Posts Tagged commodities

2018: A Challenging Year Might Be Ahead

“Whatever has the nature of arising, has the nature of ceasing.” – The Buddha


First thing first: I hope you had a wonderful Thanksgiving with your family and loved ones, and wish you a great Holiday Season, Christmas, News Year….under whatever name, shape or form you enjoy celebrating. My usual attitude I have adopted from a longtime friend is: “Is there something to celebrate? What are we waiting for?”

If you have read my previous newsletter, you might recall the above quotation and might be wondering if I have forgotten something. No, I haven’t. When I sat down to produce this quarter’s letter, I realized that I couldn’t have found a better quote, so I kept it.

As we’re approaching a new year, following a period of strong performance, many of you are probably nervous or wondering if a deep correction is due. Common questions are: Is this time to sell? Is there more room for growth? Should I invest now or wait for a downturn?

For those looking for quick answers: not yet; probably yes; and what about dollar cost averaging?

It all depends on your goals, time horizon and risk appetite. To demystify my answer, let’s dive in.

Cry Wolf

The current market regime we are in might be best described as the “most hated bull market in history.” For years, many participants have been calling for a correction and yet here we are, with solid returns.

I can not tell you how many client meetings I have had since 2011, making a bullish case, settling a client’s nerves, who had just read a report suggesting that huge losses were ahead.

There is actual research showing that some republican leaning investors had missed out on the “Obama rally”. It looks like now it is the democratic and liberal leaning investors’ turn to sit on the sidelines and watch the market that they so “hate”, to run up.

Looking at valuations and extreme optimism, is this “the” time to go out and save the shepherd from the wolves? If we do so, will we look like fools, again? There is a third way.

Don’t Throw the Baby Out with the Bathwater

There is plenty of research that shows that the majority of portfolio returns come from asset allocation decisions. In other words, whether or not you will be invested in stocks, bonds, alternatives or stay in cash, is the most important decision. The effect of security selection, is miniscule compared to this very fundamental decision.

That being said, like most things, it is not black and white. You should make buy all, or sell all decisions. Better said, fine tune your asset allocation, to fit the current investment regime.

We are not bound to decide whether to fully get out of the market, or blindly stay in it. Instead, we need to keep our eyes on current market drivers, pay close attention to our time horizon and investment goals, and make adjustments accordingly.

Current Market Drivers

I am fortunate to serve many clients who are smarter and better educated than myself. One of them once told me “I don’t get what you’re doing, it seems so complex.” Coming from a man with a PhD in computer science, I was humbled, but to tell you the truth, it isn’t all that complex, it all boils down to:

  • Markets go up because there are more buyers than sellers.


  • Economies grow because more money is spent this year than last.

So, the two most important components are: 1 – How much money is out there? 2 – What is the investor/consumer sentiment? In short, it’s all about the FED and psychology.

How about valuations? Research shows that valuations are better indicators for long term (5-10 year) returns, but have a terrible record for shorter term (1-3 year).

The FED, crowd psychology, the economy and politics are undoubtedly interrelated but the end-result on investments has to be separately and carefully analyzed.

We still have a friendly FED, an overly optimistic crowd, a strengthening economy and a market friendly tax bill on its way.

Not too shabby, however the key word here is “overly”. In spite of Keynes’ famous quote “Markets can stay irrational longer than you can stay solvent.” overly optimistic sentiment usually gets punished shortly after.


If you think I am giving mixed messages, that’s because I am. On one hand, I know that when the FED is friendly, the crowd is optimistic, the economy is strong and politicians are market friendly, fighting against this picture is foolish.

On the other hand, looking at historically high valuations, very little cash sitting on the sidelines, and extreme investor optimism, this might be the time to give the shepherd who cried wolf, the benefit of the doubt.

Action Items

How to reconcile these two sentiments?

  • Clarify the purpose of your investment. If you have a long-term goal, short term fluctuations shouldn’t scare you away from investing, but if you may need these funds within a year, this might not be the best time to get in.


  • Brace yourself for volatility. 2018 probably has one or two 5-10% pull back(s) built in to it. So, consider how to lower stock exposure, raise cash, or prepare yourself to ride the roller coaster, and have a 10% drop in US stocks as one of your what if scenarios.


  • Make sure you’re diversified. Usually, what went up the most, comes down the fastest. In the current case, it is the tech stocks. Make sure your tech stock exposure is in line with your risk appetite.


  • Have some international exposure. While the US FED is raising rates, European and Japanese central banks are still in their easing mode, most likely till the end of 2018. These countries, along with Emerging Markets may offer better value.


  • If you’re overly concentrated in any particular security, look for strategies such as put options.


  • Don’t be afraid of raising cash.


  • Watch for earnings because the market is priced for perfection and a negative surprise could be the black swan in the lake.

In Short

2018 will likely end up being a positive year, but returns may be muted and may come with volatility. So adjust your strategy accordingly.

Thanks for reading my commentary and as always, you can reach me at for questions and comments.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , , , , ,

Leave a comment

Markets Comfortably Numb, or Confused?

“It is easier to find man who will volunteer to die, than to find those who are willing to endure pain with patience.” Julius Caesar

If you think the stock market was down 5% since November, then up 8%, then down 2%…and it’s been on a trade mill during which time the end result performance has been flat for the last 8 months – you’d be correct (you’d get a very similar result with Dow Jones). In more detail:

On November 26th 2014, S&P 500 closed at 2072.83. Lowest we’ve seen this large cap US equity index that we call “market” hit since then, was on December 16th at 1972.74. The highest point was on May 21st 2015 at 2130.82. The drop from November to December was 4.8%, and the increase from December to May was 8%. On Friday June 12th, this index closed at 2,094.11, 1% above November 26th high!

Well, then bonds must have done relatively well, right? No…20 year treasury (Symbol TLT) index is down 2.9% in the same period (Nov 26 – June 12) and in fact down 6.3% year to date…

How about commodities (Symbol DBC)? Down 17.8% since Nov 26th and down 4.7% year to date.

US small cap equity index (Symbol IJR) is up 5.6% since Nov 26th and up 4.9% year to date.

Lastly, a safer bet in stocks, utilities is down 6.9% (Symbol IDU) since November.

Emerging markets (EEM) is down 4.98% since November 26th and developed internationals (EFA) is up 2.6% (Please note that I look at investable ETFs instead of an index as they are better indicators of money flow.)

So what does this picture tell us about the present and the future of capital markets? Short answer: it’s a mixed message. Volatile and yet flat, not knowing which direction to take. Let’s dive deeper.

The U.S. Economy

The good and bad news about the US economy is that it’s growing at a moderate paste, or one can call it a “sluggish growth”. This is good because we are far from recessionary pressures as some fear mongers would like to argue, bad news because it is below the historical averages and expectations.

Every period has phrases that become short term clichés and sometimes for good reasons. Last quarter’s cliché reward goes to “Extreme Weather Conditions and Port Disruptions”, which was seen as the main root of the negative real annualized GDP growth of 0.7% during the first quarter. (Notice how I used negative growth as opposed to contraction…it should say something about our addiction with growth). Market reaction to this news was a “meh”…for two reasons 1 – The cliché accurately described the main reasons behind the contraction and both conditions dissipated, which signaled an expected stronger second quarter as a result. 2 – By some measures, there was no contraction. For instance if you look at Gross Domestic Income (GDI), which in theory should be the same with Gross Domestic Product (GDP), as one’s spending is another person’s income. GDI grew 3.6% year over year versus 2.7% growth in year over year increase in GDP. The difference arises due to different data sources and these two figures converge in the long run. The gap suggests that GDP is not accurately capturing all the output in the economy and understating growth (Source: Ned Davis Research).

So first quarter contraction should largely be ignored and deservedly it was. The economy did slow down because of a shrinking shale gas industry, stronger dollar and the cliché mentioned above but there is a big question mark on contraction.

Second quarter and second half of this year is expected to bring stronger economic growth. I base this conclusion on forward looking indicators such as Purchasing Managers Index and most current data on revised retail sales to the upside, exceptional strength in auto sales, strong employment trends and rising incomes.

Stocks, Bonds and Commodities 

The mixed message from the main asset classes is probably the following: the longer term uptrend in stocks is likely to continue. Shallow declines should be seen as buying opportunities. Long term bull markets in bonds and commodities are likely to be over.

When the stock market goes sideways for 3-4 months let alone 8, unless a catalyst for a deep correction is on its way, it usually builds up for the next up trend. Why? Because this period frustrates the investor, bullish sentiment quickly fades, patience is replaced by pessimism and negative sentiment is bullish for stocks (just like extreme optimism is bearish). Negative sentiment is bearish because it signals a built up of potential buyers if and when the tide turns.

Along with an improving US economy, negative investor sentiment is likely to turn into a tailwind for the stock market during the second half of the year.

Those who have been waiting for a correction may not be aware but one form of a correction is a long side-way trend. Is 8 months long enough? We shall see.


A few take-aways from the market action during the first half of the year are:

  • Long term bull market in bonds and commodities might be over.
  • Second quarter US economy and second half stock market may perform better than the prior period.
  • Small cap out performance gives hope for a sustained uptrend.
  • Utilities under performance confirms the possibility of an uptrend. Why? Because as the market matures, the defensive sectors outperform growth oriented sectors (a rotation towards lower beta). Defensive sectors’ under performance keeps the bulls in the game.
  • International opportunities may out shine US investments, but for only those with patience and longer time horizon, as the timing of this switch is impossible to guess.

The contrary view to the market building for the next uptrend argues that the valuations based on price/earnings ratios are stretched, margin debt (to borrow and invest) is at extreme highs, we are coming close to the end of the business cycle, cash ratios are at extreme lows (everybody who is to be invested already is) and we haven’t had a meaningful correction (over 15%) since 2011.

In my next newsletter, I will expand on these bearish opinions because they are noteworthy. For now, the bull is still running, a little confused and tired may be, and so taking it’s needed rest, but until proven otherwise, a benefit of the doubt should be granted.

How to counter the bears and what to say about FED’s next move? That’s for the next commentary.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , ,

Leave a comment

Lower Energy Prices, Lower Yields, Macro Factors in Play

Central Bank stimulus programs and dropping oil prices have been the dominant macro factors affecting the capital markets.

As the European Central Bank is launching its quantitative easing program, China is joining the stimulus party with lower interest rates, and Japan is continuing with Abenomics’ easy policies.

Simultaneously, in spite of the falling oil prices, OPEC isn’t lowering production.

In this environment of lower yields and energy prices around the globe, winners and losers emerge.

Countries that rely on exports and production, like Germany and China, are benefiting from low energy prices.

On the other hand, countries that rely on energy exports, like Russia and OPEC countries, see their profits being squeezed.

In the US, the unexpected result is the sustained low yields in bonds. 

As many anticipated a rise in interest rates, stimulus packages around the globe are keeping yields down, and US bond yields are affected by this.

Rates in the US are still expected to rise in 2015, but may be not as much, and not so fast.

Stronger dollar makes it more expensive for US export goods, while keeping inflation in check with lowered import prices.

These trends are likely to continue in 2015, and so their effects…

, , , , , ,

Leave a comment

Most Hated Bull Still Running

“You know how advice is. You only want it if it agrees with what you wanted to do anyway.”  John Steinback, Author (1902-1968)

Recently, I’ve got invited to a Rotary Club to share my thoughts on current economic and market conditions. I chose instead, a topic more interesting and not as dry for many, and talked about the findings of a relatively new field of study called Behavioral Finance. It is a hybrid of psychology and economics and aims to understand how people make financial and consumption decisions.

The main premise of this field is that we are not rational beings, and in fact quite predictably irrational. A good book on this topic is called “Predictably Irrational” by Dan Ariely. We are wired and conditioned to work really hard on avoiding cognitive dissonance, a mental state of stress when faced with conflicting information and a decision has to be made. So we’d rather look for information that supports our current opinions, pre-existing biases and choices, which behavioral finance calls “confirmation bias”. Having my thoughts around the topic, the opening quote by John Steinback caught my attention. I allowed myself to fall victim to confirmation bias and picked a quote on confirmation bias.

The bull market run in stocks, which started on March 2009 is now 5 years and 8 months old. Many call this the most hated bull market in history, and there is some truth to it. Usually investors love bull markets, this is when you see your investments grow, but why the hate?

The stock market correction and Global Financial Crisis that started in 2007 was so big, so deep and so wide spread, it wiped out many investors hard earned savings and/or cost them their jobs. From peak to trough, the S&P 500 index lost 56%, meaning if you had 100 dollars in Oct 2007, you had 44 left in March 2009. This trauma caused investors, both professional and individual, build such strong negative associations with the market, that they are having hard time adjusting to its 3 fold or 200% growth from the bottom.

From the get go, it was a lonely bull. During its first two months, a 50% knee jerk reaction jump caused many people to question its sustainability. A popular term at the time to describe it was “a sucker’s rally.”

Since then we had a dozen or so pull backs and corrections, and each time there were those who argued that this has been a rally stimulated by FED’s quantitative easing policy and a new bubble has been formed. Since we have just experienced what happens when we have a bubble in our hands, it is/was time to play it safe…and so goes the argument today just like yesterday.

The losses of 2007-2008 caused many to stay out of stocks all together or with less than usual allocation towards. This can be seen with striking numbers among millennials. Those who are between the ages of 14 and 34, are not interested in equity investing, in fact, investing in general. This lack of interest spills over to buying a home or a car and the popular trend among this age group is renting rather than ownership. They saw the consequences of being at the wrong place at the wrong time and they don’t want to fall victim to their parents’ mistakes. This attitude puts them in the spectator seat of a bull market that would have other-wise helped with growing their assets.

To be fair, the $1.2 trillion dollars of student loans hanging over their shoulders isn’t helping the situation, and of course there is always someone out there claiming fame after a pull back with a sign waiving “I told you so”.

At this juncture, approaching its 6th year anniversary, we need to answer whether we are close to the end of a short term bull market, or the beginnings of a long term bull. The difference between the two are the length and breadth (how wide spread) of the trend. The shorter term (cyclical) trends last somewhere around 3 to 5 years. Examples since the tech bubble burst are 2002-2007 bull followed by the 2007-2009 bear and 2009-present bull. The longer term (secular) markets last 10-15-20 years, like the 1982-2000 bull and 1966-1982 bear. Of course, there can and most likely will be cyclical bears and bulls within secular bears and bulls, only to last shorter, if they face against the longer trend.

If the bull market will prove to be a cyclical one, the end, by definition, can’t be too far in the distance. If however, we’re in the beginnings of a longer term trend, then even with 10-15-20 percent pullbacks and corrections, like the 2010 and 2011 16% and 19% corrections respectively, the bull can run for another decade or so.

The unfortunate reality is that we can only accurately know the answer to these types of questions after the fact. But that doesn’t preclude us from taking a calculated guess, and while doing so, we should always keep John Steinback in our minds and avoid confirmation bias.

