WTI Hovers Above $58 After Bigger-Than-Expected Crude Draw
Oil prices, led by hope-ridden trade-deal headlines and OPEC+ chatter, have soared back above $58, erasing Friday’s losses…
But, after API’s reporting a bigger than expected crude draw, all eyes are on the official government data this morning…
API
Crude -3.72mm (-1.5mm exp) – biggest draw since September
Cushing -251k
Gasoline +2.931mm
Distillates +794k
DOE
Crude -4.856mm (-1.5mm exp) – biggest draw since August
Cushing -302k
Gasoline +3.385mm
Distillates +3.063m – biggest build since July
DOE data shows an even bigger crude draw than API reported (and an even bigger build in gasoline stocks)…
Source: Bloomberg
US crude production held at record highs…
Source: Bloomberg
And WTI was unsure where to go now that the algos ran the stops…
Bloomberg Intelligence Senior Energy Analyst Vince Piazza concludes: “Increasing demands among OPEC+ participants for deeper supply curbs confirm our concern about slowing demand. Additional cuts of 400,000 barrels a day would raise reductions to 1.6 million, while stronger compliance would further aid sentiment. Extending the deal for six months into 2H20 would provide the market with greater clarity.”
Musk On Trial, Day 1: “He Didn’t Literally Mean To Sodomize Me With A Submarine”
Elon Musk had his first day on the stand yesterday as part of his defamation trial for calling British cave diving hero Vern Unsworth “pedo guy”.
Based on live running commentary from various Twitter sources that were at the trial, including BuzzFeed’s Ryan Mac, The Verge’s Elizabeth Lopatto and $TSLAQ’s very own @TeslaCharts, the day lacked a lot of the fireworks that many expected, with even some Tesla skeptics even starting to speculate that Musk may be able to walk.
After jury selection, Musk was the first person to take the stand. He told the jury that the comments he made about Unsworth were “wrong and insulting” and that he didn’t know who Unsworth was at the time, according to Bloomberg. Musk claimed that Unsworth’s critical comments about Musk were “an unprovoked attack on what was a good-natured attempt to help the kids.”
Musk continued by saying: “I thought he was just some random, creepy guy that the media interviewed. So, I insulted him back.”
Musk claimed his statement of “pedo guy” wasn’t meant to be taken literally, telling the jury while on the stand: “I knew he didn’t literally mean to sodomize me with a submarine, just as I didn’t literally mean he was a pedophile.”
Musk also briefly engaged in a small spat with Unsworth’s attorney, L. Lin Wood, before the judge directed the two sides to cut it out.
Unsworth’s attorneys focused on subsequent statements made by Musk. “Bet ya a signed dollar it’s true,” Musk said, re-upping the insult a month later before asking someone on Twitter, “You don’t think it’s strange he hasn’t sued me?”
Musk then claimed Unsworth traveled “to Chiang Rai for a child bride who was about 12 years old at the time”, before calling him a “child rapist”.
Regardless of this line of questioning, Tesla skeptic @TeslaCharts did not seem impressed with Wood’s job of examining Musk. He tweeted live from the courtroom:
After today I’m considering sitting for the LSAT. I’d make a killing as an attorney if this is the benchmark.
One of Unsworth’s attorneys, Taylor Wilson, said in his opening statement that Musk’s Tweets caused Unsworth “tremendous shame”.
Wilson said: “Mr. Unsworth did the only thing he could. He filed a lawsuit against Musk for accusing him of being a pedophile in what should have been the proudest moment of his life.”
Musk’s lawyer, Alex Spiro, claimed Unsworth can’t prove damages. “This case is about an argument between two men exchanging insults,” Spiro said during his opening remarks. He also claimed that Unsworth was at court to “milk his 15 minutes of fame”.
After the day came to a close, Musk used a decoy car to escape the courtroom proceedings and avoid the media.
Unsworth helped play a key role in saving 12 boys and their soccer coach who were trapped in the Tham Luang Nang Non cave in Thailand in July 2018.
