Today, on Christmas Eve, the market set a new high for the year. That is always good news, even if it is still down 25% from its high two years ago. Often called a "Santa Claus Rally" (SCR), the market is usually good this time of year and extends through the first two trading days of the New Year. But, does it predict a good year for next year? As it turns out, a good SCR doesn't necessarily mean a good next year, but a bad SCR usually predicts a bad next year. So stay tuned for the news next week.
More importantly, I do wish you and your family a warm, healthy Holiday Season....and a bull market next year.
Thursday, December 24, 2009
Wednesday, December 16, 2009
Golden Vices???
For many years, I managed the portfolio for a wonderful gentleman in Williamsburg, who died a few years ago at the age 99. He was a great guy, and I miss him. Coincidently, his son-in-law was Morgan Stanley’s legendary investment strategist, Barton Biggs, whom I have followed closely over the years and have read both of his books. Last week, he was interviewed by Advisor Perspectives and updated his thoughts. You can read the short interview at:
http://www.advisorperspectives.com/newsletters09/Barton_Biggs_on_Undervaluation_in_the_SP_100.php
But, there is one subject that made me laugh. Talking about gold as an investment, he said: “What is the P/E ratio on gold? What’s the yield on gold? It doesn’t have one, whereas I can prove to you that US high-quality, large-cap stocks are as cheap relative to value and to their history as they have been in hundreds of years. As Winston Churchill once said of one of his political opponents – who was vegetarian, a teetotaler and very liberal – the same is true of gold; it ‘has all the virtues I dislike and none of the vices I admire.’”
The only disagreement I have with him is that a good part of the current demand for gold results from the concern that the dollar will lose its status as a reserve currency, and that may have caused the demand curve to have permanently shifted to the right, which is “econo-speak” for a fundamental change in supply and demand, which drives the price upward. While I am bullish on gold in the long run, it did get ahead of its fundamentals recently.
Regardless, Barton Biggs is a genuine sage, and I recommend him to you!
http://www.advisorperspectives.com/newsletters09/Barton_Biggs_on_Undervaluation_in_the_SP_100.php
But, there is one subject that made me laugh. Talking about gold as an investment, he said: “What is the P/E ratio on gold? What’s the yield on gold? It doesn’t have one, whereas I can prove to you that US high-quality, large-cap stocks are as cheap relative to value and to their history as they have been in hundreds of years. As Winston Churchill once said of one of his political opponents – who was vegetarian, a teetotaler and very liberal – the same is true of gold; it ‘has all the virtues I dislike and none of the vices I admire.’”
The only disagreement I have with him is that a good part of the current demand for gold results from the concern that the dollar will lose its status as a reserve currency, and that may have caused the demand curve to have permanently shifted to the right, which is “econo-speak” for a fundamental change in supply and demand, which drives the price upward. While I am bullish on gold in the long run, it did get ahead of its fundamentals recently.
Regardless, Barton Biggs is a genuine sage, and I recommend him to you!
Tuesday, December 15, 2009
Farewell to Arms............
Long-time readers know that I have proudly served for many years on the certification committee of a prestigious national investment association. For a number of reasons, we recently began making the examination process more difficult, which was fine. But, we became increasingly technical, finding a formula for every question. I recall Warren Buffett saying “Don’t do equations with Greek letters in them.” Given the collapse of almost every asset class last year, the whole concept of Modern Portfolio Theory has been called into question. However, instead of incorporating new information into our concept of investing, I felt we were desperately clutching what we were originally taught, fearful it might need to be updated.
It was a very wise person indeed who said “neither investing nor war making nor love making is hard science”. Nothing supplements education like years of experience, proven judgement and the ability to keep learning. I felt like we were giving a new toolbox full of shiny tools to a bunch of grade-school kids calling themselves financial advisors.
It was a very wise person indeed who said “neither investing nor war making nor love making is hard science”. Nothing supplements education like years of experience, proven judgement and the ability to keep learning. I felt like we were giving a new toolbox full of shiny tools to a bunch of grade-school kids calling themselves financial advisors.
Wednesday, December 9, 2009
........connected to the shin bone.......
Last week’s trouble in Dubai is connected to this week’s trouble in Greece, whose credit rating was decreased both Monday and Tuesday and that is connected to Spain, whose credit rating was reduced today. This has raised worries for the safety of foreign bonds in general, which sold down, as people ran for safety. Because the dollar is still the safest currency in the short run, they bought dollars, which increased the value of the dollar. And, since an increasing dollar hurts our exports, which are fundamental to the “new normal”, the stock market drops. Got that? Data is never free-standing. It is always connected.
