Foolish Hope Will Doom the Current Rally, Savant Says

Ahhhh, it’s just a bear market rally. You know, the temporary respite before stocks get ugly again. And research maven James Bianco says the recent climb since the March nadir will end once investors realize the news remains bleak.

“I understand the market has been up a lot since the March low,” said Bianco, president of Bianco Research. “But what I see in the market is a retracement rally that looks very similar to the first type of rallies that you get in protracted bear markets.”

And it could get worse than the previous rout, he thinks. “We’ll revisit the 2200 S&P low, if not make a lower low—probably by late summer,” he told CNBC, referring to the March 23 market nadir of 2,237. “That’s going to come because we’re going to find out now is a critical time for the market.” Meaning: Things aren’t getting back to the way they were when the economy opens up again.

Since the S&P 500’s March low point, the index is ahead 30%, which ordinarily would make this another bull market (more than 20% off the bottom). Right now, that’s driven by faith in Washington’s all-out commitment to support many corners of the economy financially, plus the hope that COVID-19 might be in retreat.

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Look at what happened Wednesday. News broke that the US gross domestic product (GDP) had dropped by a scary 4.8% in the year’s first quarter. Consumer spending slid 7.5%, already-anemic business capital spending shrank for the fourth consecutive quarter, and imports and exports sank badly as international trade has ebbed.

Nevertheless, the market found a silver lining that outshone all the bleak tidings: Early findings for a drug that might shorten virus-related hospital stays were greeted with wild enthusiasm. To be sure, the poor economic results were widely expected and were likely already priced into the market. And any notion that science was en route to finding cures and vaccines is treated like holy manna.

“What the market seems to be thinking is we’re going to restart, and we’re all going to pretend that it’s 2019,” Bianco said. “And we’re all going to stand on the subway platform with 500 other people waiting for the next train.” He cautioned that a recovery will be long and slow, regardless of the gargantuan fiscal and monetary outlays to right the economy.

“We are moving to a lower growth environment, and I think the market is a little ahead of itself right now in what that means,” Bianco said. “There’s going to be more changes and more evolution that the economy is going to have to go through before we’re ready to start a full-on bull market.” And who knows? Maybe last week’s two down days, Thursday and Friday, are the start of that.

What is Bianco doing about this situation personally? He said in March he put all his assets into cash.

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Tags: bear market rally, Bianco Research, Bull Market, Coronavirus, COVID-19, gross domestic product, James Bianco, S&P 500

A US District Court judge has dismissed a lawsuit against the Trader Joe’s Company Retirement Plan that accused its fiduciaries of breaching their Employee Retirement Income Security Act (ERISA) duties.

The lawsuit was filed at the end of December by plaintiffs Nicolas Marks and Lorri Bowling, who are former participants of the plan. Judge Percy Anderson ruled against the plaintiffs’ five main allegations, saying the claims were “insufficient to survive a motion to dismiss.”

The plaintiffs alleged that the plan’s fiduciaries paid unreasonable recordkeeping fees to its recordkeeper, Capital Research; that they failed to seek competitive bids for recordkeeping every three years; that they chose higher cost mutual fund share classes; that they allowed Capital Research to collect and invest excessive fees before giving them back to the plan; and that they failed to adequately monitor committee members.

For the first claim, the plaintiffs allege the plan paid recordkeeper Capital Research an estimated $140 per participant when a “reasonable recordkeeping fee for the plan is $40 per participant.” However, the judge ruled against this claim because the plaintiffs’ estimate of $140 per participant for recordkeeping fees has “no factual basis,” as the plaintiffs admitted they don’t actually know how much the recordkeeping fees are.

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For the claim that the fiduciaries failed to seeking competitive recordkeeping bids every three years, the judge ruled that the was no legal requirement to solicit competitive bids on a regular basis. The judge said the plaintiffs’ complaint does not show any facts suggesting that the fiduciaries could have obtained less expensive recordkeeping services elsewhere through competitive bidding. He also said there are no facts to show that the fiduciaries failed to consider putting the fee structure out for competitive bidding or failed to negotiate a reasonable fee structure with Capital Research.

The judge also said there was no basis for the allegation that “Trader Joe’s chose inappropriate, higher cost mutual fund share classes” in selecting retail share classes of funds rather than lower priced institutional class shares. Citing the case of White v. Chevron Corp, Anderson ruled that merely alleging that a plan offered retail rather than institutional share classes is insufficient to carry a claim for fiduciary breach.

“All plaintiffs have done is offer a hypothetical scenario suggesting an investor class share in a mutual fund ‘may’ in general charge an annual expense ratio higher than an institutional class share in the same fund,” Anderson wrote in his ruling.

The judge also shot down the allegation that Capital Research essentially admits that it charges excessive fees because it returns a portion of the fees to the plan at the end of each fiscal year. The plaintiffs argued that instead of getting returned fees at the end of the year, the plan should negotiate lower fees and that the plan misses out on using those returned fees during the year to invest on the behalf of plan participants.

However, Anderson ruled that the plaintiffs “do not allege any facts to support this conclusory allegation that Capital Research’s repayment of money to plan participants demonstrates an ‘admission of excessive fees’ and in turn a breach of the duty of prudence.”

The judge also sided with Trader Joe’s regarding the allegation that it failed to monitor and remove committee members because the allegation is derivative of the other claims, which were not supported by facts. Anderson said Trader Joe’s is “correct in referring to this claim as ‘derivative,’ as the claim as pled is wholly dependent on the breaches of duty previously alleged.”

Additionally, the judge also agreed with Trade Joe’s that the plaintiffs do not have standing to seek injunctive relief because they are not realistically threatened by a breach of fiduciary duties because they are former, not current participants of the plan.

Despite ruling in favor of Trader Joe’s on all five allegations, the judge said the court “cannot conclude at this point that any amendment would be futile,” and gave the plaintiffs 14 days to amend their complaint. However, if the plaintiffs fail to file an amended complaint by then, the case will be tossed out.