Musk had proposed his own solution for the rescue, embarking on a boastful public quest to construct a device that could help rescue the trapped children. But, ultimately, the rescue was done by actual professionals and without the help of Musk.
Musk’s submarine
In a post-rescue interview with CNN, Unsworth laughed off Musk’s proposed solution and told the billionaire he could “stick it where it hurts”, disregarding Musk’s effort as a “PR stunt”.
Musk, like a child who had just been bested on an elementary school playground, fired back by calling Unsworth names and insisting that he was a pedophile both on Twitter, and in communications with a reporter at BuzzFeed.
Unsworth obviously contends that Musk’s statements are false and that he should pay punitive and other damages for harming his reputation.
The trial is expected to last another 4 to 5 days.
ISM Services Disappoint As “Optimism Remains Historically Subdued”
Following the mixed picture from ‘soft’ surveys on the manufacturing side of the US economy (Markit PMI higher, ISM lower), and the extremely mixed picture from AsiaPac overnight, all eyes are on the Services data this morning to confirm/cherry-pick data that means the trough in growth is over.
Markit Manufacturing PMI rose to 52.6 (from 51.3)
ISM Manufacturing fell to 48.1 (from 48.3)
Markit Services PMI rose to 51.6 (from 50.6)
ISM Services fell to 53.9(from 54.7)
Source: Bloomberg
Under the hood, only 3 of the subindices are lower…
Source: Bloomberg
Aggregating the ISM Manufacturing and Services data provides a Composite picture (weighted by jobs and earnings) that shows the brief rebound fading…
“With both services and manufacturing reporting stronger rates of expansion, the November PMI surveys indicate the fastest pace of economic growth for four months. The improvement is coming from a low base, however, and even at these higher levels the survey is merely indicative of annualised GDP growth in the region of 1.5%.”
“Similarly, while reviving order book growth has encouraging more companies to take on extra staff after two months of net job losses being reported, the survey’s employment index continued to run at a level consistent with monthly jobs growth of only around 100,000.
“Weakened business activity and jobs growth compared to earlier in the year also led to widespread caution with respect to pushing up selling prices in the face of an uncertain outlook. Business expectations for the year ahead continue to run at one of the lowest levels recorded by the survey since 2012 with firms worried about trade wars, slowing economic growth at home and abroad, as well as the possibility of next year’s election cycle causing customers to postpone spending decisions.”
So take your pick of ‘soft’ surveys to support your panic-bid or scramble to sell.
Baltimore Mayor Warns Of Body “Snatching” White Van Targeting Young Girls To Sell Their Organs
Seriously WTF!
We tend to report on how Baltimore City’s socio-economic crisis is sending the region into a collapse. Now there’s a new report that appears to be literally from a third world country!
Baltimore Mayor Bernard C. “Jack” Young warned in an interview this week with WBAL News’ Vanessa Herring that a white van has been running around the city targeting young girls for their organs, reported The Baltimore Sun.
“We’re getting reports of somebody in a white van trying to snatch up young girls for human trafficking and for selling body parts, I’m told. So we have to be careful because there’s so much evil going on, not just in the city of Baltimore, but around the country,” Young said. “It’s all over Facebook.”
.@mayorbcyoung says, “we’re getting reports of somebody in a white van trying to snatch up young girls for human trafficking and for selling body parts.
Adding, “it’s all over Facebook” & “that’s something that our police officers are aware of because its been reported.” #WBALpic.twitter.com/k1y1o96z7T
Police spokesman Matt Jablow told The Sun that the department is “aware of the posts on social media, but we do not have any reports of actual incidents.”
WBAL asked the FBI’s Baltimore Field Office about any reports of abductions in the city, and they responded by indicating no reports have yet been filed.
A spokesman for the mayor said Young was discussing a general problem of human trafficking in the city, not a specific incident.
Councilman Kristerfer Burnett, the co-chair of the Baltimore City Human Trafficking Collaborative, said: “While it’s important that we do raise awareness about human trafficking, I would note that rarely are people snatched as you may see in film or may see on social media.”
Young’s latest claims of a body-snatching van come after a news conference last month, which he said: “I’m worried about people pulling up in vans, snatching young girls to take their organs or sell them into prostitution.”
