Why Lehman Events Happen

Why Lehman Events Happen

Snow up the wazoo!

Snow up the wazoo!

It’s Tuesday January 27th, and there’s 2 feet+ of snow outside my window. Nice to look at but I’m not going out, except maybe for a short quiet walk. The only time you can enjoy a moment outside without the sounds of some moron Boston driver beeping in the distance or screeching to a halt is when there is two feet of snow on the ground. So maybe I’ll go out.

In the meantime, I’ll ponder the thought – as the market falls hard today – of a common Wall Street saying (paraphrased): that the bond market is smarter than the stock market. I think of that as I watch the Russell 2000, an index of small company stocks, perform relatively the best today. If the bond market is truly the “smartest,” meaning the moves in that market best represent what is and what will happen in the economy, and stock markets aren’t as “smart,” where does that put people who mindlessly buy the smallest stocks on every dip, even as the economic news deteriorates?

Let me stop here to summarize a few things.

1. the 2009-2014 period is over – yes chronologically it is most certainly over. But the warm fuzzy feeling people had as every market dip was bought more ferociously and it seemed like market risk had disappeared, should be forgotten.

2. Volatility is back – meaning large price swings in assets as central banks the world over play with interest rates (some going negative!!!) and currencies. Historically, the textbook analyst values an asset based on a “risk free interest rate (usually a 10 year US treasury bond). When rates are up and down 1% every 6 months, and heading to 0% worldwide, then this idea of valuing an asset is hard to do.

3. Sucker punch probability rises – the chance of a market sucker punch, where prices move extraordinarily, in a day or a few days, is very large now in my opinion. Those of you that read my email newsletters know I have increasingly turned to using options as “placeholders” for full portfolio positions to eliminate the sucker punch risk.

Is the investor sucker punch coming? photo courtesy of Bark on Flickr

4. Bond yields heading to 0% worldwide means rate sensitive investments > bonds, real estate, MLPs, may just see some euphoric price increases – the temptation to short bonds (I have tried with many small paper cuts), is large but the risk is very high. The implications of 0% yields for 5 years in the US are being felt now and with Europe joining us, global implications are immense but unknown – scary stuff.

5. Most importantly, we have been getting company reports for 2-3 months now that economic action is slowing- “growth” is still there in the US but activity is decreasing. We also have some numbers negative (like today’s Durable Goods Report) which despite any excuses, to me is unfathomable (not really) after 6 years of 0% interest rates and $1T plus annual Fed monetary stimulus. Companies are blaming results on a rising US dollar (making our exports more expensive) but revenue growth has been anemic at many large US companies for a while. And a good chunk of earnings growth has come from stock buybacks where companies are NOT investing in the future but spending the money NOW to boost earnings.

So if risk levels are rising, and we’ve had a few months of sobering news (and granted some positive news) and the “least smart” part of the stock market is acting the perkiest, what conclusion should we draw? Here are mine:

First off, most people,  from what I read in the news – reporters, politicians, economists etc – have not fully accounted the boost to the economy from the Federal Reserve stimulus. So the baseline economic activity of this country is artificially high in my opinion, and the experts don’t fully account for that. Second, in my opinion,  the temporary boost the economy got from all of this stimulus is wearing off. we have been seeing this as some companies no longer wish to borrow money to buy back stock, and many of our foreign customers are running out of strength too.

Third – and this is the point of this all, and the reason Lehman events happen – is that people keep buying dips in stock prices robotically even when the underlying fundamentals have changed. Meaning, anyone 100% invested for the past 4 years should be reallocating to cash for now or other markets that are starting uptrends. The US market has been sideways for 2-3 months showing a possible top. If it isn’t the trend investor can always re-enter on the breakout to the upside. But why risk 100% now?

Any decline in the market the past 2 years has been bought aggressively

Any decline in the market the past 2 years has been bought aggressively

The truth is, many still are risking 100%, and many have loaded up their investments in the past 3 months as the market has made new highs – right as risks have increased. And with these clues of changing fundamentals, people are still buying – as witnessed by Russell investors/traders. At least demand more of a dip before you buy!!! Small dips are bought aggressively because people still have the 2009-2014 feeling. Events are telling you to reduce risk – one way or the other (reduce size, use options, sell and re-enter if trend continues). But most are not. Most will buy the first dip, then the 2nd dip, then the 3rd dip, then “what was I thinking” as noted hedge fund manager Seth Klarman calls that moment:

We Have Another Lehman Moment.

