Friday, July 31, 2009

This Is a Rally in a Bear Market

One of the most fascinating things about the financial markets this year has been to see the vast majority of the pundits and so-called analysts proclaim the birth of a new bull market.

These pundits can easily be dismissed. They are cheerleaders, market worshippers and perma-bulls who are always singing the only tune they know. They believe that in the long run stocks (and houses too)will come back. True, but will we still be alive?
These same people missed all of the warning signs of the recession, the credit crisis, the housing bust, the stock bear market. They seem to have suffered a 'mental recession'!

I want to visit the question whether the recent low was a once-in-a-generation stock market low or merely a cyclical, short-term low. Ned Davis of Ned Davis Research has identified seven factors to determine if a market low is a secular low, setting up the next long-lasting bull market.

The seven factors identified by Ned Davis are:

1) Money, cheap and amply available
2) Debt structure that's been deflated
3) Large pent-up demand for goods and services
4) Stocks that are clearly cheap
5) Investors who are deeply pessimistic
6) Major investor groups with below average stock holdings
7) Fully oversold, longer-term market conditions

Here are my thoughts on each of these factors:

1) Huge Positive. The Federal Reserve is absolutely flooding the system with trillions of dollars.

2) Negative. The debts that both consumers and businesses has barely been begun to be unwound. Credit market debt load is nearly four times the size of the country's gross domestic product.

3) Neutral. I really don't see much pent-up demand in the US at all.

4) Neutral to Negative. At best, US stocks are at an ok valuation. They were more reasonably valued before the recent large rally.

5) Huge Negative. Most investors I see are dancing in the street that the recession is over and that a new bull market has already begun. Perhaps they should quit listening to CNBC and the like.

6) Neutral to Negative. Most institutional investors' holdings are back to an average weighting historically. However, household holdings of stocks are not close to the low levels seen at the bottom of prior bear markets.

7) Neutral. Some of the excesses of the bubble have been worked off. There are still more excesses to be worked off.

Bottom Line? This is a cyclical bull market or a rally in a long-term bear market, whatever term you prefer.

Wednesday, July 29, 2009

China Plans Global Role for Their Currency

Once again Wall Street is asleep and missing a major economic story coming out of China. Wall Street continues to fluff off China as a "bubble" economy. If Wall Street is looking for bubbles, they should look closer to home.

I see bubbles in Treasuries, the Dollar, tech stocks and financial stocks. Almost everything where the government and/or Wall Street has their greedy hands.


The big news out of China is that the Chinese have kick-started a plan to internationalize the yuan or renminbi. And it is likely to be a faster process than the sleepy-heads on Wall Street realize.

If the Chinese plan is successful, by 2012 as much as 50 percent of China's annual trade flows will be settled in their own currency, not the US dollar. This totals nearly $2 trillion!

Most of the trade flows where the Chinese currency will be used in settlement is with other Asian countries and with other emerging markets. These countries are China's major trading partners, not the US. Another fact which has escaped the notice of sleepy Wall Street.

Someone not investing in China today is making the same mistake "smart" European investors made in the late 1800s, when they fluffed off the emerging market called the United States as too risky and with poor business and working practices.

Yes, China still has lots of bumps and warts, but it is emerging as a global economic power very rapidly.

What's that sound I hear? Oh yeah, just Wall Street snoring in blissful ignorance.

Friday, July 24, 2009

Investing Lessons From John Templeton

Sir John Templeton was a legendary investor who used a value approach to investing and who was THE pioneer of global investing. Templeton took value investing to an extreme, picking entire nations, industries and companies hitting rock bottom or what he called “points of maximum pessimism.”

John Templeton was also a very spiritual man who gave much of his life and money to matters other than purely monetary matters. He was known for starting his mutual fund's annual meeting with a prayer. Somehow I don't picture Goldman Sachs and other Wall Street firms today starting any of their meetings with a prayer.

