Interesting note on capital gains liquidations in index funds
Don Hay's Comments
As promised in recent comments, this "vacation-based" edition of these
comments will be very brief. But isn't it obvious to you that the wheels
are about to come off this bull market? Yesterday's market action was
a precursor, in our opinion, to what is about to come. Earnings
disappointments, weakness in Japan, weakness in Hong Kong, and a
good relative performance from the bond market. This March Madness
is apparently trying to end early, before the "silly season" gets kicked off
with any type of gusto. But what in the world is this bull market going to
do for an encore?
With the "bottoms-up" analysts still predicting sharp advances for this
year, there is a lot of room for disappointment. Japan is already starting
to hint that they are about to revert to any measure they can muster to
weaken the Yen, which should start massive retaliation from the
Chinese, which we expect to begin a currency war. First China, then
Germany and the rest of the European Union, and then the US will
start to fire their bullets. This currency war is expected to bring
short-term interest rates down to a level that will eventually start a
massive "growth" era to put the 80% of the world's population that is
impoverished to work, and initiate them into the world of consumer's.
It will be a fantastic 30-50 year period of emphasis on growth, rather
than the last 30 years when fighting inflation has been the central
theme. When you fight inflation, "real" interest rates remain abnormally
high. When you fight inflation, you discourage any form of aggressive,
or speculative, growth initiatives. But that 30-year theme is coming to
an end.
But to change personalities, it takes massive levels of fear. That fear
will come from the currency war that we see on the horizon. But so far,
our Federal Reserve is still too far in their cocoon. So far, the European
Monetary Union is too much engrossed on keeping the technical
targets intact. Fear will change these personalities.
The first introduction to the new era will only come from a plunging
stock market to catch their attention. Was yesterday's market action
the first wheels to come off the wagon? We think so.
Be careful. If we are right, the next 7 days are going to start to produce
a major personality change in the investment sentiment. Did you read
the article this morning about the Vanguard S & P index fund, and how
investors have been gradually selling shares in this product? That
raises an interesting possibility. Since these funds traditionally have a
low turnover, they have built tremendous capital gains for their
shareholders over the last 5 years. Fund redemptions require them to
take enormous capital gains, which means enormous capital gains for
their shareholders when reported at year-end. How do you think recent
purchasers will react to those enormous capital gains from the
long-term held positions? I suspect paying taxes on other's capital
appreciation will cause disenchantment, and further liquidations in the
upcoming years. This certainly fits our projection that the S & P 500,
and the index funds are about to experience a decade of
under-performance. This possible liquidation trend will certainly cause
pressure on these stocks, just as their newfound acceptance fed the
big-cap dominance in recent years.
That's it for today. Unless something VERY unusual happens in the
next two days, we will not be sending another comment until next
Monday morning. On Friday morning early, I expect to be trying to
concentrate on keeping my left arm straight, my eye on the target, and
not swinging too hard. Don't roll your wrists. Keep your head down.
Swing through the ball. Line up with the target. . .The really important
things in life. |
