Last month, one of the more memorable characters in the investment industry passed away. In the 1970s and 1980s, Joe Granville was one of the most, if not THE most, famous stock market prognosticators in America. I didn’t say he was the BEST prognosticator, just one of the most famous. According to the Hulbert Financial Digest, Mr. Granville’s overall track record was pretty poor. In his prime, he was proof that if you made enough predictions you would eventually get one or two correct. And if you loudly announced that you had made a correct prediction, the investment community would beat a path to your door waiting for your next prediction.
Never mind that your correct prediction was a result of random luck. If it was correct, Wall Street somehow would assume your next prediction would also be correct. That’s one of the problems with Wall Street. It is always looking for that special someone who has mystical powers. Wall Street never ceases to assume that someone was born a generation ago who carries within him (or her) the innate ability to consistently predict the direction of market activity.
And Joe Granville parlayed Wall Street’s gullibility into a career. He didn’t just try to predict the direction of the markets… sometimes he ENGINEERED the direction of the markets. His advice became gospel to his followers and there were days that the market experienced significant declines simply BECAUSE Joe said it was going to decline. He didn’t just predict a decline… he CAUSED a decline.
Joe wasn’t just an alleged “seer,” he was an entertainer. I once attended a luncheon where Joe was the featured speaker. In his gravelly voice, he told everyone in attendance never to watch CNBC without a bath towel. As we sat there puzzled by that advice, he explained, “Drape the towel over the top of your television and continue to drag it down until it covers the entire picture except the numbers scrolling across the bottom of the screen. Then turn the volume completely off. That’s all you need to get from CNBC… the prices of the latest trades.” Actually, that was probably the best advice Joe ever gave anyone.
Over the years, there have been others whose names have achieved legendary status. (Legendary status any more MUST include having your own Wikipedia page. Joe Granville has his own Wikipedia page. I, on the other hand, do not. There are, however, two Richard Boyers who do have their own Wikipedia page. One was a broadcaster in Australia who died in 1961 and the other was an American freelance journalist who died in 1973. Perhaps I need to die to have my own Wikipedia page.)
Recently a Wall Street analyst named Meredith Whitney achieved legendary status. (Yes, she has her own Wikipedia page.) In 2007, she correctly predicted the banking crisis that was at the heart of the economic meltdown in 2008.
Ms. Whitney was smart enough to use that prediction as a springboard for starting her own investment firm. She also made many appearances on CNBC and even was the subject of a small segment on 60 Minutes. (If legendary status was in doubt, any question of it was clearly put to rest with her appearance on 60 Minutes.)
She used her CNBC appearances, as well as her moment on 60 Minutes, to warn investors about an impending financial crisis in municipalities across America. The following is a quote from her Wikipedia page: “On December 19, 2010, in an interview on the CBS program 60 Minutes, Whitney stated that between fifty and a hundred counties, cities, and towns in the United States would have ‘significant’ municipal bond defaults, totaling ‘hundreds of billions’ of dollars in losses, and that this would be something to worry about within the next 12 months.”
Ms. Whitney may end up being correct someday, but that advice in 2010 can be officially labeled “premature.” So far she is off by well over one hundred billion dollars (give or take a few billion) as well as several years.
But at Boyer & Corporon Wealth Management, we appreciate her advice and we understand how difficult it is to make economic and financial predictions. The reason we appreciate her advice so much is because investors far and wide took her advice to heart and sold their municipal bonds as if municipal Armageddon was imminent. Their blind belief in Ms. Whitney’s prophecy was so strong that their actions drove down the price of municipal bonds, providing us with the investment opportunity of a decade. (I wrote about it in several previous Investment Commentaries.) After stepping back from the forest so we could see the trees, we found municipal bonds that had become extremely cheap. Some were priced to yield in excess of 7% TAX-FREE! School District Bonds. General Obligation Bonds. Bonds rated AA. Everything was on sale and we backed up the truck.
