Thursday, December 24, 2009

Here Comes Santa Claus...???

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.

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:

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.

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 . . .