Saturday, February 13, 2016

Emotional Symmetry

Excess emotions produce bad decisions.

Did you feel bad when the Dow lost 300 points on Thursday?  How bad?
Did you feel good when the Dow rose 300 points yesterday?  How good?

I'll bet the strength of your bad feelings on Thursday was greater than the strength of your good feelings on Friday.  That's because the pain of loss far exceeds the joy of gain.

You might have considered taking your money out of the stock market on Thursday, but I'll bet you didn't consider adding more money on Friday.  That's because the pain of loss far exceeds the joy of gain.

Psychologists tell us that one of our most powerful emotions is "fight or flight."  When facing a large sudden loss, it is our natural instinct to flee the stock market, since we cannot fight back.  It is also the worst time to make a reasoned decision.

Mr. Spock of Star Trek  fame would tell you there is no room for emotions in making investment decisions, because . . . the pain of loss far exceeds the joy of gain.

The emotions surrounding gain and loss are not symmetrical.  Don't trust in your ability to make rational decisions when the market is down - your more powerful asymmetric emotion to flee will trick you . . . and cost you!

Friday, February 12, 2016

An Economic Stent

Readers know I have no fear of recessions nor bear markets.  We have experienced many of both and know they always end.  There is no "sky is falling" concern to recessions or bear markets.  However, I have been very worried about a financial crisis, which is like a heart attack.  It comes suddenly, and recovery is slow.

The usual channel for a financial crisis is the banking sector, which includes the investment banks.  In particular, I have been very afraid of a blow-up in derivatives, such as credit default swaps.  They are dangerous, because there is no assurance that the counter-parties can make good on their promises to make the swaps-buyer whole, in the event of default.  The main reason for this lack of assurance is that nobody knows who they are, nor what their financial strength is.

Because the vast majority of derivatives are written in the U.S. and Europe, it would be useless for the U.S. to improve regulation of derivatives, because the business would just move to Europe.  Naturally, the trade group, the International Swaps & Derivatives Association, was opposed to any additional regulation.  Negotiations have been ongoing for five years.  Frankly, I was just hoping to live long enough to see any meaningful regulation of derivatives.

Buried deep in yesterday's Wall Street Journal was the news that a deal had been reached!  While I don't know the details yet (such as the effective date), I am just excited that, apparently, all derivatives have to be traded through a clearinghouse, which captures enough data for us to measure who is holding how much risk.  This would be a huge step forward!

While it is almost unfashionable to be happy about anything right now, especially when the bears are running down Wall Street, it is the same emotion that a heart attack victim has when he wakes up to find the doctor inserted the stent that will save his life.

Bring on your recession, bring on your bear market -- we'll be just fine!

In fact, I'm already feeling better.

Wednesday, February 10, 2016

In The Fresh Produce Section

What's the difference between a doctor and a financial advisor?  The obvious difference is that the doctor is worried about your physical health, while the financial advisor is worried about your fiscal health.

Another difference is that doctors are frequently asked for free advice at cocktail parties and other places.  Financial advisors are also frequently asked for free advice.  The difference is that there is no cyclical trend in doctors being asked for advice.  It is relatively constant.  Their advice is always wanted.

There is a strong cyclical trend in financial advisors being asked for advice.  When the stock market is up, investors tend to be overly-confident and are more likely to tell the financial advisor what to do, rather than ask for the advisor's advice.  When times are good, people think they don't need financial advice.

At the grocery store yesterday, I ran into two people I know, who almost immediately asked me about the stock market.  When the stock market is down, over-confidence is also down, and people suddenly want advice from financial advisors.

I could be rudely dismissive to them.  Or, I could smother them with "buzz-words" they wouldn't understand.  I could even give them a learned opinion.  But, they are human beings -- human beings dealing with fear, who are really just asking if they need to be afraid.

