tag:blogger.com,1999:blog-83925085158533701002024-02-20T01:01:38.832-08:00Wealth ManagersWayne Strout is an Investment Manager and Economist in the York, PA area (Office in New Freedom, PA) Investment advisory services are by WS Wealth Managers, Inc., an investment adviser registered in Pennsylvania and Maryland. (See ADV for more info)Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.comBlogger113125tag:blogger.com,1999:blog-8392508515853370100.post-57499296295520037102020-04-17T10:17:00.002-07:002020-04-23T12:48:14.036-07:00Real Life Economic ResearchI<span style="font-family: "arial" , "helvetica" , sans-serif;"> have written in the past that Federal Reserve Quantitative Easing and other Federal stimulus has grossly distorted the "traditional" economic principles in place since the 1930's. It has led to artifically restrained interest rates which in turn has changed asset values and reported inflation. Coupled with what I call the "Great Globalisation" of manufacturing and services as well as the rise of Hedge Funds, the field of economic forecasting for investments and investors has forever and dramactically changed.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Now, in 2020, we have the added situation of a Global Pandemic and additional government actions wihout any historical precedent.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Any forecaster that claims to "know" the future with any reasonable certainty is a fool or a charlatan. We are now relegated to managing probabilities and risk acceptance. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As always, a exhaustive and continuous search in the economic news media and academic literature is important. But today, I assert that it is also critical to physically observe economic activity, in person. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Obviously, one cannot travel extensively globally or even nationally while maintaining "social distancing", but one can do so regionally. Traveling in one's personal vehicle on a regional basis, can provide valuable information from first hand, personal observations. Traffic levels, cars in parking lots, activity at recreational locations like parks and waterfronts. Interviews with places where people consider making large discretionary purchases--car dealers, marinas, yacht and aircraft brokers. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">During these uncertain times, it is important to assess some sort of probability distributions for asset price levels. I am engaged in that very activity and applying the knowledge gained toward intelligent investment advice and management of your portfolios.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Fortunately, Secretary Mnuchin has declared the Financial Service sector as "essential" so I am permitted to travel as long as social distancing guidelines are followed.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The recovery after the dramatic and global "Great Shutdown" will certainly be uneven.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The greatest casualty is probably the sit down restaurant business. Projections are that 75% of the businesses will be lost along with those employed. Great uncertainty exists as to the hotel and other parts of the travel industry as "at home" work and "video" conferencing is likely to grow. Massive unemployment in these sectors is likely and the effect on the economy will be large.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">People are likely to drive more in personal automobiles for "socially distanced" pleasure, but will be commuting to work less. Auto auctions are building used car inventory rapidly which will certainly lead to a glut in the used car market--falling prices will effect new car sales. There will likley be massive unemployment in the auto industry.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Despite a falling stock market, a large segment of the retired population hold significant wealth. Socially distanced family entertainment may drive and increase in RV and Yacht sales.</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Be skeptical of the present bump in stock prices. The market is dominated by institutional action reacting to Fed actions and massive stimulus. It has not yet factored in the almost certain unemployment drag on the economy.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Another underestimated issue is the probable cost cutting by state and local governments that cannot run deficits. They will have massive shortfalls and will cut employment as well as try to raise taxes--both will be a big drag on the economy,</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">On the other hand, be aware that central banks are printing money at a rate never before seen. There is no way that it will not lead to inflation. But, how that inflation shows up may be a surprise.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There is a significant probability that it will not appear in the price of necessities, but that it will appear in the price of assets. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For sure--its complicated!</span><br />
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<span style="font-family: arial, helvetica, sans-serif;">In a recent "field observation" I made for Baltimore, DC, Richmond, and Norfolk, I was shocked that road traffic was significantly higher than expected. Lunchtime lines are drive thru fast food restaurants were very long. Cars parked in strip center retail parking lots were much more numerous than expected.</span><br />
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<span style="font-family: arial, helvetica, sans-serif;">Given, the continuing number of new Covid cases, even after 4 weeks of shutdown, it is apparent that more people are working than reported, and many more people are "out and about". I suspect some are simply ignoring the stay at home orders...and..I also suspect that we are beginning to see a growing "black market" cash only, under the table, economy that is growing. </span><br />
<span style="font-family: arial, helvetica, sans-serif;"><br /></span>
<span style="font-family: arial, helvetica, sans-serif;">Interestingly though, there appears to be a wide variance in the level of "fear" as I noticed a large % of drivers, driving their cars with windows up and masks on....and many others walking about without a mask. </span><br />
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<span style="font-family: arial, helvetica, sans-serif;">The economic damage from the "stay at, shelter at home" orders has already plunged the country into a deep recession. It will surely snow ball to affect many industries--including local and state government employees. The only remaining question is the recession's duration and speed for recovery. </span><br />
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<span style="font-family: arial, helvetica, sans-serif;">I think the effects on autos, banking and commercial real estate will be far greater than expected. </span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-86106361634494507182019-08-07T07:59:00.000-07:002020-04-17T11:27:11.323-07:00Excess Capacity is the Cause of Economic Turmoil<span style="font-family: arial, helvetica, sans-serif;">It has been more than a year since my last post in 2018. Then, I warned of an increasing probability of a nasty stock market correction.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In January of 2018, the Dow Jones Industrial Average was at 26149. Today, it is essentially at, or slightly below that level. During the 19 months since January 2018, the Dow has seen a low of 23327 in December 2018 and a high of 27359 in July 2019---a nearly 15% change. And, the risk of a nasty stock market correction continues. (Even after the down turn in August, the Dow is still more than 10% above December 2018.)</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The problem stems from a gross misunderstanding of basic economics and history. Economists have known that increasing the money supply can stimulate economic demand. The important distinction here is the word "can" versus "will". Sometimes increasing the money supply (decreasing interest rates) does cause more borrowing and more consumption---assuming there is "pent up" demand that has been limited by higher interest rates AND limited by supply capacity. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So, IF economic activity has been limited by high interest rates and a limited supply, THEN lowering interest rates will cause borrowing for the purpose of increasing capacity.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">But, what happens if central banks lower interest rates when supply capacity is so excessive that nobody increases capacity? The answer---people borrow money for purposes that do not increase economic activity---they borrow money to 1) speculate in financial assets; or 2) borrow money to simply rearrange the capital structure of their enterprise; or 3) borrow money for activities for which there is no demand. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Without an increase in the money supply thru lower interest rates (or other ways of printing money) a situation with excess capacity results in deflation--falling prices. Central banks fear deflation more than inflation, so they tend to err on the side of too much stimulus vs too little.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">That is exactly what has been happening for years--but has accelerated since 2013. Speculation in financial assets has caused the Price/Earnings ratio of securities to increase. Corporations have borrowed money to buy back stock--reducing the number of shares outstanding resulting in higher Price/Earnings ratios of stocks. Governments have increased borrowing. Students have increased borrowing for education in areas where there is no demand. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">And, lower interest rates do have a cost. When central banks lower interest rates, they reduce the income from savings. The loss of this income reduces economic activity dramatically.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Here is the text of my economic commentary mailed to clients this month:</span><br />
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>Monetary Stimulus occurs when the money supply is
increased by the central bank. The central
bank lowers interest rates and generally this provides an incentive for
producers to borrow and invest, or for consumers to borrow and consume more. It
is the borrowing that increases the money supply. In addition, the central bank
can increase the money supply by literally depositing funds in banks thru a
process called quantitative easing. It has always been assumed that this monetary
stimulus is limited. Producers may not want to borrow and invest if there is
already too much productive capacity. And consumers may not wish to increase
their debt, or they are prevented from borrowing because they have reached
their credit limit. These limitations are illustrated by the metaphor: “The Fed
can’t push on a string”. So, increasing
the money supply may NOT actually stimulate the economy. <o:p></o:p></i></span></div>
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<br /></div>
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>The other reason central banks increase the money supply
is to fight against deflation. Economists
fear deflation for two reasons. Falling prices tend to cause consumers to
postpone purchases in anticipation of getting a lower price later. This tends
to cause an economic slowdown. Secondly,
falling prices make borrowing much less attractive as debt becomes relatively
more expensive to repay—and debtors default. Expanding the money supply can create
inflation, even in a shrinking economy and central banks have dubiously decided
inflation is better than deflation. <o:p></o:p></i></span></div>
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<i><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">Whether it is a need to stimulate the economy or
fight deflation---the underlying condition/s that create the need for stimulus is:
excess capacity; fear and uncertainty about the future, or both. In either case, monetary stimulus </span><b><u><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">often</span></u></b><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"> does not expand the economy---producers
do not invest in productive projects and consumers don’t consume much more. Consumers
save instead of spend. What does happen is interest rates fall or stay low and
the price of monetary assets increase to reflect the lower rate of return on money. This is exactly what has been going on since
2013—all over the world. Corporations are borrowing more, but not to increase
capacity—rather just to buy back stock.
The only consumer borrowing that has increased significantly is student
loans—many of which will never be repaid in full. <o:p></o:p></span></i></div>
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<i><span style="font-family: "arial" , sans-serif; font-size: 11pt;">Generally excess capacity is “cured” over a long
period. Older and/or less efficient operations are closed and eliminated.</span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"> </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;">And, increasing population generally increases
demand. </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"> </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;">This can take a long time.</span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"> </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;">Most of the excess capacity was built outside
of the US—that is why Europe and Japan are suffering the most. </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"> </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;">China is likely to experience even more pain
as they have increased capacity by historic proportions. </span><span style="font-family: "arial" , sans-serif; font-size: 11pt;"> </span></i></div>
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<i><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">When does this situation change? One thing that can occur is that central banks
reverse the stimulus for whatever reason---most often because they sense an
expanding economy and fear inflation.
This in fact happened in 2018 causing a dramatic stock market correction
in November-December. </span><span style="font-family: "arial" , sans-serif; font-size: 11.0pt;">Another is that the expanded money supply simply leads to rising
prices. People, especially businesses and governments simply become willing to
pay higher prices. Once prices begin to rise, interest rates tend to follow. <o:p></o:p></span></i></div>
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<br /></div>
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>Of
course, instead of inflation and interest rates rising, there could be a sharp
economic slowdown—most likely from a pattern of debt defaults. With the central banks having already used up
their ability to stimulate---there is little that can be done to reverse the
resulting economic decline. <o:p></o:p></i></span></div>
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>Given
that stock and bond prices are at historically high levels relative to their
earnings---either case: Inflation or Recession will probably lead to a substantial
decline in the price of many stocks and bonds.
Or, if not, there will be a very long period with historically low
returns on investments--economic stagnation like never before seen.<o:p></o:p></i></span></div>
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>If your
investing horizon is less than 20 years, this high risk requires a careful
assessment of your personal tolerance for risk. The very definition of risk is
an uncertain outcome. <b><u>The current situation has never existed before</u></b>.
Bad may never happen. But, bad may happen and you must evaluate whether you
wish to reduce the negative consequences for your personal situation.<o:p></o:p></i></span></div>
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<span style="font-family: "arial" , sans-serif; font-size: 11.0pt;"><i>My personal
advice for most clients: Do not over-react, but you should be more conservative
in your investments with larger holdings of assets that do not fluctuate until
this current uncertainty diminishes. And be prepared for this period of
uncertainty to last longer than most people think. Be what is called a “Careful
and Prudent Investor”. </i><o:p></o:p></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The future can never be predicted with absolute certainty. I highly recommend that you read my January 2018 post. I inferred that we are in a time like the 1920's. We are seeing all of the same kinds of "beggar thy neighbor" actions by governments around the world--increased tariffs and trade barriers, changes in currency valuations, arguments over trade and in China, the same kind of "totalitarian empire rising" issues that we saw in the late 1920's and throughout the 1930's with Japan and Germany. A crash like 1929 may not be in the cards---central banks are very unlikely to allow deflation--and it is highly unlikely there will be the type of military conflict we saw in WWII--but it is highly likely that we will be seeing a very uncomfortable and long period of "transition" as demand and supply return to a more balanced condition and we see the outcome or a more clear picture of China's military and economic rising. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">And, since central banks tend to err on the side of inflation, it is very possible that central banks may allow inflation to rise more than expected. In that case, they are likely to react swiftly by raising rates which will slow down demand and likely cause stock markets to fall for a time. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>(Keep in mind that when central banks stimulate by expanding the money supply--there is always inflation. In the latest round of stimulus, since 2009, the inflation has been in the price of stocks and bonds. What many fail to realize is that low interest rates mean that bond prices are "inflated". The inflation we saw in earlier periods was in good and services--consumption and hard assets like commodities, oil, copper, gold, art, collectibles, silver and real estate. The inflation we have seen since 2015 has been pretty much limited to financial assets like stocks and bonds. At some point, it is possible and even likely that "excess" holdings of stocks and bonds will be moved toward consumption and hard assets---the "old fashioned" inflation. This will likely result in dramatic drops in the prices of both stocks and bonds, with bonds no longer being the "safe" investment they have been historically.)</b></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;">So, whatever occurs, be prepared for above average fluctuation in investment market prices during this transition period. </span>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-39884179904478811252018-01-05T09:08:00.001-08:002018-01-05T09:20:10.379-08:00Bull Markets Come to an End--But WHEN??<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "arial" , "sans-serif"; font-size: 16.0pt; line-height: 115%;">Bull Markets Come to an End<o:p></o:p></span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 16.0pt; line-height: 115%;">When? </span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt; line-height: 115%;">The above chart illustrates some similarities between the
1920-1930 and 2008-2018 periods. Markets saw an approximate 40% correction in 1920-1921
(adjustments to aftermath of WW1) followed by an almost 8 year rise (driven by
new technologies of electricity, radio, and autos) with a brief period of
exuberance—then followed by a drop of more than 60%. <b><i>Nobody is predicting anything
close to the 1929 scenario</i></b>, but the 300%+ 8 year rise from 2009-2017
(driven by new technologies in oil/gas, internet and medical) has some
similarities to the 300%+ 8 year rise in 1921-1929. Often, such periods are
followed by a period of euphoria with rising prices----and then a nasty
correction. The only conclusion to be
drawn, is January 2018 appears to be a time with relative high prices and a
great deal of investor euphoria---investor caution seems prudent and
appropriate. </span><br />
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<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt; line-height: 115%;">At some point in time, even
the market's greatest cheerleaders admit that sooner or later some sort of “correction”
is coming. When and how big is completely unknown. Be prepared by managing risk—but
not necessarily completely avoiding the risk. <o:p></o:p></span><br />
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<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt; line-height: 115%;">Keep in mind that most of the "experts" did not see the 1929 crash coming. In the first half of 1929, markets rose 25%+.</span><br />
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<span style="font-family: "arial" , "sans-serif"; font-size: 10.0pt; line-height: 115%;"><a href="https://www.britannica.com/event/stock-market-crash-of-1929">https://www.britannica.com/event/stock-market-crash-of-1929</a></span></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-31693745521551238842017-02-17T08:57:00.001-08:002017-02-17T08:59:04.771-08:00Bond Dilemma<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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I am often questioned by clients about the makeup of the "fixed income" or "bond" portion of their portfolio. Most clients understand risk associated with stocks--but the risks associated with interest bearing investments is less well understood.<br />
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Portfolio Allocation often is oversimplified as "60/40" or "70/30" referring to the mix of stocks and "bonds". (i.e. 60% stocks and 40% interest bearing fixed income.) In reality, Portfolio Allocation is much more comprehensive in that it relates to the form and benefits of "diversification".<br />
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The purpose of the "interest bearing fixed income" portion of the portfolio is generally two-fold. First to provide investments that are more stable and therefore less risky. Second, to provide investments that often are negatively correlated to stocks. (Negative correlation is when stocks "zig" then bonds can "zag.) So, essentially the purpose of the "interest bearing fixed income" portion of the portfolio is to reduce the volatility and risk of the portfolio.<br />
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What is often misunderstood, is that many fixed income investments carry SIGNIFICANT risk of loss. When interest rates rise, the market value of the "bond" can fall significantly. The longer the "term" or "maturity" of the bond, the more it will fall. So, when interest rates are historically low, an important part of risk management is to hold more stable fixed income investments----meaning short term.<br />
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The definition of "short term" is important. To some, a one year maturity is "short". To another, "short" is more like 90 days. The markets often tend to now use the term "ultra-short" or "cash" for investments that mature in 90 days or less.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYGe5tGPaqVYjG8PVri8EN0Xj9JofhsCJua-MWP8lsDuX7sj7x0kISEUfxM7VM3onOkphfkDZEXoN1lkSGocGfjY2OLMmyRW9BjRWVCLkQVdrbqJpzxZzJDSAY6iV8vM8zsAVQdOt9mfI/s1600/BondDilemma.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="181" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYGe5tGPaqVYjG8PVri8EN0Xj9JofhsCJua-MWP8lsDuX7sj7x0kISEUfxM7VM3onOkphfkDZEXoN1lkSGocGfjY2OLMmyRW9BjRWVCLkQVdrbqJpzxZzJDSAY6iV8vM8zsAVQdOt9mfI/s400/BondDilemma.PNG" width="400" /></a></div>
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The graph shows the "dilemma". (Click on graph to see it bigger.) In the last six months, as interest rates increased only slightly: Ultra Short Term Fixed Income was essentially unchanged at 0.12%; 1-3 year US Treasuries fell by 0.72%; Short Term Corporate Debt fell by 1.39%; and 10 year US Treasuries fell by 6.23%.<br />
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Imagine having $400,000.00 or 40% of your "60/40" so called "conservative" portfolio invested in 10 year US Treasury Bonds (thru mutual funds or ETF's) and suffering a $25,000.00 loss in portfolio value!<br />
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So, since 2014, with the FED and other Central Banks engaging in unprecedented interest rate reduction strategies, the risk of rising interest rates has created this dilemma: Make low interest but take low risk, or try for higher interest and take the risk of suffering substantial loss. Such is the "dilemma" always faced when evaluating the best investments for a truly diversified portfolio that carries the level of "appropriate and acceptable" risk.Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-63399974420115292512016-12-08T10:11:00.001-08:002016-12-08T10:12:13.542-08:00Post, Post Election (The Really Big Event happened in July)<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Will the election of "dark horse" Donald Trump be the biggest event of 2016? Well, certainly it is a "big event" but many, including myself think that the end of falling interest rates (rising bond prices) will be the "biggest" event with the largest financial impact. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Today, Myles Udland wrote an great article..</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="http://finance.yahoo.com/news/2016-marked-the-end-of-the-biggest-bull-market-of-our-lifetimes-154353053.html">2016-marked-the-end-of-the-biggest-bull-market-of-our-lifetimes</a></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: 15px;">"</span>In 2016, the nearly 40-year bond bull market ended. Date of death: July 11.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">And this was the biggest economic event of the year.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">“The biggest of 2016, in a weird way, was not Trump, was not Brexit, was not the end of the OPEC war back in February, it was July 11,” Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said at a panel on Wednesday.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">“On July 11, 2016, a couple weeks after Brexit, the 30-year Treasury yield fell to 2.088%. On that day, the Swiss government could borrow money for 50 years — out to 2076, a year most of us won’t be around to see — at a negative interest rate.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">“And that day was the day that the greatest bull market ever, in the bond market, ended. Since then, yields have been rising. And that without a doubt is the biggest event of 2016."</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For many investment professionals, a secular decline in interest rates is the only reality they’ve ever known. Since the <a href="https://www.bloomberg.com/view/articles/2012-08-20/how-volcker-launched-his-attack-on-inflation" rel="nofollow noopener" style="background-color: transparent; color: #0081f2; text-decoration: none;" target="_blank">Paul Volcker-led Federal Reserve cranked interest rates up sharply</a> in the early 1980s to end US inflation once and for all, bond yields have been on a steady decline. Bond prices rise when yields fall.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Through the decades, however, there have been episodes of yields rising. And <a href="http://www.businessinsider.com/wall-street-10-year-treasury-expectations-2015-9?r=UK&IR=T" rel="nofollow noopener" style="background-color: transparent; color: #0081f2; text-decoration: none;" target="_blank">this is not the first time strategists have called</a> for the end of the bond bull market. But since the early 1980s — nearly 40 years ago — interest rates in the US, and most major developed markets, have been in decline.</span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">A move towards interest rates rising, not falling, has implications not just for financial markets but the real economy, too. Rising interest rates will pressure mortgages. Rising interest rates also make it more expensive for governments, and businesses, to borrow money."</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">This sentiment is being heralded by many "gurus" such as Bond Czar, Bill Gross and his former Pimco associate, now Financial Pundit, </span><span style="background-color: white; color: #26282a; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; letter-spacing: 0.15px;">Mohamed El-Erian.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Ray Dalio is CEO of Hedge Fund, Bridgewater--largest in the world with $150 billion in invested assets. He is very smart and his commentary tells you a lot about how "big money" thinks about investing. He clearly indicates that "things are about to change".</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://www.linkedin.com/pulse/reflections-trump-presidency-one-week-after-election-ray-dalio?trk=prof-post">Ray Dalio Commentary</a></span><br />
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<span style="color: #232629;"><span style="font-family: "arial" , "helvetica" , sans-serif;">"To clarify the distinction, one could have capable people driving conservative/right policies or one can have incapable people driving them, and the same is true for liberal/left policies. To understand where we are likely to be headed, we need to assess both. To be clear, we are more non-ideological and practical/mechanical because to us economies and markets work like machines and our job is simply to understand how the levers will be moved and what outcome the moving of them is likely to produce."</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #232629;">"Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc. We won’t go down the litany of particulars about the directions, as they’re well known, discussed in my last </span><em style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: border-box; color: #232629; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: 0px; padding: 0px; text-size-adjust: 100%; vertical-align: baseline;">Observations</em><span style="color: #232629;">, and well conveyed in the recent big market moves. As a result, whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields. Of course, there will be other big shifts as well, such as pertaining to business profitability, environmental protection, foreign policies/alliances, etc. Once again, we won’t go into the whole litany of them, as they’re well known. However, the main point we’re trying to convey is that there is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth)"</span></span><br />
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<span style="color: #232629;"><span style="font-family: "arial" , "helvetica" , sans-serif;">"As for the effects of this particular ideological/environmental shift, we think that there's a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation. When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out."</span></span><br />
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<span style="color: #232629; font-family: "arial" , "helvetica" , sans-serif;">Is this the time to buy??? Probably not. Opportunity is coming, but it will probably appear after we get the "big reset" in prices that will occur when the reality of increasing interest rates "sinks in" and becomes more certain.</span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-8709330115826012642016-11-10T09:34:00.002-08:002016-11-10T09:42:46.475-08:00Post Election <object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As I have often mentioned...the "stock market" is made up of "investors" and "speculating gamblers". Mr. Market fell into a severe depression as election returns came in, but somehow snapped out of it, emerging in a euphoric manic state as soon as he heard Trump's victory speech.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Before and after the election, the "speculating gamblers" were busy. There were many smug commentators who predicted market directions who have turned out to be very wrong--as they usually are! At least in the first days, the market has gone almost exactly in the opposite direction they predicted.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There are lots of "bets" being made. Just since Friday, 11/4:</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">CAT is up 15.9%. Crane maker MTW is up 44.5%. Aerial platform and construction equipment maker OSK is up 15.4%. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Vulcan Materials is up 18.3%. But the giant concrete supplier, CX is down 6.1%--probably because it is based in Mexico, even though it's operations in the USA are larger than in Mexico.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">(Most of the rise in prices occurred before or at the open, the morning after the election! A sure sign of computer algorithm driven gambling.)</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">XOM is up 5.2%. Coal miner, ARLP is up 8.8%. Coal hauling railroad, CSX is up 10.4%.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Healthcare bellweather JNJ is up 3.3%.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">But, 20 year US Treasuries have fallen 5.4%. And utility ED is down 5.9%.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So the bets are all about a rise in construction, as well as a reduction in hate for fossil fuels, especially coal. Any maybe drug companies will be able to keep raising prices.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">These assumptions seem reasonable, but perhaps a bit overdone.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">What I think is the most important "trend" is the expectation of higher interest rates and inflation that are underlying the fall in US Treasuries and Utility Stocks. The two most important determinants of stock prices are earnings and interest rates. And, interest rates are essentially driven by inflation expectations.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Contrary to fears of a market correction caused by uncertainty regarding Trump, the markets have priced in a "hope" of a rising economy that will result in higher corporate earnings, with added effects in part from expected cuts in corporate tax rates. This MAY be a reasonable assumption, BUT...</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The "elephant in the room" is the fact that many stock prices are presently assuming a "lower for longer" scenario and the expectations about growth and tax cuts seem to indicate a high risk that this "lower for longer" scenario is wrong. IF markets abandon this "lower for longer" assumption regarding interest rates...then price to earnings ratios must decline...the market will need to be "repriced" lower even in the face of rising earnings.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The risk of the market being "repriced" continues to be high--<i>not certain</i>--but probable. So, investors should be cautious, and "ready" to take advantage of lower prices later. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Enjoy the euphoria of a market with upward momentum, but be skeptical. The real future is <i>still</i> quite uncertain. </span><br />
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<span style="background-color: #eeeecc; color: #333333; font-family: "arial"; font-size: 10.7185px; text-align: justify;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</span><br />
