Posts tagged ‘investment’

Glass Half Empty Becomes Record Glass Half Full

Oh my! What a difference a few months makes. Originally, what looked like an economic glass half empty in December has turned into a new record glass half full. What looked like Armageddon in December has turned into a v-shaped bed of roses to new all-time record stock market highs for the S&P 500 index (see chart below). For the recent month, the S&P 500 climbed another +3.9% to 2,945, bringing total 2019 gains to an impressive +17.5% advance. Before you get too excited, it’s worth noting stocks were down in value during 2018. When you combine 2018-2019, appreciation over the last 16 months equates to a more modest +10.2% expansion. Worth noting, since the end of 2017, profits have climbed by more than +20%, which means stocks are cheaper today as measured by Price-Earnings ratios (P/E) than two years ago (despite the historic, record levels). For any confused investors, we can revisit this topic for discussion in a future writing.

Source: Trading Economics

From Famine to Feast

As I noted in my “December to Remember” article, there were no shortage of concerns ranging from impeachment to Brexit. How do those concerns look now? Let’s take a look:

Government Shutdown: The longest government shutdown in history (35 days) ended on January 25, 2019 with minimal broad-based economic damage.

Global Trade (China): Rhetoric coming from President Trump and his administration regarding a trade deal resolution with China has been rather optimistic. In fact, a CNBC survey shows 77% of respondents believe that the U.S. and China will complete a trade deal.

Federal Reserve Interest Rate Policy: After consistently increasing interest rates nine times since the end of 2015 until late 2018, Federal Reserve Chairman Jerome Powell signaled he was effectively taking monetary policy off rate-hiking “autopilot” and would in turn become “patient” as it relates to increasing future interest rates. Interestingly, traders are now forecasting a 70% chance of a rate cut before January 29, 2020.

Mueller Investigation: Special counsel Robert Mueller released his widely anticipated report that investigated Russian collusion and obstruction allegations by the president and his administration. In Mueller’s 22-month report he could “not establish that members of the Trump Campaign conspired or coordinated with the Russian government in its election interference activities.” As it relates to obstruction, Mueller effectively stated the president attempted to obstruct justice but was not successful in achieving that goal. Regardless of your political views, uncertainty surrounding this issue has been mitigated.

New Balance of Power in Congress: Democrats took Congressional control of the House of Representatives and reintroduced gridlock. But followers of mine understand gridlock is not necessarily a bad thing.

Brexit Deal Uncertainty: After years of negotiations for Britain to exit the European Union (EU), the impending Brexit deadline of March 29th came and went. EU an UK leaders have now agreed to  extend the deadline to October 31st, thereby delaying any potential negative impact from a hard UK exit from the EU.

Recession Fears: Fears of a fourth quarter global slowdown that would bleed to a recession on U.S. soil appear to have been laid to bed. The recently reported first quarter economic growth (Gross Domestic Product – GDP) figures came in at a healthy+3.2% annualized growth rate, up from fourth quarter growth of +2.2%, and above consensus forecasts of 2.0%.

Curve Concern

The other debate swirling around the investment community this month was the terrifying but wonky “inverted yield curve.” What is an inverted yield curve? This is a financial phenomenon, when interest rate yields on long-term bonds are lower than interest rate yields on short-term bonds. Essentially when these dynamics are in place, bond investors are predicting slower economic activity in the future (i.e., recession). The lower future rates effectively act as a way to stimulate prospective growth amid expected weak economic activity. Furthermore, lower future rates are a symptom of stronger demand for longer-term bonds. It’s counterintuitive for some, but higher long-term bond prices result in lower long-term bond interest rate yields. If this doesn’t make sense,  please read this. Why is all this inverted yield curve stuff important? From World War II, history has informed us that whenever this phenomenon has occurred, it has been a great predictor for a looming recession.

As you can see from the chart below, whenever the yield curve (red line) inverts (goes below zero), you can see that a recession (gray vertical bar) occurs shortly thereafter. In other words, an inverted yield curve historically has been a great way to predict recessions, which normally is almost an impossible endeavor – even for economists, strategists, and investment professionals.

Source: Calafia Beach Pundit

Although the curve inverted recently (red line below 0), you can see from the chart, historically recessions (gray vertical bars) have occurred only when inflation-adjusted interest rates (blue line) have climbed above 2%. Well, the data clearly shows inflation-adjusted interest rates are still well below 1%, therefore an impending recession may not occur too soon. Time will tell if these historical relationships will hold, but rest assured this is a dynamic I will be following closely.

