California Wild Fire Too Close
24 July ~ Clients who live in a beautiful mountain-top villa estate near Napa Valley sent this photo yesterday. It is a 6,700 acre fire burning out of control. They evacuated soon after.
The Second Quarter
24 July ~ During the past quarter all bonds and interest-rate sensitive stocks like REITs had their prices reset in anticipation of the Fed raising interest rates some time this year. This included our shares of Build America Bond Fund. The stock market in general ended June on a down note, and has since bounced in July. Since the July 19th top, we have raised cash and bought inverse index funds.
Lull Between Crises
11 July ~ Greek news in the headlines, but a much bigger event equal to fifteen Greeces in China, where their stock market crashed over -30%. Their government has declared short selling illegal. Pension plans and insiders are not allowed to sell any shares for six months. Chinese brokerages are required to buy shares. As of Friday, both Europe and China were up as things went from worst to merely bad. Janet Yellen gave a long talk which boiled down to the possibiity of a rate raise unless something else unexpected happens. Meanwhile, this week companies begin reporting Q2 earnings. Goldman analysts predict S&P 500 earnings overall will drop -4.4% year-over-year and sales -2.2%. So, this summer a time to patiently await opportunity and choose non-correlated investments.
Greeks Vote 'Oxi'
5 July ~ ...which means 'no' but the word has historic emotions embedded, as there is a national Oxi Day to commemorate Greek refusal to admit an invading army during World War II. Today 61% of Greeks voted no to the referendum. They plan to not pay the IMF or live under its imposed austerity rules. This evening Greeks are dancing in Syntagma Square to celebrate. Greece is a small nation, so it is the reverberations throughout Europe that we are watching, since Ireleand, Spain and Portugal also owe the IMF money they don't have.
This is nothing new for Greece, which has announced five external defaults during the past 200 years and has spent 48 years since 1800 in default, the most of any developing nation, as this graph illustrates:
27 June ~ In the past sixty days while the stock market was range-bound, all income investment share prices declined due to fear of the Fed hiking rates. Many REITs, utilities and royalty trusts are much higher yield now. The XLU utility fund is -12% so far this year and long-term bonds -8%. We plan to wait before buying, since the yields may get higher yet, as weekend developments in Europe and Puerto Rico unfold.
Visualizing the Wealth of Nations
15 June ~ From Year 1 to today, Angus Madison, a British economist who specialized in measurement and analysis of economic growth and development, combined modern research techniques with his own extensive knowledge of economic history to estimate the historical spread of The Wealth of Nations. Watch for sixty seconds while the animated timeline progresses through two thousand years of history
Click the map to view the original page.
Another week when Bonds were more Volatile than Stock6 June ~ Investors buy stock for those big moves up to increase net worth. Investors buy bonds to store value in less volatile entities. That's been reversed the past few weeks, as bonds have been more volatile -- and volatile down at that, than the indexes.
My Theory on Why the Market Hasn't Corrected Yet
2 June ~ Market pundits wonder what can possibly be keeping this market up. QE ended last October. The Fed threatens to raise rates. The P/E ratio is at an historic high. There is no “cash on the sidelines” (see sidebar article). So what is it? I have a theory, which I haven’t heard anywhere else. The market is up because so many are expecting it to go down, and therefore are short, and it is easier to be short now than at any previous time in history, so many more have shorted, and shorted in a new way.
Shorting the market used to be a complex, expensive, and dangerous move, and was not even allowed in many accounts. However, now it's easy. in the past few years dozens of inverse exchange-traded funds have been created, which are bought and are equivalent to going short, and not just 1x short but 2x and 3x short. Millions of these shares trade each day. Anyone can short now. IRAs can short. A lot of financial engineering goes on inside these funds in the futures and options markets. This keeps the market up because fewer actual company shares are sold. Hedge funds maintain their long stock positions and buy these inverse exchange-traded funds to hedge the feared correction.
As I've written about earlier (see below), central banks are no doubt continuing to buy equities, contributing to the levitation, and corporate share buybacks are at an all-time high. These are factors too. The incredible ease of shorting is one that's been overlooked.
Big Caps Stronger
1 June ~ Though investors need more than charts to make decisions, charts are a useful shorthand to reveal what market participants are doing. In this case, the blue line is an equal-weighted S&P 500. The grey line below is the regular price-weighted S&P 500. The divergence between the two tells us that big caps are keeping the S&P 500 up, while smaller cap members of the index are lagging.
Yet another 'New Normal'?
13 May ~ Since the April FOMC meeting, bond prices have descended, and yields correspondingly ascended as shown above, while the broad markts have traded in a tight, coiled range.
Buying out your Partners
25 April ~Imagine you own a profitable business along with some partners. Imagine that the business uses the profits to buy the partners interests. Going forward, the profit continues to gush each year, and now you get more of it. The ex-partners are happy, as they received fair market price. You are happy because your ownership percentage increased.
On a grand scale, this is what is happening with many public companies. I think it is a great use of capital. We like to own companies which are buying their own shares. The Wall Street jargon for this is "shrinking the float".
One must read the fine print, though. Some companies authorize share buybacks and then don't actually buy shares. Other companies issue executive stock options at a rate exceeding the share buybacks, so the float doesn't shrink. Companies which borrow money to buy shares are a bit more suspect than companies buying shares out of cash flow, although with today's low rates, there is an argument for borrowing now. Lastly, it is not a panacea; share prices will continue to fluctuate with the ebbs and flows of the market. It does generally give one an edge, as one is buying a profitable company whose profits are shared among fewer people. I like to be one of those people.
Biggest Buyback Ever
12 April ~ A wonderful thing happened Thursday near the market close: GE announced they were selling their huge financing unit, as well as most of their real estate. After a qucik analysis, I bought at the close. Then Friday a more wonderful thing happened: GE, a stodgy Dow stock, rose 10.8% in a day. This is highly unusual for a Dow stock. GE's CEO, Jeffrey Immelt, announced that they planned to use the $50 billion proceeds of the sale to purchase GE stock, the biggest share buyback in history. This a great, tax-free way to increase shareholder value, as it shrinks the number of outstanding shares and concentrates ownership with the remaining shareholders, so profits per share increase.
GE was formed in 1892 by Thomas Edison and is one of the twelve original companies comprising the Dow Jones Industrial Average, and now 122 years hence, it is the only company remaining from that original list.
Q1 Ends Even
4 April ~ Prices went up and down, often several hundred Dow points a day, and finished the first quarter right about where they started. My theory is there is always a trend, one needs to adjust to the size. This quarter, trends were short, sometimes one or two days. We have cash while the market descends, and plan to buy at lower levels.
Early this Morning Raised Cash
25 March ~ Indicators looked bearish so this morning I sold a lot and our accounts are about 80% cash with small short positions. Consequently, we avoided most of the big drop this afternoon.
At October Levels
16 March ~ The US stock markets are at the same levels as last October, when the Fed ended their quantitative easing program.
There will come a Time when Stocks and Bonds Decouple
... and that time is now.
The usual formula for a balanced portfolio is a percentage in stocks and some in bonds, based on the theory that when stocks go up , bonds go down. When stocks go down, bonds go up. With the distortion of that usual pattern created by central banks worldwide participating in markets, for a time both bonds and stocks went up. Nirvana! Well, starting recently, both bonds and stocks are now going down.
3 March ~ Tax information is available on our custodial brokers websites. Clients and CPAs can contact me for help.
Europe is Moving Up
21 February ~ As we wrote in January (see 2015 Outlook, below), European stocks have begun their ascent now that the ECB has begun QE, and Greece has received a four-month extension, subject to official final approval this coming week. We are invested in European companies such as BMW, Daimler, Unilver, Seimens, all hedged for Euro currency exposure.
Something Happening Here with Bonds
1 February ~ On September 11, 1998 money managers thought Euro-Yen LIBOR's first negative print was an historic event. It wasn't. Institutions and hedge funds took the other side, certain that it couldn't continue. It did. We have similar events unfolding now. Institutions and hedge funds are short German bonds, which are at record highs, and thus interest rates are at record lows. Anyone who thinks with bunds under 1%, they are only risking 1% a year is getting an education.
German monthly CPI printed -0.3% last week, the first negative print since 2009. If that were to continue, and Germany had -3.6% annual deflation, those bund owners will profit in real terms, if not nominal.
The developed world hasn't yet experienced sustained deflation, except for Japan. Deflation means lower prices, so those who have cash benefit. Those who have debt suffer. Today six G-10 countries have nominal negative bond rates going out two years, a total of €1.5 trillion worth, about 20% of Euroland's bond universe.
The next logical thing, I suppose: A Danish bank has offered negative mortgages. Yes, certain customers are paid by Nordea Kredit for their mortgages. The bank's computers weren't accustomed to calculate negative mortgage interest, but their IT department patched the glitch.
Here's a long-term plan that's occurred to me. The US could use these negative rates to pay off the national debt. First, create more scarcity in 30-year bonds by not issuing many. This is already happening. Because of the scarcity, the frightened money of the world will bid them to negative yields. When they reach -1%, the US government can begin issuing 30-year bonds to retire all the short-term paper they now owe. At negative one percent per year, the national debt will be paid down by about half in fifty years. Voila.
We are long certain US bonds. Many hedge funds have been short bonds for over a year.
24 January ~Apple, Facebook, Google, Qualcomm are among the 140 earnings reports this week, including 11 Dow stocks. Last week most earnings disappointed with the exceptions of Netflix and Starbucks. The FOMC will issue a statement Wednesday. Today President Obama met with Prime Minister Modi and they agreed to install a hotline. Today Greeks will elect a new government. Never a dull moment.
4 January ~In 2015 we will likely see some turbulence in January as funds reposition. As long as central banks are aggressively investing, we will buy dips alongside them in the US market.
We will watch the energy sector. Oil was down -46% in 2014, so we are researching that entire sector for companies which have low or no debt, low production costs, who will be the survivors. The price moves each day so far tell me there is no big rush, that the bottom is not here yet, but we will monitor this as 2015 unfolds. Smaller oil exploration companies will close, leveraged oil bonds will default, rig counts will drop --- all this news will appear in 2015. Texas and North Dakota economies will decline, as well as Canada. An early casualty is Civeo, which provides housing for oil workers, down -82%. More will follow.
A result of low oil and metal prices will be a continuation of Russia’s economic decline. I recall Russia’s bond default in 1998, and its worldwide ripple effect, so we will watch for that possibility in 2015. The sanctions, the oil price, the gold price have pushed the Russian stock market down -47% in 2014.
Oil is really the world currency, in a sense. We want to anticipate world effects. With oil trending lower, the Canadian economy will also decline somewhat, with oil sands companies the most vulnerable, regular oil and mining next. We will consider shorting high-yield bond funds, which contain 20% oil bonds.
In Europe there is much to watch too. Their Dow equivalent, the Stoxx 50, was down -13% in 2014. Their central bank head, Mario Draghi, said he would begin QE last June, and then did nothing. When he does act, it will be time to buy European big cap stocks with a view toward gains as we saw in the US markets during the Fed QE here. No position yet.
A third mega-theme is the new spirit of growth in India. Modi works tirelessly to implement his policies and demands the same of his staff. Although it will be bumpy, the overall trend will continue up for awhile in India-based stocks. There are 11 Indian companies which trade on US exchanges, and we can invest in more through several funds. The most interesting at the moment is ICICI Bank. India is a net oil importer, so lower prices will add to the economy. India is the third largest cell phone market, among many other positive metrics.
