Wisdom From Uncle Warren

I love Warren Buffett!  He is not just another egocentric, egomaniac billionaire.  He remains humble and even makes jokes about himself.  He gives mostly excellent advice to investors.  Of course, he can sometimes confuse investors, as he did this weekend.

The media coverage was that he believes passive investing is always superior to active investing.  There has been an ongoing debate about this within the investment community for the last two decades.  A passive investor simply buys the S&P 500 (or NASDAQ or whatever) index fund or ETF and holds it passively thereafter.  An active investor prefers individual securities and timing the market.

Some years ago, he offered to bet $500 thousand with any active manager who could beat the indexes used in passive investing.  Only one investor took up that offer, and that one investor is losing.

The confusion exists because there are more than two types of investors, not just polar opposites like active and passive.  Buffett himself is both.  He takes many large positions in individual stocks.  His investment performance has lagged the stock market many times, but he has been in the market long enough to still be very successful.  Also, his description of active managers applied to very active managers, like hedge funds, which have done relatively poorly the last few years.

He was not talking about mutual fund managers with constrained investment parameters, such as mid-cap growth, for example.  My experience is that passive investing works best for large-cap stocks but not for small-cap stocks.  There is a time and place for both schools of investing.  Little in life is either-or!

Just as extremist politicians should have no place in legislation, extremist advisors should have no place in investing.  Pure passive investing makes as little sense as pure active investing.

Snoozng Thru SOTU

Most of us know the simple, guilty pleasure of falling asleep during the annual State-of-the-Union (SOTU) address by the President.  These speeches are usually bombastic partisan ranting without meaning, which make the sleeping even better.  However, the next one should be worth an extra cup of coffee at dinner.  It will be different.

Since the election last November, the bulls have been happily running down Wall Street.  The press was quick to label it "the Trump Bump," but that ignores the different legs to this rally.  The first leg following the election was a relief rally, which happens when something bad was avoided.  Just prior to the election, the market had priced in four more years of gridlock.  With gridlock gone, America can get moving again, and the stock market began pricing that in.  It was relieved!

That gridlock-relief rally stalled in January before beginning the second leg, which was the real Trump Bump.  It was at that point that analysts had restated their corporate earnings estimates, based on real reform of our tax code and a real stimulus program to rebuild our infrastructure.  But, the market is already becoming anxious as there are no details on either, as well as no sign that the Republican Congress will work with the Republican President.  More worrisome is the possibility that Trump will waste his political capital on social issues or personal grudges, like Bush II wasted his political capital like Don Quixote, on privatizing Social Security following his reelection.

If the President does not provide some clarity in the speech or at least a deadline when we will receive that clarity, I expect this second leg of this stock market rally will end quickly.  It will be same reaction if it becomes obvious that he is wasting his political capital.

Take a nap if possible before the speech, but don't miss it.

Political Cancer

I've written many times that the cancer on the body politic of America is gerrymandering.  It is the core of the political pollution that we see daily.  It discriminates against moderate Republicans and moderate Democrats, in favor of extreme Republicans and extreme Democrats.  Moderates can compromise and accomplish things, extremists cannot.

Unfortunately, the fight has taken on a partisan tinge.  Make no mistake, both political parties are GUILTY!  The Democrats invented it originally, but the Republicans now practice it religiously.  Gerrymandering must be eliminated, regardless of who is practicing it.

The OneVirginia2021 group has been fighting this battle for several years, and they are making progress, but still fell short in the last General Assembly session.  For a good recap of their crusade, go to:

https://www.youtube.com/watch?v=vD3ZZ-wzrHQ 

No Promise, No Expectation

I have written several times that every President since Reagan has been a failure, because each has promised to "do something" about LOUD commercials on television.

Bush II and Obama both claim at least partial credit for the Commercial  Advertisement Loudness Mitigation" (CALM) Act, which theoretically limited the LOUDness of commercials to the programming before and after.  That new law became effective at the end of 2012.

Prior to CALM, the most common complaint received by the Federal Communications Commission concerned the LOUD commercials.  Since CALM, that number of complaints has decreased significantly.  Does that mean television commercials are less LOUD?  No, it means complaints on loudness now have to follow the parameters required by CALM.  This new law is as big a failure in regulating LOUD television commercials as all these Presidents have been.

Did these Presidents lie to the American people?  No, I think they had good intentions.  But, no President is more powerful than the advertising industry.  It is the most powerful industry in America, more powerful than even the defense industry.

Despite exhausting Bing and Goggle searches, I have found no promise by Trump to control LOUD commercials.  Could it be the only President who didn't promise it . . . may actually accomplish it?

No, not even a thousand tweets about the advertising industry will help.

Know Thy Custodian!

"Must-see TV" consists of only two shows for me, i.e., Fareed Zakaria's GPS on CNN and Sixty Minutes on CBS.  Last night, I was slow finding the remote after Sixty Minutes, when some fictional show began.  Before I could cut off the TV, I heard the word "Ponzi" and was hooked.  I had to listen!

It seems a prominent lawyer decided to retire and move to France, because her investment portfolio had done so well.  Unfortunately, as soon as she resigns her partnership, she learns she has been a victim of a Ponzi scheme.

I am not insensitive to such victims, but Ponzi schemes are so easy to spot that it is hard to generate a great deal of sympathy.  Remember this:  if there is not an independent third-party that holds the actual assets and sends reports directly to the client, you should assume it is a Ponzi scheme and stay away.

Please re-read that last sentence again and again.  Tell your friends!

For my clients, their assets are held by TD Ameritrade, who also sends monthly statements directly to the client.  Other good custodians include Schwab and Pershing.  If you don't know who your custodian is, stop what you are doing right now and find out!

Janet's Woes

The two primary methods of controlling the economy are monetary policy (by the Fed) and fiscal policy (by Congress).  Since the 2008/9 Global Financial Crisis, the United States has only had monetary policy to control the economy, as Congress has been worse than useless.  To the extent that our economy has recovered, we can thank the Fed.  However, the good news is that, as monetary policy has reached its limits, fiscal policy may come back to life, thanks to the elimination of gridlock last November.  For years, the stock market has over-reacted to any possible action by the Fed.  Today, it is starting to over-react to anything on Capitol Hill.

This should be good news for Fed Head Janet Yellen and the Board of Governors.  They want to "normalize" interest rates, which is Fed-speak for raising rates, and they should, but they face some conflicting pressures.

First, there are the Libertarians, who believe anything-the-government-does-is wrong.  They believe that holding interest rates so low for so long was an illegal action to punish one class of Americans, i.e., the savers.  They believe low interest rates have chased money out of bonds and into stocks, creating a terrible bubble, which is untrue.  Also, because the government is always wrong, they are worried that the government now agrees with them and want to increase interest rates, which must therefore be wrong.  They also want even more audits of the Fed, as well as reducing the Fed's independence.

Second, there are the Republicans, whose sole belief system is that they-get-credit-for-anything-that-goes-right-and-Democrats-get-blamed-for-anything-that-goes-wrong, which perfectly mirrors the sole belief system of the Democrats.  More to the point, they would not confirm Jesus Christ to the Fed's Board of Governors if nominated by a Democrat.  There are now four vacancies on the Board of eight governors.  In a population of 340 million people, they cannot find four qualified people???  The governor tasked with bank regulation just resigned.

Then, there is the Presidential problem.  Libertarians wanted to raise interest rates years ago, and now so does Janet.  But, the President has already said the dollar is too strong, which hurts American exporters.  Raising rates will normally make the dollar even stronger, reducing demand for American-made products.  In addition, rising interest rates cause income capitalization rates to rise, which causes the value of commercial real estate to fall.  So, professionally and personally, the President doesn't see the need for higher interest rates.

My expectation is that she will get the "last laugh," raising rates once or twice before her term expires next January, when she will be ceremoniously dumped by the President and will exit like Frank Sinatra, doing it her way!

Needless Hypocrisy

Last time . . .

The Democrats were right, and the Republicans were wrong.

This time . . .

The Republicans are right, and the Democrats are wrong.

You will recall the summer of 2011 when the Republicans threw such a hypocritical hissy-fit about the Debt Ceiling that Standard & Poor's actually lowered the credit rating of the United States for being ungovernable - not for having bad credit but for being ungovernable.  Since then, we have either raised the debt ceiling or suspended it several times.  Guess what happens again next month?

