16 October 2017: What if Warren Buffett is wrong?

Warren Buffett’s 3 October statement that “[stock market] valuations make sense with interest rates where they are” strengthened the conviction among many investors that the current market boom is not a bubble about to burst. John P. Hussman, president of the Hussman Investment Trust and former professor of economics and international finance at the University of Michigan, thinks Buffett is missing the point here. In his 9 October article Why Market Valuations are Not Justified by Low Interest Rates, Hussman states that “if interest rates are low because growth rates are also low, no valuation premium is ‘justified.'” According to Hussman, “[…] the convenience of investing-by-slogan, rather than carefully thinking about finance and examining evidence, is currently leading investors into what is likely to be one of the worst disasters in the history of the U.S. stock market.” But as long as the markets continue to reach all-time highs, these are just voices in the wind. And that may turn out to be a problem sooner than later.

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US markets bathed in a sea of green on Friday. All three indices reached new intraday records. Even the Trump administration’s unexpected cut of healthcare subsidies couldn’t spoil the party. The Dow closed 0.13% higher and the NASDAQ gained 0.22%, while the S&P 500 lost much of its intraday gains, but still ended in the green: +0.09%. The S&P 500 eked out a small gain for the week: 0.15%. The NASDAQ doubled that: +0.31%. The Dow was the best performer of the three indices, with a profit of 0.43% for the week. Volatility eased once again last week. During the first half of the week, the VIX hovered around the level of 10 points. During the second half, it sank back into the single digits, closing at 9.61 on Friday (-3.03% for the day, -0.41% for the week). XIV ETNs profited from this easing volatility and gained 1.86% on Friday. UVXY ETFs lost 3.69%.
Danny Daredevil is holding UVXY ETFs and as a result he paid the price last Friday. His RSS dropped by more than 4 percentage points to 15%. Adventurous Anny is holding cash. Her RSS remained at 9%. Solid Suzy and Lazy Larry saw their RSS rise to just below 62%.
None of our models gave a trading signal at the end of Friday’s session.

Model  Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

15.17%

-71.43%

-17.33%

8%

Adventurous Anny Cash 6 March 2017

9.22%

9.22%

0.67%

16%

Solid Suzy XIV 6 March 2017

61.73%

61.73%

10.56%

120%

Lazy Larry
XIV 6 March 2017

61.73%

61.73%

10.56%

120%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

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Last night, the Rolling Stones played the second-to-last gig of their European No Filter concert tour. The event took place at the Gelredome in the city of Arnhem. René counted himself lucky to be there. One of his favorite Stones songs is You Can’t Always Get What You Want. There is something about that song that appeals to him a lot. It is not only about the beautiful, haunting melody (sung by the London Bach Choir on its 1969 release). But most of all, it’s about these beautiful lines: You can’t always get what you want / But if you try sometimes you just might find / You just might find / You get what you need…

 

Picture of Warren Buffet by Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0], via Wikimedia Commons