Finally, biotech is likely to continue its trend up. We have some positions in smaller biotech companies.
Although it's a bit arbitrary to bundle themes, predictions and trends at the beginning of the year, since opportunities, trends and news present themselves constantly, nevertheless, that's my current outlook for growth for the year ahead.
A Rare Pattern
26 December ~ The chart above is the S&P 500 index fund from June through mid-December. The straight trend lines illustrate that there have been higher highs and lower lows. This is very rare. Aside from this central-bank fueled rally, this pattern has only appeared in the market three other times in history: once in 1957 and twice in 1929. The usual outcome after a lower low is a lower high. So, after the October 16th low, which was lower than August, usually prices would bounce some, then continue down. They didn't. This statistically improbable move lends further credence to the theory that central banks and sovereign funds are buying, creating this rare pattern, known by chart analysts as a 'megaphone.'
Never before in history
7 December ~ In the past few months the market experienced an outlier: The usual chart pattern after the lower low spike on October 15th is a lower high, then lower still, which would be consistent with the Fed’s end to their Quantitative Easing stimulus program. That didn’t happen. Prices moved in a way they’ve never moved before: The S&P 500 closed above its 5-day moving average 29 days in a row. This has never happened in the entire history of the market. Tis gives more evidence of the new behemoth central bank buyers.
Other than during this recent central bank buying binge, the higher highs and lower lows of September through November, known as a ‘broadening top’ by chart analysts, have occurred only three other times in market indices: Once in 1957. Twice in 1929. In 1957 the market went lower afterwards. In 1929 the market went higher near the end of the speculative frenzy known as the Roaring ‘20s. This is why we weren’t full participants at this party, prudence amidst the euphoria.
Then there is total stock market cap to GDP ratio, a metric that Warren Buffett’s calls the single best measure of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the dotcom bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble, which was the single biggest stock market bubble in 100 years. The market is more overbought now than it has been in years.
1 November ~ This colorful chart shows the immediate early morning rise Friday of the US dollar and other major currencies vs. the Yen, as soon as the Bank of Japan announced their new massive stimulus program. Click chart for a larger view.
My thesis, first published June 22nd (click here to read), that central banks worldwide have created a new price paradigm by buying each dip, remains intact, with the straight-up rally the past week from the 9% mid-October correction. In August, I found evidence (click here to read) they are also trading options and futures in such quantity that the CME has a special rebate program for them. The Bank of Japan must have received a nice rebate sum this past week as they announced huge new QE, propelling world stock markets and currencies upward. Friday's event finally got media attention, but the buying by other central banks continues to be ignored, and I continue to assert it is the biggest investment news of the year.
Signs of Change
13 October ~ Since we have high cash positions, short-term bonds, with a sprinkling of volatility and inverse ETFs, our accounts didn't suffer from today's -222 point plunge in the Dow.
12 October ~ The main reason stock prices are descending: the Fed is going to end QE this month. Other reasons, Europe, earnings, Ukraine, Middle East, aren't the prime cause, though they're highlighted in the media. The S&P 500 has tracked the QE billions for several years. Now that is ending, so savvy traders are anticipating this change and selling.
As of Sunday evening, the futures have gone lower than the August low. We may have rally attempts this week, but the near-term trend is down for the time being. Cash and bonds, along with excursions into the inverse index funds and volatility ETF—these are the investments of choice for now.
Inquiring Minds will be Pleased to Know
10 October ~ Our accounts closed positive again for the day, while the stock markets continued their descent.
9 October ~ Though we ideally would like to hold positions, in markets like these our first priority is preserving capital, so early Thursday we had to exit stocks to protect Wednesday's profits. We were predominantly safe in cash and short-term bonds as the stock market descended all day.
8 October ~ Mid-morning Wednesday we covered our short positions for a profit and began buying index funds and selected stocks, so we profited from today's move up.
7 October ~ We have had large cash positions recently. As of this morning most accounts are 70% cash, and of the remaining 30% most is in short-term bond funds.
A Six Percent Profit in all US Accounts
4 October ~ The chart below is the US dollar value, measured against other major
world currencies. This is a profit which won't show up on your statement, even though you made it.
Note that from January to August the price meandered. Then, suddenly at the end of
summer, through September and continuing this month, the value has ascended +6%. Viewed worldwide, this
is a profit for all US dollar investments.
Why is the world buying dollars? Political risks in China. Economic ills in Europe. A plague in Africa. War in the Middle East. All told, the US is seen as a safe haven for wealth.
Big-Cap Bull, Small-Cap Bear
16 September ~ The leadership in this market is becoming more and more narrowly focused as stunningly 47% of Nasdaq Composite stocks are down at least 20% from their highs with the average stock in the index in a bear market (down 24%). The same is true for the Russell 2000, with over 40% of stocks in bear market and an average drop from recent highs of 22%. By contrast only 31 names in the S&P 500 have seen drops of 20% or more this year.
This Week's Watch
14 September ~ The ECB has announced their version of QE, which they call Targeted Long Term Refinancing Operations, or TLTRO. We will watch for eventual higher European stock prices, as we saw in the US after QE began, long before US economic data began to improve. Fixed deposit rates in Europe are now negative and banks can borrow at 15 basis points — almost free money.
Here in the US, any change in tone or verbage from the FOMC meeting will be acted on, as QE appears to be ending. Analysts will attempt to decipher the timing for rate increase targets. At the previous meeting, they said rates would stay low for a "considerable time".
Thursday Scotland will vote on their independence. Five large banks have threatened to leave if citizens vote "yes". Many questions would arise: would Scotland be part of NATO? What currency? How to divided the oil wealth? UK stock prices, which fell when polls indicated the vote would be too close to call, will rebound with a "no" vote, which seems more likely.
Friday Alibaba will float its IPO. We will be watching closely and if priced right will buy.
Central Banks Increase Buying
31 August ~ Although it has received almost no media coverage, the revelation that Central Banks around the world are now buying stocks is the biggest investment news of the year. I first wrote about it in June, which you can read below.
And it just got even more important. There is evidence they now trade futures and options as well. In fact, there is so much activity that the CME Globex has published a "Central Bank Incentive Program". Click here to read their notice.
This is important because it hasn't been done before. Central Banks bought bonds and currencies, never stocks. It provides a massive new source of buying power and explains why every dip is bought.
14 August ~ The common belief is that over the long term the stock market has risen 9% a year. Not many years are 9% though. Each year is more often higher or lower, creating that long-term average.
This can be understood in a probability problem. If one flips a coin 10 times, on average there will be 5 heads and 5 tails. However, as my probability professor, Steve Ellison, told me, the chance of any one set of 10 flips being 5 heads and 5 tails is only about 25%. There is an 75% chance that a set of 10 flips will not be 5/5. All those 6/4s and 7/3s, with the occasional 9/1 make up that 5/5 average.
It's like the fellow who had one foot in a bucket of ice water and the other foot in a bucket of boiling water. When asked about his temperature, he said, "on average, I'm fine."
While we’re on the subject of averages and comparisons, a word about using the S&P 500 as a benchmark. What’s not well-known is that even John Bogle, the evangelist of index investing, doesn’t often beat the S&P 500 in his portfolios. Why is that? Because, of course, he adamantly recommends an allocation between stocks and bonds. So, that portfolio doesn’t often best the raw S&P 500. No investment advisor recommends 100% in the stock indexes. Measuring an overall portfolio against the S&P 500 index is a frustrating exercise, caused by that unreasonable expectation, expecting bonds and stocks to be the same as all stocks.
Using a 7% average annual return in long-term planning is more realistic, and only 15% of the years will equal 7%. Most will be higher or lower.
8 August ~ Thursday and Friday we began buying what appears to be the "dip of the month". Our choices include S&P index funds and funds which pay high dividends and dividends and purchase their own shares.
31 July ~ Thursday the markets dropped 2%. During the past week we've raised cash as the signs appeared, so came into Thursday with about 25% exposure to stocks, the rest in cash and bonds.
The first sign was a week ago when Caterpillar decisively fell below it's long-established trend. Cocoa Cola did the same. Then UPS. These bellwethers told me all was not well.
Perhaps the central bankers who bought every dip this year have gone on August holiday. They didn't buy today.
Who Else is Buying?
15 July ~ In May I published a chart (you can scroll down to view) revealing who was buying shares at this high level: the companies themselves. Now estimates are in for Q3 and it looks like companies are buying more than ever. The latest hard evidence is Intel, who said this week that out of $5.5 billion in earnings, they used $2.1 billion to buy Intel shares, in addition to payint $1.1 billion in dividends. They don't plan to stop: the Board authorized an additional $20 billion for future buybacks.
Big Week Ahead
14 July ~ This week tech companies, Intel and Google, as well as big banks, Goldman, JP Morgan, Bank of America will report earnings, providing some extra inspiration for buyers and sellers.
Despite concerns about the bond market, investors submitted $3.4 trillion of bids for the $1.12 trillion of notes and bonds sold so far in 2014. That is a bid-to-cover ratio of 3.06, the second-highest on record and up from 2.88 last year.
The high stock market and great appetite for bonds are each signs there is too much money chasing too few investment opportunities.
Central Banks Worldwide buying Stocks
22 June ~ Central banks around the world have bought stocks and intend to buy more, according to a study released last week. This is important news. It could prolong the market move upward.
The report was issued by the Official Monetary and Financial Institutions Forum (OMFIF), a think tank for central bankers. Here is a quote: "A cluster of central banking investors has become major players in world equity markets." It was reported in London in the Financial Times, and discussed for a few minutes on CNBC. I'm surprised it hasn't received more attention.
This means the population of buyers has changed—it's unprecedented for central banks to become giant hedge funds. Worldwide, central banks have assets of about $11 trillion. So far, I estimate 25 banks have admitted allocating up to 10% of their reserves to equities. So, they have much more money to continue to prop up prices, dwarfing any other investor. I suggest we go along for the ride, but keep an eye on the eventual exit, because when this megatrend ends, our relatively small size will be a distinct advantage.
How did these bags of white powder cause a gold spike?
21 June ~ On the western shore of the Yellow Sea, in nondescript warehouses in the seaport of Qingdao, a city of 9 million souls, eighth busiest port in the world, investigators are looking for a hundred thousand tons of missing alumina, a white crystalline powder that is used for smelting aluminum. The missing alumina is collateral for a bank loan—maybe more than one bank loan—and therein is the tale.
Using commodities for loan collateral is common in China. Copper, iron ore, rebar, rubber, even cotton, is stored in bonded warehouses which are legally "offshore" and thus not subject to taxes and duties. Banks loan hundreds of millions with these commodities as collateral in every one of the thirty-four major seaports from Yingkou to Behai.
On Wednesday State-owned CITIC Resources admitted it could not locate 123,446 metric tons of missing alumina, which had been mortgaged and supposedly stored in a Qingdao bonded warehouse. News of the investigation sparked fear of a crackdown on commodities financing in other ports, causing skittish traders to unwind their financing deals and move their money elsewhere, selling iron ore, rebar, zinc, copper, cotton—any commodity where they stored value for the duration of their financing deals. They moved to gold and silver,which spiked to levels not seen since April. On June 19th alone, half a billion in gold futures were purchased. Meanwhile, nervous bankers are double-checking their collateral all over China. Some report warehouses haven't let them in, making them even more nervous.