Long time readers know how little I think of bond funds, i.e., mutual funds that invest in bonds. Those mutual funds that invest in long term bonds are the worst. Nonetheless, if you must invest in foreign bonds, I would only do it via a large bond fund that specializes in that. Some analysts believe foreign bonds are a separate asset class because they are not perfectly correlated to any other asset class. Frankly, the only use I have for those funds is to benefit from the depreciating dollar. If you think the dollar will continue to depreciate, one good way is to hold un-hedged foreign bonds, preferably in a bond fund. (Un-hedged means you are exposed to swings in currency values.) I’ve bought more in the last six months than ever before. Don’t forget, you will lose money if the dollar appreciates, as it has done for the last few days.
I’m confident the long term trend of the dollar is down . . . which makes imports inflationary . . . which is connected to the shin bone . . . which is connected to the hip bone . . .
Long time readers know how little I think of bond funds, i.e., mutual funds that invest in bonds. Those mutual funds that invest in long term bonds are the worst. Nonetheless, if you must invest in foreign bonds, I would only do it via a large bond fund that specializes in that. Some analysts believe foreign bonds are a separate asset class because they are not perfectly correlated to any other asset class. Frankly, the only use I have for those funds is to benefit from the depreciating dollar. If you think the dollar will continue to depreciate, one good way is to hold un-hedged foreign bonds, preferably in a bond fund. (Un-hedged means you are exposed to swings in currency values.) I’ve bought more in the last six months than ever before. Don’t forget, you will lose money if the dollar appreciates, as it has done for the last few days.
I’m confident the long term trend of the dollar is down . . . which makes imports inflationary . . . which is connected to the shin bone . . . which is connected to the hip bone . . .
Friday, November 27, 2009
Take a baby aspirin, and enjoy the weekend!
As I write this, it looks like the market will open about 200 points down, entirely due to the news that Dubai’s biggest company has asked for a “standstill” on almost $60 billion in debt for six months. Will this trigger the systemic heart attack that worries me? Probably not! Even if the lenders had to write-off their entire loan as worthless, which is silly to contemplate, it is only a small sliver of the total $1.5 trillion that is expected to be written off over the next two years. A more legitimate concern is that Dubai will fire-sale their other assets, driving down market prices, in order to raise cash. Most of those assets are in the UK, including a large ownership interest in the London Stock Exchange itself. However, this “chest pain” will undoubtedly reduce investors’ appetite for risk, slowing or stopping the markets rise. But, that’s OK, because the market has gotten too far ahead of the economy and needs a rest. It is even well ahead of its own 50-day-moving-average. It needs to slow down now to avoid a more disruptive drop later.
For the economic cardiologists among us, the thing to watch is not stock market closing prices, but the cost of credit default swaps. These derivatives played a large part in triggering the crash in September of last year. Unfortunately, information is hard to obtain on them. Nobody even knows how many there are. There is no central exchange to keep track of them. A mere $60 billion related to Dubai would mean nothing. But, that can be leveraged a great deal, thru derivatives called “CDOs squared”. A trillion dollars worth could easily produce the heart attack I fear. We need a central exchange NOW!
One thing is certain: The market will over-react. It has a long history of that, and it is especially true following a recession. The next few days could be ugly, but you don’t need to go the emergency room. I’ll let you know when you do!
For the economic cardiologists among us, the thing to watch is not stock market closing prices, but the cost of credit default swaps. These derivatives played a large part in triggering the crash in September of last year. Unfortunately, information is hard to obtain on them. Nobody even knows how many there are. There is no central exchange to keep track of them. A mere $60 billion related to Dubai would mean nothing. But, that can be leveraged a great deal, thru derivatives called “CDOs squared”. A trillion dollars worth could easily produce the heart attack I fear. We need a central exchange NOW!
One thing is certain: The market will over-react. It has a long history of that, and it is especially true following a recession. The next few days could be ugly, but you don’t need to go the emergency room. I’ll let you know when you do!
Saturday, November 21, 2009
Dr. Bernanke: STAT
While data about our economic health has been improving rather consistently since the Crash of 2008, I’ve become very concerned that the patient might suffer an unexpected heart attack. The problem now is the same as the problem then. We still have not figured out how to intelligently regulate derivatives, which Warren Buffett described as “financial weapons of mass destruction”. But, heart attacks are often triggered by something exogenous, e.g., sudden exertion, surprises, etc. So, what would trigger our economic heart attack?
