Posted by admin on December 4, 2004
Optimistic Market? Care To Speculate?
An Article in this months Investment Advisor magazine reflects the title, Advisors Still Upbeat. Investment Advisor magazine represents itself as the advisor to investment advisors. The IA article states: Advisors are overwhelmingly optimistic, with 85% of those responding saying the stock market and economy would strengthen over the next twelve monthsMore advisors are optimistic now than in September 2003, when 10% of those surveyed predicted a stronger stock market and economy.
On the other side of the discussion, this months CFA Magazine showcases an interview with Jeremy Grantham. CFA Magazine is the CFA Institute member magazine for investment professionals; and, Jeremy Grantham is among the most respected investment management professionals in his peer group. Grantham is predicting a very painful market environment ending in typical fashion with people [as a result, becoming] more concerned with caution, conservatism and capital preservation. An ending in 2006 would be perfectly typical for a bear market; it wouldn't be the shortest, and it wouldn't be the longest. Grantham assumes the bear market started in March of 2000.
As mentioned in our prior newsletters, we strive to provide articles on various aspects of wealth management to assist your understanding of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience.
This months letter will review what some well-credentialed market observers have professed recently. So lean forward, and listen closely to hear the stock markets message to see if it seems to be saying that it wants to go higher. But, consider this, the task of assessing how high and for how much longer may likely be far less soothing. As our investors already know, we've positioned ourselves defensively since May of this year. You decide. Lastly, and as always, we will finish with an update on our investment activities.
How Upbeat Are Advisors?
With the great majority of advisors optimistic about the stock market, many are putting their money [or reputations] where their mouths are, says IA magazine. Twenty-six percent said they allocated more to stocks over the previous 12 months, while 20% said they had allocated less to stocks. The remaining 54% said they had maintained the same allocation to stocks over the past year.
Most stock indices have moved up nicely over this past month. In fact, a nearly unceasing surge pushed up the S&P500 to a new high for the year. And the result greatly increased investor spirit and hunger for risk. The prevailing mood has gone from the fear of an election stalemate and angst over rising oil prices to excitement and an urgency to buy into the rally.
Barron's, Michael Santoli, wrote this month: Its always hazardous to guess what causes any market move. But the markets lift coincided with an electoral sweep by Wall Streets preferred political party, a sharp retreat in petroleum prices and an improved employment report [present] good enough proximate causes to keep the story moving. He continues with the belief that, previously frustrated investors took it from there, rushing to participate and salvage what has been a tough year to turn a buck in stocks.
Not alone in these proclamations, even self announced market maven, former hedge fund manager and columnist for TheStreet.com, Jim Cramer, was seen as returning to the fray. Last month, Cramer opined, during an episode of Cramer and Kudlow that: the only way to catch up is to join the crowd There simply aren't enough trading days left to make a lot of money... The clock is ticking... The downside will be very limited here because the feeling you felt in your stomach when the market opened up huge is the feeling that comes from recognizing 'Darn it all, I gotta get in. Because you do.
Well that is all right then, invest because you have a feeling in your stomach; just make sure it isn't trapped wind! Investors falling over themselves to buy highly valued stocks are the investment equivalent of Pavlovian dogs. Just in case you aren't aware, Pavlov was a pioneer in conditioning. He showed that if a bell were reliably rung before dogs were fed, eventually the dogs would start salivating when they heard the bell, even if no food were present. Santoli, Cramer and friends may very well be the bell with nothing behind them.
Small Investor Theory Reminder
As the theory goes, a small investor buys purchases investment assets when prices are high and sells when prices are low. This is because the small investor is more likely to follow the crowd rather than follow a disciplined approach. They invest when they hear of the successful experiences of friends, neighbors and, yes, even touting market professionals usually after a significant run up in the market and sell when they hear that market prices are falling. This is the parenthetical opposite of what investors need do to create wealth.
One the most important figures in the history of economics, John Maynard Keynes, noted in his writings: Our decisions to do something... the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
Its not my belief that the boom is back; rather I think the bubble mentality never left. Too many investors cling to the hope that the good times are about to return, urged on by the dream of bubble blowers. However, conditioning doesn't last forever. Eventually investors may learn that investing in overvalued stocks is a short cut to the road to ruin. Unfortunately, this lesson is likely to prove an expensive one once again.
Warnings From Living Legends
As CFAMagazine writes, [Jeremy] Graham first made a name for himself by avoiding the Nifty Fifty in the early 1970s A devout student of history, Grantham has imbibed the lessons of the past and uses them assiduously to help steer the [asset management] firm he co-founded in 1977. Today, Grantham's firm manages over $70 billion in money for large institutional investors.
Grantham believes that we are experiencing an extended bear market rally due to the amount of stimulus, in the form of interest rate and tax cuts, which was hurled at the markets. Yet he warns that history reflects there has never been a worse broadly based overpricing [across several markets] than we have this year with bonds and real estate as anything but cheap and small cap stocks, perhaps, dangerously overpriced.
With the bear market starting in March 2000, according to Grantham, he hopes that the markets will begin to provide greater opportunity by 2006. His thoughts are that 2000 through the end of 2002, marked the first leg down and the next leg could deal investors more significant damage. Upon reviewing the entire article, however, its clear that he favors capital preservation strategies over greater risk taking, for now.
Grantham is not making the argument that investors need to keep their money in cash. Among his various recommendations, he sees conservative hedge funds translate: long/short and other market neutral strategies as a safe place to be. Clearly, he sees this as a very important time for managing investment risk. In fact, he cautions investors not to go looking for big gains right now, unless prepared to stomach potential large losses.
And, just in case you missed it. Fed Chairman Alan Greenspan announced at the European Banking Congress last month: Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now is obviously desirous of losing money.
Some Concluding Thoughts
Well, Im certain to hear from my contemporaries from both sides of the isle for what Im about to say, but here goes.
While I am not a proponent of market timing, economic cycles have been around for hundreds of years and markets have duly reflected this fact. The cycle of boom and bust has been repeated so many times that it seems sensible to conclude that there must be a fundamental tendency for this to occur, just as the tides are caused not by chance, but by the varying gravitational pull of the moon on its orbit.
What is interesting, however, is that from time to time human beings manage to convince themselves that these cycles have ceased to exist. Historically, whenever a large number of people have believed that the old rules no longer apply, the market at some point delivered a salutary lesson. As the famous saying goes, Those who do not learn the lessons of history are doomed to repeat them.
While most academic studies have proven that you don't need market timing when things are bad. After a bad year, simply waiting for the market to "come back" can produce big paper losses that may last for years, along with a lot of anxiety that could be avoided with the judicious use of market timing. Is it fair and realistic to expect investors to endure devastating losses, even if those losses are temporary? I don't think so.
We're At Your Service
At ELF Capital Management, our focus is to help our clients achieve a more certain future. As such, our wealth management clients gain comfort in knowing that they've hired disciplined decision makers whose objective favors consistency of returns and capital preservation rather than magnitude of returns. By the way, our non-pension plan accounts enjoy that we hedge risk by employing a long/short strategy.
ELF Capital Management Investment Performance Update
For the month ended November 30, 2004, our one-month performance is down 0.01%, our three-month return is down 0.10% and our one-year return is up 0.26%.
For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.
ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.
The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.
The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELFs ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.
Copyright 2004 ELF Capital Management, LLC. All rights reserved.