Disclosure: Last week we purchased GDX and GLD.
From ZIRP to NIRP
6 June ~ As you probably know, ZIRP means 'zero interest rate policy'. As of Thursday , Europe now has NIRP, 'negative interest rate policy'. The European Central Bank announced negative interest rates. Depositors need to pay to keep money on deposit. This is an unprecedented event by a major Central Bank. It didn't bother the stock markets, as Europe and the US rose on the news. They also announced they are planning QE. The Fed QE buoyed US stocks for a long time, as I wrote here. Now it is time to buy European stocks for similar reasons. We own Total, Sanofi, Bayer, Santandar, Siemens, Daimler, Allianz, and may buy more.
Thinking ahead—I'm just brainstorming now—central banks could take more interest rates negative and solve the debt crisis. For example, if the average bond rate were -2%, debts would be extinguished in less than 50 years. Debt crisis solved.
Enough brainstorming for a Sunday afternoon.
Why is Gold down?
31 May ~ Gold prices posted their biggest weekly decline in eight months. We have not owned investment gold for a long while, but want to understand why it fell below a solid support level. When something moves in a big way, one looks first to the biggest traders. For gold, that’s China and India. With their new government, India has relaxed gold import restrictions, so there is less smuggling. Small-scale gold smuggling added up to big business for a few years. In one recent flight from Dubai to Mumbai, when authorities checked, every single passenger had some gold. My theory is that now Indian citizens know of the easing of gold import restrictions, and know they don’t have to pay the smuggled prices anymore, so aren’t buying much, while waiting for further easing. In addition, the Sensex is up, so investors are selling gold to buy stocks. On top of this, there is complacency, no fear, in any investment sector, as measured by the VIX, which is at a seven-year low. People buy gold when they fear other investments.
Who is Buying US Stocks?
27 May ~ In case you've been wondering who is buying stocks at these highs, the chart above reveals the answer: it is the companies themselves, purchasing their own shares. The bar on the far right represents $160 billion in company purchases during Q1, which is, as you can see, an all-time high.
By doing this, they shrink the number of outstanding shares, which helps the earnings per share number increase even if the absolute earnings number stays the same. This decreases the price/earnings ratio, so stocks are cheaper. This is why many of the companies we own are companies which not only pay dividends, but also buy their own shares.
Following the Leader
15 May ~ In spite of all the systems, computers, algorithms, on days like today we see much of the market is still emotional, playing follow-the-leader, the leader in this case being David Tepper.
Bonds still the place
14 May ~ Many stocks have retraced all of Monday's gain — especially small caps — while our bonds continue to move up in value. That's why I'm still smiling and so is California State Controller, John Chiang, as seen in this photo from a March event, which I wrote about earlier (scroll down).
This year most economists and analysts predicted interest rates would rise and bond prices would fall. The reverse happened. Interest rates are difficult to predict. The forecasts seemed logical, since the Fed has begun tapering, and US economic reports show improvement. Our approach of participating when price trends begin, whether they seem logical or not, helped us in this case.
Many fund managers shorted bonds, so they are in the midst of a slow-motion painful capitulation during these months, which usually ends in a big price spike up as the last of the shorts are forced by their margin desks to cover. Read more here.
5 May ~ Most of the profit we've made in April came from bonds. Bonds and indexes are each near highs. Usually they move in opposite directions. Who's right in this case? In the past, it has usually been bonds. Consequently, we are keeping an extra close watch on the stock market. Margin debt has declined from a record peak. Some sectors are down big: Social media stocks have crashed already. Biotechs have crashed already. The blue chips have been good, so we are in large cap, dividend-paying companies with enough profit to buy back their own shares, including Oracle, Time Warner Cable, Direct TV, AT&T. I think of buybacks like recycling money.
View from a European banker: The American Dream
30 April ~ "America’s GDP growth has ranged between 1.3% and 3.3% since its economy pulled out of recession in late 2009. Judging by the forecasts of our econometric model, this upbeat (if uneven) movement is likely to continue. US GDP should rise 3.0% this year before edging back down to about 2.3% in 2015 (see left-hand chart below). That is quite good compared with other developed countries.
The main reason for the American economy’s relative strength is that it can claim strong fundamentals. Growth in private consumption, accounting for 68% of overall GDP, has remained almost continuously above 2% a year for the past three decades. (By comparison, consumer spending in Euroland has ranged around zero growth for several years.) Actually, US consumption amply counterbalances the government’s recent budget cuts.
Some of the credit for the buoyant mood of US consumers is due to the corporate sector. Again in 2010, as in 2002, companies invested massively in equipment without waiting to be absolutely sure that the economy was bouncing back. They put their cash to work to upgrade and expand their production facilities, at a time when capacity utilisation was still running at less than 80%. This capital expenditure was followed, quite naturally, by hiring. That explains why job creation has been relatively high in the past four years."
from Banque Privée Edmond de Rothschild Macro Highlights
22 April ~ Wednesday Apple, Facebook, QualComm report earnings, and Thursday Amazon, Visa, Starbucks, Microsoft, Caterpillar report. These bellwethers provide a view of the economy, and so will likely move markets. Even after six days up, the trend continues until the market informs otherwise. We've seen two instances, one in February and one in March, where selloffs were met with a rip above the previous high, so that's our operating thesis for this current move too.
9 April ~ Billions are saved using this best of all savings accounts
California Municipal Bonds
24 March ~ On Friday I talked with California State Controller, John Chiang, about the state's municipal bonds. Very citizen-centric and articulate, I think he will be the next state Treasurer. The California Municipal Bond Advisor noted, "State Controller Chiang has been a hero of sorts to us during California’s recent distress because he did just what he was supposed to do to protect bondholders by conserving cash flow to make sure California could cover top-priority funding requirements such as education and debt service."
Municipal bonds, irrespective of tax bracket, and even for retirement accounts, now pay more than CDs or treasuries. One can assemble a decent portfolio with a minimum of $1 million. For smaller accounts, there are other folk who have already assembled portfolios of muni bonds. Those are known as closed-end funds. Some of these funds are trading at a 9% discount to the value of the bonds they hold, the Net Asset Value, (NAV). The interest yield is about 6%. Good in itself, and even more attractive for those in high tax brackets, as it is equivalent to a 10% pre-tax yield. Muni interest is exempt from Federal taxes, including the new 3.8% medicare tax. So we advocate buying these for conservative high interest and further capital appreciation.
The difference between bonds and CDs? Bond funds capital value and NAV fluctuate, whereas a CD capital value is set. (In my opinion, CD capital value really does fluctuate with inflation and purchasing power, but the numbers on the statements don't change, and that's another story.)
What to buy? I've researched the possibilities. Amazing, but there are still bond mutual funds with 5% commission loads being sold. I recommend avoiding those. A better choice are publicly-traded closed-end funds (CEF). Last year, 2013, they dropped double-digits to a deep discount after Bernanke hinted in June the Fed might taper. Now in 2014 the taper is old news, and with Yellen's recent statement of prolonged near-zero interest, the CEF's value has risen and may continue to narrow the discount. Some CEFs are up more than +5% so far in 2014 already.
Though the asset class is huge, the world of municipal bonds is murky and often illiquid. For many issues it is difficult to get a two-sided bid/ask, and when one does, it is often very wide. We have direct access to the most cutting-edge, state-of-the-art, bond trading desks and platforms, and can search for inventory and availability. We can compare the relative merits of individual bonds with closed-end bond funds.
Municipal bond owners are unheralded heroes of our society. Behind the scenes, those who buy these bonds help build the libraries, schools, highways, airports, seaports and other infrastructure of America.
Bank Rule Change Creates Opportunity in 2014
22 February ~ Before the Great Recession, Royal Bank of Scotland was briefly the largest company in the world. Now, after layoffs of 34,000 since then and another 30,000 announced today, the bank is much smaller. The UK government owns 81% of the bank, as a result of a $850 billion government bailout.
Fascinating, I'm sure, but what does all that have to do with us? We look for a decent reward with low risk, and believe we've found it in a part of RBS capital structure: their preferred stock. During the crisis, RBS bought ABN-Amro. To finance the purchase they issued several series of preferred stock, which now yield about 7% in dividends. The regulators allowed RBS to count the preferred stock as Tier 1 capital. However, as of January 1, 2014, regulators will phase out that allowance, which means RBS is likely to refinance these shares, and likely to do that at par, $25. We purchased shares at a discount around $21.
Generally, preferred shares aren't too interesting, because they don't have the upside potential of common stock. However, when there is a catalyst for change, such as we have with RBS, then we want to invest for that reward, implicitly backed by the English government, and collect 7% while waiting.
Rental Homes: Is it Time?
5 February update ~ Our newborn EK Homes Model Portfolio is up +15.65% in January. I know. I didn’t believe it either when I first saw the number. But apparently others had the same idea I did, and bid up companies involved in this new public asset class. That, and I was quick to take profits when the general market mood darkened.
15 January ~ After the boom and bust where we saw prices drop a greater percentage than they did in the Depression, one can't be blamed if just the thought of rental property makes one ill, but of such feelings are cycle bottoms made. Have you thought this might be a good time to invest in rental homes, but don’t want the management headaches? I felt that way, so created a new model portfolio of rental homes. I began a beta test account January 1st, and was pleasantly gratified to monitor its climb up +9.84% in the past two weeks.
Forty-two percent of US homes purchased in December were all-cash deals, up from 18% a year before. In the chart below the jump in 2013 is clearly visible. The publicly-traded companies which own single-family homes bought most of theirs in 2012. Analyst speculate the buyers are from all over the world. The NAR successfully lobbied to have real estate purchases exempt from the Patriot Act's onerous money-laundering provisions. The French are buying certain parts of South Florida. Chinese are buying too. US stock markets are too high to buy now many think, so single-family real estate is attractive. It's a significant trend.
3 February update ~ The sellers got serious today and sold each rally attempt. The Dow closed Monday down -326 points. We remain in bonds, cash with a few inverse ETFs, so had another good day.
Those with shorter memories are calling this a buyable dip, and the emerging market currency woes transitory. Those with longer memories recall it was emerging market currency problems which eventually snowballed into the demise of the huge hedge fund, Long-Term Capital, in 1998 and one of the early Fed bailouts.
31 January update ~ The S&P ended January -3.5%; the Dow -5.2%. Our accounts fared much better, due to early increased allocations to bonds and cash.
24 January ~ We raised cash this week and early Friday morning allied with a relatively rare species in the investment jungle: the inverse exchange-traded fund. These investments rise in price when the market descends. So we didn't have a lot to worry about Friday as the Dow worked its way down -318 points, and don't have a lot to worry about this weekend.
Stock market analysts are worried about emerging countries economic weakness, specifically Argentina and Turkey, about growth slowing in China, about more Fed tapering announcements. There are also big earnings reports in the week ahead: Apple, Google, Facebook, Caterpillar, Pfizer, AT&T and 3M. We plan to let their worries play out, and watch for a time and place to buy again.
Yes, we are not perfect, but we are ferocious about protecting capital on days like this. As those with children of a certain age know, 'hakuna matata' is Swahili for 'no worries' popularized by the Lion King.
