Day 230: You're Wreaking Havoc?


Mother's Little Helper portfolio was UP today +$11,095.35 (+1.43%).

Overall GAIN YTD: +$200,667.98 (+34.37%).

According to CNN Money our benchmark index, the S&P 500 is up +10.14% Year To Date. http://money.cnn.com/data/markets/sandp/

Are average investors wreaking havoc on the markets?

(insert sarcasm here) I know this is going to make you sad, but I think so, we may be creating an inflection point that has professional investors worried.

Lately I've been hearing a familiar cadence on the financial news channels and in the papers; it's that line of bearish preaching warning that the end is near. The nay-sayer's, dooms-dayer's and the worst of the bunch, the all-knowing hedge fund managers and market gurus are all speaking from the same play book again. It's like someone sends out a memo, "Speak fear until markets sell off". I have a tremendous amount of respect for how smart these people are, but I hate the fake fear they love to dole out on the average investor. It's scary when someone who knows a lot more about investing tells you that you shouldn't be invested in 'this' market. My personal problem is that it's because I'm not as smart as those guru's and because I wasn't trained the way they were that I find myself asking questions, like "If not 'this' market then which market"? "I thought market timing was a bad thing, but you're telling me to get out now and come back later"? And the most important question I keep asking myself is, "Why would any of them care about me"?

Seriously, what possible motivation do any of these Wall Street titans have to be looking out for my well being. Are they just that good natured? Do they care so much about the average investor that they are willing to take time out of their busy day, go on TV and espouse all the reasons why we should all sell off our stocks? Are they all joining forces to look out for the rest of us? "Hold cash, buy gold, get out of stocks". My BS meter is about to explode.

Here's what my simple thinking tells me, they only do the things that make their fund more money. That's not wrong, it's their job. I'm not judging these people I'm simply NOT following their advice. Ask my parents, I've spent a life time not following advice. Professional investors, the portfolio fund managers, need volatility in the market in order to make money. If stocks don't go down and offer values they have nothing to buy. If they don't sky rocket up, they have nothing to sell. Making money slowly to a fund manager is like the biggest, most painful wedgie ever. It's a "Nuclear Wedgie". Particularly these days when their very high fees are in question. These people have billions of dollars to invest and when they do it moves markets. But these days the market isn't really moving around much; except in one area directly related to the average investor.

Over the last few years individual investors have poured a lot of money into index funds, these are also known as 'passive investments' because there really isn't any active buying and selling going on. Passively invested funds, the kind you and I buy, now hold $1.9 trillion in assets, triple the amount invested in 2007. On top of that there's another $1.7 trillion in exchange-traded funds. The total investment in passive funds accounts for over 40% of all stock fund assets. In 2010 it was only 24%. In 2000 it was only 12%. By my count roughly 20% of all stocks are owned by an index fund. The more we invest in passive investments, the more volatility we remove from the market. You heard me right, I just said, 'Average Investors are Controlling the Market'.

These index funds are invested in a market basket of stocks that make up the DOW, the S&P 500, The NASDAQ and other indices. Here's the rub, indexes are typically “capitalization weighted.” The market capitalization is simply the number of shares outstanding times the price. So if a stock’s market value grows, then it has greater influence on the index’s. As you and I invest in index funds, the fund itself must invest more in the stocks in the index. I think this means we're pushing up prices and holding them there even if the company hasn't performed too well. You buy a few shares of an S&P 500 index fund and forget it. You send some money to Wealthfront, Betterment or Personal Capital and forget it. Why? Because it grows very nicely without all those fees. But every investment has an impact on the market. Collectively all of us average investors are having an effect, let's call it the 99% Effect. When Warren Buffett makes a purchase they call the aftermath the 'Buffett Effect'.

So what's a hedge fund manager to do? Simple, instill fear in average investors. There I said it, I think they do it intentionally to create volatility on purpose. Last weeks sell-off was initially blamed on geo-political tensions between North Korea and the U.S., but then investors figured out that a war with North Korea didn't have a lot to do with how many Big Macs McDonald's sells in Iowa. I think North Korea was just the proverbial straw that got the worry started and then Howard Marks, the Co-Chairman and chief memo writer for Oak Tree Capital went on CNBC to tell the world how dire everything looked out there. Here's a quote from his recent memo.

"I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses."

- Howard Marks

Yeah, he's telling you and I to get out of the market! Do you think a single professional investor makes decisions based on what Marks or any other professional says or thinks; of course not, they think for themselves and act according to their own knowledge and instincts. The market is not a slot machine, it's not a casino where riches are made over night on a hot tip. The stock market is where you invest for your future, the future of your kids and those that depend on you. Remember that you are not an Oaktree Capital client. Mr. Marks is not speaking to you because he cares about your future, he cares about the performance of his fund first and foremost. Collectively the big fund managers can move the markets with a buy or a sell, but when they are sitting on abnormally large amounts of cash looking for a place to invest it, I think they rely on that age old strategy of selling fear in order to trigger a sell-off that will present them with great values.

Mr. Marks is not alone, recently Ray Dalio another billionaire fund manager eloquently spread his warnings and advised that investors hold 5-10% of their portfolio in gold as a hedge against uncertainty. Right, that's the normal amount a portfolio should have. Not long Andrew Left of Citron Research went on CNBC and told us all that he was shorting Nvidia because the stock had simply run up to far to fast; he was wrong. What did Left do? He shorted Nvidia again a few days ago right before earnings and for no apparent reason Nvidia shares dropped right after the earnings call. The report wasn't that bad, in fact they killed it yet again showing only a little weakness in their data center business. Shares of Nvidia are up significantly since then, killing the short sellers.

There is always someone selling fear. Politicians do it, advertisers do it and yes Wall Street gurus do it too. Let's all just stay invested.

PORTFOLIO COMPANIES REPORTING EARNINGS THIS MONTH

Cisco Systems, Inc. is expected to report earnings on 08/16/2017 after market close. The consensus EPS forecast for the quarter is $0.55.

Applied Materials, Inc. is expected to report earnings on 08/17/2017 after market close. The consensus EPS forecast for the quarter is $0.83.

Veeva Systems Inc. is expected to report earnings on 08/24/2017 after market close. The consensus EPS forecast for the quarter is $0.15.

Ulta Beauty, Inc. is expected to report earnings on 08/24/2017 after market close. The consensus EPS forecast for the quarter is $1.78.

Analog Devices, Inc. is expected to report earnings on 08/30/2017 before market open. The consensus EPS forecast for the quarter is $1.15.

Stay Invested

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved