Tuesday, June 28, 2022

Tacking

 Tacking


Tacking allows a sailboat to indirectly sail to a desired waypoint against the wind; investors should take note of this timeless method of sailing. In many ways investors are also often fighting a wind on the way to their waypoint, but in their case the "wind" is a confluence of macro economic events and that waypoint is a financial goal(s).

Although no sailboat can sail against the wind, almost every sailor can tack in a zig zag pattern to reach their waypoint. The Absolute Alpha strategy was developed with this goal in mind, to harness ANY wind to reach a waypoint. Tacking of course is highly dependent on positioning the sails, but it is also a self-correcting mechanical maneuver which will quickly indicate if you're on a bad wind.

Investor need to consider not only their financial waypoint(s), but also the method in which they arrive. It is often said that life is "about the journey, not the destination." While that may largely be true, a destination of effervescent passive cash flow sounds quite lovely indeed...and the journey is the means of reaching that destination.

As previously posted in Sneaker Waves, it is extremely difficult to get to get where you want in a reasonable amount of time without having to deploy the lifeboats occasionally being long-only. Investors need to seriously consider an approach that is all-weather capable of tacking.

As always, it is important to look before you leap. What are the downsides to a tacking strategy? I believe the primary risk is signal risk. What signals will you use? How accurate are they? Are they dependable and repeatable? The secondary risk is the efficiency of using a strategy that may or may not trade frequently.

It has been knocked into our collective consciousness that frequent trading is a recipe for disaster. That is actually debatable...as Ray Dalio (amongst many others) is quoted as saying "Timing is everything." If the signals are good and the tacks made accordingly, then trading more is actually far, far more advantageous. 

Consider dear readers the investor who tacked successfully this year. Would she be down on par with the S&P 500 some 20%? I think not. Assuming successful signal utilization, she would have been short for most of the year and also most likely tacking into several Bull spikes.

Tacking requires accurate signals and trust in the proverbial "wind" that is pushing all of our sailboats around...a waypoint is nearly impossible to reach fighting against the wind. Since we're on the water today, my friend Bruce Lee had an excellent analogy about water that is applicable I think to investing as well. It highlights the importance of harnessing signals and changing a position accordingly. If your sailboat needs help tacking, consider throwing us a line.

"Empty your mind, be formless, shapeless like water
put water into a cup, it becomes the cup;
you put water into a bottle, it becomes the bottle;
you put it in a teapot, it becomes the teapot.
Now water can flow or it can crash. 
Be water my friend."




Monday, June 27, 2022

Demand Shock

 Demand Shock


Has the supply of oil suddenly increased? Has a new pipeline from Canada been approved? Has the lease utility rate spiked? No dear reader, none of these things have happened...yet the price of oil has markedly declined in the past several weeks from $130/barrel to a "paltry" $107 today. What gives?

When inflationary prices are out of control Adam Smith's old "Supply & Demand" really comes to light. The supply of oil hasn't increased, but demand sure has experienced what is termed a negative demand shock. Consumers aren't stupid, and the number one rule of game theory is that they act in their own self interest. Hence when oil spiked, consumers began shifting their demand.

This author suspects we are in the midst of a massive negative demand shock right now. Typically in a negative demand shock prices will fall as demand shifts away from the commodity being purchased and/or the quantity purchased also falls. In California for example, many gas stations now limit the amount of gas you can purchase.

As the chart above helps to illustrate, as the demand shock takes hold output falls, employment falls, and prices eventually fall. The question arises, however, how inelastic is the demand for oil? Or in other words, how much can demand truly fall for oil? This author has long suspected it will lead the economy into a recession.

Typically the first things being cut are discretionary items, all of which are touched in some way by the price of oil. Moving along Maslow's Hierarchy of Needs pyramid, the base is made of food and shelter. Nearly everything else is expendable to secure those two fundamental blocks. People don't have to go on vacation. People don't have to drive to the office all the time now. The boat (and its slip) can be let go.

Spending will be reallocated according to priorities in life. Consumers are like water, they seek maximum utility and flow accordingly. Demand started shifting even before the Fed acted to stifle it by raising interest rates. The fear of course is combined with a demand shock, the Fed's policy will tip the economy into a recession. With oil prices already moderating, and the Fed promising to raise rates until they "break inflation," expect a hard landing that skids into a recession. If you need help with your portfolio, feel free to contact us today.




Tuesday, June 21, 2022

Sneaker Waves

 Sneaker Waves


Sneaker waves. Sleeper waves. Rogue waves. Long-only is a dangerous proposition, especially when destructive financial waves roll in every couple years and destroy everyone's beach picnic. There has to be a better approach to avoid these wipeouts.

Consider, every approximately 54 months a -25% wave rolls through...and as a reader can imagine the LONGER you have been investing in the market, the LARGER this wave's impact is on your net worth. The word "catastrophic" is apt, especially if you take a sneaker wave on the cusp of retirement. Both your net worth, and potentially more damaging, your cash flow gets whacked. What is a financial farmer to do?

Consider what the Dutch and other low-plained residents near the ocean do: set-up early warning systems, act when triggered, and have ample ability to handle the inevitable overflow damage a rogue wave can cause. Early alert systems in your portfolio can be similar to Absolute Alpha, or trailing stops, or some type of macro trading which incorporates event-based triggers.

