NOTE: Interesting that the last post was on the Inverted Yield Curve.
You will understand when you read this article.
What Marty Zweig can teach us now
Published: Mar 1, 2013 6:01 a.m. ET
NEW YORK (MarketWatch) — Last week came the sad news that Martin Zweig had died at the absurdly young age of 70.
Many
tributes to him (which included an insightful commentary by Mark
Hulbert in MarketWatch) recalled his memorable appearance on Wall Street
Week with Louis Rukeyser on Fri., Oct. 16, 1987 where he warned of a
stock market crash. It happened the following Monday, and Zweig’s
reputation as a forecaster was sealed.
Read Hulbert’s commentary on Martin Zweig.
http://www.marketwatch.com/story/a-tribute-to-zweigs-many-contributions-2013-02-19
You can watch the video here, starting about six minutes in.
https://www.youtube.com/watch?v=2MyToTwag34
Still,
that understates his importance. A numbers wizard (he got a PhD in
finance from Michigan State), Zweig saw patterns in the market no one
else could. His newsletter, The Zweig Forecast, had a stellar track
record, according to Hulbert, and he ran a successful hedge fund with
his business partner Joseph DiMenna. Zweig, who famously purchased a
multistory penthouse apartment in New York City’s Pierre Hotel for a
record $21.5 million in 1999, had a net worth estimated in the hundreds
of millions of dollars.
But he also had a simple philosophy that can help ordinary people
navigate even the most treacherous markets. By sticking to it, investors
can participate in the upside while limiting downside risk. Many people
claim to have done that, but Zweig actually did.
I interviewed
him back in the late 1980s as a much-younger reporter at a small, feisty
business paper in Miami, where he spent some of his formative years. He
didn’t give many interviews (and none I could find recently), but he
was gracious and his passion for investing was evident. I recently
re-read his first book, “Winning on Wall Street,” originally published
in 1986. The many statistics are dated, but the insights are timeless.
Zweig’s
nostrums are well known — “Don’t fight the Fed,” “don’t fight the tape”
— but they shouldn’t be taken for granted. Used correctly, they’re a
recipe for making money and reducing risk.
‘Don’t fight the Fed’
“Monetary conditions exert an enormous influence on stock prices,” he wrote in “Winning on Wall Street.”
“Indeed,
the monetary climate—primarily the trend in interest rates and Federal
Reserve policy—is the dominant factor in determining the stock market’s
major direction.”
“Generally a rising trend in rates is bearish for stocks; a falling trend is bullish,” he continued.
Why? For two reasons. “First, falling interest rates reduce the
competition on stocks from other investments, especially short-term
instruments such as Treasury bills, certificates of deposit, or money
market funds,” he wrote.
“Second, when interest rates fall, it
costs corporations less to borrow. As expenses fall, profits rise…So, as
interest rates drop, investors tend to bid prices higher, partly on the
expectation of better earnings.”
Isn’t that exactly what’s
happened now? After resisting for years while the Fed drove real
short-term interest rates below zero, investors have jumped back into US
stock mutual funds and ETFs.
Read Gold’s analysis of why investors are buying ETFs but not stocks on MoneyShow.com.
And
companies have zealously controlled their expenses and have refinanced
every bit of debt they could at rock-bottom rates. No wonder corporate
profits are at their highest percentage of GDP in more than 60 years.
‘Don’t fight the tape’
“Big money is made in the stock
market by being on the right side of the major moves,” he wrote. “The
idea is to get in harmony with the market. It’s suicidal to fight
trends. They have a higher probability of continuing than not…Strong
momentum tends to persist…Fighting the tape is an open invitation to
disaster.”
Zweig advised investors not to go all in or out, but
to keep a position in stocks and increase it when the risk was low while
reducing it when the risk was high. “What you are concerned with is the
probability of success or, alternatively, the probability of losing
money. You want to avoid loss. So, it’s fine to buy above the bottom and
to sell below the top,” he wrote.
How do we know if we’re near a
top? Start with the Fed, of course. When rates are low, as they are
now, the second of two rate hikes or a one-percentage-point increase in
the prime rate would trigger a Zweig sell signal.
Would the end
of “quantitative easing” constitute a rate hike? Good question, but I
doubt it. That means we probably don’t have to worry about a monetary
sell signal until at least 2014.
Zweig
found that every bear market from 1919 to 1982 had at least one of
three conditions: extreme deflation; “ultrahigh” price/earnings ratios
in the upper teens and twenties, or an inverted yield curve, where
short-term interest rates exceed long-term rates.
Seen any of those lately? Not in this galaxy.
We
live in confusing times — slow economic growth, the aftermath of a
major financial crisis, ballooning national debt and the loosest
monetary policy the Fed has ever pursued. But that loose policy has
staved off deflation and the inverted yield curve that often precedes
recessions — two of Zweig’s critical indicators for bear markets.
Far
too many investors have been paralyzed by fear during the current
four-year bull market, while the key signs that Zweig and others (like
Jim Stack) look at have been persistently bullish.
And
too many people have stayed away because they were afraid of fiscal
cliffs or sequesters or Europe or were philosophically opposed to the
Fed’s easy money policy.
That’s fine — I don’t like the Fed’s
policy, either. But when the Federal Reserve — in Zweig’s words, “the
dominant factor in determining the market’s major direction” — is giving
away stock market profits, do you really want to sit on the sidelines
out of principle? That’s crazy.
Marty Zweig believed that flexibility was the most important trait of
successful investors — their ability to apply core precepts to fluid
markets and change their minds when conditions warranted. It’s a shame
this great thinker is no longer with us, but he left a road map of how it
can be done, if only we focused on the right things.
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This
has been posted for Educational Purposes Only. Do your own work and
consult with Professionals before making any investment decisions.
Past performance is not indicative of future results