9 January ~ While US markets see-sawed all day again, Europe and emerging markets have descended this year so far. Last week we began a short position in emerging markets, prices of which have moved down faster than the US. That short position is up about 6% so far year-to-date. Investment capital is leaving Brazil and other emerging markets. We thought they might go up this year, but the market doesn't care what we think, so we go with the flow.
Allocation Allocation Allocation
10 December ~ Similar to the familiar real estate mantra, asset allocation is important to balance risk and reward long-term. The traditional formula is one hundred minus your age. That difference is the percent of investment which should be in stocks. The rest should be in bonds. It's one formula on which most ---from John Bogle to Jim Cramer--- agree. For older folks that wasn’t very profitable this year, as stocks went up and bonds went down. In hindsight, everyone now wishes they had more of their assets in stocks. So great is the mixture of euphoria and emotion now that risk is forgotten; allocation is forgotten.
A few weeks ago I read a paper suggesting planners use 120 instead of 100, which would increase stock market exposure. So, 120 is the new 100? Maybe it will get some traction, at least until the next bear market.
We have a doubly interesting situation due to the Fed-fueled economy: When they taper QE, it is likely both stocks and bonds will decline in value. Many investors have high allocations to cash anticipating this event. Others sought refuge in precious metals. This year gold has gone down about the same percentage the S&P has gone up. They were mirror images.
Asset allocation is an age-old issue which has perplexed the brightest of people. Below is a chart of Sir Isaac Newton's investment history. He struggled with the bubble of his time, the South Sea Company. In February 1720 Newton invested a little and cashed out at a profit. Then after enviously watching his friends get richer, risked his life savings and went broke by November. Newton later lamented, "I can calculate the movement of stars, but not the madness of men."
A lesser-known but wiser investor of the same era, Anton Fugger, advised "hold one quarter in each: stocks, bonds, gold, real estate, and expect one to go down each year." The Fugger family maintained their wealth for many generations.
GM is back
9 December ~ No longer Government Motors, as Treasury Secretary Jack Lew announced today the government has completed selling all its shares. Chairman Dan Akerson expressed gratitude for a second chance. We bought GM shares recently, so we’re profiting from Wall Street's positive reaction. GM, its subsidiaries and joint venture entities sell vehicles under the Chevrolet, Cadillac, Baojun, Buick, GMC, Holden, Isuzu, Jiefang, Opel, Vauxhall and Wuling brands. Car sales have increased to 2007 levels, helped by zero percent financing. Not often reported, but the Canadian government owns 7% of the venerable automaker. We're not making a public recommendation here, as our position is part of a diversified portfolio purchased at lower prices.
1 December ~ Recently I rescued someone trapped in a gold mine. Actually, it was his future, his retirement account, trapped in many gold mines. A month ago a friend said he needed help with his portfolio. I reviewed it and saw it was all in mining and precious metals on the advice of his former money manager. It was down -24%. From chart analysis I saw each investment remained in trends down, so I sold them all. Since then, gold has descended another -5% and mining another -7%. He was trapped by a confidence cave-in, by the fear if he sold he would miss the long-awaited rally. I expalined how to overcome the fear, how to participate in the rally if and when it happens, and how to stop the bleeding in the mean time.
The bullish case for gold is logical and makes sense, but the market trend hasn't agreed for the past two years. I do my best to never argue with the market trend. I'm not anti-gold; just waiting for it to start trending up.
About the art: In the 1930s, as America worked its way out of the Great Depression, the government held national contests for art to decorate public buildings. Fletcher Martin submitted this entry, “Mine Rescue”, for the post office of the mining town of Kellogg, Idaho. This mural study is now at the Smithsonian.
Going Forward, How Will the Fed Vote?
31 October ~ In the table below there are more blue dots than orange dots, so we should expect the Fed to purchase another $1 trillion of bonds and mortgages next year, as they have this year.
Central Bankers Gone Wild
27 October ~We are revisiting an historic era in the money world: the political necessity to create money to buy government debt. The Fed must keep buying bonds, because there is not enough demand otherwise to continue to fund the US spending. I’m not alone in this analysis. Socgen and Deutche Bank agree. Deutsche Bank now argues that there 'won't be any tapering at all', while SocGen as gone a step further and is now saying 'QE may be increased'.
Historic because money creation has many precedents. This time it’s not just one country, but the world, according to this article. Canada’s central bank has decided to continue 'easing', as has Norway, Japan and the EU, as well as emerging markets from Hungary to Chile.
Therefore the stock market may enter a hyper phase, as did historical German and Zimbabwe markets after relentless money creation. Yes, I know the US is not Zimbabwe, and I'm not predicting those extremes, but our stock market is beginning to act a bit as theirs did. So is Argentina’s stock market. Every dip was bought.
Historically these mega-trends don't happen overnight. They occur over years, with much denial along the way by most participants, especially bondholders, who have the most to lose.
Meanwhile, bonds are down for the year. Among older investors, there is a great yearning to abandon traditional stock/bond allocation, where one invests one's age in percent in bonds (ie, if one is 60 years of age, inveset 60% of one's assets in bonds and 40% in stocks). Those who allocated to metals are down, as gold, silver and copper are each down double digits year-to-date. Fundamental analysis doesn't seem to matter much in times like these, only the unbridled power of central bankers gone wild.
The Risk Reward Right Now
Update 23 October ~ That dotted line in the graph below, published on the 10th, has happened.
10 October ~ The most pressing risk is not a default. It is the treasury auction. Short-term treasury prices have dropped this week to levels not seen since the Lehman default. Fidelity has sold all its short-term treasuries. If the bid-to-cover ratio at the next t-bill auction is less than 1.0, then that loss of confidence will cause the equity market to drop precipitously.
On the other hand even the hint of a debt deal resolution and
we will see a rally. How big? Since Fed POMO seems to correlate well, here is one view comparing
their balance sheet with S&P 500:
Not a recommendation to buy or sell, of course, as personal financial considerations should be analyzed first.
7 October ~With each investment in equities and fixed income, I hope to hold forever, as long as the price trend continues upward. As you’ve seen over the years in your statements, often there are small buys. These are initial investments, which may turn into big trends to add to and hold for a long time. As the greatest mutual fund manager of all time, Peter Lynch, observed, about half of the stocks he bought didn’t continue up. So, we need a way to deal with this uncertainty in the market. I deal with it by starting small, and increasing as trends develop, and exiting if they don’t continue. The exit may be after a month, a week, or a day. The object is to not let small losses turn into big ones. It's like planting seeds in a garden, then weeding out the weak plants while the strong ones flourish. Sometimes that means buying the same investment again if a trend resumes. Of course, this requires daily, and gains are not automatic.
Day to Day Work with Exchange-Traded Funds
4 October ~ From that day in the '90s when I attended the London launch party for the first ETF 'til today, they've been part of our work. I use index ETFs to hedge and adjust equity exposure as news, economic data, and price trends develop. There are two useful ones with plenty of liqudity: the SSO and SDS. They aren’t designed for long-term holding, but to help manage risk and capture profits from the S&P index.
The Big Issue
19 September ~ This week is the second time this year Bernanke first gave strong indications 'taper' is about to happen, then didn't do anything at the FOMC meeting. Each time the market sold off first then zoomed up instantaneously (ok, it took 150 milliseconds this week) when tapering didn't materialize. Yesterday, an economist wrote, "Fed credibility and its communication strategy are in tatters."
The Fed can't end their bond buying because interest rates would rise and the US government can't afford to pay higher interest. As we've seen this year, if the market even suspects the Fed might stop buying, it begins to sell off.
Real Estate vs. Stock
9 September ~ Real estate vs. stock; two different worlds of investment. We’ve learned over the years there is a time and place for each, and a time and place to avoid each. Similarities? Each has dramatic price changes. Each can be leveraged, increasing risk and return.
Differences: Stock price trends and cycles are much shorter than real estate cycles. Real estate costs of buying and selling are much higher, and the purchase process much more time consuming and complicated. Stock shares are generic and commoditized. Real estate is usuallly site specific. Stocks can be sold in a few seconds; real estate needs months. One can instantly borrow secured by stocks up to 50% at 1.3% interest. One can borrow 80% secured by real estate but it is a complicated process involving tax returns, loan documents, title insurance. You’ll never have to fix a toilet with a stock, but you can’t live in the Dow Jones.
What if your house price was quoted each day like the Dow Jones Industrial Average? It would probably drive the homeowner to distraction. Zillow creates historical and current estimates, and displays the occasional ‘trade’. On a million dollar property the bid might be $900,000 and the ask $1.1 million, or $200,000 wide. In stocks the bid and ask is often a penny wide. Stock bids, ask and trades are quoted every second for six hours monday through friday. The bid and ask on real estate is very far apart on each and every day except the escrow closing.
Perhaps one could recreate the dynamics of the good parts of real estate in a brokerage account. Buy a high dividend REIT, leveraged as one would with a mortgage. Then hold through the daily barrage of quotes, news and analysis. Would we then have the best of both worlds?
After Many a Summer
1 September ~ Soon after British writer Aldous Huxley departed England to settle in California, he wrote a novel about an aging millionaire seeking immortality, perhaps somewhat like this aging US stock market rally. The novel didn't have the Fountain of Fed to provide the elixer of eternal life the way the US market does, so maybe the ending will be different.
The longevity of this US rally is unique, in that emerging markets of India, Russia, Brazil, China have already descended, as have REITs, and bonds. Often, the US market trend and volume pick up after Labor Day. So after many a summer, this week we shall curiously turn a page to begin the next chapter.
3 August ~ Since 2009 the S&P has tracked the Fed's money creation and asset buying, as shown in this chart:
In May I wrote about it (scroll down to 'What Happened...'), and even earlier in 2011 (scroll further down to 'Tipping Point') — wrote about this time which began in 2009 when the Fed creating credit to buy US debits is the overwhelming financial force, trumping declining corporate sales, trumping main street doldrums. To the extent one hasn't jumped on board the S&P runaway train, one has suffered. The Fed chair says he doesn't plan to stop any time soon.
There is a large number of investors who believe prices will always follow a statistical reversion to the mean in a normal distribution curve. Those people are suffering too. Not every event set is a normal distribution. Or, if one wishes to be completely accurate, there are longer time frames wherein distributions normalize, and we appear to have entered one which seems longer than an investment lifetime.
A small but pertinent example: In the past 34 days, the market has moved up 30 days and down 4 days. The normal distribution would be closer to 15 and 15. A market can stay abnormally distributed for awhile. In photography, one focuses on distance, the third dimension. In market analysis, one focuses on time, the fourth diemsion. One needs to focus one's time frame.
There is a large number of investors who believed the beneficiary of the Fed's largesse would be gold and silver. Those people are also suffering.
There is a large number of conservative investors who own municipal bonds, who are just beginning to suffer, as debt-burdened cities begin the long unwinding process.
It is bitter to have seen it coming, written about it, yet not maximized profit. Bitter looking back, but looking ahead, if this is indeed "it", the tipping point where the Fed can't really stop buying US debt, it means this extraordinary rally is likely to continue.
There may be some hiccups in September, as Congress pretends to argue about the debt ceiling again, but everybody knows by now they will raise it, after much drama and last minute maneuvering, as we experienced wtih the December fiscal cliff antics. We bought the S&P and profited that day, and may get another good buying level in September.
