Posts filed under ‘Politics’
Bargain Hunting for Doorbuster Discounts
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 1, 2015). Subscribe on the right side of the page for the complete text.
It’s that time of year again when an estimated 135 million bargain shoppers set aside personal dignity and topple innocent children in the name of Black Friday holiday weekend, doorbuster discounts. Whether you are buying a new big screen television at Amazon for half-off or a new low-cost index fund, everyone appreciates a good value or bargain, which amplifies the importance of the price you pay. Even though consumers are estimated to have spent $83 billion over the post-turkey-coma, holiday weekend, this spending splurge only represents a fraction of the total 2015 holiday shopping season frenzy. When all is said and done, the average person is projected to dole out $805 for the full holiday shopping season (see chart below) – just slightly higher than the $802 spent over the same period last year.
While consumers have displayed guarded optimism in their spending plans, Americans have demonstrated the same cautiousness in their investing behavior, as evidenced by the muted 2015 stock market gains. More specifically, for the month of November, stock prices increased by +0.32% for the Dow Jones Industrial Average (17,720) and +0.05% for the S&P 500 index (2,080). For the first 11 months of the year, the stock market results do not look much different. The Dow has barely slipped by -0.58% and the S&P 500 has inched up by +1.01%.
Given all the negative headlines and geopolitical concerns swirling around, how have stock prices managed to stay afloat? In the face of significant uncertainty, here are some of the calming factors that have supported the U.S. financial markets:
- Jobs Piling Up: The slowly-but-surely expanding economy has created about 13 million new jobs since late 2009 and the unemployment rate has been chopped in half (from a peak of 10% to 5%).
Source: Calafia Beach Pundit
- Housing Recovery: New and existing home sales are recovering and home prices are approaching previous record levels, as the Case-Shiller price indices indicate below.
Source: Calculated Risk Blog
- Strong Consumer: Cars are flying off the shelves at a record annualized pace of 18 million units – a level not seen since 2000. Lower oil and gasoline prices have freed up cash for consumers to pay down debt and load up on durable goods, like some fresh new wheels.
Source: Calculated Risk Blog
Despite a number of positive factors supporting stock prices near all-time record highs and providing plenty of attractive opportunities, there are plenty of risks to consider. If you watch the alarming nightly news stories on TV or read the scary newspaper headlines, you’re more likely to think it’s Halloween season rather than Christmas season.
At the center of the recent angst are the recent coordinated terrorist attacks that took place in Paris, killing some 130 people. With ISIS (Islamic State of Iraq and Syria) claiming responsibility for the horrific acts, political and military resources have been concentrated on the ISIS occupied territories of Syria and Iraq. Although I do not want to diminish the effects of the appalling and destructive attacks in Paris, the events should be placed in proper context. This is not the first or last large terrorist attack – terrorism is here to stay. As I show in the chart below, there have been more than 200 terrorist attacks that have killed more than 10 people since the 9/11 attacks. Much of the Western military power has turned a blind eye towards these post-9/11 attacks because many of them have taken place off of U.S. or Western country soil. With the recent downing of the Russian airliner (killing all 224 passengers), coupled with the Paris terror attacks, ISIS has gained the full military attention of the French, Americans, and Russians. As a result, political willpower is gaining momentum to heighten military involvement.
Source: Wikipedia
Investor anxiety isn’t solely focused outside our borders. The never ending saga of when the Federal Reserve will initiate its first Federal Funds interest rate target increase could finally be coming to an end. According to the CME futures market, there currently is a 78% probability of a 0.25% interest rate increase on December 16th. As I have said many times before, interest rates are currently near generational lows, and the widely communicated position of Federal Reserve Chairwoman Yellen (i.e., shallow slope of future interest rate hike trajectory) means much of the initial rate increase pain has likely been anticipated already by market participants. After all, a shift in your credit card interest rate from 19.00% to 19.25% or an adjustment to your mortgage rate from 3.90% to 4.15% is unlikely to have a major effect on consumer spending. In fact, the initial rate hike may be considered a vote of confidence by Yellen to the sustainability of the current economic expansion.
Shopping Without My Rose Colored Glasses
Regardless of the state of the economic environment, proper investing should be instituted through an unemotional decision-making process, just as going shopping should be an unemotional endeavor. Price and value should be the key criteria used when buying a specific investment or holiday gift. Unfortunately for many, emotions such as greed, fear, impatience, and instant gratification overwhelm objective measurements such as price and value.
As I have noted on many occasions, over the long-run, money unemotionally moves to where it is treated best. From a long-term perspective, that has meant more capital has migrated to democratic and capitalistic countries with a strong rule of law. Closed, autocratic societies operating under corrupt regimes have been the big economic losers.
With all of that set aside, the last six years have created tremendous investment opportunities due to the extreme investor risk aversion created by the financial crisis – hence the more than tripling in U.S. stock prices since March 2009.
When comparing the yield (i.e., profit earned on an investment) between stocks and bonds, as shown in the chart below, you can see that stock investors are being treated significantly better than bond investors (6.1% vs. 4.0%). Not only are bond investors receiving a lower yield than stock investors, but bond investors also have no hope of achieving higher payouts in the future. Stocks, on the other hand, earn the opportunity of a double positive whammy. Not only are stocks currently receiving a higher yield, but stockholders could achieve a significantly higher yield in the future. For example, if S&P 500 earnings can grow at their historic rate of about 7%, then the current stock earnings yield of 6.1% would about double to 12.0% over the next decade at current prices. The inflated price and relative attractiveness of stocks looks that much better if you compare the 6.1% earnings yield to the paltry 2.2% 10-Year Treasury yield.
