I spill a lot of digital ink pointing out potential investment risk to investors. As I have stated in the past, the reason I do this is because the media expends a great amount of effort to avoid such a discussion because it does not attract viewership/readership. (Also, since their advertisers are primarily Wall Street related firms - suggesting an individual carry more cash is not financially beneficial.)
However, there are two problems with my approach. Because I share my view of risk with you, I am considered a "bear." Fair enough. However, that moniker assumes that I am sitting in cash, hoarding gold and "beanie-weenies" and expecting an immediate demise of the known universe. However, that is hardly the case as a read of my weekly e-newsletter will show a long history of successfully navigating the ebbs and flows of the market.
For this reason, as I wrote recently, if I am a bear then I am an "almost fully invested bear." However, that is the point of this weekend's reading list. Recent market actions, the rapid decline in interest rates, earnings deterioration and plunging energy prices have all made me much less comfortable being long the market.
While the "buy-and-hold" crowd suggests this is all rubbish, it should be worth remembering that every single one of that group never saw the corrections in 2000 or 2008 until it was far too late. Their only excuse was "no one could have seen it coming." The truth is that many did see what was coming.
Paying attention to what is happening at the margin leads to an understanding of when the "tides" begin to shift. With the general complacency in the markets beginning to deteriorate and risk appetites receding, these have historically been predictors of corrections or worse.
This weekend I am heading to Vancouver to speak at a financial investment conference, so here is what I will be reading on the plane.
1) Vanguard Warns Advisors On Risk by Trevor Hunnicutt via Investment News
Investors are taking a level of risk not seen since 1999 and 2007, and financial advisers should restrain the impulse of clients to boost sagging returns.
Martha G. King, who oversees Vanguard Group Inc.'s adviser-sales division, said investors have taken on the highest stock exposure in their portfolios since the years preceding two recent market routs.
“I do see some advisers adding risk to their portfolios to provide yield substitutes for those old reliables that aren't delivering what they wanted, and that's worrisome."
Read Also: The Markets Will Riot by Albert Edwards via Advisor Perspectives
2) Ignore The Bears by Alan Hartley via Advisor Perspectives
"Despite six consecutive years of positive returns in the current bull market, we likely have further to go. Historically, the U.S. stock market has provided positive calendar-year returns about 75% of the time. Said another way, the U.S. stock market has fallen in about a quarter of the years since 1926. Most declines—about 80%—were accompanied by recessions. Those that weren’t can be counted on one hand.
The U.S. economy should continue to expand and that bodes well for stocks
The next bear market will likely start due to a recession or geopolitical conflict and not from the start of Fed interest rate increases or time elapsed
The current economic landscape is favorable to growth
Stock markets are priced for low returns
We do not own the stock market, but 17 well-researched, individual companies
We still expect double-digit returns from our portfolios"
Read Also: Yesterday's Dip Was A Warning by David Stockman via ContraCorner
3) Caught In A Debt Trap by Ralph Atkins and Michael Mackenzie via FT
"'The economic fabric of our society has been built on the premise of positive nominal interest rates. Negative interest rates are an unprecedented experiment,' says Claudio Borio, head of the monetary and economic department at the Bank for International Settlements in Basel, which acts as a think-tank for central bankers. 'If it’s not temporary, there are going to be significant implications.'
Tumbling yields are partly the result of central bankers becoming big bond buyers: QE by the Bank of Japan is in full swing; the ECB’s programme starts in March.
But low and negative bond yields also tell a story of persistently slow economic growth and low inflation, even after adjusting for recent sharp falls in oil prices. They imply bond markets think central banks will fail to boost inflation any time soon — exactly the opposite of what the BoJ and ECB plans are supposed to achieve."
Video: Dollar Creating Systemic Risk by Larry McDonald via CNBC
4) Important Signs To Watch by Cris Sheridan via Financial Sense
"Here is a chart of the S&P 500 (shown in blue) with four different measures of financial stress provided by various Federal Reserve regional banks. As you can see, financial market stress started to bottom over the course of last year and has now started to move higher. This typically happens prior to market selloffs and, if all four measures make a sustained move into positive territory (above the x-axis), also raises the possibility of a much deeper bear market.
Bottom line: financial risks have risen from their lows and may put pressure on U.S. stocks ahead; keep a close eye on corporate profits and U.S. leading economic data for broader deterioration."
5) The Bears Are Back by CNN Money
"The bears build their case that a crisis is near on four factors: falling oil prices, stagnant wages, the "two-edged sword" of a strong US dollar and big trouble abroad.
Weaving their four factors together, the bears' quilt for 2015 is quickly looking gloomy and gray. The U.S. markets are already overdue for a correction -- a drop of 10% or more -- and this global backdrop could exacerbate the fall when it comes."
Bonus Read: Games People Play by Bill Gross via Janus Funds
Must Read: A Dozen Things I've Learned About Value Investing via 25iq
"The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments." - Mad Magazine
Have A Great Weekend