Income Investments More Stable in July
30 July ~ At the beginning of May the value of high-dividend stocks moved precipitously downward, due to fear of increasing interest rates. We exited a few days after that began, and have waited patiently for the buyers and sellers to find a balance. It looks like that is happening. After the FOMC meeting this week, one can more safely own those again. So many are looking for a return on capital these days, and some retired have most of their portfolio in fixed income.
Worst have been the municipals, which we don't buy, but I got a close-up look recently when someone sent me their muni portfolio to liquidate so they could buy a farm. It has been difficult to even get decent bids, in such disarry is the income market, even though we sent requests to many bond houses.
The retired worldwide look enviously at US equities compared to their own fixed income losses, and as the chart below revealed, are joining in to buy at these recent highs. With the Fed QE program injecting billions, the rally may continue.
Fed Chairman comments have caused US dollar volatility in June and July.
14 July ~ One can't help but notice the May-June selloff on the mere hint Ben might taper off Fed purchases sometime next year, and the big rally back when he assured the markets he will continue his spending spree, as yet another remarkable example of the power of the spoken word to move billions in stocks, bonds, and currencies. To exert that power, one needs to be holding the biggest credit card on the planet.
Those market reactions mean there is a massive, yet-unnamed asset bubblem which, after five years of Fed stimulus, perhaps not even a robust economy can replace. If the move at even the hint of tapering is any indication, then there is a chance asset prices are going to fall once the Fed stops injecting $85 billion each month.
Since the US government can't really afford to pay higher interest, the unwind of this bubble isn't likely to happen this summer or this year but some time in the long-term. In 1914, the first British acceptance of US dollar-denominated bonds was a tipping point as the world's reserve currency transitioned slowly from the Pound to the buck. Looking far ahead, when the US accepts Yuan-denominated bonds—which no-one is predicting now— will be another tipping point.
Long-term musing aside, this week Ben will speak to Congress again, and banks will report how they profited from him buying their toxic mortgages. Twenty or so other blue chips will report earnings as well.
Surprise: Ray Dalio's Fund
25 June ~One of the hedge fund world's most closely watched managers, Ray Dalio, runs the $70 billion All Weather Fund at Bridgewater Associates. He practices transcendental meditation, lives in Greenwich, and is the 44th richest person in America. In 2013, his All Weather Fund, widely held by major pensions, is down -$5 billion, or -8% year-to-date. Click here to read the Reuters press release. Click here for the CNBC video.
Ben Speaks, Market Squeaks
19 June ~ Today Fed chairman hinted he might stop propping up the bond market. Gold dropped -1.2%, the S&P -1.4% and the TLT bond fund -1.0% at market close, and more after hours. Our accounts, hedged, were -0.1% today.
Like London and Paris
2 June ~ If Charles Dickens had been an investor this year, he might have penned the same words he did in 1859 to describe London and Paris at the beginning of A Tale of Two Cities. If one put everything into S&P (+12%) or Nikkei(+9%) funds it was the best of times. If one put everything into gold (-18%) and mining (-37%), or Yen (-13%), it was the worst of times. Most of us are diversified somewhere between these extremes.
Fundamental analysis hasn't helped. Following the Fed and other central banks has been the principal correlation with market movements.
What's Happened to the Stock Market
16 May ~ This is no ordinary rally. This is what was supposed to happen to gold. According to some past year predictions, currencies and stocks were supposed to all collapse and gold soar to new heights. Instead, investors worldwide chose the US stock market, fueled by years of zero-interest rate handouts to financial institutions. I’m not saying “this time it’s different” because this rally will end as all do, but it is motivated by a perfect storm of forces which have already taken it farther than ordinary seasonal rallies. Some signs of the unusual strength: (1) IPOs which go up; (2) secondaries which go up; (3) shorts capitulating each day in the final hour; (4) eighteen consecutive up Tuesdays; (5) rising markets in spite of weak seasonal tendency; (6) markets rising in spite of negative economic figures — all indications of buying beyond ordinary.
Happy Arbor Day
26 April ~ Perhaps it is a coincidence that a company which grows 50 varieties of tree seedlings reports earnings on Arbor Day. In any case, we've enjoyed profits from our holding of Weyerhaeuser but needed to sell today, as the trend up appears to have ended.
This 112-year old REIT manages 20 million acres of forest and pays a 2.23% dividend. We will watch closely for an opportune time and price to invest again.
The Great Gold Crash... of 1869 !
22 April ~ In 1869 the US was on the gold standard and President Grant was in the White House. Two speculators, Jay Gould and James Fiske, attempted to trade gold using inside information. The Treasury Secretary, George Boutwell, retaliated by selling $4 million of the Treasuyr's gold to keep prices low, so the speculators' plan failed. More details here.
The civil war debt, the railway boom and bust (the high-tech investment fad of that era) led to a general depression by 1873. The lessons here are that the country on the gold standard still had severe economic ups and downs, and that government adjustments to gold prices are nothing new. Click here to read more.
Who is Behind the Gold Drama?
15 April ~ A year ago big hedge funds were sure quantitative easing would double, triple gold priced in US dollars. So they bought millions of ounces—Soros, Bass, Paulson, and others.
The severity and timing of this two-day plunge indicate some big hedge fund, possibly in India or China, may have had a big margin call. The first leg down in the morning below a significant quadruple bottom support triggered stop losses creating further selling, which triggered the call, then the hedge fund(s) needed to sell to meet the margin requirement before market close. Monday, the Shanghai Gold Exchange announced trading margins for the gold forward contract would be raised to 12 percent. Monday the CME raised gold margins to 18%. This causes more forced liquidation, and gold is drifting lower after hours.
Why India? Because there it is common to use gold holdings as collateral for business loans or investments. Lenders will have triggers in their documents that stipulate if the collateral value decines below a certain percentage of the loan, the agreements must be adjusted.
Worldwide, investors in general have become discouraged by the two-year decline from $1,900, and have sold: Holdings of gold in exchange-traded funds plunged 900,000 ounces over the past week. Holdings are now down 7.2 million ounces (223 metric tons) since the start of the year, nearly wiping out the 9-million-ounce increase during 2012.These are significant numbers. For context, 7.2 million ounces represents 5% of annual global gold demand. As prices continue to plummet, investors sell to preserve capital. It's a cycle: As investors liquidate, prices adjust for the extra supply. As prices decline, that spurs another round of liquidation.
My son is into rock climbing these days. He has a joke: "Where can you find lots of high-quality climbing equipment for free?" Answer: "At the bottom of Half Dome." The chart below depicts the number of ounces held by all gold-related ETFs in 2012 and 2013 ytd. You can see the mountain of buying ahead of the election and the fear of the fiscal cliff. This year the Half-Dome side of the mountain formed, as hedge funds and investors sold.
To preserve fingers, I don't want to catch a falling piton, not even a golden one. Before buying I would like to see the huge sell orders filled and out of the way, and see big buyers appear. That could be Monday or five years from now. I'm ready either way. The price and volume pattern will reveal them as the days go by. My job is to employ capital elsewhere until that time. These days the deep discount commissions, massive liquidity and penny spreads make such sector re-allocation easier than it's ever been. More importantly, this means I don't have to be caught in the many imaginary future predictions, both up and down. I can respond in the moment as events unfold. There is no time like the present.
I remember in 1975, when gold ownership became legal again, our family bought gold at $35 and higher prices. Contemplating the long-term chart, I now see that the run up from 1975 to 1978 was a result of other Americans reinvesting in gold as we did after so many years when it was forbidden. We bought from a local coin dealer who guaranteed to buy back gold at the price he sold in order to get customers to his shop rather than the competition. After the 1980 crash, we went to his shop one day, and he was gone. Shop closed. No forwarding address.
Somehow it's ironic that it's April 15th, the day when the Federal and state governments take 29% of all American's' income, on average. Though this is the biggest two-day drop in thirty years, on a long-term chart it is a minor pullback after the precious metal's long, long rally.
1 April ~ No April Fool's here, Stockton is officially bankrupt. GDP of Stockton is $19 billion. GDP of Cyprus is $24 billion. So, we have our own little Cyprus right here in central California.
The next big legal question: does Federal bankruptcy law trump California law regarding pension obligations? Stockton's biggest creditor is CalPERS. $900 million. Stockton's pension and health benefits are most generous: coverage for city retirees and spouses for life, even if they worked for only a month. The retirement age? Fifty. Even Cypriots had to wait until age sixty-five. Read more details here.
Just for some perspective
10 March ~ While taking in all the media's discussion of the government spending issues, keep this chart in mind. The blue is projected federal government spending. The thin red line is the amount of the dreaded Sequester. Note the blue line continues to ramp higher. There are no actual reductions in spending. Politicians, lobbyists, media---they all know this---so watching who complains is an education in itself.
Hyperinflation: Commodity prices have increased sharply since 2000, erasing all the declines of the 20th century
20 Feb ~ Even with precious metals making new 7-month lows today, the long-term chart of commodities prices above shows that right along with fiat money creation has come price inflation, for they are two sides of the same coin. Commodity prices were higher in 2011 than during the entire 20th century. To read McKinsey's entire 21-page pdf report, download here.
Yale Professor Opines on Housing
16 Feb ~ Yale professor Robert J. Shiller talks about his eponymous housing index, and advises that while everyone needs a place to live and that he owns two homes, houses as an investment might have been a fad and are risky today. See video interview here.
Meanwhile last week Bloomberg reported Blackrock mutual fund company bought $3 billion of single-family rentals and may plan to roll out a public REIT.
Happy New Year !
31 December ~ We used our cash to buy this morning as the market began to ramp up anticipating compromise. Friday our accounts were mostly cash. Monday they are mostly long S&P500. The overnight futures indicate a gap up opening on Wednesday.
There is not much historical evidence of politicians choosing financially prudent solutions to overborrowing, except in Iceland. They got rid of their bankers. So, we shouldn’t expect a financially prudent solution from our politicians, no matter what they say. They are playing their part. There are individual solutions at each stage of the long drama. We can each find it. We study history, study the long cycles, and estimate where we are now. Some inflammatory economists compress the long cycles and write as if their fears will manifest next week. So we need to perceive the realistic time track for valuations of currency, metals, food, land. We observe what other individuals did throughout history, to find our part to play in the current drama and perform well. My part is managing wealth denominated in the US currency so long as it endures, and invest in other stores of wealth as the currency value erodes. That's the long term.
Short term, we will participate in the relief rally. The new law is appropriately named the Taxpayer Relief Act of 2012.
Here's what a fiscal cliff looks like
28 December ~ In case you are wondering why we have high cash balances this Friday, this S&P chart shows why. We avoided that cliff, which happened Friday afternoon. Not only Congress, but Wall Street is getting serious.
Pay to Save
4 December ~ In Switzerland they don't pay you interest on your deposits. You pay them. This is stage two in the race to debase, undertaken by all developed countries in the world. US deposit rates have been near zero for years. This is known as the risk-free rate, which during most of our lives has been greater than 3%. Now that is zero, and heading towards negative, and already negative when inflation-adjusted. investors, savers, pension plans, are searching for a return on capital, and assuming more risk.