That is an easy response:  The world is not ending.  There may be a mild recession, but that will not the first one nor the last one.  We're still the greatest nation . . . both on Earth and in history.  Then, I paraphrase Warren Buffett by reminding them I don't know where the stock market will be next week, but I do know where it will be in five years -- UP!

Monday, February 8, 2016

Thank You, Republicans!

An  old rule of thumb on Wall Street is that corrections (down 10%) can end with a roar, while bear markets (down 20%) end with a whimper.  In other words, there has to be capitulation or surrender by the investors, when they can no longer take the pain.  Getting to capitulation sooner rather than later means the pain ends sooner rather than later.  Bring it on!

The stock market is bearing the uncertainty of (1) China's slowing economy, (2) the possibility of several currency wars simultaneously, (3) the rippling effects of the oil crash, (4) the Ultimate Whack-Job of North Korea launching a satellite or worse, (5) a worsening refugee problem in Europe, creating instability, (6) rising interest rates in the U.S. while interest rates are falling elsewhere, making the dollar too strong, (7) the increasing possibility of tenacious deflation, and (8) other problems almost too numerous to mention.  All of that is enough to cause pain for investors.  Now, we need to cause capitulation . . .

Watching the Republican debate on ABC, I almost forgot that we are the "prettiest horse in the glue factory."  We have a relatively stable GDP growth rate and the best job growth in the world.  The economy is still doing better than the stock market.  Even if the economy suffers a recession, which generally means two consecutive quarters of negative GDP growth, nobody expects anything worse than the 6% GDP drop we got in 2008/9.  That doesn't explain a 10% or 20% drop in the stock market.

While the "PollyAnna" Democrats maintain the economy is very good, the Republicans are scathing in their criticism.  Keep it up, Republicans!  We want everybody to get scared . . .  and capitulate!  

Sunday, February 7, 2016

A Disturbing Lecture

I attended a disturbing lecture on Saturday.  About 30 minutes into the lecture, the speaker stopped abruptly, producing an awkward silence.  His facial expression became trance-like.  Finally, he said "I've been diagnosed with stage 4 cancer."  There was an audible gasp among the hundred or so attendees.  He went on to say that, while he recently learned the cancer is in-remission, his doctor also told him the cancer will certainly return.  He has to be tested every three months.  His lease on life is quarterly.  The dread leading up to the test had been producing a euphoria after he got a good result.  But he is tired of the uncertainty, and the euphoria is decreasing each time.  Claiming he has never been a patient person, he is becoming inpatient to get the inevitable over with.  Then, there was another awkward silence.  The expression on his face returned to normal, when he said "Anyway" and continued with his lecture.  I don't think I heard another word he said.  I was too rattled by what I just heard.

My guess is that his own mortality was more important than his lecture, which is certainly understandable.  That thought of his own death swept through his mind, shutting down any other thought.  Maybe, he just wanted to share his emotional pain or to connect with other people, but I don't think so.

I think he is contemplating suicide and consumed by that process.  I don't blame him.  He cannot save himself.  We cannot save him from his fate.  What is there left to do but "get it over with?"  Besides, how many times can you say good-bye to loved ones?

Saturday, February 6, 2016

A Lost Art ?

Tucker Carson is an industrial-strength Republican, and Paul Begala is an industrial-strength Democrat.  While I hold no great respect for partisans of either flavor, I did attend a debate between them recently and actually enjoyed the experience.

There was the obligatory hyperbola, of course.  Carlson predicted Trump would never win the nomination, because he is "emotionally incontinent," meaning his ego will eventually overwhelm  political good-sense.  Begala predicted the Republican Party was doomed, because the Democratic Party is hunting for converts, while the Republican Party is hunting for heretics, meaning purity tests such as abortion, immigration, and gun control.

What made this debate enjoyable is that I was watching two friends disagreeing on almost everything political.  They were disagreeing without being disagreeable.  If anything, their disagreement with each other gave them respect for each other.  They did not suggest that the other was either stupid or evil.

