Whose Advice You Shouldn't Listen To: Asset Allocation Daily

by: SA For FAs
Summary

Franklin Templeton Investments anticipates rising demand for munis as a consequence of tax reform.

Richard Turnill and John M. Mason offer opposing views of the energy sector.

Thought For The Day: Investors need to learn to spot the charlatans.

Munis

“With the cap on SALT (state and local tax) deductions at $10,000, we expect demand to increase for municipal bonds, particularly from higher tax states. While we haven't experienced a material increase in such demand as of this writing, we tend to see a shift in demand only after the impact is felt during the tax period by investors. Therefore, we believe a pickup is likely after the impact of the cap is fully felt in early 2019 during the tax preparation season.” (Franklin Templeton Investments)

Oil Price Rebound?

“One reason oil prices may be near a bottom: production appears set to decline after oversupply concerns contributed to the recent rout. The Organization of the Petroleum Exporting Countries (OPEC), and its partners are expected to cut production at their meeting this week in an effort to help stabilize prices. OPEC curbs since 2016 have had that effect... We estimate a cut of roughly 1.2 million barrels per day in this round.” (Richard Turnill)

Or Further Energy Sector Woes?

“Economic growth has been seen to be softening almost everywhere, leading to feelings that the global economy will not be very strong in 2019 and possibly 2020. This would mean that oil prices would stay near current levels or even decline further. This outcome is seen as seriously hurting energy companies that have over-borrowed during times of very low interest rates. The declining oil prices could result in serious financial difficulties for the energy firms.” (John M. Mason)

Private Equity

“Not only has it outperformed, the US Private Equity Index also has much lower volatility than the S&P 500… Unfortunately, it is more illusion than reality. After all, private equity portfolio companies are typically valued on a quarterly basis so lack a daily time series. In addition, most portfolio company valuations are smoothed as they are conducted by external appraisers using business plans from the private equity firms. If private equity firms valued their portfolio companies on a daily basis using public market multiples, volatility would be much higher and more reminiscent of the S&P 500.” (Nicolas Rabener)

How To Think About Annuities

“Think about the following ‘allocation’ question: should you include phosphorus or zinc supplements in your ‘portfolio’ of daily pills? Well, if your regular diet consists of plenty of peas (phosphorus) and shellfish (zinc), then you are probably consuming more than the recommended milligrams per day. There’s no need for more. But if you don’t (or can’t) enjoy those foods, or other dishes heavy in phosphorus and zinc, you should consider supplements. But remember, 700 milligrams of phosphorus per day is a good idea, 7,000 is unhealthy and 70,000 will incinerate your internal organs and kill you. My point? The role of annuities in the optimal retirement portfolio is similar to the role of these minerals and elements. A well-balanced daily diet includes a cocktail of copper, iron, phosphorus, and zinc. All diversified retirement portfolios should consist of some cash, stocks, bonds, real estate, health insurance, long-term care insurance, and some - but not too much - annuities. I like to think of it as a retirement cocktail.” (Moshe Milevsky, writing in the Journal of Financial Planning)

Thought For The Day

If someone could have told you in advance that Disney (NYSE:DIS) would be make an offer to purchase 21st Century Fox (NASDAQ:FOX), is that the sort of actionable advice you’d be interested in? If that same soothsayer could have provided you advance notice that Donald Trump would become president, would that be worth something to you? If that very same source was so attuned to the subtleties of economic thought as to have foreseen Bengt Holmstrom’s 2016 selection as Nobel Prize laureate in economics, would it interest you to follow this source in your own financial decision making?

I certainly hope not, because The Simpsons, the aforementioned source for all of the above, is not a reliable guide to investment decision making. Despite the fact that these and other items appearing in the popular show’s gags did in fact materialize, the show’s forecasters (I mean scriptwriters) have been far less prescient with most of their other spoofs.

Consider this my holiday public service announcement to readers as the season of predictions get underway. Fortune’s 2019 predictions helpfully note what they correctly predicted for 2018 (if you make a bunch of predictions, especially in binary choices, some will turn out right!) And TheStreet.com’s Jim Cramer nailed Nvidia’s (NASDAQ:NVDA) earnings miss a month ahead of time. How do we know? Courtesy of the TheStreet.com, whose notification helpfully includes a membership offer. Do they put out articles letting us know of Cramer’s bloopers too (along with a cancellation offer)?

And so it goes. Even a serious market maven, who wouldn’t seek guidance from the Simpsons, might credit the views of the very distinguished economist Martin Feldstein, who recently wrote about how rising long-term rates would lead to a stock market rout, an article ominously published on October 29 (which was Black Tuesday back in 1929). Yet as John M. Mason points out, just a short time later, long-term interest rates are now falling, to most everyone’s surprise, and logically, that might imply a different market forecast.

The point of this warning is not to bury market analysts but to praise the good ones, who offer their insights without any pretense of knowing the unknowable. If you have funds available with which to invest, then it makes sense to listen to many arguments about how best to do that and go with the one that is the most persuasive. But investors need to learn to spot the charlatans. Probably the biggest give away is bragging about having been right about some market call. It is only fair for readers to assume that someone who does this is in the habit of making multiple such forecasts. One should therefore assume that many other predictions did not pan out, and that this is someone not worth listening to, on the basis of both arrogance and deceit.

In contrast, humility and honesty can form the basis of a market outlook when the analysis focuses on earnings, revenue, competition, technological developments, market history, current events, the legislative process or what have you, so long as it is written with an awareness of the fog of uncertainty that always shrouds our knowledge of the future. The market’s mountebanks intentionally project a false certainty because a) they generally have a business model tied to their supposed clairvoyance; b) they know people don’t generally hold them accountable for their mistaken predictions; and c) they want to be able to say, “see, I told you so” when random chance yields them a correct call.

The bottom line when it comes to the future is that no one gets to know what will happen until it actually happens.

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