Thursday, May 28, 2015

Fear > Greed

I think the first thing I learned in the first class of the first investment course I took in college was that "the pain of losing money far exceeds the joy of making money."  To a college kid, it is hard to understand how the emotion of losing a thousand dollars is significantly worse than the emotion of making a thousand dollars.  After all, we were trained that emotions are out-of-place in the workplace and that a thousand dollars is just that - a thousand dollars and nothing more.  Of course, once the college kid loses his first thousand dollars, then he understands!

I thought about that old lesson yesterday as I reviewed some research on market behavior.  During the twenty-year time period of 1991-2011, the market moved 10% or more on 51 different occasions - up 26 times and down 25 times.  The average length of time to go from the trough or low-point to get to the peak or high-point was 224 days.  However, going the other way, from the peak to the trough, it only took 55 days on average.  So, that was 224 days to get to the top and only 55 days to get to the bottom.

Why are falls so much much quicker than rebounds?  Because investors cannot take the pain of losing money and they sell in a panic.  Of course, this type of behavior absolutely drives investment advisors crazy, but it is normal human behavior.

Wall Street pundits like to say there are only two emotions on Wall Street, i.e., fear and greed.  The next time you feel fear, don't forget you will again feel greed.   Recognize that your normal human behavior will only hurt your investment returns -- after all, you are human, aren't you?

Tuesday, May 26, 2015

Rand Quixote

I love the philosophy of Ayn Rand but find her followers too strident and too intellectually arrogant for my sensibilities.  That's why I'm distrustful of Rand Paul, who was named after her, and is her principal acolyte in Congress.

But, I applaud his efforts to stop the NSA invasion of our privacy.  He does not believe you have to surrender the last shred of your privacy to be just a little safer . . . maybe.  On the other hand, he has done a masterful job of minority control of the Senate, which I detest.  Like all adherents of Ayn Rand, he is unbending and intolerant.

While his cause is just, so was the cause of Don Quixote.  Rand Paul is tilting at windmills.  The privacy he so gallantly seeks to protect is already gone.  The NSA doesn't need to violate your privacy to have your privacy violated.  Your privacy is already violated by Google and dozens of other websites. every single day, and that is legal.

Why does business have the right to violate your privacy - because you already clicked "I Agree" to a long, incomprehensible document on your monitor.  Business needs the private personal details of your life to sell to advertisers, who are far more important and more powerful than the NSA.

So, Senator Paul, thank you for your noble but merely theatrical effort to save something already dead and gone!  

Monday, May 25, 2015

The More Things Change . . .

Apparently, I visited my late mother in November of 1998.  While cleaning out some of her possessions, I discovered a copy of my favorite magazine, The Economist, dated November 21st, 1998 that I must have left there.  Taking a trip down Memory Lane, I was bemused by the discussion of interest rates on page 75.  Here is a sampling:

"The Chairman of the Federal Reserve may have good reason to believe that America's economy is on the edge of a cliff.  He may have inside knowledge of the risks of an imminent financial bust . . . But big doubts remain.  America's economy is still growing briskly.  Labor markets remain tight.  Money-supply growth is bounding ahead.  Moreover, financial worries  seem to have eased . . . But America's economy looks set to slow sharply next year.  GDP growth may be only 1.5% in 1999, down from 3.5% this year . . . Moreover, things could conceivably turn out worse.  Consumer spending could fall if Americans start saving again -- as they must some day.  Companies may cut back sharply on investment . . . and exports would be hit if the international outlook worsens . . . but the more share prices are become overvalued, the more they will eventually have to fall . . ."

This sounds like it could have been written today, doesn't it?

 . . . the more they stay the same?  

Saturday, May 23, 2015

Never Forget

I don't know which poet wrote this, but I am thankful to them . . . as well as thankful to those who "paid the full measure" for the rest of us.

Reminder of what Memorial Day is all about…

It happens today, and in the past;
Sacrifice made, for ours to last.

Wives to widows, families torn;
Gave their lives, for them we mourn.

Gone forever, souls are lost;
Freedom comes, with this cost.

Enjoy the life, they did preserve;
Fate they suffered, did not deserve.

On this day, lest we forget;
To them we owe, our life in debt.

Thursday, May 21, 2015

Good News Is Not Bad News

The stock market is bouncing around record highs.  I hate that -- because investors start asking if it is time to sell.  "You know, it can't go up forever."

