One of our readers wondered why we keep advising holding onto the recommended investments in the Fleet Street Letter portfolio. Isn’t this, asks our subscriber, contrary to our bearish stance?
It’s a good question – and here’s my reply …
We are worried about markets looking toppy. And we have felt it our duty to warn readers about that. Clearly if the stock market now drops back, most of our current portfolio picks could dip a bit too.
But here is our position: we’re not traders. So if we continue to expect our recommendations to achieve a decent long-term total return, we’ll advise holding onto them – even in a downswing.
What’s more, many of our stock picks pay out good dividends. In fact, the latter are absolutely crucial in boosting the total return you can get from holding stocks.
We’ve also taken steps to ‘de-risk’ our portfolio. That’s given us the chance to add new and unique ideas. We reckon these stocks represent great potential value. And we firmly believe this will become clear to other investors at some stage in the near future.
In other words, it’s quite possible to have an overall bearish view on shares, but still make money from quality stock picking. That is what The Fleet Street Letter aims to do.
But don’t just take my word for it. Look at hedge fund manager John Hussman, who’s renowned for being of the biggest bears around…
Massive bear delivers serious returns
Most portfolio managers are fundamentally bullish, even if they do run scared of the markets on occasion. Hedge fund manager, John Hussman, by contrast, is a good old-fashioned pessimist. Right now, more than a third of his Strategic Growth Fund is in cash. Another 28% has been in the healthcare sector – which has not participated in the dash to trash rally we’ve seen recently.
And yet despite his downbeat market views, Hussman has still succeeded in putting together a pretty good long-term performance track record.
Over the last five years his Strategic Total Return Fund has averaged 7.13% annually, versus a 0.25% per annum average drop in the S&P 500’s total return in that time.
How has he done that? Well Hussman’s overall portfolio performance boils down to the stock picking point I made earlier.
Since equity markets bottomed in March 2009, for example, he’s managed to generate an 85% return from his US stocks compared with around 78% from the S&P 500. Investing in the right individual stocks has enabled him to achieve a decent total long-term return – while at the same time being prepared for a sharp market downturn.
That said, you probably won’t be surprised to hear that Mr Hussman isn’t too keen on the US stock market at its current level. As he puts it, American shares are suffering from an “overvalued, overbought and over-bullish syndrome”. And the most severe risk is…”the likelihood of a particularly deep drawdown within the coming 18-month period”.
“The good news is that large market drawdowns open up the potential for significant changes in the set of investment opportunities”.
That’s another way of expressing what we’ve been saying recently. Stock markets are clearly becoming more expensive, and the consensus is becoming dangerously upbeat. It’s a sure-fire recipe for a sell-off – which will throw up some more places to invest when prices drop.
But I wonder if this market dip may actually happen quite soon. That’s because I’ve been studying one of Wall Street’s leading indicators. And the omens from the TRAN don’t look very good.
Let me explain.
A grim omen for the stock market
The Dow Jones Industrial Average (DJIA) is the best-known US stock index. But it’s not the oldest – that’s the Dow Jones Transportation Average, otherwise known as the TRAN.
The TRAN does what it says on the tin. It consists of shares in firms that shift people or products around. Like truckers, airlines, railways, shippers, delivery service providers… you get the idea. As all this movement has to happen before anything gets made, the TRAN is a handy early warning guide to the future course of US economic growth.
But it’s not just the economy that the TRAN forewarns. It’s also widely seen as a harbinger for the DJIA. If the TRAN takes a tumble, the rest of the stock market is likely to follow on behind.
And that could be about to happen right now. Take a look at these charts.
Source: Bloomberg, FSL
The TRAN, the blue line in the upper chart, clearly topped out at the beginning of February. In contrast to the DJIA (red line), it’s been in a clear downward trend.
And the TRAN effect on the rest of the market is shown in the lower chart. This purple line is the ten-day moving average of the TRAN relative to the DJIA. Big downswings in the latter – ie where the TRAN underperforms – have always gone hand-in-hand with a significant market sell-off.
After the DJIA’s recent run, this time it’s set to do just the same. Be prepared.
Editor’s note: David Stevenson is the investment director at the UK’s longest-standing investment newsletter, The Fleet Street Letter, where a version of this essay first appeared. David and his team adopt a contrarian approach to unearth stocks that have fallen out of favour with the market – investments where both the valuation and the dividend yield now present a very compelling investment opportunity.
This analysis applies both to big and small stocks. The Fleet Street Letter believes there are still some great investments out there to buy right now – despite the economic background. In fact, the team has just put together a report that can help you in these tough times: Three simple steps to take before the State ransacks your wealth.
This is solid contrarian investment insight. We urge readers to make use of it. You can read The Fleet Street Letter’s new report for free, below.
The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
Category: Market updates