That is the America that I both love and miss!  It was an America before talk radio and the corrupting commercialization of campaigns by turning them into mindless reality TV shows.

Thursday, February 4, 2016

Lucky To Listen

There are lots of geopolitical "experts."  Ian Bremmer is one of them -- the one who created The Eurasia Group, a highly regarded consulting firm,  However, he specializes in that intersection between geopolitical events and stock markets, worldwide.  I had the pleasure of attending a lecture by him today.  In no particular order, here are some of the things I learned about the Mideast:

1.  ISIS is the best funded and most effective recruiter of any terrorist group in history.
2.  Most of the land controlled by ISIS is wasteland.
3.  Saudi Arabia is more unstable than most analysts realize.
4.  The 30-year-old defense minister is likely to be ousted by the 15,000 member royal family.
5.  ISIS may take control of central Saudi Arabia, which is also a wasteland.

Not every geopolitical crisis matters . . . but some do.  If we read about North Korea putting up a satellite, which South Korea promptly shoots down, stock markets in South Korea and Japan will tank dramatically.  That would be a great buying opportunity, courtesy of a geopolitical crisis.  Then, they are other geopolitical events, such as a collapse of Saudi Arabia or Russia, for example, which have long-term consequences, including a possible redistribution of power.

He seemed particularly worried about a pending refugee crisis in Europe.  If Germany does as badly integrating the Syrian refugees into European life as the French failed to integrate the Algerian refugees, then Europe could become the new Mideast.  Integration will be expensive and will retard economic growth in Europe until a peaceful integration becomes apparent.  Europe does need more labor, but it is not clear the new refugees will fill that need, at least in the short run.

He also fretted that the same fate that caused the Putin-made oligarch of oil-giant Yukos to disappear could await the similarly-outspoken Jack Ma of Alibaba in China.  I hope not!

My takeaway is that the international component of investment portfolios should be relatively minimal for now.

Wednesday, February 3, 2016

Moment of Truth . . . Not Yet

The "wild and crazy" stock market is testing some critical support limits.  Take a look at this chart:

Chart of the Day

From a technical viewpoint, if it pierces the green line, it will go much lower.  My expectation is that it will pierce the line and go lower, almost entirely because we pay too little for gas at the pump.

The oil industry is huge and hurting.  More importantly, the banks that lend to that industry now have loans of less value and will have to take write-offs.  Does that sound like the banks in 2008 that held mortgage-backed securities, which are actually nothing more than exotic loans?  A financial crisis comes through the banks, and we may be facing one.

Here's what I don't know:  (1) how does the proportion of energy loans today compare to the level of mortgage-backed securities in 2008, and (2) will this financial crisis cascade more slowly because it is more apparent that the last one?  Stay tuned . . .

Tuesday, February 2, 2016

Not Breathless

Now that the Iowa caucus is over, I have only one question -- is it November 8th yet??

It would be refreshing to see news coverage again, without such breathless coverage of The Election!

Sunday, January 31, 2016

Glad January Is Over??

Shall we think about the “January Effect” on Wall Street, which says the stock market, for the full year, will mimic the stock market during the month of January.  I hope not!

Or, shall we think about the historical performance of the stock market during years of a presidential election, which average a gain of 11%.  While I would prefer to think about that, this presidential election cycle has been so bizarre, I cannot imagine history means as much this year.

What we know is this – the month started down so rapidly that historical records were shattered almost daily, before it turned back up the last week or so.  What does it mean?

The number that best explains it is .97 – that was the correlation between the stock market and oil prices for January.  In other words, they moved together 97% of the time, which is a record high.  The stock market reflected oil prices and little else.  (Importantly, that problem is not fixed.)  Last week’s rally is explained primarily by the calls for an emergency OPEC meeting to control the over-supplied oil market.  OPEC is the only institution as dysfunctional and useless as Congress.  They could meet every day of the week and produce no agreement that was enforceable.  Their best days are behind them, just like Congress.

