Dealing with a cold today, but I thought this was so worth sharing, as it should frame your investment decision making and help provide some road signs as for what to watch to indicate the direction of the markets. My thoughts, I am bullish in as much as equities continue to make new highs, knowing that record highs presage record highs, but also side with the bearish camp long-term, understanding that the market is manipulating vis-a-vis the Fed's money pump.
Thursday, September 4, 2014
Wednesday, September 3, 2014
The Fed Thinks You are Hoarding Cash
The folks at the St. Louis are out with a research paper, as reported by CNBC, claiming that U.S. consumers are hoarding cash and that has made the Fed's QE efforts infective. I guess the economists at the Fed don't take a look at their own data.
The personal savings rate has remained largely flat over the last five years. So unless consumers are shoving cash under their mattresses. I guess the economists also forgot to look at the banks reserve holdings, which have exploded over the same time frame.
This is nothing to the fact that financial inter-mediation makes the whole argument (that is unless the cash is literally going into mattresses) of cash on the sidelines, savings as negative, reserves lockup, and hoarding cash a red herring. But great job trying to make the argument that consumers are hoarding cash.
The personal savings rate has remained largely flat over the last five years. So unless consumers are shoving cash under their mattresses. I guess the economists also forgot to look at the banks reserve holdings, which have exploded over the same time frame.
This is nothing to the fact that financial inter-mediation makes the whole argument (that is unless the cash is literally going into mattresses) of cash on the sidelines, savings as negative, reserves lockup, and hoarding cash a red herring. But great job trying to make the argument that consumers are hoarding cash.
China's Slow Crash with Michael Pettis
You have undoubtedly heard of or read a quote pertaining to Michael Pettis' view on the coming crash of the Chinese market. Mr. Pettis delves deeper in to that thesis and gives listeners a broader view on what he sees coming for China.
Low Rate Hallucination and the Fed End Game
This video is a must listen to at least once, if not twice.And just to save you some time, the first half is far more interesting and worth your time versus the back half, with the first half dealing with the machinations of the Fed and how they are manipulating the market. The back half dips more in to the conspiracy theory waters and probably can be skipped.
7 Rules To Beat The Market
Last week, I discussed how beating the market is hard to do.
I wrote the commentary to provoke an awareness of the challenge that
faces anyone pursuing an active strategy. Bluntly put, if you try to
handpick investments without a disciplined, rational, well-thought-out
plan for doing so, (barring really good luck) you will underperform.
Rule
1: The optimal strategy is not one that maximizes return, but rather
one that helps you stick to your long-term investing plan and achieve
your goals. Big returns always sound enticing. Pitched by
someone with a charismatic personality, a high-return strategy sounds
even better. But if you can’t stick to the strategy because of its
complexity, the volatility it incurs, the time commitment it requires,
the number of transactions associated with it, your interest level or
any other reason, then it’s not an optimal strategy for you. If you are
unwilling to or can’t stick with a strategy, don’t use it.
Rule 2: Set up procedures to keep your emotions in check.
The biggest threat to most people’s portfolios is not the economy, the
Federal Reserve, valuations, or high-frequency traders, it’s their
brain. The human mind evolved to cope with very different hazards than
Mr. Market’s ever-changing moods. So be cognizant of what your emotional
tendencies are and set up procedures to keep them in check. These can
include pre-written sell rules, limiting how often you check your
portfolio, triggers to periodically adjust your portfolio or consulting
with a financial adviser.
Rule 3: Think and invest different.
Your biggest advantage as an individual investor is that you are not
tied to an investment objective. Rather, you are allowed to invest in
anything your wealth, your financial goals and the tax code allow you
to. So why focus on the 300 largest U.S. stocks when there are nearly
5,000 listed on the U.S. exchanges and a large choice of funds that
invest in international securities? Better yet, why use the same
strategy everyone else is or focus on the stocks currently making
headlines? If you want to beat the market, you have to invest in a
different manner than most people.
Rule 4: Use the wisdom of the crowds to your advantage.
While market efficiency is a big hurdle for active strategies to
overcome, there are benefits to be gained from paying attention to the
collective thoughts of market participants. We (AAII) use relative
valuation rules for managing our portfolios, letting the market help
guide our views about what is cheap and what isn’t. The trend in
earnings estimate revisions can tell you if a company’s outlook is
brightening or worsening. Momentum indicators such as the 26-week
relative price strength rank pair well with low-valuation strategies.
Rule 5: Higher Valuations = Greater Expectations = More Room for Disappointment.
The more favorably people view a company, the smaller its margin for
error. Far more money is made from buying stocks that are undervalued
than from buying stocks that are overvalued. Even if you are a growth
investor, make sure the stock is undervalued relative to its prospects
(after ensuring those prospects don’t assume an overly optimistic
outlook).
Rule 6: Lower your costs.