Without looking for information confirming our hatred and death wish of this current uptrend, or our love and wishes of long and prosperous life, objectively how can we tell where we are right now?

We luckily have historical guidelines on our side to make and attempt to judge our coordinates. Here are some of the 10 indicators to watch:

1) Investor and trader sentiment

2) Valuations

3) Breadth

4) Cash ratios

5) Volatility index

6) Technical readings and seasonality

7) Economic indicators, demographics

8) FED Policy

9) Political risks, domestic and foreign

10) Interest and inflation rates

This list, of course can be broadened until cows come home but believe me, if you can make an objective analysis of these indicators, you will be ahead of many of your competitors.

When I look at these indicators, I see a mixed picture. In my next newsletter, I will get in to a deeper analysis of individual readings, but for now, this much I can say: stretched sentiment, valuations, cash ratios and technical, accompanied by high margin balances, are headwinds for the stock market.

On the other hand, seasonality, mainly post mid-term election period, low interest rates, low volatility, accommodative FED, low inflation rates, relatively calm politics and most importantly a growing economy are tailwinds.

This mixed picture, at least for now, is still in favor of a continuing bull market and a stronger argument for a secular trend. Once again, we can only have definitive answers in hind sight, but a 60/40 chance in favor of a secular trend versus a cyclical term makes more sense to me.


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

In my next newsletter, I will elaborate more on this topic with more details on the above indicators.

, , , , , ,

Leave a comment

An Irrational Stock Market?

“Don’t let your ego get too close to your position, so if your position gets shot down, your ego doesn’t go with it.” – Colin Powell.

There are many reasons why managing your own investments is a daunting task. The biggest challenge isn’t the lack of expertise or time…those can be attained. The ultimate challenge is removing your emotions from your money and investments. If you associate success, self-worth, security and future well-being with the balance in your bank account, then you need to be aware of the emotional roller coaster you are on. That’s not even the worst of it all. If you make decisions influenced by these emotions, that’s when you get hurt. Your ego gets in the way and sometimes, what your ego asks you to do in the short term, isn’t necessarily in your best interest in the long run. Your ego should carefully be excluded from your critical thinking. Makes perfect sense and sounds easy to do, but even step one – identifying your ego – is a long process, let alone excluding it from important decision.

So what can we put our trust in? Objective data. To find the right answers, one has to ask the right questions.

What are the most important and main macro drivers of capital markets?

  • Inflation (or deflation)

  • Economic growth or lack of it

  • Demographics (aging population)

  • Policy (FED – monetary and Congress – fiscal)

  • Trend (momentum) and prices

  • Sentiment (consumer and investor)

  • Debt burden (or lack of it)

  • Credit conditions

  • All of the above factors in international markets and geo-political conditions

Now clearly, getting into the details of all the above would be beyond the scope of this newsletter, but we can at least talk about the crème de la crème factors and decide for ourselves, whether or not there is more room for growth in stock values given we are at all-time highs. Ladies and gents, allow me to introduce: Inflation, the FED, credit conditions and the economy.


Research shows that, there is indeed a sweet spot for a market friendly inflation rate, which is somewhere between 1.5% and 2.5%.

Below 1.5%, the economy shows the signs of weakness and the risk of deflation becomes a reality. Here, probably the supply-demand balance is supply heavy. Above 2.5%, the economy starts heating up, borrowing rates start to climb, as a result the FED is pressured to raise rates to fight inflation and cool off the economy.

So in case of low inflation, excess supply slows down stock price appreciation. With high inflation, rising costs become the nemesis. A growing but not overly heated economy is where you want to be.

Current year over year inflation rate, (Consumer Price Index issued by the Bureaus of Labor Statistics) is 1.6%. Judging by weather related economic slow-down (more on this later) and its effects on inflation, high inflation is a low probability event for 2014, so you can add this as a plus.

Last note on inflation: low inflation also means low interest rates; low interest rates mean cheap money; cheap money means an investor friendly environment and relatively low fixed income (bonds) returns. When savings accounts and fixed income investors feel they are wasting time with low returns, they are forced to allocate a higher percentage to stocks. Even if these investors chose large dividend paying companies, this pushes valuation of these stocks higher, making growth stocks relatively cheaper and a preferable habitat for growth stocks as well.

The FED:

 In a free market capitalist economy, there are two masters pulling the strings at the macro level: central banks (the FED) and law makers (the Congress). The FED controls monetary policies while Congress oversees fiscal policies. Together, they aim to provide just the right amount of incentives and limits to foster a healthy environment for economic growth and prosperity of all citizens.

The FED has more influence over the market in the short term. Easy monetary policies make it cheaper to borrow and invest, start or grow a business, refinance existing loans and stimulate the economy. Tighter monetary policies would reduce liquidity, raise interest rates and aim to cool off the economy.

Current FED policies are market friendly and accommodating (even with tapering = cutting bond purchases). Yes, the FED cut the amount of sugar but the candy jar is still out there kids. Just because it’s not all you can eat, doesn’t mean you are on a no-chocolate diet, so yes, add this on your list of pluses as well.