Source: Yardeni.com
This analysis doesn’t mean everyone should pile 100% of their portfolios into stocks, but it does show how expensively nervous investors are valuing bonds. Time horizon, risk tolerance, and diversification should always be pillars to a disciplined, systematic investment strategy, but as long as these disparities remain between the earnings yields on stocks and bonds, long-term investors should be able to shop for plenty of doorbuster discount bargain opportunities.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AMZN and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Stock Market Tug-of-War
Image by © Royalty-Free/Corbis
Some things never change. There are several certainties in life, including death and taxes. And when it comes to investing, there are several other certainties: the never-ending existence of geopolitical concerns, and incessant worries over Fed policy.
Let’s face it, since the dawn of mankind, humans have been programmed to worry, whether it stemmed from avoiding a man-eating lion or foraging for food to survive (see Controlling the Investment Lizard Brain). Investors function in much the same way.
There is always a constant tug-of-war between bulls and bears, and if you are obsessed with following the relentless daily headlines about a Grexit (European Greek Exit) and an imminent Federal Reserve rate hike, you like many other investors will continue to experience sweaty palms, heart palpitations, and underperformance.
Despite the gloomy headlines, the bulls are currently winning the tug-of-war as measured by the 6-year boom in global stock prices, which has breached a record $70 trillion in value (see chart below).
Source: Mark J. Perry (Carpe Diem)
If you become hostage and react to the headlines about Greece, China, Fed policy, Ukraine, ISIS, Russia, Ebola, North Korea, QE Tapering, etc., not only are you ignoring the key positives fueling this bull market (see also Don’t Be a Fool, Follow the Stool) but you are also costing yourself a lot of money. While I have been watching the “sideliners” for years, they have missed a market driven by generationally low interest rates; improved employment picture (10% to 5%); tame inflation; steady improvement in housing market; fiscal deficit reductions; record corporate profits; record share buybacks and dividends; contrarian investor sentiment (leaving plenty of room for converts to join the party), and other fundamentally positive factors.
Yes, stocks will eventually go down by a significant amount – they always do. Stocks can temporarily go down based on the fear du jour (like the 10-20% declines in 2010, 2011, 2012, and 2014), but the nastier hits to stock markets always come from good old fashion cyclical recessions. As I’ve discussed before, there are no signs of a recession on the horizon, and the yield curve has been a great predictor of this trigger (see Dynamic Yield Curve in Digesting Stock Gains). Until then, the bears will be fighting an uphill battle.
Independent of recession timing, investing is a very challenging game, even for the most experienced professionals. The best long-term investors, including the likes of Warren Buffett and Peter Lynch, understand the never-ending geopolitical and Fed policy headlines are absolutely meaningless over the long run. However, media outlets, blogs, newspapers, and radio shows make money by peddling fear as economic and political concerns jump like a frog from one lily pad to the next. At Sidoxia we have a disciplined and systematic approach to creating diversified portfolios with our proprietary S.H.G.R. model (“sugar”) that screens for attractively valued investments. We believe this is the way to win the long-term tug-of-war.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Inflating Dollars & Deflating Footballs
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (February 2, 2015). Subscribe on the right side of the page for the complete text.
In the weeks building up to Super Bowl XLIX (New England Patriots vs. Seattle Seahawks) much of the media hype was focused on the controversial alleged “Deflategate”, or the discovery of deflated Patriot footballs, which theoretically could have been used for an unfair advantage by New England’s quarterback Tom Brady. While Brady ended up winning his record-tying 4th Super Bowl ring for the Patriots by defeating the Seahawks 28-24, the stock market deflated during the first month of 2015 as well. Similar to last year, the stock market has temporarily declined last January before surging ahead +11.4% for the full year of 2014. It’s early in 2015, and investors chose to lock-in a small portion of the hefty, multi-year bull market gains. The S&P 500 was sacked for a loss of -3.1% and the Dow Jones Industrial index by -3.7%.
Despite some early performance headwinds, the U.S. economy kicked off the year with the wind behind its back in the form of deflating oil prices. Specifically, West Texas Intermediate (WTI) crude oil prices declined -9.4% last month to $48.24, and over -51.0% over the last six months. Like a fresh set of substitute legs coming off the bench to support the team, the oil price decline represents an effective $125 billion tax cut for consumers in the form of lower gasoline prices (average $2.03 per gallon nationally) – see chart below. The gasoline relief will allow consumers more discretionary spending money, so football fans, for example, can buy more hot dogs, beer, and souvenirs at the Super Bowl. The cause for the recent price bust? The primary reasons are three-fold: 1) Sluggish oil demand from developed markets like Europe and Japan coupled with slowing consumption growth in some emerging markets like China; 2) Growing supply in various U.S. fracking regions has created a temporary global oil glut; and 3) Uncertainty surrounding OPEC (Organization of Petroleum Exporting Countries) supply/production policies, which became even more unclear with the recent announced death of Saudi Arabia’s King Abdullah.
Source: AAA
More deflating than the NFL football’s “Deflategate” is the approximate -17% collapse in the value of the euro currency (see chart below). Euro currency matters were made worse in response to European Central Bank’s (ECB) President Mario Draghi’s announcement that the eurozone would commence its own $67 billion monthly Quantitative Easing (QE) program (very similar to the QE program that Federal Reserve Chairwoman Janet Yellen halted last year). In total, if carried out to its full design, the euro QE version should amount to about $1.3 trillion. The depreciating effect on the euro (and appreciating value of the euro) should help stimulate European exports, while lowering the cost of U.S. imports – you may now be able to afford that new Rolls-Royce purchase you’ve been putting off. What’s more, the rising dollar is beneficial for Americans who are planning to vacation abroad…Paris here we come!
