Category Archives: Investing Money

3 Reasons The Current Equities Market Is Exhausted

profit-loss-riskMy Comments: Many of my clients are asking how come their investments are not as exciting as what they hear on TV these days. And my standard answer is that exciting comes in two flavors, great and frightening.

For the most part, I’m trying to help them avoid the frightening part. For many years I followed what we now call a strategic approach to investments. This is when you pick out good stuff to be invested in and then simply leave it alone. If the markets move up, you get to participate, but when they go down, you also get to participate.

The alternative is a tactical approach. This is where you accept the fact that you will only capture some of the upside, but you also capture less of the downside. In fact some programs I have not only avoid capturing the downside, but actually make money when all around are losing money.

The dilemma is that the noise from TV and the media and magazines helps you forget and overlook the panic that always happens from time to time. Which is why it’s hard to make sense of falling behind your friends when they tell you excitedly their investment in X was up 25% last year.

For every article that tells you the world as you know it is about to end, there are articles that tell you it’s not. Here are 3 reasons to be cautious over the next several months. If you want to see the charts, you’re going to have to go to the source, which is HERE.

May. 29, 2014 3:44 PM ET

With the S&P 500 hovering near record highs, is the market over-bought? Here are three reasons to be cautious when making new equity purchases.

Shiller CAPE 10 Ratio:
The current CAPE 10 ratio at 25.7 is significantly higher than its mean value of 16.5. When the ratio value moves above 20 it is time to become wary of the equity market. Even a value over 25 is not conclusive evidence the market will not move higher as investors in the late 1990s will remember. However, the probability of significant upward market movement diminishes as the CAPE 10 ratio continues to rise.

Bullish Percent Indicators: A second warning signal comes from Point and Figure graphs for hundreds of stocks that make up the important U.S. market indexes. The following table shows the Bullish Percent Index (BPI) percentages for seven major U.S. Equities markets. Markets that reflect large-cap stocks are all priced in the over-valued range or 70% and above. Those indexes are: S&P 100, S&P 500, DJIA, and DJTA. The New York Stock Exchange (NYSE) dipped below the 70% zone last April. Smaller-cap stocks are not showing the same strength as large-cap stocks, another signal the current equities market is beginning to falter.

Going back to 2013, it is apparent that these major markets can remain in the overbought zone for many months. The question is, how long can the bull market continue without a 10% to 15% correction?

Cluster Weighting Momentum Analysis: The third reason the current stock market appears to be tired is not as straight forward as the first two indicators. Cluster Weighting Momentum (CWM) requires digging deeper into the weeds of security analysis. The first move requires developing a list of ETFs that cover all major U.S. Equity asset classes, an array of bond and treasury ETFs, developed international markets, emerging markets, domestic and international REITS, international bonds, precious metals, and commodities. In other words, the global market is included in the list of ETFs [one stock, Berkshire Hathaway (BRK.B) is included] selected to make this point.

Once the ETFs are selected, we run what is known as a Cluster Weighting Momentum analysis to see which areas of the global economy are performing best. After ranking the ETFs using three metrics, we then “cluster” the ETFs based on a correlation cutoff. A correlation cutoff of 0.5 was used in this example. We are attempting to find the best performing ETFs that have low correlations.

This list of ETFs are ranked based on the most recent three-months’ performance, six-months’ performance, and volatility. Percentages are assigned to each variable and a semi-variance calculation is used to determine volatility. The rankings are shown in the following table.

Check where the U.S. Equities ETFs show up on the list and you will observe they are not high on the list, particularly mid- and small-cap growth, VOT and VBK respectively. ETFs that rank high are bonds, dividend generators, REITs, Treasury, and emerging markets.

Correlation Results: ETFs from the above table are next run through a correlation analysis using 0.5 as the correlation cutoff. The cluster diagram is too large to be shown in this article, but the results are presented in the following table.

The top performing ETFs with correlations below 0.50 are: VNQ, DBC, RWX, BWX, PCY, TLT, BRK.B (Yahoo codes it BRK-B), DBA, IDV, and UNG. Not one of the “Big Seven” U.S. Equities ETFs made the list and they are: VTI, VTV, VOE, VBR, VUG, VOT, and VBK. Instead, we see three commodities (DBC, DBA, UNG), REITs (VNQ and RWX), and bonds-treasuries (BWX and TLT). BRK.B is the closest we come to the U.S. Equities market.

Will the broad U.S. Equities market move higher? That is an unknown, but the three signals listed above place a low probability we will see significant improvement over the next four to six months. It is time to be a cautious investor.

Our Flawed Financial System is Reflected in Bitcoin

My Comments: What exactly is a bitcoin? I’ve been reading about them for many months now and I’ve yet to understand how I would spend one if it happened to show up in my change at Publix. Chances are it never will. But…


The image suggests they are made of metal. But that runs counter to the notion they are a digital invention. Yes, I know the $20 bill in my wallet is really just a piece of paper, allegedly backed by the full faith and credit of the US Government. For more years than I care to remember, I’ve used similar pieces of paper to buy breakfast and other things I need because the guy on the other side of the counter believes the same thing. So we all get along.

