There was what I will call an odd article in the NY Times that was mostly interview with a touch of profile of Tobias Levkovich from Smith Barney.I have tended to be critical of his thought process and his use of what I'll call the compliance crutch for never naming names--other people in similar positions from other firms are able to give the occasional name.
No doubt I may be overly critical, even biased, as I am very underwhelmed every time he comes on. Maybe I am totally off base but it doesn't strike me that he is right very often. Am I wrong?
To quote him from this NYT article “The hit my portfolio has taken has become a significant loss by anyone’s measure, I feel crummy.”
Despite what anyone may be feeling the S&P 500's drop from the peak does put it in the category of down a lot. At just over 15% I will concede it has gone past down a little but down a lot? No.
So either the chief US Equity Strategist of a major wirehouse firm is badly lagging the market in what I presume is his own portfolio or he is having an emotional response to a 15% decline. What is anyone to make of this? As I said above I just find this odd.
If you read the article you will get an inkling of why I don't think much of his analysis, at least the analysis he talks about publicly. There is a point in the article where he spells out what I would describe as a sort of bottoms up analysis that focuses on earnings declines that he thinks are priced in and a variation of the Fed Model along with a stat about how often the market has been up in the past with similar circumstances.
Of his SPX 1675 target for year end 2008 he says “I’m sticking with it for now because I don’t have an analytical basis for changing that view.” I will say that he could turn out to be right for all I know but what are Smith Barney clients paying for? Any broker there following Levkovich's advice has apparently taken clients on a painful ride as I think he is telling us he did not see the decline coming and has ridden it down with no action.
I am not critical of a client being emotional but I am critical of a anyone who is a professional who gets emotional in this sort of circumstance.
The types of earnings stats he mentions in the article and when he is on TV does not appear to ever be forward looking and further I believe his approach brings up a forest for the trees analogy. He focused on the little picture while the big picture was very obvious.
I believe I have the credibility to say it was obvious as I expressed concern for the financials and the broad market when the yield curve first inverted (here is a link from two years ago that recaps a debate I had on RM Columnist Conversation with another writer where I said inversion mattered and the other writer explained why he felt did not matter). To be fair I was early as far as when I thought it would come home to roost.
Mr. Levkovich's approach does not strike me as being simple, the article actually says "the actual math gets pretty complicated..." To be clear that is a quote from the writer of the article not a direct quote from Levkovich.
It should be obvious than a strategist of any sort at a firm like his is very smart and knows a lot (there is no way I would ever be considered for this type of position, not false modesty I know enough to know this is true) but for whatever reason he looks at the wrong things. Cycles matter, cycles end and they often end with roughly the same set of variables, issues and indicators and I have never heard Levkovich ever pay heed to them.
So my wife has been volunteering fulltime for an animal rescue for about a year now and we've gone this long without bringing a dog home until yesterday, lol. Trixie.
25 comments:
All one need do is travel this country to see that we have become a nation of services. All services do is move money around between various parties. Meanwhile, real wealth is being generated overseas in the new markets, such as China. You don't need to take my word for it either. Just travel around and have a look.
I'm starting to believe that the yield curve inversion wasn't giving a strong enough foreshadowing of what is to come. When AMBAC and others in that space can't borrow money cheaply due to credit downgrades from Moody's or S&P, there will some failures in the insurers. That scenario does not bode well for equities. IMO derivatives are just fancy way of saying fraud. We learned a little about that with Conseco here in Indy. Tom in Indy
Now that you are a dog owner your life will take on a richness you would never have experienced otherwise.
The 8:17AM comment is the sort of ill informed nonsense that passes for fact today.
It's unclear what this commentator's 'travel' involves but clearly he has yet to hear of GE, Boeing, Caterpillar, John Deere, ADM, Big Pharma, Microsoft, yes even Ford and GM, and on and on. Things made in America by American companies with American labor and sold abroad as much as here.
This ill informed writer had better look to Washington for the cause of the problems before defaulting to the socialist lament that forever blames China, which is nothing but a low value commodity manufacturing subsidiary of the US in commercial terms. The high value added work is done here.
We remain the industrial powerhouse of the world by a vast margin.
Tom in Indy
I don't think yield curve inversions are capable of predicting magnitude, I have mentioned before that i take it as a warning of trouble without trying to guess what the trouble might be.
I have said that I expect this bear or recession or whatever to just be normal because it seems like so many are worried about Armageddon. I should note that being right about magnitude is zero priority.
anon 843, thank you but Joellyn and I have had dogs together since 1992. Trixie makes five. We have been three dog people for most of that time, four for the last 14 months and now five.
ah, dogs. we're a three dog household, 2 corgis and a bichon/king charles cav mix known in designer dog circles as a cavichon. i figured the cav was going to be a laze-about lapdog but turns out, at a year old, the wee beast is a prey-driven, frisbee-chasing fantatic. i love that dog! good luck w/ your newcomer.
It didn't sound to me like 8:17 was blaming China; just pointing out that while we screw around creating new structured products to speculate with until they blow up in our faces, the Asians are busy cranking out everything from underwear to ocean freighters.
I expect you and Mr. Levkovich will not be sharing a beer anytime soon :)
"It should be obvious than a strategist of any sort at a firm like his is very smart and knows a lot (there is no way I would ever be considered for this type of position, not false modesty I know enough to know this is true) but for whatever reason he looks at the wrong things."
I hate when you sell yourself short. If I could reach across the internet I'd slap you.