Angry Trump Cancels Press Confedence, Leaves NATO Summit Early After Video Of World Leaders Laughing At Him
The leak by the Canadian Broadcasting Corporation of a clip showing Justin Trudeau, Emmanuel Macron and Boris Johnson caught on a hot mic appearing to ridicule President Trump at the NATO 70 year anniversary summit, appears to have made an already tense diplomatic situation, downright unbearable.
Shortly after Trump told reporters that Trudeau was “two-faced” in response to questions about the hot mic video, which reportedly was also a reference to the Canadian PM’s “blackface” history, Trump tweeted that he won’t hold a scheduled news conference to conclude the NATO summit, noting that he’s spoken repeatedly to reporters at meetings with world leaders that past two days, and would leave the NATO summit early, heading to Washington at the end of the day’s meetings.
Great progress has been made by NATO over the last three years. Countries other than the U.S. have agreed to pay 130 Billion Dollars more per year, and by 2024, that number will be 400 Billion Dollars. NATO will be richer and stronger than ever before.
Just finished meetings with Turkey and Germany. Heading to a meeting now with those countries that have met their 2% GOALS, followed by meetings with Denmark and Italy.
When today’s meetings are over, I will be heading back to Washington. We won’t be doing a press conference at the close of NATO because we did so many over the past two days. Safe travels to all!
Confirmed by @POTUS that the news conference in London is cancelled.
Then Trump issued a thinly veiled threat to his NATO peers, whom he has criticized of repeatedly underpaying, saying that if they refuse to pay their required quote, he would “get them on trade,” hinting that the trade war may soon spread to even more NATO member nations:
TRUMP: IF NATO COUNTRIES DON’T PAY `WE’LL GET THEM ON TRADE
So, as NYT reporter Katie Rogers, summarized: “This was a really unusual trip for Trump, who abided by Boris Johnson’s wishes to not interfere in UK elections, got an earful from Macron, woke up to footage of close allies mocking him, and, on top of it all, decided not to get the final say with a presser.”
This was a really unusual trip for Trump, who abided by Boris Johnson’s wishes to not interfere in UK elections, got an earful from Macron, woke up to footage of close allies mocking him, and, on top of it all, decided not to get the final say with a presser.
You Better Not Short; You Better Not Try; Larry Kudlow, Please Tell Them All Why
Submitted by Michael Every of Rabobank
The NATO summit saw the expected shenanigans with: Turkey’s President Erdogan stating it will oppose defense of the Baltic region if NATO doesn’t support it in its fight against the Kurds; France’s Macron refusing to do so; and US President Trump and Macron having a public spat, and then uniting in a clash over Turkey and the Kurds and its Russian S-400 missile system, with the word “sanctions” being mentioned by the US president again. Trump also suggested that countries who don’t pay up the 2% of GDP for defence might be dealt with via the trade channel, further politicizing trade as an issue, if it wasn’t already. Markets didn’t pay any attention.
That was because they were too busy being rocked when President Trump stated he is in no rush and “in some ways I think it’s better to wait until after the election” to make a trade deal with China. Not September, as we were told by those ‘in the know’ at certain financial media; not October, as were again told; not November, as we were still told; and not December, and perhaps not early 2020 – but after the US presidential election….which might as well be forever for markets. Especially as Trump will not have any electoral concerns at that point so might just dump the whole idea and go ‘all-in’. Indeed, Commerce Secretary Ross also made clear if “substantial progress” isn’t seen soon then the final 15% tariff tranche is indeed going to happen on 15 December.
The market reaction was clear: US 10-year yields plunged from 1.84% intraday to 1.72%, presumably because of all the inflation now coming from the tariffs, and 2-year yields from 1.62% to 1.55%; the S&P dipped; and CNH went from under 7.04 to over 7.08 and is at 7.0726 at time of writing. Perhaps it will go lower again when people read headlines on Bloomberg like “China Stockpiles Foreign Tech as ‘Silicon Curtain’ Descends”.
