Indices for January

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Indexers having their day

There’s no questions that indexing has become more popular. And since most active managers can’t beat the index, that’s probably a good thing.

Here’s the latest piece arguing that it’s impossible to identify market-beating managers before the fact. Larry Swedroe shows that none other than Bob Goldfarb of the Sequoia Fund can’t predict which managers will beat the market. Goldfarb mentioned 9 managers in a 2006 speech whom he identified as value managers with the ability to beat the index. Swedroe shows that only one, Bill Nygren at Oakmark Select, beat the index from 2006 through 2014.

It’s a tough piece for a value investor, no doubt. One can pick out problems with this fund or that fund — manager changes and improper indexes, etc…. — but the argument is sound enough as Swedroe sets it up. Goldfarb picked a few managers (or funds), and they failed over 9 years.

However, it seems that whenever we have an index rage like this it signals the top of the market. Investor bad behavior — buying at tops and selling at bottoms — is well documented. But it’s also a common problem among indexers.

The fifteen year annualized return for the Vanguard 500 Index fund is 4.13%. By contrast, the Morningstar investor return over the same period of time for that fund — what the average dollar in the fund returned — is a pathetic 1.25%. That lands the fund in the bottom 67th percentile of the Morningstar large blend category for investor returns. Maybe investors piling in to index funds is a warning signal…..

Also, I wonder if all the cash the value funds are holding will soon make both their short-term and long-term records look much better. Federal Reserve action has made it a rather difficult time to be a value investor, if being a value investor means computing intrinsic value of something and trying to buy it at a 30% or 40% discount to that computed number. Not much is trading at a substantial (if any) discount to most reasonable computations of intrinsic value. Perhaps this is the moment where having held cash puts value investors in the worst possible light. That doesn’t mean that continuing to hold cash now is a bad thing.

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Greek Default: Get on with it

Brett Arends calls for Greece to default.

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Okie from Muskogee struggling (The negative consequences of cheap oil)

According to this LA Times piece, the Kern County supervisors have declared a fiscal state of emergency due to lack of anticipated property tax revenues because of the low price of crude.

Not many people know Kern County (110 miles North/Northeast of Los Angeles) is one of the biggest oil producing counties in the country; California produces a lot of oil, most of it in Kern County, the center of which is Bakersfield and the Kern Oil Field. Anyone who doesn’t realize the importance of oil to California can check out There Will be Blood.

According to the 2008 report from the California Department of Conservation, California ranked fourth among states in oil production behind Texas, Louisiana, and Alaska. That year the state produced nearly 240 million barrels or what would have comprised nearly three days of global oil consumption.

Oil companies have accounted for 30% of the county’s property tax revenues recently, according to the Times piece. Soaring pension costs also accounted for the county’s decision to declare a state of emergency.

Last, it’s hard to read about a California Central Valley county declaring a fiscal state of emergency and not think of Meredith Whitney/ Is her dire municipal bond thesis still intact? One California Central Valley city, Stockton, has already gone bust. Are Bakersfield and/or Kern County far behind?

(Hat tip to ZeroHedge for highlighting the LA Times story.)

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Gundlach: Deflation

The Fed is in a difficult spot. It will raise in order to have more tools in the future. If the economy seriously rolls over before they raise, they will have no tools left. That’s what they’re trying to avoid. Another gem: The Fed wants price stability, but it also wants 2% inflation. Those are not the same things.

Gold is a high yielder compared to the 10-Yr Swiss Bond.

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Sam Zell: Opportunities for gravedancing

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Today’s Reads

The NYTimes has a good piece and a data segment detailing the shrinking of the middle class.

Megan McArdle discusses the taxation of the upper middle class by targeting its savings.

Morningstar discusses the Illinois retirement plan initiative mandated by the Illinois Secure Choice Savings Program Act starting in 2017. This will contribute to taking small business owners out of the 401(k) business. And perhaps that’s a good thing given a recent report by Brightscope indicating that the general trend of lower fees in the mutual fund business doesn’t apply to small 401(k) plans.

If you work for a small business, it’s likely that you’re at a serious disadvantage in the quality (expense) of your retirement plan compared to an employee of a large company. And this is particularly important now, given the low future expectations for both stocks and bonds at least in the view of Research Affiliates.

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Gold: not linked to industrial commodities

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Correlation

This isn’t the way value investors typically think, but correlations have been very high for the past 18 months or so — except for high yield and commodities. Are they the canaries in the coal mine? Especially if you think valuations are high to begin with across the board?

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Pat Dorsey on Moats

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