Tuesday, December 11, 2018


While I have only been talking about the country of China in my two most recent posts and not China per sae as an investment, I think I should still probably also disclose that I am long investing in China via certain ETFs in client and personal accounts.  Also clients and my personal accounts will have exposure to China via certain international ETFs that we own.

Again, not sure I actually need this disclosure given what's been discussed but I will put it out there anyway in an effort to be as transparent as possible.

And Again China

So right now you know I think it's China that wags the market dog's tail.  On cue futures are up on news of talks commencing between the US and China today amid a more positive vibe out of the two countries on the basis for formulating a deal.   Of course given the most recent trading history we could be down 500 points by the end of the day.  Hard to make any sense out of these opens.  Buyers are on strike, spooked by all the volatility and most of the day belongs to the program traders.  

However, if we can get some stability on the China front then there is a higher probability that we see some sort of rally into January.  Most years I would give you an 80-85% chance that we'd be up higher by the December 31 close but this isn't most years.  Right now I'd peg odds of a rally only between 60-70%.  That's assuming we don't see negative developments on the trade front.  Oh, and it would be nice if the President would lay off of his twitter feed for a bit as well.   If there was ever a stage and a time for stocks to put in some sort of meaningful bounce it would seem to be now as we are again oversold enough for us to rally.  I still think we could potentially see a 4-5% rally between now and year-end.  However, I also think that potential for higher prices {or not}  will largely be based now on news events and not market fundamentals.

Back Thursday.

Monday, December 10, 2018


I listed on Thursday the main issues I believed have been spooking the markets.  What I believe right now is bothering stocks the most is our seemingly increasing trade tensions with China.  The news of the arrest this weekend of of the CFO of Chinese company Huawei Technologies at the request of the United States on charges seemingly related to illegal exports to Iran cannot be seen as a positive development and we will have to see how it plays out this week and whether it has the capacity to derail current trade negotiations.  Regarding China I believe there are two issues weighing on markets.  The first regards the more immediate issue of resolving our basic trade differences. The longer term problem is an increasing view of China as a rival in the geopolitical sphere.  I hope to return to my longer-term views on China, its opportunities and risks at some point early in 2018.  

The more immediate issue with China revolves around trade.  Here I am of the belief that at some point we will get a deal with the Chinese because it is in their interests as well as ours to come to the table and resolve some of our immediate issues on trade.  I do not expect this issue will be resolved before the end of the year.  As such, while I think that stocks have the ability to tack on 4-5% by the end of 2018. This will likely depend more on headline risk on this trade front and the volatility associated with the past four months is unlikely to subside until such a deal is announced.  

Again I will have more to say about China at a future date.

Friday, December 07, 2018

Still At Sea

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea by the United States Navy.

Thursday, December 06, 2018

Warren Buffett On Volatility

Market sell-offs such as this generate a lot of fear.  Wall Street uses the term volatility to specifically mean a decline in stock prices.  Volatility works both ways but presumably investors for the most part don't mind when stock prices spike higher.  It's the concept of losing money in a short period of time that most investors dislike.  Warren Buffett has over the years opined on volatility and market declines.  I thought I'd share these for your consideration. 

“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities — Treasuries, for example — whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is farfrom synonymous with risk.Popular formulas that equate the two terms lead students, investors and CEOs astray.”


What's Spooking The Markets.

Ok so here's all the issues spooking the markets and why we've dropped nearly 6% in the S&P 500 in the past two trading sessions.

1.  Over bought after all the giddiness from Federal Reserve Chairman Jay Powell's more dovish comments regarding a possible softening stance on interest rates last week and the 90-day freeze on tariff implementation coming out of the G-20 meeting between China and the US.

2.  Continued decline in the price of oil.

3.  Inversion of certain parts of the yield curve.  {Not enough time to go into this in detail.  Just know that some investors believe this can be a harbinger of a recession or at least an economic slowdown.}

4.  Fears of a slowing US economy.  {Note that a slowing economy doesn't necessarily mean a recession.}

5.  Fears that there was less than meets the eye out of the supposed positive outcome between Presidents Trump and Xi Jinping at the G-20 meeting.  

6.  Algorithmic trading run amok. {Again a topic for another time.}

All of these events have led more to a buyers strike than out and out selling by most investors.  Any  of these reasons, or just a few of them, might have been enough to bring back volatility to stocks.

Next week we'll begin our long promised series on what we think this means going forward.  Here's a hint.  Right now the evidence is not indicative of a recession next year and stocks may be cheap based on what we know today and looking out 12-18 months.  The one wild card to that scenario is China which we'll also discuss in the future as well.

Back early next week.

*Long ETFs related to the S&P 500 and many of the countries listed above via regional or international funds in client and personal accounts.  Please note positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication. 

Wednesday, December 05, 2018

On President Bush

The markets are closed today as the nation mourns George HW Bush.  Much has been said about the President as a man and there's no sense in repeating all of that.  However, it is hard not to notice the genuine outpouring of sadness that seems to have enveloped the American people on his passing.  This is perhaps more acute amongst those of us old enough to remember those years.  President Bush was the last President of the World War II generation and also the last President to have seen active duty and combat.*  

The passing of President Bush and ultimately when he passes President Carter will truly mark the passing of that generation and it seems that our politics is much smaller and the worse for it as they leave the stage.  We will be back talking about the markets tomorrow.  Today we'll celebrate the life of this remarkable individual.

