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John Coumarianos

John Coumarianos

Articles by John Coumarianos

Q1 2019 Markets Review: Curb Your Enthusiasm

April 4, 2019

It’s been a wild opening to 2019 for investors. It’s always hard to know why markets make big moves, but it seems the big gains of this quarter are the result of Fed Chairman Powell softening his stance on interest rate hikes. The Fed’s support has likely buoyed the stock market since the financial crisis, and that could continue. But, at some point, a spate of bankruptcies or some other failure could take the Fed’s control away. Over the short-term, anything is possible, but, at current prices, investors shouldn’t expect too much in terms of long-term stock returns.

quarter ended with the S&P 500 Index up 13.65%. Because of the mathematics
of compounding, that doesn’t completely erase the 13.55% loss in the last
quarter of 2018, but it’s comes close. The index is within two

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You Can’t Get Blood Out Of A Stone

March 13, 2019

My title comes from Jeremy Grantham’s recent CNBC interview. This remark occurs in a discussion about likely returns from the U.S. stock market. Everyone at Grantham’s firm, Grantham, Mayo, van Otterloo (GMO), agrees that over the next two decades stocks will deliver around 2% after-inflation or “real” returns, says Grantham himself. Traditionally, the market has delivered 6%-7% annualized real returns, but trying to achieve that now will be like trying to draw blood out of a stone. Investors hoping for the historical 6%-7% are bound to be disappointed.

The reason for Grantham’s pessimism is simple — P/E ratios are high. Grantham uses the Shiller PE (current price of the S&P 500 Index relative to the underlying constituents’ past 10-year average real earnings). The long term

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Don’t Be Euphoric Over Two Months Of Gains

March 6, 2019

are up big this year, and that means it’s time to be skeptical.

Warren Buffett says you should be greedy when others are fearful and fearful when others are greedy. That doesn’t mean stocks are ready to give up all their January and February gains immediately or even eventually. But it means the right psychological disposition to have is one of doubt and skepticism. If we get the decline, you’ll be ready for it. And being ready for declines, so that they don’t surprise you and cause you to sell, is the most important thing in investing.

Here are the numbers. Domestic and foreign stock are all up between 9% and 12% for the opening two months of the year. Mid-caps and small-caps are up even more, with the Russell 2000 up an eye-watering 17%. Junk bonds are up more than 6% and

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Morningstar 2009 International Equity Manager of the Decade Nominees — 10 Years Later

February 27, 2019

(This article originally appeared in Citywire.)

Beating an index is hard enough when you’re focusing on just one market. Imagine the challenges you encounter when you’re attempting to achieve this on an international scale.

Over the past couple of months, I have been casting an analytical eye over the managers that Morningstar nominated in 2009 as its domestic equityand domestic fixed income ‘Managers of the Decade.’

In this round though, I have looked beyond the US to see how well the managers that Morningstar tipped in the international equity category have held out since their nomination.

One thing is immediately clear: International equity managers have performed noticeably better than their domestic counterparts. The international equity nominees have arguably delivered

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Checking Up On Workhorse Bond Funds

February 8, 2019

Advisors, we do ongoing research on investments for managing client portfolios,
of course. And we recently reassessed some popular bond funds. The results
might be interesting for readers.

We looked at a group of bond funds that often make short lists for advisors – DoubleLine Total Return (DBLTX), DoubleLine Core Fixed Income (DBLFX), PIMCO Total Return (PTTRX), Baird Aggregate Bond (BAGIX), Dodge & Cox Income (DODIX), Western Asset Core Bond (WATFX), and Metropolitan West Total Return (MWTIX). We started with five year returns and Sharpe Ratios. That’s not a comprehensive analysis, but it’s where we began. Here’s what we found out.

DoubleLine Total Return’s 3.10% annualized return was the second best over the five years through January 2019, but that fund also had the best

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It’s Not A Bad Time To Rebalance

February 5, 2019

Maybe you don’t like a lot of fuss as an investor, and you want to buy-and-hold a simple portfolio for the long term. That’s fine, but you do have to rebalance periodically. And people who favor simplicity may do that rebalancing on a pre-set schedule – quarterly, semi-annually, or annually.

