Market Commentary

by Byron Wien

Blackstone is pleased to offer the following Market Commentary by Byron Wien to share his thinking on global economic developments, market insights and other factors that may influence investment opportunities and strategies.

Byron Wien is a Vice Chairman

  • Jul 08, 2011

    The Smartest Man in Europe Is Very Cautious

    Usually we have our discussions in hotels or offices, but this year I spent a weekend with him at his summer home on the Mediterranean in France. There, surrounded by his impressive paintings and sculpture, we talked about the current outlook for global investors. I wrote my first essay about these meetings in 2001 and it was called “The Smartest Man in Europe Is Upbeat.” His mood was very different this year.
  • Jun 01, 2011

    Time for a Pause

    Finally, however, the optimism began to wane. We have learned that the best time to buy stocks is when most investors are pessimistic. Points of extreme pessimism in terms of investor sentiment most recently occurred in March 2009 and August 2010, both important buying opportunities for U.S. stocks. As investor confidence improves and cash is employed, equities can have a sustained move. If investors are already positive, as they were at the beginning of 2011, stocks can still rise but it is likely that the energy of the market will dissipate and a correction will begin before too many months go by. The decline will be blamed on the factors that the market successfully plowed through during the upswing. The question then becomes: How vulnerable is the market and how far down will stocks go? Sentiment seems to be turning. Some survey-based indicators which were very optimistic (and therefore negative for the outlook) have shifted to neutral and the transaction-based Chicago Board Options Exchange put/call ratio is approaching a bearish reading which is favorable.
  • May 05, 2011

    The India / China Contrast

    Perhaps the most memorable experience of my trip to India was an early Sunday morning visit I made with my friend, the hedge fund manager Richard Chilton, and some of his team to a small village an hour and a half’s drive from Bangalore. I had long wanted to get direct exposure to the rural poor in India. The location was twelve kilometers off the main highway, and we went there to watch a meeting of a microfinance company with some of its clients. Two groups of 45–50 women each sat on the ground in circles before a representative of the company. Having taken off their shoes, they began with a chant about how they pledged to pay off their loans. It was almost like a religious ceremony. Each of the circles consisted of nine or ten subgroups of five, each of which had a leader who gave the company man cash representing their payment obligation. Then several applications for new loans were made and the whole circle gave a voice vote approving the loan.
  • Apr 07, 2011

    Some Thoughts about the Current Situation in the Middle East, North Africa and Japan

    The events in the Middle East and North Africa coupled with the earthquake and tsunami in Japan unsettled markets everywhere. There was a sudden rush to liquidity, and currencies, commodities and bonds responded irrationally. The Japanese yen strengthened even though the Bank of Japan was expanding the money supply vigorously, which, in effect, was debasing the currency.
  • Mar 02, 2011

    Off to a Good Start

    If you believe as I do that the market was put on earth by God to make fools of the greatest number of people, it would not be surprising to you that stocks rallied throughout the early part of the year. The fundamental background was positive. Retail activity was firm, automobile sales were surprisingly strong, fourth quarter earnings were mostly beating expectations, the European credit crisis was dormant for the moment, state and local governments were making an effort to control expenses and initial unemployment claims were trending downward. There were some negatives: the Federal budget deficit was running at an unprecedented $1.5 trillion rate and the United States was likely to run up against its debt ceiling by March. Inflation was beginning to become a serious problem in the developing world, casting some doubt on the potential profitability of companies operating in those markets. Political upheavals in Tunisia, Egypt, Libya and Bahrain raised the issue of stability in that critical oil-producing region. The January unemployment report came in at 9.0%, but that was more because of people dropping out of the work force than new jobs being created. As we moved into February investor optimism remained undaunted and those who were cautious began to buy again, recognizing that it was futile to “fight the tape.” Mutual fund buyers who had shunned equities in favor of bonds during 2010 bought more common stocks in January than in any month since 2003.
  • Feb 04, 2011

    It Could Be a Very Good Year

    If there is a theme in this year’s surprises, it is that more than half of them are in the direction of the consensus but go further. Understandably, investors tend to extrapolate current trends. Before September last year the United States market moved back and forth 165 times over its starting point of the Standard & Poor’s 500 at 1115, but stocks did very well in the fourth quarter. Historically forecasters usually expect the market to rise 10% in the following year almost regardless of what it had done in the previous period and that was also the case this year. The same was true for the economy, where observers were looking for a continuation of the modest growth we experienced in 2010.
  • Dec 06, 2010

    A Radical Approach to Asset Allocation

    During these trips I have been asked to look over dozens of institutional portfolios and to comment on their structure. In most cases the asset allocation is heavily weighted toward long-only investments in the developed markets. While bond portfolios have been trimmed, the allocation to higher yielding fixed income securities is small. Few institutions own gold or other commodities. Many have a quarter of their portfolios in alternatives, but the split among hedge funds, real estate and private equity varies widely. I believe few of the portfolios I reviewed are constructed to perform well in the investment world that exists today. The investment committees overseeing these assets have made incremental changes over time but they have failed to step back and say that the future is likely to be very different from the past and our asset allocation should recognize that fact.
  • Oct 04, 2010

