"Don't worry about the world coming to an end today. It's already tomorrow in Australia." - Charles M. Shultz
Well we have almost made it to the end of 2011 and certainly a year that most of us would like to forget. Others however would like it to continue on forever, but such is life; there is always someone that benefits at the expense of the rest and 2011 was definitely one of those years.
Heading into 2012 I like to look ahead to see how to position my investments and in all honesty I doubt that I will be making many changes. My private equity investments are all looking relatively solid and all should continue to prosper in 2012, and based on my outlook for the global economy, my fixed rate deposit investment is looking very good. So what is my outlook for 2012?
When I was a boy growing up in Cape Town we used to have a "fort" where our neighborhood gang of boys would congregate to plan our next attack on the neighborhood girls. We were very fortunate that we lived right next to the girls only high school so we could spend tons of time working on plans that usually included insects and mud. Little did we know that a few years later we would be begging them to take notice of us but at that time the fun was to scare them.
To get to the clubhouse you had to climb an eight foot high wall, balance along the top for about 10 paces and then climb up the A framed roof of the garage. The roof was made of metal so when there was due or a rain it could be very slippery. There were more than a few times that we would slip and would be saved by the gutter at the bottom of the roof! Once you had navigated the ascent you then walked along the pinnacle of the roof to the edge and swung yourself over the edge lowering yourself down until hopefully your feet touched the hole in the wall. From there you would swing yourself into the "fort" which was the attic above the garage. I am still amazed that none of us ever fell the 20 feet onto the concrete below and even more surprised that our mothers even let us use the place, but it was a great place to hide!
So why am I wasting your time with this story. I think that it is a perfect summary of the market and how 2012 will play out. The pitfalls are enormous with everything from a collapse in Europe (falling 20 feet from the roof) to another global scare (slipping down the roof to the be saved by the gutter). It is wrought with pitfalls and the upside is limited. Undoubtedly there will be massive rallies that will be fleeting and these will be followed by sharp violent reversals. I would not be surprised by weeks of five plus percent moves in either direction all ending the year either where we started or lower.
Fear is still very much present and Europe is more than likely already in a recession. Any more slips and it will destroy what little the United States has achieved in the way of a recovery. Interest rates will remain low and may even continue to contract and it is looking more and more likely that the United States congress will be stuck in no-mans land unable to make any decisions that have a lasting benefit to society.
Not a happy environment to end the year but all of us should give thanks that we missed the mess this year and that we are well positioned for next year. Remove the stress, stay in cash and enjoy 2012. All the best for the holiday season and the New Year.
Friday, December 23, 2011
Friday, December 16, 2011
The Dollar Breaks Out
"It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo. It kind of makes you a little bit suspicious." - Congressman Gary Ackerman
The above quote was said by Congressman Ackerman after Chrysler, Ford and General Motors executives went to capital hill with hat in hand to ask for a $25 billion bail out. While that in itself was not an issue at the time the problem was that they all showed up in their private jets!
Watching the dollar break out to the upside is similar in nature. The United States economy is hardly robust but when compared to the mess in Europe it looks like a great place to invest. The chart below shows how the dollar has recently surged to the upside and has broken through resistance. A longer tailed chart would show that it recently broke through its 50 week moving average for the first time since mid 2010 a significant achievement.
So what does all this mean to you and me? Well the first thing to realize is that a strong dollar normally points to a strong economy. This is not the case and this is troubling. In order for an economy to cure its ills it is normal for that country's currency to weaken thereby strengthening the export and local economy. The reason the local economy strengthens is that imports become more expensive making locally produced goods more affordable and with the added push of increased exports the economy recovers. This is a very basic analysis but for the purposes of this blog that will suffice.
As the dollar still remains the global currency of choice most commodities are traded in dollars. A strong dollar therefore makes the price of the underlying commodity weaken as it becomes more expensive in global terms thereby reducing demand for the commodity and forcing the price lower. A look at the chart below shows how the price of crude oil has recently rolled over (for those of you who read my last blog this will not be a surprise). A lower price of crude should result in a benefit to the United States economy as crude oil is one of the main drivers of inflation. Contain the price of crude and you have a good chance of containing the inflation rate.
Looking further it appears that the inflation and fear trade in terms of gold purchases has wained as depicted by the chart below. While gold serves as a gauge of fear it is also considered to be a hedge against inflation. Based on this chart and the one above it appears that the market is not anticipating inflation any time soon.
Typically in the situation as described above you would start to see a recovery in the United States however I do not believe that this is happening. Certainly all the pieces of the puzzle are there to ignite a recovery. You have low interest rates and limited chance of inflation in the near term as unemployment is high and there is masses of factory capacity. However the weakness in the United States persists due to a poor housing market that shows no sign of recovery for at least the next 12 months, a weak employment market, high levels of debt and a fragile global market. All a strengthening dollar is pointing to is that the United States is less weak than Europe not that it is recovering. In fact a strong dollar could be the final straw that breaks the back of the meager recovery that is in place.
The stock market is looking weak and any more poor news from Europe or China could derail that train in no time at all. Certainly not a place to be at present. Stay on the sidelines and if you must go into the market head for the large cap dividend players as they have the capacity to weather the impending storm. Furthermore with yields as low as they are (and I believe that they will remain low for far longer than anyone can imagine) you need to start to accept that your "safe" money will not earn anything north of one percent unless you are prepared to step outside the box. A number of you have turned to the fixed rate deposit investment that I have been touting for a year now but for those of you still thinking about it compare the rates at www.fixedratedeposits.com with what you can receive elsewhere and I think you will be very pleased at what you find.
The above quote was said by Congressman Ackerman after Chrysler, Ford and General Motors executives went to capital hill with hat in hand to ask for a $25 billion bail out. While that in itself was not an issue at the time the problem was that they all showed up in their private jets!
Watching the dollar break out to the upside is similar in nature. The United States economy is hardly robust but when compared to the mess in Europe it looks like a great place to invest. The chart below shows how the dollar has recently surged to the upside and has broken through resistance. A longer tailed chart would show that it recently broke through its 50 week moving average for the first time since mid 2010 a significant achievement.
So what does all this mean to you and me? Well the first thing to realize is that a strong dollar normally points to a strong economy. This is not the case and this is troubling. In order for an economy to cure its ills it is normal for that country's currency to weaken thereby strengthening the export and local economy. The reason the local economy strengthens is that imports become more expensive making locally produced goods more affordable and with the added push of increased exports the economy recovers. This is a very basic analysis but for the purposes of this blog that will suffice.
As the dollar still remains the global currency of choice most commodities are traded in dollars. A strong dollar therefore makes the price of the underlying commodity weaken as it becomes more expensive in global terms thereby reducing demand for the commodity and forcing the price lower. A look at the chart below shows how the price of crude oil has recently rolled over (for those of you who read my last blog this will not be a surprise). A lower price of crude should result in a benefit to the United States economy as crude oil is one of the main drivers of inflation. Contain the price of crude and you have a good chance of containing the inflation rate.
Looking further it appears that the inflation and fear trade in terms of gold purchases has wained as depicted by the chart below. While gold serves as a gauge of fear it is also considered to be a hedge against inflation. Based on this chart and the one above it appears that the market is not anticipating inflation any time soon.
Typically in the situation as described above you would start to see a recovery in the United States however I do not believe that this is happening. Certainly all the pieces of the puzzle are there to ignite a recovery. You have low interest rates and limited chance of inflation in the near term as unemployment is high and there is masses of factory capacity. However the weakness in the United States persists due to a poor housing market that shows no sign of recovery for at least the next 12 months, a weak employment market, high levels of debt and a fragile global market. All a strengthening dollar is pointing to is that the United States is less weak than Europe not that it is recovering. In fact a strong dollar could be the final straw that breaks the back of the meager recovery that is in place.
The stock market is looking weak and any more poor news from Europe or China could derail that train in no time at all. Certainly not a place to be at present. Stay on the sidelines and if you must go into the market head for the large cap dividend players as they have the capacity to weather the impending storm. Furthermore with yields as low as they are (and I believe that they will remain low for far longer than anyone can imagine) you need to start to accept that your "safe" money will not earn anything north of one percent unless you are prepared to step outside the box. A number of you have turned to the fixed rate deposit investment that I have been touting for a year now but for those of you still thinking about it compare the rates at www.fixedratedeposits.com with what you can receive elsewhere and I think you will be very pleased at what you find.
Friday, December 9, 2011
Oil Prices - Where To From Here
"Behind every great fortune there is a crime." - Honore de Balzac
If ever there is a commodity that has its fair share or more of crimes it must be oil. For the last few months oil prices have been spiralling higher from a low of around $74 a barrel in October to over $100 a barrel earlier this month. As such it is time to have another look at the commodity that shapes much of the global economy and has a great impact on global growth.
Sometimes I have the misfortune of tuning in to a news cast of the day's market activities and I always have a laugh when I hear the analysts crowing over how high the price of oil has moved that day, or week, or for the year. It is as if the upward movement in price is a good thing. Well in all likelihood it is a good thing for the trader if he is long the position. It is also a great thing if you are an oil producing nation, but what of the majority of countries that are oil importers? Furthermore is this not a massive sign of impending inflation?
The problem with oil prices is that they are based on very poor data. On the one side of the equation is the supply of oil. How much oil is there available and how easily is it accessible? These two questions are almost impossible to answer as most of the oil lies in fields that are governed by notoriously shady characters in parts of the world that are mired in violence and corruption. Furthermore as technology advances and techniques for extraction improve, places that were once considered inaccessible are suddenly viable and wells that were thought to be dry can now be re-drilled and provide additional supply. Finally it is never known exactly how much oil can be extracted from a given well even when the total supply is fairly well known. Some wells dry up well before they were supposed to while others continue to produce for years after they were supposed to be depleted. Adding all of this up to determine supply and adding to that an estimate of unfound reserves means that the amount of oil remaining is unknown.
The second problem is that while the oil may be accessible, it can be disrupted by a war or a coup. As very little of the oil comes from economies that are considered "stable" in western eyes, there is a fear premium attached to the price of oil.
On the supply side things are a little more quantifiable. A good and growing world economy would drain the supply of oil faster leading to an increase in the price of oil, however as the price creeps up so do the incentives to producing fuel efficient vehicles, machinery and equipment. This can create a situation where less oil is used even while the economy expands.
So why in this poor of an economy is the price of oil going up so fast and does this point to inflation and an expanding economy? With new fields being tapped in Brazil and others coming online in Canada and the United States it appears that there is more than sufficient supply to handle the current economy. Furthermore it is my opinion that with the technological advances in extraction and seismology that we will find massive oil fields dotted all around the world that will become accessible. It is also my contention that as the world turns "green" that consumers in developed economies will start to rely more and more on alternative energy sources and move away from the toxicity associated with oil burning options. So that leaves the developing world.
To the developing world the cheapest option is the most viable. That said the price of oil is rapidly becoming uncomfortably high again so I believe these economies will start to feel the pinch of high oil prices and will begin to reduce their consumption. Furthermore the current state of the global economy does not warrant the current price of oil and these price levels will start to affect growth as more and more money of an already strapped consumer is swallowed up by the oil monsters. As such the global economy will not be able to continue to support these price levels.
Looking forward I believe that the current price levels are unsustainable and are set to fall. Weak global fundamentals and a burgeoning supply of oil from places like Brazil will put a lid on this move and will stave off any concerns that these price levels will start to move inflation. On the flip side of this, if prices remain elevated for much longer then you will start to see a ratcheting down on economic growth rates as consumer spending will be impacted and company profits will become squeezed.
Oil companies have been a recent benefactor from the rise in the price of oil however their rise has not been in line with the price of oil as the share prices are under performing the commodity move. Furthermore the chart of oil company stocks is looking decidedly weak. So while this group of stocks has aided the stock market rise it signals a level of distrust for the recent commodity price rise. Going forward if the price of oil falls to a more manageable level these benefactors will be levelled and will put a drag on the stock market advance.
If ever there is a commodity that has its fair share or more of crimes it must be oil. For the last few months oil prices have been spiralling higher from a low of around $74 a barrel in October to over $100 a barrel earlier this month. As such it is time to have another look at the commodity that shapes much of the global economy and has a great impact on global growth.
Sometimes I have the misfortune of tuning in to a news cast of the day's market activities and I always have a laugh when I hear the analysts crowing over how high the price of oil has moved that day, or week, or for the year. It is as if the upward movement in price is a good thing. Well in all likelihood it is a good thing for the trader if he is long the position. It is also a great thing if you are an oil producing nation, but what of the majority of countries that are oil importers? Furthermore is this not a massive sign of impending inflation?
The problem with oil prices is that they are based on very poor data. On the one side of the equation is the supply of oil. How much oil is there available and how easily is it accessible? These two questions are almost impossible to answer as most of the oil lies in fields that are governed by notoriously shady characters in parts of the world that are mired in violence and corruption. Furthermore as technology advances and techniques for extraction improve, places that were once considered inaccessible are suddenly viable and wells that were thought to be dry can now be re-drilled and provide additional supply. Finally it is never known exactly how much oil can be extracted from a given well even when the total supply is fairly well known. Some wells dry up well before they were supposed to while others continue to produce for years after they were supposed to be depleted. Adding all of this up to determine supply and adding to that an estimate of unfound reserves means that the amount of oil remaining is unknown.
The second problem is that while the oil may be accessible, it can be disrupted by a war or a coup. As very little of the oil comes from economies that are considered "stable" in western eyes, there is a fear premium attached to the price of oil.
On the supply side things are a little more quantifiable. A good and growing world economy would drain the supply of oil faster leading to an increase in the price of oil, however as the price creeps up so do the incentives to producing fuel efficient vehicles, machinery and equipment. This can create a situation where less oil is used even while the economy expands.
So why in this poor of an economy is the price of oil going up so fast and does this point to inflation and an expanding economy? With new fields being tapped in Brazil and others coming online in Canada and the United States it appears that there is more than sufficient supply to handle the current economy. Furthermore it is my opinion that with the technological advances in extraction and seismology that we will find massive oil fields dotted all around the world that will become accessible. It is also my contention that as the world turns "green" that consumers in developed economies will start to rely more and more on alternative energy sources and move away from the toxicity associated with oil burning options. So that leaves the developing world.
To the developing world the cheapest option is the most viable. That said the price of oil is rapidly becoming uncomfortably high again so I believe these economies will start to feel the pinch of high oil prices and will begin to reduce their consumption. Furthermore the current state of the global economy does not warrant the current price of oil and these price levels will start to affect growth as more and more money of an already strapped consumer is swallowed up by the oil monsters. As such the global economy will not be able to continue to support these price levels.
Looking forward I believe that the current price levels are unsustainable and are set to fall. Weak global fundamentals and a burgeoning supply of oil from places like Brazil will put a lid on this move and will stave off any concerns that these price levels will start to move inflation. On the flip side of this, if prices remain elevated for much longer then you will start to see a ratcheting down on economic growth rates as consumer spending will be impacted and company profits will become squeezed.
Oil companies have been a recent benefactor from the rise in the price of oil however their rise has not been in line with the price of oil as the share prices are under performing the commodity move. Furthermore the chart of oil company stocks is looking decidedly weak. So while this group of stocks has aided the stock market rise it signals a level of distrust for the recent commodity price rise. Going forward if the price of oil falls to a more manageable level these benefactors will be levelled and will put a drag on the stock market advance.
Wednesday, November 30, 2011
Inequality Hurts
"For a greedy man even his tomb is too small." - Tajikistani Proverb
Ask any 9 year old and they will tell you the secret to winning. Stack your team with all the best players and then take on a weak team and crush them. It is obvious. Getting ahead in business is similar. Find an opportunity and fill it quickly. Once there draw up the gates, build protective walls and attack any competitors. Once you have forged a secure environment protected by legions of attorneys and scores of patents squeeze the life out of your employees so that the few at the top can reap all the rewards for their investment risk.
In a normal society those are basically the rules to the game and so long as you obey the rules of the law you have the opportunity to make a fortune. On paper this is fine, but in the real world most entrepreneurs reap a decent amount of reward and form the middle class. A few manage to break that mould and become the super wealthy while the majority of the population struggle to make ends meet. This inequality is normally healthy but as the spread between the haves and the have nots widens problems start to occur.
As with any business operating in a healthy economy the weaknesses in the company are hidden and the personalities of the owners are manageable until the proverbial fan starts to sling mud around the room. In society when things start to go wrong the divide opens up like a festering wound and society becomes restless. In severe cases riots break out and governments can be toppled. New regimes come in and with one swoop extract from those that have and give to those that supported their uprising. These lucky few then start the cycle again. Greed is a terrible thing to waste!
At present the divide between the rich and the rest is as wide as it has been since the great depression. There has been a slow creep since 1980 and has been covered over by the middle class taking on more and more debt to keep up with the Jones'. As the fat lady has finally stopped singing and this class of society is being squeezed the divide has increased. Over $650 billion has shifted from the middle class to the rich. The problem is this - societies that have a large divide suffer from weak recoveries and large economic slowdowns as the buffer of a large middle class is removed.
Furthermore the problem is exacerbated in political circles as deadlock ensues leading to lame duck sessions with no progress just when leadership is needed. As there is no resolution or guidance from the top people lose faith in their leaders and start to point fingers. A loss of confidence ensues and a generation of non-believers is born that forever shuns the markets. After the great depression it took the Dow Jones Industrial Average until 1954 to achieve its highs of 1929. A quarter of a century to recover.
When I look at the problems that face the world and see the lack of trust and the divide growing every day, it is clear to me that regardless of how much propaganda Wall Street dishes out via the media it is not enough to repair the damage that the past decade has inflicted on the average person. So even though the market rallies here and there I am still convinced that we are just setting up for a very poor outcome but hopefully one that levels the playing field for the next generation to enjoy.
Ask any 9 year old and they will tell you the secret to winning. Stack your team with all the best players and then take on a weak team and crush them. It is obvious. Getting ahead in business is similar. Find an opportunity and fill it quickly. Once there draw up the gates, build protective walls and attack any competitors. Once you have forged a secure environment protected by legions of attorneys and scores of patents squeeze the life out of your employees so that the few at the top can reap all the rewards for their investment risk.
In a normal society those are basically the rules to the game and so long as you obey the rules of the law you have the opportunity to make a fortune. On paper this is fine, but in the real world most entrepreneurs reap a decent amount of reward and form the middle class. A few manage to break that mould and become the super wealthy while the majority of the population struggle to make ends meet. This inequality is normally healthy but as the spread between the haves and the have nots widens problems start to occur.
As with any business operating in a healthy economy the weaknesses in the company are hidden and the personalities of the owners are manageable until the proverbial fan starts to sling mud around the room. In society when things start to go wrong the divide opens up like a festering wound and society becomes restless. In severe cases riots break out and governments can be toppled. New regimes come in and with one swoop extract from those that have and give to those that supported their uprising. These lucky few then start the cycle again. Greed is a terrible thing to waste!
At present the divide between the rich and the rest is as wide as it has been since the great depression. There has been a slow creep since 1980 and has been covered over by the middle class taking on more and more debt to keep up with the Jones'. As the fat lady has finally stopped singing and this class of society is being squeezed the divide has increased. Over $650 billion has shifted from the middle class to the rich. The problem is this - societies that have a large divide suffer from weak recoveries and large economic slowdowns as the buffer of a large middle class is removed.
Furthermore the problem is exacerbated in political circles as deadlock ensues leading to lame duck sessions with no progress just when leadership is needed. As there is no resolution or guidance from the top people lose faith in their leaders and start to point fingers. A loss of confidence ensues and a generation of non-believers is born that forever shuns the markets. After the great depression it took the Dow Jones Industrial Average until 1954 to achieve its highs of 1929. A quarter of a century to recover.
When I look at the problems that face the world and see the lack of trust and the divide growing every day, it is clear to me that regardless of how much propaganda Wall Street dishes out via the media it is not enough to repair the damage that the past decade has inflicted on the average person. So even though the market rallies here and there I am still convinced that we are just setting up for a very poor outcome but hopefully one that levels the playing field for the next generation to enjoy.
Friday, November 18, 2011
A Change Can Go A Long Way
"Know thyself." - Gnothi Seuton
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
Friday, November 11, 2011
The World Needs A Leader
"I can calculate the motion of heavenly bodies, but not the madness of people." - Sir Isaac Newton
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
Friday, November 4, 2011
Why Are We So Enamored With The Stock Market?
"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffet
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
Thursday, October 27, 2011
A Step In The Right Direction
"Hell there are no rules here - we're trying to accomplish something." - Thomas A. Edison
Today the euro zone came out with some good news. The plan is to shore up the financial conditions by increasing the euro zone bailout fund to $1.4 trillion, recapitalize the banks and increase Greece's haircut to 50 percent. While the details are far from being complete this is a great step towards curing the ills of Europe and the markets in Europe have responded with rallies of more than 4 percent.
In the United States third quarter gross domestic product (GDP) increased 2.5 percent. This is the largest increase since the third quarter of last year. All of this news has the stock market up more than 3 percent for the day. Further good news is that all sectors contributed to the GDP growth; personal consumption rose, residential construction was up and exports increased. All in all good news all around.
So is the end of the poor economy in sight? Certainly if things keep improving this fast then you would have to say we are at the beginning of the about turn. The issue is that there is still a long way to go before we can actually say with confidence that the trend is favorable. Housing is still a major drag on the global recovery, unemployment is still far too high and the euro zone still has a long way to go to vote these measures in to effect, but it is a step in the right direction.
A further caution is that if this bailout package appears to be too small (and there is more than a small chance that it is) then this relief rally will turn nasty in a hurry. If it turns out that sufficient funds have been allocated then the rally should continue but we will only know that in the months ahead. As such, if you are a gambler you can take a pick at a direction, but many a portfolio has been undone with an incorrect guess.
I suggest that you stick to your knitting and wait for there to be more concrete signs that things have stabilized before going all in as after all this patience, to jump the gun too early would undermine all of our work to date.
Today the euro zone came out with some good news. The plan is to shore up the financial conditions by increasing the euro zone bailout fund to $1.4 trillion, recapitalize the banks and increase Greece's haircut to 50 percent. While the details are far from being complete this is a great step towards curing the ills of Europe and the markets in Europe have responded with rallies of more than 4 percent.
In the United States third quarter gross domestic product (GDP) increased 2.5 percent. This is the largest increase since the third quarter of last year. All of this news has the stock market up more than 3 percent for the day. Further good news is that all sectors contributed to the GDP growth; personal consumption rose, residential construction was up and exports increased. All in all good news all around.
So is the end of the poor economy in sight? Certainly if things keep improving this fast then you would have to say we are at the beginning of the about turn. The issue is that there is still a long way to go before we can actually say with confidence that the trend is favorable. Housing is still a major drag on the global recovery, unemployment is still far too high and the euro zone still has a long way to go to vote these measures in to effect, but it is a step in the right direction.
A further caution is that if this bailout package appears to be too small (and there is more than a small chance that it is) then this relief rally will turn nasty in a hurry. If it turns out that sufficient funds have been allocated then the rally should continue but we will only know that in the months ahead. As such, if you are a gambler you can take a pick at a direction, but many a portfolio has been undone with an incorrect guess.
I suggest that you stick to your knitting and wait for there to be more concrete signs that things have stabilized before going all in as after all this patience, to jump the gun too early would undermine all of our work to date.
Wednesday, October 19, 2011
Global Deflation - Is This Possible?
"Armaments, universal debt and planned obsolescence - those are the three pillars of western prosperity." - Aldous Huxley
I tend to agree with Aldous. In times of war government spending creates jobs and prosperity for those that are not in the trenches. For some that are in the trenches it is better than being at home unable to find a job and wondering why life has dealt you such a poor hand. A man needs to work for his soul more than anything. He needs a place to go, where he can feel wanted, needed and a part of something, whether it is fighting on the front line or working on Wall Street. A sense of purpose goes a long way to cultivating a positive attitude about the future. Those of you who follow this blog will know that I believe that a lot can be accomplished with positive consumer confidence.
Planned obsolesce is what technology thrives on. Think back just five years and try to remember what your cell phone could do. I am unsure if mine could even download emails let alone surf the web, play music, take pictures, give me directions, pay a bill, deposit a check, reserve an airline ticket and then be that ticket at check in, just to name a few. Technology creates obsolescence and this drives the consumer to upgrade and consume.
So with wars all over the globe and technology creating new products left and right plus a rapidly growing governmental debt burden we should be primed for inflation right? Not so fast. There are a number of people that think that deflation could be on its way and if they are correct then we are really looking at a long protracted problem.
In order to create inflation you need to have excessive demand over supply. Pumping money into an economy and lowering interest rates normally does the trick but the problem is that this works when other economies around the globe are growing and have a demand for your goods and services. The issue right now is that pumping money into the global pool is not working for two reasons; first there is no demand for the money no matter how cheap you make it, and second the bubbles that burst in the housing and the derivative markets were so large that the influx of cash is soaked up in a nano-second before reaching their intended targets.
With every government around the globe trying to resuscitate their economies at the same time the world is awash with cash. Furthermore the large companies of the globe are sitting on more than a trillion dollars. Pumping more money into the system is therefore having no effect. Those that can borrow do not need the money and those that desperately need the money are unable to get a loan. Consumers are trying to cut debt as fast as possible and are certainly not interested in adding more debt, so the Federal Reserve is pushing on a string.
Furthermore the recession is driving the prices of virtually everything down. Technology is one factor that is driving deflation but there are others. Amongst them is the continual depreciation in the price of housing and other assets. In addition, the lack of demand is forcing businesses to cut the price of thousands of items. Look no further than Walmart or all of the discount airfares and hotel prices that abound. The four stand-outs that are not getting cheaper are gas, food, health care and education. Of these I would expect that gas prices will start to drop as demand for oil drops. Food prices should continue to spiral higher as the world demand for food continues to outstrip supply and medical expenses will spiral higher as long as the government meddles. Education is similar to medical in that the government subsidies are creating a false market for these products and hence drive the prices higher, but these are the only three places where I can see sustained price growth.
Should we therefore be concerned that inflation is around the corner. For that to happen you require demand to exceed supply, therefore you need the consumer to buy more goods than are available. Think of what happens at Walmart and other stores on Black Thursday when prices are dropped to ridiculously low prices for one day just to drive traffic. It is madness and shows in real life what it is like to have demand exceed supply. In the real world however we have massive unused capacity at the factories around the world and there are million of unemployed workers looking for employment. Until these two data points start to dip it is hard to see how inflation can resurrect itself. You need consumers to buy goods but they are out of work and those that are working have seen their pay getting cut or are trying to whittle down their debt burden. Companies are not necessarily laying people off, but they are not hiring. In this environment I would expect to see increased productivity numbers as less workers produce more goods. So until there is a binge of hiring (which I do not see in the immediate future) we will be stuck in this quagmire.
In this environment consumers tend to save as buying assets is a losing proposition. Just look at Japan who has one of the highest savings rates in the world and who has been stuck in a deflationary environment for two decades. I would expect to see the US savings rate climb to a double digit number in the coming years and this will create a drag on economic growth for years to come. Furthermore, interest rates should remain low for years because until there is demand for the money being lent there is no reason for rates to increase. The incentive to borrow is that rates are low so take on debt, but when no-one wants to borrow rates can stay low for decades. Once again look at Japan which shows how this situation will be exacerbated by an increase in the savings rate.
Sluggish growth will not help the stock market and therefore I am firmly in the bear camp. That said there will always be rallies within a bear market so for you traders who can sniff out the next rally I wish you luck. For the rest of you I would continue to recommend that you sit in cash and start to get used to returns of three percent or less on your money.
I tend to agree with Aldous. In times of war government spending creates jobs and prosperity for those that are not in the trenches. For some that are in the trenches it is better than being at home unable to find a job and wondering why life has dealt you such a poor hand. A man needs to work for his soul more than anything. He needs a place to go, where he can feel wanted, needed and a part of something, whether it is fighting on the front line or working on Wall Street. A sense of purpose goes a long way to cultivating a positive attitude about the future. Those of you who follow this blog will know that I believe that a lot can be accomplished with positive consumer confidence.
Planned obsolesce is what technology thrives on. Think back just five years and try to remember what your cell phone could do. I am unsure if mine could even download emails let alone surf the web, play music, take pictures, give me directions, pay a bill, deposit a check, reserve an airline ticket and then be that ticket at check in, just to name a few. Technology creates obsolescence and this drives the consumer to upgrade and consume.
So with wars all over the globe and technology creating new products left and right plus a rapidly growing governmental debt burden we should be primed for inflation right? Not so fast. There are a number of people that think that deflation could be on its way and if they are correct then we are really looking at a long protracted problem.
In order to create inflation you need to have excessive demand over supply. Pumping money into an economy and lowering interest rates normally does the trick but the problem is that this works when other economies around the globe are growing and have a demand for your goods and services. The issue right now is that pumping money into the global pool is not working for two reasons; first there is no demand for the money no matter how cheap you make it, and second the bubbles that burst in the housing and the derivative markets were so large that the influx of cash is soaked up in a nano-second before reaching their intended targets.
With every government around the globe trying to resuscitate their economies at the same time the world is awash with cash. Furthermore the large companies of the globe are sitting on more than a trillion dollars. Pumping more money into the system is therefore having no effect. Those that can borrow do not need the money and those that desperately need the money are unable to get a loan. Consumers are trying to cut debt as fast as possible and are certainly not interested in adding more debt, so the Federal Reserve is pushing on a string.
Furthermore the recession is driving the prices of virtually everything down. Technology is one factor that is driving deflation but there are others. Amongst them is the continual depreciation in the price of housing and other assets. In addition, the lack of demand is forcing businesses to cut the price of thousands of items. Look no further than Walmart or all of the discount airfares and hotel prices that abound. The four stand-outs that are not getting cheaper are gas, food, health care and education. Of these I would expect that gas prices will start to drop as demand for oil drops. Food prices should continue to spiral higher as the world demand for food continues to outstrip supply and medical expenses will spiral higher as long as the government meddles. Education is similar to medical in that the government subsidies are creating a false market for these products and hence drive the prices higher, but these are the only three places where I can see sustained price growth.
Should we therefore be concerned that inflation is around the corner. For that to happen you require demand to exceed supply, therefore you need the consumer to buy more goods than are available. Think of what happens at Walmart and other stores on Black Thursday when prices are dropped to ridiculously low prices for one day just to drive traffic. It is madness and shows in real life what it is like to have demand exceed supply. In the real world however we have massive unused capacity at the factories around the world and there are million of unemployed workers looking for employment. Until these two data points start to dip it is hard to see how inflation can resurrect itself. You need consumers to buy goods but they are out of work and those that are working have seen their pay getting cut or are trying to whittle down their debt burden. Companies are not necessarily laying people off, but they are not hiring. In this environment I would expect to see increased productivity numbers as less workers produce more goods. So until there is a binge of hiring (which I do not see in the immediate future) we will be stuck in this quagmire.
In this environment consumers tend to save as buying assets is a losing proposition. Just look at Japan who has one of the highest savings rates in the world and who has been stuck in a deflationary environment for two decades. I would expect to see the US savings rate climb to a double digit number in the coming years and this will create a drag on economic growth for years to come. Furthermore, interest rates should remain low for years because until there is demand for the money being lent there is no reason for rates to increase. The incentive to borrow is that rates are low so take on debt, but when no-one wants to borrow rates can stay low for decades. Once again look at Japan which shows how this situation will be exacerbated by an increase in the savings rate.
Sluggish growth will not help the stock market and therefore I am firmly in the bear camp. That said there will always be rallies within a bear market so for you traders who can sniff out the next rally I wish you luck. For the rest of you I would continue to recommend that you sit in cash and start to get used to returns of three percent or less on your money.
Friday, October 14, 2011
The Great Stock Recovery - Or Not?
"You can fool all the people all the time if the advertising is right and the budget is big enough." - Joseph E. Levine
Let me start this blog by saying that I am not a perma-bear (a person that is constantly negative on the stock market), I am just giving you the best advice I can based on my overall economic outlook. Let me also say that this blog or quote is not about Apple stock or its products both of which I believe are overly priced stocks and gadgets that have been hyped by an exceptionally brilliant salesman.
No, I am referring to the market which has just rallied more than 10 percent in less than two weeks. Many are talking about this as the beginning of the next bull market but I would caution you to remain on the sidelines. In dissecting the stock market movements that have occurred during the previous decades it is clear that the market has averaged returns north of 7 percent a year. This number is often touted by unseasoned professionals and financial planners as the reason to invest in a portfolio of stocks. The return is higher than those of the bond market or most other investments the argument goes, so it is imperative to hold stocks (and a large portion of them) in your portfolio. Not only should you buy them but no matter what the outlook you should remain in stocks as you can never time the market and the average return will even out over the long-term.
My beef with this argument is that the long-term is often longer than any of us have left in our lifetimes. This average return has been averaged over roughly 100 years! I am sure I do not have that long left on this planet and if I do then my son will have his hands full in supporting me! No, most of us have a horizon of 10 to 20 years at most, so I would argue that you need to look at returns over those periods of time. Taking these parameters the landscape changes in an instant. Stocks have not moved at all since 2000 and in fact are well below that peak and have provided a negative compound annual rate of return of (0.5) percent. Going back another 10 years (1990 to 2000) and suddenly you are rewarded for being in stocks with compound annual returns of over 13 percent for that decade. Taking the two decades together and your total return falls to just over 6 percent or below the general trend.
So buy stocks now and be rewarded over the next 10 years? To answer that question we have to look at what drives stock returns. Returns to stocks are highly correlated to the increased earnings that companies enjoy as the economy expands. Looking back at the 1980s through to 2000 the US economy benefited from years of overspending by the US consumer whose savings rate dropped from 12 percent to 1 percent. Furthermore household debt increased from 65 percent of disposable after tax income to 135 percent. Added to this was low interest rates, easy money loans and many other exuberance's that were unsustainable. It was just a matter of time until the party was over and it is now over. These excesses are going to take a long time to unwind driving down economic growth and therefore company profits. I expect that the current economic environment will last at least another five years if not a decade therefore I conclude that the stock market will produce returns close to zero or even negative returns during that time frame. Assuming no return for the next decade takes the average return in the market for the 30 year period down to 3.85 percent. Certainly not something to crow over.
I would argue that rather than risk your money in a volatile stock market that is producing no returns but which has the propensity to nose dive at a given notice that you should exit stocks for an extended period and start to realize that a return of three to four percent on your money is the new "normal". At least for the next decade it is. If you then factor in the real probability that there may be global deflation coming your real rate of return on an investment yielding 3 percent could be as high as 6 percent. No-one would sniff at that now would they? (In my next blog I will look into the reasons that deflation is still an impending problem and how it will affect your investment outlook for years to come.)
In these poor economic times and until the global economy gives signs of stability I believe that you should exit stock positions and look to invest the proceeds in income bearing investments. If you must own stocks then look to large cap dividend plays as these companies will be able to sustain an extended downturn far more safely than smaller companies. Don't get me wrong, I believe that there will be plenty of companies that make a lot of money in this environment and innovators will succeed as always, but outside of these exceptions stocks are not a good place to be invested at present. Furthermore I would argue that finding a safe return of 3 percent will be looked upon as an excellent investment in the coming years.
Let me start this blog by saying that I am not a perma-bear (a person that is constantly negative on the stock market), I am just giving you the best advice I can based on my overall economic outlook. Let me also say that this blog or quote is not about Apple stock or its products both of which I believe are overly priced stocks and gadgets that have been hyped by an exceptionally brilliant salesman.
No, I am referring to the market which has just rallied more than 10 percent in less than two weeks. Many are talking about this as the beginning of the next bull market but I would caution you to remain on the sidelines. In dissecting the stock market movements that have occurred during the previous decades it is clear that the market has averaged returns north of 7 percent a year. This number is often touted by unseasoned professionals and financial planners as the reason to invest in a portfolio of stocks. The return is higher than those of the bond market or most other investments the argument goes, so it is imperative to hold stocks (and a large portion of them) in your portfolio. Not only should you buy them but no matter what the outlook you should remain in stocks as you can never time the market and the average return will even out over the long-term.
My beef with this argument is that the long-term is often longer than any of us have left in our lifetimes. This average return has been averaged over roughly 100 years! I am sure I do not have that long left on this planet and if I do then my son will have his hands full in supporting me! No, most of us have a horizon of 10 to 20 years at most, so I would argue that you need to look at returns over those periods of time. Taking these parameters the landscape changes in an instant. Stocks have not moved at all since 2000 and in fact are well below that peak and have provided a negative compound annual rate of return of (0.5) percent. Going back another 10 years (1990 to 2000) and suddenly you are rewarded for being in stocks with compound annual returns of over 13 percent for that decade. Taking the two decades together and your total return falls to just over 6 percent or below the general trend.
So buy stocks now and be rewarded over the next 10 years? To answer that question we have to look at what drives stock returns. Returns to stocks are highly correlated to the increased earnings that companies enjoy as the economy expands. Looking back at the 1980s through to 2000 the US economy benefited from years of overspending by the US consumer whose savings rate dropped from 12 percent to 1 percent. Furthermore household debt increased from 65 percent of disposable after tax income to 135 percent. Added to this was low interest rates, easy money loans and many other exuberance's that were unsustainable. It was just a matter of time until the party was over and it is now over. These excesses are going to take a long time to unwind driving down economic growth and therefore company profits. I expect that the current economic environment will last at least another five years if not a decade therefore I conclude that the stock market will produce returns close to zero or even negative returns during that time frame. Assuming no return for the next decade takes the average return in the market for the 30 year period down to 3.85 percent. Certainly not something to crow over.
I would argue that rather than risk your money in a volatile stock market that is producing no returns but which has the propensity to nose dive at a given notice that you should exit stocks for an extended period and start to realize that a return of three to four percent on your money is the new "normal". At least for the next decade it is. If you then factor in the real probability that there may be global deflation coming your real rate of return on an investment yielding 3 percent could be as high as 6 percent. No-one would sniff at that now would they? (In my next blog I will look into the reasons that deflation is still an impending problem and how it will affect your investment outlook for years to come.)
In these poor economic times and until the global economy gives signs of stability I believe that you should exit stock positions and look to invest the proceeds in income bearing investments. If you must own stocks then look to large cap dividend plays as these companies will be able to sustain an extended downturn far more safely than smaller companies. Don't get me wrong, I believe that there will be plenty of companies that make a lot of money in this environment and innovators will succeed as always, but outside of these exceptions stocks are not a good place to be invested at present. Furthermore I would argue that finding a safe return of 3 percent will be looked upon as an excellent investment in the coming years.
Thursday, October 6, 2011
A Liquidity Trap?
"Putting somebody who is suffering from anorexia on a diet doesn't make a lot of sense to me." - Paul McCulley
A liquidity trap is loosely defined as a period in which the private sector delevers their balance sheet of debt or increases their savings rate at which time reducing interest rates has no effect on aggregate demand as there is no desire to accept more debt regardless of how cheap. During these periods the Keynesian economists believe that the only way out of this trap is to have the government shoulder more debt until such time as the private sector has cleaned itself up and is ready to start to grow again. In this argument, cutting government spending and stimulus during this period is suicide as this will lead to further contraction and exacerbate the problem.
The main example of how this worked in real life was back during the great depression era. The great depression ended in large part to WWII. The massive influx of spending from the government produced the stimulus needed to pull the economy out of its malaise. Furthermore the GI Bill helped millions of Americans returning from the war purchase a house and get retrained. In those times it was considered a privilege rather than a handout (as it would be today). Having been in combat myself I can assure you that it is a privilege that is deserved whereas right now it is definitely a handout.
At present there is a global call for governments around the world to delever their balance sheets and this could push the entire global economy over the edge. I must admit that to some extent I agree with this argument. Cutting government spending would mean cutting jobs and this would lead to an increased unemployment level reducing demand for goods and services even further. On the other hand having the government spend more money sends a chill down my spine. So why is that and what are the differences between then and now?
The difference between the government spending money on a war and spending money during peace time are significant. During a war you send away (or employ) thousands of people to fight, many of whom never come back. This contracts the workforce significantly. During WWII it resulted in there being a lack of employable men to run the factories so the women stepped into that roll. Furthermore the government spent money on factories and innovation, a direct stimulant to the economy that required immediate employment. The result was that after the war the boom continued and lasted for decades as the private sector stepped in to monetize the opportunities.
Today we see a government that is bent on spending but the use of the money is what is exasperating. To date we have spent more than $3 trillion to fix nothing. Had the government used that money to hire people to work factories and innovate rather than sink it into the hands of a few large failing banks and businesses we would have a different outlook. People would be back to work rather than collecting unemployment checks for 99 weeks. This would have the effect of turning our current pessimistic outlook into a positive outlook and we have all seen what happens when everyone believes in the future - the future is bright.
The current pessimism around the world is a factor of a poor economy AND a lack of leadership. If it were just a poor economy people would be of the mindset that the vacation this year may have to be cancelled. Adding in weak leadership and people start to think that not only will we not go on holiday this year but we will never go on holiday again. Furthermore they begin to question the government spending programs and start to call for austerity right at the time when we need the government to step up spending.
Do we still have time to fix this? I believe that we do, however I do not think it will happen until we have a leader that takes the helm and drives the ship away from the rocks towards which we are headed. At present we have the capacity to take on more debt. Due to the weakness around the globe every country is trying to weaken their currency. With everyone trying to weaken stimulating more should not create a capitulation in the dollar. The problem therefore is not that we are unable to print more money (like Greece) but that if we do we will not spend it in the correct manner.
Based on this it certainly appears that the economy will stagnate for a longer period than anyone is prepared to accept. My view is that at present we are locked into this malaise until the property market clears and that is looking like at least another five years if not longer. Low interest rates are here for the foreseeable future as well as there is no demand to borrow from the private sector. Furthermore inflation seems to be contained as there is such an output gap that further stimulus from the government should keep a lid on this for the foreseeable future. In addition the price of raw materials is falling as weak demand is starting to seep into those prices. For example oil is down more than 25% from its recent highs.
In this environment stocks will not perform well and there will be limited opportunities to make money on your investments in the traditional ways. Look to alternative investments and once you have found an opportunity make sure that you scrub it down thoroughly as often times the risks associated with the investment will far outweigh the potential rewards.
A liquidity trap is loosely defined as a period in which the private sector delevers their balance sheet of debt or increases their savings rate at which time reducing interest rates has no effect on aggregate demand as there is no desire to accept more debt regardless of how cheap. During these periods the Keynesian economists believe that the only way out of this trap is to have the government shoulder more debt until such time as the private sector has cleaned itself up and is ready to start to grow again. In this argument, cutting government spending and stimulus during this period is suicide as this will lead to further contraction and exacerbate the problem.
The main example of how this worked in real life was back during the great depression era. The great depression ended in large part to WWII. The massive influx of spending from the government produced the stimulus needed to pull the economy out of its malaise. Furthermore the GI Bill helped millions of Americans returning from the war purchase a house and get retrained. In those times it was considered a privilege rather than a handout (as it would be today). Having been in combat myself I can assure you that it is a privilege that is deserved whereas right now it is definitely a handout.
At present there is a global call for governments around the world to delever their balance sheets and this could push the entire global economy over the edge. I must admit that to some extent I agree with this argument. Cutting government spending would mean cutting jobs and this would lead to an increased unemployment level reducing demand for goods and services even further. On the other hand having the government spend more money sends a chill down my spine. So why is that and what are the differences between then and now?
The difference between the government spending money on a war and spending money during peace time are significant. During a war you send away (or employ) thousands of people to fight, many of whom never come back. This contracts the workforce significantly. During WWII it resulted in there being a lack of employable men to run the factories so the women stepped into that roll. Furthermore the government spent money on factories and innovation, a direct stimulant to the economy that required immediate employment. The result was that after the war the boom continued and lasted for decades as the private sector stepped in to monetize the opportunities.
Today we see a government that is bent on spending but the use of the money is what is exasperating. To date we have spent more than $3 trillion to fix nothing. Had the government used that money to hire people to work factories and innovate rather than sink it into the hands of a few large failing banks and businesses we would have a different outlook. People would be back to work rather than collecting unemployment checks for 99 weeks. This would have the effect of turning our current pessimistic outlook into a positive outlook and we have all seen what happens when everyone believes in the future - the future is bright.
The current pessimism around the world is a factor of a poor economy AND a lack of leadership. If it were just a poor economy people would be of the mindset that the vacation this year may have to be cancelled. Adding in weak leadership and people start to think that not only will we not go on holiday this year but we will never go on holiday again. Furthermore they begin to question the government spending programs and start to call for austerity right at the time when we need the government to step up spending.
Do we still have time to fix this? I believe that we do, however I do not think it will happen until we have a leader that takes the helm and drives the ship away from the rocks towards which we are headed. At present we have the capacity to take on more debt. Due to the weakness around the globe every country is trying to weaken their currency. With everyone trying to weaken stimulating more should not create a capitulation in the dollar. The problem therefore is not that we are unable to print more money (like Greece) but that if we do we will not spend it in the correct manner.
Based on this it certainly appears that the economy will stagnate for a longer period than anyone is prepared to accept. My view is that at present we are locked into this malaise until the property market clears and that is looking like at least another five years if not longer. Low interest rates are here for the foreseeable future as well as there is no demand to borrow from the private sector. Furthermore inflation seems to be contained as there is such an output gap that further stimulus from the government should keep a lid on this for the foreseeable future. In addition the price of raw materials is falling as weak demand is starting to seep into those prices. For example oil is down more than 25% from its recent highs.
In this environment stocks will not perform well and there will be limited opportunities to make money on your investments in the traditional ways. Look to alternative investments and once you have found an opportunity make sure that you scrub it down thoroughly as often times the risks associated with the investment will far outweigh the potential rewards.
Thursday, September 29, 2011
The Power of Compounding
"The safe way to double your money is to fold it over once and put it in your pocket." - Frank Hubbard
I know that this is a subject that most of you understand but most of us tend to forget how powerful it is over the long run. I spend a lot of my time chatting to investors about how to maximize their investment returns and it simply boils down to maintaining a consistent positive return year after year.
When I talk about consistent I am referring of course to small amounts of volatility. Volatility is fine if you are trading but it can be murder on returns. Selling at the lows and buying at the highs is the most common mistake made by pretty much all investors. Eliminating this from your portfolio will produce far better returns. If you could cut the losers from your portfolio and let the winners run I am sure you will agree that you would be in a far better financial position.
Now this is not easy to do for a number of reasons but the most prevalent reason of them all is that people get emotionally involved with their investments. After months of research you buy into a position just as the market turns and you are instantly in a losing position. You double down and it falls lower so you buy more. Down it goes again. Now your pride is hurt and you want to get even but the more you buy the lower it goes so the trade now turns to a long term hold. There is no way that you will sell now that your pride has been called into question. Rather sit on the position for eternity until it at least comes back to where you purchased it so that you can proudly tell everyone that you did not take a loss.
This is where you have thrown all thoughts of compounded annual rates of return out of the window. The way to true wealth is through compounding but by dragging along a loser for years you have immediately dropped your total rate of return and thereby reduced the compounding effect on your overall portfolio. Rather take the loss early and look to get in when the position is a lot lower or reinvest the proceeds into something that is working than have the drag on the portfolio.
Furthermore the psychological impact can be immense. First off there is the negativity that can impact your social life and secondly it can have a negative impact on your next trade. If the next trade does not go well then you can end up losing confidence and this can destroy a person's trading career. I do not say this lightly as it has ended many a career on the trading floor.
As a brief recap on compounding, the table below shows you the impact that just 3 percent can have on a portfolio of $1 million:
Compound annual rate of return at 5% for 10 years = $1,283,359
Compound annual rate of return at 8% for 10 years = $1,489,846
The difference after 10 years is over $200,000. This is not insignificant. If you increase the time frame to 20 years the difference balloons to $2,214,162. That is real money and therefore you should pay strict attention to all the investments in your portfolio to ensure that they are providing you a few extra percentage points of return as this can mean the difference between a happy retirement and one that is a struggle.
The last issue with this is that normally it takes a lot more risk to get those few percentage points than it is worth however one place that you can look is your cash deposits. These create a huge drag on a portfolio as they are currently earning nothing. Find a place that can provide you 2 or even 3 percent on this cash like fixed rate deposits and this will provide your entire portfolio the boost that it needs to get you to retirement sooner rather than never.
I know that this is a subject that most of you understand but most of us tend to forget how powerful it is over the long run. I spend a lot of my time chatting to investors about how to maximize their investment returns and it simply boils down to maintaining a consistent positive return year after year.
When I talk about consistent I am referring of course to small amounts of volatility. Volatility is fine if you are trading but it can be murder on returns. Selling at the lows and buying at the highs is the most common mistake made by pretty much all investors. Eliminating this from your portfolio will produce far better returns. If you could cut the losers from your portfolio and let the winners run I am sure you will agree that you would be in a far better financial position.
Now this is not easy to do for a number of reasons but the most prevalent reason of them all is that people get emotionally involved with their investments. After months of research you buy into a position just as the market turns and you are instantly in a losing position. You double down and it falls lower so you buy more. Down it goes again. Now your pride is hurt and you want to get even but the more you buy the lower it goes so the trade now turns to a long term hold. There is no way that you will sell now that your pride has been called into question. Rather sit on the position for eternity until it at least comes back to where you purchased it so that you can proudly tell everyone that you did not take a loss.
This is where you have thrown all thoughts of compounded annual rates of return out of the window. The way to true wealth is through compounding but by dragging along a loser for years you have immediately dropped your total rate of return and thereby reduced the compounding effect on your overall portfolio. Rather take the loss early and look to get in when the position is a lot lower or reinvest the proceeds into something that is working than have the drag on the portfolio.
Furthermore the psychological impact can be immense. First off there is the negativity that can impact your social life and secondly it can have a negative impact on your next trade. If the next trade does not go well then you can end up losing confidence and this can destroy a person's trading career. I do not say this lightly as it has ended many a career on the trading floor.
As a brief recap on compounding, the table below shows you the impact that just 3 percent can have on a portfolio of $1 million:
Compound annual rate of return at 5% for 10 years = $1,283,359
Compound annual rate of return at 8% for 10 years = $1,489,846
The difference after 10 years is over $200,000. This is not insignificant. If you increase the time frame to 20 years the difference balloons to $2,214,162. That is real money and therefore you should pay strict attention to all the investments in your portfolio to ensure that they are providing you a few extra percentage points of return as this can mean the difference between a happy retirement and one that is a struggle.
The last issue with this is that normally it takes a lot more risk to get those few percentage points than it is worth however one place that you can look is your cash deposits. These create a huge drag on a portfolio as they are currently earning nothing. Find a place that can provide you 2 or even 3 percent on this cash like fixed rate deposits and this will provide your entire portfolio the boost that it needs to get you to retirement sooner rather than never.
Tuesday, September 20, 2011
QE3?
"Enjoy when you can, and endure when you must." - Johann Wolfgang von Goethe
Europe is a mess. Italy has just been downgraded and Greece will default at any moment. The stock market, the only beneficiary of the Federal Reserve's quantitative easing, is struggling and the fear around the world has pushed gold to new highs. Every investment conference I go to touts gold and gold mining stocks. A bubble is starting to form in the space. Don't get me wrong it is still a long way from a bubble but it is coming. I would still load up on the gold mining stocks as the market has not yet priced in the gold price move but I doubt that this will be a long-term hold but rather a short-term trade.
The Federal Reserve is currently meeting. They have extended the meeting an extra day to make sure that everything that needs to be discussed is discussed. They have a lot to talk about and I believe that a lot of what will be said will be about another round of quantitative easing.
It is clear that the stock market needs the juice provided by the Federal Reserve to operate. Take the stimulus away and it is all over for the stock market. The housing market continues to drag and the shadow inventory will begin to show up in the very near future forcing prices even lower. The government entities are holding almost 1 million houses in inventory. They need to unwind these but there is no market for them. Add to this the number held by the banks and it is easy to see why the price of housing has nowhere to go but down.
With all of these issues and the problems in Europe, the Federal Reserve has no option but to continue to print money. They are already adding to the Eurodollar reserves. Even though I believe that the policy is flawed they are too deep into it to stop now. The questions are how large is the stimulus going to be and when will it happen? I believe that they will announce round three at the close of the meeting this week and that it will be a large amount. The reason for this is that this is really one of the last opportunities that they have without bringing into question their neutrality.
Already there is a lot of mud slinging going on in congress and President Obama has recently unveiled a tax hike aimed at the rich. Jobs and a balanced budget are front and center in the political debates and the Federal Reserve cannot be seen to support either side. Delaying the inevitable will create a situation that drags the Federal Reserve into the political spotlight. It cannot afford this if it is to remain intact. Already there is a high level of distrust of their policies and the politicians are eager to find somewhere to place the blame. What easier target than the Federal Reserve.
Therefore I believe that if we are to see some new easing it will be in the very near future and could easily be tomorrow. As such if you are a gambling man you could take a swing that it happens tomorrow and go long the market as if the announcement happens there should be a good upside pop. On the flip side I believe that the market is starting to price in another round of easing and if it does not happen you could be in for a huge decline. A safe way to play this is to buy options on the market. If you straddle the market with a put and a call option at the money then you could benefit no matter which direction the market goes. All you need is a big move and I believe that one is coming.
As this is a short-term trade I would not go all in on this but would limit your risk by moving the bulk of your investments into cash if you have not already done it. Look to alternate investments options and if you are at a loss as to what those may be contact me and I will point you in the right direction.
Europe is a mess. Italy has just been downgraded and Greece will default at any moment. The stock market, the only beneficiary of the Federal Reserve's quantitative easing, is struggling and the fear around the world has pushed gold to new highs. Every investment conference I go to touts gold and gold mining stocks. A bubble is starting to form in the space. Don't get me wrong it is still a long way from a bubble but it is coming. I would still load up on the gold mining stocks as the market has not yet priced in the gold price move but I doubt that this will be a long-term hold but rather a short-term trade.
The Federal Reserve is currently meeting. They have extended the meeting an extra day to make sure that everything that needs to be discussed is discussed. They have a lot to talk about and I believe that a lot of what will be said will be about another round of quantitative easing.
It is clear that the stock market needs the juice provided by the Federal Reserve to operate. Take the stimulus away and it is all over for the stock market. The housing market continues to drag and the shadow inventory will begin to show up in the very near future forcing prices even lower. The government entities are holding almost 1 million houses in inventory. They need to unwind these but there is no market for them. Add to this the number held by the banks and it is easy to see why the price of housing has nowhere to go but down.
With all of these issues and the problems in Europe, the Federal Reserve has no option but to continue to print money. They are already adding to the Eurodollar reserves. Even though I believe that the policy is flawed they are too deep into it to stop now. The questions are how large is the stimulus going to be and when will it happen? I believe that they will announce round three at the close of the meeting this week and that it will be a large amount. The reason for this is that this is really one of the last opportunities that they have without bringing into question their neutrality.
Already there is a lot of mud slinging going on in congress and President Obama has recently unveiled a tax hike aimed at the rich. Jobs and a balanced budget are front and center in the political debates and the Federal Reserve cannot be seen to support either side. Delaying the inevitable will create a situation that drags the Federal Reserve into the political spotlight. It cannot afford this if it is to remain intact. Already there is a high level of distrust of their policies and the politicians are eager to find somewhere to place the blame. What easier target than the Federal Reserve.
Therefore I believe that if we are to see some new easing it will be in the very near future and could easily be tomorrow. As such if you are a gambling man you could take a swing that it happens tomorrow and go long the market as if the announcement happens there should be a good upside pop. On the flip side I believe that the market is starting to price in another round of easing and if it does not happen you could be in for a huge decline. A safe way to play this is to buy options on the market. If you straddle the market with a put and a call option at the money then you could benefit no matter which direction the market goes. All you need is a big move and I believe that one is coming.
As this is a short-term trade I would not go all in on this but would limit your risk by moving the bulk of your investments into cash if you have not already done it. Look to alternate investments options and if you are at a loss as to what those may be contact me and I will point you in the right direction.
Monday, September 12, 2011
Investing versus Trading
"Business is the art of extracting money from another man's pocket without resorting to violence." - Max Amsterdam
This week's blog is very near and dear to my heart. When I began in this business over 20 years ago I was an investor through and through. The only way to invest was through hard work. Start with a detailed analysis of a company, drill down into the numbers to find hidden value, interview management to make sure that nothing was missed and if the stock was still cheap relative to the results from my analysis then I would load up on the position. If the stock dropped lower I would confidently add to my position and then wait patiently for the rest of the market to discover my hidden gem and take it to my target price. Once there I would offload.
Of course I would keenly await the quarterly reports and raise or lower my expectations based on management comments and the reported numbers and guidance. I would hold positions for months if not years and normally I would be rewarded for my effort. Time, effort and patience were virtues and a formal education in analysis was important. Do your apprenticeship with a financial consulting firm or one of the major investment banks and you had a ticket to riches.
This all changed with the NASDAQ bubble and the advent of massive computer power. I clearly remember during the NASDAQ bubble in 1999 a technical trader friend of mine asking which positions I held. After our discussion he took five minutes to evaluate each of these technically and purchased a few of the names on their "breakout". He proceeded to buy more and more as the stocks moved higher and then exited near the top for a massive profit. I was amazed that anyone could base millions of dollars on a technical chart.
Over the years since I have become a keen advocate of technical analysis mainly because the market has changed so much that it almost makes financial analysis worthless. Certainly there is a place for financial analysis but it is more and more likely to be found in private equity funds than in Wall Street hedge funds. Traders have taken over the market and seek to gain an edge not by superior financial analysis but through superior speed and cheaper price of execution of a trade.
Traders seeking an edge try to sit right next to the market (literally) to get a millisecond advantage over the competition that is sitting a thousand miles away. This is all that they need. Company stocks are unknown only tickers are relevant and price to earnings ratios are replaced with stock price momentum. This is why you have situations where high priced stocks just keep on going while lower priced stocks do not move.
This is all very good and well but it has turned Wall Street into a glorified casino. The authorities are turning a blind eye to all of this as they are all making money. The average daily volume of stocks traded has almost quadrupled over the past decade while the market value of the Standard and Poors 500 (the largest 500 companies listed on the United States stock markets) has not moved. Money is being made by charging a fee for each share traded. Meanwhile investors are not being rewarded for this greed and are in reality the chicken fodder. Give us your money so we can pay ourselves fees and you can receive a negative return on your money.
This has to stop and is going to end badly. While everyone is making money no-one will turn their attention to these market practices. The downside is that just as the computers are pushing prices higher, at some point when the market bursts they will drive prices lower and in a hurry. At this point Congress will look into the problem but by then it will be too late. Thousands of investors will have lost their shirts but this time hopefully Wall Street will be made to pay.
Protect yourself by moving out of the market and looking for opportunities elsewhere. For those of you with a conservative edge I would advise that you take a long hard look at your overall portfolio and try to find a decent yield in a low yield environment. As I mentioned to a friend of mine the other day, it is better to get out now and protect against a 50% retracement than to try to catch a 10% increase in the market. Things are skewed to the downside so look to exit and wait patiently for the bottom. It will come and you will be rewarded, just like the old days.
This week's blog is very near and dear to my heart. When I began in this business over 20 years ago I was an investor through and through. The only way to invest was through hard work. Start with a detailed analysis of a company, drill down into the numbers to find hidden value, interview management to make sure that nothing was missed and if the stock was still cheap relative to the results from my analysis then I would load up on the position. If the stock dropped lower I would confidently add to my position and then wait patiently for the rest of the market to discover my hidden gem and take it to my target price. Once there I would offload.
Of course I would keenly await the quarterly reports and raise or lower my expectations based on management comments and the reported numbers and guidance. I would hold positions for months if not years and normally I would be rewarded for my effort. Time, effort and patience were virtues and a formal education in analysis was important. Do your apprenticeship with a financial consulting firm or one of the major investment banks and you had a ticket to riches.
This all changed with the NASDAQ bubble and the advent of massive computer power. I clearly remember during the NASDAQ bubble in 1999 a technical trader friend of mine asking which positions I held. After our discussion he took five minutes to evaluate each of these technically and purchased a few of the names on their "breakout". He proceeded to buy more and more as the stocks moved higher and then exited near the top for a massive profit. I was amazed that anyone could base millions of dollars on a technical chart.
Over the years since I have become a keen advocate of technical analysis mainly because the market has changed so much that it almost makes financial analysis worthless. Certainly there is a place for financial analysis but it is more and more likely to be found in private equity funds than in Wall Street hedge funds. Traders have taken over the market and seek to gain an edge not by superior financial analysis but through superior speed and cheaper price of execution of a trade.
Traders seeking an edge try to sit right next to the market (literally) to get a millisecond advantage over the competition that is sitting a thousand miles away. This is all that they need. Company stocks are unknown only tickers are relevant and price to earnings ratios are replaced with stock price momentum. This is why you have situations where high priced stocks just keep on going while lower priced stocks do not move.
This is all very good and well but it has turned Wall Street into a glorified casino. The authorities are turning a blind eye to all of this as they are all making money. The average daily volume of stocks traded has almost quadrupled over the past decade while the market value of the Standard and Poors 500 (the largest 500 companies listed on the United States stock markets) has not moved. Money is being made by charging a fee for each share traded. Meanwhile investors are not being rewarded for this greed and are in reality the chicken fodder. Give us your money so we can pay ourselves fees and you can receive a negative return on your money.
This has to stop and is going to end badly. While everyone is making money no-one will turn their attention to these market practices. The downside is that just as the computers are pushing prices higher, at some point when the market bursts they will drive prices lower and in a hurry. At this point Congress will look into the problem but by then it will be too late. Thousands of investors will have lost their shirts but this time hopefully Wall Street will be made to pay.
Protect yourself by moving out of the market and looking for opportunities elsewhere. For those of you with a conservative edge I would advise that you take a long hard look at your overall portfolio and try to find a decent yield in a low yield environment. As I mentioned to a friend of mine the other day, it is better to get out now and protect against a 50% retracement than to try to catch a 10% increase in the market. Things are skewed to the downside so look to exit and wait patiently for the bottom. It will come and you will be rewarded, just like the old days.
Thursday, September 1, 2011
Labor Day 2011
"Borrowed money shortens time." - Chinese proverb
Labor Day in the United States is September 4th this year. According to the knowledgeable people at Wikipedia "it became a federal holiday in 1894, when, following the deaths of a number of workers at the hands of the US military and US Marshalls during the Pullman Strike, President Grover Cleveland put reconciliation with the labor movement as a top political priority. Fearing further conflict, legislation making Labor Day a national holiday was rushed through Congress unanimously and signed into law a mere six days after the end of the strike."
To celebrate labor's day it would seem that labor should again strike, walk on the government and demand that Congress implement policies that create jobs for the needy rather than the fat cats in bank high rises. Unemployment is terribly weak after years of stimulus and this week second quarter productivity was revised down by the largest drop since the fourth quarter of 2008. For those of you with short-term memories, the fourth quarter of 2008 was the eye of the storm in terms of market weakness. Non-farm productivity was revised down to -0.7%. Yes that is correct it is negative! This has to lead to further layoffs in the near future. Not a great way to celebrate labor's day.
To add to the hurricanes battering the East coast it appears that the economy continues to be battered and the Federal Reserve has all but given up its fight. Mr. Bernanke finally admitted that the severity of the market ills is far worse than he ever anticipated and handed over the reigns to Congress when he stated that ".. most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." So let me get this straight; he spent trillions of dollars with no reward other than an overpriced stock market and now he walks away and says it is all Congresses fault? Don't get me wrong, I agree with him to a large degree, but what about mopping up the mess that he created with all the additional debt that we are now burdened with? That is the problem with this country at present, there is no leader willing to take up the helm and drive the ship into the storm. We can only run on this course for so long until either the storm catches us or we crash into rocks.
Let's turn to the Congressional Budget Office (CBO). The CBO is entrusted with estimating the growth of the economy and thereby expected tax revenues, surpluses, deficits and the like. Based on their expectations Congress makes its plans for the future of the country. Well the CBO expects that growth will be at 2.3% for the year. Considering that this number has already been ratcheted down a number of times and considering that we only grew at 1.4% for the first half of the year, there is absolutely no way that they are remotely close to being correct in their forecast. Furthermore they predict a 2.7% growth rate for 2012. It is my contention that 2012 will be the beginning of a recession and that the budget deficit will balloon just at the time when we need it to contract.
With Mr. Bernanke handing the reins over to Congress to make the right decisions (become austere) and with Congress relying on the inflated numbers from the CBO it looks like the hurricane will catch up to us before we reach the rocks! The Chinese who have lent us a significant amount of money have summed it up in the proverb at the beginning of this blog: "Borrowed money shortens time." I have said it before and I will say it again, get out of the market while it has sent you a life raft in the form of a weak bounce and harbor your cash into something safe for an extended period. Do not get sucked back into the market for at least the next 12 months.
To end this blog I am attaching a link that was provided to me by a friend. it is very clever and funny, particularly if you have spent any time in the mid-west like I did many years ago. Enjoy.
Labor Day in the United States is September 4th this year. According to the knowledgeable people at Wikipedia "it became a federal holiday in 1894, when, following the deaths of a number of workers at the hands of the US military and US Marshalls during the Pullman Strike, President Grover Cleveland put reconciliation with the labor movement as a top political priority. Fearing further conflict, legislation making Labor Day a national holiday was rushed through Congress unanimously and signed into law a mere six days after the end of the strike."
To celebrate labor's day it would seem that labor should again strike, walk on the government and demand that Congress implement policies that create jobs for the needy rather than the fat cats in bank high rises. Unemployment is terribly weak after years of stimulus and this week second quarter productivity was revised down by the largest drop since the fourth quarter of 2008. For those of you with short-term memories, the fourth quarter of 2008 was the eye of the storm in terms of market weakness. Non-farm productivity was revised down to -0.7%. Yes that is correct it is negative! This has to lead to further layoffs in the near future. Not a great way to celebrate labor's day.
To add to the hurricanes battering the East coast it appears that the economy continues to be battered and the Federal Reserve has all but given up its fight. Mr. Bernanke finally admitted that the severity of the market ills is far worse than he ever anticipated and handed over the reigns to Congress when he stated that ".. most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." So let me get this straight; he spent trillions of dollars with no reward other than an overpriced stock market and now he walks away and says it is all Congresses fault? Don't get me wrong, I agree with him to a large degree, but what about mopping up the mess that he created with all the additional debt that we are now burdened with? That is the problem with this country at present, there is no leader willing to take up the helm and drive the ship into the storm. We can only run on this course for so long until either the storm catches us or we crash into rocks.
Let's turn to the Congressional Budget Office (CBO). The CBO is entrusted with estimating the growth of the economy and thereby expected tax revenues, surpluses, deficits and the like. Based on their expectations Congress makes its plans for the future of the country. Well the CBO expects that growth will be at 2.3% for the year. Considering that this number has already been ratcheted down a number of times and considering that we only grew at 1.4% for the first half of the year, there is absolutely no way that they are remotely close to being correct in their forecast. Furthermore they predict a 2.7% growth rate for 2012. It is my contention that 2012 will be the beginning of a recession and that the budget deficit will balloon just at the time when we need it to contract.
With Mr. Bernanke handing the reins over to Congress to make the right decisions (become austere) and with Congress relying on the inflated numbers from the CBO it looks like the hurricane will catch up to us before we reach the rocks! The Chinese who have lent us a significant amount of money have summed it up in the proverb at the beginning of this blog: "Borrowed money shortens time." I have said it before and I will say it again, get out of the market while it has sent you a life raft in the form of a weak bounce and harbor your cash into something safe for an extended period. Do not get sucked back into the market for at least the next 12 months.
To end this blog I am attaching a link that was provided to me by a friend. it is very clever and funny, particularly if you have spent any time in the mid-west like I did many years ago. Enjoy.
Wednesday, August 24, 2011
Recession Deux
"Prediction is very difficult, especially about the future." - Niels Bohr
It seems relatively clear to me that we are now entering another recession. I have named it Recession Deux as I believe it to be a double dip recession rather than a new recession altogether. We never truly recovered from the recession of 2008 and all indicators are pointing to us falling into part two of the Great Recession as some people have named it.
A recession does not normally end without some form of stability or growth in the housing market. Most of the population in the United States relies on housing as their main investment and retirement fund. In fact according to the federal government 50 percent of typical home-owning family wealth is tied to their real estate investments. As a market housing was valued at over $18 trillion as of the first quarter of 2011. However this does not tell the whole story. Housing as an industry accounts for about 27 percent of investment spending and 5 percent of overall economic activity in the United States annually.
Looking at housing data points to continued economic weakness. New home sales decreased for the third consecutive month. Furthermore existing home sales fell to 4.67 million homes in July. This is the second straight month of sales declines and the National Association of Realtors blamed the number of contracts that were cancelled as the source of the weakness. Sales cancellations point to a couple of areas of weakness: it is still difficult to find a lender willing to lend against housing; appraisals are coming in lower than the negotiated price of the house sale creating an additional problem with financing; and, with housing prices continuing to fall buyers are reconsidering buying. Until the inventory of distressed housing is cleared continued economic weakness will ensue. Considering that the lack of sales has pushed inventory levels to 9.4 months of supply the highest point since November 2010, it is unlikely that there is any economic recovery in the works.
In fact when you consider that the Federal Reserve has pushed over $3 trillion of stimulus into the economy and there is little to show for their actions it is easy to see why the weak recovery is turning to Recession Deux.
It seems relatively clear to me that we are now entering another recession. I have named it Recession Deux as I believe it to be a double dip recession rather than a new recession altogether. We never truly recovered from the recession of 2008 and all indicators are pointing to us falling into part two of the Great Recession as some people have named it.
