Research Watch

PORTFOLIO POINT: This is a sampling of this week’s best research notes. In a world of too much information, we hope our selection helps you spot the market’s key signals.

In the aftermath of a shock, once-in-a-lifetime storm that literally shook markets, and days out from an unpredictable US presidential election that could alter the course of the world’s largest economy, we turn to some of the sharpest minds around to help navigate the uncertainty. Dave Rosenberg reveals the 13 investment rules he lives by, Hugh Hendry offers his own “existentialist” take on stocks and gold, and Jeremy Grantham unveils his investment thesis for 2013 – including a warning about the ramifications of the presidential cycle. But no matter who claims the keys to the White House next week, Barclays see opportunities. Farther afield, Deutsche Bank names its expected top-performing economy for next year, while the global bond rally appears to have reached Bosnia – although one commentator warns against pumping money into fixed-income securities as the market apparently tops out. Meanwhile, there’s a new country at the top of the list of global construction powerhouses, National Australia Bank emerges victorious from Singapore’s Hedge Fund Fight Night and Chinese businesspeople find new meaning in the term “gold card”. On video, ogle a newly-completed yacht designed by the late Steve Jobs.

Rosie’s rules to remember...

1. In order for an economic forecast to be relevant, it must be combined with a market call.

2. Never be a slave to the data -- they are no substitute for astute observation of the big picture.

3. The consensus rarely gets it right and almost always errs on the side of optimism -- except at the bottom.

4. Fall in love with your partner, not your forecast.

5. No two cycles are ever the same.

6. Never hide behind your model.

7. Always seek out corroborating evidence.

8. Have respect for what the markets are telling you.

9. Be constantly aware with your forecast horizon -- many clients live in the short run.

10. Of all the market forecasters, Mr. Bond gets it right most often.

11. Highlights the risk to your forecasts.

12. Get the US consumer right and everything else will take care of itself.
13. Expansions are more fun than recessions (straight from Bob Farrell’s quiver!).
(David Rosenberg of Gluskin Sheff, October 25)

Buying gold stocks is ‘insane’...

“[Hugh] Hendry is long gold and short the S&P. ‘It was a great trade until 2008.’ It has been ‘profitable but less predictable’ since the intervention of QE in 2009. ‘There is an observation that QE has fortified the S&P versus the performance of gold.’ For the edification of those caught in the endless debate of gold vs gold miners, he says: ‘I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300. And there is no valuation argument that protects you against the risk of confiscation. And if you are bullish gold why don’t you buy gold ETFs, gold futures or gold bullion.’ And his brilliant conclusion: ‘I have resigned from the professional undertaking of coin flipping. I am not here to tell you where gold’s going to be. I have no idea. That’s my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may.’ (ZeroHedge, October 25)

The presidential cycle has already turned...

“I am going to be careful [in 2013], particularly for the first half of next year. Great brands of blue chips are not so bad in the US. Emerging countries are about fair price. Beaten-down European stocks, particularly the so-called value stocks, are probably a little cheap, although risky. And resource stocks, once they reflect the weak economy–and we’ll get another whack-down–will be a wonderful long-term purchase. Farmland and forests, which should be the backbone of any long-term, serious portfolio. … It will also be a good time to buy in. … I’ve hero-worshipped the presidential cycle. Going back to 1932, if you take the first and second year together, they’ve had no real return in the market. All of the return has been compressed into a gigantic Year Three and a respectable Year Four. For us, the cycle years start on October 1st. So now we’re in the dreaded first year. And we have Republicans threatening to add fiscal constraints into a very fragile economy. We have the European situation. We have China stumbling in an incredible slow-motion style. I think it’s a really good year to keep your head down.” (Jeremy Grantham of GMO via Businessweek, October 25)

If Obama, Sell Stocks; If Romney, Sell Bonds...

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“The US elections have the potential to have a significant impact on US equities and rates markets, according to a recent survey by Barclays Research. Investors seem to believe in a more promising growth outlook under a Romney win, in spite of their concerns about a likely tighter monetary policy stance. They favour long equities and short bond portfolios as the best way to express a Romney win. Under an Obama win, investors favour bonds and are divided about the direction of equities, but would choose bonds and equities over FX and commodities to express this scenario.” (ZeroHedge, October 30)

The size of major bull markets...

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(Barry Riholtz, October 25)

Next year’s fastest growing economy will be...

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(Deutsche Bank, October 30)

Searching for yield farther afield...

“Gabriel Sterne, an economist at the frontier-market brokerage firm Exotix, told Business Insider, ‘You get some of these big funds – a lot of the funds in the States – just getting these inflows every month. What do they do with them? They tend to just double up and put them in [emerging markets]. In the absence of any bad news, there is not enough supply out there, so yields just fall down.’ … Sterne, whose clients at Exotix are typically looking for investment opportunities in frontier markets – economies not even developed enough to be considered ‘emerging’ – said investors were going to extraordinary lengths to find value. ‘We’ve got quite a repeated trade recommendation – the more [the EM rally] goes on, the more the less liquid stuff gets hit, and it’s fairly predictable, actually. Now, we’re up to the last vestiges – it’s like the Bosnias and the Seychelles that haven’t yet been tightened in. The really illiquid stuff looks like really good value at the moment, because it’s not quite hit them yet,’ said Sterne. He told Business Insider that Exotix just promoted Bosnian and Seychelles sovereign debt to its ‘top-5’ list, ‘just kind of on a valuation basis.’” (Business Insider, October 27)

Until the bond market inevitably collapses...

