Monday, December 22, 2014
From June 19th's high of $115.06 per barrel, we've seen oil fall over 50% to $55.26; this is probably the most important financial news of 2014.
Assuming we don't see a "V" recovery in the price of oil, and I think it is highly unlikely we will because supply to the market is significantly stronger than demand, this should bode EXTREMELY well for consumers, manufacturers, and transportation. A glut is nice is you're a price taker.
No doubt there has been carnage; just take a gander at any number of the North Dakota small to mid-cap plays and those charts are simply horrifying, especially for investors who had been purchasing on the entire way up. The global players though, have suffered glancing blows. Down single to low-teens, the majors stand to benefit if they can leverage M&A deals out of this bust to gobble up domestic fields.
Previous posts on this blog identified the fall in oil as a massive tax cut; that is without question true for the vast majority of Americans who regularly drive anywhere or own small businesses with light manufacturing or are dependent on transportation. From a macro view, the "trickle up" effects should be significant to large manufacturers' direct bottom lines (unlikely consumers will realize a price cut in the aisle, that's for sure!)
Ultimately, the crude bust should have meaningful effects on GDP, consumer sentiment, and socioeconomic advantages inclusive of a better hiring environment. What politics has often failed to do, a crude bust just did.
As a financial farmer there are a multitude of looming advantages; the labor rate, harvest and planting expenses, and seed cost will be all lower. Net positives all around to those who wish to Invest Like A Farmer. This should position 2015 & 2016 into meaningful extensions of the existing bull market. My long-standing call of Dow 20,000 by the end of 2016 may now be too low.
Sunday, December 21, 2014
Great Returns Breed Complacency
If there has been one truism consistent in the investing realm it is that great returns breed complacency. Many of you who have chosen to Invest Like A Farmer have realized significant gains over the past several years by investing in large, monopolistic companies with healthy dividends. Now what?
Yearly, or better yet on a quarterly basis, financial farmers should survey the farm and conduct a thorough review of holdings, seed capital, and expected harvest returns. Action isn't necessarily warranted, but rather a game plan, no matter how perfect on paper, should be routinely reviewed in the field to see if execution is proceeding as planned. Course corrections may or may not be warranted.
Those who survived any of the numerous "setbacks" in the markets over the past decade (or longer) well remember the pain of a correction and the ensuing panic which destroys accumulated wealth in the stock market. Seed capital is best to have on hand sitting in the silo well in advance of a downturn, though it may draw little interest in the interim.
Multiple prosperous years don't necessarily warrant a change in strategy, but rather a top-level review of holdings, seed capital (cash) available, and coming cash flow needs. As readers of this blog well know, I champion having a healthy silo of seed capital at the ready. It has tremendous value in terms of peace of mind and potential to invest when the economic winds change.
Selling into weakness is not a pleasant experience, one that many old farmers can recall with a tinge of heartfelt pain. Make hay while the sun shines, but silo some of those gains too.
Saturday, December 20, 2014
Double V is a W!
Like Halley's Comet, investors were recently treated to a surprisingly rare event--two sharply defined "V" patterns. I consider this oddity to be a "W" (WIN!) for investors. If the existing trend line stays in place we should see Dow 18,000 prior to the end of the year.
As the investing season grows long in the tooth, and with the S&P 500 and Dow at record highs, those who Invest Like A Farmer should consider any tax-loss selling in the coming days as well as rebalancing portfolios to established benchmark allocations.
Cash on hand (seed capital) has proven to be a valuable resource over the past year, with spurts of sell-offs proving to be excellent times to deploy new funds.
Remember, Investing Like A Farmer is simply the sum of short term successes (additive wins) that are harvested throughout the year in terms of capital gains, seasonal crop sales (dividends), and holding the plow steady in turbulent conditions (long-term, unrealized gains.)
It's all about the epsilon.
Thursday, December 4, 2014
Well my fellow financial farmers, it was just a short 45 days ago when we were (once again) in the throes of another doomsday scenario; ebola, ISIS, mid-term elections, and oil still in the triple digits. What a difference a month-and-a-half makes; Dow record, S&P 500 record, and virtually all of the above concerns have dissipated.
In terms of historic "Vs" this one will probably go down in the stock market annuals as one of the most defined patterns of a sell-off and subsequent recovery. To put it plainly, this "V" is the proverbial textbook example. (It might even be in the next textbook!)
What can we pull from this "V"? A couple observations; after a multi-day decline leading up to the free fall that constructed the back edge of the "V," volume increased markedly, the advance-decline ratio fell precipitously, and just as the "V" marked its bottom the market recovered to close well-above its low for the day. The market actually then opened up lower the following day, but closed higher. The "V" notch was in and off to the races we went!
Essentially from Oct. 16th until yesterday we have seen an unrelenting move higher, with only a handful of modest down days. So just over 200 S&P 500 points in 45 days. To put this in another perspective, if you only invested for 45 days this year you would have notched an 11.3 return (the high-end of the average YEARLY return!)