But some people have had their bitcoin companies go bankrupt, and gone to jail or committed suicide. Others have made a fortune (so far…). Maybe this is a timely article from the Financial Times. One key phrase used by the author is for us to… think of money as a social contract between the citizen and the state.

By Wolfgang Münchau / March 2, 2014 / The Financial Times

The degree to which economists have ignored Bitcoin is surpassed only by the extent to which Bitcoin enthusiasts have ignored economics. The divide between these groups is larger than that between analogue and digital.

If you were to ask what is the immediate economic importance of the artificial internet currency itself, then there is indeed really not much to say. Bitcoin is not macroeconomically relevant, and never will be. This explains why economists show so little interest. The entire stock of Bitcoins was worth less than $7bn last Friday. The monetary base of the US is $4tn.

This misses the point, however. The real importance of the technology behind Bitcoin is its future potential. Bitcoin itself may just end up playing the role of the useful idiot that is ultimately usurped by a worthy successor – call it Bitnote.

Properly constructed, Bitnote could mount a serious dual challenge to our established economic system: first to our currency-issuing monopolistic central banks, second to the global system of financial intermediation. Take the two together, and Bitnote becomes potential challenger to the entire system of global finance, in particular of fractional reserve banking – where a central bank channels money into the economy through the banks.

If that were to happen, it would be an act of huge macroeconomic, indeed geopolitical significance. Whether such a change would be benign, or not, is another matter. It would depend on the circumstances in which the challenge occurs and the features of the new money itself.

Bitcoin in its current form is not up to the job because of its limited monetary base. It may have a money creation algorithm, but the total number of bitcoins in circulation is capped at 21m. If Bitcoin were already our currency, it would at best operate similar to the gold standard. This is about the last thing you would want in today’s fragile global economy. But this is only an argument against Bitcoin specifically. It is not an argument against the principle of an economically more literate monetary system as such.

The monopoly of central banks is enshrined in law – but the law will not guarantee the status quo indefinitely. It would be hard to discriminate against Bitcoin and its successors through legal force alone.

Think of money as a social contract between the citizen and the state. Democracies have entrusted central banks with the task of money issuance because this is how we hope to ensure its core functions: as a universally accepted means of transaction, as a unit of account and as a store of value. The central bank has the tools to assure stable prices. It can use its monopoly to provide lender of last resort functions in a crisis. It can use monetary policy to reduce fluctuations in the economic cycle. And it can do all this much more securely than any private-sector competitor. Money printing plants and central banks are guarded by people with guns. Internet security is not quite the same. And while a fiat money system can go broke in theory, the Mt Gox Bitcoin exchange went broke in practice.

These advantages are important but possibly ephemeral. The current system exists only because society decided that the previous one did not work. It was the accumulation of financial crises in industrial societies that brought us the fiat-currency issuing monopolistic central bank.

But while economic and political change gave rise to our current system, it will also end it. It was the internet and advances in cryptography that made Bitcoin technically feasible. But whether a hypothetical Bitnote will grow to macroeconomically relevant scale will depend less on technology than on the new system’s perceived usefulness relative to our current system.

Those perceptions may be changing. The combination of financial deregulation and globalisation, national economic policies and a lack of global co-ordination is unsustainable. Something that is unsustainable either ends, or is made sustainable.

The experience of our handling of the global financial crisis and its various regional cousins would suggest that big-system change is unlikely. The G20 and other international debating clubs have achieved little in terms of financial sector reforms and monetary policy co-ordination. The financial lobbies are stronger than ever. Just as 10 years ago, the policy establishment has no clue how to control financial bubbles. Whatever the priorities are of the advanced countries, making the financial system sustainable is not at the top of the list.

If global instability persists it will produce more crises. Whether the next Bitcoin or its successors can succeed is impossible to forecast. But the environment is one in which an alternative decentralised system could flourish.
For those running such a system and especially those who advocate its development into a global monetary unit, it would be a good idea to develop at least a cursory interest in monetary economics. I suspect the challenge for the economics profession would be incomparably larger.

10 Bear Market Catalysts To Watch For

My Comments: I guess it’s human nature to abhor a vacuum. If there isn’t a crisis, we invent one. We’ve had 5 years of mostly good times in the markets, since about the first of April in 2009. The second chart below kinda proves that.

From a timing standpoint, we’ve had people predicting the end of the world on a daily basis, probably since the beginning of time. For the most part, they’ve been wrong. But as I get older, I realize almost daily that what I could have easily overcome twenty years ago is increasingly difficult. What used to take an hour to get done now takes two hours, or more. So I guess I look for excuses instead of remedies.

I offer you this chart, which is the S&P500 over the past 20 years, with peaks in 2000, in 2008 and now. My point? That the good times come to an end, but then so do the bad.

