Howard Marks in Barrons. Is a Retraction/Correction Coming?

I do not think that Barron’s front page headline in this week’s magazine accurately reflects Howard Marks’ thinking.

Marks’ latest full-length memo (he is famous for his memos) seems to be a LOT more cautious and a LOT less sanguine about markets, especially debt markets, than the above headline. That memo, published on January 7, 2013, is titled “Ditto” to reflect that he feels the same way about exuberent behavior in credit markets today as he did right before the credit crisis unfolded.

The memo can be found in the Value Investing Resource section in the right margin, but I will quote a little of it here and leave Marks’ original emphasis:

Risk and Return Today (2013):
“…Sober attitudes on the part of investors should be a source of comfort, since in normal times we would expect them to bring down asset prices to the point where they’re attractive. The problem, however, is that while few people are thinking bullish today, many are acting bullish. Their pro-risk behavior is having its normal dangerous impact on the markets, even in the absence of pro-risk thinking. I’ve become increasingly conscious of this inconsistency in recent months, and I think it is the most important issue that today’s investors have to confront.

…People aren’t buying because they want to, but because they feel they have to.”

Marks then writes a section he titled ”Getting Rid of Money” in which he lists an alarming number of current market behaviors driven by the policies of the Federal Reserve:

“Regardless of the reason, things are happening again today–especially in the credit world–that are indicative of an elevated, risk-prone market…”

Such as:

“Total new issue leveraged-finance volume–loans and high yield bonds–reached a new high of $812 billion in 2012…surpassing by 20% the previous record set in pre-crisis 2007…”

…I find it remarkable that the average high yield bond offers only about 6% today. Daily I see my partner Sheldon Stone selling callable bonds at prices of 110 and 115 because their yields to call or yields to worst start with numbers–’handles’–of 3 or 4 percent…I’ve never seen anything like it.”

 He lists several more examples, too. Marks’ conclusion:

“In 2004, as cited above, I stated the following conclusion: ‘There are times for aggressiveness. I think this is a time for caution. Here as 2013 begins, I have only one word to add: ditto.”

“The greatest of all investment adages states that ‘what the wise man does in the beginning, the fool does in the end.’ The wise man invested aggressively in late 2008 and early 2009. I believe only the fool is doing so now. Today, in place of aggressiveness, the challenging search for return should incorporate goodly doses of risk control, caution, discipline and selectivity.”

Wow: “Things are happening again today…that are indicative of an elevated, risk-prone market” and “…only a fool is (investing aggressively) now.” Could the impression left by that statement made by Marks only two months ago be farther from the impression that the Barron’s cover leaves this week?

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