A few years ago, many economists fretted about the Yen-carry trade. At that time, investors were borrowing Yen in Japan at essentially zero interest rates and buying dollars in Australia or New Zealand, for example, which paid as much as 7%. They kept the difference in interest earned in Australia and interest paid in Japan as their profit. Their risk was that Japan might raise interest rates, which would cause the Yen to appreciate, which would then make it more expensive for the investors to buy enough Yen to repay their loans. This is the greatest risk to the investment strategy of “currency carry trades”. When the reversal happened, Japan paid a heavy price as the value of the Yen suddenly spiked, which made their exports un-competitive worldwide overnight.
Recently, famed pessimist Nouriel Roubini, who accurately predicted both the timing and the intensity of The Great Recession, claimed the Yen-carry trade was nothing compared to the new Dollar-carry trade, calling it “the mother of all carry trades”. I suspect he is right. The world is awash in dollars right now, borrowed at no cost and invested in more risky assets elsewhere, which has been a major factor driving up stock markets worldwide this year. However, when the market feels the Fed is ready to raise rates, we can expect a vast amount of more risky assets, such as international stocks, to be sold quickly, driving down their values. It will happen suddenly.
Will that trigger the heart attack I fear? Probably!
Will the patient be better prepared for a reversal of the Dollar-carry trade if we better regulate derivatives before then? Absolutely!
I wish it wasn’t so boring that Congress cannot pay attention . . . paging Dr. Bernanke!
A few years ago, many economists fretted about the Yen-carry trade. At that time, investors were borrowing Yen in Japan at essentially zero interest rates and buying dollars in Australia or New Zealand, for example, which paid as much as 7%. They kept the difference in interest earned in Australia and interest paid in Japan as their profit. Their risk was that Japan might raise interest rates, which would cause the Yen to appreciate, which would then make it more expensive for the investors to buy enough Yen to repay their loans. This is the greatest risk to the investment strategy of “currency carry trades”. When the reversal happened, Japan paid a heavy price as the value of the Yen suddenly spiked, which made their exports un-competitive worldwide overnight.
Recently, famed pessimist Nouriel Roubini, who accurately predicted both the timing and the intensity of The Great Recession, claimed the Yen-carry trade was nothing compared to the new Dollar-carry trade, calling it “the mother of all carry trades”. I suspect he is right. The world is awash in dollars right now, borrowed at no cost and invested in more risky assets elsewhere, which has been a major factor driving up stock markets worldwide this year. However, when the market feels the Fed is ready to raise rates, we can expect a vast amount of more risky assets, such as international stocks, to be sold quickly, driving down their values. It will happen suddenly.
Will that trigger the heart attack I fear? Probably!
Will the patient be better prepared for a reversal of the Dollar-carry trade if we better regulate derivatives before then? Absolutely!
I wish it wasn’t so boring that Congress cannot pay attention . . . paging Dr. Bernanke!
Friday, November 13, 2009
Why did we send in the clowns?
Late last year, a client wisely predicted that China would emerge from the crisis before the U.S. His reasoning was interesting. He thought that great problems require great decisions, but that the U.S cannot make great decisions like China, which is governed by engineers, while the U.S. is governed by lawyers. I've thought about this alot!
Yesterday, I heard from David Gergen, advisor to five different U.S presidents, of both parties. He pointed out that our founding fathers intentionally created a difficult legislative process. However, they had no expectation that the process would later be made ever more difficult with (1) the problem of filibusters, requiring 60 votes instead of 51, (2) the complexity of requiring CBO analysis of all spending bills, (3) the pointless "food fights" created by the media to sell advertising and (4) the "quiet conspiracy" between Republicans and Democrats to protect safe seats during re-districting every ten years, which pushes candidates to the extremes instead of the center.
If the founding fathers could have seen what would happen, would thay have made the legislating process so difficult? But is it too late to send in the engineers?
Yesterday, I heard from David Gergen, advisor to five different U.S presidents, of both parties. He pointed out that our founding fathers intentionally created a difficult legislative process. However, they had no expectation that the process would later be made ever more difficult with (1) the problem of filibusters, requiring 60 votes instead of 51, (2) the complexity of requiring CBO analysis of all spending bills, (3) the pointless "food fights" created by the media to sell advertising and (4) the "quiet conspiracy" between Republicans and Democrats to protect safe seats during re-districting every ten years, which pushes candidates to the extremes instead of the center.
If the founding fathers could have seen what would happen, would thay have made the legislating process so difficult? But is it too late to send in the engineers?
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