...we're always in pursuit of the investments, sectors and regions that are on the move...

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December 7, 2009

"... We have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the Government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed have cost enough money to pay the National debt several times over... This evil institution has impoverished and ruined the people of these United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Fed and through the corrupt practices of the moneyed vultures who control it." - Rep. Louis T. McFadden (D-PA), Chairman, Committee on Banking & Currency US House of Representatives Congressional Record/Page 12595, Year 1932

"We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will [further steeply devalue] our currency if we do it again". - John Hussman, PhD, November 2009, Economist and Fund Manager.

"... Thus far, [all factors] continue to support the likelihood of further advances in the primary uptrend, albeit possibly after a [likely] near term corrective move." - Lowry's Institutional 12/4/09.

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July 9, 2009

Giving money and power to government is like giving whiskey and car keys to teenage boys. ~ P. J. O'Rourke, American political satirist, journalist, and writer.

There is a great divide among financial advisors, economists and investors over the question of whether a new bull market began in March of this year. Those who take the positive position believe in the "green shoots of recovery", as described by many in government. They believe that the stock market anticipates economic recovery, with improved corporate earnings on the way. Many others are skeptical, however, and cite ugly economic and market statistics to make their case. Lowry's Institutional, whose market analysis has helped many advisors for decades, takes the skeptical view. The simple summary of their view is that, in all the decades of new bull markets that they have studied, there has never been one that has exhibited the weak internal statistics of this current rally. These important statistics include such things as volume of trading when the market rises versus when it falls, the percentage of stocks overall making new highs, evidence of heavy institutional participation, etc.

John Hussman of the Hussman Funds makes an excellent point about where we stand today - that the market's sharp rise since March has created a situation where investors now REQUIRE favorable economic developments and will express significant disappointment if those improvements don't materialize. Based on what I see, the economy is more likely to surprise on the downside than upside. Recoveries are built on new investment, not on government or consumer spending, and corporate investment is not currently in any observable uptrend.

I decided some months ago, as many of you know from these newsletters, to follow a five stage re-entry back into the markets based on objective measures of increasing demand and decreasing supply. At the end of the fifth stage, a new bull market cycle would have proven itself with plenty of future opportunity. Typically, market cycles last 6 or so years on average, from bottom to bottom.

I think that the optimism, if it truly is excessive, is based on expectations that everything is the same as always this time. There is also a certain chatter, based on hope, from the media, from the government and from certain financial institutions that fear any exodus from their investment vehicles.

While I know that bull markets are said to be "built upon a wall of worry", I feel that much is different in this cycle. This is not an ordinary recession and we are not looking at ordinary government intervention. We have seen severe economic damage in the areas of real estate, finance/banking, government budgets, corporate deleveraging/reorganization, unemployment, bankruptcy and taxation. There is apprehension out there regarding the future inflationary effects of the flood of newly printed money, the cost impact of the new energy policy and possible new taxes on the way. The damage reminds me of a car in a multicar pile-up. The body damage just doesn't easily pop right back out. Given how much is different, I think it is important, when making market and investment decisions, to take a "show me" attitude. This is the reason for the staged re-entry.

As we redeploy sidelined cash, I will be looking especially for foreign and global opportunities. This is the area of greatest strength in the rally that began in March and the most favorable outlook for stocks in general, going forward.

Please contact me regarding your risk orientation, your investment model or other matters that you would like to discuss.

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April 18, 2009

It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder. ~ Frederic Bastiat

While we speculate on whether the great bear market is over, I observe that we have had an entire bear market and bull market already in 2009! That's right, using the traditional definition of a bull market/bear market as a gain/loss of at least 20%. From January 6 to March 3, the S&P 500 fell 27.6% and from March 9 to March 26, it rose 23.1%.

Volatility is a known characteristic of bear markets, including the final stage. It is also common for a bear market rally to last months and be very profitable before tumbling aggressively to where it began, or to new lows. This type of long, eventually false rally occurred from late 2001 to early 2002.

Bear markets end when the desire to sell is completely exhausted. Usually that precedes a bottoming in the economy by 3 to 6 months. This economic downturn has been particularly steep and perilous because it has involved collapsing values in all 3 sectors: real estate, finance and commodity prices - a rare event. In the financial sector, families and businesses are repaying (and defaulting on) debt, which is highly contractive and deflationary. Additionally, there are many investors who feel the government is fighting recklessness with more recklessness. My information points to the need for caution with the current rally based on market statistics. Although we may leave some profit on the table, my plan is to return to the market in stages, as specific milestones are passed. As of today, we are on the verge of the first 25% reentry.

