These 7 billionaires are worried about a stock-market correction

https://www.marketwatch.com/story/these-7-billionaires-are-worried-about-a-stock-market-correction-2017-08-09By now, all investors should know the research about the follies of market timing.
But similarly, all investors should admit that a quest for outperformance by stock picking and active management will never end — particularly given that 2017 shows more than half of active funds are beating their benchmarks for the first time since before the Great Recession.
So it’s worth noting that a host of big-name billionaire investors are pretty concerned about current market conditions.
Yes, there are tremendous benefits to passive, low-risk, long-term investing strategies. And obviously, some of the “best” investors on Wall Street often get things painfully wrong.
But when some of the biggest and most respected hedge funds are pumping the brakes as the Dow Jones Industrial Average DJIA, +0.77%   and the S&P 500 SPX, +0.67%   have hit new all-time highs this week (and the Nasdaq Composite COMP, +0.99%  isn’t far off) … well, it seems plain irresponsible to simply write that off.

Here are what seven of Wall Street’s most iconic investors have to say about the market and the potential for a correction in the next several months.
Jeff Gundlach advises “moving toward the exits”: DoubleLine Capital CEO and bond guru Jeff Gundlach is reducing his positions in junk bonds, emerging-market debt and other lower-quality investments on a fear that investor sentiment may roll over in the near future with painful effects. That probably won’t manifest in a huge drop over a short period, Gundlach predicted, but it’s wise to prepare nevertheless. “If you’re waiting for the catalyst to show itself, you’re going to be selling at a lower price,” he told Bloomberg recently, instead recommending investors begin “moving toward the exits.”
Read: Why Gundlach says ‘coiling’ markets could spark a volatility surge
Carl Icahn warns stocks are overvalued: Investing icon Carl Icahn has made plenty of bold bullish calls in recent years, including a winning bet on Herbalife HLF, +1.47%  despite a lot of negative press at the time. However, Icahn generally isn’t seeing a lot of opportunities given how much stock prices have run up. “I really think now, I look at this market and you just say ‘look at some of these values’ and you have to wonder,” he told CNBC in June.
Howard Marks warns clients of “too-bullish territory”: In a late July note to clients, billionaire Oaktree Capital founder Howard Marks used one of his popular memos to warn about the chance of a correction. You should read the whole piece about the formation of bubbles, market cycles and about the importance of caution right now. But in a nutshell, he warns aggressive investors are “engaging in willing risk-taking, funding risky deals and creating risky market conditions” and that this has been a hallmark of past downturns.
Warren Buffett has nowhere to go: When you think of corporate cash hoards, Apple Inc. AAPL, +1.84%  normally springs to mind — not Berkshire Hathaway Inc. BRK.A, +1.01% BRK.B, +0.81% the conglomerate known for big deal-making. Unfortunately, those deals haven’t materialized and the company that Warren Buffett built has seen its stockpile soar from under $40 billion in the second quarter of 2013 to nearly $100 billion at the end of June. That is telling, considering the Oracle of Omaha’s adage that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Despite all that cash, apparently Buffett & Co. don’t see many opportunities — either to buy wonderful companies, or to get them at fair prices.

George Soros gets bearish in a big way: George Soros recently sold stocks and bought gold in anticipation of a big downturn. Admittedly, the billionaire investor jumped the gun with a bleak outlook for stocks, warning right after Trump’s election that global markets were in trouble — a call that clearly was incorrect. But Soros made a name for himself for a reason, so that he is doubling down again on this call is at least worth acknowledging.

David Tepper is “on guard”: The hedge fund guru behind Appaloosa Management isn’t leaning to the short side just yet, but is far less bullish than just several months ago. He has even suggested wary investors put some money in cash if they don’t like the frothy valuations on Wall Street right now. Tepper was particularly concerned about central-bank intervention over the last several years distorting bond markets and how that is influencing stocks in a way that could lead to trouble.
Paul Singer warns of an ETF crisis: Admittedly, hedge-fund icon Paul Singer of Elliott Management has a personal stake in the fight against passive ETFs, given the active strategies pursued by his firm. However, Singer’s recent warning on CNBC that passive funds could create an inflexible trend that leads to a marketwide sell-off is worth listening to. “It means that at one point you will not have the active end in the market to stabilize it. You would have just the passive guys getting into herd mentality,” Singer said. In other words, if sentiment takes a hit, it will be dramatic — and no amount of bargain hunting or logic about fundamentals will help cushion the blow.