He entered the mutual fund business in 1954 when he established the Templeton Growth Fund. The fund averaged a 14% annualized gain over the next 50 years, while he managed the fund. In other words, each $10,000 invested into this fund in 1954, with dividends reinvested, would have grown to $2 million in 1992 when he sold the Templeton Funds to the Franklin Group.

This performance over five decades is absolutely remarkable! How did Templeton do it?


Most of all, John Templeton was a value investor. He used a fundamentals-driven, 'bargain-hunting' approach to investing. He would look for shares selling well below their asset values due to temporary circumstances and hold those stocks for years. In John Templeton's words “The long-range view requires patience.” His Templeton Growth Fund held stocks for an average of six to seven years.

John Templeton urged investors to focus on value because most investors made the mistake of focusing on outlooks and trends. Therefore, he rejected the “technical” method for choosing stocks. He believed that technical analysis using charts was a waste of time. He believed that “You must be a fundamentalist to be really successful in the market.”


Another of John Templeton's key investment principles is that outperforming the majority of investors requires doing what they are NOT doing. In other words, to go against the grain – to be what is called a contrarian. As a contrarian, he didn't just bet against the crowd – he liked to invest at “the point of maximum pessimism.”

One of John Templeton's quotes sums it up nicely. He said that “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

Mr. Templeton also liked to point out that many investors tend to repeat their mistakes or the mistakes of others and warned against investing along with the supposed safety of the Wall Street “herd.” He believed that simply hoping bad things won't ever happen again is not a sound investment strategy.

When speaking about this danger to investors, John Templeton uttered one of his most famous quotes. He said that “The four most dangerous words in investing are: 'this time it's different.'”


Taking a less-traveled route in investing, John Templeton showed Americans the path to investing worldwide through his fund. He was THE pioneer of global investing - at that time he established his fund, most Americans rarely considered investing in foreign markets. As to why Americans were not investing outside the United States, Sir John was quoted as saying, “That is very egotistical. Why be so short-sighted or near-sighted as to focus only on America?”

In order to follow in John Templeton's footsteps, one needs to:
1) Be a bargain-hunter on a long-term fundamental basis and ignore the short-term trends;
2) Sit back and take a look at the big picture – the macroeconomic trends;
3) Go against the crowd and buy where others are selling and sell where others are buying;
4) Spread your purchases around the globe – wherever you can find the most for your money – as Templeton said “See the investment world as an ocean and buy where you can get the best value for your money”.

Tuesday, July 21, 2009

Wall Street Performance Is Ruining Investors

With more than two decades experience in the investment industry, I am more than qualifed to give an informed opinion on what is wrong with Wall Street professionals.

So what is wrong with Wall Street professionals?

Wall Street professionals are concerned solely with the preservation of their cushy jobs and having better "performance" than their peers so they can receive more compensation. They don't give a rat's ass about whether their clients make money or not, only how they can make money from their clients.

It is perverted as to the way Wall Street calculates "performance". Wall Street looks ONLY at realtive performance - how various professionals stack up against each other. Wall Street NEVER looks at absolute performance - whether the professionals actually made money for their clients.

A friend of mine went to see his 'other' financial advisor recently. The value of the portfolio held with this 'advisor' fell by 25% in the past year. When he asked about the poor performance, he was told - "What poor performance? You greatly outperformed the averages - a decline of about 40% from the peak."

That 'advisor' is considered to be a 'star' in the Wall Street universe! After all, he outperformed the average by 15%. That type of "outperformance" will have my friend living on the street in his old age.

Another example of this "Wall Street think" was pointed recently by Tim Iacono of the Greenspan Mess blog. He pointed out ads where the Putnam mutual fund company was boasting about their mutual funds.

Putnam was boasting about how their funds had "outperformed" and moved up in the Lipper rankings of funds for various categories of funds. Yet every one of the funds had negative returns: 1-year returns of -15%, -27%,etc. and 3-year returns of -5%, -13%,etc.

Wow - thanks guys! Instead of paying exorbitant management fees to these mutual fund managers for their "hard work" and suffering a loss, one could have had positive returns by simply putting your money into bank CDs or money market funds.

