Sunday, August 30, 2015

My Friend Benjamin

I have a good friend named Benjamin I'd like to talk to you about today. Although he's also known by Benji, since this is a serious financial blog I will address him by his given name.

Now as a financial farmer there are many good reasons to own equities; appreciation, income, and liquidity of assets immediately come to mind. We have discussed at length the concepts of putting together a financial farm, diversity of holdings, and leaving fields fallow occasionally as well. We may be entering 12-18 months of diminishing growth with little inflation, and perhaps even global deflation on some levels. That typically doesn't bode well for equities. My friend Benjamin, however, is almost always a good person to have around.

First, Benjamin is very popular. He can actually get into any club he wants to, whenever he wants to, almost anywhere in the world. That's pretty cool. To say he is "widely accepted" would be a serious understatement, Benjamin is often asked for by name. He's just always been someone people like to have around. He actually has more friends on Facebook and followers on Twitter than all the other celebrities combined. So that's cool.

Second, he gets things done! Benjamin is a man of action who is an expert at many trades, skilled in manufacturing, and dominates much of the service industry. If you need something done or want to add something to your financial farm, Benjamin is the man to call. Even in this day in age, Benjamin still is pretty much the "go-to" guy for nearly anything on Angie's List, eBay, or Wall Street. Not to mention the supermarket, gas station, or heaven forbid the hospital.

Third, Benjamin has your back; in good times and in bad times it has been a good thing to keep him close by; gold? Yeah, good luck finding a smelter at midnight! He's a heavy hitter, but only weights a gram, he's got all types of security features going on to protect you, and Benjamin respects your privacy. Don't even get me started on loyalty. The IRS respects Chuck Norris, but fears Benjamin because only he can settle all your debts, both private and public. Now that's somebody who has your back!

If you haven't had a chance to meet Benjamin, look him up and don't be shy about making him your friend too…there are just so many good qualities about him not to make Benjamin an integral part of your life.

Wednesday, August 26, 2015

Waterfall Decline

Surviving a waterfall decline requires fortitude and patience, both of which are usually in short supply after a dramatic fall from a seemingly placid market. A 2,000 point drop on the Dow Jones Industrial Average over the past 2 weeks has been brutal, there's nothing quite like seeing hard-earned money getting vaporized for seemingly no fundamental reason. The question naturally arises, now what?

Frequent readers of this blog are well aware of the Invest Like A Farmer mentality; we're buying shares (small pieces) in a business, and we prefer highly profitable, monopolistic companies with a steadily increasing left to right chart. We value boring here. By definition, most monopolies are resistant to sudden economic swings. An entire farm planted with the seeds of multiple monopolies is an even better position to be in, as it is extremely unlikely, barring an astroid impact, that all business on Earth will cease.

The major change after a waterfall decline is that a company's dividend yield is now higher since the share price has fallen and financial farmers can now pick up more shares at a lower cost basis. All things being equal, consumers will most likely continue to drink coffee, smoke cigarettes, buy smartphones, wear sneakers, take medicine, drive cars, fix the shed, user their credit cards, and see a movie. Indeed, prevailing monopolies often have the ability due to their strong balance sheets of further consolidating their respective industries.

On August 9th (check out the posting to verify!) I suggested that the dollar was king and a good 401K would be $401,000…given the fall we've seen over the past two weeks, and the past week in particular, it makes sense to review your holdings and identify promising candidates for additional seed capital.

Goldman Sachs had a great article this morning in the Wall Street Journal comparing this correction to 1998 rather than 2008 and the Bespoke Investment Group also had a very interesting piece identifying just how rare true waterfall declines are (this is the sharpest in 75 years!)

My advice remains constant; have a healthy cash reserve at all times, build a portfolio of boring monopolies (i.e. highly profitable companies that pay consistently higher dividends with strong left to right charts), and continually focus on the long-term objective of creating sustainable, generational wealth. Opportunities like this don't come along too often and it is important to seize them when they do.

Wednesday, August 19, 2015

The Growth Engine

We find ourselves in the midst of a summer swoon characterized by extreme volatility, especially with a collapse in commodity prices and pure destruction of Asian stock prices. But since we Invest Like A Farmer, a classic summer sell-off presents numerous opportunities. As Fast Eddie Felson once commented, "Do you smell that? Money!"

First, the economic growth engine has not stalled. There are many, many specific industries including tech, biotech, and entertainment which, from a historical earnings perspective, are soaring. There have been more blockbusters in real dollar terms than any time in history. A lot of that has to do with the ability to pipe data, whether in terms of content or simply global connectivity, to an increasingly larger consumption base. Smart phones are ubiquitous, and that means countless upgrade cycles with thousands of must-have capabilities imbedded in them, for better or worse, that society demands; mobile pay, tweeting, and health monitoring immediately come to mind.

Second, a natural side-effect of success is chaos. As stylistically written in the NY Times recent hatchet job done on, success breeds contempt, copycats, and often litters the field with the failure of methods, products, and competitors that didn't succeed. The real concern should be for a LACK of chaos; the status quo almost universally signals a stall.

Third, they're probably right about biotech. First Bill Miller and now multiple other financial managers are jumping on the bandwagon saying that "the next Apple" is going to be a biotech. That makes sense; a product that can be distributed globally, small size, and lasting curative effect all point to towards a solid bullish case for this sector; have the stock prices themselves overextended reason? Maybe, but a strong product cycle often pauses, consolidates, and pushes higher.