David Moenning / Apr. 29, 2014

To be sure, the current stock market environment is challenging. Intraday volatility is quite high, the major indices are not marching to the beat of the same drum, and holding the wrong stock or sector ETF has proved to be a frightening affair in 2014.

In case you can’t relate to this sentiment, check out the charts of the ETFs in Biotech (XBI), Internet (FDN), and Social Media (SOCL) or names like Netflix (NFLX), (AMZN), LinkedIn (LNKD), Pandora (P), Yelp, and Twitter (TWTR).

In short, the action has been more than a little scary at times. This is a market where it has been oh-so easy to lose money and with the exception of the strategy of being long only on Tuesday’s (according to Bespoke, being long on Tuesday’s would have produced a gain of 9 percent so far this year), making money has been downright difficult.

Time For The Bears To Return?

The action has left many analysts worried that the current bull market, which is clearly long in the tooth by just about any measure, could be slowly morphing into something far grizzlier in nature. As such, this might be a good time to review what might cause the bears to suddenly awaken from their hibernation and begin wreaking havoc on people’s investment portfolios again.

But before we get started on a review of potential bear market catalysts, let’s remember that, as the chart below of the S&P 500 plotted weekly clearly illustrates, this remains a bull market.

SPX-Weekly-4-28-15However, if investors have learned anything over the last 15 years, it is that (a) all good things come to an end and (b) bear markets are no fun (and should be avoided if at all possible).

So, given that this bull has run a long way and as it can be argued, is looking a little tired, it is a good idea to be on the lookout for potential bear market catalysts.

We’ve come up with about a dozen. So, let’s review.

Bear Market Catalysts

Fed Surprise: Experienced investors know that markets don’t like surprises – especially when it comes to the Federal Reserve. One of the oldest clichés on Wall Street is “Don’t fight the Fed.” Remember, the Fed usually gets what it wants. So, if Ms. Yellen and her merry band of central bankers suddenly have to make a course correction due to inflation or some such thing, stocks will NOT react well.

Therefore, it is a good idea to listen carefully to everything the Fed says and writes these days. The bottom line here is that this bull has been sponsored in large part by the Fed’s uber-easy monetary policies and the QE money printing programs. And while Bernanke and Yellen have gone out of their way to try and provide an expected course of action for the Fed to follow, if they were forced to take a different tack, well, it might not be pretty.


Spring Check-Up: 5 Investment Ideas For Your Portfolio

global capitalismMy Comments: OK, we’re a long way into Spring, but the dramatic push to finish taxes by April 15th is behind us. Time now to review and reflect before the heat of summer is here.

These five ideas make sense to me. And yes, the approach I take with clients is a little different, ( go here when you have a few minutes ) but these five are fundamentally sound.

Russ Koesterich, Blackrock Apr. 21, 2014

Since my colleagues and I put out our 2014 outlook late last year, much has changed and the economic backdrop has shifted.

Severe weather had a significant impact on first quarter economic data and a major new geopolitical risk popped up in Ukraine. Indeed, if I could use one phrase to describe what’s happened over the last three months, it would probably be “reversal of fortune,” since the best-performing assets of 2013 underperformed while the 2013 losers flourished. In the biggest surprise, bond yields fell as prices rose.

Nonetheless, we’re sticking with the broad game plan we laid out in December for how to navigate this environment. As we enter the second quarter of 2014, investing opportunities appear more elusive than at the beginning of the year (and the challenges more evident).

However, as Jeffrey Rosenberg, Peter Hayes and I write in the spring update to our 2014 Outlook – The List: What to Know, What to Do, even though it’s a tough environment, it’s not one without opportunity. Here are five opportunities we think are worth considering this spring:

1. Stick with stocks. We still believe that stocks offer better value than bonds, even after a five-year bull market. At the same time, we expect to see continued low inflation and low interest rates, as well as a gradually improving economy – all factors that are supportive of stocks. As such, we expect that the market will push ahead in the months to come, although it will likely be a slow and uneven grind given ongoing geopolitical turmoil and Federal Reserve (Fed) tapering. As such, investors should have modest expectations, at least compared to 2013′s outsized gains.

2. More international exposure. Within equities, we believe that, in general, many investors should consider paring back some U.S. exposure in favor of non-U.S. stocks. Despite the reality of geopolitical uncertainty, we see plenty of growth opportunities abroad and would encourage investors to expand their reach globally.

In particular, we have a favorable view toward eurozone and Japanese stocks. Events in Ukraine present some risks for Europe, but we believe both European and Japanese equities look attractively valued compared to U.S. stocks. Finally, for investors with a strong stomach and long time horizon, we suggest having some exposure to emerging markets, which offer a combination of attractive value and compelling long-term growth prospects.

3. Consider a flexible bond approach. It has been a tough time for bond investors, and conditions aren’t getting any easier. What to do? Being flexible and diversified globally remains key. With yields likely to be volatile, and some areas of the fixed income market feeling the effects more so than others, a flexible, go-anywhere bond portfolio that can make adjustments on the fly is something to consider having in your fixed income toolkit.