But if you want to be a little more active regarding your rebalancing, now’s not a bad time to consider doing it. Here are some asset class returns for the year through January 30, 2019:

You can
see that stocks have done well, with the S&P 500 Index surging by around 8%.
Small cap stocks have done even better, with the Russell 2000 Index rising more
than 11%. Emerging markets stocks have bounced back too from a poor showing in
2018 with a n 8.67% return for the first month of this year. And

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Friendly Skies — For Airline Investors, Not Passengers

January 30, 2019

One of Warren
Buffett’s few unsuccessful investments was buying convertible preferred stock
of USAir in the late 1980s. For decades after that episode, Buffett would characteristically
make fun of himself, while decrying the entire airline industry for its capital
requirements and onerous competition.

As he put it in an interview, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is

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GMO: Did The Bubble Just Start To Burst?

January 24, 2019

current stock prices reflect a speculative frenzy? It’s a crucial question for
anyone trying to preserve and grow their capital, but also a difficult one to
answer. Martin Tarlie of Boston asset manager Grantham, Mayo, van Otterloo
(GMO) has just published a short
paper trying to quantify investor sentiment and whether it has
driven prices to the stratosphere.

Many, including
GMO’s James
Montier, have commented on how strange this run-up in prices has been. Cab
drivers aren’t eager to tell passengers about their latest technology stock
purchases. Euphoria seems absent. But prices keep rising, making the rally seem
cynical to Montier. And that has made it seem like there’s a disconnect between
how investors feel and what they are doing – and, therefore, also difficult to
call current

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Your Back-Of-The-Envelope Financial Plan

January 21, 2019

We do a lot of financial planning with fancy software for clients at RIA Advisors. We think a financial plan is the basis for someone having a successful financial life. But sometimes you don’t need a fancy computer program with a lot of bells and whistles to get started. There are only a few things you have to know about planning for retirement. And if you do your own back-of-the-envelop calculations, that may spur you to see an advisor and get a more detailed plan in place.

Work Backwards From Income Needed

Strangely enough, it helps to start backwards. So the first thing someone planning for retirement should think of is how much of an annual income they’ll need. There are rules of thumb including one that says 80% of your income in your last working years is adequate. Nobody

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Morningstar’s Christine Benz On Return Forecasts

January 16, 2019

Baseball Hall of Famer and sage, Yogi Berra, once said, “It’s tough to make predictions, especially about the future.” But, as Morningstar’s Christine Benz notes, plugging in a return forecast is necessary for financial planning. Without it, it’s impossible to know how much to save and for how long. In this spirit, Benz has collected asset class return forecasts from large institutional investors and Jack Bogle, who is virtually an institution himself.

the forecasts are longer term, they are worth contemplating even if you can’t
take them to the bank. Nobody knows what the market will do this year or next
year. But it’s at least possible to be smarter about longer term forecasts. When
you start at historically high valuations for stocks, such as those that exist
now, it’s

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Are Tech Stocks Cheap?

January 14, 2019

Are technology stocks cheap? It seems like a strange question to ask as the market drops on news that Apple has indicated weaker future sales. I also doubted whether Facebook’s price reflected its business value in the middle of this past summer. I thought fair value for the business was around $140 per share assuming it could grow its free cash flow by a robust 6% annually over the next decade. The stock is now in the $130 range after pushing higher than $200 in the early summer.

technology isn’t just the FAANG stocks (Facebook, Apple, Amazon, Netflix, and
Google). And at least two important firms – DoubleLine and GMO – think the sector
is at least relatively cheap. Here’s why.

First, technology is trading cheaply on a Shiller PE basis, shown by the fact that the DoubleLine

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Own The Company That Dropped Its “Don’t Be Evil” Motto

January 10, 2019

investors know what the “FAANG” stocks are – Facebook, Apple, Amazon, Netflix,
and Alphabet (parent of Google). These stocks have had big runs over the last
few years, and they’ve struggled more than the market over the past few months.
That’s typical behavior for growth or glamor stocks – higher than the market
when it goes up, and lower when it goes down.

these stocks, which one has the best long-term prospects? If you had to own one
for the next 10 or 15 years, which one would it be? I think all of them, except
for possibly Netflix, have strong business models, but I would pick Alphabet
(Google). Here’s why.

Although I’m not sure he means to, Jonathan Tepper lays out the case for owning Google in his recent book, The Myth of Capitalism:

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Does $97,000 Matter To You?