From one of my favorite movies World War Z: "First to know, first to act." There is no escaping the Pareto Principle, namely that these sneaker waves are out there and on average hit every couple years with devastating impact. Investors have several options. Do nothing and watch a long-only portfolio be destroyed like a sand castle. Use an early warning system and move your sand castle. Third, pick up your surfboard and paddle out. If you're looking for a port in the storm, feel free to contact us.


Thursday, June 16, 2022

Investment Code

 Investment Code


A man needs a code. Fellow financial farmers we are in turbulent investment times, and it is good to rehash the importance of having an investment code. What is your code? Is it...ahem...codified? Just like an NFL coach rolling into town to take on the opposing team, investors need a game plan of how they plan to invest, what catalysts spur action, what signals indicate distress, and what their exit strategy is...the old axiom of "if it can be measured it can be managed" rings true.

Consider my Absolute Alpha strategy for example. The goal is straightforward: A positive yearly return regardless of market conditions. How will the goal be accomplished? By utilizing momentum vectors. What is the benchmark? S&P 500. How is it implemented? A standard brokerage account. How are positions added or reduced? Direct buys/sells. This is just one simple example of a codified approach.

The major goal of having an investment code is the desire to manage outcomes within a certain time horizon, risk tolerance, and achieve certain financial results. A process is only as good as the data it is fed and the constructs of its creation. Having an investment code also solidifies the standard deviations which may occur...just how volatile is your process? What does the data say? How do you plan to react to the data? 

Time and information may be the most valuable commodities of all, and having an investment code helps financial farmers glean what is and what may be...we already have a pretty good idea of what was.

June 16th for many Americans is a seminal day. It is the calendar day when you are finally working for yourself after bearing the yoke of excessive taxation and regulation for over half the year. It is a day of freedom. It is the day the Founders had once set to January 1st...obviously there has been some slippage! Nonetheless if you don't have an investment code, create one today. In many ways it will help define your financial success in the future. A man needs a code. If you need help with yours, contact us.

Wednesday, June 15, 2022

Wite-Out

 Wite-Out


Today millions of American citizens will dutifully write checks to the IRS, State, and Local governments for billions of their hard-earned dollars. But this quarter their "fair share" will be lower, low enough to warrant a bottle of Wite-Out on the quarterly vouchers. Income destruction has been wrought upon you by politicians who know only a W-2 and an endless gravy train. Free Healthcare. Fat Pensions. Largess.

On this hallowed day, it is worthwhile to recount the introduction to our Declaration of Independence:

"When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation."

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed. That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursing invariably the same Object evinces a design to reduct them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over the States."

Do you ever feel like you're getting the taxation without the representation? Did you instruct your Congressman to abolish our borders? Did you tell the same "leader" that you want to rely on foreign oil and supply chains for your well-being? Is your "fair share" tossed atop government coffers overflowing with taxpayer remittences...waiting to be squandered on programs and services that benefit only the denizens of corruption? How is your "pursuit of Happiness" going these days? Feel free to contact us if you want to craft a strategy for more Happiness.

Tuesday, June 14, 2022

More Cowbell

 More Cowbell


Investors often wonder when to add to existing positions. To a large extent the answer to this question depends on their investment philosophy, time horizon, and risk tolerance. Simply put, it depends. 

Active trading is based on the theory that the market is NOT perfectly priced and that there is an opportunity for an investor to purchase something that is mispriced; maybe it will be raising a dividend, maybe new management is taking over, there are a host of potential reasons of "why" that an investor evaluates. At its heart, a trade is in essence a best guess based on available information.

To the quant investor the answer as to when to add more cowbell is simply a function of the charts. What does the chart say? Where is the momentum pointing? Does the data indicate that the trend is strong? Growing? Subsiding? These factors guid the path of a quant trader.

Much of the cowbell quandary is based on confidence in the underlying investment. What is the truth? And in this matter financial farmers need to evaluate their investment thesis. Otherwise positions are increased simply on emotion ("This stock can't go any lower!" or "I'm gonna double down on this position!") What is your thesis?

There are a host of reasons to add more cowbell, but an investor should have a code. A theory. A blueprint. Some methodology that can be captured, implemented, and evaluated. In this manor the process can help yield maximum success. If you can measure it, you can manage it. If you want more cowbell, contact us.


Monday, June 13, 2022

Tasty Tidbits

 Tasty Tidbits


Edwin Lefevre chronicles the life of legendary stock trader Jesse Livermore in the masterpiece "Reminiscences of a Stock Operator." It is a timeless read for Wall Street aficionados, students of the stock market, and even those with just a cursory interest in finance. If you haven't read it yet, put this book on the top of your summer reading list. Below are some of my favorite tasty tidbits. The wisdom and knowledge gleaned from this book are priceless, but Amazon will sell you a copy for about ten bucks!

1) "It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market, and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation."

2) "After spending many years on Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who where right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."

3) "Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

4) "There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"

5) "Speculation in stocks will never disappear. It isn't desirable that it should. It cannot be checked by warnings as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope. But apart from what one might call his natural foes, a speculator in stocks has to contend with certain practices or abuses that are indefensible morally as well as commercially."


Many readers will notice distinct similarities in Livermore's trading philosophy utilizing momentum signals and the Absolute Alpha strategy launched on June 6th.  Absolute Alpha acted on the preponderance of Bearish market signals at launch and has steadily added more cowbell over the ensuing week, including today. Bearish signals remain constant and intact. Livermore would probably LOVE trading in our era.