It has been a crazy 6-9 months in the stock market with price swings moving 20% in both directions (+/-), but it has become increasingly clear that a multitude of 2018 fears causing the glass to appear half empty have now abated. So long as economic growth continues at a healthy clip, corporate profits expand to (remain at) record levels, and the previously mentioned concerns don’t spiral out of control, then investors can credibly justify these record levels…as they peer into a glass half full.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions 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.

May 2, 2019 at 12:59 am Leave a comment

U.S. – Best House in Bad Global Neighborhood

Article below represents a portion of free December 1, 2011 Sidoxia monthly newsletter (Subscribe on right-side of page)

There is no shortage of issues to worry about in our troubled global neighborhood, but then again, anybody older than 25 years old knows the world is always an uncertain place. Whether we are talking about wars (Vietnam, Cold War, Iraq); presidential calamities (Kennedy assassination, Nixon resignation/impeachment proceedings); international turmoil (dissolution of Soviet Union, 9/11 attacks, Arab Spring); investment bubbles (technology, real estate); or financial crises (S&L crisis, Long Term Capital, Lehman Brothers bankruptcy), investors always have a large menu of concerns from which they can order.

Despite the doom and gloom dominating the media airwaves, and the lackluster performance of equities experienced over the last decade, the Dow Jones Industrial Average and the S&P 500 index are both up more than 20-fold since the 1970s (those gains also exclude the positive impact of dividends).

Times Have Changed

Just a few decades ago, nobody would have talked or cared about small economies like Iceland, Dubai, and Greece. Today, technology has accelerated the forces of globalization, resulting in information travelling thousands of miles at the click of a mouse, often creating scary financial mountains out of meaningless molehills. As a result of these trends, news of Italian bond auctions, which normally would be glossed over on the evening news, instantaneously clogs our smart phones, computers, radios, and televisions. The implications of all these developments mean investing has become much more difficult, just as its importance has never been more crucial. 

How has investing become more critical? For starters, interest rates are near 60-year lows and Treasury bond prices are at record highs, while inflation (food, energy, healthcare, leisure, etc.) is shrinking the value of people’s savings. Next, entitlement and pension reliability are decreasing by the minute – fiscal imbalances and unrealistic promises have contributed to a less certain retirement outlook. Layer on hyper-manic volatility of daily, multi-hundred point swings in the Dow Jones Industrial index and a less experienced investor quickly realizes investing can become an overwhelming game. Case in point is the VIX volatility index (a.k.a., the “Fear Gauge”), which has registered a whopping +57% increase in 2011.

December to Remember?

After an explosive +23% return in the S&P 500 index for 2009 (excluding dividends) and another +13% return in 2010, equity investors have taken a breather thus far in 2011 – the Dow Jones Industrial Average is up modestly (+4%) and the S&P 500 index is down fractionally (-1%). We still have the month of December to log, but in the short-run the European tail has definitely been wagging the rest of the global dog.

Although the United States knows a thing or two about lack of political leadership and coordination, herding the 17 eurozone countries to resolve the European debt financial crisis has proved even more challenging.  As you can see below in the performance figures of the major global equity markets, the U.S. remains the best house in a bad neighborhood:

Our fiscal house undeniably needs some work (i.e., unsustainable deficits and bloated debt), but record corporate profits, record levels of cash, voracious consumer spending, improving employment data, and attractive valuations are all contributing to a domestic house that makes opportunities in our backyard look a lot more appealing to investors than prospects elsewhere in the global neighborhood.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and VGK, 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.

December 3, 2011 at 9:39 am 1 comment

Alligators, Airplane Crashes, and the Investment Brain

“Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear…To conquer fear is the beginning of wisdom.” – Bertrand Russell

Fear is a powerful force, and if not harnessed appropriately can prove ruinous and destructive to the performance of your investment portfolios. The preceding three years have shown the poisonous impacts fear can play on the average investor results, and Jason Zweig, financial columnist at The Wall Street Journal presciently wrote about this subject aptly titled “Fear,” just before the 2008 collapse.

Fear affects us all to differing degrees, and as Zweig points out, often this fear is misguided – even for professional investors. Zweig uses the advancements in neuroscience and behavioral finance to help explain how irrational decisions can often be made. To illustrate the folly in human’s thought process, Zweig offers up a multiple examples. Here is part of a questionnaire he highlights in his article:

“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.