Source: XE.com
Another fumble suffered by the global currency markets was introduced with the unexpected announcement by the Swiss National Bank (SNB) that decided to remove its artificial currency peg to the euro. Effectively, the SNB had been purchased and accumulated a $490 billion war-chest reserve (Supply & Demand Lessons) to artificially depress the value of the Swiss franc, thereby allowing the country to sell more Swiss army knives and watches abroad. When the SNB could no longer afford to prop up the value of the franc, the currency value spiked +20% against the euro in a single day…ouch! In addition to making its exports more expensive for foreigners, the central bank’s move also pushed long-term Swiss Treasury bond yields negative. No, you don’t need to check your vision – investors are indeed paying Switzerland to hold investor money (i.e., interest rates are at an unprecedented negative level).
In addition to some of the previously mentioned setbacks, financial markets suffered another penalty flag. Last month, multiple deadly terrorist acts were carried out at a satirical magazine headquarters and a Jewish supermarket – both in Paris. Combined, there were 16 people who lost their lives in these senseless acts of violence. Unfortunately, we don’t live in a Utopian world, so with seven billion people in this world there will continue to be pointless incidences like these. However, the good news is the economic game always goes on in spite of terrorism.
As is always the case, there will always be concerns in the marketplace, whether it is worries about inflation, geopolitics, the economy, Federal Reserve policy, or other factors like a potential exit of Greece out of the eurozone. These concerns have remained in place over the last six years and the stock market has about tripled. The fact remains that interest rates are at a generational low (see also Stretching the High Yield Rubber Band), thereby supplying a scarcity of opportunities in the fixed income space. Diversification remains important, but regardless of your time horizon and risk tolerance, attractively valued equities, including high-quality, dividend-paying stocks should account for a certain portion of your portfolio. Any winning retirement playbook understands a low-cost, globally diversified portfolio, integrating a broad set of asset classes is the best way of preventing a “deflating” outcome in your long-term finances.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
The Teflon Market
At the pace of all this head-scratching going on, our population is likely to turn completely bald. One thing is for certain, nothing has scratched this Teflon stock market. If you want to have fun with a friend, family member or co-worker, just ask them how they feel about politics and then ask them how stocks have done this year? You’re bound to get some entertaining responses. Despite a Congress that has a lower favorability rating than cockroaches, lice, root canals, and colonoscopies , the S&P 500 index is up a whopping +22% and the NASDAQ index + 30% this year, both records. The USA Today ran with the Teflon theme and had this to say:
“This year alone the stock market has survived the recent brush with a U.S. debt default. It has also survived a government shutdown. Tax hikes. Government spending cuts. The threat of war. Terror at the Boston Marathon. A spike in interest rates. Plunging Apple shares. Stock exchange glitches. Fears of a less-friendly Federal Reserve. And a narrow escape from going over the “fiscal cliff.” Nothing bad seems to stick.”
The reason nothing is sticking to this Teflon market is because the market is more sensitive to reality rather than perception. Here are some come current discrepancies between these two states:
Perception: The economy is on the verge of a recession. Reality: The economy has grown GDP for 15 of the last 16 quarters. The private sector has added about 7.5 million jobs and the unemployment rate has been cut by about three percentage points.
Perception: Corporations are struggling. Reality: Corporations are actually posting record profits; increasing dividends significantly; buying back stock; and registering record profit margins.
Perception: The Federal Reserve controls the economy. Reality: Federal Reserve Chairman Ben Bernanke has little to no influence on decisions made by companies like Google Inc (GOOG), Facebook Inc (FB), McDonald’s Corp (MCD), Tesla Motors Inc (TSLA), and Target Corporation (TGT) (see also The Greatest Thing Since Sliced Bread). Interest rates are actually higher than when QE1 (quantitative easing) was first implemented, yet growth persists.
These types of mental mistakes occur outside the realm of financial markets as well. For example, most people fail to correctly answer the question, “Which animal is responsible for the greatest number of human deaths in the U.S.?”
A.) Alligator; B.) Bear; C.) Deer; D.) Shark; and E.) Snake
The ANSWER: C) Deer.
Deer colliding into cars trigger seven times more deaths than alligators, bears, sharks, and snakes combined, according to Jason Zweig at the Wall Street Journal (see also Alligators & Airplane Crashes). Other mental disconnects include the belief that planes are more dangerous than cars. In fact, people are 65 times more likely to get killed in your own car versus a plane. Also, misconceptions exist that guns are more dangerous than smoking, or that tornadoes are more dangerous than asthma – both beliefs wrong.
Party Not Over Yet
Long-time followers and readers of Investing Caffeine know that I’ve been an active participant in this bull market that started in 2009, evidenced by my critical views of Armageddonists like Peter Schiff, John Mauldin, Nouriel Roubini, Meredith Whitney, and other doom & gloomers.
I fully recognize there’s no honor in being Pollyannaish or a perma-bull just for the sake of it. However, it’s also very clear that excessive fear exercised by many investors proved very painful as S&P 500 level 666 has exploded to 1,744. The extreme panic that reached a pinnacle in 2009 has now morphed into an insidious skepticism (see Sentiment Pendulum ). Investor emotions continually swing from fear to greed, and with the political shenanigans going on in Washington DC, the skeptical pendulum has a long way before reaching euphoric levels. Or stated differently, the pre-party is over (see my article from earlier this year, Those Who Missed the Pre-Party), but the DJ is still playing and the cops aren’t here to break up the party yet.
I agree that we’ve had a Teflon market for a handful of years. There have been a few minimal scratches and a few hand burns along the way, but for the most part, those investors who have stayed invested and ignored the endless manufactured crisis headlines have been rewarded handsomely. Investing in stocks will always cause some heartburn, but if you don’t want your long-term retirement to get grilled, seared, pan-fried, or flambéed, then you want to make sure you still have some stocks in your Teflon pan.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AAPL and GOOG, but at the time of publishing, SCM had no direct position in FB, TGT, TSLA, MCD, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Who Said Gridlock is Bad?
Living in Southern California is extraordinary, but just like anything else, there are always tradeoffs, including traffic. Living in the United States is extraordinary too, but one of the detrimental tradeoffs is political gridlock…or is it? I am just as frustrated as anybody else that the knucklehead politicians in Washington can’t get their act together (especially on bipartisan issues such as taxes/immigration/deficits, etc.), but as it turns out, gridlock has created a significant financial silver lining.
Let’s take a look at some of the positive impacts of gridlock:
1) Federal Spending as % of GDP Declines
Source: Calafia Beach Pundit
The demands of both Tax-and-Spend Democrats and Tea-Partier Republicans fell on deaf ears thanks to gridlock. The U.S. didn’t institute the depth of austerity that the far-right wanted, and Congress didn’t implement the additional fiscal stimulus the far-left desired. The result has been a slow but steady recovery, which has brought spending closer to historical averages.
2) Private vs. Public Sector
Source: Calafia Beach Pundit
The implementation of more responsible (or less irresponsible) government spending has freed up resources and allowed the private sector to slowly add jobs. The next wave of sequestration spending cuts may unleash some more pain on the public sector and delay overall economic recovery further, but just like dieting, we will feel much better once we have shed more debt and spending – at least as a percentage of GDP.
3) Deficit Reduced Significantly
Source: Calafia Beach Pundit
The chart above is closely tied to point #1 (government spending), but as you can see, revenues have climbed significantly since 2010. I would argue plain economic cyclicality has more impact on the volatility of revenues. Blaming the current administration on the collapse or crediting them for the rebound is probably overstated. Comprehensive tax reform would likely have a lot more impact on the slope of revenues relative to the recent tax policy changes.
Source: Calafia Beach Pundit
The same picture can be seen from a different angle, as shown above (Deficit as % of GDP). While the absolute dollar amounts are staggeringly high, as a percentage of GDP, the percentage has been chopped by more than half since the peak of the crisis.
Everyone would like to see politicians solve all of our problems, but as we have experienced, deep philosophical differences can lead to political gridlock. When it comes to our nation’s finances, gridlock may not be optimal, but you can also see that a stalemate is not always the worst outcome either. As politicians continue to scream at each other with purple faces, I will monitor the developments from my car radio while in California gridlocked traffic…sunroof open of course.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Sidoxia Debuts Video & Goes to the Movies
Article is an excerpt from previously released Sidoxia Capital Management’s complementary February 1, 2013 newsletter. Subscribe on right side of page.
The red carpet was rolled out for the stock market in January with the Dow Jones Industrial Average rising +5.8% and the S&P 500 index up an equally impressive +5.0% (a little higher rate than the 0.0001% being earned in bank accounts). Movie stars are also strutting their stuff down the red carpet this time of the year as they collect shiny statues at ritzy award shows like the Golden Globes and Oscars. Given the vast volumes of honors bestowed, we thought what better time to put on our tuxes and create our own 2013 nominations for the economy and financial markets. If you are unhappy with our selections, you are welcome to cast your own votes in the comments section below.
By award category, here are Sidoxia’s 2013 selections:
Best Drama (Government Shutdown & Debt Ceiling): Washington D.C. has provided no shortage of drama, and the upcoming blockbusters of Shutdown & Debt Ceiling are worthy of its Best Drama nomination. If Congressional Democrats and Republicans don’t vote in favor of a new “Continuing Resolution” by March 27th, then our United States government will come to a grinding halt. At issue is Republican’s desire for additional government spending cuts to lower our deficit, which is likely to exceed $1 trillion for the fifth consecutive year. If you like more heart pumping drama, the Senate has just passed a Debt Ceiling extension through May 18th…mark those calendars!
Best Horror Film (Sequestration): Most people have already seen the scary prequel, The Fiscal Cliff, but the sequel Sequestration deserves the horror film honors of 2013. This upcoming blood-filled movie about broad, automatic, across-the-board government cost cuts will make any casual movie-watcher scream in terror. The $1.2 trillion in spending cuts (over 10 years) are so gory, many viewers may voluntarily leave the theater early. If you are waiting for the release, Sequestration is coming to a theater near you on March 1st, unless Congress, in an unlikely scenario, cancels the launch.
Best Director (Ben Bernanke): Federal Reserve Chairman Ben Bernanke’s film, entitled, The U.S. Economy, had a massive budget of about $16 trillion dollars, based on estimates of last year’s GDP (Gross Domestic Product). Nevertheless, Bernanke managed to do whatever it took (including trillions of dollars in bond buying) to prevent the economic movie studio from collapsing into bankruptcy. While many movie-goers were critical of his directorial debut, inflation has remained subdued thus far, and he has promised to continue his stimulative monetary policies (i.e., keep interest rates low) until the national unemployment rate falls below 6.5% or inflation rises above 2.5%.
Best Foreign Film (China): Americans are not the only people who produce movies globally. A certain country with a population of nearly 1.4 billion people also makes movies too…China. In the most recently completed 4th quarter, China’s economy experienced blockbuster growth in the form of +7.9% GDP expansion. This was the fastest pace achieved by China in two whole years. To put this metric into perspective, compare China’s heroic growth to the bomb created by the U.S. economy, which registered a disappointing -0.1% contraction at the economic box office. China’s popularity should bring in business all around the globe.
Best Special Effects (Japan): After coming out with a series of continuous flops, Japan recently launched some fresh new special effects in the form of a $116 billion emergency stimulus package. The country also has plans to superficially enhance the visual portrayal of its economy by implementing its own faux money-printing program modeled after our country’s quantitative easing actions (i.e., the Federal Reserve stimulus). As a result of these initiatives, the Japanese Nikkei index – their equivalent of our Dow Jones Industrial index – has risen by +29% in less than 3 months to a level of 11,138.66 (click here for chart). But don’t get too excited. This same Nikkei index peaked at 38,957 in 1989, a far cry from its current level.
