There were several key conferences this week where business leaders, investors and big thinkers shared their ideas and thoughts on the world today. The one getting the most coverage is the Ira Sohn conference in New York, where major investors give talks to raise money to fight children’s cancer. The big news out of there is that Stanley Druckenmiller (Trades, Portfolio) said flatly that investors should get out of the market.
He said the Fed has no end game and their policies are preventing the very growth they had helped to engineer.Ă‚
“I have argued that the myopic policymakers have no end game,” Druckenmiller said. "They stumble from one short-term fiscal or monetary stimulus to the next, despite overwhelming evidence that they only produce a sugar high and grow unproductive debt that impedes long-term growth. Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggest we have borrowed so much from our future and for so long that the chickens are now coming home to roost."
He also pointed out that corporations are borrowing a lot of cash and using it for financial engineering and buying back stock, rather than expanding their operations and creating and preserving jobs. All of this adds up to the approaching end of the bull market according to the former hedge fund manager. He told the gathering that "three years ago on this stage, I criticized the rationale of Fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself."
While I don’t pay attention to everyone who makes such predictions, it's worth noting that the man compounded money at more than 30% annually form 1986 to 2010. In short, he has a clue.
A similar tone was struck by panelists out on the West Coast at the Milken Conference. In a discussion titled “Global Capital Markets: Deflation or Stabilization?” the consensus view seemed to be that the developed countries would have a hard time growing their economies and their central banks are running out of tools after eight years of kitchen sink stimulus programs. Online notes from the session indicated that Mohamed El-Erian, chief economic advisor at global financial titan Allianz and chairman of the President's Global Development Council, said central banks "are having greater and greater difficulty" stimulating their economies. The result is that "growth will become more uneven and more unstable."
The number of very smart people expressing the same basic bearish view of the markets is disconcerting to some, while others blow it off as these guys have been making the same noise for a couple of years now. That is in fact true. It doesn’t make them wrong. Over the past two years, the Russell 2000 has provided a solid total return of 1.725, or 0.86% annually, so if you jumped out when the first alarms were sounded, you have not missed much. The naysayers have been exactly correct.
There are a few things worth considering. First the chorus includes some of the most successful investors of my lifetime including names like Druckenmiller, Zell, Carl Icahn, Montier and others. Second, new bull market moves are not born when prices have been going up for seven years and earnings are starting to fall for the first time in years, while the economy is slowing from a very low pace. The valuation of a baby bull is not 22 times earnings. Lastly our screens show very few stocks worth even considering right now.
I am negative about the market's prospects, but don’t call me a doom and gloomer. If we can get a meaningful pullback in stock prices, it is going to be champagne and Miller time at Chez Melvin. To get higher long term returns, we need to see lower short term prices. I will throw a party if we can get the bear to show up. Hell, I will go stand at the corner of Broad and Wall Street in a grizzly bear suit if it will get the selling started. We need a big sell off to create some value investing inventory to assist in building wealth on the way to the house in the Keys.
Have a great week, everyone. Remember, real value investors cheer lower prices because we know they will go back up at some point and we can sell all the cheap stocks we buy for big gains.
Have a great week.
Tim
P.S. It looks more and more like the seven-year bull market is finally nearing the end of the line.