That's true - the stock market will go down . . . eventually.  But, I don't think it is going down significantly anytime soon.  Take a look at this graph:

Chart of the Day
Yes, we've seen this graph before, but it bears repeating.  There have been 13 major rallies over the last 115 years, averaging 8.8 years in length.  We are not near the average rally yet.  Plus, these rallies were after 30% bear markets.  We just had a 50% bear market, and rallies tend to be stronger after severe bear markets.

This bull still has room to run . . . let him run! 

Wednesday, May 20, 2015

One Single-Issue Voter

Political-type people hate "splinter" voters, who vote on the basis of one single issue, regardless of all other policy issues.  You know, don't bother me with the facts - plural - I only need one fact - singular!  For example, I have relatives who would gladly vote for Satan himself, if he would just outlaw abortion.

I am also a one-issue voter.  By my standard:  Presidents Reagan, Bush I, Clinton, and Bush II have all been failures.  Next month, I'll know whether President Obama is also a failure.

That's because loud commercials drive me crazy.  It is a type of home invasion.  It is a physical violation of my ears and mind.  I've spent years praying for a Steve Jobs-type person to develop some device that gives me complete control over the noise in my own home.  Lobbyists insist that I already have that control, because I have a remote, but that ignores the time between the noise invasion and whenever I find the remote and the mute button.  It also ignores the aggravation.

However, on June 4th, the latest amendments to the Commercial Advertisement Loudness Mitigation (CALM) Act become effective.  It requires a new algorithm that deletes silent time during the commercial in evaluating whether a commercial is in compliance with CALM.  When this law took effect in December of 2013, it required the "average" volume of the commercial to be no louder than the programming or the non-commercials.  But, advertisers need a sudden blast of noise to get your attention.  Therefore, they put a few seconds of silence at the beginning and end of their commercials, reducing the "average."  That practice stops next month . . . I pray.

Let's hope Obama is more than just another failure!

Monday, May 18, 2015

"Hard-to-Fill" with the "Hard-to-Find"

The American labor force is changing, and this could impact the actions of the Fed.  While most investors study the monthly Jobs Report on the first Friday of each month, most economists study the monthly JOLTS report.  This stands for Job Openings and Labor Turnover Survey.

While the number of Job Openings ticked down slightly in April, reflecting the lousy Jobs Report in March, it is still important to realize that the number of Job Openings is higher now than before the 2008/9 "crash."  In fact, 3.4% of all jobs are currently open and unfilled.  The National Federation of Independent Business (NFIB) reports that 26.7% of their Job Openings are "hard-to-fill."  This is up from 10% during the 2008/9 "crash."  Appropriately trained workers are hard-to-find!

All this increases the possibility of the Fed raising interest rates, because there are two types of inflation, and the Fed can only fight one of them.  But, they can preempt the other type!

There is "demand-pull" inflation, which occurs when the economy is over-heating.  The Fed can fight this by raising interest rates or tightening loan availability.  The other type of inflation is "cost-push" inflation, which usually happens when there are shortages in labor or materials.  This is a much more pernicious type of inflation.  The Fed has no authority to restrict wage increases or oil prices, for example.  It can only depress the overall economy, which they are loathe to do, usually waiting too long.

I still believe the Fed will remain loathe to depress the overall economy and the job recovery by raising rates this year . . . even if they should.

Wednesday, May 13, 2015

Breakout or Breakdown ?

There are many approaches to investing, one of which is usually called "channel" investing.  Basically, it holds that stock values normally move within a predictable range.  Unless something unusual happens, it will stay within that range.  So, a channel investor will buy the stock when it is near the lower level of the range and sell it when it is near the upper level of the range.

That approach also applies to the stock market as a whole.  Using this approach, we see the Dow is well within the range and should be expected to continue within the upward channel.  In fact, take a closer look at this graph:

Chart of the Day

You can see the Dow has clearly broken above its line of resistance (the broken red line in the top right).  This suggests a breakout to the upside is more likely than a breakout to the downside in the near term.

In the long term, it is admittedly a wide channel, but it is has remained upward sloping for the last hundred years.  Very little is guaranteed in the investment world, but I do guarantee there will be another recession and another stock market "crash" -- when that happens, just remember the long-term channel is upward sloping!