A recession does not normally end without some form of stability or growth in the housing market. Most of the population in the United States relies on housing as their main investment and retirement fund. In fact according to the federal government 50 percent of typical home-owning family wealth is tied to their real estate investments. As a market housing was valued at over $18 trillion as of the first quarter of 2011. However this does not tell the whole story. Housing as an industry accounts for about 27 percent of investment spending and 5 percent of overall economic activity in the United States annually.
Looking at housing data points to continued economic weakness. New home sales decreased for the third consecutive month. Furthermore existing home sales fell to 4.67 million homes in July. This is the second straight month of sales declines and the National Association of Realtors blamed the number of contracts that were cancelled as the source of the weakness. Sales cancellations point to a couple of areas of weakness: it is still difficult to find a lender willing to lend against housing; appraisals are coming in lower than the negotiated price of the house sale creating an additional problem with financing; and, with housing prices continuing to fall buyers are reconsidering buying. Until the inventory of distressed housing is cleared continued economic weakness will ensue. Considering that the lack of sales has pushed inventory levels to 9.4 months of supply the highest point since November 2010, it is unlikely that there is any economic recovery in the works.
In fact when you consider that the Federal Reserve has pushed over $3 trillion of stimulus into the economy and there is little to show for their actions it is easy to see why the weak recovery is turning to Recession Deux.
Tuesday, August 16, 2011
A Loss of Confidence
"What we anticipate seldom occurs; what we least expect generally happens." - Benjamin Disraeli
Economists are at a loss as to what causes a loss of confidence. One minute everyone is happy with the status quo and the next people turn tail and run for the hills. This is of particular concern given the precipice on which the global economy is balanced. Confidence is fickle and right now it hangs in the balance. This is of great concern when governments and companies need to roll over large amounts of short-term debt which is precisely what is required at present. As an example of the size of short-term debt that needs to be rolled over, the recent stress tests performed on 90 European banks showed that EU 5.4 trillion of debt needs to be rolled in the next 24 months.
While the number is huge, in good economic times this would not be a problem. The issue is that unless there is the confidence that this amount will be repaid the market for these securities disappears. To attract buyers for this debt there needs to be the confidence that the debt will be repaid in a timely manner otherwise the interest rate needs to reflect the risk associated with non-repayment. A lack of confidence therefore leads to a spike in the interest rate right at the time when companies and governments can ill afford it. If confidence collapses, lenders disappear and a crisis ensues.
So what makes up confidence? Well unless you are an accountant you base your outlook on the current business environment and your expectation of future events. People typically follow the consensus of opinion (that is why it is the consensus) so when things are good, everyone seems to expect the goods times to continue to roll (this is why economies overheat and bubbles are created). The same is true when things turn bad; people generally take a bleak look at the future (this is why it is so hard to turn an economy around during a downturn). The issue is how to determine the inflection point, the point at which people or businesses decide that enough is enough.
Certainly at present there is an air of despair. In poor economic times people rely on their leaders to step up to the plate. Governments and central bankers are paid to take steam out of the economy when it is overheated and apply the accelerator during economic hard times. A look over the last millennium shows that there have been some success, but overall the timing of the government intervention, the amount of the intervention and the direction of that intervention is questionable. Looking back just a decade brings into question why so much support was given to the technology front by Mr. Greenspan and then why so much attention was placed on supporting the stock market collapse. This support in turn lead to the housing bubble and on and on it goes. Certainly it is very questionable as to the effectiveness of our leaders ability to support and control economic activity and it is doubtful that the current policies will be effective in solving the problems that we now face.
That aside the issue right now is one of a deteriorating level of confidence in our current administration and the governments of most of the first world economies. Given that the population of the globe is reliant on them to return the global economy to a more normal state it is very concerning to see their floundering in the eye of the storm. To the average man on the street the lack of quantifiable benefits from all of the trillions of dollars spent around the globe is feeding into their outlook. Unfortunately it is up to the politicians to correct this and looking at the lack of leaders prepared to do anything of substance (which may jeopardize their political careers) is sickening.
The downgrade of America's sovereign debt in and of itself is of little consequence, but it could be the tipping point that pushes the first domino leading to another major crisis. Only time will tell, but the lack of consumer and business confidence around the world comes at a very inopportune time and points at best towards another recession in the making and at worst a global crisis that few have ever witnessed.
Economists are at a loss as to what causes a loss of confidence. One minute everyone is happy with the status quo and the next people turn tail and run for the hills. This is of particular concern given the precipice on which the global economy is balanced. Confidence is fickle and right now it hangs in the balance. This is of great concern when governments and companies need to roll over large amounts of short-term debt which is precisely what is required at present. As an example of the size of short-term debt that needs to be rolled over, the recent stress tests performed on 90 European banks showed that EU 5.4 trillion of debt needs to be rolled in the next 24 months.
While the number is huge, in good economic times this would not be a problem. The issue is that unless there is the confidence that this amount will be repaid the market for these securities disappears. To attract buyers for this debt there needs to be the confidence that the debt will be repaid in a timely manner otherwise the interest rate needs to reflect the risk associated with non-repayment. A lack of confidence therefore leads to a spike in the interest rate right at the time when companies and governments can ill afford it. If confidence collapses, lenders disappear and a crisis ensues.
So what makes up confidence? Well unless you are an accountant you base your outlook on the current business environment and your expectation of future events. People typically follow the consensus of opinion (that is why it is the consensus) so when things are good, everyone seems to expect the goods times to continue to roll (this is why economies overheat and bubbles are created). The same is true when things turn bad; people generally take a bleak look at the future (this is why it is so hard to turn an economy around during a downturn). The issue is how to determine the inflection point, the point at which people or businesses decide that enough is enough.
Certainly at present there is an air of despair. In poor economic times people rely on their leaders to step up to the plate. Governments and central bankers are paid to take steam out of the economy when it is overheated and apply the accelerator during economic hard times. A look over the last millennium shows that there have been some success, but overall the timing of the government intervention, the amount of the intervention and the direction of that intervention is questionable. Looking back just a decade brings into question why so much support was given to the technology front by Mr. Greenspan and then why so much attention was placed on supporting the stock market collapse. This support in turn lead to the housing bubble and on and on it goes. Certainly it is very questionable as to the effectiveness of our leaders ability to support and control economic activity and it is doubtful that the current policies will be effective in solving the problems that we now face.
That aside the issue right now is one of a deteriorating level of confidence in our current administration and the governments of most of the first world economies. Given that the population of the globe is reliant on them to return the global economy to a more normal state it is very concerning to see their floundering in the eye of the storm. To the average man on the street the lack of quantifiable benefits from all of the trillions of dollars spent around the globe is feeding into their outlook. Unfortunately it is up to the politicians to correct this and looking at the lack of leaders prepared to do anything of substance (which may jeopardize their political careers) is sickening.
The downgrade of America's sovereign debt in and of itself is of little consequence, but it could be the tipping point that pushes the first domino leading to another major crisis. Only time will tell, but the lack of consumer and business confidence around the world comes at a very inopportune time and points at best towards another recession in the making and at worst a global crisis that few have ever witnessed.
Monday, August 8, 2011
Buy the Dip?
"Wise men don't need advice. Fools won't take it." - Benjamin Franklin
After this last week and particularly after today there have been a number of people commenting that you should buy this "pullback". The reasons I have heard range from the educated traders who know that in the next few days that there should be a bounce as the market is really oversold and always bounces at some point; to the completely naive who have been trained by the pigs of Wall Street to believe that stocks are always a good place to be and that a "pullback" such as this offers a great buying opportunity. "After all (as one person I spoke to this weekend said) the United States is such a great nation that everyone has to invest in the United States stock markets." How ignorant can you be?
My view is that you should remain well away from the market. Sure there may be another attempt by the Federal Reserve to bolster stocks and sure with the White House up for grabs next year there will be a lot of time and effort spent trying to make something rally, the reality is that the global economy stinks and is continuing to rot from the inside out. Until this rotting is reversed and the corpse called the global economy can be brought back to life there is no reason to try to time the market for a short-term bounce.
The S&P downgrade of the United States credit rating is just the tip of the iceberg. Look at the remaining countries with AAA credit rating and you will see that they all could very easily be stripped of that rating in very short order. France and Germany have the burden of the rest of the Euro zone on their shoulders, the United Kingdom is struggling to contain its debt loads, Australia and New Zealand will be hit hard by the slowdown in China, Canada is linked by the hip to the United States and to be honest all of the remaining 10 nations are too small to make any difference to the global economy. A contagion of downgrades will lead to another round of stock market pullbacks. As debt becomes harder and more expensive to find earnings and growth around the world will suffer and the market will tank. It is not a hard equation to work out, but for some reason people still think that they should own stocks.
Cash is an investment, and while cash may not earn you anything at present it is better to hold onto what you have than to give away 20 percent or more of your portfolio specifically if the upside is only 10 percent and is marred with risk. If you are still adamant to be in the market as it is for the "long haul" then look to high yielding solid dividend plays, but to be honest the "long haul" may just be too long for most to bear.
A look at the Japanese market will give you an understanding that the market does not have to recover any time soon. The Nikkei index reached around 40,000 in December 1989. Subsequent to that it fell, bounced, fell, bounced and now 22 years later it is still below 10,000. Yes that is not a mistake, it is still down 75% from its high. Could the United States markets be in the throws of such a secular bear market? I believe that this is the case. Will there be bounces in the market? Yes but unless you are very nimble and trade the markets daily you will find better value in other asset classes. Even if I am wrong and somehow the economy changes and we go back to a solid economic footing, there will still be plenty of time to buy stocks and make money in the market during the next bull market. The problem is that bull market appears to be a long way off.
After this last week and particularly after today there have been a number of people commenting that you should buy this "pullback". The reasons I have heard range from the educated traders who know that in the next few days that there should be a bounce as the market is really oversold and always bounces at some point; to the completely naive who have been trained by the pigs of Wall Street to believe that stocks are always a good place to be and that a "pullback" such as this offers a great buying opportunity. "After all (as one person I spoke to this weekend said) the United States is such a great nation that everyone has to invest in the United States stock markets." How ignorant can you be?
My view is that you should remain well away from the market. Sure there may be another attempt by the Federal Reserve to bolster stocks and sure with the White House up for grabs next year there will be a lot of time and effort spent trying to make something rally, the reality is that the global economy stinks and is continuing to rot from the inside out. Until this rotting is reversed and the corpse called the global economy can be brought back to life there is no reason to try to time the market for a short-term bounce.
The S&P downgrade of the United States credit rating is just the tip of the iceberg. Look at the remaining countries with AAA credit rating and you will see that they all could very easily be stripped of that rating in very short order. France and Germany have the burden of the rest of the Euro zone on their shoulders, the United Kingdom is struggling to contain its debt loads, Australia and New Zealand will be hit hard by the slowdown in China, Canada is linked by the hip to the United States and to be honest all of the remaining 10 nations are too small to make any difference to the global economy. A contagion of downgrades will lead to another round of stock market pullbacks. As debt becomes harder and more expensive to find earnings and growth around the world will suffer and the market will tank. It is not a hard equation to work out, but for some reason people still think that they should own stocks.
Cash is an investment, and while cash may not earn you anything at present it is better to hold onto what you have than to give away 20 percent or more of your portfolio specifically if the upside is only 10 percent and is marred with risk. If you are still adamant to be in the market as it is for the "long haul" then look to high yielding solid dividend plays, but to be honest the "long haul" may just be too long for most to bear.