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Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-2258495966162875022016-07-25T11:22:00.001-07:002016-07-25T11:28:09.458-07:00The Summer of 2016-Human Nature May be Wrong<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In 2008, I wrote:</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: #eeeecc; color: #333333; line-height: 18.915px;">"<i>Human nature is almost always wrong when it comes to investing. Many times, the most value a Financial Advisor can provide to a client is to help them GO AGAINST their human nature.</i></span><i><br style="background-color: #eeeecc; color: #333333; line-height: 18.915px;" /><br style="background-color: #eeeecc; color: #333333; line-height: 18.915px;" /><span style="background-color: #eeeecc; color: #333333; line-height: 18.915px;">Our nature tells us to avoid injury by taking action in response to pain. In investing that means we want to sell that investment that has caused us pain and worry by going down in value. Investing is all about selling after prices go up and buying after prices go down."</span></i></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Today, I would add, Investing is also sometimes about doing nothing. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There are times to buy, times to sell and times to hold.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Lets take a look at two stock market indexes over just a little more than the last few months: The Dow Jones 30, a domestic only large cap index, and the DJ Global Ex US, an international only index.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In May, 2015, the DOW30 was at 18272. Eight short months later, it had fallen 12.5% to 15973 in February, 2016. Six months later, now it is around 18470, up 15.6% since February but up only 1.2% since May, 2015. Like US bonds that are paying historically low interest rates, the domestic stock market over the last year has had a pretty anemic performance. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In May, 2015, the DJ Global Ex US was at 246. It fell 25% by February, 2016. It has since risen 14.2% to about 211, but is lower by 14% from May, 2015. Like many international bonds with negative interest rates, the international stock market over the last year has had negative returns.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Despite, on average, poor corporate earnings growth, there is a "sentiment" by many that stocks are a "buy" because "there is no better alternative". Hence, the dramatic rise in both domestic and international stocks since February.</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span><span style="font-family: "arial" , "helvetica" , sans-serif;">Stocks, by any measure, with the exception of the Energy Sector are historically overvalued. Some sectors, more than others.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">On the other hand, there are many that see this recent rise and headlines of markets reaching "all time highs" as a sign to "sell" and take profits.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So, let me say again: </span><span style="background-color: #eeeecc; color: #333333; font-family: "arial" , "helvetica" , sans-serif; line-height: 18.915px;"><i>"Human nature is almost always wrong when it comes to investing. Many times, the most value a Financial Advisor can provide to a client is to help them GO AGAINST their human nature."</i></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The time to buy is when you have a reasonably strong and rational conviction that you are BOTH getting a good price and buying something with good prospects for growth. The time to sell is when you have a reasonably strong and rational conviction that you are getting a good price and selling something that has no good prospects for the future. (Getting a good price by the way has nothing to do with how much profit you have made--more on that later.)</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The time to hold is when it not certain that you can buy or sell at a "good" price and you are not certain about the future prospects for growth. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">That "good price" for buying or selling has nothing to do with the past---it has only to do with the future. A stock that has gone up in price in the past may or may not be an attractive stock to buy. What makes it attractive is whether it will produce dividend income and capital gains in the future. A stock to sell has nothing to do with it being a "dog" having declined in price in the past. And, a time to sell has little to do with a stock recently hitting a "all time high". What makes it a candidate for selling is that it's future prospects look bleak. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">I repeat: "Stocks, by any measure, with the exception of the Energy Sector are historically overvalued. Some sectors, more than others." But, despite being historically overvalued, with a possibility of a price decline in the short run, I do not see a future bleak enough to justify any significant selling..nor with the exception of the Energy Sector, do I presently see any stocks that have BOTH a good price and good future prospects. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Since we are in a period of high uncertainty, HOLD seems to be the wisest course of action, at least for now. Things change rapidly. A significant pullback could create some interesting buying opportunities for long term investors. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: #eeeecc; color: #333333; font-family: "arial"; font-size: 10.7185px; line-height: 18.915px; text-align: justify;"><strong>I never recommend significant adjustments to a sound long term investment strategy unless we see some indication that markets will fall far enough and stay low long enough to justify the risk of missing the gains when markets recover from excessive fear. At this time there does not appear to be any such indication.</strong></span><span style="background-color: #eeeecc; color: #333333; font-family: "arial"; font-size: 10.7185px; line-height: 18.915px; text-align: justify;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</span></span><br />
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<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-56069796618712550302016-06-24T10:46:00.001-07:002016-06-24T10:46:43.662-07:00Brexit Update--It is NOT 2008!<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">This is not 2008. <o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">After the remarkable “recovery” of markets since the lows
in February (Dow hit a low of 15,660) I warned that a Dow of 18,000 in April
and early June was perhaps an overshoot to the upside and markets were a bit
overpriced. <o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Add to this an unwarranted smugness about the expected
outcome being “Remain” on the part of the Press and many Wall Street Traders,
one should certainly have expected a substantial downturn with the “surprise”
result of “Leave”.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Often markets get caught up in an improper reliance on “myths”
that are assumptions that are not based on fact. </span><span style="font-family: Arial, sans-serif; font-size: 12pt; line-height: 115%;">There is no doubt that Free/Fair Global Trade is a benefit
to the entire world.</span><span style="font-family: Arial, sans-serif; font-size: 12pt; line-height: 115%;"> </span><span style="font-family: Arial, sans-serif; font-size: 12pt; line-height: 115%;">However, unfair
Global Trade is harmful to some and beneficial to others.</span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Free/Fair Global Trade is not the same as Globalization.
The myth that people will be better off if all “borders” are removed was
shattered by Brexit. A great number of
people reject this myth. They do not want unrestricted immigration. They want
Free/Fair Global Trade based on value for value reciprocal benefits. <o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">People also do not want their societies devastated by
unemployment and falling living standards. Some also do not want their proud
cultures diminished by excess immigration that chooses not to assimilate.
Immigration used to be people coming to assimilate. Today, there is a sense
that immigrants are coming to “take over”. This will continue to lead to
political strife. <o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">People can love their neighbors and even love their enemies—but
that is not the same as inviting neighbors and enemies to come live in and
redecorate their homes. It is no surprise that the proud cultures of the US and
Great Britain are some of the first places to show organized resistance to a direction
toward extreme diversity. <o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Nothing in Brexit necessarily will reduce Free/Fair Global
Trade. Nothing that I can see in the upcoming US election will reduce Free/Fair
Global Trade. (One candidate has warned he intends to focus on increasing the “Fair”
part along with the “Free” part, but neither candidate is advocating a
restriction in Global Trade.)<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Hence, the only thing happening today, as the Dow 30 is
down 3% is a reaction to the surprise of the result, and concerns about
uncertainty of what happens next. Even at the level of 17480 for the Dow 30 as
I write this at 1:30PM on 06/24/2016, the market is still UP 11% since February.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Could stock markets fall further? Could they reach the
February lows again? Perhaps, but Brexit will not be the only cause. Stock
markets are driven by Corporate Profits and Interest Rates. And, investors
should not be invested in “markets” but rather a conservative balanced and diversified
portfolio of ownership in great companies.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">Be cautiously
optimistic. Lower prices will create some opportunities. There are a
substantial number of great companies with great future prospects—they will
prosper even if Great Britain and a few other countries decide to defend their
proud cultures by separating politically from the European Union</span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com1tag:blogger.com,1999:blog-8392508515853370100.post-26417270086630491842016-04-29T08:47:00.000-07:002016-04-29T08:47:29.003-07:00Will Investment Returns Be Below Historical Norms<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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The link and graphic is to Bloomberg and a McKinsey Study.<br />
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We will be hearing more of this pessimism over the near term. The negative thinking centers on assumptions that: 1) Corporate profits having peaked; 2) Global growth will slow; 3) Interest rates will continue to be low. <br />
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In addition to the short term fluctuations in market sentiment (fear vs greed) one must also consider that there are cycles in long term market sentiment.<br />
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In my humble opinion, it is unwise to accept the assumptions in this article as having a 100% probability. My assessment is that they have a more than 50% probability of being very wrong.<br />
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Perhaps the biggest factor will be the assumption regarding global growth. While the rate may temporarily slow as excess capacity is absorbed in the short term; over the long term, the substantially growing "middle class" in developing countries has not yet come even close to the consumption levels of the average American. Energy, Health Care and Communication have potential future growth rates substantially higher than we have ever seen in the past.<br />
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Be cautiously optimistic in the long term. <br />
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<a href="http://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-very-afraid-if-you-re-investing-for-the-long-run?">Long Term Investment Returns Troubling?</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfKcundgC75U2qAPLNUvo7GK7xJX7YPUEBCaT4r20kRQIoeQRKeJVamrvc-HCdgMgBU4EUjKtFDoiODyzTOFrNKIEPxiygl3uSETUHEm5BvFNF2Bo3deGMR0PbIq8Yr6Q3mW7EPmp5EXM/s1600/Investment+Returns.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfKcundgC75U2qAPLNUvo7GK7xJX7YPUEBCaT4r20kRQIoeQRKeJVamrvc-HCdgMgBU4EUjKtFDoiODyzTOFrNKIEPxiygl3uSETUHEm5BvFNF2Bo3deGMR0PbIq8Yr6Q3mW7EPmp5EXM/s640/Investment+Returns.png" width="428" /></a></div>
<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-32638648945155544792016-04-23T10:22:00.003-07:002016-04-25T10:30:08.480-07:00Is it a Bull, a Bear or a Bunny<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The symbol of a bull supposedly indicates a rising market. The symbol of a bear indicating a falling market. The symbolism relates that a battling bull engages in conflict by raising his head and horns, while the bear uses his paws and claws to pull down.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;">People have attempted to predict future market returns by describing current conditions as a Bull Market (rising) or a Bear Market (falling). A third condition is sometimes calls a "Consolidating" or "Flat" market. </span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">Keep in mind that assuming that current conditions will continue with "momentum" into the future is a dangerous form of cognitive bias. It stems from the incorrect application of Newton's First Law of Motion: "<span style="background-color: white; color: #222222; line-height: 19.84px;">Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it."</span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; color: #222222; line-height: 19.84px;"><br /></span></span></span>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; color: #222222; line-height: 19.84px;"><span style="line-height: 19.84px;">Markets are not objects. Markets are an indication of the consensus view of the likely future. And this consensus view is often strongly influenced by the very real human emotions of fear and greed.</span></span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #222222;"><span style="line-height: 19.84px;"><br /></span></span><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; color: #222222; line-height: 19.84px;">Greed and a "fear of missing out on gains" tends to drive Bull Markets. Fear of loss tends to drive Bear Markets. Uncertainty tends to create "Flat" Markets. </span></span><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; color: #222222; line-height: 19.84px;">A fourth type of markets could be dubbed a "Bunny Market". A Bunny Market jumps up and down and is driven by EXTREME uncertainty. Over the longer term, the market does not rise or fall--it just fluctuates.</span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #222222;"><span style="line-height: 19.84px;"><br /></span></span><span style="color: #222222; font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white; line-height: 19.84px;">Arguably, we have been in a Bunny Market for at least two years. </span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="color: #222222;"><span style="line-height: 19.84px;"><br /></span></span><span style="font-family: "arial" , "helvetica" , sans-serif;">The EXTREME uncertainty stems, in great part from unprecedented Central Bank interference that continues all over the world. There is no historical indication of what happens when this interference ends and interest rates return to "normal". In fact, many predict that the old normal is replaced by a new normal where interest rates and inflation will be forever low. </span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">What is known for sure is that if interest rates do return to the "old" normal, there will be a great deal of economic turmoil. Governments will have to raise taxes. Durable goods like cars and homes that are often purchased with credit will become more expensive and sales volume will decline. Some businesses that rely on credit will go bankrupt or at the very least will become much less profitable. And, people who have purchased long term government bonds at low interest rates will witness a significant loss of principal. Yikes!</span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">No wonder every word that comes out of the mouths of Central Bankers have an effect on markets.</span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">In addition to the uncertainty about interest rates, there is the uncertainty about the growth of emerging markets--particularly China. And, then there is the issue of oil and gas prices that seem to be greatly influenced by government policy--in Iran, Saudi Arabia and Russia as well as in the USA. </span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">So, at no time in history, other than perhaps during the World Wars, has the global economy and markets been more reliant on government policies and politics. </span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif;">So, the best investment policy is probably (for most people) to limit your exposure to long term fixed income investments and concentrate on owning a very diversified portfolio of stocks in companies that are likely to maintain stability and profitability during times of rising interest rates and/or a slower rate of global economic growth. And, take advantage of the Bunny Market by avoiding the temptation of buying when prices are high---and by having the courage to buy when prices are low. Be patient. Investing is about the long term.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><u>Please be sure to read the below disclaimer--Your personal portfolio choices should only be made after a complete review and analysis of your risk tolerance and income requirements and only after a discussion with your personal financial advisor.</u></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><strong style="background-color: #eeeecc; color: #424858; font-family: Arial, sans-serif; font-size: 12px; line-height: 15.33px;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</strong></span><br />
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<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-69428269125834105232016-01-16T09:43:00.002-08:002016-01-16T09:43:27.260-08:00Storm Update<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<span style="font-family: Arial, sans-serif; font-size: 12pt; line-height: 115%;">At the end of 2015, I predicted that 2016 would be the “Year
of Opportunity” but warned about “Continued Uncertainty”. Then on January 7, I
sent an email to clients:</span><br />
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<i><span style="font-family: "Arial",sans-serif;">“Markets are in decline for several
reasons--most of which have to do with concerns that several prior assumptions
appear to be, in fact, myths: 1) The China economy will continue to grow at
5-7% per year; 2) Interest rates will continue to be low forever; 3) The US has
eliminated the risk of being attacked by an enemy using a nuclear weapon; and
4) The US Economy can have robust growth while the rest of the world suffers
slow growth or recession. All of these prior assumptions were and are
"myths"--they are wrong. <br />
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Bottom line--a lot of speculators have decided that many of their assumptions
were too optimistic if not outright wrong and the market is
"re-pricing". This is what I have expected for many months. <br />
<br />
Put in perspective--this week is sort of a repeat of August...The DOW is still
800 points higher than the August 25, 2015 low. These "storms" tend
to last for 14-20 days, so expect more volatility. <br />
<br />
This is not 2008 "all over again". What is happening now is quite
different and sort of "normal" for periods when markets correct after
becoming too optimistic. Value of your portfolio is NOT determined by daily
quotes by the "market". The daily quotes of the "market"
are essentially a measure of the emotional and fickle sentiment of a lot of
market participants--many of which are not really "investors" but
rather speculators who are buying or selling on what they think will happen
tomorrow.”</span></i><i><span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><o:p></o:p></span></i></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">The ”storm” as I predicted, has continued. We are still
within that 14-20 day period that storms usually take to wear themselves out.