This is a logical consequence of countries borrowing too much and creating too much currency. Countries can't afford to pay high rates. A negative interest rate will slowly reduce debt. How convenient for the indebted! A great solution for indebted nations, and a cruel joke on conservative savers everywhere. Cash itself is now a depreciating asset. The Chinese Yuan, not mentioned in the media yet, continues up.
In our income portfolios we've needed to be nimble and jump over several candlesticks as some of Pimco's funds' premia contracted, and mortgage REITs capital value descended. We remain vigilant and have found several niches which provide ongoing income — once upon a time taken for granted — now a rare luxury.
Black Friday was a Week Early for Us
24 November ~ A week ago Friday a certain price and volume signal flashed a "One-Day Sale" sign, so I began buying after waiting patiently for two months. Friday everything in the store was on sale, and prices have risen almost every day since.
What is Volatility?
15 November ~ The volatility index [VIX] is a mood ring worn by market participants. The VIX measures the one-month volatility of S&P options. In essence, the VIX measures fear. There is some correlation, but it does not necessarily go up 1:-1 as the S&P drops, as many believe. Since there was much fear and loathing before the election, which was relieved somewhat afterwards, the subsequent VIX move since November 7th was down from 19 to 18 today, in spite of the market going straight down since election day. So the question one asks: where is the fear? There is a general complacency that congress will compromise — after its usual theatrics — on the tax issues, the so-called fiscal cliff. News of middle east fighting is too common to move markets much anymore. Maybe the most intriguing item is news that 100,000+ Texans have signed a petition asking to peacefully secede.
Stock prices work their way upwards but crash downward. VIX does the opposite. It crashes up and drifts down. But it does so on fear, not actual S&P moves. All we need for VIX profit is fear itself.
There are two exchange-traded funds based on the VIX: the VXX and VXZ. They are flawed instruments for long-term investing. This is because they are backed by futures which need to roll when front month contracts change. When they roll, there is huge slippage, about 4% every three months, which you can see in this comparison of VIX with VXX. Owning them is like keeping ripe fruit too long. Spoilage. The most profitable way to participate is to sell these perishables at premium prices. Otherwise, stay away.
Contributing to your IRA
4 September ~ The question has come up "can I make current contributions to my Rollover IRA?" The answer is yes. To do that, log in to your account, select 'Funds Management' in the left blue menu, then select 'Fund Transfers'. In the page which appears, choose 'Deposit', then 'ACH from a US Bank', then 'Proceed...". Complete the form which appears. The broker will initiate two small transactions for a test, then you can start the regular monthly deposits to your IRA.
One caveat is that once you contribute to a rollover, then it can't be transferred to a 403b employer plan again. However, most have no intention to ever do that. Another is that deductibility of the IRA contributions depends on your income, so please ask your tax advisor about how an IRA contribution benefits you for 2012. Please email firstname.lastname@example.org or phone 1.530.231.5646 for further discussion on the topic.
31 August (update) ~ The last day of August was anything but slow. Gold +$33. Stocks down, then up. Bonds the same. It's an unusual day when stocks, bonds and gold are up together. The underlying reason: dollar down, fearing further money flooding by the Fed. We navigatred successfully, and look forward to a new month beginning Tuesday. Happy Labor Day!
28 August ~ Almost every day this month the S&P 500 index has moved less than 1% up or down. Trading volume is at historic lows. Not much happening. This often changes the day after Labor Day, so we are looking forward to next Tuesday, and have high cash positions until then, since Bernanke's speech from Jackson Hole this Friday may depress the market. I've always wondered why central bankers meet in Jackson Hole—a ski resort—in the summertime. Maybe there's a brochure somewhere which says "Things to do when visiting Jackson, Wyoming: 1) hike 2) climb 3) decide the fate of the world." Friday morning we will hear their plans, and respond accordingly.
Apple Wins High Tech Trial of the Century
26 August (update) ~ Apple wins a billion. Shares open gap up Monday.
22 August ~ One block east of leafy Plaza de Cesar Chavez in San Jose, inside the Bauhausian Robert F. Peckham Federal Building, the ‘High Tech Trial of the Century’ jury received hours of detailed instructions from the Honoroable Judge Koh before beginning deliberation following almost a month of testimony. Resting on their shoulders is the fate of Apple and Samsung. The dispute? 700+ patent issues. Since Samsung hardware uses Android, one could say this is really a dispute between Apple and Google. The jury’s decisions will move the share prices of all companies involved. In the synchronicity one sometimes notices in dates and numbers, this same week as the trial’s culmination, the Empire Steve Built became the most valuable company of all time. Apple is valued at almost two-thirds of a trillion dollars. To compare, the previous high watermark valuation for a public fortune was Microsoft in 1999 at $613 billion. We owned Apple during its recent run-up, though you might not have noticed because it was neatly gift-wrapped inside the QQQ shares along with Google and Qualcomm.
Paying to Lend Money :: G8 solves their debt crisis
19 July ~ Once upon a time, governments had to pay interest to borrow money. Not now. Now lenders pay them. This week, the US government borrowed money through TIPs bonds with a negative (-0.655%) interest rate. France, Denmark, Germany and Japan are also borrowing money at negative rates. Governments are deeply in debt, so it makes sense they would turn the tables and receive interest for borrowing more! The more they borrow, the more they receive in negative interest. Problems solved!
Governments already spend more than they collect from taxpayers, so as we all know, they borrow the difference. One has to admire this elegant further solution for the redistribution of wealth. At -0.655% interest, the world debt will be paid off in less than two hundred years.
Of course, this is not very good news for those who must invest in government debt: public and private pension plans and insurance companies. In the case of many state pension plans, taxpayer residents are legally obligated to make up the difference if their state pension doesn't earn 7.5% a year.
These great slow, seismic shifts in wealth will eventually affect us all.
A profit you won't see on your P&L (even though you got it)
July 6 ~ The chart above is the US dollar vs. the Swiss Franc yesterday on July 5th. Your account profited, but it won't change the P&L because the P&L is denominated in dollars. It means the dollar is now worth more than the Franc, the Euro, the Yen, the Yuan, and gold than it was a day before. What caused this spike? The Bank of England, the People's Bank of China, and the ECB—three of the planet's largest banks—each cut rates in an effort to make their own currencies cheaper. So our dollars' value benefits, even though it doesn't show up on our P&L.
We Invest in Communities
12 May ~ Student Transportation (STB) takes students from home to school and back again in those familiar yellow shool buses. In most school districts, the need for cost reductions and capital investments has never been more urgent and STB can help school districts immediately by putting real money in their hands for reinvestment in education as well as replacing worn-out buses with new ones.
STB is run by Denis J. Gallagher, and traces its roots to a bus service established in 1922 by Gallagher's grandfather.
This is a way one can invest capital in a helpful community service. The drivers are mothers and fathers, neighbors and friends with deep roots in each community. 70% of student transportation is still run by districts, so this is a niche destined for consolidation and growth. The only other large school bus operators are privately owned.
Investment income is scarce in this era. STB shareholders a check each month, annualizing at 8%. This simple, steady service delivers a needed ride to students and an attractive profit on our savings.
STB also environmentally-friendly. They converted more than 200 yellow school buses in Ontario, Canada, to biodiesel fuels. Their Parkview Transit division was the first school bus company in Ontario to run a biodiesel fuel blend in a large number of its buses and the program continues to expand replacing diesel fuel with fuels made from renewable resources like soybean, corn and canola oils. The resulting reduction in emissions is providing a healthier environment for our young passengers and cleaner air for employees and the community at large.
Why is gold down? 16 March 2012
Why is gold down? Consider the bright red line at the bottom of the chart, labeled "ECB margin calls". Notice where it spiked up in September 2011, circled on the left, and what happened to the spot gold price then. On the right, this month, look at the huge margin call, circled on the right. Banks need to sell gold to raise cash. One simple solution would be for regulators to consider gold as good as cash, but they haven't made that connection ---yet.
A New Investment 11 March 2012
For many years we have happily owned Pimco's exchange-traded funds. Now on March 1st Pimco has launched an ETF version of their famous Total Return Fund. We bought the first day, and have added since then. Apparently, we're not alone, as investors have bought $134 million since it's recent IPO, making it the ninth largest actively traded ETF. Bill Gross actively manages this portfolio, with an eye toward index beating returns. Read the prospectus here. FINRA regulations inspire me to remind our dear readers that neither this, nor any other investments mentioned on this website, are recommendations.
31 December updated ~ Looking at the overview, the big picture, thinking long-term, here are a few trends I've noticed. First: The end of the financial world is postponed until further notice due to unstoppable fiat currency creation. It's now obvious that money printing, disguised by many acronyms, is the central banks' solution for every problem. This may postpone any true reckoning for years. In the meantime a Hawaiian friend informs me the Kona airport private jet parking is maxed out this week with 70 jets, with overflow in Maui and Oahu. In Florida, the theme parks are so crowded, they temporarily shut the gates this week. Many Las Vegas hotels are sold out for New Year's Eve. Here in California restaurants and malls are filled. Last week someone even bought a house on our street. More US citizens will continue to suffer from too much food than too little. Americans make up half of the planet's wealthiest one percent.
Consider the Gallup poll results of the "World Giving Index" in which the US ranks number one in the world, with 66% of Americans giving money to charity, 43% volunteering time, and 73% helping a stranger within the past month. A local homeless shelter reports their population is down from last year. Yes, there are big problems and crises brewing. There are always potential crises. Some have been 'immanent' for years now. All considered in perspective, things aren't so bad.
Another trend: The internet has just begun to change everything as the world's tutor, communicator, even its conscience. Libraries, phone books, even classrooms, are fading in importance, as millions do all this online. We are entering the hyperweb era, defined as over half the internet nodes being non-PC devices. Yesterday evening at a holiday party I spoke with a young teenager who I've known since birth. I remembered him as taciturn, withdrawn, quiet. Now he is articulate, intelligent, brilliant. I asked him what had changed. He said talking every day with his gaming friends online changed him. We realized that browsing the internet now we learn more in a month than we would learn in a year before. Intelligence is ramping up, as is the development and sharing of ideas, plans, solutions. The transparency and immediacy of Youtube and Twitter news tends to inspire governments to improve. The internet has changed the investment world dramatically for the better too, and there is much more on the way. A big problem in the investment world is too much information and outright misinformation. Investment success these days depends on successfully blocking and filtering all but what makes money now.
A trend that wasn't: 2011 was a year without a big trend in the S&P 500, closer to unchanged than any year since 1947, as the 50-year chart below shows clearly. This chart is drawn in the Japanese style of analysis. Much like their intricate, precise joinery, tea ceremony, calligraphy and art, centuries ago investment analysts created charts which at a glance provide more information than the line charts one sees on financial tv. In the upper portion of the chart below, each vertical line represents one year's price movement. Red for down years, green for up years. The thick part shows where the market began and ended. The small lines above and below the thick portion trace the high and low prices during the year.
This is fifty years of S&P prices at a glance, so you can see in the 90's, five consecutive up years, where buy and hold worked well. You can see the up and down years in the 00's, where trend investing worked well. Finally, look at 2011, the single skinny line on the right, where the S&P traveled up and down 3240 points and ended virtually unchanged --- a very unusual year --- with only one other similar year, so one could conclude it is not likely to repeat in 2012. The Japanese analysts word for this type of line is 'doji' and they interpret it to mean 'indecision'. The bottom portion of the chart, by the way, is an annual volume histogram.