Every dollar you pay in investment expenses and transaction costs is a
dollar you will never see again. In addition to trading with less
frequency, take advantage of the tax law. Put your most tax-efficient
investments in your traditional brokerage accounts, and use your
tax-sheltered accounts (e.g., IRAs) for your least tax-efficient
investments and strategies. Your goal should be to maximize the benefit
from what you spend.
Rule 7: Develop a consistent, well-defined approach to investing and stick to it regardless of what the market is doing. Being a successful active investor requires having a plan based on factors and strategies proven to work over the long term.
Bond Risks
Too Keynesian for thinking as to the outlook of the economic environment but many aspects of present market outlook are interesting to note.Additionally, one should stand up and take notice when a bond manager starts touting equities as a better investment.
That aside, you have to admire any investment professional in asset management touting cash as the best investment.
That aside, you have to admire any investment professional in asset management touting cash as the best investment.
Tuesday, September 2, 2014
The ISM Rings The Bell?
Just a quick comment on the yesterday's release of the Purchasing Managers Index from the Institute of Supply Management. Although the PMI print of 59 was one of the strongest in recent memory, mainly on the back of production and new orders, the markets apparently were looking for more. This is as the equity markets traded relatively flat on the day. More so, look at the inventory survey results in the table below, as presented by the ISM.
Manufacturing ISM® Report On Business® data is seasonally adjusted for New Orders, Production, Employment and Supplier Deliveries indexes.
Both inventory and customers' inventory levels increased by more than 3 points and 5 points, respectively. Generally, inventory survey results remain below the 50 demarcation, as manufacturers typically run lean production lines and a build up in inventory levels can indicate a problem. Of course, that depends on production and new order levels. I would not be so bold to predict an outright decline in either at this point, but the customers' inventory survey results are flashing a warning of a slow down in new orders. Throughout the survey's history, customer inventory survey results have averaged around 45 and lower(higher) than averaged have typically presaged a pickup(slowing) in new orders. We will have to see if the ISM results have rang the bell.
| MANUFACTURING AT A GLANCE AUGUST 2014 |
||||||
|---|---|---|---|---|---|---|
Index |
Series Index Aug |
Series Index Jul |
Percentage Point Change |
Direction |
Rate of Change |
Trend* (Months) |
| PMI® | 59.0 | 57.1 | +1.9 | Growing | Faster | 15 |
| New Orders | 66.7 | 63.4 | +3.3 | Growing | Faster | 15 |
| Production | 64.5 | 61.2 | +3.3 | Growing | Faster | 6 |
| Employment | 58.1 | 58.2 | -0.1 | Growing | Slower | 14 |
| Supplier Deliveries | 53.9 | 54.1 | -0.2 | Slowing | Slower | 15 |
| Inventories | 52.0 | 48.5 | +3.5 | Growing | From Contracting | 1 |
| Customers' Inventories | 49.0 | 43.5 | +5.5 | Too Low | Slower | 33 |
| Prices | 58.0 | 59.5 | -1.5 | Increasing | Slower | 13 |
| Backlog of Orders | 52.5 | 49.5 | +3.0 | Growing | From Contracting | 1 |
| Exports | 55.0 | 53.0 | +2.0 | Growing | Faster | 21 |
| Imports | 56.0 | 52.0 | +4.0 | Growing | Faster | 19 |
| OVERALL ECONOMY | Growing | Faster | 63 | |||
| Manufacturing Sector | Growing | Faster | 15 | |||
Both inventory and customers' inventory levels increased by more than 3 points and 5 points, respectively. Generally, inventory survey results remain below the 50 demarcation, as manufacturers typically run lean production lines and a build up in inventory levels can indicate a problem. Of course, that depends on production and new order levels. I would not be so bold to predict an outright decline in either at this point, but the customers' inventory survey results are flashing a warning of a slow down in new orders. Throughout the survey's history, customer inventory survey results have averaged around 45 and lower(higher) than averaged have typically presaged a pickup(slowing) in new orders. We will have to see if the ISM results have rang the bell.
Gold Breaks, but Watch the Equities
As of this writing, gold prices are off more than 1% and depending on the chart you may be looking appear have to broken some support lines. For instance, look at the GLD. This is as traders have come back from their August vacations and as a few wire houses have been noting that maybe September will not be as seasonally as strong as in past years.
That said, gold has not broken the 1,265 support line positioned by some, including Kitco's Wagner.
More importantly, the equities are still holding in their. As I have stated (supported by others' and my own analysis) numerous times, the equities tend to lead the yellow metal on the upside and the downside. Numerous equities can be held up as examples, but one of the companies most leveraged to the price of gold is Royal Gold- RLGD, and the stock refuses to break the support line. Just look at the chart of RGLD below.
The same pattern, albeit not showing the same relative outperformance, can be seen in the GDX and the XAU. As long as the equities hold the line, I will side on the thesis that we will see higher prices in the precious metal investment complex.