Because the Republicans are in power, the Democrats will hiss that "something" must be done about our growing debt, that we can no longer waste money on tax cuts for the rich and must raise those taxes.  It is hypocrisy writ large!

Long ago, the debt ceiling had already outlived its usefulness.   We are the only advanced nation with such a meaningless device.  Not only does the debt ceiling not help, it actually makes debt management more difficult by unleashing the hypocrisy of Republicans and Democrats, further polluting conversations.

If you think the arbitrary debt ceiling limitation has done any good, take a look at this chart:

An arbitrary debt ceiling as a curb on spending never made sense and obviously has never worked.  It is time to dispense with the notion . . . and actually negotiate with each other.

Crazies In The Senate

The difference between my children and my guns is that . . . I know how many children I have.

The difference between the NRA and myself is that . . . I am a SANE gun-lover.

The difference between the Senate Republicans and myself is that . . . I have a conscience!

I am appalled the Senate Republicans are restoring the right of crazy (yes, crazy, not merely the mentally handicapped) people to buy guns.  They are parroting the NRA excuse that keeping guns out of the hands of a few crazy people will not prevent ALL gun deaths -- no kidding?  Nobody ever said it would!

Reducing senseless gun violence has no "silver bullet."  Reducing such unnecessary violence will require many, many, many small things.  For example, teaching gun safety in school will not prevent ALL gun deaths either, but it WILL help in some small way.  There are numerous other small steps.  Of course, the first step is to stop worshiping at the checkbook of the NRA.

To the Senate Republicans . . . Shame on you!!

48 Hours

During a mere 48 hours this week, the following information was released:

1.  The Small Business Optimism Index rose again in January, as it has for the last three months, driven largely by the increase in small business owners who think the next three months will be a good time to expand their business.  (This is good!)

2.  The Consumer Price Index showed inflation has picked up this year, rising a surprising 0.6% in one month.  However, this core level of only 0.4% was skewed higher by the rising price of gasoline.  (Inflation is so much better than deflation.)

3.  The Producer Price Index was very similar to the CPI, which is somewhat unusual in itself, showing a 0.6% increase in January that was also skewed upwards by energy prices.  The core level of inflation at the producer level was only 0.2% in January.  (That is a little too low.)

4.  Rising inventory levels mean the consumers are buying less or that businesses are more optimistic and are building inventory levels to meet expected sales.  In December, inventory levels rose 0.4% . . . for the latter reason.  (The 2016 inventory correction is over!)

5.  Home Builder Sentiment dropped 2 points last month, not because homebuyers stayed away, but because the cost of building is rising so rapidly.  (Evidence of real inflation?)

6.  Utility Output declined 0.3% in January.  Normally, this is not a good thing, as it might indicate declining demand by business for electricity.  However, this decline was due to warmer weather this January compared to last year.  (No big deal.)

7.  Retail sales include auto sales, which are more volatile.  If you strip out those volatile numbers, retail sales increased a very healthy 0.8% in January, compared to a 0.4% increase in December.  (The consumer is stronger than expected.)

This was not all the economic data released during this 48 hour period and ignores the normal gushing of financial data from thousands of public companies.  It also ignores the unusually heavy flow of geopolitical events.

Now, how does a person consume and digest so much information?  How does a person "drink from a fire hose?"

It's simple . . . their financial advisor should be their "designated fire hose drinker!"

Quick & Dirty Simplicity

Momentum investing, channel investing, trend following -- all are buzzwords and/or excuses for not knowing economic pressure points or individual stocks.

Addiction to these approaches stems from their quick and dirty simplicity.  Here is a good example:

You can quickly see the Dow shows no indication that it is going to break out of its upward channel.  Investors should  therefore rest comfortable that disaster is not imminent.

This "quick and dirty simplicity" is worth a thousand words -- turning a thousand words into one instantly understandable chart.  My sanguine view of the market comes from understanding economic pressure points, but it simply reassuring to see the chart agrees.  It should only be used to confirm your market expectations, not to make them.

Plus, it saves me the trouble of typing a thousand words and saves the investor the trouble of reading a thousand words . . . whew!

Look Who's Back ?