Take note those who wish to Invest Like A Farmer; great returns can OFTEN be had by having seed capital ready to deploy at a moment's notice if your "buy" scenario emerges. Many pundits disparage investors who keep dry powder (cash) at the ready, but reality dictates that the "opportunity of a lifetime" comes around a lot more frequently than that adage suggests. Be prepared.
The big question, what's next? Given the macro climate I suspect analysts are being conservative on their existing 2015 and 2016 S&P 500 earnings calls. This leads me to believe we have a very good chance of not only meeting but possibly exceeding my call of Dow 20000 by the end of 2016.
In the meantime, I think the existing "up-trend" will moderate into the holiday season and pick up again into the New Year; a key question is whether vital elements of this macro environment (low interest rates, cheap oil, and political gridlock) will hold into 2016. Additionally, will retail investors return to the markets and deploy some of the cash currently sitting on the sidelines? All of those factors would prove to be bullish catalysts.
Wednesday, December 3, 2014
The Oil Boom (for the Rest of Us!)
Welcome to QE4; $65 bbl oil! Nothing like cheap oil to help a financial farmer's portfolio. Consider rough "back of the envelope" numbers of 0.25-0.50% GDP increase for each $10 bbl oil fall from $100 bbl oil and we're looking at some very rosy numbers indeed.
Frequent readers of this blog know that I've had a Dow 20,000 call on the market for well over a year, specially I'm predicting Down 20,000 by the end of 2016.
If we see sustained oil prices below $65 bbl, well my friends, that would imply S&P 500 earnings of around $1250 forward looking into 2016 and even a moderate P/E of 18 yields…wait for it…Dow 22,500. That's nice.
The fall in oil prices is in effect a MASSIVE tax cut across the board for: gas-car drivers (still plenty of them around), raw material consumers (read as nearly every major non-financial S&P 500 component), and secondary iterations like logistics, transport, and fulfillment.
What's very strange about this existing scenario is given the turbulence in the Middle East many investors would expect $120 to $140 bbl oil right now. Why aren't we seeing this? Two theories come to mind; first, somebody is dumping large quantities of crude on the market at cut-rate prices to raise significant capital. But even that theory wouldn't account for the global sell-off, it's just too amazingly big a move. If we look to classical economics with our good friend Adam Smith, then supply and demand should tell us everything; bottom line there is a glut of oil with middling sustained demand.
Combine the oil QE4 scenario with a dovish Fed poised to keep rates low indefinitely and low inflation (except in health care and education, but why measure those when "tons of soybeans" is available?) as well as a political environment almost guaranteeing gridlock and we're sitting on the heels of another bull run higher.
As the end of the year approaches, this sure looks like a fine time to take stock of your financial farm and adjust allocations accordingly. A quick refresher for new readers of this blog:
1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.
2. I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.
3. Of the four possible outcomes; high margin, high volume is best.
4. A steadily moving higher and higher left to right stock chart is a good thing; the inverse it not.
5. Inevitably, and by definition, more time is spent holding a losing position than is necessary. Cut your losses.
Monday, December 1, 2014
Described as "monetary inheritance that is passed on to generations that didn't earn it," dynastic wealth gets a bad rap. It is so "burdensome" that most billionaires feel compelled to increase it and disperse it via a number of nonprofits controlled by their heirs to maintain it without having to "pay their fair share." Please. Let's be honest, dynastic wealth is an enviable goal and one which most investors strive to obtain, if not fully in their lives, then at least in the lives of their children and grandchildren.
Dynastic wealth, in terms of monetary abundance, offers many significant advantages to poverty; better access to health care, education, safety, etc. It has, and will always be, one of the primary goals of our species. It is fundamentally Darwinian. In many ways, dynastic wealth is the American Dream; an increasingly better quality of life for generations to come with the ability to pursue one's own happiness.
Those who wish to Invest Like A Farmer are particularly well-suited to accomplishing this goal. It is a worthy goal and one that is obtainable. Here are the basic elements that I have seen succeed:
1) Longevity is key as both time and health are vital assets to establishing dynastic wealth.
2) Self-Discipline to repeatedly contributing to compounding investments, rarely taking distributions.
3) Financial Savvy; a lifetime hunger for knowledge about investing in a number of asset classes.
That's the quick 3-step process; there are undoubtedly thousands of ways to become wealthy. But mastering the above elements are always a significant part of the equation when establishing initial education, income, passive income, starting a business, owning equity, leveraging equity, tax-advantaged investing, developing multiple cash flow streams, strategically passing along assets to heirs, and ultimately establishing dynastic wealth.
Very few of us (suspiciously enough, probably around 1%) have privileged connections. And although that definitely matters, particularly the influence which can be wielded by those connections, almost anyone can lay the seeds for dynastic wealth in his or her own generation.
There is an old adage of "From shirt sleeves to shirt sleeves in three generations," implying that many a family struggles, builds a some wealth, and it is subsequently lost by the third generation. There is a flip side to that coin though, dynastic wealth creation that is lasting. Strive for the latter.