Investors today have many advantages that Livermore didn't have in his day; nearly real-time quotes and execution with almost universal free trading, nearly limitless data sources, and even the ability to limit risk via index trading rather than speculation in individual stocks or commodities. So although the game may have changed, most (all?) of the behavioral characteristics remain the same; fear & hope drive the investing world. If you'd like more Tasty Tidbits, contact us.


Sunday, June 12, 2022

Suffering Fools

 Suffering Fools


Dearest fellow Financial Farmers, why do we suffer fools? Investors for too long have been held hostage to economic imbeciles. Why are we gluttons for punishment? If every piece of economic data indicates that the market is POOP, why NOT short it? 

Frequent readers of this amazing blog know that this author is a big fan of "Reminiscences of a Stock Operator" by Edwin Lefevre detailing the life of Jesse Livermore. It reads like an acquired taste, in that fine champagne is an acquired taste. I consider it Gospel for trading. With that said, one of my favorite lines in the book details Livermore's thoughts on selling: "If a stock is good enough to sell, it is good enough to sell short."

Here at ILAF we have an open mind, but it closes like a steel trap when we lose money! The past 7 months have been a painful reminder of what happens when "leadership" runs amok and there is no strategy in place. Chaos ensues. Why as an investor should you be punished for this? Well because you believe in long-term growth and that the economy will "eventually recover," right? 

Recovery often takes longer than we realize, with the Bear Markets often lasting years. In times of listless trading, near-term assets are whipsawed back and forth until investors are green with nausea, not envy. So with that said, there are several options for investors who have little to no confidence in the current market.

First, there is always "do nothing." This involves keeping your current portfolio as is. You're indifferent to near-term volatility and think in decades. Second, there is Dollar Cost Average your existing portfolio during the sell-off with the hope of increasing your positions. Over long periods of time this has generally worked. Third, there is the safety run idea of going all cash until the market subsides and there is some light at the end of the tunnel. The average bear market lasts about 300 days. So cozy up to a umbrella cocktail for about 10 months. A fourth option to consider would be profiting from the downturn. There are several ways to accomplish this, some act more as buffers while others seek Absolute Alpha.

Consider your time horizon and goals, but also your risk tolerance. As Zero Hedge aptly says, "In the long run we're all dead." So for some doing nothing works, others prefer a cocktail on the beach, and a few investors will try to profit from chaos. Socrates put it best: "Know thyself." And contact us.

Monday, June 6, 2022

Absolute Alpha

Absolute Alpha


What better day to launch a new investment strategy than D-Day? 78 years ago today, America launched the largest offensive the world has ever seen to help defeat Nazi Germany and the Axis powers. Men dropped from the sky, motored on boats, and stormed the beachheads of Normandy. By sunset, blood-red tides lapped the sands...but we were victorious.

D-Day marked the beginning of the end of World War II. Nearly every freedom we enjoy today was defended and secured that day through enormous sacrifice. Much of this "paid-up" capital came at the cost of lives unlived. Thousands that day, and millions of progeny this day are not with us because of past battles. And almost every meaningful battle in history had at its core the fight for truth: What is right? What is wrong? What is the truth?

What better way to pay this sacrifice forward than a search for the truth? One of the greatest challenges investors face is trust. Indeed, a hallmark of our era is the collapse in public trust in both government and various "experts" of all types. Who do you believe? What are their qualifications? What is their track record? These questions beget another: Why should we care?

Traditionally, stock returns are predicted upon using macroeconomic variables, financial ratios, and to a large extent, data provided by corporations themselves. The summation of these forces has formed the bedrock of the financial industry throughout the world. CNBC, Bloomberg, Wall Street Journal, etc., etc. 

The list of established mediums of "trust" is long. Absolute Alpha strives to relieve investors of dependence on traditional stock market "trust" such as financial commentary, corporate messaging, or even Government reassurances. These data may or may not be accurate. Absolute Alpha is interested in sustained market movements, regardless of direction. Commentary, forecasting, and assurances be damned, Absolute Alpha seeks the truth!

The Absolute Alpha trading goal is simple: Seek a positive yearly return (absolute alpha), regardless of market conditions. Consider the chart below showing the performance of the S&P 500 from Jan '22 until May '22:


From a pure date-to-date perspective the S&P 500 was down 13.85%. Yet look closer dear readers and you will see something else entirely. Buried in this chart is an abundance of "truth." Rather than struggling with emotional turmoil experienced on a regular basis worried about whether XYZ will beat earnings, or how many units were sold, or if FDA approval was granted, investors can potentially benefit from a broad market approach focused solely on momentum vectors.

As previously discussed, Absolute Alpha's goal is to consistently produce alpha, regardless of market conditions. But how? By being on the right side of longer-term momentum vectors. In the chart above there are MULTIPLE (most likely infinite) vectors during this 5-month snapshot. The trick is capturing as many sustained momentum vectors as possible, while limiting downside losses by being late to a trade.

If we were to "cut" this chart into various date ranges there would be both negative and positive momentum vectors whose cumulative absolute total would far exceed the negative 13.85% value if timed correctly. Why not capture alpha on BOTH the upside and downside? Simply put, when the wind changes, a sailboat tacks. Investors need to do the same. Therein lies the truth. Interested in the Absolute Alpha strategy? Contact us.



 

Monday, May 30, 2022

Lives Unlived

 Lives Unlived


Look to your right and look to your left, and all around you too...those are the invisible lives unlived. On this Memorial Day pause to remember the so many lives lost in wars. Young lives unlived, so full of dreams and potential. A hundred Jonas Salks. A thousand Neil Armstrongs. Millions of fathers, mothers, son, daughters. Entire generations never to be lived. That is the true cost of war.


Sunday, May 29, 2022

Market Timing

 Market Timing


Conventional wisdom suggests that market timing is impossible, because a high or low is only made in retrospect...ie timing is only in the realm of Monday morning quarterbacks. "Impossible" may be too harsh a word though as market timing, like rocket science, might just be really, really challenging.

Literally billions of dollars, yen, euros, and every other currency is spent each year trying to forecast economic outcomes before they happen; ie how much will the Fed raise rates? What will consumer sentiment come in at? What's the unemployment number? etc., etc. And each of these metrics can have serious impacts on the global markets.

To accurately predict a market outcome one would need almost God-like knowledge of both the dataset and corresponding behavioral reaction. And that assumes the behavior reaction is rational. Often it isn't. And that's what makes successful market timing the Holy Grail of investing. 

Imagine be long (owning) stocks when the market is on an uptrend, and then quick as a cat being short (betting against) stocks when the market is on a down treat. It is financial nirvana for an investor capable of precisely timing the market. Consider the title chart above.

This example chart illustrates the hypothetical possibility of precisely timing the market from Apr 2007 through Mar 2012. The investor who perfectly timed the market would have pocketed a 120% return while the poor Buy-and Holder would have suffered a 10% loss.*

*There are a couple caveats to keep in mind dear readers before selling the farm and pawning the family heirlooms to become signal traders. First, you need perfect (or extremely accurate signals.) Signal source is paramount to success. Junk data will produce...well...the part of the farm that stinks. There's no way around it; junk in, junk out.

Second, there are signifiant tax implications to taking down short-term trades. So although the data may be good, and you may act on it, that hypothetical 120% return might be reduced by some 40% (or more!) Third, the "Wash Sale Rule" is always looking to put the hurt on you. Familiarized yourself with it immediately.

With that said, signal trading might be a compelling strategy for a disciplined trader(s) willing to address the above concerns.


Saturday, May 28, 2022

Non-Linear

 Non-Linear


A 40-year chart of the DJIA obscures an almost infinite number of non-linear events. Judged over time by the eye, stock market volatility looks benign and performance linear. It looks resoundingly positive, and it is, but zooming in on almost any short period reveals intense periods of volatility. How can this be?

Statistically speaking, the long-term stock market performance may be the finest example of linear regression next to species genetics. In many ways there are similar. Multiple non-linear events occurring simultaneously over longer periods of time result in many economic failures, and also several sustaining successes. Consider the private equity world.

In the private equity world (PE for the pros) for every Apple, Facebook, Google, Uber, Amazon, success story there are probably 1,000,000X or perhaps even 1,000,000,000X failures to reach fruition. Put another way, investing works best when you own the survivors. A great example is the S&P 500 Index. 

The companies in an S&P 500 Index are not static; ie losers drop out and off the face of the Earth, while winners survive and populate the index. By default, investors are buying a basket of winners. To be a member of the S&P 500 Index, at this very snapshot moment, you must be a non-linear survivor. The failures by default are members of the S&P 1T failure index...that has a value of zero.

The Navy Seals have many excellent quips, one of my favorites is "It pays to be a winner." You got that right! The all-weather mentality of being in the stock market through thick and thin is a tough one to adhere to when volatility spikes and misery ensues. But being a winner means surviving and thriving, just like a member of the S&P 500.  

By default the longer an investor is in the stock market the greater her fortune should be (as evidenced by the 40-year chart above.)  The danger then becomes one of timing...more to come on that next post. 


Tuesday, May 10, 2022

Wall Street Perspective

 Wall Street Perspective


As Financial Farmers we must be wary of svengalis constantly whispering doom and gloom, because it is vital to have a long-term Wall Street perspective and remember all finance is behavioral finance.

First, why is it vital to have a long-term Wall Street perspective? Over a long enough time period, as Zero Hedge has popularly quipped, we're all dead. BUT, a counterpoint to this morbid fact, is that innovation over time has propelled the economy and society to greater productivity. And the stock market has been along for the ride.

The second reason to question a svengali is that behavioral finance drives a LOT (most?) of the market's near-term volatility, trading, and returns. Sustained movements are the result of earnings, growth, innovation and major societal changes.

At this point in the economic cycle (most likely we're either in or on the cusp of a recession), the corporate picture isn't exactly bright. We've witnessed massive selloffs in tech companies and the only winners seem to be "boring" consumer staples anchored by a dividend. A lot of money has flowed out of the market into cash. Or real estate. So the bloom is off the rose for the time being.

For those entering the market, opportunity abounds. With multiple companies well off their highs and solidly into bear market territory. Many have been completely vaporized and sit some 60%, 70%, 80% or more off of their  highs from just a couple months ago. For those who have been long-term holders, the past six months has been horrific, watching gains for the past two years getting destroyed. Even "blue chip" companies haven't been spared. Carnage is everywhere.