God bless sir.

*Jimmy Carter is also a military veteran, having graduated the Naval Academy in 1946 and ultimately was an Executive Officer on a submarine but he didn't as far as I know every see combat and graduated too late from the Academy to serve in World War II.

Monday, December 03, 2018

George H.W. Bush

Sometimes we need to note things beyond the ups and downs of the investment world.  The passing of George Bush marks such an event as he represented many of the best qualities of his generation.  He has always reminded me very much of the Patrician.  God Bless and God Speed sir.  Your service to your country has ended.  Rest in Peace and I hope the reunion with your parents, Barbara and Robin was as joyous as you imagined it would be.

Thursday, November 29, 2018

International Markets.

Another excellent post from the Twitter feed of Pension Partner's Charlie Bilello.  This one shows in US dollars the massive outperformance over the past 11 years of the US versus some of the larger economies in the world.  I've been saying for a long time that I thought international markets would do better on a performance basis than the USA.  Last year that worked out pretty well but in 2018 the rest of the world has seen terrible market performance.  Most international markets are down on the year and in many cases are down over 10%, although recently relative performance to the US has been better.  On a money flow basis it currently seems international markets have found a level of support.  Whether that is a point where these markets will bounce and head higher or just a way station for the next level lower is something only time will tell.

At any rate this type of discrepancy in valuation is something  unlikely to last forever.  Longer-term it can be resolved in one of three ways.  International markets grow their markets at a rate faster than the US, the US has a period where it trades flat while the rest of the world catches up to it on a valuation basis or US markets need to trade down.  I'd pick the first two options if I definitely had to choose.  I'd also point out that many international markets are trading at some of their cheapest relative valuations in a very long time.

At some point I'm going to write about this in a bit more detail, particularly in relation to the two best opportunities I see overseas.  My main focus, hopefully next week, will be to finish up the third part of my series on the road ahead.  

Back early next week.

*Long ETFs related to the S&P 500 and many of the countries listed above via regional or international funds in client and personal accounts.  Please note positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Also in my note of yesterday I forgot to note that I am personally long ETFs related to the S&P 500.  Did a bit of cutting and pasting on that disclosure and obviously cut a bit too much.  Sorry for the error.

Wednesday, November 28, 2018

No Place To Hide In 2018

There has so far been no place to hide amongst asset classes this year as both stocks and bonds are currently showing negative returns on the year.  Charlie Bilello over at his Pension Partners Twitter feed illustrated this with a nice graphic yesterday showing how most popular allocation strategies are currently in the red.  

As might be expected an aggressive allocation to stocks is showing the worst return so far down 4% as of yesterday.  However, a 60/40 allocation, that is 60% stocks and 40% allocated to fixed assets isn't much better.  It's down 3.5% as of yesterday.  Blame the rapid rise in interest rates this year for the slippage in bonds.  

Note that nothing here suggests that this allocation strategies don't work longer term.  It's simply that in the short run they are being caught up in the issues of the day like everything else.  Not everything works all the time.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Monday, November 26, 2018

Snowed In...Go Read

Well Chicago had an unlooked for and unwanted early season blizzard last night.  I'm guessing 6-8 inches around global HQ and it looks like it's just tapering off as I'm typing this.  Markets on cue are showing a very nice rally, anywhere up from 1-2% on most major indices.  This rally only gets us back to where we were early last week.  If we're going to have an end of the year rally then now is about the time it should get started.  A lack of a rally could be seen as a negative for the start of 2019.  

Nearly every asset class has had a rough year in 2019.  There's been no place to hide.  In that vein go read {if you have a subscription or can get behind it's paywall} the article over at the Wall Street Journal that chronicles asset class woes this year.  Go read "No Refuge For Investors as 2018 Sends Stocks, Bonds Oil Lower".  Here are a couple of things to take away from the article.

Global stocks and bonds are both on track to finish the year in the red for the first time in over 25 years.

90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms thought min-November, the highest share since 1901.

I'm not sure why that's so surprising since nearly everything worked last year and we had a perfect storm for asset investing back then.  Seems reasonable we'd regress towards the mean at some point and it keeps with my belief that we've spent this year consolidating those big gains from 2017-2017.  

I'll be back on Wednesday. 

Thursday, November 22, 2018

Happy Thanksgiving!

We're going to be taking some time off the rest of this week as we do the traditional Thanksgiving thing.  We'll pick things up next week on Tuesday.  We'll break away from the food table though if anything important comes over the transom.  

Until then I want to wish each and every one of you a Happy Thanksgiving!    Avoid if you can listening to the media.  I believe America as a whole is not as divided as they would have us believe.  May your travels be safe if you're going over the river and through the woods to Grand Ma's house, your belly's full of laughter brought by family and that the rest of 2018 is a wonderful year!

God Bless!