Nobel prize-winning investment theory Modern Portfolio Theory found that performance is increased, while risk is decreased, over the long-term, if the portfolio is allocated across the many investment classes, which includes European stocks.  However, those investors who had any European exposure lost badly a few years ago and are reluctant to to embrace that hot coal again.  Once burned, twice shy, I guess?  And, I do understand.

Still, it is time to reconsider.  For the first time since 2012, corporate profits in Europe turned up 5.05% in the fourth quarter.  "The mother's milk of stock prices is corporate profits."  As confirmation and to everybody's surprise, the euro is up 1.2% so far this short year.

More surprising are the "bullets missed."  Nobody expected the different European stocks market to recover so quickly after the stunning Brexit vote nor after the stunning Trump victory.  Those markets are displaying a resilience that was not thought to be there.

Of course, governance is the Achilles's Heal of the European Union.  It will survive the exit of Britain, largely because the Brits continued using the pound as their currency, not the euro.   France is different and uses the euro.  It also faces an election this Spring.  If far right candidate Marine La Pen wins, she is expected to return France to the franc, leaving the euro, which is a direct threat to the stability of the European Union.

Money invested in the bond market is often considered "smarter" than money in the stock market.  The European bond market has a clear case of the jitters.  The difference in yield between French bonds and German bonds has risen over the last four months.

No discussion of Europe is complete without mentioning the "wild child," who is Greece.  After its near-death experience five years ago, it returned to the bond market triumphantly in 2014 when it refinanced much of its debt.  However, the first payment of about $2.1 billion comes due in July, and it is not clear how they will repay it.  The bond market thinks it will not be a problem as the value of those bonds has increased significantly in recent weeks.  Importantly, Europe has already had five years to adjust to this eventuality.  Default now will not be as destabilizing as default in 2012.

My sense is that it will soon be time to allocate more money into Europe, but not before the French election and maybe not until it is clear the Greeks have changed their profligate entitlements.  Stay tuned . . .

Slippery Slope

It happened the first Saturday after the November presidential election.  I was watching The Golf Channel, when they started talking about the impact of Trump on golf and how his election might affect play at his already-expensive golf courses.  It got me thinking about Trump, but it was Saturday, which is my "news-free" day.  I decided to just "tough-it-out" and endure the election coverage.  But, I was soiled . . .

That afternoon, I got in my car and turned on the radio, which was on CNN, and I started listening.  Soiled again!  Twice on my news-free day, I was soiled with news!!

Each Saturday since then, I have felt less and less adamant about maintaining my news--purity.  I started watching local news, just for the weather forecast . . . of course!  That spread to network news, because a little news wouldn't hurt . . . would it?

The world is different without 24/7 saturation news coverage, and abstinence gives you a better perspective on the news the other six days of the week.  Therefore, I must redouble my efforts to regain that perspective . . . by avoiding news-noise on Saturday.

A Caffenated Clue

Starbucks has always been an enigma to me.  Its customers seem fiercely loyal to the brand, for some reason.  My perception has been that the coffee is too bitter and too expensive.  Now, it seems there is a relationship to love of Starbucks and political leanings.  Take a look at this chart.

The more you like Starbucks, the more likely you are to vote Democratic.  The less you like it, the more likely you are to vote Republican.

Now, we have yet another way to label people!  If a person praises Starbucks, don't praise Trump around them.

Trump Triggers ?

Senator John McCain has always been one of my personal heroes.  When he was trashed last year by then-candidate Donald Trump, who even denigrated McCain's war record as a prisoner-of-war, I saw very clearly the naked character of Trump.  Readers may recall I wrote that Trump was trash and not fit to be president.  Trashing McCain was a red-line for me!

Nonetheless, he is now my president.  If ordered into combat by him, I would go.  If I could take a bullet to protect him, I would.  I wish him only the greatest success, because that is good for the country I love.

Of course, it is not that easy when you are responsible for the financial health of others.  My expectation is that Trump will be bad for America.  (Yes, I do understand supply-side economics and dynamic scoring.)  But, how do I protect my clients?