January 7, 2019

With the year 2018 in the books, we know the S&P 500, including dividends, has produced a meager 4.86% annualized return from the year 2000. That return has beaten inflation, but I call it meager because it’s not the 10% or so that many stock brokers, financial advisors, and market historians have taught much of the public to expect for such a long period of time. The return is way below its long term average, even if our starting point is a bit arbitrary and convenient (the start of the technology stock meltdown).

But there is another
lesson to be learned from the past 19 years besides subpar annualized returns. The
fact is those returns are radically bifurcated or back-loaded. In other words,
they have accumulated recently or in the second half of the nearly two-decade
period, not

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Gundlach’s Remarks Mean It’s Time To Check Your Allocation

December 20, 2018

“This is a capital preservation market.” So says Jeffrey Gundlach who can’t argue with anyone who wants to invest in the 2-Year U.S. Treasury, currently yielding around 2.7%. If you choose the 10-year, by contrast, and saddle yourself with 8 more years, you get less than 20 basis points of extra yield.
Gundlach is one of the world’s best investors, especially when it comes to bonds, And that means investors can’t always follow him literally because they’re not paying attention to global markets the way he is and can’t move as adroitly has he can.
Still, his remarks, delivered in a CNBC interview yesterday, are a warning for investors to check their allocations. Most investors shouldn’t try to time stock markets to the extent of being all out of or all in stocks with their long term money.

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What Your Advisor Believes (And Why You Should Question It)

December 18, 2018

Chances are your financial advisor believes in two related intellectual theories that you should question them about.
In a recent article, the excellent columnist Brett Arends wrote about the two theories governing most financial advisors – the efficient markets hypothesis (EMH) and the capital asset pricing model (CAPM). These sound like impossibly complicated things, but they’re not. The first theory says prices are right, or nearly right all the time, and that it’s, therefore, basically impossible to beat markets. The second theory says historical asset class returns will repeat and that the more risk you take (with risk meaning volatility), the more return you will make. So, for example, stocks are very volatile, but they’ll produce the best returns — something like 10% annualized (or

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Robert Shiller: Worried About Housing Again

December 12, 2018

This past weekend in the NYTimes, Nobel-laureate economist Robert Shiller sounded the alarm on housing again. For those who don’t know, Shiller called the stock market bubble of the late 1990s and the housing bubble of the following decade. He is famous for his house price index and for his method of stock market appraisal called the “Shiller PE,” which judges price relative to past 10-year average real earnings, even if this latter metric comes from the great market analyst Benjamin Graham.
Shiller doesn’t use the word “bubble” in his article, but he argues that since around 2012 we have been experiencing one of the great housing booms in history. And this one is on the heels of the previous great boom and bust. (The third and more benign boom coincided with the great post-war Baby

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REITs: Slightly Better Than Broad U.S. Market, But Still Not Cheap

December 10, 2018

When I wrote an article on REITs for the Wall Street Journal in early 2017, I used a research report from Research Affiliates in Newport Beach, CA to argue that the asset class was overpriced and poised to deliver 0%-2% or so real returns for the next decade.
My article sparked a lot of mail and controversy. One reader reply underneath my article on the WSJ website said “Among equity REITs traded on stock exchanges there has literally never been a 10-year period in the history of REIT investing when real total returns averaged 0% per year (or worse) as [John Coumarianos’s] approach predicts.”
Another letter, which the Journal published as a reply to my article, from Brad Case of the National Association of Real Estate Investment Trusts (NAREIT) strangely had the exact same language about

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The Tale Of The Two Bond Kings

December 6, 2018

(This article originally appeared in Citywire.)
Back in September, I examined the records of the managers that Morningstar nominated as candidates for ‘domestic equity Manager of the Decade’ in 2009. The results were not hugely encouraging. After making that illustrious shortlist, not one manager went on to beat their best-fit index. The Yacktman fund came closest, gliding so smoothly to its 11.43% annualized return from 2010 through August 2018 that it nearly produced the same Sharpe ratio as the S&P 500 index (1.14 versus 1.15 over the past decade). However, it still trailed the index’s return by more than 2.5 percentage points annualized.
Now, though, it’s time to focus on the nominees for the fixed income ‘Manager of the Decade’ award. The results are decidedly better. In 2009,

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Managing “Mr. Market” With Howard Marks