Short-Volatility Funds Are Being Flooded With Cash

Exchange-trade products betting that volatility will sink lower have never been more popular.
Even as the CBOE Volatility Index plunges to its lowest on record and U.S. stocks march to fresh highs, investors have continued to give the short-volatility trade their vote of confidence this year. With $2.4 billion in assets, short volatility exchange-traded funds are backed by the most cash on record, according to data compiled by Bloomberg.
The funds’ meteoric rise is to some degree a bet that the U.S. stock market will keep rising, since the VIX and S&P 500 move in opposite directions about 80 percent of the time. With the S&P 500 up 16 percent and at its highest on record, the $1.1 billion VelocityShare Daily Inverse VIX ETN has surged 141 percent, heading toward its best yearly performance in five years.
For now, the volatility bears have the momentum. Inverse VIX funds have nearly tripled in size this year alone. The amount of assets tracking short-volatility products rose above that of their long-volatility counterparts for the first time in two years in the third quarter.

In fact, regardless of direction, volatility itself is an in-demand asset class. The popularity of volatility products far outweighs that of other prominent corners in the U.S.-listed ETF market. With $4.6 billion in assets, they are larger than funds tracking any single European country, other than Germany. They also have more assets than those tracking all frontier markets and all ESG (environmental, social and governance) strategies combined.

However, despite the growth and the stellar returns, it’s unlikely most short-volatility investors have stuck around around to see all of their triple-digit profit. Because of the funds’ structure, holding periods tend to be as short as a few days or even just a few hours.https://www.bloomberg.com/news/articles/2017-11-06/most-cash-ever-backs-these-short-volatility-funds-as-calm-rules

Investors expect returns of 10.2% with millennials hoping for more

Investors expect annuals returns of more than 10% over the next five years, with millennials looking for nearly 12%.

 nvestors expect an annual return of 10.2% on their investments over the next five years, according to a major new study.

The Schroders Global Investor Study (GIS) 2017, which surveyed 22,100 people from around the globe who invest, found millennials even more optimistic. Those born between 1982 and 1999 expected their money to make average returns of 11.7% a year between now and 2022.
Older generations were more realistic. The Baby Boomer generation – born in the two decades after the Second World War – anticipated 8.6% a year.
Millennials (born 1982-1999, aged 18-35): 11.7% Generation X (born 1965-1981, aged 36-52): 9.8% Baby Boomers (born 1945-1964, aged 53-72): 8.6% Silent Generation (born 1923-1944, aged 73+): 8.1%
The expectations expressed were for a broad portfolio of investments. For equities, the most widely held asset in a portfolio, historic performance has been lower than current expectations.
The MSCI World index, which measures the performance of global stockmarkets, achieved annual returns of 7.2% between 1987 and 2017, with all income reinvested.

• See the full results from the Schroders Global Investor Study 2017

Returns in the next few years could be modest. The Schroders Economics Group has forecast a 4.2% annual return for world equities over the next seven years, or 2.1% a year after inflation is taken into account.
Keith Wade, Chief Economist at Schroders, said: “Returns expectations are simply too high. It means that many will face a shortfall when they come to realise their investments in the future as they have relied too heavily on returns to meet their objectives.
“In the current environment, where returns are likely to be lower than in the past, the only way to bridge the gap is to save more.”
The Schroders Institutional Investor Study, a separate project, also measured very different expectations for professional investors around the globe who expect annual returns of just over 5% in the next five years.
The Global Investor Study found geographical differences in expectations among consumers. Asia and the Americas were home to the most optimistic investors with both expecting average returns of 11.7% a year. In contrast, the average European investor expects 8.7% a year.
Investors in the Americas were particularly bullish, with 20% of respondents expecting annual returns of more than 20%. Only 8% of Europeans expected returns to be so high.

Average annual return expectations on total investment portfolio over the next five years

The highest expectations by country were recorded in Indonesia, where the average investor typically anticipated returns of 17.1% a year. Thailand and Brazil were close behind, expecting 15.2% a year, on average.
In Indonesia, 39% of investors expected returns of more than 20% a year.
Some emerging markets have experienced bouts of high interest rates and elevated inflation, which eats into returns. This may have increased expectations for returns in some of those countries.
However, anticipated returns were also high in Japan, which has endured decades of exceptionally low inflation and periods of deflation. Investors may now believe that measures to kick-start economic growth may be about to pay off.
Expectations were lowest in Europe. Italian investors only expected returns of 7.1% a year, the lowest figure for any country.