Credit/Lending Conditions:

Remember, we are going through the crème de la crème factors, so credit conditions are equally important and surprise: inter-related to the inflation rate and FED policies.

Ever since societies evolved from a barter economy to transacting with the means of an exchange that today we call money, along came banks and credit. In a healthy and well-functioning economic system, banks serve as institutions that funnel savings into investments and support economic growth. Almost no business today can operate without the help of credit. How many people do you know who bought a house with no mortgage? This is all good and dandy but like most things, human greed and lack of regulations to control that, brought us to an abused and over used borrowing conditions, which popped in 2008. When the lending bubble burst, it created a below-the-means response, which meant that we went from extremely loose lending conditions, to an extremely tight lending zone.

Tight lending conditions in a debt driven economy brings compressed economic growth. It is like having one foot on the gas pedal, one foot on the break. If I had more space, I would share with you charts showing the direct relation between lending conditions and market performance.

Today, we are back to less restrictive lending. We are nowhere near pre-2008 levels, but we don’t need to be. As I have noted earlier, we are in a low inflation, low interest rate environment and that’s a great place to start.

Businesses are awash with cash, which eventually would translate in to capital spending and hiring. One side note: one of the strong tailwinds of the stock market performance has been stock buybacks and mergers and acquisitions activity. So there isn’t much demand for business loans compared to previous recoveries, thanks to technological improvements and related efficiencies but that will change and when it does, we will find ourselves in an increasing demand for loans and banks eager to answer that call. If you were wondering, where the next waive for higher earnings will come from; this one will be a big help.

The Economy:

And last but not the least; the economy has to be in growth mode for stocks to appreciate. The only exception is when the economy is coming out of a recession as stocks are a discounting mechanism. In fact, this is when you get your best returns. Since we are almost five years past that point, without the economic growth, there is no tunnel or light.

The most recent real economic growth rate is 2.4% during the last quarter of 2013. This is slow compared to 50 year averages of 3.5%. Add the weather related slow down, this quarter result will probably disappoint. Then why do stocks celebrate? The expectation is a strong recovery in the second half of the year. I wouldn’t be surprised with a 4% growth during the second half of the year, since we have started seeing over 4% growth rates, like 4.1% during third quarter 2013.

Now there is a lot that can go wrong. The market at an all-time high is challenging to maneuver as it is hard for investors to find bargains when there are so many eager sellers to cash in their gains. Secondly, geopolitical threats can throw a serious punch. Russia, luckily alone in the Ukraine crisis, is contained for now but there is no limit to what Putin can and will do once he takes his shirt off and gets on his high horse. Iran is on the back burner right now but Syria is still a boiling pot. Thirdly, European economies can surprise us to the downside. Current expectation for previously troubled economies is to start or speed up with their recovery and this expectation is priced in. What if they don’t deliver? Or conversely, what if the EURO over appreciates and creates headwinds?

 IMF recently has issued a warning/recommendation to the European Central Bank President Draghi, to print more money. If they do, that would be a market positive move; if not, hard to tell at this point.

 Coming off of a very strong year, being a second year in presidential cycle, right at all-time highs, corrections can be fast and furious, case in point the 6-8% waterfall decline that started on Jan 21st. The challenge this year and task at hand is to handle these corrections with your risk appetite and investment objectives in mind.


 In a low interest rate, low inflation, easy FED, loose credit and with growing economy, stock values tend to move towards the right top corner of your charts. Risks are plenty and corrections are expected but for the cool and collected longer term investor, this year may bring positive returns. Summary of summary: Markets are driven by fear and greed. Do you see more fear or greed out there? I see greed.

 Hope you have enjoyed reading my market update. Please feel free to forward it to your friends and family and don’t forget to email your questions or comments to:


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , , , ,

Leave a comment


“Teach your tongue to say I do not know, and you shall progress.” – Maimonides (1135-1204 Spain)

 Investment management is the combination of science and intuition, anticipating what others anticipate, about a future set of events that are inherently unknowable.

 That’s what I will attempt to do in this market letter: Anticipate what others may anticipate about capital markets performance and behavior in 2014. Before I progress any further, I do need to disclose that I do not know. Having established some faith and confidence here, let’s pay a quick visit to 2013.

I prefer to look at returns on investable indexes (Exchange Traded Funds) rather than benchmarks because they are more realistic in the sense that they reflect management fees.

  • So according to iShares, Nasdaq Biotechnology Index was the top global performer with 65.61% return, followed by DJ US Select Investment Services Index 65.37%. The bottom feeders were Gold Miners Investable Markets Index -52.21% and Silver Miners Index -51.46%. Wow! Gold itself (GLD) brought a whopping -28.32% loss. So much for being a safe investment.

  • As you can tell, best results came from the US, as its S&P 500 Index returned 29.6% (capital gains only). The rest of the developed world such as Germany and rest of the Europe were also mostly positive as the Eurozone got out of recession in Q2.