4. Think high yield and municipal bonds. We continue to believe that investments such as high yield bonds and municipal bonds remain attractive sources of income. In regards to the latter, municipal bonds continue to look attractive versus both Treasuries and corporate bonds. We’re seeing competitive yields on a before-tax basis which only further illuminates the after-tax value. However given the likelihood of rising rates and improving data, a diversified and unconstrained approach is a necessary strategy in the tax-exempt space as well.

5. Go beyond traditional stocks and bonds. Investors could incorporate alternative strategies that can help broaden their diversification, protect against rising rates and contribute to growth. (Remember, however, that diversification does not ensure profits or protect against loss.)

Diversifying with alternatives means adding new asset classes such as physical real estate and infrastructure investments.
You also may want to consider new strategies such as long/short approaches that can be employed with both stocks and bonds to mitigate volatility, seek out returns and contribute to diversification. While the risks of long/short strategies include the possibility of losses larger than invested capital, we believe they can offer a powerful differentiated source of return and the potential for more consistent results over time. To learn more about what might occur in the months ahead and how to capitalize on some potential opportunities, check out the spring update to our 2014 Outlook – The List: What to Know, What to Do.


Fiduciaries: Steer Clear of T. Rowe, Fidelity and Vanguard TDFs

profit-loss-riskMy Comments: This article was meant for me as a financial professional with fiduciary responsibilities. However, I think it’s important information for everyone.

TDF stands for Target Date Funds. This is a Wall Street invention that attempts to create a special, presumably safe investment portfolio for you, Mr. and Mrs. American Investor. The investment allocation is intended to change as you get closer to the specified target date, your retirement.

Sound great doesn’t it? Heavy on higher risk equities when you are young, slowly moving toward lower risk bonds as you age. Theoretically high growth when you are younger, slower growth later. Meanwhile, the financial industry is moving toward declaring that anyone who offers financial advice be held to a fiduciary standard. Clearly, the TDFs are in any clients best interest and therefore a home run. “Safe” investments, simply pull them off the shelf, and get paid for it. Who could want anything better?

Only it hasn’t quite worked out that way. One of the problems, in my opinion, is there is a missing ingredient inside these mutual funds, and not just the ones offered by those names in the headline above. There is simply no authority for anyone to go to cash when the s__t hits the fan. I understand why it’s missing, but when you’re ankle deep in you know what, there’s no escape clause. I have an answer, especially for my clients, but here is not the place to ‘sell” it.

Here’s a chart of the S&P 500 over the past 20 years. What is your best guess for the next 20 years?

April 24, 2014

New book by Ron Surz warns against following the crowd with popular funds that over-allocate to equities, putting retirement security of millions of Americans at risk

Target-date funds were supposed to be the best thing since sliced bread when the 2006 Pension Protection Act popularized them as default investments in 401(k) plans.

But the sliced-bread investment innovation quickly turned investors into burnt toast just two short years later during the 2008 financial crisis, when the average 2010 target-date fund lost 25% — though such funds ostensibly envisioned a glide path to a retirement just two years away.

Because the Employee Retirement Income Security Act still hallows target-date funds as the most popular of the three safe options for use as qualified default investment alternatives — the other two being balanced funds and managed accounts — advisors who serve as plan fiduciaries need to know their ins and outs.

That is the rationale for the publication of a new book, Fiduciary Handbook for Understanding and Selecting Target Date Funds — due out in a week — by pension consultant Ron Surz, attorney John Lohr and ethicist Mark Mensack. (Surz is an occasional ThinkAdvisor contributor.)

Understanding the funds’ assumed fiduciary status, their popularity with investors and the opportunities for advisors to earn fees, but all too aware of the potential for these funds to blow up investors’ nest eggs again as they did in 2008, the authors endeavor to arm advisors with the ability to help clients and avoid unseen professional hazards.

For example, advisors may assume the government’s imprimatur may serve as a shield against all legal threats, but the authors point out there have been 522 ERISA-related fiduciary breach cases since 2013.

Most of those have concerned excessive fees, but the authors want advisors to think through selection and monitoring issues that could potentially put them, plan sponsors and asset managers on the hook the next time there is a crisis.

And the authors are emphatic that the next crisis is a matter of when, not if.

“Sometime in the future there will be a market correction of the magnitude of a 2008 or even a 1929. Unless risk controls are tightened, especially near the target date, fiduciaries will be sued as a result of losses. It remains to be seen whether the litigation will impact fund companies or fiduciaries, or both,” the authors write.

And that’s the thing of it. The authors’ core argument is that target-date funds are too risky, especially at the target date.

This is because the three mutual fund companies that dominate the target-date fund industry, T. Rowe Price, Fidelity, Vanguard — the book’s chief villains — have risky levels of stock ownership at the target date.

