Recession Stats

Assuming the Fed triggered a recession with their rate hike on December 16th, 2015 the above chart helps provide some idea of what we're in for over the coming months. The real question going forward is whether the Fed will continue to deny the state of the global economy, trading of the 10-year Treasury, lack of inflation, and milquetoast quality of job creation. At this point, it is a a 50/50 chance that they will raise another 0.25% for the March 15/16 (beware the Ides of March!) meeting.

Given that tomorrow is "Super Tuesday"in the United States, it is conceivable that to protect their jobs going into an election cycle the Fed in fact DOESN'T raise rates as this would further exacerbate the current situation.

The reality is the global economy is like an airplane pulling up the nose and just about to stall. Growth is so anemic that is actually feels like a recession already in many parts of the world. The United State included.

Probably the most prudent course of action, oddly enough, would be for the Fed to acknowledge their mistake AND hike again in March while also stating that they are DONE raising rates in 2016.

This would have multiple beneficial effects. First, it would put a nail in the coffin to the US economy in the short term and thereby let the steam out of any bubble in the stock market. In the short term this would be bad; but from a long-term view this would add certainty to the rest of the year which would be vital.

Second, playing financial poker with the Federal Reserve is a dangerous game; on a global scale it is borderline insanity given the massive power the Fed wields. Better for them to raise rates here 0.25% so they don't lose face in the eyes of the world, put their jobs at risk for a new Fed board in 2017, and then let the USA economy stall then begin a healthy recovery.

The greatest challenge at this point would be a strong US dollar, which would have tremendous impacts short-term on US corporations.

The probability of the Fed raising rates at the March meeting is decreasing by the day though. There is just too much political capital at risk and the entire Fed board risks losing their jobs if they mangle another hike; the safe bet here is an acknowledgment that "the global situation has changed" (due to the Fed's 16 Dec 15 move no less) and that "we will consider further tightening when data suggests our inflationary targets are met." In their own self-interest, the Fed will play it safe.

I expect gold to further its rally and stocks to climb back over 17,000 in the coming weeks. If we see some sort of definitive wording from the Fed, there well may be a massive tick to the upside here as stocks are typically leading indicators (the recession was already priced in starting with the sell-off into 2016.)

Prepare for 1% 10-Year Treasury Bonds

Investors should prepare for 1% 10-year Treasury Bonds as the global slowdown continues and many nations now are looking toward negative interest rates.

Mama Said There'd Be Days Like This

There'd be days like this my mama said. OK the damage has been done, unless you were smart enough (or lucky enough) to go all cash on Dec. 31st, we're essentially either in a Bear Market now or at the minimum on the cusp of one.

As a fellow financial farmer I wanted to share a couple thoughts, paramount being the most useless thing to dwell on after a market rout is cash you should have stashed away or what you could have bought with what you have now lost. The takeaways?

1) Even now, you probably have too much stock exposure and not enough cash; remedy that.

2) A covered call strategy probably would have cut your losses in half; dividends and selling covered calls both act to partially hedge your long positions.

3) Progressively buying into a dip doesn't always work; we've now had 8 closing "dips."

4) Leverage, especially buying on margin, can have disastrous consequences; a problem compounds itself with leverage.

5) In summation, the old adage "the market can remain irrational far longer than you can remain liquid" is and was a viable aphorism. As is "your first loss is your best loss."

My final thoughts for today as we head into a long weekend are as follows: Successful investors are OWNERS of their respective businesses, not just shareholders. By this I mean if you own shares of Facebook for example, you own a piece of a social network. Disney, you own an entertainment company. Exxon Mobil, you own an oil company with oil platforms, exploration, and refining. The mentality of those who wish to Invest Like a Farmer is clear: stocks are more than just ticker tape symbols with a price alongside of them, they are small pieces of viable enterprises.

These enterprises typically employ people, own physical goods, and produce some type of goods or services for a profit. They most likely did yesterday what they'll do today and also tomorrow. Keep that concept in mind amongst the flurry of media hype. Revenues rise and fall, some companies go out of business, and many new ones are started. The history of the US stock market, by-and-large, has been one of tremendous long-term success.