December 4, 2018

I went on a long distance drive for Thanksgiving – Houston to Southern California and back. I don’t recommend doing that unless you have two full weeks. It’s 1500 miles each way, which means you should allocate six days to driving.
I didn’t allocate my time well, because I had around 10 days, not two full weeks. That meant I spent more time driving than visiting. But on the drive I managed to catch up on some podcasts, and one that stands out is Meb Faber’s interview of Howard Marks. Marks is a legendary investor and has a new book out called Mastering the Market Cycle. A few things stand out about the interview. Cycles are related to risk-taking and behavior, and they are often debt-driven. A rising stock  market often occurs simultaneously when lending standards relax. That’s why junk

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Lessons From Thanksgiving Dinner

November 29, 2018

Talking to friends and family at Thanksgiving dinner made me realize how unprepared for volatility investors are. The gathering I attended was filled with a wide mix of investors, from the young and novice interested in technology stocks and (somehow still) in Bitcoin to older, seasoned veterans. The veterans, however, didn’t exhibit much more savvy than the novices; everyone was spooked by the recent volatility.
Based on my Thanksgiving Dinner experience, here’s what I think investors need to learn now.
Re-Set Your Expectations
First, I think investors are spooked because they are being unduly influenced by the market action of 2017. But that was an unusually calm year that saw a 22% gain in the S&P 500 without a down month. That’s a Bernie Madoff-like performance — straight up every

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The Worst Place To Be For Bond Investors

November 26, 2018

Last week, Jeffrey Gundlach of DoubleLine Funds noted in a webcast that investment grade corporate bonds are terrible. There is no way to win with them, he said. As much as half the investment grade universe could be downgraded to junk, and that will take buyers out of the market who can’t buy junk bonds. On some basic ratios, Gundlach argued, a lot of investment grade debt should already be rated junk.
Yesterday, DoubleLine Capital Portfolio Manager Monica Erickson was quoted in a Reuters piece arguing similarly that the investment grade corporate bond market is the worst place to be for bond investors. That part of the market has delivered negative returns this year. For example, the iShares Investment Grade Corporate Bond ETF (LQD) is down 5.50% for the year through November 15. The

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Will Gold Help a 60/40 Portfolio?

November 21, 2018

I noted recently that the classic balanced or 60/40 portfolio has a difficult time in periods of inflation. Bonds deliver fixed dollar interest, so they obviously fare poorly during inflation. Stocks should do better theoretically because companies can push prices up in response to higher input costs. But it doesn’t always work that way. Stocks did poorly in the 1970s, for example.
This leads to the question of whether gold can help a classic balanced portfolio in an inflationary environment. Gold is a tricky asset. It has no utility and delivers no cash flow. Its owners can’t point to any intrinsic value and depend on other market participants to set the price. If you buy gold, you have to hope that someone else will buy it from you at the same price or a higher price in the future. While

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Which Smart Beta Was Smartest in October?

November 19, 2018

It’s no secret that October was a bad month for stocks. The S&P 500 Index dropped nearly 7%, including dividends. Granted, the index still had a positive return for the year after the decline, but October wiped out nearly all the gains the index had posted for the year up to then.
Given the increasing popularity of “smart beta” strategies – portfolios tracking an index organized around a factor such as a stock’s valuation, size, dividend payout, price momentum, etc…, we thought it would be a good time to see how various strategies held up during the difficult month. It turns out, value and dividend strategies tended to hold up better than growth and momentum strategies.

For example, using mostly a variety of iShares funds, the iShares Core High Dividned ETF (HDV) was the best fund on our

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Do You Really Need Half Your Money In Stocks?

November 12, 2018

We’ve all been conditioned to think the balanced portfolio is a touchstone of investing. For many investors, it provides enough exposure to the stock market (60%) to produce a healthy return and enough exposure to the bond market (40%) to provide ballast and a little income to a portfolio. Along the way, advisors like to say that investors have counted on beating inflation by 4 or 5 percentage points. Supposedly.
But, as MarketWatch’s Brett Arends points out, a balanced portfolio hasn’t always performed as advertised, and the upcoming decade might be one of those times. That means investors should consider other allocations (depending on their individual circumstances, of course).
First, from 1938 to 1948, a balanced portfolio trailed inflation. Then, again, from 1968 through 1983, a

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The October Curse: Who Survived & Who Didn’t

November 1, 2018

October is finally over.
The S&P 500 Index dropped 6.84%, including dividends in a showing that was a rude awakening for investors who had, once again, become complacent. The beginning of this year was marked by a surge in January following a year in which the index didn’t drop for a single month. But after February and March wiped out January’s gains, rattled investors relaxed once again. Now that everyone’s on high alert again, it’s a decent time to see which stocks and sectors held up for the month. Keep in mind that our numbers are 1-month returns through October 30th, according to Morningstar, and stocks rallied on the 31st.