The market is “re-pricing” and is in the beginning stages of creating real long
term investment opportunities.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">The DOW has fallen a little over 500 points since my
January 7 warning and it is STILL above the August 25, 2015 low of 15,666<b>. It is highly probable that the storm will
continue until the DOW has fallen below this 15,666 level.</b><o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><b><br /></b></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">In addition to fears regarding a recession in China and
other emerging markets, as well as the probability of rising interest rates,
there are three other factors influencing market activity. First, speculators have finally accepted that
there is a real possibility of a “non-establishment” candidate winning the US
Presidency. (Trump, Cruz and Sanders scare Hedge Fund Managers and Big Banks
because they promise “change”.) Second,
speculators have concluded that falling oil prices are now threatening the
stability of large banks who have loaned money that fueled the recent expansion
of oil and commodity exploration and
production. (Nothing makes speculators more nervous than bank writeoffs.) Third,
the price of oil is now being heavily influenced by speculators who profit by
betting on the future price of oil. Just as speculators drove the price above reason
on the high side, they are now driving the price below reason on the low side—their
activity puts oil companies and banks at risk—a sort of vicious cycle that is
nearing it’s end.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">To put a bit of perspective on this, even though the price
of oil has dropped almost 30% since August 25, 2015, the price of Chevron (CVX)
stock has risen 19%.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">On Friday, 1/16/2016, there seemed to be a bit of panic in
market action. As if “something changed”.
In fact, nothing “factual” has changed.
None of the issues are new. The only thing that has changed is
temporarily the “fear of loss” has replaced the “fear of missing out”.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Readers of my postings will recall that I often point out
that big market moves often occur on “options expiration” days. In addition, most investors know that markets
often fall on the day just before a long holiday weekend. BOTH of these factors came into play on
Friday. Options expired and Martin
Luther King Day (US markets are closed) is Monday.<o:p></o:p></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;"><br /></span></div>
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<span style="font-family: "Arial",sans-serif; font-size: 12.0pt; line-height: 115%;">Don’t fear market declines any more than you fear bad
weather. Both unpleasant, but both are temporary.<o:p></o:p></span></div>
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<br /></div>
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<br /></div>
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<br /></div>
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<br /></div>
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<br /></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-77949155049938243012015-12-30T09:25:00.001-08:002015-12-30T09:25:32.050-08:002016, The Year of Opportunity-Less, but Continued Uncertainty<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<div align="center" class="MsoNormal" style="text-align: center;">
<i><span style="font-family: "Arial",sans-serif;">Last month I shared an
article about:<o:p></o:p></span></i></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<b><span style="color: #424858; font-size: 16.0pt; line-height: 115%;">Warren
Buffett is having an unusually bad year </span></b><b><span style="font-family: "Arial",sans-serif; font-size: 16.0pt; line-height: 115%;"><o:p></o:p></span></b></div>
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<b><span style="color: #424858; font-size: 16.0pt; line-height: 115%;"><br /></span></b></div>
<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;">Link: </span><span style="font-size: 10.0pt; line-height: 115%;"><span style="font-family: "Arial",sans-serif;"><a href="http://www.cnbc.com/2015/11/18/warren-buffett-is-having-a-very-unusual-bad-year.html">http://www.cnbc.com/2015/11/18/warren-buffett-is-having-a-very-unusual-bad-year.html</a></span></span><span class="MsoHyperlink"><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; line-height: 115%;"><o:p></o:p></span></span></div>
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<span style="font-size: 10.0pt; line-height: 115%;"><br /></span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<i><span style="font-family: "Arial",sans-serif;">As a follow up, Mr.
Buffett did not recover much in December:<o:p></o:p></span></i></div>
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<i><span style="font-family: "Arial",sans-serif;"><br /></span></i></div>
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<span style="font-family: "Arial",sans-serif;">Link: </span><span style="font-family: "Arial",sans-serif; font-size: 10.0pt; line-height: 115%;"><a href="http://www.cnbc.com/2015/12/30/warren-buffett-faces-worst-year-on-stock-market-since-2009.html">http://www.cnbc.com/2015/12/30/warren-buffett-faces-worst-year-on-stock-market-since-2009.html</a><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
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<i><span style="color: #424858; font-family: "Arial",sans-serif;">Some of the uncertainty I
wrote about in November has been resolved: <o:p></o:p></span></i></div>
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<i><span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></i></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">OPEC
decided to continue producing oil at record low prices, losing huge sums, hoping
to “make it up on volume and market share”.
Oil continues to be supplied at a rate higher than demand—and storage
facilities are nearly full.<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">The
Fed did in fact finally raise interest rates. <o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial",sans-serif;">We
are not going to have a budget impasse with a government shutdown but we will
continue to have record deficit spending at the Federal level.<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">The
economy, judging by holiday retail sales, consumer confidence and unemployment
seems to be growing, albeit slowly.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<i><span style="color: #424858; font-family: "Arial",sans-serif;">But, a lot of uncertainty
remains:<o:p></o:p></span></i></div>
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<i><span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></i></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">How
long will it take for the price of oil, and other commodities to recover to
more normal levels?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial",sans-serif;">How
fast and how much will the Fed continue to raise interest rates?<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">How
will the reality that a lot of voters are just not satisfied with the status
quo play out? Seems like both the Left
and the Right are highly energized. Change IS coming, but what kind?<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">How
fast will the global economy grow, if at all in 2016 and beyond?<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial",sans-serif;">How
will rising global terrorism affect our lives and economic circumstances?<o:p></o:p></span></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;"><br /></span></div>
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<br /></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">The
reality of Warren Buffett’s performance as an investor in 2015 simply points
out that nobody predicts the future with certainty. And measuring your personal investment
performance over a one-year period is foolish.
Investing is a long term multi-year process. The outcome in the short
term is always uncertain. History
teaches that over the longer term, despite uncertainty of events, investment
returns from owning parts of profitable businesses increases our real wealth and/or
produces attractive income over time.<o:p></o:p></span></div>
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<br /></div>
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<span style="color: #424858; font-family: "Arial",sans-serif;">In
the long run, as Warren Buffett has stated, and as common sense reinforces,
investing is really about buying and owning stocks/bonds at attractive “undervalued”
prices. Attractive “undervalued” prices meaning low enough that the likelihood
they will decline in price is low—in other words a price with a “margin of
safety”. </span><span style="color: #424858; font-family: Arial, sans-serif;">Few
investments met that criteria in 2015.</span><span style="color: #424858; font-family: Arial, sans-serif;">
</span><span style="color: #424858; font-family: Arial, sans-serif;">Many are likely to meet that criteria in 2016.</span><span style="color: #424858; font-family: Arial, sans-serif;"> </span><span style="color: #424858; font-family: Arial, sans-serif;">We are already seeing signs of opportunity in
short term investment grade corporate debt, and some well capitalized
integrated oil companies.</span></div>
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<br />
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<span style="color: #424858; font-family: "Arial",sans-serif;"><b>So
as the New Year of 2016 is rung in, be optimistic that prolonged periods of
uncertainty ultimately produce very attractive opportunities for those who
choose to focus on their long term objectives.</b><o:p></o:p></span></div>
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<strong style="background-color: #eeeecc; color: #424858; font-family: Arial, sans-serif; font-size: 12px; line-height: 15.33px;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</strong></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-73484199379661527902015-11-20T10:24:00.000-08:002015-11-20T10:24:17.204-08:00The Year of Uncertainty<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><!--[if gte mso 9]><xml>
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<br /></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: "Arial","sans-serif";">A recent headline for an article at
CNBC:<span style="mso-spacerun: yes;"> </span></span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<b style="mso-bidi-font-weight: normal;"><span style="color: #424858; font-size: 16.0pt; line-height: 115%;">Warren
Buffett is having an unusually bad year </span></b></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Link: <a href="http://www.cnbc.com/2015/11/18/warren-buffett-is-having-a-very-unusual-bad-year.html">http://www.cnbc.com/2015/11/18/warren-buffett-is-having-a-very-unusual-bad-year.html</a></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial","sans-serif";">Excerpt<i style="mso-bidi-font-style: normal;">: “Warren Buffett has seen shares of his <a data-gdsid="11916" data-inline-quote-symbol="BRK.A" href="http://data.cnbc.com/quotes/BRK.A" target="_blank"><span style="color: #2077b6; text-decoration: none; text-underline: none;">Berkshire Hathaway</span></a> fall
more than 11 percent this year. Even worse, Berkshire shares have
underperformed the <a data-gdsid="593933" data-inline-quote-symbol=".SPX" href="http://data.cnbc.com/quotes/.SPX" target="_blank"><span style="color: #2077b6; text-decoration: none; text-underline: none;">S&P 500</span></a> by more than
10 percent.”</i></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="color: #424858; font-family: "Arial","sans-serif";">There
is always uncertainty regarding the future economic outlook, but 2015 seems to
have more than usual.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The U.S.
Central Bank, the Federal Reserve, commonly referred to as the “Fed” continues
the Zero Interest Rate Policy and markets gyrate as they try to predict the first
Fed interest rate increase, and more importantly, the speed at which they
continue to raise rates.<span style="mso-spacerun: yes;"> </span>Interest rates
have a powerful influence on economic activity and asset pricing. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">For a time in
the past, it seemed that “energy” was in short supply and prices would rise.
That changed dramatically this year as the price of energy (oil, gas and coal)
dropped by 50%. <span style="mso-spacerun: yes;"> </span>Not because of market
conditions, but simply because of government actions. (A price war between
government controlled oil companies—OPEC. Sort of the mirror image of the 1970’s.)</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">US politics
continue to be a concern, although the recent change of leadership in the US
House of Representatives seems to have postponed a standoff on the Budget—at least
until the next President is elected. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">And, now the
ugly face of radical Islamic terrorism has shown itself again. Who knows what
the next government action will be in response?</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Notice most
of the uncertainty is about what governments (US and International) are doing
or about to do.<span style="mso-spacerun: yes;"> </span>Most economic activity
over the long run can be predicted by a study of history and the use of
intelligent logic. But, when you throw government actions into the equation, it
becomes very unpredictable in the short run. </span></div>
<h1 style="line-height: 13.5pt;">
<span style="font-size: small;"><span style="font-family: "Arial","sans-serif";">Back
to Buffett. His mentor Benjamin Graham said, </span><span style="color: #181818; font-family: "Arial","sans-serif";">“In the short run, the
market is a voting machine but in the long run, it is a weighing machine.” <span> </span>In other words, in the short run, markets
will fluctuate by the popular sentiment of traders buying and selling for short
term profit, but in the long run, it will be corporate earnings that determine
the value of investment portfolios.</span></span></h1>
<span style="font-size: small;">
</span><h1 style="line-height: 13.5pt;">
<span style="font-size: small;"><span style="color: #181818; font-family: "Arial","sans-serif";">Solid companies, that are well capitalized, well managed and who
have leading market shares in their areas of operation will do well in the long
run. <span> </span>Holding ownership positions in
these companies during periods of uncertainty, up years and down years is a
sound strategy. Buying them when they are cheap is also a sound strategy.<span> </span>Knowing when they are “cheap” can be a bit
more of a challenge.</span></span></h1>
<span style="font-size: small;">
</span><h1 style="line-height: 13.5pt;">
<span style="font-size: small;"><span style="color: #181818; font-family: "Arial","sans-serif";">Hold on as we may see more certainty as important meetings of
the Fed and OPEC are scheduled for December.</span></span><span style="font-family: "Arial","sans-serif";"></span></h1>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-34614270300108116312015-09-18T09:23:00.003-07:002015-09-18T09:45:47.466-07:00Fixation on the Fed<span style="font-family: "Arial","sans-serif";">The U.S.
Central Bank, the Federal Reserve, commonly referred to as the “Fed” announced
on Thursday that their Zero Interest Rate Policy or ZIRP, would continue.<span style="mso-spacerun: yes;"> </span>Essentially, short term interest rates would
remain at near zero.<span style="mso-spacerun: yes;"> </span></span><br />
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">ZIRP and the
other stimulus program used by the Fed called Quantitative Easing or QE, were
put into place to stimulate the U.S. Economy.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">There are two
valid reasons why the Fed would start unwinding both of these programs. First,
increasing interest rates would tend combat inflation. Second, increasing
interest rates would indicate that the economy is healthy and capable of
supporting “normal” interest rate levels.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">At least
according to economic statistics provided by the government, inflation is under
control. (Many would argue that these statistics are misleading.) But, in any
case, the Fed does not see a need to raise interest rates to combat inflation.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The most
important message sent by the Fed’s failure to raise interest rates is that
they believe the global economy is not healthy and not capable of supporting “normal”
interest rates. Sort of like a doctor saying “The patient is not in intensive
care, but is still not well enough to be discharged from the hospital.”</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So, in one
way, the Fed’s inaction is a good signal for stocks and bonds—inflation will be
low. But, on the other hand, it is a bad signal---the global economy is sick.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Couple that
with the fact that Friday, September 18 is options expiration day and you get a
lot of volatility.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Expect that
until the Fed finally sends a clear message that “inflation is under control”
AND “the global economy is healthy” markets will fluctuate up and down based on
sentiment regarding what the Fed is likely to do next. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">What you
should also remember is that the Fed does not control long term interest rates.
