2015 Was A Stinker…


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2015 Was A Stinker…

No matter how many times you looked at the performance data over the holidays, the results did not flip from red to green—that was your tree lights blinking and changing colors. No one likes to lose money but that is what the great majority did; luckily, most managed single digit percent declines. But those who missed the big move in October, or who were concentrated in Energy or Emerging Markets, likely saw double digit percent losses. So where do we go from here? Right now, 2016 doesn’t look like it will be any easier for investors.

Breadth remains extremely narrow with the FANGs, Nifty Nine and the Mega Caps leading the rest of the market solidly into year end 2015. The Fed will continue to look to lift rates to fight what they see as an improving U.S. economy and rising inflation (as they see energy rebounding?). The U.S. Dollar is looking to continue to impede commodity prices and emerging market currencies while also impacting the numbers of multinationals. And, the world will continue to closely monitor the downside risks of slowing economic activity in China and terrorism around the globe.

While equities are not cheap at about 16x current earnings estimates, they are also not expensive. Widening credit spreads continue to give several of us pause, but the December slide in Junk Bonds may have been overdone by year end liquidations at several hedge funds and even some mutual funds. There remains plenty of liquidity among the largest investment and pension plans who continue to dial up their risk in search of 7%+ returns to meet their liabilities. As for system health, the banking system is in good shape, Corporate balance sheets (outside of Energy, Materials) are still looking decent and Consumer balance sheets are improved with rising Home Equity values and falling energy prices.

With Value underperforming Growth equities by 900+ basis points in 2015, a large risk to fund managers will be their positioning for a possible stabilization in Energy prices. Oil has led the markets lower all year so one can only guess that the correlation will be high if Energy stops falling and changes an uncertain situation to anything more certain. Get flat to rising Oil and Energy stocks, Emerging Markets and Junk Bonds will follow. But I am not one to tell you that the lows are in for any of these broken assets. Fighting trends is not my style especially with an asset with as many variables as Energy. Someday it may bottom and you will have many opportunities to own equities and credits impacted by a stable, rising market. In the meantime, go find other stocks, bonds, sectors and geographies that can grow without a weakening China or falling Oil price. There are plenty out there and the market will often give you buying opportunities to add solid assets on the cheap. Have a great 2016 and I will do my best to keep putting worthwhile ideas in front of you to think about while you are keeping your clients and customers out of harm’s way.

A look at the major liquid financial assets ranked by 2015 total return highlights the difficulty in finding broad gains…

Dividend focused investing has been a widely popular winning strategy. But 2015 was difficult for it…

If you only own stocks that pay dividends, 2015 was not the year for you. At the start of the year, 74 stocks in the S&P 500 had no dividend payout. These 74 stocks are up an average of nearly 4% in 2015. The remaining stocks in the S&P 500 that did have a dividend payout at the start of the year are down an average of 5.15% YTD. Below we have broken the S&P into deciles (10% of stocks) based on dividend yield at the start of the year. The last group of stocks all the way to the right of the chart contains all names that had no dividend yield. This is the only group of stocks that averaged a gain in 2015. As shown on the left side of the chart, the top 10% of stocks with the highest dividend yields at the start of the year are down a whopping 14.6% year-to-date!

(Bespoke Premium)

 

David Snowball of the Mutual Fund Observer sums up well how difficult 2015 was for Fund managers…

In all likelihood, the following three statements described your investment portfolio: your manager lost money, you suspect he’s lost touch with the market, and you’re confused.

Welcome to the club! 2015 saw incredibly widespread disappointment for investors. Investors saw losses in:

  • 8 of 9 domestic equity categories, excluding large growth
  • 17 of 17 asset allocation categories, from retirement income to tactical allocation
  • 8 of 15 international stock categories
  • 14 of 15 taxable bond categories and
  • 6 of 6 alternative or hedged fund categories

Anything that smacked of “real assets” (energy, MLPs, natural resources) or Latin America posted 20-30% declines. Foreign and domestic value strategies, regardless of market cap, trailed their growth-oriented peers by 400-700 basis points. The average hedge fund finished the year down about 4% and Warren Buffett’s Berkshire-Hathaway dropped 11.5%. The Masters of the Universe – William Ackman, David Einhorn, Joel Greenblatt, and Larry Robbins among them – are all spending their holidays penning letters that explain why 10-25% losses are no big deal. The folks at Bain, Fortress Investments and BlackRock spared themselves the bother by simply closing their hedge funds this year.

(Mutual Fund Observer)

 

Looking at the specific Equity style boxes, Large Cap Growth was the only one to have positive returns. But even that style box lagged its benchmark by 300 basis points due to the greater concentration of the mega cap winners in the indexes…


(Morningstar)

For 2015, Main Street U.S.A. was the winner with their home value rising 5%+…


(S&P/Case Shiller)

Greg Ip sums up 2015 well in a few sentences…

Global financial markets in 2015 were pulled between two opposing forces: The Federal Reserve’s determination to raise interest rates as the U.S. job market strengthened and pressure for lower interest rates in much of the rest of the world as China’s economic growth slowed and commodity prices sank.