Tuesday, May 12, 2015

Bouncing Back ?

It is true of capitalism that the seeds of every recovery are planted during the last recession, and the seeds of every recession are planted during the last recovery.  However, it does seem ironic to describe Russia in terms of capitalism, but it is fair.

The Russian economy has been in free-fall for over a year.  GDP is probably down 8%, similar to the Global Financial Crisis of 2008/9.  Unemployment is not reported honestly but is believed to be approaching 15%.  Economists predict the Russian economy will continue to fall thru 2015, with recovery beginning in the second quarter of next year.

Among the "green shoots" is the fact that their currency is improving.  A year ago, a dollar bought 30-35 rubles.  A few months ago, it bought 70 rubles, reflecting a 50% depreciation in the ruble.  Today, a dollar buys almost 50 rubles.  This means their cost of their imports initially increased 50%, pushing overall inflation up, but those costs are now decreasing.  Their current rate of inflation is now estimated at a whopping 17% but can be expected to fall.

In addition to an improving currency, their inflation will be driven down by the difference in industrial production (down 0.6%) and retail spending (down 8.7%).  This means inventory levels are rising, which is not sustainable, and will lead to price-cutting to slash those inventory levels.

At 30% of Russian exports, it is also very important that the price of oil seems to have stabilized and is expected to improve slowly.  This is huge for their economy and cannot be over-estimated!

The downside risk to their economy remains in their political arena.  If peace doesn't return to the Ukraine, more economic sanctions can be expected.

Does all this suggest it would be prudent to invest in Russia this year, with the expectation of improvement next year?  Absolutely not!  (Investors are begging to be fleeced whenever they invest without the rule of law.  To understand Russian business, read Red Notice by Bill Browder.)

Does all this suggest that additional Russian aggression should not be expected this year but is a virtual-certainty next year?  Absolutely yes!

Monday, May 11, 2015

Success . . . I think

Surprisingly often, I remember a co-worker in Dallas from the late 1970's.  She was a cigarette smoker, who believed she could quit smoking whenever she wanted.  However, she also believed that the self-discipline or will-power to quit was like a muscle -- you have to exercise it!  So, she did not smoke on Fridays!  She exercised her self-discipline every Friday.

I also have an addiction problem -- with news -- I'm a newsaholic!  I watch it from early morning to late night.  So, to exercise my self-discipline muscle, I decided to spend Sunday news-free.  While I dreaded the day arriving, it was not as bad as I expected.

Yesterday morning, I avoided the Sunday newspaper and kept the TV off.  (My wife stayed in the bedroom to watch the news.)  In the afternoon, I actually went down to the beach to read a long-delayed book.  No withdrawal symptoms!  My hands didn't shake one time.

Late in the afternoon, a friend walked by me on the beach, telling me there was a three-way playoff in the golf tournament.  Was that news or not?  Or, was it drama?  I don't know, but I immediately jumped up and ran home to watch the golf playoff.  Still exercising self-discipline, the TV was turned off as soon as the playoff was over.

Excepting a little golf news, I spent a whole day news-free.  I was as proud of myself as my wife was annoyed with me!  Maybe, I'll exercise that self-disciple muscle again . . . by pushing the plate away . . . or maybe not!!

Sunday, May 10, 2015

Lesson From Wine Country

I was fortunate to be in Napa, California, last week, where a friend told me the story of the Mondavi winery and recommended The House of Mondavi:  The Rise and Fall of an American Wine Dynasty by Julia Flynn Siler, which I did read on the long flight home.  (I suspect the saga of the Mondavi brothers may have been the seed for the CBS soap opera Falcon Crest during the 1980's.)  There was certainly no end to the real-life drama in the Mondavi family.

A first-generation Italian-American family in Lodi, California, they moved into wine as Prohibition ended.  The two oldest sons later took control of the winery business.  (As was normal in those days, the two daughters were marginalized.)  Unfortunately, the oldest son was so obsessed with building the business that he permitted his ego to run rough-shod over the ego of his younger brother, with predictable results.  I strongly recommend this book as an insight into dysfunctional families, especially those with large family businesses.

However, as a CERTIFIED FINANCIAL PLANNER (r) professional, with particular emphasis on both estate planning and investing, the sad story of the Mondavi family was both predictable and preventable.