Best Action Film (Icahn vs. Ackman): This surprisingly entertaining action film features a senile 76-year-old corporate raider and a white-haired, 46-year-old Harvard grad. The investment foes I am referring to are the elder Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management. In addition to terms such as crybaby, loser, and liar, the 27-minute verbal spat (view more here) between Icahn (his net worth equal to about $15 billion) and Ackman (net worth approaching $1 billion) includes some NC-17 profanity. The clash of these investment titans stems from a decade-old lawsuit, in addition to a recent disagreement over a controversial short position in Herbalife Ltd. (HLF), a nutritional multi-level marketing firm.
Best Documentary (Europe): As with a lot of reality-based films, many don’t receive a lot of attention. So too has been the commentary regarding the eurozone, which has been relatively peaceful compared to last spring. Despite the comparative media silence, European unemployment reached a new high of 11.8% late last year. This European documentary is not one you should ignore. European Central Bank (ECB) President Mario Draghi just stated, “The risks surrounding the outlook for the euro area remain on the downside.”
Best Original Song (National Anthem): We won’t read anything politically into Beyonce’s lip-synced rendition of The Star-Spangled Banner at the presidential inauguration, but she is still worthy of the Sidoxia nomination because music we hear in the movies is also recorded. I’m certain her rapping husband Jay-Z agrees whole-heartedly with this viewpoint.
Best Motion Picture (Sidoxia Video): It may only be three minutes long, but as my grandmother told me, “Great things come in small packages.” I may be a little biased, but judge for yourself by watching Sidoxia’s Oscar-worthy motion picture debut:
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in HLF, Japanese ETFs, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
2012 Party Train Missed Thanks to F.U.D.
Article is an excerpt from previously released Sidoxia Capital Management’s complementary January 2, 2013 newsletter. Subscribe on right side of page.
There was plenty of fear, uncertainty, and doubt (F.U.D.) in 2012, and the gridlock in Washington has been a contributing factor to investors’ angst. As the saying goes, the stock market climbs a “wall of worry” and that was certainly the case this year with the S&P 500 index rising +13.4% (over +15% including dividends), and the Nasdaq index soaring +15.9% before dividends. Short-term investors had ample worries to fret about throughout the year, including a European financial collapse, the presidential elections, fiscal cliff negotiations, and a Mayan doomsday (see this hilarious clip). Despite these fears dominating the daily airwaves and newspaper headlines, long-term investors holding an adequate equity asset allocation jumped on the non-stop 2012 party train.
While Americans were served a full plate of concerns this year, global investors benefited from European Central Bank intervention by Mario Draghi who promised to do “whatever it takes” to save the euro currency (the European dominated EAFE index rose +13.6% in 2012). Growth here in the U.S. slowed as cautious consumers and businesses horded cash, but a rebound in the domestic housing market provided support to the sluggish economic expansion (3rd quarter GDP growth was revised higher to +3.1% vs. 2011).
Now that the presidential elections are over and we achieved a partial fiscal cliff deal, the amount of F.U.D. going into 2013 will diminish, which should provide a tailwind to economic growth and the financial markets. The impending debt ceiling and deficit reduction talks may slow the train down, but if a sufficient resolution can be accomplished, the economic party train can continue chugging along.
Attention: Grab Your Ear Muffs
Economists and strategists will continue to sound smart and be completely wrong about their 2013 predictions (see Strategist Predictions & MacGyver), but that won’t stop average investors from neglecting their long-term investment plans. Investors have commonly overindulged in certain narrow asset classes like overpriced bonds and gold, which both underperformed equities in 2012. Diversification may sound like an overused finance cliché, but the principle is paramount if you are serious about reducing risk, beating inflation, and smoothing out incessant volatility.
2013 New Year’s Resolution: Avoid Personal Fiscal Cliff
With the New Year upon us, just because politicians have financial problems, it doesn’t mean you have to be fiscally irresponsible too. There is no better time than now to make a financial New Year’s resolution to avoid your own personal fiscal cliff. If you are too heavily parked in cash or over-exposed to low-yielding bonds subject to significant interest rate risk, then now is the time to re-evaluate your investment plan.
There is always something to worry about (see also Uncertainty: Love It?), but in order to prevent working into your 80s, a long-term investment plan needs to be implemented, regardless of economic headlines or market volatility. In other words, investors need to replace their short-term microscope for their long-term telescope. By committing to a disciplined fiscal New Year’s resolution, you can earn a ticket on the 2013 party train!
Monthly News Tidbits
The presidential elections dominated the news cycle in November, but there were a whole host of other tidbits occurring over the last thirty-one days. Here are some of the main storylines:
Congress Approves Mini Fiscal Cliff Deal: After months of debate, Congress painfully and reluctantly agreed upon an estimated $600 billion mini fiscal cliff deal that represents the largest tax increase in two decades. Contrary to a $4 trillion “Grand Bargain” deal, this bill amounts to a more modest reduction in the deficit over 10 years. The Senate passed the bill by a margin of 89-8 and the House of Representatives by a spread of 257-167. The fact that any deal got done is somewhat surprising since the gridlock has been especially rampant in the House. As proof of this assertion, one need only point to the chamber’s meager voting activity record – the House has passed the fewest bills in 60 years during its recent term.
Fiscal Cliff Bill Details: Despite the Senate’s convincing voting margin, large numbers of Congressional Democrats and Republicans were unhappy with the bill’s details. The President made good on his campaign promises by securing revenue-raising taxes from wealthy Americans. More specifically, the law contains provisions including a 39.6% rate on earners above $400,000; a 20% capital gains rate increase from 15%; new exemption/deduction limits; an estate tax increase to 40% from 35%; and a measure to help prevent near-term milk price spikes. There are plenty more details, but I will spare your eyeballs and brain from the painful minutiae. If you haven’t had enough partisan politics, no need to worry, you have the debt ceiling debate to look forward to in a few months.