Those are controlled by bond market sentiment. At least for now, the bond market
agrees with the Fed—inflation is low and the economy is weak—so long term
interest rates are low---at least for now. History teaches that bond market
sentiment can change rapidly. </span></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-8862198424293370032015-08-27T10:33:00.000-07:002015-08-27T10:33:32.290-07:00The Dilemma Created when Short Term money is invested in Long Term Investments<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Many years
ago, Warren Buffett told a story about “Mr. Market” being this wild and crazy
business partner who suffered from bi-polar disease. The story was originally
told by Benjamin Graham. I shared it with clients most recently in 2011.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<strong><span style="color: #333333; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%;">“Mr. Market, is an obliging
fellow who suffers from a severe case of bi-polar disorder. He turns up every
day at the share holder's door offering to buy or sell his shares at a
different price. Often, the price quoted by Mr. Market seems plausible, but sometimes
it is ridiculous. Sometimes Mr. Market is wildly overly optimistic and is
willing to pay a very high price. Other times, Mr. Market is in such a
depressed state that he is convinced that the future is hopeless and that the
value of your shares are ridiculously low. The investor is free to either agree
with his quoted price and trade with him, or ignore him completely. Mr. Market
doesn't mind this, and will be back the following day to quote another price.
As an investor, you need to be confident enough in the value of your
investments to be able to take advantage of Mr. Market rather than being
affected by his disease.”<o:p></o:p></span></strong></div>
<div class="MsoNormal">
<strong><span style="color: #333333; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%;"><br /></span></strong></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Given the
recent market downturn, I thought a slightly different take on the concept
might be useful.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Let’s assume
you have $250,000 cash. Not wanting to bury it in the backyard or hide it under
your mattress, let’s assume you have two “rational” choices. Option A: You could put the money into a bank
account and earn 1% per year interest, guaranteed by the government. Option B:
You could buy a 50% interest in an office building as a Limited Partner. The General Partner of the office building
agrees to pay you a portion of the rental profits, if any. The General Partner
also agrees to buy you out at any time you ask him to, but he gets to set the
price. He agrees to quote you a “buy out price” or BOP on a daily basis. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">You choose
Option B and give the General Partner your $250,000. For the first few months,
the General Partner sets the daily BOP at $255,000 each day. After the first
three months, he even sends you a “rental profits dividend” of $625.00. You are
told that you can expect $625.00 every three months. You feel like you made a really good
investment.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">After a year
or so, the General Partner begins raising the BOP. Rental profits are rising. He offers you a
BOP of $300,000. You think about it and decide to keep the investment since it
is “doing really well”.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Several
months later, the BOP offered each day begins to slip. The BOP declines to
$285,000. The economy is slowing and it appears that a lot of new construction
has flooded the market with new office space. Then something really bad
happens. The largest tenant does not renew their lease and the office building
is suddenly only 50% occupied. The General Partner claims to be unable to find
any new tenants and the BOP falls to $240,000. You are afraid that the BOP
might fall even further. To make matters
worse, the “rental profits dividend” is cut to $200.00 every three months.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">What to do?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The problem
for most people who are presented with this dilemma is the “right” answer is
unknowable because the future is uncertain. It also depends on the financial
situation of the person as well as all the “other” investments, if any, that
the person owns.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;">History
teaches that over time, it is reasonably probable that new tenants will be
found, causing the “rental profits dividend” and the BOP to recover and rise
over time.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">It would be reasonable to
assume that over a 10-15 year period, the value of the property would rise at
least by the amount of inflation, and that the “rental profits dividend” would likely
be about the same as the interest that would have been earned if the $250,000
had been deposited in the bank. (In other words, it might be best to just “wait”
and hold on.)</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">A large dilemma
exists for those who needed that $625.00 “rental profits dividend” to cover
their living expenses. (Only a portion of that income should have been “counted
on”.) An even bigger dilemma exists for those who figured that whenever they
needed money, they could accept the BOP, sell out and use the money to cover
their living expenses.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">In other
words a big problem here is when people assume that income from their long term
investments will provide steady and consistent income in the short term. And, a
bigger problem here is when people assume that the value of their long term
investments will be stable in the short term.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Long term
investments tend to fluctuate significantly in value. It is wise to assume that they could easily rise
by 20% or fall by 20% in the short term. And if they fall by 20%, it could take
considerable time for them to recover. <o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">In our
example, the other point to consider is that making a $250,000 investment in
one office building creates a concentrated risk. The $250,000 would have been “safer”
if it had been “diversified” into several investments in different locales and
different industries. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">History
teaches that diversified long term investments tend to provide double the long
term value of shorter, less “risky” investments. But, that assumes that you
hold them for the long term. During that long term period, often, the value of,
and income from, the long term investment will fall below the value of, and income from, the short term investment. (In other words,
when interest rates are only 1%, one should not expect an 8% return from equity
investments in the short term. And, often in low interest rate environments,
normal market fluctuations from equity investments may actually result in
negative short term returns.)<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Your short
term investments (deposits) should always be sufficient to meet your short term
(3-5 year) needs. Your long term investments should be meant for the long term
so that fluctuations in their short term daily BOP does not matter to you. If
your financial plan calls for a need to liquidate some of your long term
investments to cover living expense, you need to sell, “in advance” when
markets are “high” or undertake a periodic “averaging cost” plan to sell regularly over time to average out market
fluctuations.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Remember the
story of Mr. Market: “</span><strong><span style="color: #333333; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%;">you need to be confident
enough in the value of your (long term) investments to be able to take
advantage of Mr. Market rather than being affected by his (bi-polar) disease.”</span></strong><span style="font-family: "Arial","sans-serif";"><o:p></o:p></span></div>
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<strong><span style="color: #333333; font-family: "Arial","sans-serif"; font-size: 10.0pt; line-height: 115%;"><br /></span></strong></div>
<br />
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<i><span style="font-family: "Arial","sans-serif";">PS.
I am sure that many clients are surprised that I remain so calm during
periods of market turmoil. They often ask “Aren’t you concerned when we are
losing so much money?. Shouldn’t we be doing something?” My answer is always, “All
of this up/down is pretty normal. The daily value of long term investments only
matters on the day we intend to sell them or the day we intend to buy them.
Since we don’t intend to sell them for a very long time, the emotional bi-polar
actions of Mr. Market with falling prices on a daily basis really does not
matter except when we are buying. And when we are buying, we like it when
prices go down. Investors need to remain confident that the long term value of
their highly diversified portfolio of high quality investments remains intact,
despite daily market value fluctuations.”<o:p></o:p></span></i></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-71590143682450384672015-07-15T09:48:00.002-07:002015-07-15T09:48:35.769-07:00Navigating in a Fog<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<br />
As you know, a great deal of my time is spent reading about economic events, like Greece and China, as well as news and analysis about specific companies. Another important focus is reading to ascertain the general "sentiment" of corporate insiders regarding their perceptions of the future.<br />
<br />
I find that the most accurate indication of this sentiment comes from the CFO's of companies.<br />
<br />
I came upon this article that tends to confirm my message of prudent caution being the order of the day: (Click on link below)<br />
<br />
<a href="http://www.cnbc.com/2015/07/15/cfos-this-year-is-going-to-be-bad.html">Corporate Chief Financial Officers Not Optimistic</a><br />
<br />
In the survey quoted: "More than 70 percent of U.S. CFOs said the equity markets are overpriced—only 3 percent said they were undervalued.."<br />
<br />
This may not be a "sell" signal, but it certainly makes one pause when thinking about being a buyer!<br />
<br />
<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-75673165491788684712015-05-12T08:39:00.001-07:002015-05-12T08:39:14.946-07:00Beware of Bias in Benchmarks<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<br />
<br />
Benchmarks are important tools to measure and evaluate performance, but beware of their shortcomings. Over the years they have changed from "averages" to what many might call "promotional" tools. Given the recent out-performance of the S&P500 compared to other "world" indexes, one should look carefully into the reasons for the out-performance. It is not just because the US is doing "better".<br />
<br />
The S&P500 is a "market value weighted index". Only 50 (10%) companies (the largest by market cap) comprise 50% of the index. Apple is enormously dominant with twice the weighting as the next two largest (Microsoft and Exxon) combined. So when Apple does well, the S&P500 is highly affected.<br />
<br />
Read more.<br />
<br />
<a href="http://www.forbes.com/sites/janetnovack/2015/05/08/built-for-marketing-why-the-sp-500-and-dow-are-misleading-investors/">Forbes Article on the S&P500 as a Benchmark</a><br />
<br />
When benchmarking, I suggest that comparing performance to indexes is somewhat useful, I find that risk as measured by volatility of the portfolio compared to gains is also an important factor when determining the "real" performance. In that regard I find the Sharpe Ratio to be extremely valuable when evaluating portfolios.<br />
<br />
Still, as the article mentions, indexes have become profitable businesses to the publishers and demand for the "product" is enhanced when the indexes have a bias toward gains.<br />
<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-35201358728307075392015-05-08T11:51:00.001-07:002015-05-11T10:07:23.383-07:00Hurricanes, Blizzards and Seasonality<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsKcd035j5Vu2wIXOH4sZXaEWzRL2n6YBUnYH7gcb1s3IIJcTyy28UEanjJSO7GhNdt_wPckXX13OWykxq277krs7i_XKHiU3JgvTVez-TNyudk_HvF5ct_Vt0gCM10MftP4N1GatVxpE/s1600/The_disconnect_in_the_US-Flows.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="232" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgsKcd035j5Vu2wIXOH4sZXaEWzRL2n6YBUnYH7gcb1s3IIJcTyy28UEanjJSO7GhNdt_wPckXX13OWykxq277krs7i_XKHiU3JgvTVez-TNyudk_HvF5ct_Vt0gCM10MftP4N1GatVxpE/s400/The_disconnect_in_the_US-Flows.png" width="400" /></a></div>
<br />
<a href="http://finance.yahoo.com/news/disconnect-us-stock-market-just-141141243.html" style="font-family: Arial, sans-serif;"><span style="font-size: x-small;">http://finance.yahoo.com/news/disconnect-us-stock-market-just-141141243.html</span></a><br />
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<span style="font-family: "Arial","sans-serif";">In January I
wrote, “Be Diversified, Be Patient and Be Prepared”. </span><span style="font-family: Arial, sans-serif;">There is no
doubt that Central Banks all over the world are artificially holding down
interest rates through various schemes that most have called Quantitative
Easing. Quite simply, economics demands that price is affected by Supply and Demand.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Quantitative Easing is simply the process
where Central Banks buy bonds, increasing demand, decreasing supply in the open
market, raising the price of the bonds, therefore reducing the interest
rate.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">This scheme is “experimental” in
that it has never been done before 2009 and nobody knows the long term
effects.</span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
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<span style="font-family: "Arial","sans-serif";">One result of
the lower interest rates is that it makes borrowing cheaper. And when more
money is borrowed, Classical Economics claims that economic activity increases.
So far, it has not really turned out as expected. QE has had a very perverse effect on equity
markets.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";">First, if
interest rates are lower, stocks that pay dividends are more attractive and
their price rises. Second, since the price of a growth stock is the discounted
present value of all future earnings, with lower rates, the present value goes
up significantly. Finally, corporations have a capital structure that uses
equity and debt. When debt is cheap, they tend to undertake a form of “Financial
Engineering” by borrowing money to buy their stock, reducing the supply and
therefore raising the price of the shares. Corporate CEO’s love this Financial
Engineering since it creates a sense of rising corporate earnings per share—not
because of rising earnings, but simply because of a reduction in shares.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;">So lower
interest rates tend to make stock prices go up. But what happens to stock
prices when interest rates rise back to “normal” levels? Simple answer…. stock prices decline. For
this reason, I have urged investors to adopt a cautious attitude and avoid
getting caught in the trap of feeling that they are missing out on rising stock
prices. If stock prices rise because of
a temporary government program, then logic tells us that stock prices will fall
when that temporary government program ends.
Timing the rise and fall is a fool’s errand.</span><br />
<span style="font-family: Arial, sans-serif;"><br /></span></div>
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<span style="font-family: "Arial","sans-serif";">Back to the
title of the article. As Hurricane
Season approaches, it pays to be prepared for the possibility of a Hurricane. We may worry less about Hurricanes in
December, but as June approaches, it pays to be cautious. As December approaches,
it pays to be prepared for snow storms. I get my snow blower ready. I hope I
don’t need to use it, but I get prepared.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
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<span style="font-family: "Arial","sans-serif";">As “seasons”
approach, we get prepared. We really don’t know if our location will suffer a
direct hit from a Hurricane or a Blizzard, but as the season approaches, smart
people get ready.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
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<span style="font-family: "Arial","sans-serif";">We are now 7
years from the beginnings of the last big decline that started in 2008.