Economists are fond of saying “the cure for low prices is low prices.”  With the price of oil so low, the number of rigs actually drilling is dropping rapidly -- one estimate is that 50% of all rigs are now idle.  Capital expenditures by the integrated oil companies are now based on closing-in facilities, not expanding them.  While the cure for low prices is indeed low prices, that cure is painful and prolonged.  I don’t see it in the near future.  My hope is that OPEC will make some grandiose statement that will allow the market to look elsewhere, if only for a brief while.

Friday’s massive bull run down Wall Street was also due to the Bank of Japan announcing negative interest rates – you know, I’ll pay you to borrow my money.  As nonsensical as this is, it should help propel the world’s third largest economy, which is still vibrant but nonetheless staring into the ugly face of deflation.  In other words, it should improve global demand.

Buried beneath the bulls, I did notice that the initial reading of our GDP growth was an unexpectedly low 0.7% during the last quarter.  The second reading is next month, and I’m hoping for a significant upward revision.  That requires watching, as it is the first strong sign of recession in the short-term.  (Remember:  don’t fear recessions – they come and go – but always be afraid of another financial crisis.)  

Stay tuned . . .

Thursday, January 28, 2016

Elevator Music

Just as some thought-leaders are actually thought-heroes, like Jeremy Siegel, some are just thought-clowns, whose serious message is cleverly disguised behind a funny facade.

Marc Faber is a Swiss-born and Swiss-educated economist living in Thailand.  I had the pleasure of listening to him yesterday, as he predicted the future economy was so dismal that he wanted to drain his swimming pool and fill it up with beer.  And soon!!

He is also a perma-bear, who has a long history of negative expectations.  Indeed, he is editor of The Gloom, Boom, and Doom Report.  But recall the Austrian school of economics, where annual budgets should be balance, and debt should be promptly repaid.  Like all Austrian economists, Faber painted a picture of escalating debt worldwide, with dire consequences.  While I agreed with most everything he said, it was boring, like hearing elevator music.  How many times have you heard the United States and other nations have too much debt?

It reminds me of the TV commercial where a "bank-guard-looking" person tells the customers laying on the floor that he is really a bank-robbery-monitor, who merely reports the problem but does nothing to help.

There was nothing new in Faber's talk.  At what point, can we actually discuss the implementation of entitlement cuts and new tax sources, such as wealth tax, a VAT, a consumption tax, or whatever.  At what point do we stop digging the hole deeper . . .

Wednesday, January 27, 2016

A Lucky Walk

One of my longest-running "thought-heroes" is the brilliant and affable Dr. Jeremy Siegel of Wharton.  By happenstance, I walked with him from our hotel into the conference center for his presentation yesterday morning.  It was the highlight of the conference for me!

He fairly described himself as the "token bull" in a conference dominated by bears, but he has also been described a "perma-bull" because he is almost always optimistic.  Fortunately, the economic history of the United States seems to justify such long-term optimism.  He just follows the facts, as he sees them.

His speech followed his latest book, Stocks For The Long Run.  Unquestionably, stocks have out-performed bonds and cash over most time periods - by large margins.  Rational investors should therefore over-invest in stocks and under-invest in bonds and cash.  His sound economic arguments strongly support the traditional "buy-and-hold" approach of Warren Buffet.  But, Dr. Siegel's "blind-spot" is behaviorial finance, which are the emotional gyrations investors need help managing, both going-up and going-down.

He made no particular predictions yesterday, probably because the bears would have laughed him out of the lecture hall.  But, he didn't need to . . . we already know he thinks capitalism is a blessing . . . in the long run!

Monday, January 25, 2016

A Big Unintended Consequence?

I have a great deal of respect for Jeffrey Gundlach, who is head of Doubleline and has become known as the "bond king," supplanting Bill Gross of Janus (now) and PIMCO (formerly).  At a lecture Monday morning, he discussed the latest actions of the Fed, which he thinks are unfortunate, to say the least.