Friday, July 17, 2009

Goldman Sac(h)s America

The stock market recently enjoyed a huge rally on the back of the latest earnings statement from Wall Street's premier company - Goldman Sachs. Goldman Sachs is also known among its critics as 'Government Sachs' for the firm's close ties to the Treasury department and the Federal Reserve.

Wall Street was celebrating the return of "business as usual" for them as evidenced by Goldman's results. Goldman Sachs "earned" $3.44 billion for their fiscal second quarter, up 65% from last year.

One should recall that Goldman Sachs was "bailed out" with $10 billion of taxpayers' money last fall. Goldman Sachs also received directly another $13 billion of taxpayers' money from the government's bail out of AIG. Goldman Sachs also had $28 billion of their debt insured by the FDIC - Federal Deposit Insurance Corporation - that normally insures bank deposits.

So what does Goldman Sachs give the taxpayers as a "thank you"? A hard slap in the face! The company has set aside 33% more (as compaed to last year) for compensation to its employees.

Goldman Sachs set aside $6.6 billion for employee compensation for this quarter and a total of $11.3 billion for employee compensation for the first six months of 2009. Goldman Sachs can do this legally now because they paid back the $10 billion government TARP "loan" last month.

Estimates are that Goldman Sachs will set aside enough to reward its 28,000 employees about $700,000 per employee. Obviously, the top producers will earn much more. Where is the "change", when it comes to Wall Street?

Besides being extremely well connected to the US government, what other factors allow Goldman Sachs to always do so well? A recent news story may shed light on that.

An ex-Goldman Sachs computer programmer, Sergey Aleynikov, was arrested for theft of a software trading program from Goldman Sachs. He intended to sell it to Goldman Sachs' competitors.

U.S. attorney Joseph Facciponti said in a statement "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could manipulate markets in unfair ways."

Yet no one in the media has questioned Goldman Sachs about this sophisticated software trading program that the company admits could to be used "to manipulate markets".

Why? Do they think everyone who works at Goldman Sachs is a saint who would not even think about manipulating markets? That they are of a high moral standing? The company's bonus structure is evidence that this is not so.

Don't worry - Goldman Sachs will NEVER be investigated. The company has too many influential friends in too many high places.

Monday, July 13, 2009

Financial Advisors - How Dumb Are They?

There was an shocking story on gold recently in the Personal Journal section of the Wall Street Journal. It was shocking in that I did not know that the Wall Street Journal was even aware of gold's existence.

To me, there was one outstanding feature of the story. The highlight of the story was when the author of the article turned to the so-called experts on personal wealth management - financial advisors. In my view, it really showed how out of touch these people are with financial reality and painted today's financial advisors as the dumbest guys in the room.

Remember these people are the same people who have completely missed the trade of the decade - sell stocks and buy gold. They have been wrong about gold for almost 10 years now and have been steadily losing money for their clients while continuing to "earn" fees for their efforts.

Why don't most financial advisrors recommend gold as a component for clients' portfolios? Simple - if they tell clients to go out and buy gold coins and stick them in a safe deposit box, they can't make any money!

Remember that old saying about liars figure? A financial advisor was quoted in the article as stating that over the past four decades, the annualized return for gold was only 8.4% versus a return of 9.1% for the S&P 500.

Huh? The figures I look at over the past 40 years show that the S&P 500 index has gained only about 7.5% annually. Meanwhile gold over the past 40 years has climbed from $40 per ounce to about $920 per ounce, an annual gain in excess of 11%.

Never let the truth get in the way of a great sales pitch! If only financial advisors could figure out a way to make money regularly from recommending gold.....

Thursday, July 9, 2009

Stocks as Long Term Investments

Despite many of the so-called green shoots in the economy turning brown, the propaganda machine on Wall Street keeps churning. Wall Street is telling the public to buy, buy, buy....

Here is something they aren't telling you. There is some interesting data complied by Barry Ritholtz of The Big Picture blog. The data shows what would have happened if someone invested $10,000 every January 1st from 1994 to 2009 in either the S&P 500 index with dividends re-invested or into bank CDs.

