submits such signs often signal larger problems gaining speed. He sees a reversal of roles in terms of where risk is in the bond market. High yield should be more risky but not the case now. Rowarder is worried that investors find more comfort in taking on more risk at this time. The good news is that cash flow from bonds is higher and can provide some protection in a rising rate environment. Also, that there is not a lot of potential for defaults at this time. We agree that in 2008 Treasuries did great. Portfolio managers should be more nimble, but most are not. Nathan puts liquidity first. He asserts there are ways to apply mechanical advantages as opposed to simply buying and holding. Unlike most manager or investors Rowarder has a disciplined process for measuring risk. Rowader submits because of his Exit strategy in 2008 investor’s accounts were moved from bonds to 75% cash. That’s the evidence of winning by losing less. Before the grits hit the pan, now is the time to customize your exit strategy to stay in the game.
The proof is in the planning.
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