Business cycles typically run over 7-10 years. So logic tells us we are
approaching a normal season for some form of stock market correction. Sort of
like November in Massachusetts and May in Miami. Bad weather is coming, we just don’t know how
bad or exactly when. </span><span style="font-family: Arial, sans-serif;">We are also
near the beginning of the “rising interest rate” season. Some of the Wall
Street pundits would have you believe that “this time is different” and rising
interest rates are not a concern. Don’t believe them.</span></div>
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<span style="font-family: "Arial","sans-serif";">An important
factor to remember, is the sectors that have benefitted the most from low
interest rates will likely be the hardest hit. Sectors that have already had
corrections are likely to suffer less. Energy stocks are probably not
overpriced and may not see much of a correction going forward. Auto Industry
stocks are likely to be hit very hard. Sectors that have risen much faster than
the average, like Health Care, may suffer disproportionately as “normal”
returns.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";"><br /></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Of course, it
is possible that “normal” will never return. There are those that will try to
make you believe this. In 1929, the
most prominent and well respected Economist, Irving Fisher famously predicted three
days before the crash, <i><span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN;">"Stock prices have reached what looks like a
permanently high plateau." </span></i><span lang="EN"> So be careful about following market momentum
based on an assumption that “this time is different”.</span></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">On the other hand, it does not
pay to completely cash out and “miss the storm”. Although this will be tempting to some, it
seldom results in superior returns since the strategy requires perfect timing
for the selling and buying. What history teaches us is to prepare for the
possibility, but not the certaintly.<o:p></o:p></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">Stay diversified and maintain
a balanced portfolio. Don’t think your
winners will keep winning forever and likewise do not assume your losers will
never rise again. Keep your fixed income
allocation in very short maturities—even if the interest is almost nothing on
some parts. Be a bit more cautious than
you would have been in 2010. <o:p></o:p></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">Obviously from the graph early
in the article, some mutual fund managers have already become more cautious. A
lot of money flowed out of the market—with prices maintained most probably by
Financial Engineering.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><span style="font-family: Arial, Helvetica, sans-serif;">Then there is the fact that
Corporate Earnings are not growing much. The 1% rise year over year we have seen
justifies only a 1% rise in stock market prices. That alone could be the
catalyst for a 10% correction. Then add in the fact that revenues for companies
in the S&P500 declined by 4.6%--not a good outlook for future earnings. </span><o:p></o:p></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
<span style="font-family: Arial, Helvetica, sans-serif;">In addition, the price of the
S&P500 is way “out of whack” with the value of our economy. This is often
the best source of determining market conditions. See Graph. It is one reason
why Fed Chairman Yellen just this week expressed concern that the “market” was
too high. The blue line is the S&P500--the red lower one is the GDP for the economy. When the market gets significantly ahead of the economy--watch out. Timing the ultimate correction however is very difficult.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4G0mYM_UEFAh_0_BrU6rfV5Xq29uh9VQEV0f0O6hhl3hEQC5_-PLNvTs3a9Fw6byrlVC6d4qXT2spyuJa2ocso85nMTF4uXppZVKCDcmXpEoKF0L-u9bFs4sHFf7tfyzeQ4A5QNAVD3Q/s1600/GDPtoMarket.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4G0mYM_UEFAh_0_BrU6rfV5Xq29uh9VQEV0f0O6hhl3hEQC5_-PLNvTs3a9Fw6byrlVC6d4qXT2spyuJa2ocso85nMTF4uXppZVKCDcmXpEoKF0L-u9bFs4sHFf7tfyzeQ4A5QNAVD3Q/s400/GDPtoMarket.png" width="400" /></a></div>
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<span lang="EN" style="font-family: "Arial","sans-serif"; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
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<span lang="EN" style="font-family: "Arial","sans-serif"; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">As I have said, over many
years I have acquired many skills through experience and education, but one of
those skills is not fortune telling. We
do not know when interest rates will begin rising. We do not know how fast they
will rise or by how much. We do not know
how many shares will be removed from the market through stock buybacks, mergers
and acquisitions, and other Financial Engineering that tends to cause prices to
rise. </span>But we do know that from an
investing standpoint, it is a bit like May in Miami or November in Boston.
Maybe what is coming will be mild. Maybe bad will miss us. On the other hand,
maybe not.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">The most difficult fact for many investors to fathom is that nobody rings a bell at a market top. Corrections are not announced in advance so that you can exit to avoid them. Severe corrections are usually the result of series of 1% declines over time. After a 5% fall </span><span style="font-family: Arial, Helvetica, sans-serif;">there is usually a "buy the dip" media hype. Then after a 10% decline, a "10% is normal" report from the media, followed sometimes by a continued downward spiral punctuated with some daily gains. All of a sudden at about a 15-20% decline, you can begin to see some panic selling, driving the market down further. It ends when bargain hunters begin buying. Typically, those that try to avoid the corrections by selling early are so affected by market sentiment at the bottom, that they avoid the gains that follow by staying on the sidelines--many times suffering a loss because of their actions.</span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">Stay diversified and maintain
a balanced portfolio. Don’t think your
winners will keep winning forever and likewise do not assume your losers will
never rise again. Keep your fixed income
allocation temporarily in very short maturities—even if the interest is almost nothing on
some parts. Be a bit more cautious than
you would have been in 2010. Keep a bit
more cash on hand for future needs so you will not need to sell any holdings if
and when the market is down.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">Here is the positive thing for
you to think about. Corrections are the time that investors get the opportunity
to buy good quality assets at cheap prices.
Corrections are almost always temporary.
<o:p></o:p></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;"><br /></span></div>
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<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">
</span></div>
<div class="MsoNormal">
<span lang="EN" style="font-family: Arial, Helvetica, sans-serif; mso-ansi-language: EN; mso-bidi-font-style: italic;">Summer will follow Winter in
Boston, and December-March in Miami is predictably good weather after the Hurricane season ends in September-October. </span></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-32395111772280656982015-01-27T10:17:00.000-08:002015-01-27T10:17:00.385-08:00Beware of Predictions and Remember the Boy/Girl Scout Motto<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<span style="font-family: Arial, sans-serif;">As I write
this, the “massive” snow storm of “historic” proportions that was predicted to
hit New York City and the Mid-Atlantic on January 26-27 turned out to be almost
a non-event.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Meteorologists were
actually apologizing for missing the forecast by such a large degree. (Boston and
western Massachusetts is another matter.)</span><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Sometimes we
are surprised when something unexpected happens—like a 50% drop in the price of
oil over 6 months. Sometimes we are
surprised when the expected does not happen—like rising interest rates or a
huge blizzard. Sometimes, we don’t know what to expect because one group is
predicting one thing, and another group is predicting another.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Today, we are
seeing a pretty big (almost 2%) drop in domestic US markets. Mostly because those
that claimed corporate earnings would NOT be hurt by a decline in oil prices
and a rising dollar were wrong. Those
that claim that markets cannot fall as long as interest rates stay low will
probably also be proven wrong.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">As an economist
and investment manager, I am not in the business of making predictions but
rather indentifying possibilities and assigning a range of probabilities to
each. The difference between assigning
probabilities and making predictions is very subtle and often mis-understood. But, that difference is essentially the
difference between: Making Predictions
and Being Prepared.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Making
predictions is a form of fortune telling and acting on those predictions by
placing bets is gambling. Identifying
possibilities and assessing probabilities is the process of making Preparations.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Managing your
investments with wisdom is best described by the Boy/Girl Scout Motto: <b><u>Be Prepared</u></b><u>.<o:p></o:p></u></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><u><br /></u></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">I have long
been warning that there are many different possible outcomes to the present
economic trajectory, and there is little historic precedent from which to learn
with one notable exception:<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Markets go up
and down in cycles. There are short term
ups and downs, but generally there are longer term 6-10 year cycles. We have had 6 years of upward trend which is
now quite “long in the tooth”. And,
there are parts of the markets that appear a bit over-valued. </span><span style="font-family: Arial, sans-serif;">The
probability of a substantial market decline, particularly in US stocks and
bonds is now a significant risk. </span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Such
declines seldom send an advance warning—they just grind lower over time and
then begin to recover over time. The complicated process often takes one to
three years and each sector of the market may tend to take a different path.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Keep in mind
that the probability of a temporary decline does NOT justify selling good
investments, and jumping out of the market to avoid a decline. Then jumping
back in later. That would require you to be a fortune teller to be successful. It is a fool’s errand. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">For the
retired investor this means that a prudent course of action is to be sure that
there are sufficient liquid assets available to cover living expenses so that
longer term investment holdings would not need to be liquidated after a temporary
decline in value. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"> </span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">In closing, I
like to compare risk management to the decisions of a ship Captain of a large
passenger liner running the North Atlantic. One knows that there are icebergs. Is the proper course of action running full
speed ahead in the dark? Or, should caution
be the order of the day?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The Captain
of the Titanic would have been a hero if he had set the new speed record for
the crossing. I am sure that many would
have criticized the more cautious Captains of other ships that ran slower that
ill fated evening but for the Titanic’s tragic sinking. There will be times that Being Prepared may
not produce the best short term outcome. But, it provides the best probability of actually
arriving at your destination. (Keep that in mind when the S&P500
outperforms your portfolio for one year or your bond portfolio does better than
your stocks.)<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">As investors,
we should always remember that our time horizon is 5, 10 years or longer. Investing is not like planting tomatoes in your garden---it is more like planting fruit trees in an orchard or like planting and maintaining a vineyard.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Be
Diversified, Be Patient and Be Prepared. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"> </span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">P.S. Happy that we did not get much snow in
Central PA and Northern MD last night. But, my 48" snowblower is at the ready
for our rather long driveway and Carol and I are prepared for whatever snow is
sent our way. <o:p></o:p></span></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-67842616516254804382015-01-14T10:15:00.000-08:002015-01-14T11:44:37.614-08:00Global Uncertainty<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<br />
<span style="font-family: Arial, Helvetica, sans-serif;">Here are some figures that shed some light on the current state of global uncertainty. As of January 14, 2015. See illustration graph below.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In a world with historically low interest rates, long term bonds can be very risky as they lose value if interest rates rise. But, for the past six months, interest rates have fallen. The return from July to January for Long Term Bonds is around 16.5%!</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">In a world with historically low interest rates, short term bonds that are not very risky do not produce much return. The return from July to January for Short Term Bonds is around 0.4%!</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We get conflicting information about the US Economy, but many have believed that things are getting better because unemployment is falling and confidence is improving--except wages are not increasing and the labor force is shrinking because people are giving up looking for work. The return from July to January for the S&P500 US Domestic Market Index is 1.2%.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We hear that things are not so good in Europe and Asia as well as being not so good in Emerging Markets. The return from July to January for the World (International) Stock Market excluding the US is a NEGATIVE -12.2%. (More than 10% declines are categorized as "corrections".)</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you combine the US Market and the World (International) Stock Market for a Global Combined Stock Market, the return from July to January was a NEGATIVE -5.9%.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you look at the important Global Oil/Energy sector, the return from July to January is a whopping NEGATIVE -28.9%. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Last January in 2014, NOBODY predicted falling interest rates and such a dramatic drop in Oil prices. Very few, if any predicted a negative return for international stocks.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Conventional wisdom indicates that falling energy prices should be good for the world economy--but many fail to realize that a great deal of economic growth has been fueled by capital investment in energy exploration, production and delivery. With falling oil prices, that investment is grinding to a halt--putting severe pressure on economic growth. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Conventional wisdom would indicate that housing should be booming with interest rates so low. But, many fail to realize that housing tends to fall in value when interest rates rise, so buyers are wary of losing their equity if prices fall after they buy. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Conventional wisdom tells us that growth should be accelerating--that we should finally be recovering from 2009. But, many fail to realize that all of the Central Banks around the world continue to tell us that the global economy is too weak to support "normal" interest rates. Perhaps, this is as good as it gets in this "cycle"--after all, we are now 6 years away from the "bottom". We may actually have peaked and are on our way to the next "bottom". Certainly oil and commodity prices are telling us that.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">We are sailing in "uncharted waters" and nobody is completely sure of what the future holds. When sailing in "uncharted waters" it is rational to be cautious--with your spending and your investments. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Remember that investing Principles are always more important than Predictions--stay focused on the long term with a conservative, well diversified, risk managed, portfolio. And, don't use past performance by itself as a reliable indicator of the future. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7XAoeJ5fwHVpBoyVnh_bztizzYCF_ZFoo-ydvcrTAlYky3ahlZSbNjX0fs-44JQ5uOIaLWmc_IWDocdDldC6FJutHgNHU6rc4H3nQFFREQGVGIqWJqRp_4_CrdbDkbaFWEaYq16ROO4M/s1600/Jan14sixmonth.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7XAoeJ5fwHVpBoyVnh_bztizzYCF_ZFoo-ydvcrTAlYky3ahlZSbNjX0fs-44JQ5uOIaLWmc_IWDocdDldC6FJutHgNHU6rc4H3nQFFREQGVGIqWJqRp_4_CrdbDkbaFWEaYq16ROO4M/s1600/Jan14sixmonth.JPG" height="166" width="400" /></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<br />
<br />
<br />Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-16524840647368015852014-12-16T13:56:00.000-08:002014-12-16T13:56:02.077-08:00The 2014 Oil Story<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<span style="font-family: Arial, sans-serif;">One must be
careful when listening to the media and hyperbole about oil.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Based on recent headlines and commentary you
would think that we have so much excess oil that prices will continue to
plummet until a large percentage of the producers go bankrupt. </span><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<span style="font-family: Arial, sans-serif;">Like with most
panics that are set off by the unexpected, the accompanying headlines tend to
exaggerate. </span><span style="font-family: Arial, sans-serif;">Here are some
simple facts. You can review much of the data at </span><a href="http://www.eia.gov/" style="font-family: Arial, sans-serif;">http://www.eia.gov/</a><span style="font-family: Arial, sans-serif;">.</span><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Global oil
consumption and production typically remain in equilibrium—supply equals demand
and demand equals supply. Both
consumption and production have been increasing steadily except for one year in
2009. </span><span style="font-family: Arial, sans-serif;">In 2009,
global oil consumption was 84,971,000 barrels per day, with production being
84,951,000. This was a decline of 1,128,000 per day from 2008.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">In 2013, consumption had risen by 6.4% to
90,375,000 barrels per day, with production being 90,130,000. So in essence, growth
of both consumption and production grew from 2009 to 2013 by about 1.5% per
year.</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The buffer
between supply and demand is inventory or stocks that have remained around
4,128,000,000 barrels or about a 45 day supply.
