Warren Buffett is not called the ‘Oracle of Omaha’ for nothing.
‘Be fearful when others are greedy, and be greedy when others are fearful’ is good investment advice looking back at the turmoil of September 2008.
The demise of Lehman Brothers five years ago marked the start of a truly fearful six months for investors. Only in March 2009 had risky asset prices fallen far enough for bargain-hunting buyers to begin picking up equities and lower-quality bonds.
On the anniversary this weekend of Lehman’s collapse, those investors who stayed the course in equities and junk bonds can afford a smile. The S&P 500 index has gained 50 per cent.
They have done well, though alternative bets made in 2008, such as buying a New York City taxicab medallion, have done even better.
Tough times lie ahead for investors and fund managers in an uncertain environment. The US Federal Reserve may ease its emergency bond-buying programme, global economic growth is tepid and markets are volatile.
As a result, investors will have to lower their return expectations and the industry will come under pressure over investment performance and its lack of agility.
So says Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, one of the world’s most influential bond houses, with $2tn in assets under management.
Bruised by the first widespread losses for bondholders, investors pulled $8.6bn from US bond funds in the last week, contributing to the worst four-week streak since the depths of the financial crisis.
The latest outflow takes the four-week total for withdrawals to $23.7bn, and marks the worst month of outflows since October 2008 when investors yanked a record $44bn from bonds, according to research group Lipper.
Investment managers are closely watching the flow data for signs of withdrawals rising, which would force managers to sell assets and place further pressure on bond prices.
Retail investors will return from the US Independence Day holiday next week to open brokerage statements for the second quarter that will show losses for the majority of bond funds.
“We’ve become very focused on what happens in mid-July,” said Peter Fisher, senior director of the BlackRock Investment Institute.
PIMCO Total Return Fund, the world’s largest bond fund, increased its U.S. Treasuries holdings to the highest in over a year in April, data from the firm’s website showed on Thursday.
The fund, which has roughly $292.9 billion in assets and is run by Bill Gross, increased its holdings of U.S. Treasury securities to 39 percent in April, up from 33 percent in March.
Treasuries “are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate,” Gross said in his May investment letter to clients.
Gross, a founder and co-chief investment officer of PIMCO, said in the letter entitled “There Will Be Haircuts,” that while Treasuries are a better alternative than cash, they still face a loss of at least 2 percentage points in the interest payouts after accounting for inflation.
Two former high-ranking executives at JPMorgan Chase faced tough questions from senators Friday about why the bank played down risks and hid losses from regulators when it was losing billions of dollars.
The hearing was held a day after the Senate Permanent Subcommittee on Investigations issued a scathing report that ascribed widespread blame for $6.2 billion in trading losses to key executives at the nation’s biggest bank.
Douglas Braunstein, the former chief financial officer, and Ina Drew, the former chief investment officer overseeing trading strategy, were pressed to explain why bank executives gave federal examiners in April information that significantly understated losses for the first quarter of 2012.
“The number I reported (to the regulators) was the number that was given to me,” said Drew, who resigned last spring after the losses became public.
With its prior record of 14164.53 left in the dust, the Dow Jones Industrial Average is ready to move on to its next target: 15000.
Whether stocks can reach that peak depends on the pace of economic growth, corporate earnings and the future of intervention by the Federal Reserve and other central banks, strategists say. But with the market—when viewed in relation to company earnings—still trading at a discount to previous peaks, some money managers remain bullish.
“The market could go higher on earnings, and I think we may. If monetary pressure stays positive, that could drive us higher. And if nothing bad happens in Europe, that could drive us up,” said John Manley, chief equity strategist at Wells Fargo‘sWFC +0.47% funds unit, which manages about $200 billion in assets. “If you start from that notion that everything’s going to fall apart, the gradual erosion of that thinking can drive the market higher.”
While many of recent years’ problems remain unsolved—such as a slow recovery in the U.S. economy, and debt issues in the euro zone—individual investors finally seem to be “coming out of their shells,” said Art Steinmetz, chief investment officer at OppenheimerFunds Inc., which oversees $205 billion in assets.
Adam Grimes (Chief Investment Officer of Waverly Advisors) prefaces his 2012 book, The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies, by stating: “This book…offers a comprehensive approach to the problems of technically motivated, directional trading. …Trading is hard. Markets are extremely competitive. They are usually very close to efficient and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted returns, and it is even more difficult to successfully apply such a method in actual practice. Last, it is essential to have a verifiable edge in the markets–otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits. Perhaps this is possible, but I have never seen it work in actual practice. …The self-directed trader will find many sections specifically addressed to the struggles he or she faces, and to the errors he or she is likely to make along the way. …[Institutional] traders will also find new perspectives on risk management, position sizing, and pattern analysis that may be able to inform their work in different areas.” Using example charts for many assets from different times over different time frames and from different markets, he concludes that:
From Chapter 1, “The Trader’s Edge” (Page 7): “Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. …we do not trade patterns in the market–we trade the underlying imbalances that create those patterns.”
From Chapter 2, “The Market Cycle and the Four Trades” (Page 45): “When buying pressure seems to be strongest, the end of the uptrend is often near. When the sellers seem to be decisively winning the battle, the stage is set for a reversal into an uptrend. This is why it is so important for traders to learn to stand apart from the crowd, and the only way to do this is to understand the actions and emotions of that market crowd.”
From Chapter 3, “On Trends” (Page 95): “…many outstanding trades come in trending environments. Market structure in trends is often driven by a strong imbalance of buying and selling pressure, it is often easy to define risk points for trades, and some of the cleanest, easiest trades come from trends. However, markets do not always trend.”
Jeffrey Gundlach, one of the world’s leading bond fund managers, has reversed his once-bearish stance on government debt, saying he has bought “more long-term Treasuries in the last month” than in the last four years.
Gundlach said he started buying benchmark 10-year U.S. Treasury notes in the last month after yields popped above 2 percent, because he sees value there relative to other asset classes, including stocks, which he said are “overbought.”
“I bought more long-term Treasuries in the last month than I’ve bought in four years. I am a fan of Treasuries now. I wasn’t a fan of Treasuries in July,” said Gundlach, chief investment officer and chief executive officer of DoubleLine Capital.
His Los Angeles firm manages $56 billion in assets.
The Pacific Group Ltd., founded by a former PaineWebber Inc. trader, is converting one-third of its hedge-fund assets into physical gold, betting that prices will go up as governments print more money to pay off debt.
The Hong Kong-based asset manager plans to take delivery of $35 million worth of gold bars that can be traded on the London Bullion Market Association and other international markets, William Kaye, its founder and chief investment officer, said in a telephone interview on Jan. 18. It has secured vault space at Hong Kong International Airport to store the gold, he said.
Investors disillusioned with government money printing to service “insurmountable” public debt may seek alternatives to fiat currencies, Kaye said. Asset managers, including Soros Fund Management LLC, Paulson & Co. and Sprott Inc., are betting on the precious metal even after a 12-year rally has cemented the longest bull market in at least nine decades.
“Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”
Fiat currencies have no tangible backing, such as gold or silver, except governments’ good faith and can become worthless due to hyperinflation or loss of public faith.
Pacific Group’s $95 million Greater Asian Hedge Fund, which started trading in 2001, returned 2.8 percent last year, taking the cumulative net return since its February 2000 inception to 195 percent. It suffered two down years in 2008 and 2011, according to its December 2012newsletter.