Quantitative Easing Redux (QE4): Federal Reserve Chairman Ben Bernanke helped orchestrate additional monetary policy stimulus via a fourth round of quantitative easing (a.k.a., QE4). As part of this plan, the Fed will vastly expand its $2.8 trillion balance sheet in 2013 with additional monthly purchases of $45 billion of long-term Treasuries. By executing this invigorating QE4 bond buying program, the Fed pledges to keep interest rates in the cellar until the unemployment rate falls below 6.5% or inflation rises above 2.5%.
Same-Sex Marriage: The Supreme Court tackled a long-debated social issue and declared it would rule on the legality of a law denying benefits to same-sex couples in 2013.
New Female President: Additional hormones were added to the gender-skewed global pool of testosterone-filled leaders as South Korea elected its first female president, Park Geun-hye.
Global Bank Fined: Another greedy financial institution got caught with its hand in the cookie jar. UBS agreed to cough up a $1.5 billion penalty to the U.S., U.K., and Swiss authorities as part of an agreement to resolve its involvement in the manipulation of the London Interbank Offered Rate (LIBOR) – see also Wall Street Meets Greed Street.
Sandy Hook Distressing Disaster: The gun control debate was reignited when 20-year-old Adam Lanza gunned down 20 children and 7 adults (including his mother) at a Connecticut elementary school – Sandy Hook Elementary. Besides the examination of an assault weapons ban, the government needs to revisit the inadequate awareness and resources devoted to the serious issue of mental illness.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including fixed income ETFs, but at the time of publishing SCM had no direct position in EFA, UBS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Conquering the Political & Economic Hurricanes
Article is an excerpt from previously released Sidoxia Capital Management’s complementary November 1, 2012 newsletter. Subscribe on right side of page.
Hurricane Sandy wreaked havoc across the East Coast, negatively impacting an estimated 60 million people and leaving more than 8 million people literally in the dark, without power. The hurricane may have been downgraded to a “superstorm” but the 90+ mile per hour winds and waves reaching up to 40 feet high created devastating economic impacts. How large were these impacts you may ask? This big swirly cloud that slammed into the Atlantic coastline shut down about ¼ of our economy; led to about 15,000 canceled flights; is expected to cut our nation’s
Q4 output by up to -1.5% in GDP (Gross Domestic Product); and closed our financial markets for two days (the longest weather related closure of the New York Stock Exchange since 1888). Although the damage has been distressing for millions, about 5 million kids I think were okay with missing school on Monday (I’m going out on a limb with that guess).
Besides a superstorm-hurricane offered to us by Mother Nature, our country is about to undergo a new political hurricane next week with our nation’s presidential elections. Many polls show a statistical dead heat among the two candidates (Mitt Romney and Barack Obama), but political pundits point to the key battleground state of Ohio as the key determinant of the overall election results (Obama currently appears to have a slight lead in several polls). Some wildcard issues that could throw a wrench in an incumbent victory include a potential apathetic turnout by the Democratic voter base (hurt worse by “Superstorm Sandy”); worsening employment figures reported four days before the election; or perhaps a political gaffe. None of these polls are set in stone, and the situation remains rather fluid (no Sandy pun intended).
Regardless, whatever the political outcome, history shows us that the victor’s political affiliation has little correlation with the results in the financial markets. Ed Yardeni illustrated this point recently with the following chart:
Source: Yardeni.com
What many people seem to overlook is that there are many other variables besides political affiliation that can and will impact future financial market performance including, Congressional control that may be dominated or split by the opposing political party; monetary policy set by the Federal Reserve Bank; or uncontrollable globalization influences. As emerging market countries continue to outpace our economic growth, our country’s power and persuasion will naturally diminish due to the “law of large numbers”. In other words, as the largest, most powerful economic country in the world, the mathematical gravity hinders our country’s ability to grow rapidly.
Despite the economic and political challenges our country faces, we continue to move in the right direction, albeit at a very slow historical pace. As you can see from Ed Yardeni’s chart below, our recovery from the recent recession (bottom red line) is the worst recovery in more than 50 years. On the bright side, the freshly reported Q3 GDP figures came in at a +2.0% GDP rate – uninspiring, but an improvement from Q2, and better than Wall Street consensus forecasts.
Source: Yardeni.com
The growth has been considerably weak, yet the U.S. has still recorded 13 consecutive quarters of positive growth. Not bad considering Europe is in recession and countries like Spain are Greece are suffering unemployment rates of about 25%.
In order to maintain or accelerate economic growth, most Americans understand the Fiscal Cliff (~$700 billion in automatic spending cuts and tax hikes) needs to get resolved immediately. Failure to face this urgent challenge could have dire consequences, so voting for politicians who understand the immediacy of this problem is important.
Moving into Seasonally Strong Period
Selling in May, and going away for six months has not been a profitable strategy this year, as measured by the S&P 500 index. Furthermore, investors have also survived the historically scary performance months of September and October. Nothing is ever guaranteed, but historically the months of November through April tend to be rewarding periods.
Blowing against this positive seasonal trend have been lifeless earnings. In fact, corporate profits and revenue growth have slowed to a trickle in Q3, thanks to lackluster results from companies like Caterpillar (CAT); General Electric (GE); 3M Company (MMM); United Technologies (UTX); McDonalds (MCD); and others. Denying the global slowdown is difficult, but there are signs of stabilization and fortunately financial markets look forward and not backward.
Overshadowing some of that recent slowing growth has been the positive development in the housing market. As one can see in the chart below, housing starts are up significantly at +60% from early last year, but history tells us there is still plenty of room to move higher.