Though they do not play a fiduciary role (as do employers and advisors) relative to the retirement plans that offer their products, the big fund companies are essentially driving the whole risky process — one that has swung far away from the period before the Pension Protection Act of 2006, when cash was the dominant investment default for investors approaching retirement. In contrast, the Big 3 companies have end-date equity exposure averaging 55%.

And the crux of the fiduciary problem may not be the Big 3 — who, again, aren’t fiduciaries. It’s that advisors aren’t researching and evaluating the Small 30 — the rest of the target-date fund universe available to plan participants.

“Choosing one of the Big 3 might be all right if competing TDFs were all inferior, but they are not. Most important, these Big 3 maintain the same equity exposure today at the target date as they had in the 2008 fiasco, setting the stage for a repeat calamity, this time much more devastating.”

Surz, Lohr and Mensack’s book is thus something of a cri-de-coeur beyond a mere technical explanation of “Duty of Care,” “Establishing Selection Criteria,” and “Benchmarks,” to cite just three of the book’s 10 chapters, commendably averaging just four pages of the book’s slim 51-page total.

The authors do not think fund companies will change anything of their own volition.
“You alone can improve target-date funds,” they write. “Nothing will change unless and until you set the objectives for TDFs and seek solutions that can meet those objectives.”

The authors stress that fiduciaries may pay the price — financially, legally and ethically — for the less-than-exemplary state of the TDF industry.

“If you decide not to act, there could be a personal price to pay in the form of lawsuits. The duty of care requires that you protect the financially unsophisticated. It’s like the duty to protect your young children,” they write of the tens of millions of Americans whose retirement income security is at stake.

Ruling Near on Fiduciary Duty for Brokers

investment adviceMy Comments: I’m proud of the fact that I’m held to a fiduciary standard. It’s in my best interest as a professional to be held to the same standards as attorneys, CPAs, physicians, and the like. My focus has to be on what is best for my clients, and that’s a good thing.

Readers of this blog have read my thoughts on this before. I’ve argued time and again that ANYONE holding themselves out as a “financial advisor” must conform to a fiduciary standard. At its most basic, this simply means acting in the best interest of the client. Period.

Now that it looks like this is likely to be resolved by the SEC in the near future, big financial companies across the spectrum are once again trying to keep themselves and their salesmen from being held to this standard. Their argument now is that it will hurt middle income investors.

My reaction is that middle income investors are already hurt by the often misleading, and deceptive practices of said same financial companies. These companies don’t want to be held accountable if one of their people makes a “mistake” and you, Mr. and Mrs. Middle Income Investor, gets hurt in the process.

By Daisy Maxey | Updated April 13, 2014

The debate over a new level of protection for investors in their dealings with brokers may finally be nearing a resolution. And some investor advocates worry about the direction it seems to be taking.

The debate centers on whether brokers should be required to act in the best interest of their clients when giving personalized investment advice, including recommendations about securities, to retail investors.

The “best interest” standard is known as a fiduciary duty. Financial advisers registered with the Securities and Exchange Commission already are held to this standard. But brokers for the most part are held to a different standard, of “suitability,” which requires them to reasonably believe that any investment recommendation they give is suitable for an investor’s objectives, means and age.

The Dodd-Frank Act, signed into law in 2010, directed the SEC to study the matter, and permits the regulator to establish a fiduciary standard for brokers. In late February, SEC Chairman Mary Jo White said the commission would make a decision by year-end.

Meanwhile, the Labor Department is working on a separate proposal that could establish a fiduciary standard for brokers who give advice on retirement investing. It hopes to offer a proposal by August.
Continue Reading HERE...

Where Does Gold Go From Here? Let’s Use 40 Years Of History As Our Guide

5-little-known-facts4-spouse-lgMy Comments: I’ve never been a gold bug. My mother collected silver but that had nothing to do with silver, or gold, as an investment.

But it should be included in the category most of us call “alternative investments”, along with real estate, precious metals and other commodities. I make sure my clients include alternative investments when they have the ability to diversify beyond the normal categories.

If you like gold, there are ways to play it just as there are with other investments. But if you are not going to own the idea, then be prepared to lose your money. On the other hand, if your timing is right…

Hebba Investments / Feb. 26, 2014

Let’s just get this out of the way – nobody truly knows gold will be in the short or medium term and certainly not next month or next year. Prognosticators and price targets abound, but in reality gold is a very difficult asset to predict because it has so many different factors involved in its price movements which include the understanding of the macroeconomic picture, the mining industry, the financial markets, and even the world political climate – not an easy task for any firm let alone individual investors.

If that wasn’t enough, the gold market is very opaque and its political nature means that it historically has been manipulated (GATA has done excellent research on this issue) by many types of entities for different purposes. So even if you get the fundamental analysis right, you could be dead wrong when it comes to the actions of the large players in the gold market.

