2015 World Economic Conference

8/9/2019 2015 World Economic Conference

1/17

Understanding The Bear Case


2/17

Much, but not all of the shortfall in investor returns are due to psychological factors

such as Loss Aversion, Narrow Framing, Herding or Optimism.

There are actually three primary causes for the chronic shortfall for both equity and

fixed income investors:

Capital NotAvail able, 25.00%

Capital NeededFor Other Things,

25.00%

PsychologicalMistakes, 50.00%


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4/17


5/17

0

51015202530

35404550

64.00

128.00

256.00

512.00

1,024.00

2,048.00

Jan-1871 Jan-1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006

Real S&P 500 Index With Recessions(Robert Shiller Real Price Data)

Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Pr ice))


6/17

35

2126

19 1723 20

32

1811

43

9

2126

20

49

79

3644

38

23

105

35

57

11

91

119

7263

M

ar-

1879

M

ay-1

885

Apr-

1888

M

ay-1

891

J

un-1

894

J

un-1

897

D

ec-1

900

A

ug-1

904

J

un-1

908

J

an-1

912

D

ec-1

914

M

ar-

1919

Ju

l-1921

Ju

l-1924

N

ov-1

927

M

ar-

1933

J

un-1

938

Oc

t-1945

Oc

t-1949

M

ay-1

954

Apr-

1958

Oc

t-1960

N

ov-1

970

M

ar-

1975

Ju

l-1980

N

ov-1

982

M

ar-

1991

S

ep-2

001

J

un-2

009

Historical Economic Recoveries Average 39 Months

Recovery Length - No Of Months


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8/17

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 2020

S&P 500 Earnings as of 06/01/14 EPS Growth Rate Lower Bound (5% Trough to Trough)

EPS Growth Rate (6% Peak To Peak) Earnings Growth Trend Line

2014 Estim ates

Anal ys ts NEVER saw

the earnings reversions

in advance.

2015 Estimates

2020 Estimates

The current slope of

estimated earnings growth

has never occurred in history.


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64.00

128.00

256.00

512.00

1,024.00

2,048.00

1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009

Real S&P 500 Index With Record Highs(Robert Shiller Real Price Data)

Real S&P 500 Index


10/17

The funny thing is there is a disconnect between what investors are saying

and what they are doing.

No one thinks all the problems the global financial crisis revealed have been

healed. But when you have an equity rally like you've seen for the past fouror five years, then everybody has had to participate to some extent.

What you've had are fully invested bears."

Gerard MinackFormer Morgan Stanley Strategist


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-

10

20

30

40

50

60

6.00

9.00

12.00

15.00

18.00

21.00

1998 2001 2004 2007 2010 2013

VIX

S&P500(ScaledBy1

00)

S&P 500 vs. VIX (6-Mo Avg.)

VIX/S&P 500 Ratio S&P 500 (Scaled By 100) VIX - 6 Mo Avg.

Irrational Exuberance

InvestorComplacency

InvestorCapitulation

STREETTALKLIVE.COM


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5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0700

900

1,100

1,300

1,500

1,700

1,900

2,100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Yields-InverseS

cale

S&P500

Falling "Junk Bond Yields"

S&P 500 BofA Merrill Lynch US High Yield Master II Effective Yield

STREETTALKLIVE.COM


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256.00

512.00

1024.00

2048.00

32768

65536

131072

262144

524288

1995 2000 2005 2010

S&P500

MarginDebt

Margin Debt vs. S&P 500

S&P 500 Margin Balances

STREETTALKLIVE.COM

457,106


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-60%

-40%

-20%

0%

20%

40%

60%

0.0

500.0

1000.0

1500.0

2000.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Deviation Of Markets From Long-Term Moving Average

% Deviation From 36-Mth MA S&P 500 Index 36-Mth Moving Avg.

STREETTALKLIVE.COM

S&P500&36-M

thMov.

Avg.

%D

e

viationFrom3

6-M

thMA


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200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1994 1998 2002 2006 2010 2014

S&P 500 Stock Price Index

Time To GoTime To Go

Does This

ReallyLookRational?

Not HereEither...

Absolutely

Not Here...

Liquidity Bubble

Credit/Real EstateBubble

Nope...NoBubble Here.

I Don't Need AnAdvisor - I'm AGenius

Tech Bubble


16/17

If analyzing the risk that will potentially lead to large losses of capital is bearishthen you can

call me a bear, just make sure you call me an almost fully allocated bear.

However, here are the main points to successful long-term investing:

No great investor in history EVER used buy and hold as a strategy. They may have

held positions for a long time, but they were willing to sell when necessary.

Understand and manage risk. Buy low and sell high is not a philosophy, it is a strategyto minimize portfolio risk over time.

In rising markets you can only be long or neutral. In falling markets you can only be short or

neutral. Betting against the trend has never been pro fitable.

Understand that ALL markets eventually mean revert. While irrationality can existlonger than one would deem logical, it will end. Painfully.


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2015 World Economic Conference