Source: Calafia Beach Report
Year-to-date stock performance has been nothing short of spectacular either. Although stocks were down about -2% in October, the S&P 500 index remains up +12% through October, and that excludes about +2% in dividends. If you look at the overall asset classes in the chart below, real estate is the winning segment this year with U.S. stocks not far behind. Commodities have fared the worst and the fixed income asset class showed modest gains relative to global equities.
Source: Hays Advisory Blog
Within U.S. stocks, the largest of large stocks (“Megacaps”) have enjoyed the best results. This trend is not surprising given the significant uncertainties investors are reviewing (e.g., elections, Fiscal Cliff, Europe, etc.).
Source: Calafia Beach Report
The recent Hurricane Sandy turned superstorm caused enormous damage to our country, and the political and economic hurricanes we have experienced over the last few years have yet to be conquered. The good news, in all these cases (physical and financial), is that the clouds are in the process of lifting; the worst damage should be behind us; our outlook will be more certain; and we can now begin focusing on the rebuilding process.
Like Washington, individual investors cannot afford to ignore their own personal Fiscal Cliffs. In a future entitlement-pressured world, investors need to proactively develop an investment plan, because ignoring your investments by kicking the can down the road only does more harm than good. I’m confident that, regardless of the election results next week, cooler heads will eventually prevail, and Democrats and Republicans can work together to solve our country’s Fiscal Cliff problems. Superstorm Sandy will not be the last natural disaster our country faces, but like investing, the more prepared one is for these unforeseen events, the better you will be equipped to conquer your financial future.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct positions in CAT, MMM, GE, UTX, MCD, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Autumn, Elections and Replacement Refs
Article is an excerpt from previously released Sidoxia Capital Management’s complementary October 1, 2012 newsletter. Subscribe on right side of page.
As September has come to a close, the grand finale of our annual seasons has commenced… autumn. How do we know autumn is here? Well, for starters, the leaves are changing colors; the weather is about to cool; and the NFL replacement referees are watching Sunday football games from their couches.
While 2012 is split into quarters, football games and investment seasons are also divided into four quarters. Right now, the economic fourth quarter has just started and the home team is winning. As we can see from the stock market scoreboard, the S&P 500 index is up +15% this year (+6% in Q3) and the NASDAQ index has catapulted +20% through September (+6% also in Q3). The U.S. home team is winning, but a fumble, blocked kick, or interception could mean the difference between an exciting win and a devastating loss.
Another game divided into four parts is the game of presidential politics. However, presidential elections are divided into four years – not four quarters. Five weeks from now, we’ll find out if our Commander in Chief Obama will get to lead our team for another game lasting four years, or whether backup quarterback Mit Romney will be called into the game. The fans are getting restless due to anemic growth and lingering joblessness, but for now, the coach is keeping the president in the starting lineup. Both President Obama and Governor Romney will take some head-to-head practice snaps against each other in the first of three scheduled presidential debates beginning this week.
Bernanke Changes Rules
The New York Jets have Tim Tebow for their secret weapon (1 for 1 yesterday!), and the United States economy has Ben Bernanke. Although our home team may be winning, it has required some monetary rule-changing policies to be instituted by Federal Reserve Chairman Ben Bernanke to keep our team in the lead. Just a few weeks ago, Mr. Bernake instituted QE3 (3rd round of quantitative easing), which is an open-ended mortgage buying program designed to lower home buying interest rates and stimulate the economy (see Helicopter Ben to QE3 Rescue). The short-term benefits of the $40 billion monthly bond buying binge are relatively clear (lower borrowing costs for homebuyers), but the longer-term costs of inflation are stewing patiently on the backburner.
Source: Calafia Beach Pundit (Scott Grannis)
As you can see from the chart above, August median home prices are up +10% for existing single-family homes over the last year. Housing affordability is at extremely attractive levels, and although the bank loan purse strings are tight, a modest loosening is beginning to unfold.
Economy Playing Injured
Our starters may still be playing, but many are injured, just like the jobless are limping through the employment market. Encouragingly, although unemployment remains stubbornly high, the number of people collecting unemployment checks is a lot lower (-1.25 million fewer than a year ago). Not great news, but at least we are hobbling in the right direction (see chart below).
Source: Calafia Beach Pundit (Scott Grannis)
Time for Fiscal Cliff Hail Mary?
If a team is losing at the end of a game, a “Hail Mary” pass might be necessary. We are quickly nearing this fiscal Armageddon situation as the approximately $700 billion “fiscal cliff” (a painful combo of spending cuts and tax hikes) kicks in at the end of the year (see PIMCO chart below via The Reformed Broker).
Running trillion dollar deficits in perpetuity is not a sustainable strategy, so for most people, a combination of spending cuts and/or tax hikes makes sense to narrow the gap (see chart below). Last year’s recommendations from the bipartisan Simpson-Bowles commission, which were ignored, are not a bad place to start. What happens in the lame-duck session of Congress (after the elections) will dramatically impact the score of the current economic game, and decide who wins and who loses.
Source: Calafia Beach Pundit (Scott Grannis)
Heated debates continue on how the gap between expenses and revenues will be narrowed, but regardless, Democrats will continue to push for capital gains tax hikes on the rich (see tax chart below); and the Republicans will push to cut spending on entitlements, including untenable programs like Medicare and Social Security.
Source: The Wall Street Journal
The game is not quite over, but the fourth quarter promises to be a bloody battle. So while the replacement refs may be back at home, the experienced returning refs have been known to blow calls too. Let’s just hope that autumn, the season of bounteous fecundity, ends up being a continued trend of sweet market success, rather than a political period of botched opportunities.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct positions in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Fiscal Cliff: Will a 1937 Repeat = 2013 Dead Meat?