That said, gold has not broken the 1,265 support line positioned by some, including Kitco's Wagner.
More importantly, the equities are still holding in their. As I have stated (supported by others' and my own analysis) numerous times, the equities tend to lead the yellow metal on the upside and the downside. Numerous equities can be held up as examples, but one of the companies most leveraged to the price of gold is Royal Gold- RLGD, and the stock refuses to break the support line. Just look at the chart of RGLD below.
The same pattern, albeit not showing the same relative outperformance, can be seen in the GDX and the XAU. As long as the equities hold the line, I will side on the thesis that we will see higher prices in the precious metal investment complex.
Keynesian Economist Uses The “D” Word And Why Q2 GDP Was Overstated
by Hunter Lewis at the Mises Economics Blog
Most Keynesian economists do not want to admit that we are in another depression. They find the word painful.
They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.
I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Clinton, says that he agrees. It really is a depression (http://www.project-syndicate.org/commentary/j–bradford-delong-argues-that-it-is-time-to-call-what-is-happening-in-europe-and-the-us-by-its-true-name).
DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.
These are after all the people who call the government creating money out of thin air “ quantitative easing,” “ bond buying,” and the like, all of which are parroted by the press. When Keynes did this, he was often being impish, as when he called newly created money ““green cheese,” echoing the old nursery nonsense that “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.
Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served Bush 2 as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:
US Household Net Worth 2007- 2013
Top 1% Up 1.9%
Next 9 % Up 3.4%
Next 15% Down 0.5%
Next 25% Down 16.7%
Bottom 50% Down 44.2%
None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated. But this chart of net worth is about as reliable as we can expect to get.
It tells the story of a middle class in the process of being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the nine percent below the top one percent have done best of all. Although a great many government employee households are in the top one percent, a larger number are in the next nine percent.
Sometimes the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Bill Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make sense.
In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple investing in new jobs.
We saw an example of this in the recent Gross Domestic Product numbers released by the government. Most of the new spending in the first quarter of this year was for health care and most of that for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.
As a result, the first quarter was initially reported with a minus 1% economic growth, then revised to minus 2.9%. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and thus make it look better. If so, why would the second quarter have been deemed more important? Because it is leading up to the fall elections. The second quarter is currently reported at 4.2%.
The destruction of common sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and would have been appalled to see the corruption he unleashed.
Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.
For example, if we look at what has happened to poor people since the War on Poverty began in the 1960’s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman (http://healthblog.ncpa.org/why-we-lost-the-war-on-poverty/) has calculated that economic growth cut the rate of poverty in half between the end of World War Two and 1964, when the War on Poverty was launched. Since then the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.
There are those among the top one and top ten percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments, and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed of manufactured dollars.
Most Keynesian economists do not want to admit that we are in another depression. They find the word painful.
They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.
I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Clinton, says that he agrees. It really is a depression (http://www.project-syndicate.org/commentary/j–bradford-delong-argues-that-it-is-time-to-call-what-is-happening-in-europe-and-the-us-by-its-true-name).
DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.
These are after all the people who call the government creating money out of thin air “ quantitative easing,” “ bond buying,” and the like, all of which are parroted by the press. When Keynes did this, he was often being impish, as when he called newly created money ““green cheese,” echoing the old nursery nonsense that “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.
Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served Bush 2 as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:
US Household Net Worth 2007- 2013
Top 1% Up 1.9%
Next 9 % Up 3.4%
Next 15% Down 0.5%
Next 25% Down 16.7%
Bottom 50% Down 44.2%
None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated. But this chart of net worth is about as reliable as we can expect to get.
It tells the story of a middle class in the process of being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the nine percent below the top one percent have done best of all. Although a great many government employee households are in the top one percent, a larger number are in the next nine percent.
Sometimes the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Bill Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make sense.
In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple investing in new jobs.
We saw an example of this in the recent Gross Domestic Product numbers released by the government. Most of the new spending in the first quarter of this year was for health care and most of that for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.
As a result, the first quarter was initially reported with a minus 1% economic growth, then revised to minus 2.9%. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and thus make it look better. If so, why would the second quarter have been deemed more important? Because it is leading up to the fall elections. The second quarter is currently reported at 4.2%.
The destruction of common sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and would have been appalled to see the corruption he unleashed.
Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.
For example, if we look at what has happened to poor people since the War on Poverty began in the 1960’s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman (http://healthblog.ncpa.org/why-we-lost-the-war-on-poverty/) has calculated that economic growth cut the rate of poverty in half between the end of World War Two and 1964, when the War on Poverty was launched. Since then the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.
There are those among the top one and top ten percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments, and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed of manufactured dollars.
We Are All Predictable Irrational
Having read many analyses on behavioral finance, the idea that we are all 'predictably' irrational presents a compelling case for active investment management, that is if you know what look for. Not that I am saying I have the tools or the talent to see the biases, but nonetheless.
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