The investment opportunities have never been better than now. First, the cost of adapting to changing conditions is lower than it has ever been, and flexibility is the key to survival and success these days. If one of the many simmering crises boils, we can reshape our portfolio in a few minutes. Second, one can invest all around the world, in most commodities, and every industry, without ever leaving the US exchanges. I'm not recommending worldwide investing at the moment: India's Sensex was down -25%. Japan down -17%, China down -22%, to name a few of the emerging market disasters of 2011. Third, most investors are confused, indecisive and discouraged, a warm composting environment for growth of new trends. In our accounts we are endeavoring to take full advantage of improvements which will reduce investment costs, while broadening opportunities.
So, yes, the European banking system is teetering, yes, the middle east is a powder keg, yes, real estate markets are moribund, yes most emerging markets and value investors were down double-digits, and yes, most governments are spending too much and will consequently hyperinflate their fiat currencies. Bring it on! There are always problems. Things are never perfect. That's what creates the opportunities. Our goal is to generate absolute profits no matter what, and now we have better tools and a better environment than ever to accomplish this in 2012.
7 December ~ In the past four months the index has seen sixteen moves of 5% or more. To put this in perspective, there have been entire years in past markets without moves of 5%. Another factoid of note: Though this line chart makes the price changes look continuous, most of the percentage changes gapped overnight, while the US market was closed.
Recollection of Lunch with Steve Jobs
Once upon a time twenty other wealth managers and I gathered in a private dining room at the Savoy in London, invited by Steve Jobs to view an eight-minute clip from something called "Toy Story". Jobs was doing his road show for the Pixar IPO. After the vegetarian fare, he rolled the tape, and we were hooked. I bought Pixar shares, which did well. Up close he had a slightly unbusiness-like air, more like a friendly alien delivering new tech to this backward planet. In fact, in his last public appearance he unveiled the Mother Ship, a new HQ in Cupertino for twelve thousand people.
"Apple has lost a visionary and creative genius, and the world has lost an amazing human being," Apple CEO Tim Cook wrote in a letter to employees. "We will honor his memory by dedicating ourselves to continuing the work he loved so much."
During his more than three decade-long career, Mr. Jobs transformed Silicon Valley as he helped turn the once sleepy expanse of fruit orchards into the technology industry's innovation center. In addition to laying the groundwork for the high-tech industry alongside other pioneers like Microsoft Corp. co-founder Bill Gates and Oracle Corp. founder Larry Ellison, Mr. Jobs proved the appeal of well-designed products over the sheer power of technology itself and shifted the way consumers interact with technology in an increasingly digital world.
"The world rarely sees someone who has had the profound impact Steve has had, the effects of which will be felt for many generations to come," Mr. Gates said in a statement Wednesday.
The most productive chapter in Mr. Jobs's career occurred near the end of his life, when a nearly unbroken string of successful products like the iPod, iPhone and iPad changed the PC, electronics and digital media industries. The way he marketed and sold those products through savvy advertising campaigns and its retail stores, in the meanwhile, helped turn the company into a pop culture icon.
"Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose," Mr. Jobs said in a commencement speech at Stanford University in June 2005, almost a year after he was diagnosed with cancer.
I join millions in mourning the departure of the best CEO of the greatest company --- by any measure --- of our generation. Rest in peace, Steve P. Jobs. We will appreciate your creations for years to come. You truly made the world a better place.
Beware of Greeks bearing Gifts, Paying Taxes, Moving Markets
1 October ~ For the past six weeks the US stock market has moved according to the announcements and follow-up denouncements from Europe. Germans voted to help the Greeks pay their bankers ( if the Greeks will at least pay something in taxes) and the market went up. The Deputy PM in Greece said the taxable resources of his small islands are exhausted and the US market went down. This 9% up and 9% down S&P move has happened seven times in the past six weeks. Unprecedented! The most recent word, beyond the Greeks promising to promise to promise to someday try to collect taxes which were due in 1999, takes the cake. The word is that the Greek tax authorities can't collect taxes just now because you see --- I am not making this up --- they have run out of ink to print the tax forms, according to London's Financial Times. I don't know why the market gets so surprised about all this. After all it was Greeks who came up with the Trojan Horse. They've been fooling people since the Bronze Age.
Ups and Downs of Wealth
20 September ~ One summer day in the ‘90s, my two dear children and I were walking along the Thames in London. We passed an ice cream cart and they clamored for an ice cream cone, for which the vendor wanted £ 1.25.
“No! We have to economize!” I blurted. My kids looked up at me, a bit stunned and confused. Then my inner brain asked itself “What are you doing?” During those years I was managing an emerging markets fund in the City, and although i handily outperformed my benchmark index, there were down days, and this had been one of them, with the fund down a healthy five figures, which was unusual for my style of management. Even though it was less than 1% of the fund, now, i realized, I was telling my dear children to economize on ice cream cones because of my bad day --- because I was thinking in dollars, not percentages.
From that day onward I vowed to train myself to think in percentages, for peace of mind, and because that is closer to reality. When responsible for wealth, no matter what it is invested in, the account balance can fluctuate daily by the value of an expensive car, the value of a house, or in extreme cases, billions. One needs to think in percentages to manage it correctly.
My next memory of this phenomena was a particular $2 million account during the 2008 market crash. The account was down only 2%, while the market dropped 33%. I was very content with my good work. However, at our next meeting, the client translated that 2% into $40,000, and was upset with this loss, despite my attempts to communicate perspective.
So, if one has newly acquired responsibility for wealth, my advice is to think in percentages, to stay in the realm of reason and out of emotions of elation or despair. A $5 million account, up 5%, is $250,000. That amount may be cause for elation. Down 5%, one might think of the small house they could have bought with that money. Realizing it is 5% of the ‘mother lode’ is the mature ‘old money’ way to look at it. Be kind to yourself and think in percentages.
... and yes, I did buy them each an ice cream cone. Then, to teach them about income taxes, I ate 38%.
Greece: Default Delayed is Debt Denied
18 September ~ This coming Tuesday, Greece owes a € 769 million coupon payment to bondholders, unless they agree to modify the bond terms, but why would they want to add another billion Euro on top of the already unpayable debt?
Several interesting voices have recently declared Greek debt unpayable: First, former UK Prime Minister, Gordon Brown, said the 2011 crisis is worse than 2008. Second, Dominique Strauss-Kahn, who five months ago ran the IMF, declared Greece can't repay its debts and bondholders must simply accept their losses. Funny, how people see things differently when they aren't part of the status quo anymore, isn't it?
Finally, a subplot to this tragedy of the absurd, it also appears banks may own more insurance, in the form of credit default swaps, than they sold, and more than the amount of bonds which Greeks owe, so the net benefit to the banks of a Greek default may actually be positive. As Europe agonizes over all this, our Fed meets on Tuesday. Almost a divertissement, Monday our President will announce an unpassible plan to raise taxes by $1.5 trillion to pay the US debt. Our financial seat belt is fastened this week.
Not even their famous army knife...
... can fix what the Swiss did to their franc. For thirty years a stable currency as solid as their granite Alps, the SNB decided to link their currency with the dubious Euro instead of gold. It is the end of an era. I recall in the 80's moving accounts into Swiss francs when the dollar was descending and profiting thereby. Now that the Swiss have joined the worldwide 'race to debase', literally the only measure of value is the price of gold. Like it or not --- and with it's current volatility there are those who find it hard to like --- that is the new reality.
A colleague pointed out that SNB governing board chairman, Philipp Hildebrand, was a former hedge fund partner with Moore Capital, and estimates the SNB made a $25 billion profit the day of their announcement. It is also rumored that much of UBS recently revealed $2.3 billion trading loss was due to the SNB revaluation.
Bank of America Buffeted
6 September ~ In the wonderful world of the equity markets, we invest capital by determining risk/reward. One such event last week was Warren Buffet's deal with Bank of America [BAC]. Immediately the stock price began moving, and I invested. After a few days of careful monitoring, the price didn't act quite right, so I cashed in for a +2.5% profit on August 30th. As of today's close, BAC is -13.8% below our sale price. My goal was not to make a 2.5% profit, of course. My goal was to be positioned to make a large profit if the price continued up while protecting capital if the price didn't.
This is why our accounts have a number of investments which are around break-even. One doesn't know for certain when a big move will occur. My job is to get in position to profit when a big move is more likely to happen. This is a lot of work, but the best way I've found to preserve capital in down markets while profiting in up markets. It is not a new phenomenon either. Peter Lynch, famous past manager of Fidelity's flagship Magellan Fund noted the same thing: that account profits are generally made from several big moves during a year, while most investments in a portfolio muddle along, and he was never sure which ones would be the big winners. That's just how it is, he wrote in 1994.
This week's Bank of America share price movement is yet another example of price action preceding news, as I wrote about on August 6th, further down on this page: Today, four days after I saw a sign to get out, the FHFA announced it is suing BAC to recover billions in losses from bad mortgages. Someone knew this was coming earlier and sold. I saw the price action and joined them.
Earlier this week a dear client who lives in a beautiful home in a leafy, peaceful enclave wrote asking about BAC. I replied:
In spite of Mr. Buffet's enthusiasm, the market's reaction to his buy tells us BAC still has problems. I bought some for your account, but had to exit with small profit as developments got murky. Price is now lower than when we sold. Probably can re-enter cheaper.
Twenty-eight years of managing wealth provides perspective on Buffet and banks: During the era when Buffet bought a big stake in Wells Fargo [WFC] at $80 I was managing the family money of a Wells Fargo Bank board member. He explained the rationale: The bank had over-reserved, and they would be bringing those reserves back into profits. Through the magic of corporate accounting, earnings growth was a sure thing. Earnings were literally already in the bank. Yet soon after Buffet bought at $80, the share price was cut in half to $40. So, i think we have time to wait for a better entry on BAC. Years afterward Wells Fargo went on to earn shareholders a handsome profit. All I'm saying is why not wait for a better entry price during this time when every bank stock in the world is going down due to massive lawsuits filed today by the FHFA. To read the official FHFA notice, click here.
High Noon at the SP Corral
29 August ~ An analysis of this months sharp sell-off in equities reveals the S&P 500 three-month correlation is 0.73, the highest in at least 20 years, and up from just 0.44 at the start of August. This is bad news for the average long-only equity mutual fund, whose prices descended even more than the index. What is an investor to do? Our solution was to avoid picking individual stocks, because they were all moving together like a frightened flock of birds. Instead we held high cash positions and gold, then began edging back into the market using S&P ETFs near the end of the month, thus outperforming those whose mandates force them to grimly hold no matter what. Astute trend analysis is the new alpha.
Investors are asking "is this 2008?". The answer is no. In 2008 the US dollar appreciated and gold prices fell. This year the reverse happened: the dollar dropped and gold reached all-time record highs. What does that signify? It means that 2008 was a deflationary bear market, and 2011 is an inflationary one.
Other signs of a difference: in 2008 money market funds froze. The banks didn't have enough cash. This year, banks have too much. They don't want any more. So they charge customers for depositing too much of Ben's newly created paper. Read more here.
Worldwide Bear Markets
21 August ~ The definition of a 'bear' market is an index 20% below it's peak. Many of the world's markets have achieved that dubious distinction this month. The S&P 500 is 2% away, as of Friday's close.