The results of the tug of war were a soaring dollar, crumbling junk bonds, stubbornly low Treasury yields and a manic-depressive stock market that is ending the year roughly where it started.

Those tensions are likely to continue into 2016. The probable result: a global economy that escapes recession, but investors’ nerves will be frayed and the bull market in U.S. stocks tested.

(WSJ)

 

As I wrote this piece Sunday night, China started off 2016 on a very PMI weak note which quickly ripped the CN Yuan and Shanghai equities…

@TomOrlik: China hits wrong 7% target as weak PMI data, falling yuan and expiry of 2015 market support hammer stocks

Weak China and falling Energy and Industrial Metal prices has weighed on Credit Spreads all year. We pay close attention to Credit since it often leads Equities…

But as mentioned earlier, Junk Bonds had a tough December. I agree with Barron’s that it might be a bit overdone here…

Junk Bonds

With yields averaging close to 9%, junk bonds look better than they have in several years. “A confluence of events suggests that you should be buying high-yield bonds now,” says Andrew Susser, manager of the MainStay High-Yield Corporate Bond fund (ticker: MHCAX). He argues that the junk market was an outlier in a year when U.S. stocks and interest rates were little changed and the U.S. economy advanced at a slow 2% pace.

Susser maintains that vulnerability of the $1.5 trillion junk market is overstated because buy-and-hold investors such as pension funds and insurance companies account for more than half of the investor base. Pension funds and endowments could see junk debt as an increasingly attractive asset class, as they seek to hit targeted annual returns of 7% or more.

One of the longtime knocks against junk debt is asymmetric risk—little upside and a lot of downside. The selloff has changed that equation, with most bonds trading at discounts to their face value, allowing for sizable capital gains. All of this suggests the possibility of double-digit returns in 2016.

(Barron’s)

 

Interesting chart showing that new Junk borrowers are not deteriorating in quality…

@xvrmdf: The horrifying corporate releveraging cycle in its full gory detail…

If you invest in Asset Management companies, then you have already figured out the winners and losers from the new Department of Labor rules…

This is a very big deal right now in the Financial Services industry. Discount Brokerage and Robo Advisors should win. Higher cost servicers could lose.

We assess that the U.S. Department of Labor’s proposed conflict-of-interest, or fiduciary standard, rule could drastically alter the profits and business models of investment product manufacturers like BlackRock and wealth management firms like Morgan Stanley that serve retirement accounts. Based on our proprietary estimates, we believe that the rule will affect around $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.

(Morningstar)

 

Nike showed you that it can grow without a China slowdown. Barron’s thinks the Cruise ship companies will do the same…

Global demand for cruising grew 68% over the decade through 2014, according to data published in October by the Cruise Lines International Association, a trade group. The U.S. accounts for just over half of demand, followed by Germany, the U.K., and Australia. But demand from No. 7 China is growing at a compounded 80% a year…

China’s Potential for the industry is vast. Just one million people there have cruised, versus 12 million in the U.S. Growth won’t come without choppy waters; cruise operators must play nice with Beijing, and the country needs to expand its ports. Travel brokers, too, must be trained and incentivized to sell cruises. But China is the rare investment opportunity that can pay off now and later, by keeping global cruise inventory tight in the near term and gradually tapping what could become the world’s largest cruise market within a decade.

(Barron’s)

 

Amazon showed over the holidays why it is so incredible…

Of every additional $1 Americans spent for items online this year, Amazon captured 51 cents, according to a recent estimate by analysts at Macquarie Research.

And of the expected $94 billion growth in all retail sales this year — both in stores and online — Amazon took a staggering $22 billion, or almost a quarter, Ben Schachter, a retail analyst at Macquarie, calculated.

And this year’s holiday shopping season served to solidify the notion that the Internet is increasingly Jeff Bezos’s world and the rest of us are just shopping in it.

(NYTimes)

 

And Josh had one of my favorite tweets over the break…

@ReformedBroker:

Over the last ten years, Amazon’s PE multiple has averaged 110x.

Shareholders earned 1400% by ignoring “valuation” and focusing on growth.

 

If you have a teenager, you probably bought one of these on Amazon over the holidays because you had no idea where else to buy one…

Touting its success this Christmas shopping season, Amazon revealed on Monday that its top selling home audio product this year was the Jensen JTA-230 3-Speed Stereo Turntable with Built-in Speakers. While it features a USB port for converting vinyl records to digital, and features an auxiliary input for connecting a digital media player, the No. 1 bestseller is decidedly old school, playing 33, 45 and 78 RPM records with a belt-driven three-speed stereo turntable.

(AppleInsider)

 

Meanwhile, the largest stock in the world may have wished that it had an iTurntable to compete with the kids return to vinyl…

But dang, that Apple is cheap. Just get a few of your new products right and this one will be off to the races…

 

Given that I know you saw Star Wars over the break and were thinking about it…

Yes, Disney got a great deal. They paid $4 billion for the Star Wars franchise. Dr. Damodaran back of the envelopes a $10b value for the franchise today. Of course the market cap is $170 billion so Star Wars can’t be your only reason to own Disney.

 

(MusingsOnMarkets)

 

Finally, my favorite menu screen shot over the break. Bandit Plate = Genius!

(@RudyHavenstein)

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