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Investing in Uncertain Markets

Investing in Uncertain Markets. Presentation to AAII Baton Rouge Chapter Meeting April 2014. BEARS (going into 2013): Without the Fed, this market falls apart, because … The global economy is buried under the weight of debt

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Investing in Uncertain Markets

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  1. Investing in Uncertain Markets Presentation to AAII Baton Rouge Chapter Meeting April 2014

  2. Don Lansing (don@lansinginvestments.com)

  3. BEARS (going into 2013): • Without the Fed, this market falls apart, because … • The global economy is buried under the weight of debt • Deleveraging (reducing the debt) cycle will keep earnings and investor sentiment down • Eurozone workoutsand China slowdown are big known risks. • U.S. budget issues and related debt are a big potential risk The Fiscal Cliff! Don Lansing (don@lansinginvestments.com)

  4. What a DRAG! Don Lansing (don@lansinginvestments.com)

  5. The Impact of Global Debt • Living in Reinhart/Rogoff World: • Research by Reinhart/Rogoff widely sited for concerns about U.S. debt • Studied financial situation of 44 countries over two centuries • Found that debt to GDP >90% was a tipping point • Led to reduction in growth of -1% for years on end (20+ years) • Why? Limits government’s ability to invest • Resources going to pay down/support debt • Interest rates spike as markets demand more compensation Don Lansing (don@lansinginvestments.com)

  6. But the rules don’t apply to the U.S. … yet • Is the U.S. different? • Yes – for now. • Almost unlimited ability to borrow, and very cheaply! • Reserve currency and related Treasury bond market provide important “buffer” – size of markets without peer • Debt has been transferred from private to public – lowers net interest expense in the “system” • Debt supporting investment is preferential to debt supporting consumption – “hello Greece” • It gives us the “freedom to be irresponsible” Don Lansing (don@lansinginvestments.com)

  7. Government spending growth grinds to a halt Don Lansing (don@lansinginvestments.com)

  8. Consumers DE-LEverage Don Lansing (don@lansinginvestments.com)

  9. @parhedge Be LONG insanity and SHORT common sense Don Lansing (don@lansinginvestments.com)

  10. How common is it to have a 10%+ intra-year decline? Don Lansing (don@lansinginvestments.com)

  11. What Drives Market Prices? • Fundamentals Economic Cycle and Corporate Earnings • Investor Sentiment  Enthusiasm drives P/E ratios for stocks; Yield spreads for bonds • Liquidity Availability of capital; money flow; Fed policy can influence this Don Lansing (don@lansinginvestments.com)

  12. Corporate Earnings x PE Ratio = Market Prices Don Lansing (don@lansinginvestments.com)

  13. And then THIS Happened … Don Lansing (don@lansinginvestments.com)

  14. Corp Profits take flight in 2013 Don Lansing (don@lansinginvestments.com)

  15. Into the Green – Europe Begins to recover Don Lansing (don@lansinginvestments.com)

  16. Bond investors get shocked Don Lansing (don@lansinginvestments.com)

  17. QE Sparked a flood of money into bonds Don Lansing (don@lansinginvestments.com)

  18. What if only a fraction of that bond wave flows back into stocks? Don Lansing (don@lansinginvestments.com)

  19. “The stock market is all about money. Money goes in and the stock market goes up. Money flows out and the stock market goes down.” – Jesse Livermore Don Lansing (don@lansinginvestments.com)

  20. Asset Allocation Funds have a poor year Don Lansing (don@lansinginvestments.com)

  21. BEARS: Falling like dominos • “I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.” • “I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.” • “I am out of justification to fight the uptrend. Up until now, I have had what I thought was compelling evidence to believe in the bearish case, but it has now been revealed to have been insufficient for the task.” Don Lansing (don@lansinginvestments.com)

  22. 20%+ Returns are Common Don Lansing (don@lansinginvestments.com)

  23. Compared to Historical Rallies Don Lansing (don@lansinginvestments.com)

  24. This bull market just won’t stop! Don Lansing (don@lansinginvestments.com)

  25. Been a long time … Don Lansing (don@lansinginvestments.com)

  26. What is “normal”? “In the average bull market, the S&P 500 falls by 10% or more every 16 months. It has now been over 31 months since the last such pullback. Investors have forgotten what a normal market looks like.” – CIO of $130B firm Don Lansing (don@lansinginvestments.com)

  27. What is “normal”? Don Lansing (don@lansinginvestments.com)

  28. ARE STOCKS EXPENSIVE? Corporate Earnings x PE Ratio = Market Prices Don Lansing (don@lansinginvestments.com)

  29. NOT COMPARED TO RECENT PRIOR PEAKS Don Lansing (don@lansinginvestments.com)

  30. Nor Compared to Projected Earnings Don Lansing (don@lansinginvestments.com)

  31. Don Lansing (don@lansinginvestments.com)

  32. Compared to Historical Rallies Don Lansing (don@lansinginvestments.com)

  33. 2014 – the Road to Nowhere? Don Lansing (don@lansinginvestments.com)

  34. 2014 so FAR – State of Global Economies Don Lansing (don@lansinginvestments.com)

  35. 2014 so FAR: Impact on the Sector playbook Don Lansing (don@lansinginvestments.com)

  36. 2014 so far – simple mean reversion Don Lansing (don@lansinginvestments.com)

  37. Will Higher Interest Rates kill the rally? Don Lansing (don@lansinginvestments.com)

  38. And Stocks do fine Don Lansing (don@lansinginvestments.com)

  39. Don Lansing (don@lansinginvestments.com)

  40. Spending Changes As We Age Don Lansing (don@lansinginvestments.com)

  41. How to invest in a rising rate environment? Don Lansing (don@lansinginvestments.com)

  42. What bonds are best in a rising rate environment? Don Lansing (don@lansinginvestments.com)

  43. Managing Income Portfolios • Importance of Duration • +1% move in interest rates = -D% move in bond price • Managing spreads instead of rates • Spread = Difference between rate of bond & Treasury rate • Higher the spread, the more compensation being demanded • Lower spreads = nearer to end of cycle • Watch spreads for clues about the end of the cycle! Don Lansing (don@lansinginvestments.com)

  44. Dealing with Uncertainty Don Lansing (don@lansinginvestments.com)

  45. Why the Uncertainty? “Here is the simple reality we try desperately to ignore: Most of the time, we have no idea what is going on.” – Barry Ritholtz Don Lansing (don@lansinginvestments.com)

  46. Don Lansing (don@lansinginvestments.com)

  47. Don Lansing (don@lansinginvestments.com)

  48. The benefit of not paying attention Don Lansing (don@lansinginvestments.com)

  49. WAYS to MITIGATE RISK – Increase Diversification Don Lansing (don@lansinginvestments.com)

  50. Don Lansing (don@lansinginvestments.com)

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