Investing and Faith

Contrary to popular opinion, investors need to have faith. Specifically, they need to have faith that the market has an organizing logic, and then they need to have faith that they can figure out what that logic is.

It doesn’t matter whether you are a value or growth investor, technician or fundamental analyst, random walk theorist or statistician, or anything else. When you invest you are a believer.

40 years ago today…

On February 21, 1972, President Nixon arrived in Beijing after more than two decades of hostility between China and the US. The world was also on the brink in those days. The US was still in Vietnam, and Russia was building up a million-man force on the Chinese border getting ready to invade.Viewing the remainder of this article requires a Subscription

National Geographic “Doomsday Preppers”

A reader pointed me to the National Geographic Channel's new show called "Doomsday Preppers". I had never watched the show until today, but I have to admit that it was intriguing.Viewing the remainder of this article requires a Subscription

The Hunt for Yield

I am not immune to the hunt. Yield can help you wait out a lot of volatility, and is especially important in times of questionable returns and incredibly low rates on savings. Pundits have been talking up the dividend yields of some brand name US firms such as JNJ or PG.Viewing the remainder of this article requires a Subscription

Recording everything

The piece below from the Brookings Institute is pretty disturbing -- what happens when governments have access to everything? (h.t.Viewing the remainder of this article requires a Subscription

Netflix P/E chart

I'm testing some new charting software . . . Viewing the remainder of this article requires a Subscription

On Minyanville

I was recently asked to become a regular columnist for Minyanville.com. I will have a weekly column analyzing issues in asset allcoation, behavioral finance, and contrarian investing. The newsletter will continue to provide more timely analysis of geopolitics, in-depth analysis of specific strategies, and actionable investing ideas.

Finishing the week, finishing the quarter

And the news keeps rolling in . . . (in no particular order):

• German retail sales down. Interesting in light of the fact that US sales are up while incomes are down (yes, lower savings rate - AGAIN). What does it mean? Consumers will be tapped out faster without HELOCs.

Viewing the remainder of this article requires a Subscription

Relief rally?

A quick thought: what will happen after a debt ceiling deal is reached? Will the market breathe a sigh of relief and rally in celebration? Will the actual economic news of slowing GDP growth and weak housing and lackluster employment be a wall of worry to climb or finally priced in? Is the market alViewing the remainder of this article requires a Subscription

Paralyzed by the unknown

As August 2nd looms, participants are holding off on making any major moves. You're a CEO and have to decide whether to make a major investment in the US to build a new plant; it's a 3 year project to build out.Viewing the remainder of this article requires a Subscription

When the Tide Recedes

Warren Buffett famously remarked that when the tide recedes we get to see who has been swimming with not bathing suit.Viewing the remainder of this article requires a Subscription

Taxes – High or Low?

I don't like writing about taxes. For starters, high, low, and everything in between is always irrelevant, since anyone who pays any taxes always thinks his tax rate is too high. But Bruce Bartlett, an economic advisor to the White House, had an interesting article in the NY Times yesterday.Viewing the remainder of this article requires a Subscription

Sooner or later…

You can run on for a long time
Run on for a long time
Run on for a long time
Sooner or later God’ll cut you down
Sooner or later God’ll cut you down

Go tell that long tongue liar
Go and tell that midnight rider
Tell the rambler, the gambler, the back biter
Tell ‘em that God’s gonna cut ‘em down
Tell ‘em that God’s gonna cut ‘em down

–Johnny Cash from “God’s Gonna Cut You Down”

Johnny Cash had it right for the rambler, gambler, and the lot, and he had it right for the markets as well. Sooner or later, the truth will cut you down. For months I have been writing about the fundamentals of this economy not looking good. Whether it was PMI showing the coming margin contraction, euro-zone insanity, or the fake Chinese growth. Maybe not this week, and maybe not next, but the truth cannot be ignored. ADP employment numbers are disappointing. ISM numbers have now officially rolled over and are at levels not seen since September 2009, except then, they were heading up, and now, if we keep this trend, we’ll be in contraction territory by next month.

Not surprisingly, the precious metals have held up. Why? Because deflationary busts mean that there are no financial stores of wealth, so investors have to gravitate to the physical. Why doesn’t that lead to inflation? Well, because for storing wealth, we can only gravitate to non-perishable currencies, like gold, and perishables, like food, can’t store our wealth. Additionally, people will trade down, eat less, and eat cheaper. Farmland, on the other hand, will do better than the commodities that it grows. Regardless, of the specifics, though, one thing is clear, the equity, fixed income, and currency markets must at some point reflect the economic realities.

The pressure to Do

Investors and professional money managers are probably all-too familiar with the pressure to Do. Why aren’t you DOING anything? What did you DO today? Why am I still sitting in cash? I want my money to work for me. Etc. These are common phrases, most often said critically rather than as open conversation starters. There is an intense pressure to make changes to portfolios, invest for the sake of investing, or a feeling of boredom from lack of trading. This pressure to DO can drive investors to make errors in judgment along every discipline type. For example, a value investor might begin seeing new metrics that she previously rejected as valid, or a chart reader might see patterns where there are none. The behavioral biases that drive these decisions have been discussed numerous times (and will be again) including cognitive dissonance, confirmatory bias, recency bias, etc.

Why am I bringing this up now? Perhaps because I am feeling pressure to Do. Clients are upset about large cash holdings. Clients are curious as to why we haven’t made changes in their portfolios and are still holding on to positions that have not been moving recently. Mind you, many of these are the same clients that complained when we sold silver in the 40′s and bought GDX and XLU. However, their concerns are valid. After all, who wants to pay fees on cash holdings, or have cash holdings earning virtually no return at all? These are concerns of investors and especially retirees world-wide these days. If REITs are offering only 3+% yield, and that’s AFTER a huge decline in real estate prices, where’s an investor to look? The pressure to Do also mounts as themes we’ve discussed for so long (years, in some cases) have not yet played out. How long should we maintain our short euro position? Yen? What will the world of bi-flation look like? Etc.

It’s at these times that we go back to our underlying philosophy. We are not quick movers. By studying the numbers, I’ve come to recognize that the returns are in the waiting. Waiting for the right opportunity to enter a trade, and then waiting for the theme to play itself out. On a daily or weekly basis, our goal is to prepare and research the next opportunities, and to evaluate our initial considerations for our current positions, but mostly, the returns are in the waiting.

In this type of environment, I keep telling subscribers that the opportunities are in relative trades. For example, the driving force of returns will be a world where margins come down, meaning equity valuations are still rich, and that we want limited and focused exposure if at all. Small caps are expensive relative to large caps, and except for some rare exceptions, should be avoided. This has a lot of implications for institutional traders, such as there’s an ETF arbitrage opportunity between cap weighted and equal weighted indices, namely cap weighted should outperform. For private investors, there’s no need to actively short the markets, but rather individuals can just lower equity exposure. Waiting can also happen for absolute levels. For example, long term, we like India, so we’re waiting. We have no current exposure, but I am looking for an opportunity. Why not invest early here? Mainly because I believe that the entire equity and investing complex is vulnerable, much like 2007 or 2000, and there’s no rush for us. While I think India will outperform the US, I still believe that both will show absolute losses. On the other hand, as I spoke about a few days ago, Vietnam is starting to look attractive even on an absolute level. With interest rates in the teens, and a market that has gone down about 15-20% in week and flushed out margin calls/weak holders, VNM looks like the type of market I will be able to hold long term at these levels. But for now, I’m waiting.

All of that was to highlight the fact that waiting is also DOING. Holding cash is an active decision, and should not be seen as inactivity. Holding a position is equivalent to making an infinite number of choices to hold it over all other assets. For true investors, there is never an “end game”, because there is always preparation, research, and waiting, and ongoing decision-making.

Relevant ETF’s: IWM, RWM, RSP, SH, SPY, VNM, EPI, SLV, GLD

The least beloved assets

While everyone is enamored with LinkedIn (I don’t get it), I can’t help but wonder whether there is an equal but opposite reaction to other assets. So I’ve been trying to glean some insight from the exercise.

For starters, let’s talk about the VIX. It’s down about 80-90% off it’s 2008 highs.

Hanging out at 15 or 16, it’s really an unloved asset class. Why? Call it the Bernanke put. Call it complacency. Call it whatever you want. Sometimes, it’s difficult to know why an asset is down, but I am pretty sure, when it goes up, and it will, it will be a violent move that will catch a lot of people by surprise.

What else?

How about 10 year yields?

There have been a lot of articles about how the debt ceiling limits and QEII have been a powerful combo to sap supply from the market and will cause a further spike in prices (decrease in yields). I can accept that over the near term, prices might find support; however, the long term picture for the US is not like Japan, in that the US does not have the internal savings to fund continually low rates. On the contrary, we depend on foreign savers, and those will be limited as rates stay compressed.

Of course, there’s the dollar index. Depending on how far back you go, it’s either down a lot or A LOT (think down around 90% from 1913 (creation of the Fed). I’m not a mad-eyed dollar bull, but I happen to think that some currencies, like the euro and yen, are in deeper trouble, and currencies all being relative…well, I’d question those who call for the end of the dollar completely.

Now, some things are going down and I’m not sure they’ll go back up. Electricity prices, for example, or computer memory prices, or the price of men’s pants, or the price of a flat screen TV. Those prices are facing creative destruction, so I’m not a buyer.

On the whole, asset prices have become so dependent on debt that it’s difficult to judge value. But here are a couple we’re on the lookout for and still waiting: Spanish real estate, Colombia, Florida real estate, Indian equities.

Relevant ETFs: VXX, VXN, TLT, TBT, GXG, INF, UUP