But we do believe that even though gold may be tough to predict, there are fundamentals in the gold trade that make it a strong investment for the long-term. We may not know where the gold market is going in the short-term, but we certainly can use the fundamentals to give us a higher probability of seeing where it’s going in the long-term.

In the past we’ve gone into the fundamentals of why physical gold ownership and the gold ETF’s (SPDR Gold Shares (GLD), PHYS, CEF) should give investors very good returns over an extended period of time, but in this article what we want to do is analyze the historical price movements of gold. We’re going to analyze some research put out by the World Gold Council of the historical price action of gold in similar situations to where we find gold today to try and see where it could be headed – and how fast it should get there.

A Historical Gold Price Analysis
As bad as 2013 was for gold investors, it wasn’t very different from many other corrections that gold has experienced since the 1970’s. In fact, gold’s 37% drop from its September 2011 highs was only the fifth largest drop over the last 40 years.
gold-40-yearsAs investors can see, gold has experienced twelve pullbacks that have been greater than 20% since the 1970’s and Richard Nixon officially ended the gold standard. The current correction of 37% has been almost exactly average (36% is the average) and at a length of 28 months, has been a bit longer than the average 18 months seen in the research.

We don’t know for sure if the correction is over, and even though we would be surprised to make new lows we cannot count it out. But it is more than likely that we saw the bottom in December of 2013, as gold registered a London AM fix low of around $1190 dollars per ounce (it went lower intraday), and with the current turnaround it makes it a good time to calculate where gold will go from here based on its prior recoveries.

What we’ve done in the table above is summarize the average historical retracement lengths and gains. Then we’ve used the $1190 bottom that we reached in December 2013, to estimate the expected date and gain of gold’s historical retracement performance.

Historically, gold has gained 69% from its low to its retracement date (the same length forward as the downturn – in the current case that would be 28 months). As investors can see, that would mean that we should expect gold to reach $2011 dollars per ounce in April of 2016 – an excellent return that we’re sure almost every gold investor would be happy with.

If we take it one step further and examine the average gain until the next gold peak, we find that historically gold has recovered 228% from its downturn low until its new peak. Using that in our calculations for our $1190 gold price, we would expect gold to reach $3903 per ounce – though for this calculation the date is much harder to estimate. If we had to put a date on it based on historic numbers, we would calculate the peak date as about 150% of the downturn length or about 42 months from the low (around June of 2017).

Conclusion for Investors
When it comes to gold we think the fundamentals are still very strong as the financial crisis is far from over, the debt load of governments continues to grow at a faster pace, geopolitical tensions continue to raise the odds of “tail-risk” event, gold all-in production costs hover around current prices, and we could go on and on. But this study by the World Gold Council gives investors a much more historical view on the past recoveries of gold, and it helps gold investors realize that these vicious drops in the gold price have happened before – twelve times to be exact.

Investors should remember that every single time the forward retracement (i.e. the same period forward as the length of the pullback) led to a gold price increase that averaged 69% – not bad at all even if that means a 2-3 year wait. Thus we remain gung-ho on gold and we believe it’s a good time to continue to build positions in physical gold and the gold ETF’s (SPDR Gold Shares , PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG).

Gold investors don’t miss the forest for the trees here and get caught up in the daily or weekly movements in the gold price – history shows that we should be expecting much higher gold prices. If we match the average gain of the last twelve 20% declines, then we should expect to see a gold price of $2000 per ounce somewhere in 2016. Be patient gold investors because history is on your side.

Investors’ Next Disappointment Will Come From Risk Mismanagement

080519_USEconomy1My Comments: Reader of this blog know that I try to include meaningful comments about investments and investment outcomes. Over the years, I’ve done well for some clients and done poorly for others. And while the past is history, there are always lessons to be learned. I have a personal mandate to try and do better in the coming months and years.

Here are some really good insights that I think will help you. Mistakes are part of the game, whether you prefer to make your own mistakes or hire someone to make them for you. I’ve you’ve hired me, you know that we’re on a really solid track these days and the future looks really good.

John S. Tobey / 3/29/2014

Risk mismanagement is everywhere. Many investors (individual and professional), investment advisors and even Wall Street are guilty of overstating, underweighting or misunderstanding risk. As a result, portfolios are being designed to disappoint. Worse, we have finally reached the best of times for investing, only to have investors’ prospects mucked up by bad investment decisions.

Disclosure: Fully invested in stocks, stock funds and bond funds. No position in Oppenheimer Holdings, mentioned below.

So, what’s wrong? There are three basic mistakes being made:
1. Overstating risk and investing for the next catastrophe. Here, protection from risk is taking priority. The focus is on what could go wrong. The result? Invest for protection, avoiding or hedging (watering down) equity risk/return and holding “safe” investments.
2. Understating risk and investing for top return. This attitude is a return of the performance chaser, looking for more return and less risk. The mistake is buying into a trend that happens to be exhibiting those characteristics, thereby underestimating risk.
3. Misunderstanding risk and investing inappropriately. There are many types of risk at work. Understanding them and how they relate to the investor’s situation is imperative for investing appropriately. Too often, a risk measure is chosen that over- or under-emphasizes an investment’s risk (e.g., a high or low price/earnings ratio for a stock).