What the average investment return expectation is in your country

Equities are considered to be higher risk investments given how prices can fluctuate. Riskier investments tend to offer the potential of higher returns. However, the 2017 Global Investor Study also found that investors are currently averse to taking too much risk due to the uncertainty caused by international events.

59% do not want to take on as much risk in their investments now. 48% have more money in cash, the least risky of all investments, than they used to.

The amount people are keeping in cash is perhaps a surprise giving the cost of living outpaces the interest paid in bank accounts in most countries.

The Schroders Global Investor Study, which surveyed people planning to invest at least €10,000 (or the local currency equivalent) in the next 12 months and who have made changes to their investments within the last 10 years, covers a whole range of investor attitudes and expectations which can be found at schroders.com/gis

It sits alongside Schroders InvestIQ, a new test that aims to improve the abilities of investors.

What is the investIQ test?

Do you make decisions based on logic and reason? The truth is our mind plays tricks on us more often than we realise. It makes us believe we’re thinking analytically, when we may be acting instinctively. So what feels like an informed decision, is actually clouded by behavioural biases.
The same thing happens when we’re making important choices – like how to invest our money.
At the heart of investIQ is a short test developed by behavioural scientists that helps you understand your investment personality. In less than 8 minutes, you’ll get a detailed report outlining which behavioural traits influence you the most, and how best to deal with them.
Take the investIQ test in less than eight minutes. Go to Schroders.com/investIQ

2015: Druckenmiller and Liquidity: The Key to Stock Market Success

https://www.wallstreetdaily.com/2016/04/20/stanley-druckenmiller-liquidity/


Many successful investors, including big names like Warren Buffett, believe that the future course of a stock’s price depends on its earnings.
Even Wall Street Daily‘s own Chief Technology Analyst Louis Basenese follows the mantra “share prices follow earnings.”
But, this isn’t the only path to major yields. Other equally successful investors don’t always put as much weight into earnings. They instead focus on another vital macro factor – central bank liquidity.

Focusing on Liquidity

Take, for instance, Stanley Druckenmiller.
For those unfamiliar with the name, this hedge fund legend was with George Soros in 1992 when they broke the Bank of England. He subsequently founded his own firm, Duquesne Capital Management.
Druckenmiller is a legend. Before retiring in 2010, he averaged an out-of-this-world 30% return annually throughout his 30-year career. A mere $1,000 invested with him at the start of his career would’ve been worth a cool $2.6 million by the time he retired.
In January 2015, Druckenmiller gave a speech where he revealed the secret to his success:
Earnings don’t move the overall market… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.
Additionally, Druckenmiller noted current central bank policies were “so much more reckless” than before.
To that effect, in 2015, he put about 30% of his personal multi-billion-dollar portfolio into gold. And while he looked “dumb” for a while, it appears that, yet again, his predictions panned out and he is, once again, right on the money.

The Fed Is Still Flowing

When focusing on the importance of liquidity, it’s crucial to ask, “Where does global liquidity stand right now?”
For certain, the Fed is still pumping away.
Just look at stock buybacks. According to Bloomberg, S&P 500 firms are on track to buy back $165 billion this quarter. This would bring the 12-month total above the prior record of $589 billion – which, ominously, took place in 2007.

Many companies use debt – borrowed money at practically zero interest – to fund their stock buybacks.
And, when you take the rest of the world into account – Japan, Europe, and the emerging markets – the liquidity picture isn’t so rosy.

Liquidity on a Global Scale

A picture of global liquidity is provided by Bank of America Merrill Lynch with its real-time Global Liquidity Tracker.

This 16-year graph substantiates Druckenmiller’s point about global liquidity. Note how rates went into the negative before both the dot-com-bubble crash and the global financial crisis, as well as the European debt crisis.
The liquidity measure was in the negative again in mid-2015, coinciding with the S&P 500 peak. And current liquidity is reading at negative levels exceeded only by those during the global financial crisis from 2008-10.
This points to a very real possibility that, right now, the U.S. stock market is running on fumes as global liquidity dries up. The chart below shows how the S&P 500 Index has failed to respond accordingly, with rates increasing, even as liquidity rates have moved further and further into negative territory.

This misalignment could turn out to be crucial for the future of the market.
While stocks seem poised for trouble, now is the time for investors to follow a key piece of advice from Stanley Druckenmiller – one that he attributes to his mentor, George Soros: “The way to build long-term returns is through preservation of capital.”
Good investing,
Tim Maverick