Melissa Shin, managing editor of Advisor’s Edge and Advisor’s Edge Report, has been reporting live from IMCA’s 2012 New York Consultants Conference. The conference has closed, but you can still read her coverage below.
Thanks so much for joining me here in NYC. I hope you found these last two days as educational as I did!
Asset Allocation Success in a Diminished Return, Volatile Market
Burt White, LPL Financial
10:32 This may be the first time a West Virginian is on an IMCA stage.
10:33 This guy has promised to talk 700 words a minute. So bear with me.
10:35 The S&P500 started 2011 at 1257.6 and ended at 1257.6. There were 9 minutes during 2011 that S&P500 was at 1257.6. The market travelled almost 3,239 pts. That’s like going around the country.
10:36 In 2011, you couldn’t do better than buying overpriced, crappy companies. It was a tough year for active managers. Value approach didn’t work last year. Last year didn’t reward rational investors. It didn’t make sense. Why? Last year was the Great Disconnect. Feelings disconnected from fundamentals.
10:38 Market sentiment was at record low, yet the facts were positive. We had record corporate profits, no crisis, and solid economic data. Yet everyone was really pessimistic.
10:39 If I told you there was going to be a quarter where we’ll grow 2.5%, and we’ll hire 1 million jobs and corporate profits would be at record highs, then would you invest? That was Q3 2011. Markets were down 15%. There’s the disconnect.
10:41 We’re in the 360,000-370,000 unemployment claims a week. That sounds bad but typical is 325,000. We’re close. The S&P500 tracks the unemployment claims line. You want to know what markets are going to do? Look at the unemployment trend line. It’s the same line. It’s never disconnected until 2011. We should be at 1412 on S&P500, not 1312.
10:42 Things aren’t great right now, but it’s not meteor-crashing times. We’re priced there, though. That’s where sentiment has been. It’s better than what this market is giving it credit for.
10:43 Consumer sentiment is a lot lower, starting in 2008, than GDP justifies. Usually it tracks GDP. It disconnected for the first in the history of the markets.
10:45 We were feeling worse in summer 2011 than at the depths of the recession. Yet in 2008, we were laying off 600,000 Americans a week. In summer 2011, we had +120,000 jobs/week, record high GDP and corporations were never as profitable as they were then. Yet we felt that the GDP was shrinking by 10% — even though it was +2.5%.
10:46 Two alternatives: GDP will fall to match consumer sentiment OR consumers need to get more confident. Confidence is rising. That’s why markets are doing better. We’re in a recession of confidence.
10:47 Consumers are spending a lot more than is justified by how they’re feeling. (Consumer confidence is low, yet consumer spending is higher.) Confidence and spending used to track each other. In last 2 years, we’ve lied to the pollsters. We’re spending at 2005, 2006 levels.
10:49 Both numbers can’t be right. So which one is wrong? Lots of smart people issued mea culpas last year. They lost 30%. Last year made smart people look stupid. This disconnect, you had to be a therapist to do well. You had to ignore the facts.
10:50 Here’s something offensive. I have 4 daughters and I’m married, incl. twin 14 year olds. (No one in room has more daughters.) So let me offend you. It’s irrelevant how many people are unemployed. 5%, 8%, 20% — it is irrelevant how many Americans are unemployed. It matters WHO is unemployed. 80% of spending is done by businesses and the top 20% earners.
10:52 Bill Gates spend more than all of us combined, so if he’s unemployed, that’s a lot worse for the economy. Bear Sterns was the first to go under, and the average salary there was $500,000. Lehman, autos, then banking…the Great Recession stunk because lots of people who were rich got laid off. We lost our best jobs first and that doesn’t usually happen in a recession. Usually the mail room gets fired first. They stopped spending and that’s 80% of spending in the economy!
10:54 Unemployment rate for college education and above is 4%, record lows. That’s an unemployment number we don’t talk about. The other one is irrelevant — socially it’s relevant, but that’s not my job. Not every person is worth the same economically. 8-14% unemployment is irrelevant, what matters is WHO.
10:55 Why the disconnect? They poll everybody, and 80% of people are upset. The top 20% with record low unemployment is spending.
10:56 So how do we win? You have to have a plan. Know what matters. We think we know what’s happening — but it changes. It used to be easy to invest. Know what the consumer’s going to do. They used to tell you. It worked for decades. It’s why smart managers outperformed before. You have to find something else now.