How to avoid the mistakes

First, realize risk is everywhere. OppenheimerFunds has a current ad, headlined “Taking risks is not the same as using risk.” It makes the key point about investing: All investments carry risk, so make sure to carry (use) risk for your benefit, not simply accept it as a cost of owning a desired investment. (Even cash carries risk – the loss of purchasing power through inflation – so an investor must choose which risks are acceptable and in what combination.)

Second, realize you can’t have it all. As a new stockbroker in the 1960s, I was given a sales kit that included the golden triangle. It depicts investing’s tradeoffs that exist in all markets – i.e., within the triangle below, we must pick our desired point. There is no ducking the fact that investing is the ultimate compromise – that we cannot have our cake and eat it, too. (Interestingly, Oppenheimer has brought this message back in its aptly-named website,

Third, start with the basic allocation and work from there. The long-held, rule-of-thumb allocation is 60% stocks (equities) and 40% bonds (fixed-income). This mix provides the most oomph (return) per unit of risk. That doesn’t mean it should be every investor’s choice, but it is the perfect place to start. Varying from it has consequences that need to be understood and accepted.

Fourth, control that risk over time.
Controlling a portfolio’s risk means taking two actions:
1. Rebalance as needed. Different investments will follow different paths. The resulting performance differences reset the portfolio’s risk, so it’s important to periodically rebalance back to the desired allocation and risk level.
2. Monitor the chosen investments. Changes happen to funds and companies, so it’s important to ensure the reasons for choosing them remain in place. If not, they should be replaced.

Fifth, check performance infrequently and do not use it to change allocation. It’s a proven fact that more frequent checking makes risk look greater and trends look longer. Both erroneous perceptions can lead to equally erroneous portfolio allocation changes that adversely affect risk and return. If the portfolio has been designed appropriately, expect to keep the allocation unaltered. Only a change in personal circumstances might require an allocation change.

Sixth, avoid all combination investments unless you fully understand and need them. Wall Street is filled with combination investment “products.” While some have a financial purpose (e.g., convertible bonds and mortgage pass-through bonds), some are designed more for investors’ desires (e.g., leveraged funds and stock + written call funds). Options, by themselves, are also a combined investment. All of these investments have odd risk-return characteristics that need to be understood. Otherwise, investors can see win-win where none exists.

The bottom line
Happily, we are now in a normal market environment. That does not mean everything is headed up and there is no uncertainty – that would be an abnormal market. Rather, it means we can rely on time-tested investment wisdom to design our investment approach. Starting with the basic 60%/40% mix, we can fashion a portfolio that best fits our needs, ignoring today’s headlines and any left over Great Recession worries.

Another risk, not discussed above
The academics refer to it as “specific” risk. It’s the uncertainty attached to an individual investment (e.g., a favorite stock), a non-diversified portfolio (e.g., a biotechnology fund) and an investment strategy (e.g., a small-cap growth fund). Selecting successfully can increase return, but picking poorly can reduce return. Because so many experienced investors are actively involved, Warren Buffett offered his advice to buy a broad index fund and leave the stock picking to others.

Are We Looking At A Bond Bubble?

Interest-rates-1790-2012My Comments: There are just as many ways to lose money with bonds as there are with stocks. The risk is different; what happens to interest rates in the future vs corporate earnings and their relative size. That’s an oversimplification but you get the idea.

The chart above shows interest rates from 1790 – 2012. You can draw your own conclusions about where they are likely to go next. It won’t surprise anyone if it happens this year or three years from now, but happen it will. And yes, I’m sensitive to the length of the horizontal axis.

When it does, you need to be positioned to not only avoid losses, but to potentially make money. It can be done and smart people will make money. Who you talk with and when you act is up to you.

By Gillian Tett / March 13, 2014 / The Financial Times

The more money that floods into fixed income, the more risky any reversal

Seth Klarman, the publicity-shy manager of the $27bn Baupost hedge fund, has given investors a slap. In his quarterly investment letter, he declared capital markets are in the grip of a wild bubble.

“Any year in which the S&P jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern,” he wrote, pointing to “bubbles” in bond and credit markets, and “nosebleed stock market valuations of fashionable companies like Netflix and Tesla”.

It might sound reminiscent of 1999, when “fashionable” technology stocks last soared on this scale. But there is a twist: today it is not equities but bond markets that may yet be the most significant cause of concern.

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Consider the numbers. Just after Mr Klarman issued his warnings, the investment research group Morningstar produced analysis that suggests US investors have put $700bn of new money into the most mainstream taxable US bond funds since 2009. Since bond prices have risen, too, the value of these funds has doubled to $2tn. That is striking. But more notable is that these inflows to fixed income have outstripped the inflows to equity funds during the 1990s tech bubble – in both absolute and relative terms.

