Diversification

U.S. stock market gains are incredibly concentrated.

One of the hallmarks of mature U.S. stock markets is when index funds are doing better than actively managed mutual funds. That’s because the “rational” active managers are scared so they begin to avoid risk. The result is lagging returns relative to fearless, mindless index funds. I’ve seen this in 1987, 1990, 2000, and 2007. It can go on for years.

Another indicator of mature stock markets is when the market concentrates into only a few big players. This time, the big players are the FANG stocks (Facebook, Amazon, Netflix, Google). Citibank broadens them out to the FANTASY stocks (Facebook, Amazon, Nvidia, Tesla, Alphabet, Salesforce.com and Yahoo). However you label them, they are up a lot so far this year, about 30% by some estimates, and account for the majority of the broader indices’ gains. Doesn’t this sound familiar to anyone?

Also according to Citibank they have an average P/E of over 60, which is way up there in the bubble zone. That’s more than overvalued. And of course they are skewing the large indices’ valuations higher.

Combine this with the cryptocurrency markets and you’ve got looneytunes right here, right now. This has bubble written all over it. But it’s NOT a bubble in the entire financial system. Yet.

What happens next?

This may go on for years. My thought is that there’s no need to rush for the exits as long as we stay diversified. And if we sell early we risk being left far, far behind.

On the other hand a political event could trigger the inevitable landslide.

Meanwhile, economies are growing and valuations are much cheaper overseas. I’m examining that option.

Stay diversified. We are sure to have an interesting year.

For more evidence, read here.

The Biggest Iceberg Of Unrecognized Risk

It’s a ship-killer.

While we obsess about the stock market, an even-bigger financial challenge is possibly looming in the future. Yet few people are paying attention.

Debt has once again risen to outlandish proportions. Especially, state-driven debt and pension obligations may have reached a level which is impossible to pay back.

Read more about yet another state’s financial struggle here.

Why don’t we clearly know if these massive commitments are fundable?

Because we don’t know how much the economy will grow in the future.

Also we don’t know if sanity will emerge and spending will be reduced.

And, finally, we don’t know what actuaries will define as future contribution requirements for the large pension plans.

All this has deep implications for our economy and especially our bond markets. As investors, diversification is key, since we can’t really know where and when debt defaults might occur, if ever.

To help with this, we’re keep municipal bond investors diversified into nation-wide municipal bond mutual funds and not just state-of-residence-only mutual funds. Yes, you’ll pay a bit more taxes, but you’ll probably be safer.

In the taxable bond arena, we’ll keep most of our long term bonds in our asset allocation funds, so the managers have a non-bond place to run if a crisis suddenly pops up.

Most likely we’ll simply muddle by, as tends to happen. Patience, courage, and discipline.

Have a great weekend.

Legendary Investor Jim Rogers Predicts A Stock Market Crash, And The World Yawns

Legendary investor Jim Rodgers has often been right, and often been wrong, about the future of U.S. financial markets. He’s completely bullish on the future of Asia, and in fact now lives officially in Singapore.

Now he’s calling for the worst stock market crash in our lifetime. Read more here.

He may be right. Or not.

It’s worth noting that when the stock markets first began flashing indications of overvaluation, they were at about half their current levels. Had we gone to cash in 2013 as the statistics suggested, we would have missed out on at least 1 of every 4 dollars in our diversified portfolios.

Why didn’t the financial markets crash after 2013? The unexpected happened: the Fed and other central banks of the world intervened to support financial markets.

I have my own emotional reservations about that: when governments intervene in markets as the mood strikes them, then markets become unquantifiable. But the money which has been made is quite real.

So now Jim Rogers says that the biggest stock market crash in our lifetime is imminent, he may be right. Stock markets ARE very overvalued, and have been for years. My response for all of us has been to stay very diversified and be a bit cautious. The result has been that our investment returns haven’t beaten the stock markets, but we’ve at least participated while remaining realistic about genuine dangers out there.

I also remember that the Financial Panic of 2008 was followed by a market boom.

Genuinely, we don’t know what will happen. Let’s also keep in mind that we want to buy low, and sell high, and we want to persist. Investing is a marathon, not a sprint.

An even bigger bubble?

So I’m reading this morning that Snapchat, after yesterday’s booming IPO, is larger financially than American Airlines, CBS, and host of other established businesses. This is the moment when clients call me and tell me that they want to go all-in on the stock market. They may be right. But according to this chart, we are in a bigger bubble than 2000. And that ended so well….not.graph of comparative indicators

Taking profits in energy

Today we exited our relatively high-risk energy holdings, after a very profitable short term run. I tried to hold on to get as many clients as possible long term rather than short term capital gains. However since we’ve been going sideways for a couple of weeks I thought it would be wise to take gather our profits and depart. The easy money from the days of grotesque overvaluation last year appears to have been made. Also I’m hoping that our diversified value stock mutual funds have a toehold in energy. Now we’re on to other bargains.
 
In the bigger picture, we could see either the stock or the bond markets move dramatically based on news. Both are overvalued. Our energy adventure was a bit of sideshow, compared to the bigger challenges of asset allocation and diversification. That’s where our greater attention must focus. Go slow and stay cautious.