9/22/2011
Hello All,
I’ve been very busy lately with work and other projects I’m involved with outside of work so haven’t been able to write any summaries or update my blog. I'll try to make more time for this.
Markets have gotten hammered the last few days as almost every market has been sold off hard, with the exception of USD and US Bonds. Hit especially hard have been commodity /growth related sectors and emerging markets (investors fleeing the less liquid areas). First off, I’d like to acknowledge and highlight the fact that treasuries / fixed income area have been the biggest winners this year as global growth estimates are being dialed down and the fed has gone forth with its “operation twist”, which translates to buying longer dated bonds. Those who were more heavily weighted toward bonds have done very well as this trade has outperformed pretty much every other market out there this year. I have a friend who doesn't work in the investment industry but is an independent thinker (and a good poker player), he tells me he owns a fair number of bonds in his 401k and has been reminding me of how well that's doing. The beautiful thing about investing vs any other activity is that one does not need a fancy degree, nor some certification, nor a job in finance, nor any of the other things that wall street thieves tout to the public while the public is being robbed, to be a good investor. One needs only look at their returns to determine how one has done; investing is one of the most objective activities / professions because performance does not lie. Performance is crystal clear. So hat's off to that!
Recall that my advice to inquiring family/friends this year has been to remain mostly in cash with exception to a portion in precious metals and another portion in commodity / frontier markets (latter turning out to be mis-timed). Such an allocation will have allowed an investor to avoid the impact of the recent selloff, and thus leave the investors with plenty of cash for redeployment from a much lower level once the market is done puking. However, an allocation to more bonds and perhaps offsetting short positions (unfortunately not possible in most 401k plans that only offer a few shtty alternatives) would have done even better versus your typical cookie-cutter portfolio allocation recommended by some fee-focused hindsight trading investment advisor who typically gives advice that lag by 1-3 quarters.
More recently, I’ve been fairly bearish on this market as the market has struggled to rebound a bit after falling off a cliff starting the end of July, a rebound which many prominent investors have called unsustainable, and correctly so. I believe a break below 1100 at this point is a reasonable downside target for the current decline and afterward, 1040, the next target.
- Investors woke up yesterday and are now cognizant of the fact that there is only so much more the fed is willing and currently able to do, especially with the GOP telling Bernanke to stay away from manipulation of the markets. The probability of hardcore QE3 (not this QE2.25 twist crap) is inversely proportional to the S&P level, with my estimate of that probability rising to north of 90% should we slump into the triple digits again (another 12% drop from current levels).
- The fed action does nothing to help the real economy. Interest rates are already at all time lows (10 year rates closed at 1.72% today!!!), I don’t know of any businesses that will suddenly decide to invest and create new jobs just because rates are a bit lower. No, companies will only invest when there is favorable conditions for investment, and most importantly, DEMAND. With government handouts slowed, poverty increasing, and inflation trends moving up, what company in their right mind would want to invest? What bank would want to make loans?? How much more bang for the buck do you think this policy action has, especially for homeowners who are already underwater with negative home equity on their mortgages? I don't know what the fed is really thinking but I’ll tell you what I believe this does do - it will make it even harder for people to get a safe level of return from their money and hurt many pensioners / endowments / insurance companies who now have to move further out the interest rate curve, take greater risk, just to maintain an adequate level of investment income.
- The GOP is standing in the way of Obama’s fiscal proposals as election season is right around the corner, and they want to make Obama a one term president. I suppose the opposite of the ‘wealth effect’ is the ‘poverty effect’… the poverty in this country and around the world is hitting new highs even as the wealth of the super rich continue to compound (see Forbes richest 400 list that just came out, gee, I wonder where these billionaires are banking their billions from…).
- EM / Frontier market stocks - growth is clearly slowing down across the world due partly to higher interest rates (to deal with the inflation problem caused by Bernanke) in emerging markets and partly do decelerating economic activity in developed countries. Keep your eyes out for the turning point in many of these highly attractive markets as these will be the areas of growth once we put the European situation behind us. I think we will look back 5-10 years from now and see what a bargain Brazil, Russia, Indonesia, Thailand...etc markets, are at these prices.
- China – stocks market in china has clearly broken down into bear market territory. The glut of bad loans, higher inflation, property bubble has been cited repeatedly by a few renowned short sellers with very strong track records over the past year. Most investors do not expect a hard landing in China and with China consuming so much of the world's resources in its infrastructure buildout, a stumble by China could throw one hell of a wrench into global growth. One famous emerging market investor recently said that he doesn’t believe in soft landings, “there can only be hard landings or no landing”.
- Europe – a slow motion train wreck happening before our eyes. I can tell you that the panicky bank and liquidity runs is really picking up as some of these large global financial companies are entering crisis mode. Cost of insurance on some of these banks are starting to spike and there are murmors of security auctions going on as these banks try to quickly raise cash right as liquidity is leaving the system. Should Greece default and this continue to cascade into a bigger global financial disaster, I do believe coordinated central bank action awaits. However, I think it is better not to catch a falling knife before this is resolved…
- Stronger Dollar - the removal of the Japanese Yen and Swiss Franc as safe-haven currencies now makes the dollar more attractive among the candidates in teh trash cash category, so we’re seeing the dollar cross move higher, and taking the air out of the sails of many risk assets. Even gold is being sold off along with everything else due to 1) stronger dollar 2) too much late entrants now being punished 3) forced liquidations from investors who over-levered themselves or need to raise cash. That said, I still recommend that one stick with the physical precious metals allocation (my favorite play being platinum), this is a longer term bull market that will resume once the greedy and impatient latecomers are flushed out.
My Recommendation: Same long term allocation as before. Hoard your cash. Hide your gold. As the economic situation unravels, more money will inevitably be pumped into the system, and this should help prop up asset prices at the lower end, but not at current levels. Be patient, think for yourself, ignore economists/research that have proven wrong, and don’t be scared to get greedy once everyone is scared shitless.
Happy investing and good luck to everyone.
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