14 Feb Active Management is DEAD (According to Barron’s)

In this week’s edition of Barron’s, Donald Callaghan of Global Strategic Investment Solutions decided to ring the bell and declare that active management is dead.  First of all, the argument for indexing is not unique; many people have been championing it for several years.  I don’t have anything against Barron’s, I’m a subscriber, I instead take issue with their choice of guest contributors.  For a more intelligent and accurate Barron’s article on the active/passive management performance argument, see their January 2015 article: The Return of the Stockpickers.  Instead of blindly stating that active management is dead, this article actually suggests something unique — that active manager relative performance moves in step (roughly) with interest rates.
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02 Feb Interesting Reads for February 1st

Please see below for some of the more interesting reads for February 1st.  There’s a lot of noise around Trump and his day-to-day activities, so we’re intentionally light on that theme.  See links below:

 

(Only political link) Visual Map – 80 Years of Shifting Supreme Court Ideology

 

Trump selected Neil Gorsuch as his nominee for the Supreme Court, a conservative to replace Justice Scalia.  As noted in the link, justices tend to get more liberal near the ends of their careers.  I would also not that, in general, they tend to get more extreme over the first portion of their term.

 

Helpful Tool from Shadow Stock Blog Allowing Users to Search Insider Activity Through 2016.
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26 Jan Growth vs Value Stocks, How to Invest Now

Many investors fail to to give enough thought or analysis when choosing to invest in growth vs value stocks.  They will either choose what feels right or design a portfolio balanced between each theme.  Investing in growth stocks has been a wonderful decision from the 2009 low until mid-2015.  Through that time growth investors have witnessed some seriously strong performance, both on a relative and absolute basis.  The term “FANG” was coined and companies like Apple, Facebook, Tesla, Netflix, Google and Amazon notched sizable gains.

 

Growth vs Value: short-term

Click for larger image.        Source: StockCharts.com

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16 Jan Barron’s 2017 Round Table: Flat Performance?

Part 1 of Barron’s 2017 Round Table was released this week.  I look forward to this edition since there are usually a couple people who I respect as an analyst or portfolio manager.  Although I look forward to this edition, my favorite article is their Big Money Poll, which I value for the contrarian benefits.

 

So, what is in store for 2017?  What are the “gurus” predicting and recommending for the next twelve months?  Well, we will have more information next week with part 2 of the special edition, but there seems to be a general consensus of flat performance for the upcoming year.
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09 Jan Why a Higher Inflation Rate May Be Coming

Last year, Mack Research compiled a five-part series (part 1234 & 5) on the inflation situation in the United States.  We tried to create a holistic view by addressing inflation from a number of different vantage points: commodity prices, unit labor costs, velocity of money, TIPs and the Personal Consumption Expenditure price index (PCE).  A higher inflation rate was not on the radar at that time.

 

We highlighted the pronounced bear market in the inflation rate as well as, and more importantly, an acceleration in the rate of decline.  This extreme trend seemed to be nearing a turning point, somewhat like the “blow off” stage of an asset market, particularly if a catalyst presented itself.  Barring a move to outright deflation, it’s logical to see at least a temporary rebound in the inflation rate.
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22 Dec Rising Investor Sentiment Trumped by Fiscal Policy?

Measuring investor sentiment is the closest thing to a “free lunch” in the investing world. Knowing that the investing public cannot buy or sell forever means that, at some point, they’ll stop and prices will react accordingly. Measuring investor sentiment aims to identify these points in time. Fortunately, there are a variety of different ways to gauge sentiment and to identify extremes in investor behavior. These extremes typically indicate turning points in a market or at least peaks in momentum.

 

Currently, the Trump rally is sparking some excitement with investors, both retail and institutional. The S&P500 rose nearly 10% since the election and CNBC is actively making sure the whole world knows that the Dow Jones inches closer to 20,000. This type of cheerleading should normally be a red flag to viewers, particularly when more traditional indicators show elevated levels of optimism as well.

 

Investor Sentiment Trump Rally
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14 Dec Bond Sentiment Drops, Rates and Fear Move Higher

Bond sentiment is in the dumps.  The recent presidential election sparked a massive rally in interest rates.  The market digested Trump’s victory, coupled with his campaign rhetoric, as inflationary and bad news for bonds.  We know he doesn’t like the Fed or Janet Yellen in particular.  Does this mean that he specifically wants higher rates, something the Fed has resisted?  Or, does he just not like Janet Yellen?  Time will tell, until then the market seems to be voting.

 

Bond Sentiment

Credit: Bloomberg

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13 Dec What I’m Reading – December 12th

Well, it’s nearly the middle of December, markets continue to rally and our December Mack report has been released.  I have a bit more free time until I begin writing January’s report so my time is filled reading more than normal.  Below are a few of the more interesting items from my week:

 
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05 Dec Low Housing Supply – Strong Market in 2017?

U.S. real estate went from being a rather slow moving asset over the past several decades to front page news and the subject of a historic crash in ’07-’08.  Now, back in bull market mode, the asset class enjoys very strong returns once more.  Here at Mack, we monitor real estate prices as they impact our own portfolios but also our stock market timing models and simply the health of the overall economy.  Housing remains a huge part of our economy and a very large slice of most people’s net worth.  Not only is it a big part of the average person’s financial picture, it remains their largest source of debt and financial leverage.  Currently, it appears that low housing supply will be quite influential on prices through 2017.

 

Housing Supply and Demand

 

Real estate prices digested the impacts of the crash and bottomed in 2012 when they started a healthy advance to the current time.  Since 2012, prices advanced for a number of reasons, among them: depressed/bargain prices, economic growth, declining interest rates and low housing supply.  However, on the other hand, a persistent headwind over the past several years, which continues today, is the declining home ownership rate.  The contributing factor to the current bull market which I find the most interesting is the supply component.  Housing supply challenges helped to propel prices higher throughout the last five years.  At first, low supply resulted form the number of underwater mortgages and the fact that people couldn’t sell if their mortgage balance exceeded the market value of their home.  This problem grew with more and more people, in the “reach for yield”, becoming landlords.  I’m sure other reasons influence the supply picture as well, but low supply persists.  RedFin offers a very nice, real-time tool to monitor a number of different data points relating to the housing market.  Find it through the prior link, I highly suggest exploring it.  I know of no other tool updated in real time or one offering such a wide array of metrics.  Cool stuff.

 

Housing Supply

(Click for Larger)

 

Current Conditions

 

If you play around with RedFin’s data tool, depending on the locations your browse, low supply continues to persist.  Where I live, in Seattle, low supply pushes prices higher and seems to be setting up to be more problematic and pronounced than last year.  Barring any major changes, I think home prices could advance in a major way through 2017.  In terms of demand, the recent move in interest rates could be quite influential.  The recent move in mortgage rates and the 30-year treasury will negatively impact most valuation models for real estate.  However, the recent jump in rates may very well boost buyer demand in 2017 as the fear of getting priced out of the market takes hold.  Low supply and FOMO (fear of missing out) could set the stage for a very strong year.  Then, if rates continue to advance and housing prices do make a large jump in 2017, home prices may be firmly in the overvalued category.

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