What's an investor to do? Stay focused on what matters; earnings, branding, growth, innovation, integrity, and cash flow. Have emergency cash on the sidelines. Look for opportunities and be patient. The last bit is perhaps the hardest. Many older investors in the stock market don't think they'll live to see a Bull Market again. But it is hard to believe that this great country, which has weathered so much in the past, could be permanently hobbled by inept leadership today for very long. So we're in a waiting game now.

Similar to economic cycles, the political pendulum swings and very few Presidents or political parties survive recessions intact. New blood focused on innovation, growth, and stability rises to the moment. Remember dear readers, the business of America is business. In the meantime, a fallow field presents many, many opportunities for a farmer with a keen eye.


Monday, May 2, 2022

Biden Bonds

 Biden Bonds


It was the best of times, it was the worst of times. Record low unemployment. Free healthcare for all. Open borders. Employment unionization. Limited law enforcement. And 9.62% I Bonds! Who could ask for more?

As CNBC proudly touts, the Series I Bonds available all this month are "virtually risk-free." Hmmm...let's ponder that fellow financial farmers. Why are the Series I Bonds pricing at 9.62% in the first place? Wouldn't that imply raging inflation? Why yes dear reader it would. And what is the I Bond's inflation component based on? Ahhh...CPI. Now what if the average American doesn't consume tons of soybeans or compute data in terabytes, but actually EATS and DRIVES on a daily basis? Might that skew CPI even higher?

To the shill writers at CNBC who are apparently fully endorsed by a government not-so-quite-on-the-level, obviously there is tremendous risk in the sense that you potentially are LOSING purchasing power due to inflation. How much? This author estimates Americans are losing approximately 2% PER MONTH (assuming you eat food and drive using a..gasp...fossil fuel car!)

Let me slide my Nobel Prize in Economics aside and grab my dusty calculator behind it....OK so 2% per month is like...hmm...24% annually! Wow. Maybe that 9.62% isn't such a good deal after all? Where is all that money going? Hint: Free ain't cheap.

One of my heroes, and an American statesman par excellence, Art Laffer wrote this AM in the WSJ: "The current 8.5% inflation rate is the highest in 40 years. But few policy makers or Federal Reserve governors seem to have learned the lessons from the last bout of surging prices--how it started, the economic wreckage it caused, and how to get out of it. We wince when we hear investment gurus arguing that because inflation often means rising consumer demand, it is good for the economy and stock market."

Quite the opposite is true. Both investors and workers care about REAL returns, ie stripping out inflation and seeing nominal growth...when purchasing power collapses (think high gas prices, high healthcare costs if you pay for healthcare, high education costs, high housing costs, high food costs, etc. etc.) larceny at a grand scale is occurring via inflation. Hence the worst of times.

So as investors back up the truck on Biden Bonds, consider for a moment WHY Series I Bonds are yielding 9.62% and pray that the limit isn't raised from $10K per person to $100K. It would mean the utter collapse of capitalism and the government would become all. Because, really why take the risk of getting out of bed in the morning if you can get a juicy 9.62% from Uncle Joe?


Monday, April 25, 2022

Let Freedom Tweet!

Let Freedom Tweet!


What an amazing day in America, as Elon Musk purchased Twitter and vowed to help restore free speech in the United States. 

There are several truly shocking angles to this story, one of which of course is that it took a South African to champion the ideal of democracy in America! Another is that our elected leadership corralled and silenced literally millions of citizens using big tech as their Gestapo.

It took one billionaire with cajones to do what is morally right. Bravo Elon, bravo!

 

Sunday, April 24, 2022

DCA Primetime

 DCA Primetime



Imagine investing for a lifetime. Not for a moment, not just early in your career, but rather for a lifetime. Consistent, disciplined buys made over decades. Many long-term investors like the curmudgeon Warren Buffett swear by it. But why?

The stock market will generally go up over time. In fact, something like 53% time on a daily basis the Dow Jones Industrial Average ends the day in the green. Granted, that's only slightly better than a coin flip, but that small spread adds up significantly over time. Wall Street is pretty much the opposite of a casino actually; the longer, more regularly you invest in the stock market the higher percentage chance you have of winning. 

Dollar Cost Averaging (DCA) is an investment strategy wherein an investor buys stocks, or an index even, on a regular basis with the same dollar amount over an extended period of time, ideally forever.  This results in purchasing more shares of an index for example when the price is LOW and fewer shares when the price is HIGH.

In a listless Bear Market with violent swings in daily prices with no discernible end in sight, this strategy makes plenty of sense. When no man, or even computer, can call a bottom buying in fixed intervals offers an investor the ability to circle around a low with higher conviction rather than investing a massive lump sum at a singular point. Think of it this way: Would you rather have 50 small darts to hit the bullseye of a moving target or one big dart?

The greatest risk of the DCA strategy is when investors abandon it, either by cashing out or no longer making periodic investments. Once that occurs they are fully at the whim of the market's volatility, which as we have painfully learned again this year can whipsaw violently, leaving investors who were punch drunk only months ago on the euphoria of a winning cycle easily down double digits in a short, brutal period of time.


Monday, April 18, 2022

Civic Duty

 Civic Duty


On this most hallowed day of Civic Duty, did you get a call at the crack of dawn from your Congressman profusely thanking you for paying your "fair share?" No? Hmmm. I'm getting the distinct feeling that we (taxpayers) are getting the taxation without the representation. This brings me to a serious and singular question for you my dear readers: Would you pay income taxes if there was no threat to your personal liberty?

Reimagine a Republic where income taxes are voluntary. Citizens pay of their own accord, with no threat to personal liberty. What would happen? First, from an administrative standpoint the IRS would largely cease to exist. How much does is cost to actually run the IRS? As usual, nobody really knows. Estimates are in the $10-20B range or 35 cents per $100 collected. But that seems woefully low. I doubt the IRS is more efficient than PayPal's piggish 3% vig on every transition. Regardless, the vast majority of this cost goes away without enforcement.

A cursory knowledge of the Laffer Curve (which differs significantly from the current Gaffer Curve) reveals that productivity will explode with less taxation. Keep in mind, a large volume of Americans will still pay income taxes. Probably on the order of at least 40% based on their personal desire to support true civic utility, ie the proverbial collective defense, infrastructure, and benefits that this country has established. But the net effect of voluntary taxation will be the honing of budgets, collapse in corruption, and laser accountability of public funds because "representatives" will now be truly beholden to citizens, rather than corporations.

"It's dangerous to be an honest man," quips Michael Corleone in Godfather III. When there is rampant corruption and no trust, personal liberty needs to be threatened to pay taxes, otherwise no rational person would pay taxes. Representatives, do your duty to your true constituents or resign.

Let's reimagine this Civic Duty as one that aligns with our highest ideals as a nation. Participation is voluntary. Personal liberty is no longer threatened. Civic Duty becomes one of pride, not fear or indignation, and check images proudly sent to the IRS circulate like viral Twitter cat videos.


Friday, April 15, 2022

Half Pay All

 Half Pay All


To the half of all eligible taxpayers who pay for it all, I salute you! Sadly, not one of you will even get a cursory phone call from your elected "representative" on this hallowed day...regardless of how much of your income earned with blood, sweat, and tears is sent to the U.S. Treasury to be squandered by our politicians. And that fellow financial farmers is a true travesty...taxation without representation!

In a Republic everyone should have skin in the game, and today we have serious leakage at both the top and bottom...corporations are skirting income taxes by nefarious means protected by the politicians true constituents (corporations) and at the bottom it is is a free-for-all (literally and figuratively) as this country no longer has borders. The net result of both of these scenarios is the value of citizenship is diluted.

Diluted citizenship ultimately breaks the back of a Republic because it cannot function anymore without a rule of law. Oscar Wilde once quipped that taxation is the price of a civilized society. And he was right. But taxation cannot be increasingly borne by the middle class. The truly wealthy have achieved escape velocity. They have the ability to regulate income flow, or even employ the classic "Buy, Borrow, Die" strategy of owning assets, borrowing from them, and then when they die passing those assets to heirs who can then employ the same strategy. Effectively it is possible for multiple generations to not only to never pay income taxes, but to also pass those very assets to their heirs for generations to come.

For those wanting a better life and coming to America the pastures seem green indeed. Simply walk across the southern border into Texas and not only will you get a free iPhone and airfare to a destination of your choice, but more importantly, access to a myriad of services. But all is not what it seems. The America of today without laws, borders, or political leadership is simply replenishing the working class poor for the next generation of serfdom. Just like citizenship, "free" dilutes the value of goods and services to nothing. Free schools. Free housing. Free healthcare. Look at what "free" buys and it looks a lot like horse manure.

We know HOW this is happening. But WHY? Click the chart below and it should reveal some interesting statistics:


As of 2022, approximately 150,000,000 taxpayers filed returns. The United States has a population of about 330,000,000. So 45% of the total population filed a return. Of that 45%, only about 50% paid any taxes at all. So 50% of 45% comes to about 75M people. That essentially is the sum total of the remaining Middle Class. It effectively keeps the entire country running. Dear readers, let's call it what it is.  These 75M people pay "protection money" not to be ensnared in legal troubles, lose their passports, or go to jail. Who would actually pay taxes voluntarily without threats to their personal liberty? Civic duty my a$$.

Yet when we look for holes in the system, corporate taxation is oddly missing at levels commensurate with their respective profitability. And that's the rub. Big corporate earners now valued in the hundreds of billions of dollars and a handful in the trillions are largely avoiding taxation. 

Corporate scofflaws own the elected representatives in this country. How else could they pay only $360B in taxes (as estimated by the CBO in 2021), yet have a collective valuation of approximately $53T? A simple "back of the envelop" measurement indicates that some 99.4% of their valuation is retained on corporate balance sheets rather than in the US Treasury every year. Put another way, literally TRILLIONS are missing from the Republic's coffers. 

What's good for the goose should be good for the gander. The problem is the 16th Amendment permanently handicapped the human citizen, and empowered the corporation. Representatives listen and act for those who pay them. Today that is largely the corporation. Granted they get a "little" pocket cash in terms of salary and pension and healthcare from citizens, but the corporations keep them in power. The gravy train will continue until there is a significant legal schism that once again empowers people over corporations.

 




Monday, April 11, 2022

Splitsville

 Splitsville

How does a stock split typically affect stock performance? It depends. In principle, a stock split does not add any intrinsic value. A stock split simply increases the number of existing shares while simultaneously reducing the corresponding price point. So on the surface a stock split is a neutral event at best. So why would a company bother?