I think you do a lot better than you think, you just do not seem to be a natural sales person. You also need to rethink your dress policy. Frequently, people with millions of dollars will invest with someone not wearing T-shirts even when the guy wearing the T-shirt is correct.
You were correct about the inversion signaling a problem coming. But, until the liquidity crisis also took effect the market was booming so it made sense to stay invested. Once that changed the sell everything guy (in the future to be seg when he remembers) sold almost everything.
seg
"an emotional response to a 15% decline"
_______
- indeed it is helpful to be mentally adjusted to the idea that we are probably in a Bear Market.
- yes - -15% is not down a little & yes - -15% is not down-a-lot.
If this is to be a Kondratiev super-cycle down wave, then it is not unthinkable for the market to be down -80% and that would be down-a-lot.
A reliable sign that the down-wave had finished could be that one troy ounce of gold will have the same value as the Dow Jones Industrial Average.
..............
I can remember watching Larry Kudlow and his merry men the first day that the yield curve inverted. He yelled and waved his arms and interrupted anybody who even hinted that this might presage a recession. I took solace in his conviction at the time. Maybe he'll still turn out to be right, but with the market tanking, it would be a pyrrhic victory at best.
anon 12:51,
i can't say no way about a 25 year cycle but i have trouble with the concept. there are so many things that change over time that measuring such a long time period and comparing it to another 25 year period seems difficult to create a fundamental case of any sort to support a technical view as serious as what Kondratiev implies.
anon 1:34,
no surprise about Kudlow IMO he fails to recognize that assets don't need to be protected from bull markets and great stories. Assets need to be protected from big declines.
Your comment makes an interesting point about Pyrrhic victories. As I have written about this issue I almost always talk about big declines in the market (bear market if you prefer) with very little mention of economic recession.
for the purposes of managing portfolios I am far more concerned with what the market does than whether we go into a recession. If there was a recession but only, say, an 8% drop in stock prices I wouldn't really care about the recession. That may sound cold but no investment manager can solve the world's problems all they can do is try to protect assets, this applies to people who manage their own money too.
Roger--Dr. Brett posts an interesting chart on S&P sector performance today. One interpretation is that everything is down and there's no place to hide (except cash.) To your credit, though, it's pretty obvious that overweighting and underweighting sectors could produce results that are down less, if not a little. Hopefully, the point isn't lost on Tobias.
Roger,
You said, "It should be obvious that a strategist of any sort at a firm like his is very smart and knows a lot." Highly paid, brainy, he and his cohorts add prestige to a firm. No doubt. But.
Tobias Levkovich reminds me of what Burton Malkiel says about the type. Essentially, it is this: save your money.
For a few years a small number of them may strike it lucky, getting their faces in Barrons for outstanding track records, and then their star fizzles out.
Year-in and year-out, over the long haul, even broad index funds do better than any boy genius.
Index funds doing better is probably true but many of the people buying them, being human, allow their emotions to get in the way.
It is a complicated issue regardless of whether this one strategist is great or is lousy at his job.
HI Roger,
I assumed Tobias was feeling "crummy" because he probably has much of his personal wealth tied -up in Citicorp Stock. Now, that is down a lot! I thought, wow, even these guys don't seem to learn to diversify out of their company stock! Just a guess, of course. By the way, thanks so much for your blog, I read it everyday, and I really like your balanced, calm approach to investing.
I think it was at least three years ago that I read in the Economist magazine an item about the terrible fallout risk for the US economy caused by increasing liability of the subprime mortgage market. If these people couls see this coming why was it that the financial advisors - the ones that earn such big commissions, could not?
I've been through a couple of these and a recurring behavior is the sincere belief that this time is different. Excesses in the financial sector, as we know, have happened several times before and they will happen in the future.
Each excess is a little different so people incorrctly project that because of those differences the fallout will be less or not at all.
I am a big fan of yours, Roger. Because of your idea of adding double shorts to my IRA (as well as investing in GLD), I'm only slightly down right now. But I am losing ground. If this is a bear market which will ultimately drop 25% to 30% (or more), wouldn't I be wise to go to cash now while I'm still ahead. When the market turns bullish, I will have plenty of time to get back in because I won't be making up a 25% to 30% loss. No?
what if its not a bear market and Friday was the bottom?
I have no idea what you should do, I have a couple of ideas as to how to take a little more defensive action as this moves on.
If you own a double short fund it will hedge more if the market keeps going down. your answer depends on your tolerances I suppose.
New York Times. "All the news that's fit to print".
Ha.
Roger,
Is there any conceivable set of circumstances that would compel you to exit your short position(s), or would you merely underweight them a "bunch"? Just curious...
Jan
i would be willing to sell. for the last 18 months I felt we were late in the cycle. soon, we will be early in the cycle and while the market may still be bumpy at that point hedging will hold less appeal.
MLK Holiday
___________
- just been looking at the S&P500 Index which is trading on Globex inspite of the holiday
- the March contract of S&P500 has just done a Swan-Dive touching 1282,25
Kondratiev - perhaps we are in a super-wave
...............
S&P500
_____
- around noon in Europe, Globex March S&P500 touched 1256,50
- maybe not down-a-little any more.
.................
susan made a comment about levkovich not diversifying his citicorp holdings. several people i worked with defected from smith barney/citicorp around 1999 and 2000. at that time citicorp paid annual bonuses largely in citicorp stock with essentially a three year handcuff (think of it as vesting). if citicorp still does that, levkovich holds a pretty big slug of citicorp (at least relative to his annual base comp). it's not surprising he shows signs of depression.
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