Bull vs Bear 4/13/13

Saturday I listened to two very good speakers at our local AAII (American Association of Individual Investors) Chapter.  John M. Simms, Jr. Ph.D., CFA  took on the bear side while Dennis Stearns, CFP sided with the bull. They first presented the economic climate, then looked at valuations for the market and what this means for withdrawal rate for retirees.

John Simms started off saying the weight of the debt that we carry will hold us back despite our innovations and entrepreneurial spirit in the USA. Last month 88,000 people were added to disability while only 81,000 jobs were added. A dismal picture indeed.

Dennis Stearns described the economy still in a muddle through mode. There is a skilled worker shortage. High unemployment for those with less than a High school diploma but not the case for college graduated people. Real Estate in some areas is booming. and home inventory has dropped to 4-5 months in some cases. Shiller says home prices will go up 10%.

The other silver lining is that the US will exceed Saudi Arabia in oil production by 2015-2016, not counting the boom in natural gas. The US had an average of 200 oil rigs in the 2004-2009 time frames. Since then we are now at 1300. There is also a renaissance in manufacturing in the US and innovation is alive and well.

The balance sheet of most companies is healthy. The stock market has more legs. Given the huge jump in the first quarter, history says that we will end the year even higher.

Dennis would be happier if we saw a correction as we are due one. The correction would enable us to achieve higher highs. John felt we are due for a larger 20% correction. Current corporate profits are at historical highs.

After the recent drop in gold, John Simms who is a gold bug, was asked what he thought of gold. John said that gold is a good hedge against poor policy and he feels we have plenty of poor policy. John bought gold starting at $900. He is catching the falling knife buying gold miners now.

 The speakers were asked many questions. For example how would they advise building a stock/bond portfolio if they were concerned with bonds dropping in price as interest rates go up? Dennis still likes the 60:40 rule except he weighs the 60 on equities with high quality dividend paying stocks and keeps plain vanilla municipal bonds and uses bond market timers to give him a better buy and sell on bonds. He also likes First Eagle Global.

In the last segment Dennis showed a chart as to how long a $1,000,000 portfolio would last if one pulled $50,000 a year if you retired in 1973 and another case with 1982. The two pictures were opposite. In the first, money ran out by 1993, while in the latter, the portfolio would have grown to $11,000,000 by 2012!!. That suggests that we have to be flexible and pull less out of a portfolio if the market does poorly in our earlier years after retirement - although I am not ready to retire yet!

Or, lose less money in the markets, as I see it, using methods such as outlined by Faber and Richardson in “The Ivy portfolio”.  I feel I know how both these fine gentleman think.