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“There’s going to be such a brutal bond investor slaughter at some point over the next decade that the streets of Boston’s mutual fund district will run red with blood, the skies will be shot through with the lightning and thunder of unexpected capital losses and those who manage to survive will envy the dead. … Since December 2007, investors have poured more than $1.1 trillion into bond mutual funds and exchange-traded funds (ETFs)–more than 33 times the amount allocated to equity funds and ETFs. … Llunatics are ploughing money into fixed income at all-time low interest rates during the parabolic final phase of a 30-year bond market rally. You are going limit-up long into one of the most obvious blow-off tops in the history of investing. And you’re doing this with almost guaranteed inflation ahead of us and only the prospects of negative real rates of return... And you’re doing this because you are mistakenly worried about a possible 20% drawdown in equities at some undetermined future point in time. Many of you are worried about this even despite the fact that you’ve got 15, 20, 25 years left til retirement and the actual use of your invested capital. Would you like to know the amount of 20-year rolling periods over the entirety of the 1926-2010 period during which US stocks declined in value? OK, sure - the answer is zero. … I don’t hate bonds, they are an integral part of our low-vol portfolio models. But to be doing bonds instead of stocks looks suicidal to me in the context of a long-range retirement portfolio.” (The Reformed Broker, October 26)

Welcome to the golden age of investing...

“Last year I had the privilege of interviewing Burton Malkiel, author of the classic book ‘A Random Walk Down Wall Street’. He reminisced, not too fondly, about the investing landscape of the 1970s, when the first edition of his book came out. ‘The typical mutual fund at the time had a 7% load fee,’ said Malkiel. ‘So a $2000 investment might mean $140 in essentially a commission.’ In addition to the 7% front load, that mutual fund probably also charged about 2% in annual expenses. … In September, Schwab announced price cuts on most of its exchange-traded funds (ETFs). An ETF, for our purposes, is basically equivalent to a mutual fund. Schwab’s flagship stock fund, the US Broad Market ETF (SCHB), now charges 0.04% a year and their Intermediate Investment Grade Bond ETF (SCHZ) will cost you 0.05%. If you also buy and sell the ETFs through Schwab, there are no trading fees whatsoever. … So, let’s compare the fees paid on a $10,000 investment by a 1970s mutual fund investor versus someone investing in that dirt-cheap Schwab stock fund today:

That’s a 99.6% reduction in fees. … The best investors are unrepentant cheapskates. For them–for us–the golden age is now.” (Mint.com, October 23)

The new challenger in global construction...

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“Not so long ago Japanese construction firms were the competitors that Western ones feared the most. But in less than a decade the Japanese have disappeared from International Construction magazine’s annual top ten, with their places taken–inevitably–by the Chinese. China’s unprecedented construction boom has coincided with stagnation in Japan. … As the Chinese firms seek to expand globally, they can learn from the decline of the Japanese and the survival of some big Western firms. One reason the Japanese dropped down the world league... was their reluctance to grow through acquisition. In contrast, the biggest European firms have been enthusiastic buyers. … In the past year [French giant Vinci] has acquired companies in Canada, India, Turkey and New Zealand. In some cases Vinci bought firms for their understanding of their home market. In others it has followed a trend among big Western builders of buying specialist consultancies, in areas such as soil mechanics and electrical engineering, to have their expertise on tap. To be capable of bidding for the most sophisticated projects, the Chinese builders may also have to make such acquisitions and integrate them well.” (Economist, October 27)

How to do business in China...

“One of the new trends we’ve seen and heard about from business colleagues in Asia is how mainland officials are now receiving bribes in the form of solid gold business cards. Imagine you’re a businessman in Xian who needs some silly permit, and you have to grease a local bureaucrat. It would be untoward to deliver a suitcase full of cash… especially these days with all the internal scrutiny from the Bo Xilai incident. So now what business people seem to be doing is minting solid gold business cards. When they want to bribe an official, they schedule a meeting, and hand them a business card or six. It’s so innocuous, nobody really notices. For the bureaucrat, it’s much simpler to travel with a few ‘gold cards’ than cash. And Hong Kong is an easy place to store a collection of such cards… or even melt them down into other forms.” (Sovereign Man, October 30)

Banker bashing...

“Adam Gazal trained for six months to stand in the ring for six minutes of live boxing. He remembers the noise, and not much else, and said he’d like to try it again, though he realises that the time in the gym took time away from home. ‘I think my wife will divorce me if I go through another six months of training,’ Gazal said after the fight. The managing partner of National Australia Bank was one of 14 contenders who on Thursday took part in Hong Kong’s sixth annual IronMonger Hedge Fund Fight Night, a fundraising event that is now a staple of the city’s financial community. Gazal, who fought his pal Grant Livingston, an executive director at JPMorgan with a long reach and quick jab, won by unanimous decision. … At more than HK$2,000 ($260) a seat, the black-tie crowd filled every chair inside the makeshift boxing tent. Proceeds go to children’s charities Operation Breakthrough and Operation Smile, with last year’s event raising more than HK$500,000.” (Reuters, October 25)

Video of the Week: Behold, Steve Jobs’ yacht...

A sleek yacht designed by Steve Jobs has been completed a little over a year after the death of the Apple co-founder and CEO.

(Market Watch, October 29)