2015 Can’t End Soon Enough

This article was originally published on at 5:00pm EDT on Dec 21st, 2015

This year has been enormously challenging for us – both as investors and as advisors. While it is some consolation that 2015 has been difficult for many professionals, it’s really become a year to which we’ll happily say goodbye. Though major U.S. stock market indexes remain within 5% of all-time highs, many industries and subsectors within the economy have undergone significant corrections. 

2015 has been a year where one could have been correct about big picture themes, but still have lost money investing with that information.

I was of the out-of-favor view that, despite tightening rhetoric out of the Fed, we were likely to see a flattening yield curve rather than steepening. I felt the Saudi’s strategy of flooding the world with oil, and the resulting collapse in oil prices, would have a much larger impact on countries outside the US (like Venezuela, Brazil, Russia, Nigeria, and Mexico) than it would here at home. And I worried that the fall in oil prices would not be unilaterally positive for the US—that any “savings” by the consumer would likely be offset by resulting currency headwinds to US Large Caps (low oil = strong dollar = pressure on US Large Cap stocks to cut costs and outsource work).

I was of the view that the US stock market was fully (fairly?) valued at the beginning of the year, and that better opportunities for investment existed in Europe—where stimulus efforts are still very much alive and equity valuations opened the year discounted for the worst case scenario, with almost double the yield of the S&P.

We outlined these views in January (here), many of which have come to pass, to some extent. But being right in this context was simply not helpful in 2015.

Through August, European stocks did outperform those in the U.S.—and if you were properly hedged against the falling Euro, the outperformance was even more pronounced. But since then it’s been essentially a wash:

Midstream MLPs, which make up a portion of most of our clients’ portfolios, have more or less been an unmitigated disaster—with the exception of providing an uninterrupted flow of tax-advantaged distributions (to go along with tax loss selling opportunities). My belief is that fears of distribution cuts in the space are largely overblown, and have sprung up as a result of price action. Investors in MLPs have been whipsawed this year multiple times, and are desperately searching for a [logical] explanation for the volatility. The most common reason we’ve heard is “leverage”—and while I do believe that to be true, I think it’s more about the leverage of the owners of the companies’ stocks, rather than the companies themselves.

We remain long the following names in the midstream space: Buckeye Partners (BPL), Enterprise Products Partners (EPD), Enbridge Energy Partners (EEP), Energy Transfer Equity (ETE), Energy Transfer Partners (ETP), Magellan Midstream Partners (MMP), Oneok Partners (OKS), Plains All American (PAA), and Williams Partners (WPZ). We have sold our position in Kinder Morgan (KMI).

And for anyone reading this who had a similar experience in 2015, the battle going into next year may have become, “What are we going to change to improve into next year?”

What if the “right” answer is not much?

Speaking on behalf of our clients, after many portfolio reviews, the general feeling is that we must now construct a plan—a different plan—to “fix” what is wrong. And it only makes sense; the phenomenon known as “recency bias” tells us to expect more of what we have just seen. If it’s been cool and cloudy for the past few days, it feels more likely to be cool and cloudy tomorrow.

How likely is it that the Euro continues to weaken next year at the same pace—or at all—against the US Dollar? Or that oil falls further into territory in which it’s uneconomic for everyone bringing it to market? How likely is it that the dislocations we’re seeing in the high yield market simply don’t end?

The carnage that 2008 brought with it to many investors is still very fresh, and I believe many continue to wear their scars on their investment sleeves. The fact that something terrible can happen—confirmed by fairly recent history—can make it very difficult to maintain conviction in an investment thesis.

My advice going into next year, provided you had a similar experience in 2015, is to resist the urge to make sweeping changes. Consider carefully whether your strategy/allocation still has merit, and don’t make changes for the sake of making changes.

Have a wonderful rest of the Holiday Season and a Happy New Year!

Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main

Adam Scott’s profile on RealMoney can be found here.