Ultimately, business and markets hate uncertainty. Because of the uncertainties that remain, there are many observers who make the case that the next bull market cycle could be very tepid. My opinion is that active management will once again be important. Think of 2007, when the S&P 500 gained less than 10% while emerging market foreign funds gained many times that. We are far removed from a bull market like the late 1990's when people picked hot stocks as a hobby. I feel that bonds and market neutral funds will occupy a place even in aggressive model portfolios. One of the funds we're using is the American Century Diversified Bond, which was just named the best corporate debt fund over three years (of 161 funds total) by Lipper Fund Intelligence (email me for documentation regarding this award). Another sector that I have incorporated recently is convertible bond funds - such bonds having an additional feature entitling the holder to convert the bond to the company's stock.

A few clients have asked about the danger of a Bernie Madoff type of disaster occurring with their Fidelity account and/or with my company as advisor. The difference is that Madoff's victims did not have brokerage accounts in their names. They signed their money over to him, giving up title to it. In your case, your Fidelity brokerage accounts are protected explicitly against fraud. You can read about this by going to fidelity.com and clicking on the tab entitled security. Also, if Fidelity went bankrupt, as with any brokerage firm, its shareholders and bondholders would bear the risk - not its account holders. Similarly, if your company went bankrupt, creditors could not make a legal claim on your 401(k) account in order to satisfy company debt.

We moved important amounts of money to cash in 2008, helping the cause greatly. Moving the sidelined cash back into the market is an exercise that guarantees being wrong - either some degree too early or some degree too late. Given that I know I will be wrong, the open question is whether to err on the side of early or late. My feeling is to err on the side of caution, partly because of the tepid bull market that may lie on the other side; partly because I trust in our ability to make money during the next bull market cycle.

Please contact me regarding your risk orientation, your investment model or other matters that you would like to discuss.

2009 First Quarter Returns
While our accounts finished down of course in 2008, we finished down much less than the averages, which lost close to 40%. I began to cash in various stock positions in August and September, before the major drop in October and November. If you would like to review your investment orientation, please contact me by phone or email.

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January 19, 2009

Remember that there is nothing stable in human affairs; therefore avoid undue elation in prosperity, or undue depression in adversity. ~ Socrates

Ideas for 2009
I haven't been at all surprised that the market has lost much of its recent gains. The market statistics that I follow simply have not shown any evidence that a new bull market was developing. Bull markets start with broad based, enthusiastic, high volume buying - which was not present. I do not believe that it is time to put all of our sidelined cash back in stocks just because the market has fallen so low or because we are closer to the bottom than the top. One thing (among many) that I learned last year is to watch market statistics. My focal point for 2009 for client accounts will be to reenter the market in stages, based on solid evidence of enthusiastic buying, however much patience that may require.

The stock market will turn around when the end of the recession is in sight - always a matter of months ahead of it. The candidates for growth when the turnaround and new bull market begin are likely to include industrial equipment (infra-structure), medical equipment (a true growth industry) and healthcare (especially pharmaceuticals), biotechnology (best stock sector in 2008), energy services (exploration, development and transportation) and defensive technology (information services). Foreign regions I am watching include Latin America (especially Brazil) and Asia (especially China).

Investment and Risk Orientation
I believe it is very possible that we will experience a low return environment for a while, possibly another year or more. We be prepared in case this recession becomes longer and deeper than some think. The long cycle of ever increasing private indebtedness is unwinding, which is very deflationary. Unfortunately, it is now morphing into a mushroom cloud of public indebtedness. Further, there are uncertainties surrounding the effectiveness of the economic stimulus that may be implemented. I consider a natural progression for moving cash back into the market to be: start with quality bonds, then blend higher yield and convertible bonds and finally move to stock. As you may have noticed, many months ago I configured aggressive model accounts to look like moderate; moderate to look like conservative; and conservative to look ultra conservative. Therefore, I will soon be moving much of the excess cash to bonds.

2008 Returns
While our accounts finished down of course in 2008, we finished down much less than the averages, which lost close to 40%. I began to cash in various stock positions in August and September, before the major drop in October and November. I have emailed your returns to you. If you would like to review your investment orientation, please contact me by phone or email.