Thanks for reading – and as I finish this, markets are trying to claw back. Buy the dip!:)

I’d Buy Real Estate in Portugal

9.26.14 Update: Read this recently and had a chuckle:

7 Best Places to Retire Around the World

And wouldn’t you know it, Portugal (southern coast) was one of them! Now back to the original post

After reading for the past few years of European national debt problems, and seeing the fire sales in real estate, I got the idea that owning ocean view property in Portugal might make sense. This is a totally speculative post, just a thought I’ve had for some time. And since I can not do this at the point, maybe you could and would benefit from the idea.

Portugal is a small country, with a population roughly equal to Southern New England. And since they didn’t have the front page debt problems of Greece, and since they weren’t one of the European countries with an important opinion (read: Germany and France), it is easy to forget them. Of course football fans (soccer) know Portugal as the home of Cristiano Ronaldo – but Portugal is so much more than that. They have a good infrastructure for food and food-related basic industries like fishing, wine, and farmland.

There is also the old world charm. Portugal wasn’t bombed out in World War 2 so they retain many old buildings (that of course need some renovation) and their charm. Some might accuse the country and its population of being a bit isolated, but they are on the tip of the Iberian Peninsula, on the beautiful Mediterranean, so being close to home isn’t so bad.

I know very little else about Portugal – my fault -and  since I go to the west coast US often, Portugal is almost the same distance and wouldn’t be out of range.  But I have not been. However, my instincts tell me that for Americans near retirement, and maybe especially for Americans of Portuguese descent who know the language, there may be some nice opportunities to get a retirement home. Portugal isn’t too far from North Africa either, and could serve as a nice 2nd home area for Americans with roots in North Africa who may prefer to live in Europe but be close to relatives in North Africa.

if any of you have some input on this, please share in the comments. I’d enjoy your perspective and any clarifications of my thoughts above.

Fed Minutes Rally Playing into the Pros Hands

I found the “rally” yesterday a bit amusing in that it seemed so strong from a price perspective. And underneath the hood, some of the most explosive names from 2013, the ones that have fallen precipitously in 2014, tried to regain all of their substantial losses (many greater than 20%) in one day.

But days like that happen often in bear markets. If we have seen the peak for US equities, then days like that will again happen. Also under the hood the volume was lighter. Prices crept back to levels where, on many stocks, heavy sell sequences occurred. If this is indeed a low volume (early) bear rally, then amateurs have played right into the Pros hands – giving them a better price to sell (or sell short).

I’ve said this before and was wrong (and don’t want to discount the power of the BUY THE DIP mentality) – but I think in terms of odds – and try like heck not to care about being right (I am working hard to relieve myself of a lifelong need to be “right” or “smart” about something all the time).  Therefore, as Peter Brandt often says, “an opinion is not a position.” And here, I am making an opinion – I may test a position idea – but I am not committing myself fully, nor my or my clients’ funds fully to this idea.

Just something to think about – just another possibility

Fitness & Nutrition Plan Progressing Nicely

I reported a couple of weeks back that I had become fed up with my poor eating and chose to go strictly vegan.

How’s it been going?

Quite well actually. Chalk up now about 6 weeks of eating vegan – and not nasty vegan (some people go vegan and eat foods heavily laden with oils to “make up for” lost flavor) which tends to make people fatter in my anecdotal experience. I’ve followed a starch based diet, which is typical of many trim populations worldwide. I’ve based my meals around oats and other grains, quinoa, spelt, kamut, rice and noodles. Noodles are my favorite.

I’m eating a good portion of fruit and eating a good share of vegetables. What I am not doing is ADDING oil to my meals (not even any “good” oils). I like Dr John McDougall’s statement – “the fat you eat is the fat you wear.” I have put some sugar in iced tea but haven’t significant added sugar to my foods either.

We’ve cooked at home for every meal – soups, wraps, rice dishes, pizza, salads and other stuff I can’t even think of right now.  It’s been 1. quite fun, 2. a huge savings over dining out, 3. quite healthy as we pick the organic ingredients we use. Some people may go over the top with organic, but even so, I am certainly not feeding my son the junk that some of these well-known companies put out and call “food.”

Lastly, I have found the “7 Minute Workout” and the many off-takes of it to be a tremendous boost to fitness for various reasons. 1. it is a decent workout. 2. you can bang it out in 7 minutes and 3. just by doing this frequently (3xs week?) you keep positive and forward moving and therefore more motivated to turn down bad foods. It’s also enough fitness, if couple with regular daily exercise like stretching and walking, to keep the average person in good shape.

I hope the above helps motivate some of you (or all of you) to hit your physical goals. Feel free to drop a comment on what you’re doing. And remember, this post is not meant to be advice specifically for you, since I don’t know you or your health history. Check anything you do with your doctor and professional trainer. Then MAKE IT HAPPEN!