We determined that at best, Ms. Whitney was premature and that we had a chance to make a nice profit BEFORE her prediction came true. (It seems that if Ms. Whitney made an error, it was putting that 12-month time frame on her prediction. Without that, she could say today, “Hey, it still might happen.” That’s the tough thing about the investment industry. You can be correct but appear to be incorrect for a long time. Sometimes it is the smartest person who recognizes looming disaster the earliest.)
Within two years, the “Meredith Whitney moment” passed, and as bonds returned to their pre-panic prices, we were looking at gains in excess of 20% to 30%… sometimes even over 50%.
People who are really good at predicting market moves (if those people exist) are very valuable. Just do what they say and you make money, right? Ironically, people who are really bad at making market predictions are equally valuable. Just do the opposite of what they say and you make money.
Unfortunately, most people are just guessing and it’s difficult to count on them for any kind of reliable market information, good or bad. That’s why you should never watch CNBC without a bath towel.
I suppose this is where you expect me to impart some wisdom about what is happening in Washington. As I am writing this, we are 16 days into the “Government Shut Down” and one day away from… I’m not sure. One day away from defaulting on U.S. Treasury Debt? One day away from an agreement between Republicans and Democrats regarding the debt ceiling?
And, if there is an agreement, are we going to be going through this again in early 2014? Markets have held steady throughout the government “shutdown” and are rallying again today. It is difficult to quantify how much the dysfunction in Washington impacts U.S. growth potential. We don’t think anyone really knows what the impact will be and if anyone tells you they know, they are probably lying or misguided.
What we do know is, assuming there is a deal (and they have announced there IS a deal as I am typing this), the focus will turn back to the Federal Reserve Bank and when “tapering” will begin. (Tapering is the act of reducing the amount of bonds purchased by the Federal Reserve each month until eventually they are not purchasing any bonds.)
Janet Yellen has been nominated by President Obama to succeed Ben Bernanke as the next Chair of the Federal Reserve. Many pundits feel that Ms. Yellen will follow a similar monetary policy to Ben Bernanke. For the past several years, she has been considered the most “dovish” of the Federal Open Market Committee (FOMC) so it would not surprise us to see very little change in policy at the Federal Reserve.
One of Ben Bernanke’s criteria to commence tapering has been a reduction in the rate of unemployment. Ironically, unemployment figures are figured by the Department of Labor, which is on an involuntary sabbatical this month so those figures have not been available. Since we don’t know what the “jobs number” was for September, the Fed does not know what to do about bond purchases. This delay in employment information will likely cause the Fed to postpone tapering until December.
Earnings season is just getting underway and we are keen to see how companies are performing in this environment. Valuations are not as cheap as they were a few years ago and appear to be pricing in stronger global growth in upcoming years. However, we believe that if the calm market conditions persist after the “debt ceiling crisis” has passed, stocks can move higher but we are much more cautious after the strong performance of the past couple of years.
The S&P 500 increased over 19% and the foreign markets (EAFE Index) over 24% during the 12 months ending September 30th so stocks clearly are not as cheap as they were. Emerging Markets (primarily the BRICs… Brazil, Russia, India and China) have been flat the past 12 months and may provide a better investment opportunity than domestic markets.
If the agreement they announced (while I was typing) is completed, we expect that stocks could get more expensive before they get cheaper. Just because there is no “headline risk” to get in the way of higher stock prices.
And municipal bonds are still not expensive.
AFTERWORD: Of course after I finished writing this October Investment Commentary, Congress agreed to disagree sometime in the future instead of right now. The House and Senate passed a bill, which the President signed, effectively postponing any possibility that the U.S. would default on its debt. The government is reopened through January 15th and the debt ceiling issue has been suspended through February 7th at which time they will vote to raise the debt ceiling and keep the government open.
Did you really think we were going to default on our debt? Come on, man. You default on your debt when you CAN’T pay your bills. You don’t default on your debt just because you decide NOT to pay your bills. This was like Y2K with a little more drama.
Now CNBC will have something to talk about for the next three months. (Hey, wait a minute. Maybe CNBC engineered this agreement!) So keep your bath towel handy.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.