While he made a number of comments, including an unnecessary comparison between the "looks" of Janet Yellen and Pete Carroll, who arguably called the worst play in SuperBowl history, the most damning comment was that the Fed thinks they raised short-term rates by a mere quarter-point or 25 basis points.  That means the Fed thinks there was no stimulative equivalent to Quantitative Easing or QE.  (Of course, if that was true, they would not have engaged in QE.)

By a formula I didn't catch (but would like to study), he thinks the end of QE was like an interest rate increase of 250-275 basis points.  If so, the U.S. economy has endured a 3% hike in one year, which would crush most any economy.  He expects the Fed will be forced to cut interest rates before they can actually increase them again.  So much for the four interest rate hikes the Fed said they expect for this year!

I have written numerous times that we didn't need a rate increase, as neither unemployment nor inflation are problematic.  Rates were raised merely to appease the Libertarian wing of the Republican Party, who has demanded interest rates be "normalized."  If Gundlach is right, the Fed got bullied into really damaging America.

Saturday, January 23, 2016

Annual Guilt Trip

Doctors, lawyers, (not Indian Chiefs) and financial advisors all practice in continually changing professions.  Therefore, they are required to get a certain number of continuing education hours each year to maintain their license or certification or registration.  Naturally, an industry has developed to supply those continuing education hours, and it is no small coincidence that conferences providing those educational hours are held in Florida during winter time, because people want to escape the lousy weather.

So, here I sit in Fort Lauderdale, getting ready to take a run, while friends are struggling with a huge winter storm back home.  There is always a choice.  I could spend the next five days studying the latest developments in exchange traded funds, or I could spend that time fighting winter weather. Because I need the continuing education credits, and because I am intellectually curious, and because I am very winter-phobic, I think I'll stay right here.

Should I feel guilty . . . ??

Friday, January 22, 2016

Waiting For The Fat Lady

What does the stock market do?

No, I'm not talking about financial intermediation or about bringing buyer & sellers together or price discovery or any of that academic stuff.

What does the stock market do?  It worries!

It is often said that Wall Street is forever climbing a Wall of Worry, and it is true.  Sometimes, unfortunately, the Wall is a taller than normal (like now).  That's the reason a slight increase in uncertainty is so problematic for the stock market.  Increased uncertainty means a taller wall of worry for Wall Street to climb.

In the past two months, it has become apparent to everybody that the world is swimming in oil, that Saudi Arabia and Iran really would enjoy killing each other, that the Clueless Wonder of North Korea would enjoy killing everybody else -- none of which is good for corporate profits.  Did I mention the slowing Chinese economy?  And, it is now "confession season" when companies have to report their fourth quarter profits.

These problems don't need to be resolved, before the stock market recovers, but they must stop growing in uncertainty.  If we could "get our arms around" the oil problem, that would help enormously.  For example, if we knew the daily over-supply of oil production was exactly 1.1 million barrels, we could start dealing with that.  As it is, nobody really knows, especially in light of Iran's re-entry into the oil market.  The sudden winter blast has temporarily pushed up oil prices nicely, but that will be temporary.  With respect to the Middle East, some cooling off of the Sunni-Shiite civil war would also help our stock markets enormously.

Many analysts have been predicting a "profits recessions," where the profits of American companies goes down.  So far, that does not seem to be happening, but the "fat lady" has not sung yet.

Despite yesterday's nice relief rally and today's expected rally, I still don't believe the bottom has been established, but we are getting closer.  If uncertainty will stop increasing, we will get over that Wall.

 I'm counting on stronger-than-expected corporate profits to hide the other problems . . . please!

Thursday, January 21, 2016

Patience or Panic -- Your Choice

The Internal Revenue Code makes a big distinction between earned income and investment income.  Earned income is what you get for actually working -- actually sweating for income to live on.  The popular impression of investment income is what some fat millionaire sitting on a beach gets for nothing, just for having investments.