    The Evolution of the Hedge Fund Industry

    The number of funds closing after the peak in 2007 was somewhat more significant than the decline in assets. About 22% of the funds operating that year closed over the next three years while the funds under management only declined 16%. There are several reasons for this. First, with increased regulation, a greater emphasis on risk control and increased client pressure for transparency and contact, it became more expensive to operate a hedge fund and the critical mass of funds under management to be profitable escalated. In the early days of the industry, back in the 1970s and early 1980s, it was possible to start a fund with less than $10 million, and Julian Robertson and Steinhardt, Fine, Berkowitz both did so. There is considerable debate about what the critical start-up mass is today. Even though management fees have doubled to 2%, you probably need $50 million, although many go into business with less than that hoping for a strong performance year which will provide substantial incentive fee income and attract new clients. The implementation of the so-called Volcker rule will result in some brokerage firms closing or spinning out their proprietary trading operations, internal hedge funds and private equity activities. As a result we may see more hedge fund start-ups over the near term run by managers with impressive records.
  • Jul 02, 2010

    The Smartest Man Thinks We Are Writing History

    This is the tenth annual essay I have written about the views of this investor who has impressed me over the past three decades with his ability to anticipate major trends before they were widely understood. He saw the end of communism in Russia and the rise of capitalism in China. He identified opportunities in the developing world before most others and he recognized the growing shortage of commodities as a result. A descendant of an international mercantile family whose roots go back to the operation of canteens selling food and weather protection along the Silk Road centuries ago, his career has been spent successfully managing his own and other people’s money, collecting art (from Canaletto to Kandinsky) and trying to understand the growing complexity of the world.
  • May 11, 2010

    Confusion and Complacency Abroad

    Even though Labor held a strong majority of seats in Parliament it looked like the conservatives would make important progress in gaining political power. Suddenly, seemingly out of nowhere, the Liberal Democratic Party candidate, Nicholas Clegg, surged forward. He was younger than the other two and proved to be a one-man Tea Party, lashing out at the other candidates and appearing to oppose everything they stood for. For the first time in its history Britain had a series of three television debates giving Clegg exposure to a broad national audience and throwing the election into turmoil. Clegg did not do well in the election, however.
  • Apr 09, 2010

    The Healing

    On the political front the passage of the health care bill was important. Almost everyone in favor would agree that it is not what we once hoped it would be, and many believe that it is a step backwards because of its cost, but for those who had lost confidence in the ability of the American legislative system to get anything done, it was a step forward. The cleavage between the Republican and Democratic representatives in Congress had become so sharp that it seemed to observers abroad that our system of government was dysfunctional.
  • Mar 12, 2010

    A Crisis In Confidence

    And the problems were not confined to the United States. Greece, with $400 billion in national debt, threatened to default on its bonds, which would throw the European Union and the euro into turmoil. As soon as austerity measures were proposed to deal with the problem the whole country went on strike. The fear was that even if the problems of Greece were temporarily solved, Spain, particularly, and other marginal European countries would follow with similar problems.
  • Feb 01, 2010

    The Market is Ahead of the Economy

    Deciding on this year’s Ten Surprises was not easy. While I had developed a list of many alternatives, coming up with the final ten proved to be difficult. It was harder to identify the consensus on some of the issues and I thought other potential entries, while of great interest to investors, were not really surprises. The final ten are generally positive on the economic outlook but reflect my thinking that the market itself may already discount the favorable fundamentals. Last year was the best ever in the twenty-five year history of The Ten Surprises in terms of accuracy. As I have often said the goal is to step back and stretch your thinking about what could happen. Doing that can help you invest more creatively. I try not to worry about how many will be right. I listed the Ten Surprises last month. Now let’s take a look at them in more detail.
  • Jan 04, 2010

    The Surprises of 2010

    For the past 24 years I have prepared a list of ten investment-related surprises that I believe are likely to happen in the New Year, but to which the average investor would only assign a one out of three probability to the event taking place. I started doing this in the 1980’s because I thought short term thinking was the curse of effective money management. Investors were too concerned about quarterly earnings, monthly sales, the latest unemployment report and other economic data. Once a year I wanted to take a longer view and reflect on what non-consensus (not necessarily contrary) events could have a major influence on the investment environment.
  • Dec 03, 2009

    Wondering About 2010

    What has caused economists to abandon historical precedents, one of the most cherished tools of their trade, is the belief that a series of circumstances have made this cycle different. To cite a few examples, consumers entered the recession carrying a heavy burden of debt which they are now unwinding and which is holding back their spending. Because of the decline in home values and the stock market consumer net worth is down $7 trillion. Manufacturing competition from abroad has discouraged capital spending. A heavy inventory of unsold homes and high mortgage delinquencies have dimmed the prospects for residential construction. Office vacancy rates of 17% have slowed commercial real estate projects. Finally the U.S. government itself is running a budget deficit of 10% of GDP, the highest ever in peacetime, raising the prospect of higher interest rates and inflation.
  • Oct 06, 2009

    Short Term Optimism: Longer-Term Fear

    Every August I organize two Friday luncheon discussions for serious investors who spend their summer weekends in Eastern Long Island. We focus on the major issues which will influence the world economy and its financial markets during the coming year. It is a broad constituency which includes more than a handful of billionaires, chief executives of public companies, private equity leaders, hedge fund managers and former government officials. There are about twenty five at each session. Called the “Benchmark Lunches”, they represent an opportunity to reflect on what is likely to happen with a group of successful and hopefully knowledgeable people. Since I write up the discussions, each participant can look back and assess whether the group was able to see future events clearly. As you might expect, their skill in doing this is not notable for its accuracy.
  • Sep 16, 2009

    Good News Coming Soon

    The August unemployment report carried both good and bad news. Those who were looking for jobs and couldn’t find them, rose to 9.7% of the work force, the highest in 26 years but only 216,000 jobs were lost which was an improvement compared with recent months. We all expect the unemployment level to stay high for two reasons. First, it is a lagging indicator and may remain near 10% even if the economy continues to recover. Second corporations know that increasing revenues is difficult in the current economic environment and are slow to add workers even as business improves. You can see that in the impressive increase in productivity.