Thoughts Going Into The Weekend...

The Chinese word for crisis, Wei Ji, is a compound of the characters for Danger (Wei), and Opportunity (Ji). There is probably no better word for describing the mindset of successful investors.

Where we're at... (Brief comment from Don Coxe)

What we know from the 70s is that if you have a recession at a time of fast money supply growth that what happens is that the stock groups that tend to do best during the recession and to lead you out of the recession tend to be commodities. So the commodities stocks of course, were just hammered after the ‘midnight massacre’ of July 13, 2008 which is what really launched deflation in the world. But what’s interesting is what’s happened to them since then in relative strength. We come back to my old faithful of the IBD’s 197 industry subgroup rankings and what changes there are in that from week to week. This week, if we take the top 21 stock groups, we see that 7 of them, that is one-third of them are commodity groups led, of course, once again, by metals, ores, gold and silver; they’ve been at the top for some time. But we’ve got food flour and grain; we’ve got oil and gas transport pipeline, we’ve got oil and gas refining and marketing, I feel very good about the fact that pure refiners have done so well, I can tell you. Food, miscellaneous preparation, retail, wholesale food; and Oil and Gas, International Exploration and Production interestingly enough.

So, what that tells me is that this is the kind of swing at a time when everything looked bad, back in 1974, and by the way, things looked much worse then than they do now, in 1974. We were down to a 6 mulitple on the Dow. And the belief in equities as an asset class was being abandoned on all sides and unemployment was double digit levels and governments were falling; things were much much worse then. But, what you could see was the relative strength of the commodity groups, including, by the way, the supermarkets back then, which is interesting, because the supermarkets are doing well now. So, I would therefore like to take the view that what signals we’re getting for the market are that the market like all the pundits, isn’t sure that this $2-trillion that’s being thrown at the system is going to work. But the belief is if it does work, we’re going to have a greater demand for scarce assets, and that everybody recognizes that the huge selloff that we’ve had in commodities and commodities stocks means that scarcities could come back pretty quickly. And that’s exactly what happened in the 70s.

Now, I’m quite sure there’s a lot of you out there saying ‘you keep talking about the 70s, and its a different world.’ It is in many respects, but only in one, I think, that’s really crucial, and that is on the real estate side. Because back then what we had was the baby boomers were university graduates having to live with their parents or grandparents because there were no houses available for them. There was a housing shortage because of course, there was no way they could expand the housing market fast enough to take cognizance of the huge number of baby boomers coming out of high schools, community colleges, and universities; well we havn;t anything like that this time, because of the birth dearth that began back then. What we have is a situation where the housing supply was built on the assumption that things would be the same as they had been every other cycle and of course they aren’t the same, and they will never be the same the next 50 years. So that’s the big difference. We have demographic deflation across the industrial world and in that sense, what it means is that there is one asset class which cannot behave as it did back then. And back then, house prices, although it took them a while to start moving up, even though we had inflation, they did. In any case, you didn’t lose money on housing back then.

I think that the fact that the oil stocks, despite the fact that spot WTI has gone to a new low, the oil stocks are actually starting to perform better, is people’s recognition that with the cutbacks that OPEC has already delivered and then the evidence that US consumption hasn’t fallen by 5%, 6%, or 7% as people thought; those statistics were clouded by what the retail gasoline sales were; and of course, what they did, because retail gasoline was down by 50%, was in trying to adjust for this after you took out state taxes and all these things, people got wrong what the actual volumes there were. So what we see is that the actual demand for oil in the world has not fallen off a cliff. Yes, the demand for industrial goods and consumer goods and ? and things like that has fallen of a cliff. But certainly not for most commodities, and particularly, not for oil. And with the move that we’re getting in the fertilizers, and I’d just like to mention once again, the value of the IBD survey, because way down, you get way down the list, number 56 on the list, and you see chemicals and fertilzers [12:23] but that this week and three weeks ago they were down in the depths at 154 and the charts show you that there has been a huge change in attitude towards the fertilizers and indeed towards the agricultural stocks generally.