Source: StockCharts.com
The presidential election is upon us and markets around the globe are beginning to factor in the results. More importantly, in my view, will be the post-election results of the “fiscal cliff” discussions, which will determine whether $600 billion in automated spending cuts and tax increases will be triggered. Similar dynamics in 1937 existed when President FDR (Franklin Delano Roosevelt) felt pressure to balance the budget after his 1933 New Deal stimulus package began to rack up deficits and lose steam.
What’s Similar Today
Just as there is pressure to cut spending today by Republicans and “Tea-Party” Congressmen, so too there was pressure for FDR and the Federal Reserve in 1937 to unwind fiscal and monetary stimulus. At the time, FDR thought self-sustaining growth had been restored and there was a belief that the deficits would become a drag on expansion and a source of future inflation. What’s more, FDR’s Treasury Secretary, Henry Morgenthau, believed that continued economic growth was dependent on business confidence, which in turn was dependent on creating a balanced budget. History has a way of repeating itself, which explains why the issues faced in 1937 are eerily similar to today’s discussions.
The Results
FDR was successful in dramatically reducing spending and significantly increasing taxes. Specifically, federal spending was reduced by -17% over two years and FDR’s introduction of a Social Security payroll tax contributed to federal revenues increasing by a whopping +72% over a similar timeframe. The good news was the federal deficit fell from -5.5% of GDP to -0.5%. The bad news was the economy went into a tail-spinning recession; the Dow crashed approximately -50%; and the unemployment rate burst higher by about +3.3% to +12.5%.
Source: New York Times
Source: Blue Mass Group
What’s Different This Time?
For starters, one difference between 1937 and 2012 is the level of unemployment. In 1937, unemployment was +14.3%, and today it is +8.1%. Objectively, today there could be higher percentage of the population “under-employed,” but nonetheless the job market was in worse shape back then and labor unions had much more power.
Another major difference is the stance carried by the Fed. Today, Ben Bernanke and the Fed have made it crystal clear they are in no hurry to take away any of the monetary stimulus (see Hekicopter Ben QE3 article), until we have experienced a long-lasting, sustainable recovery. Back in early 1937, the Fed increased banks’ reserve requirements twice, doubling the requirement in less than a year, thereby contracting monetary supply drastically.
Furthermore, we live in a much more globalized world. Today, central banks and governments around the world are doing their part to keep growth alive. Emerging markets are large enough now to move the needle and impact the growth of developed markets. For example, China, the #2 global superpower, continues to cut interest rates and has recently implemented a $158 billion infrastructure spending program.
Net-Net
Whether you’re a Republican or Democrat, everyone generally agrees that job creation is an important common objective, which is consistent with growing our economy. The disagreement between parties stems from the differing opinions on what are the best ways of creating jobs. From my perch, the frame of the debate should be premised on what policies and incentives should be structured to increase competitiveness. Without competitiveness there are no jobs. At the end of the day, money and capital are agnostic. Cold hard cash migrates to the countries in which it is treated best. And where the money goes is where the jobs go.
There is no single silver bullet to solve the competiveness concerns of the United States. Like baseball (since playoffs are quickly approaching), winning is not based solely on hitting, pitching, defense, or base-running. All of these facets and others are required to win. The same principles apply to our country’s competitiveness.
In order to be a competitive leader in the 21st century, here are few necessary areas in which we must excel:
Education: Chicago school unions have been in the news, and I have no problems with unions, if accountability can be structured in. Unfortunately, however, it is clear to me that for now our system is broken (a must see: Waiting for Superman). We cannot compete in the 21st century with an illiterate, uneducated workforce. Our colleges and universities are still top-notch, but as Bill Gates has stated, our elementary schools and high schools are “obsolete”.
Entitlements: Social safety nets like Social Security and Medicare are critical, but unsustainable promises that explode our debt and deficits will not make us more competitive. Politicians may gain votes by making promises in the short-run, but when those promises can’t be delivered in the medium-run or long-run, then those votes will disappear quickly. The sworn guarantees made to the 76 million Baby Boomers now entering retirement are a disaster waiting to happen. Benefits need to be reduced and or criteria need to be adjusted (i.e., means-testing, increase age requirements). The problems are clear as day, so Americans cannot walk away from this sobering reality.
Strategic Government Investment: – Government played a role in building our country’s railways, highways, and our military – a few strategic areas of our economy that have made our nation great. Thoughtful investments into areas like energy infrastructure (e.g., smart grid), internet infrastructure (e.g., higher speed super highway), and healthcare (e.g., human genome research) are a few examples of how jobs can be created while simultaneously increasing our global competitiveness. The great thing about strategic government investments is that government does NOT have to do all the heavy lifting. Rather than write all the checks and do all the job creation from Washington, government can implement these investments and create these jobs by providing incentives for the private sector. Strategic public-private partnerships can generate win-win results for government, businesses, and job seekers. If, however, you’re convinced that our government is more efficient than the private sector, then I highly encourage you to go visit your local DMV, post office, or VA to better appreciate the growth-sucking bureaucracy and inefficiency.
Taxes / Regulations / Laws: Taxes come from profits, and businesses create profits. In order to have a strong and competitive government, we need strong and competitive businesses. Higher taxes, excessive regulations, and burdensome laws will not create stronger and more competitive businesses. I acknowledge that reckless neglect and consumer exploitation will not work either, but reasonable protections for consumers and businesses can be instituted without multi-thousand page regulations. Reducing ridiculous subsidies and loopholes, while tightening tax collection processes and punishing tax dodgers makes perfect sense…so why not do it?
Politics are sharply polarized at both ends of the spectrum, but no matter who wins, our problems are not going away. We may or may not have a new president of the United States this November, but perhaps more important than the elections themselves will be the outcome of the “fiscal cliff” legislation (or lack thereof). If we want to maintain our economic power as the strongest in the world, solving this “fiscal cliff” is the key to improving our competiveness. Avoiding a messy 1937 (and 2011) political repeat will prevent us from becoming dead meat.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct positions in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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