That's not fair to fat millionaires!

During times of market turmoil like this, every investor who stays up late at night with worry and anxiety EARNS every penny of their investment income.  It would be easier if you just had to get up in the morning and go to the factory for a job.  At least, you would have some control over that.  But, the average investor can do nothing . . . except worry.

That's not entirely true.  The worried investor can control something, i.e., himself or herself.  Refusing to panic earns long term profits.  You cannot control market gyrations, but you can control yourself.  It is a time for patience, not panic!

The irony is that panic doesn't end worry.  If you panic and sell everything, there are still plenty of other things to worry about, like going back into the stock market to rebuild your portfolio, like the end of the world if your candidate is not elected President, if you develop health problems, or even worse, if a loved one develops health problems.

So, go to the beach and enjoy your freedom . . . from worry!

Wednesday, January 20, 2016

Exporting Fear

Steve Schwarzman is CEO of private equity giant Blackstone (not Blackrock).  He is attending the world's most exclusive think-fest in Davos, Switzerland, and I watched an interview with him this morning on CNBC.

He touched on an interesting subject.  Is the anger in U.S. politics spilling over and polluting the world?  He seemed to think that it is scary for the rest of the world, when the world leader is angry and dysfunctional.  I think that is right, but this is not the first time that U.S. politicians behaved like petulant children.  However, it is the first time that such behavior had 24/7 coverage, which is beamed around the world in real time.

One of the most important duties of any president is to understand the importance of diplomatic speech.  After all, offending your negotiating partners, especially at the outset, just doesn't make sense!  Do we even consider that important quality when electing a president?

Does the U.S. have a duty to export confidence or fear?

Besides, who wants to cozy-up with an angry and petulant partner?

What, No Apocalypse ?

Despite being famously called "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," I nonetheless do respect and appreciate Goldman Sachs . . . well, their research department anyway!

Their latest predictions are interesting.  While their narrative seems somewhat sanguine, their conclusions are not.  They still expect the S&P 500 to end the year at 2,100.  In fact, they see stock markets worldwide to be positive for 2016, especially Japan.  They see long-term interest rates increasing 73 basis points in the U.S. this year (I don't!)  The dollar will continue to strengthen against the euro and the pound, but not yen.  Most importantly, they see oil rising $54/bbl over the next twelve months, while gold remains dead within a narrow trading range.

Like the dog that didn't bark, there is no mention of a recession or financial collapse in the foreseeable future.

Monday, January 18, 2016

Missionaries of Calmness

 I'm proud of my clients!  Even though the stock market has been historically awful so far in this young year, not a single client has panicked and wanted to sell everything.  There were a few who wanted to increase their level of cash, just to help them sleep, which is fine.

But, I have been getting a lot of questions - two in particular.  First, is it over yet?  No, it is not!  My best guess is that we are halfway through the downdraft.  Part of my thinking reflects the sheer speed of the decline.  It has its own momentum and will need time to slow down.

There is still a possibility of a genuine financial crisis being exported from China, but they do have one advantage most nations lack - they can make a quick decision.  So, sit back and help others who might panic.  After all, history tells us that sudden sharp downturns in the stock market are often followed by dizzying sharp upturns in stock values.

The second most-asked question is . . . why is it so bad that gas is below $2 a gallon?  Normally, a cut in gas bills leaves the consumer with more money to spend elsewhere.  That is not happening this time.  Instead, consumers are reducing debt.  Also, the oil-producing regions of the country are rapidly moving from recession into depression.  I know, I know . . . it is hard to feel sorry for bragg-ish Texans, but their growing economic misery has already spilled over into Oklahoma, Louisiana, and North Dakota.  Firms selling in those areas can expect decreased sales.

More importantly, one-third of high-yield or junk bonds sold since the last recession are bonds related to fracking companies, who are the high-cost drillers of oil.  When oil was $50/bbl, they could barely pay interest to their bondholders.  At $29/bbl, increased defaults in that bond market are inevitable. This is a big deal!

