Tuesday, December 31, 2013

Three Cheers for Boring Investors!

As reported in the Wall Street Journal this morning, boring investors did well in 2013. Apparently, this is such big news that it was actually ABOVE the fold on the front page. Of course frequent readers of this blog have known this approach since day one. The extent that this strategy worked in 2013, however, was truly impressive. After literally several decades of pain, those who decided to Invest Like A Farmer notched a spectacular win this year. For a quick recap of the rule set T. H. RAPKO & COMPANY, LLC implements, see below:

Rapko's Rules

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.

This rule set has served the financial farmer very, very well in 2013 and based on the economic climate going into 2014 it should prove equally fruitful. What's really so surprising is that this is of any great news at all. Warren Buffet has preached this sermon for over 60 years and NEARLY every successful long-term investor follows a similar rule set in some form or another. There are notable exceptions, but for some reason they always seem to end up in jail. 

Going into 2014 individuals who wish to Invest Like A Farmer should laser focus on either buying or developing quality brands that have both scale and utility. America still has one of the best climates, quality of soil, and promising batch of seeds to plant for your own financial farm. Embrace calculated risk and plow ahead.

Here's a toast to very happy and profitable 2013 and may many more years of the same follow. Cheers!

Sunday, December 29, 2013

Market Momentum

Based on historical data from the 1950s to today, a yearly rally of over 20% in the S&P 500 is followed 82% of the time by an average increase of 11%. Put simply, there is a good probability (which I define as better than 50/50) of 2014 being another up year for the S&P 500. Prudent financial farmers enjoy utilizing positive market momentum to their advantage.

Statistical probability alone isn't foolproof, however, but it is an important planning tool for those who wish to Invest Like A Farmer; it acts somewhat as the investor's financial Farmer's Almanac when deciding what seeds to plant on our financial farm. Momentum can be a powerful ally when investing, and the odds indicate 2014 should play out well. I also suspect we will have a positive year in 2014 based on some derived empirical data.

First, the market rally itself has not been widely embraced by the average investor. "Mom and Pop" have not returned to the market since the calamity that was 2008/2009, and if they have, it is in bits and dribbles, not significant positions. The average investor still feels burned. The overall sentiment, and in particular trust, in the large financial institutions is wary at best even among extremely wealthy investors. That, surprisingly, bodes well for keeping enthusiasm in check. There are massive swaths of capital lying dormant on the sidelines. As those funds slowly renter the market in the form of equity demand, that should drive prices of the corresponding stocks higher.

Second, although margin usage is at an adjusted all-time high from a dollar standpoint, so is the amount of money in circulation. With a Fed balance sheet in excess of $15 Trillion and continuing to grow at a marked clip, I suspect we will add significantly more cash money to the kitty by the end of 2014. I was shocked that the Federal Reserve tapered at all at the last meeting, but assuming they stick to a conservative $10B or so reduction a month, that still implies nearly $500-650B being added through the end of 2014. Easy money is growing and here to stay. Margin, buying, and stabilization should all increase accordingly.

Third, I don't see any obvious chinks in the armor of this rally. Corporate profits are coming in repeatedly at record highs, interest rates remain abnomraly low, the housing market is recovering across the country, unemployment continues to fall (although the actual quality of the jobs is questionable), and a variety of new industries in the manufacturing, software, and hardware sectors have arisen. These are all very BULLISH indicators. 

All of these signs lead me to believe we should not only have a decent 2014, but as previously blogged in my Dow Twenty Thou post several weeks ago, an excellent chance of reaching the Dow 20,000 mark by December 31st, 2016.

Thursday, December 19, 2013

Shrimp Inflation

Sadly it appears that shrimp inflation is upon us. A recent report has identified a spike in the price of shrimp in the high teens and land-based protein inflation running into the mid-single digits. Indeed, even a basket of groceries notched a 2.4% increase in the second quarter. For an economy in many respects still emerging from the 2008/2009 financial crisis, this isn't good news.

We're now seeing solid evidence of food inflation. Add that to increases in health care costs, housing, and most notably eduction, and we have the beginnings of an inflationary environment. Some argue true inflation is currently running in the mid-single digits; if your personal consumer price index (CPI) includes food, housing, medical care, and education it probably is, if you prefer to use the established CPI like the Federal Government of tons of soybeans and computer processing power, you probably haven't seen a cost of living increase in decades.

Although the prospect of shrimp inflation may seem laughable to many readers, those who wish to Invest Like A Farmer should pay heed to inflationary signals, even in such small data points as shrimp; these can have jumbo implications for the financial farmer. Inflation eats away at your real returns; even a 27% increase in the S&P 500 eventually succumbs to inflationary pressure. This has the possibility of impacting both the wallet and palate of the average investor. Inflation is truly an enemy of the Republic and is most notably the sign of a fiscal and monetary policy run amok.