  • Even though it was a good year for the residential housing market, the same can’t be said for the returns on Real Estate Investment Trusts (REITs).

  • Bonds? Ouch! 2013 was a markedly bad year for bonds. The 20 year treasury index lost over -15% due to the tapering and rate increase expectations.

I looked at my Jan 2013 market letter and the headline said it all; “A Ticking Time Bond?” In so many ways, it was anticipated, but the timing is always the toughest and the most important part of investment management. In 2011, most bond fund managers thought it would be a bad year for bonds, only to watch double digit returns to slip away. They were right, but early.

In short, the best performing capital markets in the world was the good old US equity markets with all else trailing it.

One hard to believe figure came from the Bureau of Economic Analysis on third quarter Gross Domestic Product (GDP) growth over second quarter: 4.1%! This was surely unexpected and underlines the sustainability of the recovery. We still don’t have the fourth quarter results so we can only estimate 2013 GDP growth rate to be around 2.5%. This is still below averages but surely above recessionary levels.

Inflation has been tame at 1.2% through November. This actually gives mixed signals. A low inflation is a good thing, but too low will waive the deflation flag (prices coming down) and it is a serious risk to the health of the economy. With falling prices, investors prefer to stay in cash, consumers wait as much as they can to get a better price and the whole economy can get in to a grid lock. This is one of the reasons the FED (I speculate) hasn’t been as aggressive as some anticipated in cutting their bond purchase program that is now referred to as the tapering.

According to the Bureau of Labor Statistics, the unemployment rate dropped to 6.7%, yes another surprising result. A year ago it was 7.9% and most analysts didn’t expect it to drop to these levels until the end of 2015, we are two years ahead of schedule so it seems. Now…some surely will argue that this is due to less available labor pool, people giving up on looking for a job, it’s a flawed statistic and so on and so forth. True, can’t say no but this rate is still important to watch closely as it’s one key metric the FED  pays attention to while making interest rate related decisions. This figure, once below 6.5%, may start pressuring wages to the upside, great news for the individuals and consumer stocks and potentially bad news for the overall corporate profitability.

So much could go wrong in 2013 and yet we came through: an economic recession, military action on Syria, tensions with Iran, fiscal cliff, debt ceiling, fights on Obamacare and tapering were some big risks we had faced in 2013. Now what? After an approximately 30% return in US equities, what to expect in 2014?

As I have said, I don’t know, but please read on!  I do think that there are some possibly probable events ahead of us in 2014 that may or may not happen and here they are:

I think two big words to pay attention this year are seasonality and earnings. I anticipate positive returns in the US equities, but certainly nothing like the ones we had in 2013, with a pull back or two during seasonally weak summer months.

Where would gains come from? Earnings growth. Yes, there is still room for growth in company earnings and if you can find the sectors that may benefit from global macro trends or if you are a bottom up stock picker, find those companies with healthy earnings (low accruals), you’re golden. Oh, don’t forget to buy them low and sell high, so easy!

Bonds may have another tough year in 2014 as interest rates may face upward pressure due to the recovery in the US and Europe. So stay with high yields and low duration bonds.

A great comeback story may be seen in the emerging markets following an upsetting 2013. They have been trailing the developed markets and a catch up is due at some point. Remember, not all emerging markets are equal and this year, pay attention to Asia rather than Eastern Europe and Middle East.

Europe is two years behind the US with the central bank giving away free money game. So, its equity markets may have more cards to play as they were late coming to the table.

Commodities could also be a comeback story, as they have been an area of the markets we all loved to hate in the past few years. Global economic recovery can trigger a run on industrial commodities and transportation stocks. Watch for themes supporting global recovery until summer months or the end of the bull run whichever comes sooner, go defensive if the anticipated pull back occurs, and go back to your seats in fall or the bounce back whichever is first.

With fracking, the US is turning into an oil exporting country, which translates into low energy and overall industrial production costs. Add the fact that the employment costs are rising in China, you get a reversal of the trend that had shipped jobs to overseas. I sincerely hope fracking won’t have lasting environmental damages that will prove true an old adage from an Indian Chief: Money won’t mean anything after the last fish is caught, but the economic future of the US is surely promising as a result of this and the demographic trends similar to the post World War II era. While the rest of the developed world population has been shrinking, the US has been able to manage population growth with the help of immigration. The cultural implications may keep some folks out of their comfort zone but the economic implications have been favorable.

Iran is being pulled back to the global system. I am not an international political science expert but one can call me a political junky and as far as what I’ve gathered, it seems like Asad’s presence in Syria will be tolerated by the US, as the alternatives have proven to be even worse options, like Al Queada dominance for instance. Can someone say unintended consequences? It’s a reversal of the US policy in Syria. The agreement it seems will result with Iran stopping the progress on the nuclear warhead development and being more transparent about it. In return, it will be allowed to keep its 40,000 troops in Syria to help Asad win his war while Iran continuing to sell oil to the international markets. An interesting twist in the conflict between the Sunni camp with the Saudis-Kuwait-Turkey-Katar-US coalition against the Shia camp with Russia-China-Iran-Syria coalition.