Why we didn't wait for news announcements
6 August ~ The news of the S&P credit downgrade of the US, released only after hours Friday, after the market plunged all week, illustrates once again that as prudent investors we can't wait for news announcements to conserve capital, as those who have the inside information move the market before the news. Read here how the S&P was in meetings with US government officials this past week before announcing the downgrade. Our move to cash when the market first began to weaken saved our capital. Responding to price moves is mandatory. Knowing why is optional. The most important line in the article: "...further downgrades may lie ahead."
Five Famous Funds Fumble
18 June ~ This is a strange year in the markets. Many troubles wherever one looks, yet the market ignored them until May. Five famous fund managers have had trouble all year though. The ubiquitous Dennis Gartman's fund is down-12% year-to-date, yet he continues to reign on financial television, answering the hushed questions of genuflecting interviewers. Ken Heebner's CGM Focus Fund --- which was up +80% one year when we owned shares --- is down -13% this year. Bill Miller, the famous value investor is not faring any better, down -12%. Fourth, Bruce Berkowitz was sure enough banks would outperform that he loaded up his $14 billion portfolio, is down -13%. Finally the fifth: Warren Buffet's Berkshire is down -8% year-to-date.
Argentina: 25% Inflation
4 April ~ As noted in this space on 14 and 17 February (scroll down) hyperinflation has begun. One can read about the euphoric effects in Argentina in this article. Citizens of that country have seen it all before and recall how to deal with prices which rise daily.
As an advocate for those in or near retirement, I protest government policies which declare 'inflation is good' and 'a weak dollar is good'. Those policies are good for corporations, but very bad for citizens who have prudently saved. Governments won't change, so the way out, of course, is to exchange dollars for those items rising in price, as the Argentines do.
Silver at a 31-year high
31 March ~ As I suspected, and invested accordingly, in the first quarter silver rose much more rapidly than gold. Silver, mined for milenia, reached a price not seen for thirty-one years, up 22% in three months, while gold only increased 2%, as reported here. This precious metal is now the flight to safety destination for many investors, and the economic forces are in place for another historic spike, as paper holders demand physical delivery, apocalyptics hoard bags of quarters, and ETFs scour the market to collateralize their shares.
Read in-depth research here.
17 Feb ~ We have been talking about it for years. Now it has begun. My sign is Thursday's 30-year high in silver and the price increase in January for these agricultural items: Corn spot up 7.76%, wheat up 5.63%, Rice up 10.08%, Sugar up 5.64%, Orange Juice up 3.33%, and cotton up 17.08%. That's in one month!
Hyperinflation has occurred many times before. This book (pdf) , written ninety years ago by a founder of Cornell University, chronicles in great detail an eerily similar occurrence in France, and writes of events which could be repeated in our near future.
Mission Accomplished, Mr. Bernanke
31 Jan ~ This is an interactive heat map depicting world-wide inflation, the darker the red, the higher the rate. Blue is deflation. Click on it to enlarge. Last year the Fed Chairman explicitly said he wanted to fight deflation. In other words he wanted to make the US dollar less valuable. I don't know about you, but I would like my dollars more valuable. Anyway, as the sea of bloody red graphically depicts, he succeeded.
Hyperinflation is the real fear. One is taught to think only of Weimar Germany, and "it can't happen here", but click this link and read when it has happened more recently in Israel, Russia, Brazil, Argentina and historically already in the USA.
In case there is any doubt inflation is here, consider the price increase in January for these agricultural items: Corn spot up 7.76%, wheat up 5.63%, Rice up 10.08%, Sugar up 5.64%, Orange Juice up 3.33%, and cotton.... up 17.08%. That's in one month!
29 Jan ~ Investment profits are not usually linear. An account will drift along for a period of time, a little up and a little down. Then just about the time one questions the whole thing, there will be a big move in account equity. Historically, the stock market has trended for about 20% of the time, and consolidated for about 80% of the time. The work and vigilance necessary to manage a portfolio is to be ready for the trending periods, and participate in the moves up, yet guard against moves down.
This revaluation happens occasionally with most possessions, with one’s home, art and other assets. The difference is that one doesn’t get minute-by-minute quotes on one’s home. So, market quotes are two-edged: If one worries about each tick up and down, it can be nerve-wracking. Yet, it is a wonder of the modern world that there is such global liquidity that one can buy or sell when one wants, unlike many other types of investments.
In the tax information, clients will see a number of small profits and losses. This is a behind-the-scenes look at what happens in many mutual funds. The portfolio manager starts a position, and increases it if things remain positive, growing into large gains. However, keeping any loss small. Similar to planting seeds, then weeding out the weaker sprouts to leave the healthiest plants to grow.
Dec 23 ~ POMO is an acronym for the Fed's Permanent Open Market Operation, which has been buying billions in US debt almost every day recently. The Fed is kind enough to pre-announce the dates of their purchases, and often announces the exact debt they plan to buy. Coincidentally, the US stock market has closed up almost every day the POMO bought debt. Some economists theorize that large traders are front-running the Fed, buying low before the POMO date, then selling higher to the Fed when they buy, and investing the resultant liquidity in the stock market.
In Greek legend a golden apple, pomo d'oro, was awarded to a beauty contest winner who had bribed the judge. Discontent over this unfair act led to the Trojan War. Today's discontent over bankers receiving these continuing riskless profits is similar, though the bankers have won the war already, according to Marketwatch.
Did it ever seem annoying when you couldn't reach your wealth manager after hours or on weekends? It did to me years ago. Consequently, I've carried forward my father's policy of giving a number to clients where they can call day or night, 24/7/365. Though the old saying is "money isn't everything", in my opinion it is important enough to have the facility to talk at any time. You can read about our other policies here. One of our asset custodians, Interactive Brokers, also effectively has this facility, as one can call their London or Hong Kong office when their US office is closed.
Tipping Point: Fed owns $1t US treasuries
Updated Dec 23 ~ In September mainland China bought far less US government agency debt than ever before, as the chart below shows. In fact, they were net sellers of $26 billion. This includes Fannie Mae and Freddie Mac bonds. On November 22nd, the Federal Reserve passed the Chinese government as the largest holder of US debt. You can read that whole story here. In December, the Fed owned $1 trillion of US debt, a milestone, or perhaps a millstone. Taken together, this is a tipping point, where others are not buying as much US debt, so the Fed is buying it, under the fuzzy label of "quantitative easing".
This news is not mentioned by the major media, even though this gigantic milestone is arguably more important to America's future than even Bristol Palin's dance moves.
Although our accounts sometimes are up more than the S&P, our main goal is prudent capital growth and preservation. Because of this our accounts often have yields more like balanced mutual funds, comprised of stocks and bonds. In classic portfolio theory, the original point of stock/bond allocations was to mitigate the dramatic drawdowns which periodically overtake the S&P. We achieve similar goals by analyzing trends and entering when uptrends begin and exiting when they end. So our accounts are safer than 'buy-and-hold' S&P index accounts, whose theoretical risk is substantial. I feel ours is a responsible way to grow capital as our account beneficiaries approach retirement.
Inflation is Back
Two years ago I wrote that we were experiencing deflation and invested accordingly. Now that has ended. Inflation is back in all sectors except housing. Food, cotton, oil, precious and ferrous metals, each is trending higher. Our early responses have been increasing investment in gold, silver. We also owned the inflation-protected government bond ( TIP ) until it reached a high selling point. Notice the tiny bar on the far right in the chart above. That's the official government inflation, and is why the Social Security Administration decided to not increase benefits this year.
A Few Words about Income
Updated Dec 22 ~ The past few weeks I've received questions about income portfolios in 2010.
For those depending on their savings for income, now is the worst of times. T-bill interest is almost zero. Bond interest is low. High-yielding CDs don't exist. Most now are under 2% per year. Many of the old, tried-and-true investment maxims don't work anymore.
Not too many years ago we used to get 9% from a US treasury bond, and all was happy for income investors. Those days are gone. That's reality. There are too many dollars seeking a return, and their competition drives rates down. The Fed is keeping rates artificially low, which in effect transfers money from savers' pockets to banker's pockets.
So, as clients know, my solution is to invest in income stocks when they are trending up, and move to cash when they are trending down. Generally, January and February are weak months in the market, so I increased cash, and March often recovers, so I invested again in income stocks. The market looks more stable this year than during the past two years. This approach, of course, is more risky than CDs, but the choice is (1) earn almost zero and spend principal each month; or (2) risk some capital value fluctuation with the goal of higher returns.
This method requires constant daily vigilance monitoring price trends, and hours screening thousands of stocks, researching the ever-changing world of high dividend stocks and bonds.
This approach has two benefits: First, of course, collecting income from high-dividend stocks. As you may know, stock dividends are not like bond interest. When one owns a bond, one is paid interest pro-rata for the days one owns the bond. For dividend-paying stocks, one only needs to own the shares on the record date of the dividend. For example, with a stock paying quarterly, one technically only needs to own the shares four days out of the year. Practically speaking, it's a bit more complex, because the capital value often drops the approximate amount of the dividend on the ex-dividend date. So, in times like these, the arduous management work is to buy right, ramp into the dividend, and move to cash when a stock stops trending up.
Second, applying this trend analysis to our accounts moves us to cash before big moves downward take too much, thereby tending to protecting capital, as we did in 2008, though there is principal fluctuation, and the occasional market-moving surprise. It is not glamorous, but has worked well in the past, which of course is not a sure indication for the future. This is how I invest for current income.
Easan Katir is a fiduciary Registered Investment Advisor in California and Texas, providing fee-only planning, investment advisory and retirement services throughout California, including, but not limited to: San Diego, La Jolla, Newport Beach, Los Angeles, Santa Barbara, San Luis Obispo, Big Sur, Monterey, Carmel, Pebble Beach, Santa Cruz, Silicon Valley, Woodside, Atherton, Berkeley, San Francisco, Santa Rosa, Redding, Sacramento, Davis, Grass Valley, Nevada City, Roseville, Fresno, Bakersfield, Riverside, Lancaster, and in Texas including Midland, Odessa, Austin, Dallas, Ft. Worth, Houston… Please contact Easan Katir if there are any changes in your financial situation or investment objectives, or if you wish to modify investment account goals. Easan Katir transacts business per applicable state registration regulations and the "de minimis" exception. All information herein has been prepared solely for informational purposes, contains no guarantees of any kind and is not an offer of case specific advice. One is advised to carefully consider each idea only as part of a diversified portfolio suitable to one's circumstances. Investment views subject to change. We offer no legal or accounting advice. Charts should not be used exclusively for investment decisions. A list of the advisor's investment recommendations is available by request. '3157 Woods Circle, Davis CA 95616. © 2010-14. Form ADV Pt. II available by request.
Famed market research analyst, Ned Davis, can't find any. Click here to read full story
Bond manager Bill Gross said "German bunds are the short of a lifetime." He didn't think it would happen this fast.' Click here to read full story
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From the New York Times. Link.
"Many years ago, falling prices were a sign of improved efficiency and expanding wealth, and of widening consumer choice. Thanks to the spread of electricity and other such wonders in the final quarter of the 19th century, prices dwindled year by year at a rate of 1.5% to 2% per year. People didn’t call it deflation – they called it progress." ~ Jim Grant
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29 December 2011
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