The seemingly most docile creature of the bunch turns out to cause the most deaths. Deer don’t attack with their teeth, but as it turns out, deer prance in front of speeding cars relatively frequently, thereby causing deadly collisions. In fact, deer collisions trigger seven times more deaths than alligators, bears, sharks, and snakes combined, according to Zweig.

Another factoid Zweig uses to explain cloudy human thought processes is the fear-filled topic of plane crashes versus car crashes. People feel very confident driving in a car, yet Zweig points out, you are 65 times more likely to get killed in your own car versus a plane, if you adjust for distance traveled. Hall of Fame NFL football coach John Madden hasn’t flown on an airplane since 1979 due to his fear of flying – investors make equally, if not more, irrational judgments in the investment world.

Professor Dr. Paul Slovic believes controllability and “knowability” contribute to the level of fear or perception of risk. Handguns are believed to be riskier than smoking, in large part because people do not have control over someone going on a gun rampage (i.e., Jared Loughner Tuscon, Arizona murders), while smokers have the power to just stop. The reality is smoking is much riskier than guns. On the “knowability” front, Zweig uses the tornadoes versus asthma comparison. Even though asthma kills more people, since it is silent and slow progressing, people generally believe tornadoes are riskier.

The Tangible Cause

Deep within the brain are two tiny, almond-shaped tissue formations called the amygdala. These parts of the brain, which have been in existence since the period of early-man, serve as an alarm system, which effectively functions as a fear reflex. For instance, the amygdala may elicit an instinctual body response if you encounter a bear, snake, or knife thrown at you.

Money fears set off the amygdala too. Zweig explains the linkage between fiscal and physical fears by stating, “Losing money can ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.” Money plays such a large role in our society and can influence people’s psyches dramatically. Neuroscientist Antonio Damasio observed, “Money represents the means of maintaining life and sustaining us as organisms in our world.”

The Solutions

So as we deal with events such as the Lehman bankruptcy, flash crashes, Greek civil unrest, and Middle East political instability, how should investors cope with these intimidating fears? Zweig has a few recommended techniques to deal with this paramount problem:

1)      Create a Distraction: When feeling stressed or overwhelmed by risk, Zweig urges investors to create a distraction or moment of brevity. He adds, “To break your anxiety, go for a walk, hit the gym, call a friend, play with your kids.”  

2)      Use Your Words:  Objectively talking your way through a fearful investment situation can help prevent knee-jerk reactions and suboptimal outcomes. Zweig advises to the investor to answer a list of unbiased questions that forces the individual to focus on the facts – not the emotions.  

3)      Track Your Feelings: Many investors tend to become overenthusiastic near market tops and show despair near market bottoms. Long-term successful investors realize good investments usually make you sweat. Fidelity fund manager Brian Posner rightly stated, “If it makes me feel like I want to throw up, I can be pretty sure it’s a great investment.” Accomplished value fund manager Chris Davis echoed similar sentiments when he said, “We like the prices that pessimism produces.”

4)      Get Away from the Herd: The best investment returns are not achieved by following the crowd. Get a broad range of opinions and continually test your investment thesis to make sure peer pressure is not driving key investment decisions.

Investors can become their worst enemies. Often these fears are created in our minds, whether self-inflicted or indirectly through the media or other source. Do yourself a favor and remove as much emotion from the investment decision-making process, so you do not become hostage to the fear du jour. Worrying too much about alligators and plane crashes will do more harm than good, when making critical decisions.

Read Other Jason Zweig Article from IC

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, 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.

February 25, 2011 at 1:47 am Leave a comment

Lessons Learned from Financial Crisis Management 101

For many investors the financial crisis over the last 24 months was an expensive education. Rather than have to enroll and take the courses all over again, I am hopeful we can put that past education to good use. Here are some valuable lessons I learned from my two year degree in Financial Crisis Management 101.

Investors Don’t Get Paid For Emotions: In investing, emotional decisions generally lead to suboptimal decisions. Over the financial crisis, despite the market rebound last year, many investors fell prey to fear. This queasiness (see Queasy Investors article) resulted in money being stuffed under the mattress – earning subpar yields – and asset allocations dramatically shifting towards bonds. Not surprisingly, the Barclays Aggregate Bond Index fell -1% in 2009 as the herd piled in. On the flip side, those willing to brave the equity markets were rewarded with a +23% gain in the S&P500 index. Certainly this bond-equity picture looked different in 2008, but unfortunately many mainstream portfolios lacked adequate bond exposure then. As famed Fidelity Magellan fund manager Peter Lynch points out, fretting about your portfolio can work against you:  “Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”