I read this shrimp inflation report as a solid signal that wholesale food costs are going to be rising markedly, which means REAL purchasing power is decreasing. The ability for retailers to pass along price increases depends largely on the type of customer; large chain-based restaurants are going to have trouble passing along meaningful price increases, whereas higher-end restaurants will have considerably less pushback. Along those lines, the same school of thought should also hold true for grocery retailers; the high-end retailers should have the ability to pass along prices increases whereas the lower-end shops are going to see their revenue and profit lines narrow. Keep in mind however, this isn't the whole story; inflation is insidious in that it has butterfly effects among asset classes.

Luckily, it appears that energy costs (especially in North America) are falling. Recent news out of Mexico indicating a push towards privatization of many of the resource-rich country's fields may further increase the supply and push prices down further. Notably, we're also seeing significant production increases in the United States which suggest even more pricing pressure to the downside. This impacts food pricing positively, meaning theoretically in North America it should be cheaper and cheaper over the coming years to product land-based protein and potentially harvest more ocean-based protein at a lower price point.

Nonetheless, I would argue that shrimp prices are a useful leading indicator similar to the lipstick index; it is something we at first smile and laugh about, yet often proves to be a harbinger of things to come.

Thursday, December 5, 2013

Dow 20,000 by December 31st, 2016

At some point during the next 3 years, the Dow Jones Industrial Average should hit 20,000 assuming even moderate growth of about 8% per year.

Although it has proven almost impossible to precisely forecast the financial future, and investors know that markets rarely act with linear frequency, I believe the stage is set for Dow 20,000 based on three factors; compelling strength in corporate earnings, sustained low interest rates, and a marked improvement in the employment picture. Even assuming Washington, D.C. continues in a state of relative gridlock and political angst, investors should still be on solid ground.

We are currently in the midst of the 4th or 5th (depending on how you calculate it) best bull market since the 1920s and, surprisingly, we're not too long in the tooth on a relative duration basis.  There is a distinct possibility that this rally continues and becomes one of the ALL-TIME best bull markets. Given the relative political stability for the next 3 years, systemic changes in the banking sector that have been implemented, and finally a surging "IPO 2.0" environment, this current bull market has many good things going for it.  

With easy money still flowing from the Federal Reserve, I see two industries in particular generating significant growth; technology and medicine. From a technology perspective, many companies are laser-focused on the fast-growing mobile sector. With a worldwide population approaching 7 billion, mobile technology is at the forefront of capturing users and revenue. The same can be said of the pharmaceutical industry that has successfully prolonged lifespans throughout the world. Additionally, there are many, many exciting nascent sectors in the economy such as 3-D printing which may lead to a fundamental paradigm change in manufacturing. Finally, as the economy further improves, there is a distinct domino effect on employment; as more workers simultaneously enter the work force (new college grads, the "re-skilled" unemployed, laid-off employees) AND leave the workforce (starting up new companies.) Both of these scenarios should fuel further growth.

What could possibly spoil the farmer's harvest? I see two things on the horizon that are very troubling; the first is the growth of unfunded pension obligations and the mother of all sociopolitical wrangling, the health care system in this country. Unless we can adequately address both of these topics, they stand to possibly derail this rally and cause lasting damage to our great nation.

The Federal Reserve will probably continue to inject billions into the bond market well into 2014 and beyond. There is little doubt this country will have sustained low or very low interest rates well past 2016; the consequences of making any preemptive moves prior to a sustained recovery in the housing, employment, and manufacturing base would be disastrous. I suspect that rates will remain artificially low until a significant inflationary target is exceeded. With that said, the only other major concerns that arise are geopolitical; those are by definition almost impossible to predict and typically have fracking effects throughout the world (Chinese airspace, Iranian enrichment, and the rise of conflict in Africa for example.)

Those hoping to Invest Like A Farmer should absolutely expect at least a dozen or so 3-5% corrections and most likely a pair of 10% drops along the way to Dow 20,000; as mentioned previously, the market rarely follows a linear path. If you plan to buy and hold, it would serve you well to have adequate seed capital in reserve as it has proven fruitful in the past to add to quality positions when there are inevitable dips. Invest accordingly, and as always, it behooves the prudent financial farmer not to get in the way of this "compounding machine" known as the stock market. Let Mr. Market do his thing.

Wednesday, December 4, 2013

Broke Billionaires

In regards to "The Coming Global Wealth Tax," the silence heard from the IMF's proposal was in actuality a collective gasp from billionaires worldwide. As even a cursory reader of "Rich Dad, Poor Dad" knows, the way to wealth is through ownership of corporations that use advantageous tax rates on capital versus income derived from labor. A certain oracle of Omaha is first in line to popularly endorse an eponymous rule championing higher incomes taxes, but it is truly the audacious billionaire indeed who would step forward to pay a wealth tax. Consider the consequences, nearly every "non-profit" would shutter, "giving pledges" would be upended, and generations of dynastic privilege would have to find meaningful employment. If anything ever so draconian as a wealth tax were to occur, just make sure to do it retroactively, otherwise the food banks will be filled with broke billionaires.