My greatest fear is always a financial crisis, because they happen so quickly and recover so slowly.  Fortunately, there is a distant-early-warning system.  For example, when I see the prices of credit default swaps rise unexpectedly, especially for money-center banks or sovereign debt, I know the stage is being set for a financial crisis.  The same can be true for the TED spread or interest rate differential between Treasuries and euro dollars.

Naturally, I worry about a bear market (down 20%) for the stock market.  There are many components to that particular distant-early-warning system, such as the "death cross" when the 50-day moving average crosses below the 200-day moving average.  Or, the A/D ratio of advancing stocks compared to declining stocks.  I know those distant-early-warning signals and follow them.

Everybody is always worried about recessions, it seems.  This is the least of my worries.  Unless sparked by a financial crisis, a recession is usually visible far ahead of time.  There are many, many economic indicators, maybe too many, which just confuse investors.  For most investors, minor recessions are best ignored.

But, what is the triggering data-point for a political crisis?  Is it when the impeachment paperwork is filed?  (Make no mistake:  an impeachment is a grueling, painful experience for everybody!)  Is it when China announces a ban on U.S. imports?  Is it the first time the President deploys our military?  Or, the second time?  Is it when a blue state like California files for succession?  Or, is it when a red state like Texas files?

I'm searching for useful triggers . . . any suggestions?

Gonna soak up the sun . . .

Existentialists view death as the ultimate fraud.  They fear boredom before death far more than death itself.

Sheryl Crow is a superbly talented musician and singer.  She has been quite successful, with an estimated net worth of $40 million.  At 54, she still retains that certain hard athletic beauty.  She has long been one of my favorite performers.

I attended a performance tonight and was no more than ten feet away.  While I enjoyed her performance immensely, it was difficult to ignore her boredom in singing songs that made her wealthy ten to twenty years ago.  She seemed to be on automatic-pilot.

An investment strategist wakes up in a new and different world every day, with a new set of tea leaves.  There are new economic reports and corporate announcements to absorb.  There is no reason nor time for boredom.

Should I feel sorry for Sheryl?

Brit Thoughts

David Cameron was Prime Minister of Great Britain from 2010 until July of last year, when he lost the Brexit vote and resigned.  I attended a lecture of his yesterday and took away the following thoughts:

1.  He is not worried about England following the Brexit vote, just sad that the many impending inconveniences are so unnecessary.  (He is worried about losing some of the financial sector, which is so huge in London, and may migrate to the Continent.)

2.  He is not worried about the continued existence of the European Union, unless Madame LaPen wins the French election later this year.

3.  He is worried about the chaotic and unpredictable growth of populism worldwide.  In its zeal to "break everything and start over," the cost of breaking everything is not considered, in either money terms or human terms.

4.  He felt one of the great honors of being Prime Minister was delivering a weekly update to the Queen, whom he obviously respects and appreciates.  He pointed out that, as Queen, she has met 25% of all American presidents in history, which speaks to the length of her reign.

5.  He played golf with Obama and was glad he did.  He declined the opportunity to go hunting with shotguns in the Russian forest with Putin and was glad he did.  He obviously trusts Putin very little.

I already had great respect for him, but after being in the same room with him, I got the sense he is also a "nice guy."  It would be an honor to buy him a pint! 

Smartest Guys Somewhere

There are those who think the legendary investment house of Goldman Sachs has "the smartest guys in the room."  I am not one of those.  However, I do think their research department has "the smartest guys in Goldmen Sachs."  Their research is always thoughtful and generally well-written!  Here are five thoughtul quotes from their latest research:

1.  The resilient US expansion may get a nudge from fiscal stimulus and infrastructure spending, though US trade and European electoral risk may be noticeable counterweights.

2.  Global inflationary pressures appear subdued, but price pressures are unfolding in the US amid market expectations for sizable fiscal stimulus and a shrinking output gap.

3.  Despite the likelihood of rate hikes in the US, we expect policy to remain supportive globally. (That means low rates.)

4.  From the US Republican sweep to upcoming European elections, we expect macro risk to be amplified by unpredictable political outcomes.  Populism has proven difficult to size and price.

5.  Besides global politics, we are watching other persistent risk sources, the pace of US rate tightening, the sustainability of the Chinese recovery, and corporate earnings.

In other words, they see no recession in the near future and are worried what damage politicians might do, here and abroad . . . but who isn't?