There are several important reasons to consider doing a stock split, some are purely aesthetic while others have significant value. First, from an aesthetic standpoint who doesn't like having MORE of something? Shareholders generally like the idea of having MORE shares. High flying stock prices make significant share volume purchases pricey, so companies feel that increasing the number of shares via a split will attract a larger base of potential investors (similar to the pricing of IPOs...rarely, if ever, do you see an IPO issue in the hundred dollar plus column; issuers want to generate enthusiasm for a deal by pricing MANY shares in the teens rather then far few shares in the hundreds of dollars.)

A second aesthetic reason for splitting a stock is to smooth the chart. Stocks that have literally gone through the roof have a parabolic chart that often suspiciously looks like it will collapse. Hence, we see splits to help smooth this 3, 5, 10-year chart to something approximating a ramp rather than a rocket ship launch.

The third aesthetic reason, but also a practical one, is the ability with greater volume of stock to better hedge positions via Covered Calls or Puts. Contracts are traded in 100 share units, thus for several big tech companies an investor would have to own several hundred thousand dollars worth of the stock just to have enough shares for a single options contract.

Aesthetic reasons aside, several large tech companies have announced share splits that will effectively transform their shares from several thousand dollars each into several hundred dollars each. Why does this matter? Potential inclusion into the Dow Jones Industrial Average hinges on share price rather than market cap. Currently three large tech companies come to mind that are NOT included in the DJIA. Significant splits make the eligible.

In summary, stocks split for many reasons. It has often been a litmus test of a company's success as to whether they do split or not. One of my favorite websites is: www.stocksplithistory.com

Here a financial farmer can input a ticker symbol and get the historical stock split history of a company, resulting shares, and it also provides recent 10-year data of the hypothetical $10K invested in a company. Great financial tool!

Friday, April 1, 2022

April's Fool

April's Fool


Citizens must always be vigilant against their governments, because tyranny never sleeps. Consider legislation tucked into the "American Rescue Plan Act of 2021" which will generate a 1099-K on a cumulative total of $600 in annual transactions....that's right $600. Over a year.

The IRS (and whatever political party that controls them) will now be collecting ALL transactions done with a credit or debit card or such peer-to-peer services such as Venmo or PayPal. Readers of this blog should be concerned, very concerned. 

As the Wall Street Journal reports, "...millions of taxpayers who have never seen a Form 1099-K will be receiving them. While no one knows how many Americans will be getting these forms, tax lobbyists estimate the number at as high as 20 million."

20 million? Ha! Assume nearly EVERY Venmo, PayPal, eBay, Etsy, Facebook, and Amazon seller will be getting a 1099-K. This essentially provides the Government with complete financial surveillance on every American, destroys the fundamental rights of privacy, and moves us closer to a 1984 scenario. We're getting to the point where citizens can't even THINK too loudly.

How did this happen? Thank your "representative" in Congress and the former Senior Senator from Delaware. Joe Biden most assuredly did this. But the true betrayal began as this blog has long lamented even earlier, by John Roberts acquiescence to the Wayfair Decision

In a landmark 5-4 decision, the Supreme Court ruled that essentially all internet transactions were taxable. This author believes that this decision is the most consequential judicial ruling in a generation, yet it has been quietly (except for the regulators) swept under the rug. Make no mistake, innovation, commerce, nigh the entire American way of life was impacted.

It is hard to believe prior to 1913 there was no income tax. Ironically, for some 57% of Americans in 2021 there STILL was no income tax! Substantial tax reform is almost impossible given that the majority of Americans pay no income tax, while the "meat & potatoes" of society (ie the dying Middle Class) pays nearly all of it.

As financial farmers this blog typically suggests voting for change. But that is a joke. The lobbyists control Washington, your local Congressman(en) is bought & paid for, and even if you do vote, what is the purpose? The non-payers far outnumber the payers.

With the passage of the freedom-torching "American Rescue Plan Act of 2021" financial farmers need to go back to the old ways of doing business.  Yes I'm talking cash. 

 

Thursday, March 17, 2022

Happy St. Patrick's Day

 Happy St. Patrick's Day


Happy St. Patrick's Day financial farmers! There are few cultures so naturally blessed with song, word, and dance than the Irish. The best investments are those that we can enjoy. If you're in the mood for some traditional Irish song along with your Guinness beer today check out The Harris Bros: https://youtu.be/6jfx7D10etE


Saturday, March 12, 2022

#Bidenflation

 #Bidenflation


Mr. President, please stop lying. On Thursday the U.S. Bureau of Labor Statistics released the Consumer Price Index. "Over the last 12 months, the all items index increased 7.9 percent...the 12-month increase has been steadily rising and is now the largest since the period ending January 1982." That's 40 years fellow farmers, 40 years! Is a recession next?

In the face of rampant inflation, demand priorities shift to essential items a la a "Maslow's Hierarchy of Needs." So although unemployment is at historically low levels, the jobs aren't necessarily higher-paying. So once the purchasing barrier develops it will be hard to prevent negative GDP growth; ie consumers will focus on staples like food and housing, cut travel consumption to the bare minimum, and look for alternative means of entertainment. Pot and streaming services come to mind as the ultimate crutch for a large swath of the population; remember, politicians have a vested interest in keeping the "Bread & Circuses" running.

There is a great line in Seinfeld where Jerry asks George to teach him to lie like him. George shrugs and tells Jerry "It's like saying to Pavarotti, Teach me to sing like you." But he continues with this sound piece of advice Joe Biden has internalized: Jerry, just remember. It's not a lie, if YOU believe it." That's where we are right now...data doesn't matter, truth is subjective, and the future is rosy. Just not for the middle class.