Martin Luther King Jr. put anxious emotions into perspective by expressing, “Normal fear protects us; abnormal fear paralyses us.” Prudent conservatism makes sense, but panicked alarm can lead you astray. Behavioral economists Daniel Kahneman and Amos Tversky punctuated this idea by showing the impact that “loss” has on peoples’ psyches. Through their research, Kahneman and Tversky demonstrated the pain of loss is more than twice as painful as the pleasure from gain. Euphoria, whether for homes or for other forms of credit-induced spending, is not a desirable emotion when investing either – just ask any house-flipping Florida or California resident looking for work. The moral of the story: plan for a rainy day and don’t succumb to the elation of the herd. Create a disciplined systematic approach that relies less on your gut. Emotional decisions, as we’ve seen over the last few years, generally do not fare well.

Quality Doesn’t Die in a Crisis: Good companies with solid growth prospects don’t disappear in a bear market. On the contrary, they typically are in much better position to invest, step on the throats of their competitors, and steal market share. Many of the quality companies left for dead last year have risen from the ashes. Leveraged financials and debt laden companies were hit the hardest, and bounced nicely last year, but the market leaders are the companies that endure through bull and bear markets.

Buy and Hold is Not Dead:  Catching fish can be difficult if one constantly dips their line in and out of the water. Academic research falls pretty bluntly on the shoulders of “day traders,” and I’m still searching for a Warren Buffett equivalent to show up on Oprah or Charlie Rose espousing the virtues of speculation – oh wait, maybe Jim Cramer qualifies?

Long-term investors are a rare but dying breed – just look at the average fund manager’s holding period, which has dropped from about five years in the 1960s to less than one year today. The 1980s and 1990s weren’t too bad for buy and holders (about a +1,400% increase), but the strategy has subsequently gone in hibernation for a decade. Warren Buffett may be pushing a bit too far when he says, “Our favorite holding period is forever,” but directionally this posture may actually work well over the next ten years. Patience can pay off – even if you arrive late to the game. For example, if you bought Wal-Mart shares (WMT) after it rose 10-fold during its first 10 years, you still could have achieved a 60x return over the next 30 years. I, myself, believe there is a happy medium between high frequency trading (see HFT article) and “forever” investing. Regardless of your time horizon, I agree with late Sir John Templeton who said, The only way to avoid mistakes is not to invest – which is the biggest mistake of all.”

Cyclical is Not Secular: Party crashers may be optimistic about the prospects of a gathering, but if they arrive too late to the event, there may be no more food or wine left. The same principle applies to investment themes, as well-known value manager Bill Miller states, “Latecomers are usually persuaded that the cyclical has become the secular.” Over the last few years, the secular arguments of “real estate prices will never go down nationally,” and the belief that emerging markets like China would “decouple” from the U.S. market in 2008, simple were proved wrong. Time will tell if the gold-bugs will be right regarding their call for continued secular increases, or if the spike is a crescendo on a return to more normalized levels. On the whole, I much rather prefer to arrive at a big party prematurely, rather than showing up late sifting through the crumbs and scraping the bottom of the punch bowl.

Turn Off the TV: Fanning the flames of our daily emotions are media outlets. Thanks to globalization, the internet, and the 24/7 news cycle, we are bombarded with some type of daily fear factor to worry about. Typically, an eloquent strategist or economist pontificates on the direction of the market. In many instances these talking heads don’t even manage client money or are not held accountable for their predictions (see Peter Schiff article). I like Barron’s Michael Santoli’s description of these story-telling market mavens, “A strategist’s first job is to have a plausible, defensible case to shop around client conference rooms globally. Being right is gravy.”  Although intellectually stimulating, I advise you to limit your consumption and delivery of strategist commentary to cocktail parties and don’t let their advice sway your portfolio decisions. You’ll be much better served by listening to veteran investors who have successfully navigated choppy market cycles. Famed growth investor William O’Neil shrewdly chimes in on the subject too, “Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable.”

Bad Loans are Made in Good Times: Markus Brunnermeier, a Princeton economist known for studying financial bubbles, declared this observation regarding loans. Hindsight is 20-20, but it’s no wonder that boat loads of no-doc, no down-payment, teaser rate subprime loans and overleveraged risky private equity loans were being made when unemployment was at 5% — not today’s 10% rate. Now with the loan spigots shut, the tables have been turned. Relatively few loans are now being made, but with a massively steep yield curve, surviving financial institutions are in a golden age for bringing on new wildly lucrative assets onto their balance sheets. Sure, the industry is still saddled with toxic legacy assets, but the negative impact should begin fading in coming quarters if the economy can continue building a firmer foundation.