Year of the Red Monkey

2016 is the Year of the Red Monkey in the Chinese Zodiac. It has been a fitting start to the year already, although the festivities officially don't start until February 8th this year for the Chinese. The "festivities" for the rest of us have already started with the lowest stock market start ever. Ever!

There are three fundamental problems driving the market lower; excessive valuation of Chinese equities/currency, oil, and the Fed's decision to begin a tightening cycle in the midst of a global rout.

The first problem is going to take as much time as needed to unwind given the use of circuit breakers, forced market closures, and limiting of sales. We've seen this many, many times in U.S. markets over hundreds of years; if you prevent sellers from selling it just promotes more selling. Water, and sellers, will always seek their own level. It is futile to prevent sellers from selling and simply exacerbates the problem.

The yuan is in the same boat; it too should be allowed to float freely without artificial influence. The "Chinese situation" may make take months if not the entire year to resolve itself. Expect the selling (and pain) to continue until legitimate market conditions return. A good entry point for investors looking to put money to work in China? When a stock trades at an option price that sounds good for me, i.e. no more than a couple bucks a share for a GAAP-monopoly stock. Even then assume you'll lose it all. Moral? Stay in the USA.

Second, the price of oil is great for consumers. Even in California, the country's 3rd largest producer behind Texas and Alaska, which has the highest gas prices in the country, gas is cheap. (As an aside, where is that extra buck per gallon at the pump going? It flows through the biggest unnatural pipeline of them all, which had no trouble being built: from your wallet to Sacramento.)

The existing oil slump should fuel further light and heavy truck sales keeping the rally alive in autos and additional savings have shown to be funneled directly into consumers pockets for their discretionary purchasing choices. It is undoubtedly a stealth tax cut; enjoy it while it lasts!

The underside of this oil barrel, however, is the complete and utter devastation to many of the small and mid-cap producers who had ramped up production at high oil prices only to see their investments crater during the oil rout. $35 oil is here, $25 oil is in sight. With supply at all-time highs and demand flat expect this environment to continue for the foreseeable future.

Finally, with little to no inflation, the Fed decided it was time to act. Not acting would have somehow caused them all to look ineffectual so it was apparently better to jack up the Fed Funds rate rather than promulgate any doubts about their resolve. Buying equities into a rising Fed environment has not been healthy for investors; expect them to continue raising anywhere from 2 to 4 more times in 1/4 point intervals until the stock market is sufficiently punished. Naturally, new home starts and existing home sales will fall. Mortgage rates have already begun to creep up. If it quacks like a duck and walks like a duck, it must be 1937 all over again.

In spite of all these headwinds, I expect 2016 to end well with the Dow reaching 20,000 by Dec. 31, 2016. Why in the world do I expect this? A crappy 2015, massive bearish sentiment into 2016, and  healthy corporate balance sheets are streaming money back to investors, buying back their own shares, and consolidating via mergers into greater and greater monopolies. This should lead to pricing power and ultimately increasing earnings that have traditionally led to higher stock prices.

With 5 days into 2016 and nearly 1000 points vaporized the retail investor once again is on the ropes, but this time in the first round of the fight. Given a nasty political season ahead and continued fears about the Middle East there is a mountain of worry to climb ahead of us as a country.

The Red Monkey Year is a tough one and this is not the business for the faint of heart; Mr. Market wants to extract every nickel from the financial farmer, and the financial farmer just wants a reasonable rate of return.

So it begins.

Do Nothing

Leo Tolstoy

A "do nothing" gets a bad rap in a busy bee world obsessed with constant updates, feedback, postings…a proverbial deluge of activity. The reality is, it a takes a lot of effort to do nothing.

Long-time, and long-term, financial farmers will appreciate and validate the soundness of this theory. One of the great modern philosophers of our time was Yogi Berra who had innumerable "yogisms" over the years. One of the best? "You can observe a lot by watching."