I appreciate my clients!  Now, I hope they will be missionaries - calming down those around them.

Saturday, January 16, 2016

Quarterly Perspective

For the terminally bored who cannot wait to read my column when they receive their copy of Inside Business, here it is: 

Friday, January 15, 2016

2016 . . . NOT 1929

One of the more interesting human behaviors is called "anchoring," which is the tendency to view things in a strict relationship with other things.  When we think of the Crash of 1929 in the stock market, we think of utter destruction, of stocks becoming worthless, of investors suddenly becoming penniless.  Now, when we see stocks plunge, we instantly associate it with the Crash of 1929.  We are anchored to that bad memory . . . of something before we were even born.

We are NOT experiencing the Crash of 1929!  We are not perched on the edge of a depression.  In fact, I seriously doubt if we will experience anything even close to the 2008/9 global financial crisis, when stocks dropped 52%.  Larry Fink is the head of the gigantic asset manager named Blackrock.  He said this morning that another 10% drop was "possible."  I think that is reasonable.

First, there is scant economic evidence that a recession is approaching.  The U.S. economy is doing comparatively well.  Furthermore, economic historians quibble as to whether the U.S. has ever imported a recession from another country.  The point is that importing a recession from somewhere else is very unlikely to happen.

Second, our banking system and stock market practices are vastly safer now than 1929.  Banks have never had such a large capital cushion before.  Just try to get 90% margin in 2016!  There may be a remote possibility that stocks go down 50% again, but it is even a more remote possibility that individual stocks would go down 100%, like in 1929.  Besides, what happened last time that stocks dropped 50%?  The market came back up over 200%.

Third, long time readers know I have no worry about recessions.  They come, and they go.  I do fear another financial crisis like 2008/9.  If that happens, it will NOT develop here.  We would have to import it from abroad, probably from China.  If a larger financial crisis in 2008/9, which was based in the U.S., could only drive down our stock market by 52%, why are we so afraid of a smaller financial crisis elsewhere?

Forth, our investment psyche is not accustomed to geopolitical events in a globalized world.  That causes us to over-react.  The stock market was not wildly over-priced before this slide began.  Still, investors are selling because they don't understand the impact of a cold war between Saudi Arabia and Iran, as just one example.  If the Clueless Wonder of North Korea really has an H-bomb, should we sell all our stocks?  No, of course not!

We need to pull up our big-boy pants and start taking advantage of all these buying opportunities!

Cold Commodities

It can be difficult to separate the message from the messenger.  Legendary investor Jim Rogers is not my kind of guy - more Donald Trump than Warren Buffett.  While I would not have lunch with him, I am glad that I read his 2004 book titled Hot Commodities, which predicted the super-cycle in commodities began in 1998 and would continue at least fifteen years.

Here's a news flash:  Jim Rogers was right.  The super-cycle in commodities has ended!

Oil has crashed below $30/bbl.  Copper and other industrial metals have been crushed.  Nobody ever suspected rare-earth-minerals would lose value, but they have!  Even precious metals like gold are relatively lifeless.

Commodities reflect the emerging markets, many of whom have commodity-based economies and need different commodities from other nations.  China has been a huge buyer of commodities, but their economy is now slowing even faster and need fewer commodities.  Not many analysts are predicting strong growth in any of the emerging markets . . .

Commodities have been a driving force in stock values for a long time.  What will take its place?  Look up Singularity University, where they believe we are entering a Age of Abundance, which could propel the stock market, but how long before that lift-off?

Until we experience that lift-off from some propelling forces or engine, I suspect equity returns will be lackluster.  Instead of the 8% target we usually expect, those returns could be more in the range of 4%.

