What I know and what I wish I knew

A short while back I decided to return to writing on the blog as a way to encapsulate my thoughts and review tactics and strategies.   With the noise that exists within our culture and data driven industry we can lose ourselves to the impulses caused by the most recent data points.

The talking heads on TV uniformly speak with such clarity and conviction but are never held accountable to the results of their recommendations.  Do they eat their own cooking the way I do?  I doubt it very much.   So while you the reader may consider that this blog is for your benefit please consider its also for my benefit at well.

What do we know:

The political leadership existent within the US and Globally lacks the political will and savvy to solve the debt and currency crisis.   There is a continual sense that their intentions are to “kick the can down the road” for future leaders and tax payers.  The lack of cross the aisle cooperation between parties is pathetic.  The Republican’s lack of cooperation, even at the cost of benefit to the country in order to gain the White House appears to be the game plan.  Speaker Boehner is even disagreeing with the proposed short term tax credits proposed in the jobs bill.

If you’re a country that cannot print money then you are crashing.  Why this is lost upon the tea party, I have no idea.

There is a global race to devalue currencies.  PIMCO predicts the Euro will fall to 1.20 USD within three to six months.   When Janene and I were in Paris this May the Euro was 1.45 USD.

2012 estimated earnings for the SP 500 are coming down in deliberate fashion.   In August the estimate for 2012 was $112, now they are at $110 and falling.

Most European stock markets are down 15%-20% while the US is down 2% for the year.    Macroeconomic data continues to deteriorate.   Last night Goldman Sachs lowered their end of the year target for the SP500 to 1250 down from 1400.

Investors are extremely bearish.  AAII figures show 40% bears against 30% bulls.  This is an uncomfortable status in light of my hedged positions.   The issues of Greece, the Euro, our budget impasse, US debt, falling currencies and high odds of recession appear to be largely baked in the cake of many share prices.

Shares of dividend paying stocks look very attractive relative to bonds.

Contrary to Bernanke’s talk:  US money supply is rising.  Rising money supply frequently has a steroid effect in the short term for stock prices to move higher.

With Peyton Manning on the sidelines is there is no doubt that Tom Brady is simply the best at his position.

What I don’t know:

How low will SP 500 earnings estimates fall before they bottom?   The average recession cuts earnings by 25% from the previous peak or in our case $75 a share.

While a Greek default is inevitable, can Europe handle a Greek default in an orderly fashion, and then an Italy default, followed by a Portugal default……..rinse and repeat.

Will the Chinese support the Euro to allow multiple currency options for its growth.

Can the European banks reduce their systemic risks and raise gigantic amounts of capital they require?

One potential cure-all would be for the Chinese to let the Yuan trade freely on its own merits?  Is this just pie in the sky hopin and wishin?

Will investors finally purge Treasuries en masse and allow yields to rise?

Is our unemployment issue systemic (see Doug Kass) or cyclical (Paul Krugman)?

Can the opinions expressed by Tim Geithner in stating there will be no Euro Lehman’s be trusted?

How can Duane Allman and BB King be ranked higher than Eric Clapton in the Rolling Stone Top 100 guitarists of all time.  I’ve adored Live at the Fillmore East since I was a kid and Riding with the King is superb but shouldn’t the breadth of work by Clapton be considered?


Long Clapton


Should a Socially Responsible Investor Invest Heavily In Bonds Now?

Green and SRI investors along with investing professionals are always asked to make the best decisions under pressure, and the most common one we face today is should “Socially Responsible Investors abandon stocks in favor of bonds?”

It is my opinion based on close to thirty years of trading that the best trades are those done when you’re in the minority not the majority opinion, otherwise who’s left to buy or sell?

For this question of stocks sold off in favor of bonds, bad news has to be considered good news.    Any good news on the economy will be treated negatively at this point in time for bonds.   Today’s stock market strength and weakness in bonds is due to the better than expected August PMI report which came in at 56.3 versus the consensus of 52.9 and the August report is an improvement upon July’s 55.3.   Adding fuel to the rally is survey from Investors Intelligence which shows that just 29% of newsletter writers are bullish which is the lowest percentage since the crash in 2008.   Remember folks, the more extreme the consensus the greater chance of a reversal in market direction.   A bull figure at just 29% might be enough to halt the decline at worst…..but its certainly in the range to mark the bottom where a new rally can emerge.