Catching a falling knife is by definition a risky move; why bother? As financial farmers and readers of this blog well know, I suggest keeping a dry keg of powder (cash) at all times and waiting for that moment(s) of capitulation, and then waiting even a bit longer until you start to visually see and feel an uptick to deploy capital. We're probably not there yet, but if history is any guide, the volatility of August and September usually yield a multitude of buying opportunities (what we call "planting cycles"in the Invest Like A Farmer business!)

And that noise you hear in the background, the quiet hum? Oh that's just the growth engine humming along...

Saturday, August 15, 2015

Tweet Nation

Once in a while I find a really cool website, and for those of you who like metrics, data, and generally cool marketing stats I think you'll love Nielsen Social. It is the fusion of television and Twitter which of course is a marketeer's dream; instant analytics on user reaction (and subsequent action.)

From an investing standpoint, this public information on Nielsen Social is really telling; it instantly gives you the ability to evaluate an audience size, its effects on motivating them to interact socially, and a higher degree of certainty in regards to what actions they took as a result.

Although I don't have additional data to back up this theory, I suspect there is a direct correlation to the efficiency of an advertising campaign linked to the content which generated the best buzz.

But like Don Draper said, advertising only works on some people. The people who watch…and Tweet about it. 

Monday, August 10, 2015

Asymmetrical Reward

Sharp movements in the stock market, to the upside or downside, often reveal asymmetrical rewards waiting to be harvested by the patient, and thoughtful, financial farmer.

By definition, an asymmetrical reward implies a significantly higher return than the initial investment; in fact a MULTIPLE return.

Typically this is associated with Las Vegas style gambling, where the odds are definitely not in the farmer's favor. The thing about the stock market, though, is that even if a stock doesn't go up today, tomorrow, or for weeks or longer, and it is still a viable company making money on money, well then what is occurring is P/E compression (price-to-earnings). The value stacks up, but the price hasn't moved.

Sooner or later something has to give. As we witnessed in 2008/2009 many companies went under, especially in the financial sector. Yet, as many companies that traded down to $1 per share offered true asymmetrical rewards; many of those dogs are now darlings trading well, well above their $1 capitulation points.

Given the recent sell-off we've witnessed, I have a couple ideas on the radar which I believe have reached capitulation points yet are still earning millions upon millions of dollars while laying on the side of the investment road left for dead. 

At a certain point, shares act like options; i.e. there is a known downside to a share price, $0. While the upside is truly unbounded. The difference becomes a share's expiration date is theoretically infinite and as a prudent financial farmer you can pick up what others consider manure to fertilize your growing financial farm.

Look closely, those stocks are out there right now.

Sunday, August 9, 2015

$401,000…the new 401K

Cash is king, again. Although it might not seem possible, cash has been one of the best performing assets in 2015. Forget the paltry, negligible interest rate return. I'm talking buying power!

Walter White might have had it right amassing a massive stash of cash, indeed, cash actually might be the new 401K

Portable, valuable, and with taxes already paid a pile of cash offer opportunities for purchasing distressed assets for a song.

Consider the killings made in 2008 and 2009 when weathered farmers came down from the hills with their crumpled bags of cash and picked up stocks, bonds, and even more farmland for….cash.

With the Fed poised to begin raising rates, most likely one of many in the coming months, the value of the dollar should subsequently increase. 

Friday, August 7, 2015

Earnings Beat…Stock Sell-Off

Nothing like the sound of the Fed starting up its interest rate machine to destroy the gains in the stock market…as the 2nd quarter of earnings releases are announced, and approximately 90% BEATING estimates, one would surmise that this market would have taken off. Heck, historically years ending in 5 which are the last year of a lame duck presidency are the BEST…but alas it is not to be the case.

The flu started with the infection of Google which completely destroyed earnings (hey, it's great to be a total and utter monopoly and control the fate of the internet…that pays handsomely) to the upside. After crushing earnings and spiking some $60B in market cap during a single day, Wall Street lined up like a pack of hyenas for the next killing…Apple. That didn't turn out too well; over the past 2 weeks the largest public company on Earth gave up nearly 20% of its market cap. Facebook and Twitter would save them, right? Not to be. Billions more lost the following trading days. Well surely blue chips like Disney wouldn't disappoint? Scratch that; because beating is no longer beating if the current trading cartels can justify after a call (in hindsight naturally) what was wrong in a beat. We're seeing any excuse to sell. Case in point, start-up Fitbit nearly quadrupled earnings yet is off some 25% since their announcement. Benjamin Graham said it well, "…in the short term the stock market is a voting machine." 

The list goes on and on, but the trend has taken place; biotech broke and the majority of tech got whacked too…the blue chips followed and underpinning all of this is a compete collapse in commodities.

Barron's had a great piece on commodities versus GDP growth…it wasn't pretty. If investors are to put stock in their article lower and lower commodity prices signal the end of robust growth.

In short order the most powerful (and unelected) person in the world, Fed Chair Janet Yellen will almost certainly raise the Fed funds rate.  The data and rhetoric has been too strong not to make a move now.

Recent results we've seen globally are, unfortunately, I believe, a precursor of what is going to happen over the coming months as global growth stalls, the Fed raises rates, and investors cash in significant gains accumulated since the last recession in the hopes of buying even lower. And lower. And lower still.

Probably a better idea to wait until there is not only clear inflation, but several sustained quarters of it before raising the Fed funds rate; cutting the fuel and pulling up the stick isn't a good combination.