The money invested into bank CDs would now be worth $207,509 while the money invested into the S&P 500 would now be worth only $178,253. Other studies have shown that in the period from 1968 to 2009, bonds outperformed stocks. Stocks for the long term?

And let's not forget that during the past 10 years, the S&P 500 index has lost 37 per cent before dividends. On the other hand, during the past 10 years, gold has returned 325%. Stocks for the long term?

The decision on where to invest one's money - stocks, bonds, commodities - is extremely important. After all, the average person has only about a 40 year time frame at most to save for their retirement. They can't wait decades for the stock market to just get back to breakeven.
How does the average person figure out where to put their money? One has to identify where we are in the "secular market cycle." History has shown that many financial markets go through a cycle, from peak to trough, of approximately 17-20 years.

For investors, one key problem is that an overall "secular cycle", from peak to trough, and back to trough, can take 35 years. That is a big chunk of a person's wage-earning years, leaving little room for any missteps in getting the stage of the cycle right.

So it's essential to determine where we are in the cycle, because that will likely affect returns over the next decade or so. And since people spend at most 40 years of their lives saving for retirement, not knowing where we are in the cycle leads to mistakes and losses.

Recent examples of these cycles include the period from 1966 to 1983 when the US stock market did nothing while commodities soared; the period from 1983 to 2000 when US stocks soared and commodities fell steeply; and the period from 2000 to the present where stocks have fallen and commodities have risen.

So where are you now in the cycles here in the US? If we define the current bear market in stocks as having started in 2000, we may only be half way through the whole bear market cycle.

Bonds? The bull market there is VERY extended (thanks to Federal Reserve interference), having started roughly in 1981 when Paul Volcker crushed inflation. With foreign investors seeming to be ready sellers, the bear market in bonds may be close at hand.

Commodities? If we look strictly at the cycle, it's just the opposite of the stock cycle - we seem to be about half way through the bull market cycle.

Thursday, July 2, 2009

How the Really Smart Money Invests

Three of the most famous and successful investors of our time are Warren Buffett, George Soros and Jim Rogers. Warren Buffett is a deep value investor, George Soros pursues investments involving currencies and macroeconomic trends, Jim Rogers pursues international and commodities investments. Yet they are more alike than they are different.

These three very sucessful investors use strategies than run counter to Wall Street's conventional wisdom. All three gentlemen stress the importance of NOT losing money. They've also stressed the importance of waiting until REALLY compelling opportunities develop before investing.

Another common trait is that not one of these three gentlemen believes that you have to take big risks in order to make big money. In fact, all three gentlemen believe that it's how you concentrate your wealth that matters.

This belief flies directly in the face of Wall Street conventional wisdom. Wall Street would have the general public believe that you need to diversify your assets in order to get ahead. Diversification, as practiced by Wall Street professionals, is more proof that most of the financial professional establishment doesn't know what they are doing.

The thinking is that by spreading your money around willy nilly, some of your holdings will rise while other holdings will fall. Investors have found out the hard way throughout this decade that this type of diversification doesn't work when everything is falling.

The only exception this decade being gold, which Wall Street hates, and would not be recommended by most financial professionals as a prudent way to diversify your portfolio.

What matters most is that investors THINK for themselves! Put the comments you hear from financial professionals into proper prospective - they are biased and have an agenda, usually trying to make it urgent that you invest NOW.

Not only is the manufactured urgency designed to separate more of your money from you but they wouldn't do it if they knew that most investors got it right more often than they got it wrong.

Neither Buffet, nor Soros nor Rogers care about what other people think about their investments. Nor do they care about what the market will or won't do over the short term - they are not "traders". And I still challenge Wall Street to show me a trader that has been successful over a 10 or 20 year period like these three gentlemen have been.

The key points to take from these successful investors is that individual investors need to ignore Wall Street, think long-term, be patient, and do the research so you can find and put your money into only a few select investments.