First, there was an obsessive focus on family-control, pointedly excluding professionals.  The surviving wife, Rosa, was unable to control her oldest son, who could not control himself.  A professional co-trustee would have done that, probably by empowering a Chief Financial Officer.  (The family employed accountants but no CFO!)  Similarly, passing on a family business to the next generation has a certain quaint charm but, considering the risk, is not enough reason to own a business in the first place.

Second, the Mondavi family had no respect for cash -- everything was plowed back into the business.  They went to the edge of survival numerous times, due to the predictable liquidity problems.  (Does anybody believe that financial problems have zero impact on the family harmony?)  More importantly, the Mondavis  had no respect for diversification -- their only asset was the wine business, leaving them 100% exposed to the wine industry alone.

The family always employed excellent, expensive attorneys, usually with political connections, but never used a CERTIFIED FINANCIAL PLANNER (r) professional.  They may have saved some money in the short run, but it also caused them a lot of emotional pain in the long run!

Saturday, May 9, 2015

drip . . . drip . . . drip . . .

Companies are required to disclose their financial results on a quarterly basis.  This is known as the "confession season."  Stock analysts estimate the company's total earnings and earnings-per-share beforehand.  Their estimates are then averaged and published.  Normally, a company's stock will increase if their financial results exceed the estimates or decrease if they don't.

The same reaction is true for the market indices, such as the Dow or S&P 500, compared to economic estimates.  Economists prepare the estimates.  If the economic data released is better than the  estimates by economists, the stock market indices usually increase.  If the data doesn't beat the estimates, the stock market indices usually decrease.

Yesterday's release of the monthly "Jobs Report" was unusual, because the data almost exactly met expectations, i.e., 223 thousand actual jobs compared to estimates of 228 thousand.  The stock market should have not reacted to hitting the estimates.  There should have been no reaction.  Instead, the Dow soared 267 points or 1.5%.

This tells me that the stock market didn't really believe the analysts' estimates and had not priced the securities to meet those expectations.  There must be a reason for this.  I think the slow drip of weak, but not bad, economic data coming out of the winter has worn down the natural optimism of investors, just like it did last year.

The final estimate of first quarter GDP is not yet available but is expected to be weak, even negative, just like last year.  Early estimates of the second quarter are in the 2.5% range, just like last year.

Now, do you really want to "sell in May and go away" . . . or just stop listening to the short-term dripping. 

Sunday, May 3, 2015

The Grieving Season ?

My mother died thirteen months ago, and I think about her several times every day.  All my friends, as well as the "experts," say it is normal to grieve the loss of a loved one, and I do!

But, I know the particular date that she died -- March 30th, 2014 -- which is a date-certain that many people don't have.  Having a date-certain makes the necessary grieving less difficult for me than those loved ones who don't have a date-certain.  My heart will always break for those who loved our POWs & MIAs in Vietnam.  They never knew when their loved ones met their end, which made their grieving far, far more difficult.

I attended a lecture last week on driver-less cars.  They discussed LIDAR, which is the image-capturing radar on the roof of driver-less cars.  It will take high-resolution photographs 360-degrees around a driver-less car, up to 100 meters or about 300 feet.  It can spot a squirrel sitting in a tree.  Anything showing through any open window, anybody going in or out of any building, anybody driving by, or anybody in the area for any reason will be captured forever.

Afterwards, I brought up the issue of privacy and was told "Privacy is already dead.  Don't be silly, hoping that you will ever again have any privacy.  Just get over it -- let it go!"

Maybe, that was the date-certain that I needed -- April 29th, 2015.

Maybe, it is past-time to begin that grieving process.  

Friday, May 1, 2015

In Praise of Proctologists

Would you rather go to the airport and deal with TSA . . . or go to your proctologist's office?

You don't have to arrive two hours early to see your proctologist.

It is easier and less expensive to park your car at the proctologist's office.

Your proctologist doesn't exchange pleasantries just to hear if you have a foreign accent.

You don't have to pass thru a metal-screening device to see your proctologist.

You are more likely to meet a decision-maker in a proctologist's office than the airport.

Your proctologist usually has his qualifications posted on a wall, unlike TSA.

Your proctologist is unlikely to insult your intelligence, by banning toenail clippers while permitting 12 inch knitting needles.

Lastly, you'll probably get a nice nap while you're in the proctologist's office.