First, as we look at the top positions of the S&P 500 Index, it’s striking how many companies are technology or financial services companies, according to

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Rules For Managing Volatility

October 30, 2018

Volatility is back. Your success as an investor is based on how you’ll deal with it. Here are some rules to help you cope.
First, reconsider your allocation. If you have 50% or 60% stock exposure in what’s often called a ‘balanced” portfolio, and you can’t handle a 5% or 10% portfolio hiccup, you’re probably in the wrong allocation. After all, a correction (stock market decline of 10%) will take your portfolio down around 5% and a bear market (stock market decline of 20% or more) will take your portfolio down 10% or more.
In 2008, balanced portfolios dropped around 20%, and that’s what I tell balanced portfolio investors to anticipate. We’ve had two 50% drawdowns in the stock market since 2000, and there’s no reason why we can’t have another one. It’s true, we may not. But we just as

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You Are Different This Time

October 22, 2018

You don’t always see a respected member of the financial commentariat argue that it’s different this time. But that’s almost what Morningstar’s Christine Benz has done in an excellent recent article.
What Benz means is that you’re different now than you were during past market cycles. More specifically, you’re older now than you were during the last market debacle, so you have less time to recover from another one if it should occur. That might not mean much if you were 10 in 2008 and 20 now. But it means a lot if you were, say, 50 in 2008 and 60 now or even 45 in 2008 and 55 now. If you’re five to 10 years from retirement, the risk of encountering a period when bonds outperform stocks is high enough – and dangerous enough to your retirement plans — so that you should reduce stock

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Closed-End Fund Discounts

October 17, 2018

It’s debatable whether the recent stock market slide created some bargains, but there’s another corner of financial markets where inefficiencies prevail more regularly – the closed-end fund universe.
What’s a Closed-End Fund?
Unlike mutual funds, which continually issue and redeem shares according to investor demand, closed-end funds take in money and issue a finite number of shares once, in an initial public offering. After the IPO, the fund closes to new money; there are no outflows and no inflows, making the arrangement convenient for holding illiquid assets. Investors must then trade shares on an open exchange like stocks to each other rather than purchasing and redeeming with the fund itself.
For that reason, the share price of a closed-end fund can rise above or fall below the net

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Finding Opportunity In The Retail Apocalypse

October 15, 2018

The stocks of retail REITs have struggled lately. Malls and shopping centers are under pressure from Amazon and online shopping. But not all retailers are under extreme pressure. Home Depot, TJX Companies, Kroger, WalMart, Whole Foods (now an Amazon subsidiary), Best Buy, CVS, and Walgreen’s are financially healthy big tenants of many shopping center REITs. And that means the landlords that rent to stores that can withstand pressure from Amazon are worth a look.

We’ve listed the 7 largest shopping center REITs by market capitalization, showing their dividend yields and Price/FFO.
As a reminder FFO (funds from operations) is net income adjusted for property sales and depreciation. It’s not a perfect measure of cash flow since stripping out all depreciation can’t be accurate. Some long

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Analyzing This Year’s Market Returns

October 10, 2018

Many investors assume their accounts have achieved good returns this year. After all, the S&P 500 Index is up nearly 9.5% through October 8, including dividends. But that doesn’t necessarily mean your account has an inflation-beating return for the year depending on your bond and international stock exposure.
And while bonds and foreign stocks have been drags on portfolios this year, owning them is no reason to change your allocation. But now is a good time for a portfolio assessment or a moment of understanding what you own and why – and how asset class returns have diverged this year.
A Tale of Two Balanced Portfolios
Let’s say you’re a balanced investor (around 60% stocks and 40% bonds) and you have all your money in one fund – the Vanguard Balanced Index fund (VBINX). That fund keeps

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