Now, that’s not because I think the world has embraced our view of the strong possibility that the two centuries of global warming have come to an end, and that we might be entering a period of global cooling which would dramatically affect the outlook for crops in the northern hemisphere. No, I think its simply once again the recognition that although demand is reduced somewhat for key grains and feedgrains as a result of the economic slowdown, that it has not collapsed and the carry overs even though they’re bigger than they were a year ago, are not so great as to suggest that the prices farmers are going to get for their grain are going to be profitable. Yes, spot corn is $3.66, but the new corn that hasn’t been planted yet, which will be delivered in December is $4.07, and corn for the next year after that is $4.25. These are prices, that if you’re a farmer who does a good job producing it, could make a lot of money on it, despite the collapse in demand for ethanol. So, what I’m basically saying is that we already have two commodity groups which in the last few weeks have been moving up strongly, and they’re basically saying that you don’t have to take a bet on how the Obama program works out, as to whether or not this recession is going to drag out a couple more years. You can make money here.

Nick Murray... Words of Wisdom

Stocks Vs. Bonds:

The most important thing is: did you invest relentlessly in any stock funds as opposed to any bond funds, individual bonds or CD’s. The Megatruth is: real wealth come to, and abides with, the owners of great companies, not to the lenders to great companies. I’m not suggesting that an owner can’t lose; I’m declaring as an article of faith that a loaner can’t win.

If you steadily accumulate even mundane stocks month after month and year after year, if you patiently remain true to your tortoise disciplines even when hares go whizzing past you left and right, and above all if you regard “bear markets” as opportunities to buy more of your stocks at sale prices rather than as the onset of Armageddon – you’ll not only achieve wealth, you’ll probably “outperform” 90% of your fellow investors without even trying.

Thus, a huge percentage of your total lifetime return is attributable to the simple decision to be an owner and not a loaner. And most of the rest of your return depends not on how your stocks perform vs. their peers, but on how you behave. Wealth isn’t primarily determined by investment performance, but by investor behaviour.

Equities neither make you wealthy nor keep you wealthy. You have to do those things yourself. You can’t, as we’ve seen, build and hold wealth without equities. But the converse is even more importantly true: equities can’t do it without you. Your appropriate behaviour with respect to equity investments – and not the relative “performance” of those investments – is the variable that will govern your financial success. (And in the end, your behaviour is the only thing you can ever really control.)
The single most important variable in the quest for equity investment success is also the only variable you ultimately control: you own behaviour.

Four Behavioural Tactics to Success:
1. Setting goals in dollar-specific, date- specific terms.
2. Establishing a plan for achieving those goals, assuming a specific rate (or rates) of return.
3. Investing the same dollar amounts at regular intervals, so as to harness the power of dollar-cost averaging.
4. Meeting your retirement income needs via systematic withdrawal from your equity portfolio.

Short-term Numbers. (Think Beyond)

Just as in every boom the bulls proclaim that “this time is different” — that the markets are fundamentally more stable than ever before — so in every slump, the pessimists insist that the world faces unprecedented disaster and that, just this time, the recession will not be followed by recovery as it always has before.

The cause of the current economic misery is an unprecedented credit crunch. But against these deflationary pressures there are equally unprecedented expansionary forces: the lowest interest rates in history; the fastest-ever fall in oil and commodity prices; the biggest-ever peace-time public works programmes; and, most importantly, a willingness and ability by governments and central banks to support their financial systems.

This crisis has therefore become a tug-of-war between two extraordinary forces. So what can we say about the outcome of this elemental battle?

We can only say one thing for certain: that no economist will accurately forecast the numerical result. However a reading of the major economic thinkers — Schumpeter, Hayek, Keynes, etc. — can remind us that in one way or another, the profit motive will ultimately triumph.

Bottom Line.....

(1987 VS. Present)



You will regret not owning equities over your investment lifetime. You will regret even more if you miss this wonderful opportunity to acquire companies at fire-sale prices.

In the coming weeks I will be referring to old adages from Mr. Nick Murray. I find that his words of wisdom on markets and investing are the most clear and concise argument in the face of media driven adversity. There are no shades of grey, just precedence and fact... Markets always go up.

Stocks are inexpensive VS. Bonds!



Growth Stocks now are priced equally to Value Stocks!



I can't think of a more prudent arguement for investing in equities at present. Please feel free to counter this statement. Cheers.

Signs for Optimism. (Happy Birthday Bro.)

Following a strong start to 2009, equities had a disappointing showing last week, and given everyone’s painful 2008 memories, most investors were probably quick to conclude: “Oh no! here we go again”… But does this reaction make sense? As mentioned in the past, investment returns typically depend on four very important variables:

* Where do we stand on the valuation front? Buying overvalued assets can work in the short term during rising markets, but is hardly a long-term recipe for getting rich. The good news is that today, almost all assets (bar OECD government bonds) are at the very least fairly valued—and many remain very undervalued.

