At challenging times like these, I like to stroll down the hall to my old office and seek a private audience with its new inhabitant, Jack Rivkin. He succeeded me as chief executive officer at Altegris in 2015 (I’m still chairman), and he also heads our investment team.
Maybe you have seen him on Bloomberg News or CNBC. Financial reporters love Jack. He has a knack for taming unruly economic data and for the quotable quote, like the time someone asked him what makes a good money manager and he shot back, “Introspection and paranoia.” That's pure Jack.
Jack has had a storied career in the investment business, holding senior positions with Neuberger Berman, Citigroup Investments and Paine Webber, among others. His managerial achievements are featured in one of Harvard Business School's most popular case studies.
So at times like these, when Third Avenue Focused Credit Fund halts redemptions — a mutual fund, for heaven's sake — when pollution in Beijing forces a partial shutdown of the world's 10th largest city, when oil dips to 2004 prices, it's time to ask Jack what's going on. Here is a sampling of his predictions for 2016.
1. Investment Opportunities
Active management, confined to North and South America, could produce as good a set of returns in 2016 as a more diversified portfolio in Jack's view. First, dispersion is returning to U.S. equities. As of late December, half of the stocks in the S&P 500 index had risen 18% and half had fallen 18%, according to Jack. It's looking more and more like a stock picker's market. That may apply to Canada, too, if problems in the energy sector continue and spread to its housing and banking sectors.
While Brazil and Venezuela are both mired in deep depressions, Argentina may present dispersed opportunities. The November 2015 election of Mauricio Macri should help Argentina regain access to international capital markets. Moody's still rates its debt CAA 1, which means its bonds are of “poor standing and subject to very high credit risk,” but that could change if Macri succeeds in jump starting the economy and justifies Argentinians’ newfound optimism.
2. High-Yield Bond Credit Crisis
Jeffrey Gundlach's quip that “there's never just one cockroach” in any kind of credit meltdown resonates with Jack. Gundlach's DoubleLine Capital serves as a sub-advisor to Altegris, and as Jack says, “It's hard to argue with Jeffrey.” But in Jack's opinion, investors (and the media) overreacted to Third Avenue's decision to close its high-yield bond fund, creating “a very interesting opportunity.” Some good quality high-yield bonds are currently available at prices not seen since 2011, a situation likely to continue into early 2016. The key, says Jack, is to invest with active managers who can evaluate bonds one by one to make sure you are investing in quality debt.
3. Inflation and Oil Prices
Jack was early in forecasting lower energy prices, but now he thinks oil prices may rise from these very low levels, while all other commodities prices could continue falling because of uncertainty in the Middle East. Even if oil prices remain flat, inflation could reappear as early as mid-2016 as the “energy transfer of wealth” dissipates.
Let's back up. The 50% reduction in oil and gas prices over the last year has added perhaps as much as $2 trillion-plus in pre-tax corporate profits. That 4%-5% pickup in profits has offset the 2%-plus annual increase in unit labor cost price increases. Even if energy costs remain flat, labor costs will continue rising.
4. U.S. Markets
Gross revenues and peak profit margins are growing at a slower pace. Credit is getting more expensive. Stock market multiples are high. Given that, Jack thinks it is hard to project the market will grow more than 5% to 7% per annum, sort of in line with nominal GDP growth. If inflation stays low, look for growth in the range of 4%-5%. That means, on balance the equity markets will slowly grind their way up over the next decade. Corrections? Yes. Bear markets? No, unless markets get way overvalued, something Jack doesn't expect to happen.
“Prophesy is a good line of business, but it is full of risks,” Mark Twain once said. But Jack and I agree with the mathematician Henri Poincare who said, “It is far better to foresee even without certainty than not to foresee at all.”
--- Read Alternatives Sector Assets Topped $7 Trillion in 2015 on ThinkAdvisor.