Rule 2: Ignore the noise. Was last year volatile? Yes. Wait… day-to-day, yes, but month-by-month there wasn’t that much volatility. Annually? We didn’t go anywhere! We had zero volatility.
11:00 Markets are worried about Italian 2-year yields. Their Fed site is in English, so you can use that info to predict how the markets will do. Let your process evolve. You DON’T know what make markets go up anymore. When the market tells you something, listen.
11:02 If I had an asset class that will get you 9.5% in the next ten years, would you invest? It’s stocks. Not going to happen, right? Inverted trailing P/E for S&P500 predicts that will happen. This has worked, every time.
11:04 Be fearful when others are greedy — well now, be greedy when others are fearful. This is the most amount of fear ever. When things are scary and cheap, the long-term investor should invest.
11:05 Diversification has changed. It doesn’t work anymore. They help, but they don’t work.
11:08 We build portfolios and think growth and value is enough. But how much, how often and try not to deliver surprise. Great portfolios outperform and do it often. Diversification is always good, right? It’s not always good. It’s just math. If you combine growth and value, it outperforms less of the time. Why? What we missed is both managers are top down managers, higher quality…we didn’t diversify by that.
11:10 It’s not just what you own, it’s HOW you invest. We diversify by holding period, how we found the idea (fundamental, technical, valuation), team that it comes from, AND asset class.
11:12 You need to stay emotionally connected without being emotional. Most PMs are “buttholes.” That’s what makes them good, they have no feelings. That worked great, until last year, because they weren’t listening to sentiment in 2011. They weren’t listening to the concern in Washington. They only watched GDP and earnings. I have to figure out how to add emotion. I’m not a caring person, so I have to replicate feelings with numbers. So we use a bull/bear ratio.
11:13 Low-risk treasuries are far from low-risk investments.
Let’s get a bit happier, a bit more confident. We’re not talking about the end of the world. We’re halfway to double-digit returns in 25 days of 2012. The market would be at 1,400 if we weren’t so scared. We’ve already priced in fear. We just have to take the coat of fear off and that’s worth 10%. The rest comes from Fed, ECB, China…that’s just gravy. The fear is worth 10%.
Q. Don’t you think govt policy and the fear of what it will do to us explains the disconnect?
A. I agree. It is something softer. It’s not about our jobs, or housing or the economy. It may not even be about Europe. It’s disgust with the childishness in Washington. I’m upset with how things are being run by the govt. So we’re expressing that in our sentiment. But we do have confidence — look at our spending.
Q. The markets can remain irrational longer than you can remain solvent. Agree?
A. Remember, the market is you. The market is you buying and selling stock. For us to say it’s irrational, no — it’s irrational because we’re irrational. I agree the market can be irrational for long periods of time. It can disconnect. It can do things it’s never done before. But over time, things get cheap and better. The meteor may never come. It’s a lot to hunker down into a bomb shelter for decades. If they don’t come, we’ll come out for fresh air. I’m not saying this is a Mary Poppins market; but it’s not a disaster.
Q. Are emotions a leading or lagging indicator? How do you use them?
A. I’m not a behaviouralist. I’ve found emotions are a lagging indicator on the recovery. Bad news comes, we don’t foresee it. Take confidence. You don’t lose confidence, you just never had it at all. The real measure of confidence is when something isn’t working.
Q. How much of US GDP is coming from cuts and layoffs, thus explaining poor consumer sentiment?
A. Record profitability is coming from lower costs (layoffs) at corporations. That’s partially true. We’ve been arguing that for 4-5 quarters now. We say we’ve seen peak margins, and they keep going up. We believe about 2%-3% come from higher-than-average cutting. 2009 was lowest level of patent applications ever. Businesses have overcut spending, so their earnings are better, but that doesn’t account for revenues within 3% of all-time highs. GDP is at all-time highs. Earnings are at all-time highs.
Q. Cash on balance sheets — re: stock buybacks, are they good or bad?
A. Depends on what you do with the cash. They’re *an* option, some companies are making them the option. I’d rather see the capital deployed for future growth and reinvested into M&A, new ideas, new ways of growth, higher-ROI activities. But in this environment, not a lot of companies feel secure enough that there are high-ROI projects. So a safer bet is share buybacks. They’re a wash over time. They’re a sign that a company doesn’t have vision as to what it can do with that extra cash. That’s scary.
Click through below for Decade of Debt with Carmen Reinhart, PhD, Peterson Institute for International Economics