For those readers lucky enough to have read Tolstoy's masterpiece "War and Peace," the value of doing nothing is often featured as a prominent theme when faced with making a decision without enough data or confidence. "When in doubt, do nothing."

Finally, one of my favorite trading books of all time is Reminiscences of a Stock Operator which is a loosely veiled biography of the stock trader Jesse Livermore, who throughout his career had many massive ups and downs, is quoted as saying that he made most of his money by "sitting." That is to say, he made his move into an equity position and waited. And waited.

It takes a lot of effort to do nothing; there are multiple temptations, earnings releases, perceived opportunity costs, and yet to those who wish to Invest Like A Farmer, to "do nothing" is something indeed.

The Startup IPO vs. The Established

In this land of amber waves of grain, one look at the above chart and it is obvious; investors should plant all their money into IPOs rather than established companies…or should they? Hmmm…I think financial farmers know a thing or two about what REALLY constitutes a viable business. Is an established company going public or has a company been established to go public? Those are two different things indeed; one is wheat, and the other chaff.

Established companies going public typically have significant track records of EARNINGS and increasing revenues. They may have been in business for years, if not decades. They have the three "Cs" locked up; cash, competence, and clients. This actually is a business that generates positive cash flow, has barriers to entry, and a validated business model. Many investors consider them boring businesses.

The flip side of this IPO coin, however, is the company with a limited track record, possibly increasing revenue (but no profits), and concentrated ownership with shocking compensation numbers. They often have complex business models with "new" metrics outside of GAAP (Generally Accepted Accounting Principles.) They are generally NOT considered boring by any means; indeed they are often labeled "disruptive."

These are two different scenarios indeed, and if you separate the proverbial wheat from the chaff, financial farmers will find that the former typically are actually established companies making a debut onto the public markets, while the latter are in fact dumping grounds to get founders, VCs, and banks paid on the backs of retail investors.

Make sure you're buying wheat, and not the chaff, as more and more companies come to market due diligence is essential.

Traditional Recipe for Disaster

As Thanksgiving rapidly approaches, I thought I would share a recipe I was given long ago. As I transitioned from Middle School to High School I was entrusted with this hardy document. Today I'd like to share it with you in the hopes that my fellow financial farmers make sure this recipe never makes it to their tables for any type of celebratory dinner.

No doubt readers of this prestigious blog also read lesser publications like the Wall Street Journal or Barron's that have featured in recent days numerous hedge fund meltdowns, all of them seemingly following the Traditional Recipe for Disaster to a tee; troubling given the immense asset bases they are entrusted with and also kind of odd given that a hedge fund by definition should have a HEDGE against the very position(s) they are long. (But what do I know, I'm just a lowly financial farmer investing in boring industries that pay me consistent dividends, have strong left to right charts, and I'm knowingly biased towards companies that report GAAP earnings.)

So download, print, and post this recipe somewhere you can enjoy the year-round; it's never to early to learn what can destroy your financial farm!

Pay Yourself First

One of the most challenging aspects of being a financial farmer is cashflow; that monthly ritual of deciding who gets what from your till. 

Pay yourself first. The reason for this is both mathematical and psychological; by paying yourself first you are entering on the leading edge (front) of the compounding cycle verses at a later, disadvantageous time. All things being equal, "now" is better than "later" regarding the time value of money.

Psychologically, as financial farmers we can usually justify paying other expense before ourselves, but that expense can usually be met somehow. We often justify waiting for saving or investing in our financial farm because it doesn't rank high on the priority list. That is a mistake. Pay yourself first, otherwise your expenses take on a higher compounding priority than your survival.

Finally, by paying yourself first you also are imposing a scarcity of resources which in reality mirrors the challenges of life. Running a successful financial farm involves feeding a lot of mouths, fixing equipment, and spending funds on a variety of unanticipated bills. The least you can do is pay yourself first; it will ultimately prove to be the resource which carries the day down the line.