Whenever supply drops, this inventory normally supplies the market
temporarily and rising prices tend to increase supply, bringing everything back
to equilibrium. Without having empty
storage locations, if consumption drops or supply suddenly increases, there is no
place to put the oil. Production has to
be reduced quickly or prices can fall rapidly. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Studying the
numbers confirms that production has increased in North America significantly,
rising as much as 1,500,000 per day year over year. The rest of the world’s
production had remained stable, with one exception: Libya. So in essence, the growth in North America
made up for the loss in Libya and North America recently supplied enough to
support stability and equilibrium. That
was until this Summer, when the production from Libya came back online. Now, unless production was cut somewhere,
production was about to exceed consumption by about 0.6% or 600,000 barrels per
day. With no place to put the oil, producers
had one of two choices: A) Keep pumping and take a lower price, or; B) Stop
pumping. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">For the most
part, producers have chosen option A and have kept pumping. After all, once you’ve
invested in drilling the well, the incremental cost of pumping it is very low,
so even at a substantially lower price, pumping oil is still a very profitable
business for most producers. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">In fact, when
the producer is a government (like with Saudi Arabia, Iran, Russia, and
Venezuela) who needs the revenue to pay the bureaucrats and government
programs, there is an incentive to actually pump more oil to “make up” for the
lower price. So, even with too much production causing low prices, many
producers may actually increase production causing the price to fall even
faster and ultimately lower. <o:p></o:p></span><br />
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><b>So how does
this finally stabilize?</b><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"> </span><span style="font-family: Arial, sans-serif;"> </span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">First,
consumption over time will increase. The trend is an annual increase of about
1,350,000 barrels per day. We may be below this trend in early 2015, but will likely
return to this trendline in late 2105 or early 2016. And, lower prices tend to
encourage consumption. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Next, production
will stop growing as fast or even perhaps decline. This is the “wildcard” and is extremely
unpredictable. Saudi Arabia could
unilaterally decide that they are better off with higher prices and could cut
their production by 10%. There could be
some other global event. At present
prices, one can be sure that new drilling will be seriously reduced. Without new drilling, oil production tends to
fall off quickly—particularly in shale oil locations.</span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><b>Keep in mind,
assuming a constant global consumption throughout the day at the rate of 90,000,000
barrels per day, the “excess” supply in the market is equivalent to only 14
minutes of global consumption!</b><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">History has
taught us recently that the price supporting stable equilibrium for consumption
and production is somewhere above $100 per barrel—almost double the price that
it has currently reached. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">It would seem
rational to assume that we will be back to $100+/barrel within 18 months. Under
certain circumstances we could be back within 90-120 days.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">If you are a
gambler, your “market bets” will require prediction of an exact date for “recovery”
of oil prices. I wish you luck.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">If you are a
long term investor, consider that the current situation is an opportunity to
increase your ownership of well managed, and well capitalized energy producers
at bargain basement prices. These types of opportunities do not present
themselves so often. Each investor
should examine their own tolerance for risk and act accordingly.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Of course,
everyone likes to get the best price, so even the long term investor will want
to predict the time when we will hit “bottom”. Unfortunately the exact time of the “bottom”
is unknowable. So, when the “best” time
is unknowable, but the opportunity looks attractive, the principle of “dollar
cost averaging” is often the strategy used by the most successful investors---along
with intelligent diversification. Start
buying and continue buying periodically as long as the price and opportunity
seems attractive. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Finally,
always consider that there is always that remote possibility that the hyperbole
turns out to be predictive—that panic begets panic and consumption begins
falling because of economic contraction.
History teaches that this possible, but not probable. In such a case,
the result is probably just that it will take longer than expected to see the
benefits of your investments.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<strong style="background-color: #eeeecc; color: #424858; font-family: Arial, sans-serif; font-size: 12px; line-height: 15.33px;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</strong></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-48157902342124724642014-11-18T10:32:00.002-08:002014-11-18T10:43:59.589-08:00Investing with ZIRP<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<span style="font-family: Arial, sans-serif;">Zero Interest
Rate Policy (ZIRP) is where the central bank maintains a policy of artificially low
interest rates. Interest rates may not be “zero” but the idea is that they are “nominally”
zero or less when inflation is considered.</span><span style="font-family: Arial, sans-serif;">
</span><span style="font-family: Arial, sans-serif;">Essentially, we have been in a ZIRP environment for some time. </span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">There is no historical precedent for this
environment over any significant period of time.</span><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">There is an
equation, ER= I +E that can be adapted to many investment theories. ER is “expected return”. I is “interest” and E is “equity return from
dividends and capital appreciation”. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">When
discussing portfolio investment allocation, one could think in terms of the “expected
return” being the sum of the return from Interest on fixed income investments
(bonds) plus the return from dividends and capital appreciation applicable to Equities
or stocks. <o:p></o:p></span><br />
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Another use
of the equation is the attempt to explain the “expected return” and valuation
of a particular investment, such as Equities or stocks in general. The “expected return” from owning equities or
stocks would be the return you would get from a zero risk investment, plus the “extra”
return or “risk premium” that you would earn because of the special additional
risk associated with stocks. Stocks are
generally considered to be more risky than bonds and hence investors expect a
higher return. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Generally, in
either use of the equation, I is not zero. But, in a ZIRP environment, it IS zero,
creating some strange and unusual outcomes as well as a great deal of
misunderstanding.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span>
<span style="font-family: "Arial","sans-serif";">In the
Allocation example, with I=0, ER=E, meaning the entire return from the
portfolio comes from equities. In the
Valuation example with I=0, ER=E meaning the expected return of the investment
is equal to the “equity risk premium” associated with owning stocks.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">History
teaches us that the “equity risk premium” or ERP for stocks varies depending on
many factors, but generally is in the range of 5% to 8% for the “market”. What that means is that the price of the “market”
or for an “average” stock is based on the expectation that the owner will earn
an average ERP of 6.5% per year over and above the % return per year for a “riskless”
interest bearing investment. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So let’s say
for example, we have US 10 year Treasuries
(theoretically riskless in normal times) paying 5% and the ERP of 6.5%. Then the ER or expected return would be 11.5%
per year. (This happens to be the
average return from the stock market since 1900.) <o:p></o:p></span><br />
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Now, let’s
say that US 10 year Treasuries are only paying 2.5%. One would expect the ERP
to stay at 6.5% and the ER would drop to 2.5+ 6.5=9%. But, what if people are concerned about
rising interest rates, where US 10 year Treasuries could fall in value. The “riskless”
interest bearing asset now becomes very short term notes that earn essentially zero
interest. In this odd case, the ER would drop to 0+6.5=6.5%. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So why would
stock markets rise more than 9% per year in an environment where the long term “expected
return” would be somewhere between 6.5% and 9% per year? The S&P500 rose significantly more than
this in 2013 and so far in 2014.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">When the
alternative is 2.5% from US 10 year Treasuries, then one is paying a price of
$100 for a $2.50 return or a 40 “PE” or price/earnings ratio. In such a world, to some a price of $2000 for
stocks that earn $100 seems like a reasonable “PE” of only 20. (This is about where we are right now.)<o:p></o:p></span><br />
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">During that
time from 1900 to 2014, when the market earned an average of 11.5%, the PE averaged
around 15. When market prices rise to a
PE of 20, the price for a dollar of return is theoretically 30% higher than
average. Put another way, the return going forward based on current prices, on
a percentage basis should be expected to be 30% less---more like 8% than 11.5%.
<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So, no matter
how you slice and dice, the reality is that a ZIRP, while providing a temporary
rise in prices, essentially reduces the expected future returns from saving and
investing. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Here is the
most important point…<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">What if ZIRP
is temporary and that “magic” formula of ER=11.5% with I equal to 5% and ER
equal to 6.5% becomes the norm again?
That means a PE of around 15 and a dramatic drop in stock prices—even assuming
that earnings and the economy remain strong. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So unless you
are one who believes that interest rates will stay below their historical
averages for the foreseeable future, you should assume that the S&P500 is
considerably overvalued—even if earnings grow at the same time that interest
rates rise. That means that you should
at least maintain a conservative asset allocation with a considerable portion
allocated to fixed income. And, a
portion of that fixed income should be liquid enough to take advantage of lower
stock prices when they “correct” back to more normal valuations. <o:p></o:p></span><br />
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">This should
not be considered as some form of market timing strategy because when and even
if this “correction” might occur is “unknowable”. It is better to think in
terms of the proven concept of rebalancing; recognizing that markets fluctuate
between being overvalued and undervalued. Buying during periods of
undervaluation is one of the keys to being a successful investor. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">An important
caution… Interest bearing fixed income
investments in a ZIRP environment can be very risky. Bonds historically are a part of the
portfolio in order to provide a stable if not even a negatively correlated return
compared to stocks. But in a transition out of a ZIRP to a normal environment,
BOTH stocks and many bonds will decline in value. In such a situation, investments that are
stable in a rising interest rate environment may be quite attractive and
valuable. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Finally, when
thinking about government sponsored ZIRP, it is true that ZIRP favors the
consumer over the investor. And, since consumers and borrowers as voters outnumber
investors and savers, one should be aware that ZIRP will be politically
acceptable until rising prices and inflation become an issue to consumers and
borrowers.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">I happen to
believe that one major reason we have not seen inflation, despite central bank
stimulus is the simultaneous trend to force or “encourage” banks to raise
capital and reduce leverage. When banks have reached the politically acceptable
level of capitalization, money velocity and inflation will likely increase
considerably. When this will occur is a
bit of a mystery—even to the central bankers. But, when it does ZIRP will end.<o:p></o:p></span></div>
Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-79307801914228581612014-10-13T11:37:00.000-07:002014-10-13T12:32:18.800-07:00Gambler, Saver, or Investor ?<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<span style="font-family: Arial, sans-serif;">Are you a Gambler, Saver, or Investor? </span><span style="font-family: Arial, sans-serif;">The answer
to that question is important yet a surprising number of people who participate
in financial markets do not even know appropriate descriptions for each title.</span><br />
<span style="font-family: Arial, sans-serif;"><br /></span>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">A Gambler is
someone who seeks to “make money” by placing “bets” based on speculation that
their “guess” about the future is accurate. </span><span style="font-family: Arial, sans-serif;">A Saver is
someone who seeks to accumulate financial assets by spending less than their
current income in order to fund future spending. A Saver expects that their
financial assets will decline whenever they stop accumulating and begin
spending more than their current income in the future. </span><span style="font-family: Arial, sans-serif;">An Investor
accumulates financial assets with the expectation that those assets will
provide a future and rising income.</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">One
complication is that sometimes Savers engage in gambling and sometimes
Investors engage in the process of saving.
But, most people have a “preferred mindset” concerning money that
defines them as being primarily a Gambler, Saver or Investor.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">The study of
Economics is really a social science studying aspects of human behavior. And as an Economist, I believe that it is
important for people to have an understanding of their “preferred mindset”
concerning their activity as it relates to financial markets. This “preferred mindset” will determine their
emotional reaction to market fluctuation.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Keep in mind,
market participants at any time include Gamblers, Savers and Investors. Savers may not be directly participating, but
since most Savers use bank accounts or insurance company products, they indirectly
participate in markets through the activities of these intermediaries. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">When markets
are rising, Gamblers are generally happy as most of their bets are winners. In
addition, rising markets in a low interest rate environment attracts Savers
seeking a higher rate of return. Prolonged
periods of rising market prices tend to generate overconfidence on the part of
Gamblers and Savers. They forget the
<b><u>Fundamental Law of Markets is that market prices fluctuate--UP and DOWN.</u></b><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">When markets
decline and Gamblers begin to incur losses, they tend to try to protect their
gains by “locking in” and selling. When
markets decline and Savers begin to incur losses, they tend to fear that the “climate
has changed” and that the only place for “safety” is with bank deposits or
insurance company products. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Investors see
market declines from a different perspective.