Good news is bad news for bonds.  The 10 year Treasury has moved from 2.48% to 2.6% today while the 30 Year Treasury Bond has moved from 3.53% to 3.68%.  Bond yields are now at levels seen in late 2008 and very early 2009 and we all know how productive it was to buy bonds in February of 2009.

The stampede into bonds has been nothing short of epic and the Consensus Survey of bond investors maxed out at approximately 80% recently.   Rarely has such a consensus opinion been profitable.   These are the kinds of surveys we frequently see at major market tops which begs to ask whether bonds are in a Bubble.    Bubble talk has been pervasive in the media much just as talk of Deflation has been over commented upon.

Frankly there’s more contradictory information and confusion in the media to rival a Republican politician who wants to reduce the deficit while maintaining tax cuts.  The bottom line is we do not have Deflation in the U.S. at present as Deflation is a very rare event here.

But are bonds really in a Bubble?   My answer would be “not at present”.  My definition of Bubble for the any investor including the Green Investor or the Socially Responsible Investing community is that for a Bubble to truly exist the risk of a significant and permanent loss of capital must be present.   A Treasury bond will eventually pay off at par upon maturity, so while its very possible to lose 20% or more in a bond, the loss would be temporary if you were patient enough to wait till maturity.  The reality is only a very few investors have that kind of patience.   In addition, many of the investors who are retirees and have been buying Treasuries will not be around in time for their bonds to mature, so a loss could be taken.

With Consensus opinions at present in the range of 70% to 80% Bullish on Bond prices, should the tone of economic data change (I believe its starting to happen now) the rush to exit bonds could be swift and very dramatic, especially in this day of algorithmic and program trading.

A by product of the rise in bond prices and drop in yield is the relative valuation of bonds to stocks.

As the chart above highlights, the relative valuation of bonds to stocks is at extreme levels and the other two times in the past century this relationship was reached, buying bonds in lieu of equities was a significant mistake.   Can we say that in the two past examples that bond investors lost money?  No, not unless they held to maturity but they lost “opportunity” to be in equities as the mean relationship between stocks and bonds eventually asserted itself once more.

We’re faced with the challenge of “getting back to pre-crash levels” and by over allocating to bonds now is essentially giving up that goal at time when the odds are stacked against you.

To be a successful Green or Socially Responsible Investor sometimes means enduring pain and the pressure of the media, not to mention friends who offer their opinions in an effort to “help”.   Diversification between bonds and equities is always a good thing and proper re-balancing when one asset class becomes overvalued is essential, but to join the mass entrance into bonds at this stage may very well lead to a mass exit when the weak patch of our economy passes and moderate growth re-emerges.

Non confirming markets

Both the US stock market and Treasury market are seeing non-confirmations in the most recent moves lower.

US stock market:

Advance / Decline line is not confirming the move lower as the average stock is not falling with the market indices.

New Lows: The number of new lows continues to shrink when compared to the two other times we’ve been this low in the past month.

VIX: The VIX which is a measure of volatility which peaked in this cycle at 45 in May closed yesterday at 34.

Sentimentrader.com’s Intermediate Term model has moved to excessive pessimism once again. Generally a good time to increase long exposure.

In the Treasury market:

Investor Sentiment is at the highest since December 2008, not one of the better times to be buying bonds. Plus we have to be concerned with the thought of worldwide investment managers buying US Treasuries to look good for their clients in light of the decline in Euro bonds, otherwise known as “Window Dressing”.

Lastly, the decline in US Treasury yields is not confirmed by the bonds of other G-7 nations.

The Tesla IPO has gained a great deal of attention but it has to be time to ring the register. There will be other times to buy this if it can deliver something other than losses. I just read the battery for the car costs $30,000 and does not work in cold weather. Well, that pretty much kills the potential for a Tesla at 8000 feet in Colorado.

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