There has been a long-running argument as to whether passive investing beats active investing.  In other words, should you buy an ETF, that mimics an index like the S&P 500, or buy a more-expensive mutual fund, where a manager actually tries to beat the index?  Retail investors are fleeing mutual funds and loading up on ETFs.  Last year, they took $207 billion out of stock-picking mutual funds and put $414 billion into index investing.  I think that should be just the opposite.  If you know the index will be lackluster, why try to match that?  Index investing is easier when you have a propelling engine like commodities, but I expect old-fashioned stock picking is now more important.

Wednesday, January 13, 2016

Voodoo Charts

Last August, the Chinese stock market tanked, and the rest of the world followed it down.  The Dow dropped almost 10% but then rebounded.  This chart shows the Dow bouncing off its long term trend line, but we are now back to that green trend line.

Chart of the Day

According to technicians, if the Dow continues down, we can expect another scary bear-market slide.  If it bounces off the green trend line, the bulls are going to run hard -- a "rip your face off" stock rally.

Let us pray . . . 

Frankly, I just want to know how a silly chart like this can factor in the price of oil, Iranian relations, Fed actions, Russian invasions, a do-nothing Congress, terrorist attacks and everything else?

Tuesday, January 12, 2016


British banking giant has just issued their advice to investors to NOT PANIC but to sell everything anyway.  I understand what they are saying, because I am also worried about the increased possibility of a financial crisis.  But, unless you are sleepless with worry, this is bad advice!

In behavioral finance, we know there is a behavioral tendency called "anchoring," whereby a person makes decisions about the future based on decisions made in the past.  Investors who sell now will be reluctant to get back into the market later, when the market is again healthy.  In other words, the odds are high that they will miss the recovery later.

This is not the same thing as the "buy-and-hold" strategy that is often criticized unfairly.  That strategy suggests you buy the stocks you like and hold them forever.  Warren Buffet has often said his favorite holding period is forever.

What this is -- is extreme "market-timing," which could also be termed "mission impossible."  (I have the same disdain for extremist investors as I do for extremist politicians, i.e., extreme disdain.)  You need perfect knowledge when stock prices bottom, as well as when they peak - good luck on that!

There is an inverse  relationship between sleep and cash.  If you are losing sleep, then you need more cash in your portfolio.  Instead of more normal 5-10% in cash, you might need 20% or 40% or 60% cash in order to stop worrying and to start sleeping well.  No, this is not about maximizing profit.  It is about maximizing life.

Don't sell everything . . . but don't lose sleep either!

Saturday, January 9, 2016

Watching Closely

I have no fear of recessions.  They are a normal part of the business cycle.  They come and they go.  If anything, they are good for the economy and the stock market in the long run.  Still, it is good news that there is little economic data suggesting a recession is approaching us any time in the near future.

However, I have great fear of a financial crisis, like 2008/9.  They happen quicker and do far more damage than a recession.  Normally, it comes from banks holding worthless loans or other assets.  There is no indication that is about to happen in the United States, especially since our banks have been required to increase their capital ratios.  (It is possible that Chinese banks may have this problem, but that is still unclear.)

It doesn't happen often, but a financial crisis can also be caused by currency issues.  In August, China began devaluing its currency, the yuan, about 6%.  An unintended consequence of the Fed raising interest rates in December was to put upward pressure on the dollar, forcing further depreciation in the yuan.  Knowing the Obama Administration was getting increasingly irate about this devaluation, the Chinese spent over $100 billion trying to support the yuan from depreciating further, but it didn't work.  I expect the yuan will continue to depreciate, as their economy slows and the Chinese move their money abroad.

The currency market is the largest market in the world.  Trading is dominated by hedge funds and large money-center banks.  Their trades/bets tend to be very large indeed.  My concern about a financial crisis has increased.  This is separate and distinct from the geopolitical gyrations we have seen over the past week in worldwide stock markets.  That will pass!

If I learn about some hedge fund getting wiped-out over the next few weeks or if some large bank is forced to increase their reserves, I will seriously consider selling some stock to increase cash levels.