For the same reason that people prefer good weather over bad weather—sunny
days are generally more pleasant than rainy, stormy ones; Investors prefer
rising markets. What makes Investors
different is that they understand that downward market fluctuations are “normal and necessary”
and really are opportunities that improve the Investor’s chance of meeting
their goal of future and rising income. <b><u>Investors are always potential buyers and
buyers are always looking for a low price.
</u></b><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Investors
know that even when they are “taking income” for example while in retirement
that some of their dividends will need to be “reinvested” requiring them to be
buyers on almost a continuous basis.</span><br />
<span style="font-family: "Arial","sans-serif";"><o:p><br /></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">I make no
judgments as to the one title or activity being better or more noble. There are many successful and rich
Gamblers. (Although there are probably more Gamblers who lose than win.) And,
if you can save enough that your future income requirements will be met, despite
inflation; being a Saver provides a certain emotional comfort. However, few can save enough to meet those
future income requirements, <em>inflation considered</em>.</span><br />
<span style="font-family: "Arial","sans-serif";"><o:p><br /></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Savers tend to seek “certainty”. Yet funding “retirement” with a fixed savings
program does not provide the “certainty” they seek. Retirement comes with many
uncertainties: A) Lifespan; B) Income
requirements given uncertain health---medical and long term care expenses; and
C) Inflation. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Investors
accept the reality and necessity of market fluctuation. They realize that the present uncertainty of
daily “market price” is more than offset by the probability of rising future
income from “investing”. By being owners of a highly diversified portfolio of
businesses they improve their chances of dealing with the future uncertainties
of inflation and unknown living expenses. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><u><b>It has been
said that you can tell whether you are a Gambler, Saver or Investor by their emotional
reaction to market fluctuations like we have seen during July-October
2014.</b></u> If the market fluctuations during
the week of October 6, 2014 caused you to contemplate major liquidation so you
can buy back later at a lower price, then you are probably a Gambler. If they
made you feel uncomfortable, thinking that perhaps you should sell your
investments and just put the money in the bank, then perhaps you are a Saver. </span><span style="font-family: Arial, sans-serif;">If the recent
fluctuation caused you to start thinking about what you might buy with cash you
have been accumulating, then you are an Investor.</span></div>
<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">Remember that
there is a big difference between those that predict market direction
versus those that predict the timing of market direction. If you think you can predict the timing of
market direction, you are a Gambler. On the other hand, History has taught Investors
to trust that the market direction for a portfolio of quality diversified
portfolio of businesses is generally up over the "long term" of more than five year time horizons.
<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">So, to an
Investor, market fluctuations are seen as either a buying opportunity or simply
the “cost of doing business”. Everyone
should be a Saver with some of their money, but for many people, being an
Investor is the best way to prepare for the future.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">If you are a
Gambler, all I can say is “Good Luck” since I have no idea what markets are
going to do tomorrow, next week, or next month. If you are a Saver, I suggest
that you are underestimating the very real uncertainties of Lifespan, Health
and Inflation---and suggest that you need much higher savings than you probably
have accumulated---or you need to learn how to be an Investor. As an Investor, I can say that as prices for good quality
companies fall, they become increasingly more attractive to buy—hence the
probability of you reaching your future income goals actually go up.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";"><br /></span></div>
<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif";">One important
thing to note. Increased use of computer
software seems to have emboldened Gamblers to make bigger and bigger “bets”.
This leads to the potential for an increased level of volatility and makes the
market very dangerous for the small time Gambler. (On some days as much as 60% of the market volume is from Gamblers.) It also makes the market very uncomfortable
and perhaps inappropriate for the Saver. <b><u>
For the Investor with the right patient and disciplined approach, this high volatility potentially creates substantially increased opportunity.</u></b></span><br />
<span style="font-family: "Arial","sans-serif";"><strong><u></u></strong><o:p><br /></o:p></span></div>
<br />
<br />
<br />
<strong style="background-color: #eeeecc; color: #424858; font-family: Arial, sans-serif; font-size: 12px; line-height: 15.33px;">This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.</strong>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-48610060378440812982014-10-06T15:12:00.000-07:002014-10-06T15:23:36.076-07:00The Mystery of Sustained Low Interest Rates<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">The terms “HQLA” and “LCR” may be a bit wonky for the
typical investor, but given the effects of these terms as they have been
recently placed in banking regulations, they are important.<o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Interest rates are extremely important. They affect
the value of almost every financial asset including stocks. It has long been
acknowledged that short term interest rates can be influenced, if not
controlled by the Federal Reserve and other Central Banks. But, up until
recently, it was assumed that Central Banks could not affect longer term
interest rates---the assumption was that “market forces” of supply and demand
would determine long term interest rates. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Even Central Banks and many famous economists have
been puzzled and frustrated to some extent by the fact that falling interest
rates since the 2009 financial crisis have not resulted in more economic
expansion and growth.<o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">The economic “law” of supply and demand has not been
repealed. Interest rates are low because the price buyers are willing to pay
for a given unit of debt obligation is high.
If a “buyer-lender” or “investor” is willing to pay $100 for the promise
from a debtor to pay $4.00 per year in interest, the interest rate is 4%. If however, buyer-lenders bid up the “price”
to $400 for the same promise of $4.00 per year in interest, the interest rate
is only 1%. The only way that the price
can go from $100 to $400 is for there to be increased demand and/or decreased
supply for interest payments. </span></span><span style="font-family: Arial, Helvetica, sans-serif; font-size: 10pt;">So where is this increasing demand coming from?</span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">For a while, the Federal Reserve itself became a
buyer-lender with the introduction of Quantitative Easing. They bought Government Debt with IOU's created "out of thin air". But continued QE was
politically unpopular. So the massive
increase in demand created by QE is coming to an end, at least in the US. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">To replace it, a more politically acceptable way to
increase demand for the interest payments from the government was devised
through implementation of regulations to “insure the financial stability of
banks”. These regulations were recently
finalized with minimum standards for LCR or “Liquidity Coverage Ratio”. (Rules
approved September 3, requiring 80% compliance by 1/1/2015 and full compliance
by 2017.) The Liquidity Coverage Ratio regulations indicate that banks are
required to have a certain level of holdings defined as HQLA or “High Quality
Liquid Assets”. The most acceptable form
of debt meeting the definition for HQLA?
You guessed it….Government Debt.<o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">A recent Bloomberg article indicates banks have added
$180 Billion to their now historically high government debt holdings this year.
One estimate indicates that Bank of America alone will have to add $65 Billion
to their government debt holdings in the future to become fully compliant with
the new regulations. </span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">(<a href="http://www.bloomberg.com/news/2014-10-05/america-s-banks-pile-up-treasuries-as-deposits-overwhelm-lending.html">http://www.bloomberg.com/news/2014-10-05/america-s-banks-pile-up-treasuries-as-deposits-overwhelm-lending.html</a>)<o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Insuring the safety of bank deposits by requiring banks
to buy government debt tends to produce low interest rates but it does not
encourage any expansion in business activity. Increased savings by the public
increases bank deposits and ramps up the requirement for banks to hold even
more government debt. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">To reverse this trend, given the current regulations,
the public will need to borrow more and save less. Borrowing more is unlikely because again,
consistent with well intentioned goal of financial stability, lending standards
have been tightened. Saving less is also
unlikely because people are so uncertain about the future. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Lowering interest rates as an economic policy has long
been compared to pushing on a string. Economic expansion will require a
dramatic change in the global population’s expectations regarding future
economic opportunity and prosperity. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: 10.0pt;"> </span><span style="font-size: 10pt;"> </span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">So on one hand, the government has been stimulating
the economy…but on another hand it has been implementing policies to restrict
credit…policies that restrain economic expansion. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Despite the probability that the Fed may raise short
term interest rates in 2015, keep in mind that regulations to “insure the
financial stability of banks” were put into place not just in the US, but
around the world—particularly in Europe.
Interest rates in Europe and Japan are considerably lower than in the
US.<o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Unless we see a substantial increase in “animal
spirits” leading to both increased borrowing (hopefully for productive activity)
and/or decreased savings, it is very possible that we will have low interest
rates for a long time. (<i>Animal spirits is an economic term referring
to people’s willingness to take risks because of an expected future economic
boom.)</i> Of course, in such a low interest rate scenario, without such "animal spirits" we will have many banks where most of the depositor’s money is simply lent to
the government. This is a recipe for
economic stagnation. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">A far out possibility is that depositors tire of low
interest rates and begin seeking alternatives to placing their money with banks
subject to the LCR regulations--in other words with "investments" NOT subject to the LCR regs. We have actually seen a bit of this….increased
demand and rising prices for dividend paying stocks. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Rising interest rates will only occur because of
increased supply of interest payments (more borrowing) from borrowers and/or
decreased demand for them (less lending/saving). <i>(This is a bit counter-intuitive as popular opinion seems to assume
that interest rates are low because banks are not lending. Interest rates are
low because demand for interest payments from the largest borrowers, namely
governments, is increasing.)</i> $4 of annual interest would no longer fetch a
price of $400. The price would need to fall perhaps back to the historical
average of $100. (4% per year interest rate.)
One wonders whether the regulators considered that possibility as one
can only imagine the economic effects if the value of HQLA held by banks declined
significantly. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Keep in mind, more borrowing might be not because of “animal
spirits” and increased productive activity, but rather because of increased
borrowing by governments. Given the current situation with Social Security and
Medicare, that is a distinct possibility. <o:p></o:p></span></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<br />
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;">So am I making a prediction? No I am, not. There is a high probability
that interest rates will stay low for longer than many expect. But there is also a possibility that interest
rates could rise significantly. What I
am warning about is a high degree of uncertainty regarding interest rates. And,
where there is high uncertainty, caution is usually warranted. </span><o:p></o:p></span></div>
<div style="text-align: justify;">
<span style="font-size: 10.0pt;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span></div>
<span style="font-family: Arial;"><span style="color: #333333;"><span style="font-size: 10pt;"><span style="font-size: 10pt;"><span style="color: #333333; font-family: Arial;"><span style="color: #424858; font-family: "Arial","sans-serif"; font-size: 10.5pt; line-height: 170%; mso-fareast-font-family: "Times New Roman";"><o:p><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><o:p><span style="font-family: "Arial", "sans-serif"; font-size: 9pt; mso-bidi-font-family: "Times New Roman";"><strong>This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.<o:p></o:p></strong></span></o:p></span></o:p></span></span></span></span></span></span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0tag:blogger.com,1999:blog-8392508515853370100.post-40190374284722597642014-09-16T11:08:00.003-07:002014-09-16T11:21:56.206-07:00Indicators of Relative Value<object data="https://clients4.google.com/voice/embed/webCallButton" height="85" type="application/x-shockwave-flash" width="230"><param name="movie" value="https://clients4.google.com/voice/embed/webCallButton" /><param name="wmode" value="transparent" /><param name="FlashVars" value="id=4a32b606461cea499c427296540869901acc4f6e&style=0" /></object><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Often investors fail to remember the important indicators of relative value in the market. </span><span style="font-family: Arial, Helvetica, sans-serif;">Stocks fluctuate from being undervalued to overvalued. But the definition of these terms and the boundaries are subject to debate.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">One important "indicator" is the aggregate value of the stock market vs. the total value of the Gross National Product of the the US economy. When in the graph below, the blue line (Value of Stocks) is below the red (GDP) line, stocks generally continue to rise. When the blue line rises above the red one, a correction usually follows not too long after.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisRez02_p8sl9ijeXJ77e5jxY9ijXPvFWIRDn1hvIIY0Zrw0gMpXIWVdxk4Zuq5fwbTz_UGlMLGzYG9AvOqbxXRoZOFz60IDCOIsLV_egfBajLW4y7ZjNaKRmA9UHkfcGQZBrbHtu9aHw/s1600/Relative+Valuation.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisRez02_p8sl9ijeXJ77e5jxY9ijXPvFWIRDn1hvIIY0Zrw0gMpXIWVdxk4Zuq5fwbTz_UGlMLGzYG9AvOqbxXRoZOFz60IDCOIsLV_egfBajLW4y7ZjNaKRmA9UHkfcGQZBrbHtu9aHw/s1600/Relative+Valuation.png" height="265" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Actually, the historical average for the ratio of equity value to GDP is around 70%. (When the blue line touches the red, the ratio is 100%. Just before the correction in 2001, the ratio reached 150%. Just before the crash of 2008, it reached 112%. The ratio is now 126%. It has been above 100% since the beginning of 2013.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Another clue provided by the above graph can be ascertained by studying the relative movement of the blue and red lines from the late 1960's to 1980 where the value of stocks did not "keep up" with gains in the economy. What was the cause? The answer: RISING INTEREST RATES. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">So not only are we in a "overpriced" market, we are also at a point where rising interest rates are likely. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">It would seem that the intelligent investor should be particularly careful to search for individual stocks (and sectors) that can be purchased at reasonable prices rather than trying to follow the market.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">If you were lucky enough to retire in 1982, the stock market was significantly undervalued, and we were poised for a period of falling interest rates...in other words, the perfect environment for a rising stock market and extraordinary returns. The situation today is almost the exact opposite of the environment in 1982. </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Until we see a correction, being overweight in short term fixed income seems to be the most prudent prescription. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>Donald "Wayne" Strouthttp://www.blogger.com/profile/00783187920169018228noreply@blogger.com0