It seems like Putin has saved Obama from the Syrian dilemma by arranging this deal with Iran, which of course the neo-conservatives along with the Israelis are all up in arms about. I will leave politics to the experts but lower oil prices and a more stable Middle East in the short term are logical conclusions. Remember my thoughts on commodities? Well, keep oil out of that potential comeback story and if you are looking into buying baskets, make sure oil allocation is low.

Put your trust in the market itself more so than forecasts. Monitor market moves and be ready to react because 2014 will not be as easy as 2013, but again who thought 2013 was going to be easy? Just remember how troubling the fiscal cliff alone was, or fights on Obamacare and yet sometimes things did turn out to be better than expected.

One final thought before a suggestion for your New Year’s resolution. In my last market letter, I have suggested that a bull run is a possibility until the fiscal negotiations in February. I am reversing that statement as the Congress, thanks to Republicans’ realization of how damaging this can be to their political careers, has already shown signs of a much easier tone and some agreements have already been made. A pull back is still a possibility in that period but not as much as I have previously anticipated. The other big risk I have also talked about was tapering, FED’s reversal of the bond purchase program. This too is appearing to be of less concern as the FED has been doing a great job managing expectations around this issue. A decent part of this action is already priced in the markets. Tapering may slow the markets this year no doubt, but probably not as heavily as previously thought. Also, say hi to your new FED Chairwoman, first woman in that post, San Francisco’s own Janet Yellen.

2014’s Financial Resolution:

I don’t believe in New Year’s resolutions because I think meaningful change happens instantly when you’re ready and it’s impossible to schedule for it. Once you have had enough of the unwanted and you can’t accept it anymore, once the conditions are ripe for a change, that moment instantly shifts your gears towards the wanted.

All that said, I do think every year, you should have at least one financial goal to accomplish and I suggest you look into your estate planning this year.

Estate planning involves finding answers to questions such as: “If something happens to me, are my assets going to be handled exactly the way I want them to be and in the most tax efficient way? If I get into a coma, what happens then?”

I am a Certified Financial Planner and I understand estate planning enough to talk about them, but ultimately you should meet with a trust attorney and put everything in writing until it feels right. A good trust attorney will walk you through different kinds of scenarios and help you make the right decision. If you have further questions on this, I would be happy to answer or point you to the experts in this field.

Hope you have enjoyed reading my Newsletter. Please feel free to forward it to your friends and family and don’t forget to email your questions or comments to:


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , , , , , , , , , ,

Leave a comment

Is Good News Actually The Bad News

“It’s quite exciting” said Sherlock Holmes with a yawn. – Sir Arthur Conan Doyle, A Study in Scarlet

As I was looking for a quote to start October’s market letter, I have stopped yawning when I saw this one liner from my favorite fictitious character, Sherlock Holmes. It captures the current market mood perfectly as I have never seen a market rally that is much hated, and much ignored.

Let’s look at the S&P 500 Index growth as of Oct 31, 2013:

Since March 9, 2009 bottom: 159.64%

Year to Date: 23.16%

Since 2012 Year High: 23.78%…and 12.74% above last all-time high.

Has there been a severe correction since March 2009? Nope, the deepest correction since then came in the summer of 2011 with a 17% loss. We have seen no 20% or more correction in the last 4.5 years.

Then have the markets been very volatile? The VIX index (one measure of volatility) sky rocketed to 60 in 2008, than spiked once more to 40s in the summer of 2011, which was during the above mentioned correction. Other than that, it has been hovering within the trading range of 10-20.

So you are saying we have seen a 159% percent gain in the last 4.5 years, without a correction of 20% or more, while one measure of volatility, the VIX index was within the 10-20 range for the most part?


Then why is everybody yawning and not excited?

My guess is that most investors are still heart-broken from the 2008-2009 trauma, and most of them rightfully so. If you haven’t kept faith and stayed invested (in risk managed portfolios), your investments still haven’t recovered from that period’s waterfall decline.

I never get tired of throwing this fun little fact out there: when you lose 50% in year one, you have to make a 100% gain in year two to break even.

This is why Warren Buffet says “There are two rules to investing: 1 – Don’t lose money. 2 – Don’t forget Rule #1.”

If you generate 10% growth every year for 8 years and then lose 5% percent for 2, (assume a simple return with no compounding), then your average return for the 10 year period is 7%.

So what I am trying to get at is, that even after 4.5 years, you may still be feeling the heat.

One other reason that may explain why many professionals haven’t been active in this rally, and why most mutual funds and hedge funds have been underperforming broad indexes is this: This uptrend entirely driven by the FED.

For many investors, this liquidity-driven rally of the FED has been creating a bubble and it is about to burst any day. It is not real, because it is not supported by economic fundamentals and so it can’t be trusted. According to them, the FED has been devaluing the dollar, which will create inflation; it will expose us to an alien attack, and therefore hard assets are the way to go (gold, commodities, real estate).

I have been writing against this trend ever since I have started publishing market letters in 2010, and so far I have been sleeping quite well. The defenders of the above faith has first turned blue waiting for this apocalypse, then black…that’s when I stopped watching. I can’t stand blood, except when it’s on Dexter.