Diversification Matters: Contrary to current thinking, which believes diversification didn’t help investors through the crisis, owning certain asset classes like treasuries, certain commodities, and cash did help in 2008. Certainly, the correlations between many asset classes converged in the heat of the panic, but I’m convinced the benefits of diversification provide beneficial shock absorbers for most investment portfolios. Princeton professor and economist Burton Gordon Malkiel sums it up succinctly, “Diversity reduces adversity.”

The Herd is Often Led to the Slaughterhouse: The technology and housing bubble implosions serve as gentle reminders of the slaughterhouse fate for those who follow the herd. Avoiding consensus thinking is virtually a requirement of long-term outperformance.  As Sir John Templeton stated, “It’s impossible to produce superior performance unless you do something different from the majority.” John Paulson can also attest to this fact. If aggressively shorting the housing market and loading up on CDS insurance was the consensus, his firm would not have made $20 billion over 2007 and 2008.

These are obviously not all the lessons to be learned from the financial crisis, and by following a philosophy of continual learning, future mistakes should provide additional insights to help guard against losses and capitalize on potential opportunities. Having freshly graduated from Financial Crisis Management 101, I hope to immediately implement this education to land on the financial market’s Dean’s List.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including fixed income ETFs and FXI). Also at time of publishing SCM and some of its clients had a direct long position in WMT, but no position in BEN or BRKA/B. 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.

January 11, 2010 at 12:40 am 2 comments

Water…the Next Oil?

Water engulfs our daily lives – we drink, bathe, wash clothes, soak our lawns and brush our teeth with it on a consistent basis. We notice our reliance in our monthly water bills. The earth is covered by approximately 70% water, so if this commodity is so abundant, then how could it be such a scarce, valuable resource? Water is so important; the majority of our body mass consists of the fluid (about 60% in males and 55% in females). Although our planet is covered with this liquid, the main problem surrounding the issue is that only about 2% of the water supply is considered fresh water (predominantly located in Antarctica). Desalinization of salt water is one solution to the limited amount of fresh water, but unfortunately the current technology and energy requirements make it a cost prohibitive process. As a result of the inadequate supply, over an estimated 1 billion people do not have access to clean water and 2.4 billion people are subject to stressed water conditions.

Water

In the “Golden State” of California, budgetary problems are not the only concern on people’s minds – the state is in the middle of a water shortage. Certain water jurisdictions are escalating prices by upwards of +15%. Regardless of your view on “climate change,” objective data points to declining water levels and heightened scarcity. By 2030, OECD predicts that half of the world’s population will live in areas under severe water stress.

I’m certainly not the only believer in this theme as an investment opportunity. T. Boone Pickens, renowned commodity investor, is spending over $100 million on water investments (including access to water rights) because he believes that H2O is the next oil. Water, like oil, is a depleting resource that will experience intensified demand over time.

How to Invest in Water:

Not everyone has millions of dollars like Pickens to invest in land and water rights, so there are different ways for the average investor to participate in the rising demand for water. For example, investors, like Sidoxia Capital Management, can invest in ETFs (exchange traded funds) with a water focus. ETF options include, PowerShares Water Resources (PHO), PowerShares Global Water ETF (PIO), and/or Claymore S&P Global Water (CGW). For those wishing to invest in individual stocks, some water related companies include, Nalco Holding Company (NLC), Danaher Corporation (DHR), Itron Inc. (ITRI), and Valmont Industries, Inc. (VMI).

Water Demand Drivers

  • The globe’s population of approximately 6.5 billion people is growing and becoming thirstier. Water demand is expanding much faster than population growth.
  • Climate change exacerbates the growing water supply problem.
  • Agriculture and irrigation needs are driving the majority of global water demand.
  • There is no substitute for water at any price.

Conservation, technology, and efficiency are tools to improve the usage of our finite water resources. As the water problem becomes more acute, profiting from water investments is a way to offset the inevitably higher costs of usage. Now if you’ll please excuse me, I’m thirsty for a glass of water.

Wade W. Slome, CFA, CFP®          www.Sidoxia.com

DISCLOSURE: At the time of publishing, Sidoxia Capital Management and some of its clients owned certain exchange traded funds (including PHO & CGW), but had no direct positions in PIO, CGW, NLC, DHR, ITRI, VMI, or any other security referenced. 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.

June 26, 2009 at 10:15 am 2 comments


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