Meanwhile, Goldman Sachs estimates (using slightly different forms of calculation) that $1.2tn has flowed into global bond funds since 2009, compared with a mere $132bn into equities. And a new paper from the Chicago Booth business school estimates that inflows to global fixed income funds have been almost $2tn since 2008, four times that of equity funds.

Given this, it is no surprise that investment grade companies have been rushing to sell bonds at rock-bottom yields (this week General Electric, Coca-Cola and Viacom were just the latest). Nor is it surprising that junk bond issuance hit a record last year; or that Moody’s, the US credit rating agency, warned this week that investors are so desperate to gobble up bonds that they are buying instruments with fewer legal protections than ever before.

But the $2tn question is what might happen if, or when, those flows change course. Until recently it was often presumed that corporate bond investors were a less skittish group than equity investors; fixed income funds were not prone to quite such wild sentiment swings.
However, the four economists who penned the Chicago Booth paper argue that this is no longer the case.

Analysing market data since 2008, they conclude bond market investors have an increasing tendency towards volatile swings and herd behaviour. That is partly because of fears that the US Federal Reserve could soon raise rates. But the sociology of asset managers is crucial, too.

“Delegated investors such as fund managers are concerned with relative performance compared to their peers [because] it affects their asset-gathering capabilities,” they note. “Investing agents are averse to being the last one into a trade [which] can potentially set off a race among investors to join a sell-off in a race to avoid being left behind.” And while such behaviour can affect all fund managers, the Chicago analysis suggests bond fund managers have recently become much more skittish than their equity counterparts.

One sign of this occurred last year when bond markets, fearing the Fed was about to tighten monetary policy, had a “taper tantrum”, the Chicago Booth authors say. They warn that “bond markets could experience another tantrum” when the “extraordinary monetary accommodation in the US is withdrawn”. And since it is now the bond funds, not banks, that hold the lion’s share of corporate bonds, if another taper tantrum does take hold that could be very destabilising.

Today, as in 1999, nobody knows when that turning point might come. But the more money that floods into fixed income, the more dangerous any reversal could be. Investors and policy makers alike need to heed the message from the Chicago paper – or from Mr Klarman. History may not repeat itself; but, when bubbles occur, it does have a tendency to rhyme.

Are Gold And Silver Ready To Rumble?

My Comments: I’ve never been much of a gold bug. I recognize it’s value as a trading opportunity and the need for a large portfolio to include what are thought of as non-traditional investments. But since it tends to increase in value during times of high inflation and general woe and gloom, and being a person whose natural inclination is optimism, it tends to disappear from my personal radar.

Plus there are some in the blathering media who seem to glorify the act of owning gold, as though having some was a path to rightousness.

A recent conversation with someone caused me to see this as it crossed my desk and I thought you should be aware there is a strong sentiment that you can make serious money with gold over the next couple of years.

James P. Montes, Equity Management Academy / Mar. 2, 2014

At first glance, silver appears to be moving in step with gold. Gold’s up 11% year to date and up over 7% month to date, while silver’s up 10% for the year and gaining 11% for the month.

“The silver market is showing quiet strength and major support has been defined in the $19 to $20 levels for May Silver.” Commented Karl Schott, a silver specialist with the Equity Management Academy. The fundamentals have not changed and in fact have gotten stronger.

“Silver is finding its own support independent of gold due to strong buying from China and India and an increase in industrial production of electronics,” including smart phones, said Eric Sprott, CEO Sprott Asset Management in a recent phone interview.

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply.

Here is a chart showing the World Gold Supply

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 2).

Trend showing price of goldThe gold and silver markets have met and fulfilled all expectations for an upswing into the late February time frame as documented and published on Seeking Alpha.

The silver market needed a rally above 20.97 to turn The VC Price Momentum Indicator up and complete the expected initial target zone level of 22.10 documented in last weeks’ report and culminate this initial advance. “The gold and silver markets have given a very powerful confirmation of the 1 to 3 month outlook for an initial bottom confirmed late December into late February. Major resistance shows up in the 1336 to 1347 area for the April futures contract. The silver major resistance shows up in the 22.10 to 22.37 levels basis the March contract.”

Echoing my comments, “The market will provide us with another opportunity to get long again for those that missed the initial breakout. A close below 1322 would confirm a correction into the 1311 to 1297 areas is possible where it would offer traders/investors with another ideal buying opportunity to get long. Buy corrections and add to your long-term positions in silver as we approach the 21.44 to 21.02 levels. A close below 21.71 would confirm a possible test to the mid to low 21 area for March silver futures.”

Our Live trading room subscribers exited all long positions short – term to intermediate above 22.10 for May silver. They were well informed and prepared days ahead of silver moving towards these expected levels of resistance and realized some very substantial profits. The weekly high was 22.18.

( If all of this interests you, then here is the link to the original article where you can get the full monty about both SILVER and GOLD.- TK )