A look at the Japanese market will give you an understanding that the market does not have to recover any time soon. The Nikkei index reached around 40,000 in December 1989. Subsequent to that it fell, bounced, fell, bounced and now 22 years later it is still below 10,000. Yes that is not a mistake, it is still down 75% from its high. Could the United States markets be in the throws of such a secular bear market? I believe that this is the case. Will there be bounces in the market? Yes but unless you are very nimble and trade the markets daily you will find better value in other asset classes. Even if I am wrong and somehow the economy changes and we go back to a solid economic footing, there will still be plenty of time to buy stocks and make money in the market during the next bull market. The problem is that bull market appears to be a long way off.
Thursday, August 4, 2011
Images of Debt
"Calamity n. A more than commonly plain and unmistakable reminder that the affairs of this life are not of our own ordering." - Ambrose Bierce
Now I normally do not use other people's work or images to make my point but these are so powerful that I thought you would enjoy seeing them. Below each is a brief commentary. The point of the matter is that until this mountain of debt starts to shrink there is trouble ahead. Combine this with the massive load of sovereign debt in Europe and other parts of the world and you can understand why the chances of a global soft landing are minimal. Remember that these debt levels continue to rise each and every day. You can learn more about how and why this happened by reading Ellen Brown's "THE WEB OF DEBT".
One Hundred Dollars - $100
The most counterfeited money denomination in the world. Keeps the world moving.
Ten Thousand Dollars - $10,000
One Hundred Million Dollars - $100,000,000
Plenty to go around for everyone. Fits nicely on a standard sized pallet.
If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...but ~$700 billion - same amount the banks got during bailout.
Comparison of $1,000,000,000,000 dollars to a standard-sized American Football field and European Football field. Say hello to the Boeing 747-400 transcontinental airliner that's hiding on the right. This was until recently the biggest passenger plane in the world.
15 Trillion Dollars - 15,000,000,000,000
Unless the U.S. government fixes the budget, US national debt (credit bill) will top 15 trillion by Christmas 2011. The Statue of Liberty seems rather worried as United States national debt passes 20% of the entire world's combined GDP (Gross Domestic Product). In 2011 the National Debt will exceed 100% of GDP, and venture into the 100%+ debt-to-GDP ratio that the European PIIGS have (bankrupting nations).
114.5 Trillion Dollars - 114,500,000,000,000
This is the total US unfunded liabilities. To the right you can see the pillar of cold hard $100 bills that dwarfs the WTC & Empire State Building - both at one point world's tallest buildings. If you look carefully you can see the Statue of Liberty.
The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Programme, Social Security, Military and civil servant pensions. It is the money USA knows it will not have to pay all its bills.
The unfunded liability is calculated on current tax and funding inputs, and future demographic shifts in US Population.
With the market cratering around the world today it should be enough of an alert that you should be in cash or gold. Once again to protect your wealth for the next few years look to http://www.fixedratedeposits.com/ as a source of excellent rates on your short term cash investments.
Now I normally do not use other people's work or images to make my point but these are so powerful that I thought you would enjoy seeing them. Below each is a brief commentary. The point of the matter is that until this mountain of debt starts to shrink there is trouble ahead. Combine this with the massive load of sovereign debt in Europe and other parts of the world and you can understand why the chances of a global soft landing are minimal. Remember that these debt levels continue to rise each and every day. You can learn more about how and why this happened by reading Ellen Brown's "THE WEB OF DEBT".
One Hundred Dollars - $100
Ten Thousand Dollars - $10,000
Enough for a great vacation or to buy a used car. Approximately one year of work for the average human on earth.
One Million Dollars - $1,000,000
Not as big of a pile as you thought, huh? Still this is 92 years of work for the average human on earth.
One Billion Dollars $1,000,000,000
You will need some help when robbing the bank. Now we are getting serious!
One Trillion Dollars - $1,000,000,000,000
When the U.S government speaks about a 1.7 trillion deficit - this is the volumes of cash the U.S. Government borrowed in 2010 to run itself. Keep in mind it is double stacked pallets of $100 million dollars each, full of $100 dollar bills. You are going to need a lot of trucks to freight this around.
If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...but ~$700 billion - same amount the banks got during bailout.
15 Trillion Dollars - 15,000,000,000,000
114.5 Trillion Dollars - 114,500,000,000,000
The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Programme, Social Security, Military and civil servant pensions. It is the money USA knows it will not have to pay all its bills.
If you live in USA this is also your personal credit card bill; you are responsible along with everyone else to pay this back. The citizens of USA created the U.S. Government to serve them, this is what the U.S. Government has done while serving The People.
The unfunded liability is calculated on current tax and funding inputs, and future demographic shifts in US Population.
Note: On the above 114.5T image the size of the base of the money pile is half a trillion, not 1T as on 15T image. The height is double. This was done to reflect the base of Empire State and WTC more closely.
Source: Federal Reserve & www.USdebtclock.org - visit it to see the debt in real time and get a better grasp of this amazing number.
Wednesday, July 27, 2011
Smoke and Mirrors
"It isn't so much that hard times are coming; the change observed is mostly soft times going." - Groucho Marx
All eyes are on the United States debt ceiling debate. This is just smoke and mirrors. If anyone out there really thinks that the United States will not raise the debt ceiling in time to stave off a default then they must be from another planet. No United States congressman or senator would throw their political career in the toilet by forcing a default. It is not going to happen. Not yet anyway. Whether the compromise will be enough to calm the jitters of the market is another debate entirely but for now all this smoke is covering up the real problems scattered around the globe.
I have discussed Europe in my previous blogs, but it is becoming abundantly clear that the only way forward in Europe is a dramatic write-down of sovereign debt. This will cripple the German, French and Swiss banks and could set off another round of financial contagion. To be honest I do not see any other way out and the longer that the European leaders dither about the solution the more pronounced the fallout. To me this is a time bomb that will explode at the worst possible moment.
The next major issue is China. Growth there is slowing at an alarming pace and it appears that the real estate bubble in China has finally burst. Banks are now scrambling to remain solvent and this is feeding into the economy in general. There are reports that manufacturers are unable to fill orders as they cannot access the money previously promised from bank lines of credit. As China is or was the only bastion of hope in the globe this is big news. Watch out if it gets worse as those sovereign Chinese investments will need to be repatriated to help offset some of the problems on mainland China.
The United States stock market appears to be overvalued. I know that based on historic levels of price to earnings ratios it is low, but when you compare the current price to earnings ratio in a low interest rate environment, the valuation metric is actually high. A "normalizing" of the price to earnings ratio extrapolates to roughly 20 from the benign level being reported of 13 and this is worrisome. Particularly when you match this against the high levels of earnings.
Company earnings are extremely high. This is a factor of many things but two major causes of this are the unlocking of working capital as a result of slower growth and the low interest rate environment which is throwing billions of dollars down to company bottom lines. This is not sustainable and therefore I expect that going forward company earnings will slow dramatically. This will have the negative effect of increasing the current price to earnings ratio further and will show that the market is overvalued and due for a correction.
Another signal is that company insiders are selling stock of their own companies at an alarming rate. The latest report is that sellers outnumber buyers by 7,900 to one. Not surprisingly this is an all time high and does not bode well for the future. If anyone knows about the future of a company earnings and its prospects it is the insider.
The final issue for the market is that it is now being almost exclusively driven by the high frequency traders. These companies buy and sell millions of shares so fast that they are occurring our in cyberspace. Stocks cross so fast that the computers running the markets are unable to capture these trades which are therefore occurring unregistered in cyberspace. If and when all of these traders head in one direction watch out below. Combine this with weak underlying fundamentals as described above and you have a situation that could make the flash crash seem mild.
Economic weakness persists in the United States. It was recently reported that temporary employees are now at a higher percentage of total workers than during the great depression. A lot of this could be attributable to a change in the style of work but certainly not a statistic that points to strong consumer spending in the near term. Housing is stuck in the doldrums and recent changes to the laws have increased the number of strategic walkouts. These are people that decide not to keep the extra house or the investment property because it is a drain on cash flows so they just walk from the property and stop paying the bills even if they can manage to afford it. This strategy is effective in wiping out debt to the homeowner but will keep the price of properties depressed for years to come.
I am afraid that I do not see any silver lining at present and as such I cannot recommend investing anywhere else other than in cash or if you have the stomach for volatility then you can try gold or silver. Once in cash research my company on http://www.fixedratedeposits.com/ and earn a decent return on that cash while waiting for something to change for the better.
All eyes are on the United States debt ceiling debate. This is just smoke and mirrors. If anyone out there really thinks that the United States will not raise the debt ceiling in time to stave off a default then they must be from another planet. No United States congressman or senator would throw their political career in the toilet by forcing a default. It is not going to happen. Not yet anyway. Whether the compromise will be enough to calm the jitters of the market is another debate entirely but for now all this smoke is covering up the real problems scattered around the globe.
I have discussed Europe in my previous blogs, but it is becoming abundantly clear that the only way forward in Europe is a dramatic write-down of sovereign debt. This will cripple the German, French and Swiss banks and could set off another round of financial contagion. To be honest I do not see any other way out and the longer that the European leaders dither about the solution the more pronounced the fallout. To me this is a time bomb that will explode at the worst possible moment.
The next major issue is China. Growth there is slowing at an alarming pace and it appears that the real estate bubble in China has finally burst. Banks are now scrambling to remain solvent and this is feeding into the economy in general. There are reports that manufacturers are unable to fill orders as they cannot access the money previously promised from bank lines of credit. As China is or was the only bastion of hope in the globe this is big news. Watch out if it gets worse as those sovereign Chinese investments will need to be repatriated to help offset some of the problems on mainland China.
The United States stock market appears to be overvalued. I know that based on historic levels of price to earnings ratios it is low, but when you compare the current price to earnings ratio in a low interest rate environment, the valuation metric is actually high. A "normalizing" of the price to earnings ratio extrapolates to roughly 20 from the benign level being reported of 13 and this is worrisome. Particularly when you match this against the high levels of earnings.
Company earnings are extremely high. This is a factor of many things but two major causes of this are the unlocking of working capital as a result of slower growth and the low interest rate environment which is throwing billions of dollars down to company bottom lines. This is not sustainable and therefore I expect that going forward company earnings will slow dramatically. This will have the negative effect of increasing the current price to earnings ratio further and will show that the market is overvalued and due for a correction.
Another signal is that company insiders are selling stock of their own companies at an alarming rate. The latest report is that sellers outnumber buyers by 7,900 to one. Not surprisingly this is an all time high and does not bode well for the future. If anyone knows about the future of a company earnings and its prospects it is the insider.
The final issue for the market is that it is now being almost exclusively driven by the high frequency traders. These companies buy and sell millions of shares so fast that they are occurring our in cyberspace. Stocks cross so fast that the computers running the markets are unable to capture these trades which are therefore occurring unregistered in cyberspace. If and when all of these traders head in one direction watch out below. Combine this with weak underlying fundamentals as described above and you have a situation that could make the flash crash seem mild.
Economic weakness persists in the United States. It was recently reported that temporary employees are now at a higher percentage of total workers than during the great depression. A lot of this could be attributable to a change in the style of work but certainly not a statistic that points to strong consumer spending in the near term. Housing is stuck in the doldrums and recent changes to the laws have increased the number of strategic walkouts. These are people that decide not to keep the extra house or the investment property because it is a drain on cash flows so they just walk from the property and stop paying the bills even if they can manage to afford it. This strategy is effective in wiping out debt to the homeowner but will keep the price of properties depressed for years to come.
I am afraid that I do not see any silver lining at present and as such I cannot recommend investing anywhere else other than in cash or if you have the stomach for volatility then you can try gold or silver. Once in cash research my company on http://www.fixedratedeposits.com/ and earn a decent return on that cash while waiting for something to change for the better.
Thursday, July 14, 2011
Greece and the United States
It is my last day in London and then I am back to the sunny shores of San Diego. It has been a marvelous trip and I must say that my son now has the same love for London that I do. One day I look forward to bringing him back here to share in a few pints at my favorite pubs but for now I am just enjoying showing him all the magnificent historical sites that London has to offer.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
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