The only real asset that has been a good investment lately has been residential real estate and apartment buildings. If you bought a house in the last couple of years, you have done well, and REITs had been going up until recently. A few months ago REITS topped and now it’s the residential real estate market that is blowing smoke from the exhaust pipe.

There are two big market forces you can’t fight against; one is the market itself, which doesn’t care if you are right or wrong, and the second one is the FED, whose mandate is low inflation and full employment. In case you missed it, “YOU” are not on that list, and thus no one cares if you win or lose. As my grandfather used to say: “The bus won’t wait for you, so you have to go early and wait for it. After all, it’s bigger than you.”

Another saying is: “The mountain doesn’t come to you, you come to the mountain.” So if the FED and the market are the mountains, it is better to watch when and where they are going, not so much what you hoped to see. As famously said: hope is not a strategy.

While stocks have been rallying in spite of not getting much love, bond values have been dropping since late last year. In the short term, they may see a bounce back and possibly be oversold but the longer term trend is stocks’ likely outperformance of bonds to continue.

For some investment strategies, this rally has been a complete lost opportunity. If you allocate funds based on economic numbers, you have been sitting on the side lines or have been in bonds while waiting for the economy to turn around. Unfortunately for six years in a row, the growth rate of the US economy has been below the 1947-2013 average of 3.23% a year. Here is what real annual US GDP growth looks like:

2008    2009    2010    2011    2012    2013 Q1    2013 Q2    2013 Q3

-0.4      -3.1      2.4       1.8       2.2       1.1                2.5          2.8

The interesting thing, and most likely most frustrating for these folks waiting for the economy to turn, is that each time we got good news about the economy; it has caused a drop in the broad US stock market indexes. Case in point, as I am putting this letter together (11.7.13), the S&P 500 Index is down 1.32% precisely because unemployment and growth numbers came strong, which means the FED’s QE might be coming to an end. That has been the real threat to the Market. Quantitative Easing has been fuelling the markets and like any other sugar candy, it has to stop at some point. We need to get back on the veggie, fruits, nuts and fish diet (red meat ok here and there).

Good news becomes bad news for the markets, as it indicates possibly tapering; an end to the FED’s bond buying program.

So here comes the big question: Is good news really the bad news? If we won’t invest when the economic news is good, then when should we?

For those nervous types, who watch the market every day, yes it is bad news because of the reasons mentioned above: FED taking away the punch bowl is a sign that the party is over.

But IF this will result in the economy improving, after the initial sugar low, which may last a quarter or two, we may start seeing the Earnings (E) portion of the P/E ratio expand. This would make the Price (P) portion look relatively smaller and cheaper, and attract more buying. At the end, the only for sure right answer to the question, why do stocks go up, is: because there are more eager buyers than sellers.

This, moving from the sugar to veggies, won’t be fun. It never is. But it is, a necessary correction and for long term investors, the ideal case scenario. Because if the economy doesn’t improve and Earnings don’t expand, I don’t know how much more the stock market can sustain this uptrend solely relying on the FED.

Currently, margin debt levels are high (borrowing and investing – bearish), mutual funds are invested (low cash – bearish), investors are optimistic (bearish) and early next year we will wake up to yet another debt ceiling and government shut down dog and pony show. All this may point out to a rally to the year-end…AND cut!

September and October are seasonally softer months of the year and broad stock indexes were up this year same period. This happened only 13 times before and 11 of those 13 cases; the following November and December were both positive months as well. So seasonality favors the stock market, but it never hurts to start keeping your investments a bit closer in the next couple of months.

One last thought before I send it to my good friend and Editor in Chief Greg Bronshvag. Are we due an economic recession?

Short answer is yes, we are always due a recession. You can’t grow to perpetuity, at least not in an economy governed and driven by earthlings.

But the 5 year growth, 2 quarter recession model (there is no such model but it is true that on average, every 5 to 7 years, the US economy dips into a recession) has happened over and over again in the past with one characteristic we have missed this time: a jump and above average economic growth right after recession. Yes we are in the 4th year of economic growth but they have all been sub-par years, heavily relied on the FED punch bowl (running out of analogies here) and yes it does make many people yawn. So I predict, the recession won’t come as scheduled and we will have a year with economic growth in 2014.

Hope this was an enjoyable and informative read. Always, please feel free to reach out for questions and comments. Before now and my next market letter, you will be enjoying your family time around the Thanksgiving table. I wish you a great Thanksgiving and safe travels.


Next on Shield Wealth Newsletter

Hope you have enjoyed reading my Newsletter. Next month we will discuss investment opportunities outside of the US. Please feel free to forward this email to your friends and family and don’t forget to email your questions or comments to:


The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

, , , , , , ,

Leave a comment


Fighting cognitive dissonance and confirmation bias in market analysis.

Pragmatic Capitalism

Just another site

The Reformed Broker

An Irreverent and Insightful Blog about Wall Street

The Big Picture

Fighting cognitive dissonance and confirmation bias in market analysis.