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The Independent Adviser for Vanguard Investors • October 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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experienced is quite normal. I looked
back at every single one of the 295
three-month periods (not just calendar
quarters) since the newsletter’s 1991
inception and discovered that between
25% and 29% of the time, we’ve suf-
fered losses in the Model Portfolios
over that short time frame. Of course, as
you know, the long-term returns for the
Models are excellent, particularly given
the level of risk taken to achieve them.
So I wouldn’t chalk this up to anything
more than what it is—a market setback.
Why am I confident that this is noth-
ing more than that?
Our economy is in good shape,
though it’s got its warts, for sure.
Consumer confidence and consumer
sentiment are near their highs for this
economic cycle. The last time they
were at these levels was in 2007. Job
growth remains strong, and new claims
for unemployment are at levels last
seen more than 40 years ago. While
the unemployment rate, at 5.1%, has
fallen dramatically, the U-6 rate of
total underutilized workers remains at
10.3%, but it’s falling as well. And
this is happening as Baby Boomers are
turning 65, the typical retirement age,
at a rate of 10,000 per day. Household
debt is incredibly low. The household
debt service ratio, which measures how
much disposable income is eaten up by
monthly debt payments including mort-
gages and consumer debt, has been at
record lows for the past couple of years.
And GDP growth has re-accelerated
and was up at a 3.9% rate, after infla-
tion, in the second quarter.
At their much anticipated meeting,
Federal Reserve Chair Janet Yellen and
LOSS FROM PAGE 1 > her colleagues left policy and interest
rates unchanged. Gear up for more
headlines, handwringing and second-
guessing as we approach the final two
Fed meetings of the year in October
and December. My advice would be
to tune them out. Yellen has indicated
that a hike in rates is still likely this
year, but whether the fed funds rate
is at zero, 0.25% or 0.50% shouldn’t
make a bit of difference in how our
economy fares.
The Fed standing pat on policy does
reflect that, yes, there are issues here at
home as well as overseas. But as I’ve
noted before, investors are always faced
with uncertainty, and the current eco-
nomic and market cycle is no different
from any that have preceded it.
The same could be said for the
revolving cast of characters using the
Internet to scare investors. First it was
the off-base comments about the dol-
lar losing its safe-haven status and the
Chinese yuan becoming a de facto cur-
rency of choice. Now, corporate raider
Carl Icahn is sharing his views on
politics, the economic cycle, corporate
profiteering and more in a video he
posted on September 29. Icahn’s best
criticisms are of government dysfunc-
tion and some of the tax tactics corpo-
rations and fat cats use to avoid pay-
ing their fair share. But his simplistic
comments about interest rates having
caused the financial crisis, or the fact
that earnings are falling (actually, earn-
ings growth rates are falling, and that’s
something we’ve seen coming for
years now) aren’t exactly news. Plus,
his criticism of financial engineering,
which in many ways has developed as
a direct result of the actions of activist
investors like him demanding immedi-
ate profit increases, is hypocritical to
the max.
Further, Icahn warns that junk
bonds are bound to crater and investors
will panic, causing even greater mar-
ket stress. This is not a new or novel
warning, and as Jeff keeps reminding
me, liquidity in the junk bond market
always dries up when the economy
falters (and we’re nowhere near trou-
ble today). High Yield Corporate’s
portfolio manager Michael Hong says
most high-yield companies’ funda-
mentals are healthy. Plus, when Jeff
and I looked back at the data, the fact
is that investors haven’t panicked out
of this fund in the past. While the
value may decline for a time, that
“high-yield” income keeps on giving,
month after month.
For Contrarians
In January, I told you about a con-
trarian trading strategy involving
Capital Value. When the fund’s three-
year return lags that of Total Stock
Market, historically, this has signaled
an opportune moment to buy. Well,
that time has arrived, and I sent out
a special trading alert on Wednesday
morning. But just to close the loop,
at September’s end, Capital Value’s
cumulative 37.7% three-year return
lagged Total Stock Market’s 41.8%
return. While I am not putting Capital
Value into our Model Portfolios, as I’m
happy with Selected Value as our hold-
ing in a similar space, I did buy some
for my personal account. If you’ve
got an aggressive bone in your body
and are looking for a market-beating
strategy, albeit one that’s focused on a
single fund run by contrarian managers,
you may want to follow my lead. n