* Where do we stand on the sentiment front? When sentiment is buoyant, company managers are prone to over-reach, take on too much leverage, and jeopardize the long term health of their businesses. At the same time, as the past year has shown, buying assets alongside people who are over-extended can prove highly detrimental… in that forced selling hardly begets rising prices. The good news today is that a lot of the excess leverage has been wrung out of the system—there can hardly be any “weak hands” left. The bad news is that “strong hands” remain hard to identify.

* Where do we stand in the inflation cycle? Changes in prices are a key determinant to asset valuations. In a positive environment, prices remain stable, allowing companies to focus on their core businesses. When prices rise too fast, or decline precipitously, companies worry about their level of inventories, about the ability of their suppliers to continuing delivering, etc… Thus rapidly accelerating inflation, or collapsing prices, typically lead to serious contractions in P/Es (with inflation actually being worse for P/Es than deflation). The bad news today is that we are entering into an overtly deflationary phase, with consumer and producer prices collapsing in almost all major economies. The good news is that this trend may come to a halt sooner than most investors realize as a) central banks are pushing an unprecedented amount of money into the system, and b) the velocity of money, after an 18 month long pull-back, may finally be creeping back into positive territory.

* Where do we stand in the economic cycle? The three measures above combine to form the “P” in the P/E equation. But of course, valuations also depend on the “E”, and earnings are driven first and foremost by the economic cycle. And on this front, the news continues to remain bleak. Whether it be record job losses in the US, contracting retail sales in Germany, or shocking industrial production numbers out of France, there is little on which to hang one’s hat. In fact, the only piece of positive economic news we could rake up is the turnaround in the diffusion index of Asian leading indicators.

So where does all this leave us? On the positive side, most equity markets today are extremely undervalued and “weak hands” and other over-levered investors must have been shaken out by now. This good news is mitigated however by the fact that equity investors, having taken such a beating over the past year, now have little tolerance for pain of any kind. And with the visibility on both prices and economic growth still very limited, and unlikely to get better in the very near term, it is hard to think that equity markets will not remain choppy over the coming quarters. However, if investors do buy into the belief that the combination of an unprecedented monetary loosening, fiscal easing and low oil prices will help the US and Asian economies recover by the second half of 2009, then any significant dip in equity markets over the coming months should be seen as a buying opportunity.

(Courtessy of GaveKal Research)

Back To The Grind...

Ahhh the holidays. Nothing is better than to recharge the battery's and look into the New Year thoughtfully, aggressively, meaningfully, and maybe a bit timidly...

Most of the time, being a financial advisor ranks among the very best careers around. Once you’re over the hump of building an initial client base, few jobs offer the unique combination of being able to make a positive impact on so many lives, the freedom to take lots of time off and an above average income. (in some cases way above average)

And then there are periods like 2008. Your response to those market events was the ultimate measure of discipline and fortitude - as the old cliché goes, it’s periods like 2008 that separate winners from losers.

So now what? The value side of the market, like much of the bond market, is priced for a depression. The growth side of the market is priced for recession. With dividend and other income vehicles yielding in some cases 15% to 20%, and a possible ballooning of the Government fixed-income market(bonds, T-bills, etc.), it seems that applying appropriate risk and re-establishing a long equity position seems justified. (If you have not already done so.)

From their lows, most stocks recovered nicely in December. Yet again proving that accumulating during weakness beats buying into strength, and that market timing is not an intelligent practice. I won't go into company specifics, as you can just as easily open any finance paper and see the performance up till now. It is not industry/sector specific either, however...

Almost everybody, retail investors and institutional investors alike, invests with their eyes in the rear view mirror, favoring what has worked best in the past. But there is a very powerful pattern of mean-reversion in the markets. What has done spectacularly well often takes a rest or it takes a bear market to get back to normal. So the notion of looking at markets and asking what has been hit really hard and, as a consequence, may be priced at really attractive levels is alien to most investors. That goes for highly sophisticated institutional investors as well. This temptation to buy what has done well is the single greatest pitfall in investing, and it is the single reason that a disciplined approach to asset allocation can actually work very, very well.

Something to consider.