Thursday, March 10, 2022

Bear Market Playbook

 Bear Market Playbook


Surviving a Bear Market ain't easy. Obviously the first thing you lose is proper grammar, mainly do to shock of the financial mauling you're getting in the market. First, keep calm. It is highly unlikely you can outrun a bear. The goal here is survival. We're where we're at for a conflux of reasons, none of them good. Now the question is, "How do I position my portfolio to survive, no THRIVE in a Bear Market?"

The first step is to understand what a Bear Market is. It is a historical "rule of thumb" for the past several hundred years which denotes the fall in valuation of roughly 20% off the highs of an index. I'm using the NASDAQ index as my benchmark. The high was 16,212 in Nov 21 and the low (so far) was 12,588 which we plumbed last week. This indicates we are some 22% off the record high and in a Bear Market.

More than just a percentage, a Bear Market also has some very, very "special" traits; ie it feels like you are getting mauled because, well you're getting mauled. Massive volatility spikes cause precipitous price declines (below what we think is even possible), which are often followed by sharp spikes the following day. Only to be succeeded by plunges the following day. And around and around the wheel turns until there is a day or period of capitulation in which the bear has taken everything he wants from you and departs for his cave.

The journey to the cave typically takes about 289 days on average. That's a long time. In that journey back to the cave there are multiple head-fakes, sniffing, foraging trips, digging, biting, and other general uncivilized acts of behavior. Timing the bottom is almost impossible. What is possible is security selection, discretion, and allocation. Investors need to decide if they plan on staying in the game or not, and if so what is a tolerable near-term loss. Booking a loss is painful, but not booking a loss is often worse.

So to playbook this out, figure out what type of loss is tolerable in the near-term. They say your first loss is your best loss, so with that in mind sketch out several "pain bands" and stick to them. After the bear rolls through, along with tons of carnage, there also remain good companies which have been beaten up. You have even previously owned them! Take a look around and start rebuilding slowly, and for God's sake please, please avoid the wash sale rule; don't sell a security and then buy it back within a 30-day window. As an American still kinda free, you have a right to minimize your taxes....part of this means don't get whacked for wash sales.

One of my previous posts dealt with the value of education. Reread that. A solid education often results in a solid job with a corresponding good income. A good income allows you to buy stocks, real estate, companies, etc. etc. during bad times. And a LOT of money can be made in the bad times. Indeed, it is often said "the profit is made in the purchase." That is the true value to an investor that a Bear Market provides; the ability to pick up good brands, companies, and cash flow on the cheap. In fact, a strategy of ONLY buying in Bear Markets is commonly used by investors I term "Mountain Men."

Mountain Men are like the sasquatch, they are only rumored to exist. Typically you don't hear from them for long periods of time until there is a crisis of some sort. Then they spring into action. The Mountain Men come down from the mountain, or in from the jungle or away from the beach with bags of money. These bags of money are then used to purchase quality stocks on the absurdly cheap prices of a fraction of their true book value or growth prospects or leadership value.

The point here is that you need a list, a bag full of money, and the structure in place to buy. We can all have a list. If we have a decent job and live (somewhat) frugally then we can use excess cash to purchase more assets. The structure of course is your brokerage account or retirement account or 401K or personal balance sheet.

Eventually a Bear Market turns into a Bull Market. And those Bear prices rise to Bull levels. And investors who had excess liquid capital available stand to make a killing if their list was good and there cash was deployed correctly. 


Siege of Kiev

 Siege of Kiev

After squandering multiple opportunities to destroy the sitting duck convoy of Russian tanks invading the Ukraine, the United States and its European Allies now face a dire decision. Will they let the Russians encircle major Ukrainian cities like Kiev or provide direct intervention?

In the coming days Russians will have surrounded multiple Ukrainian cities, despite the best attempts of the brave and vastly outnumbered Ukrainian resistance. History tells us Russia is entering a siege mentality; they will attempt to squeeze the Ukrainians out of their homeland by incessant shelling, cutting off water, electricity, and inflows of food. The Russians are going to have a hell of a time, however, eliminating every Ukrainian and taking all of the major cities. There are fundamental differences in moral, motivation, and support that the Ukrainians enjoy.

Consider, the Ukrainian Resistance is fighting for their homeland. Russians are invading under the direction of a unelected tyrant determined to destroy cities in a medieval fashion. The weeks ahead will reflect the dire consequences of utilizing war crimes to get a population to surrender. The desire to survive is far greater than that to conquer, especially when the entire world is united against Russia. An endless supply of weapons is now flowing into Ukraine. 

Sieges only work if those surrounding a city, or castle, or country, can maintain endless shelling, have vast supplies of food, and have some degree of rotation or relief in their forces. And at all times the siege force must be aware of the dangers to their flanks of cutting off their supply, communication, and leadership lines. 

So although the current situation looks dire for the Ukrainian people, the Russia hordes need to be extremely concerned as their armies will soon begin wasting away from constant guerrilla warfare. The Ukrainians have demonstrated a steely resolve the defend their homeland. Hopefully they will receive a Berlin Airlift-type of supply run from the Western world to help them defeat these invaders. America needs to stand strong with true patriots lest we find ourselves in a far, far worse scenario in the coming weeks. Leadership matters.