If not, it certainly should do given the US House of Representatives just passed legislation 407-1 to impose sanctions on Chinese officials responsible for alleged human rights abuses in Xinjiang, and to prevent the sale of technology to China that can be used in such repression. The Senate measure has already passed, but the House has added provisions that require the president within 120 days to list all officials deemed responsible and to impose visa restrictions and Global Magnitsky Act sanctions; the bill also ties US policy to China to Xinjiang via an annual State Department report to Congress on the issue. As with the recent HKHRDA legislation, it is expected there will now be rapid work to consolidate the two similar bills into one and to pass it to Trump before year-end – again with a veto-proof majority behind it. Indeed, a president who already signed the HKHRDA, and who is about to be impeached by the House on strictly bipartisan lines based on the Democrats just-released report, is not really going to be in a position to veto a bill backed by his own party. China has already vowed a response: banning US-based NGOs and US military visits to Xinjiang? And not getting as much coverage, but very significant, Taiwan is inviting US military experts to the island to advise on how it can bolster its defences: that’s on top of the recent agreement of US arms sales to it.
In which case, for those in markets trying to close out their books for the year-end and to get into the Xmas party spirit–and to pretend that the geopolitical issues I have been warning about as potential landmines for so long will never actually matter–it’s time for a Christmas Carol.
The following needs to be sung to the tune of ‘Santa Claus is Coming to Town’, and is best accompanied by a *large* brandy and a larger dose of tongue-in-cheek:
“Larry Kudlow, Larry Kudlow, Please don’t let this bull market go – tell us
A trade deal is comin’ to town! A trade deal is comin’ to town! A trade deal is comin’ to town!
He’s making a list; He’s checking it twice; Of all the things about China that’re suddenly nice – so
A trade deal is comin’ to town! A trade deal is comin’ to town! A trade deal is comin’ to town!
He sees when stocks are slipping; He knows when bears awake
He knows the Dow Jones must look good; For Trump’s electoral sake
So you better not short; You better not try; Larry Kudlow, please tell them all why – ‘cos
A trade deal is comin’ to town! A trade deal is comin’ to town! A trade deal is comin’ to town!
A great, great trade deal is comin’ to toooooooooooooownnnnn!”
And there will be nowhere singing this more loudly than Australia given that Q3 GDP came in at just 0.4% q/q, a tick weaker than expected vs. an upwardly-revised 0.6% in Q2, and meaning only 1.7% y/y, around half of where the RBA sees the low-productivity/high-net immigration Aussie economy as deserving to grow. The Reserve Bank Governor of course left rates unchanged yesterday at 0.75%, and once again displayed his magic touch in saying that some downside risks to the global economy had lessened recently. Maestro!
What else to wrap with? Kamala Harris is out of the presidential race unless she gets offered VP by someone else; and Trump has stated he wouldn’t want the NHS even if it was offered to him on a silver platter; and Corbyn obviously doesn’t believe him, especially on drug pricing. On which note, the US has just proposed stripping 10-year protections for biologic drugs from generic rivals from the USMCA to speed its passage in Congress, which seems the complete opposite of what Labour is saying the US would do to the UK in a US-UK trade deal.
Catalysts, as usual, are unclear but a sudden surge of buying has lifted cryptos across the board this morning…
Source: Bloomberg
With Bitcoin testing $7800…
Source: Bloomberg
And Ethereum above $150…
Source: Bloomberg
This surge happens as CoinTelegraph reports that Bitcoin futures open interest on digital asset platform Bakkt has hit a new all-time high.
According to a Dec. 3 Twitter post published on Dec. 3 by Bakkt Volume Bot — a Twitter account dedicated to reporting Bakkt trading volumes — Monday’s open interest on Bakkt Bitcoin futures reached a new all-time high of $6.5 million.
In futures markets, open interest is the number of open contracts in the market and is often used to indicate the health of the market. When there is a large amount of open interest, new or additional capital is flowing in.
Regularly breaking records
The reported open interest is a 42% increase from the previous day, which was an all-time high as well. Last Friday and Saturday saw open interest records of $4.2 million and $4.3 million, respectively.
The platform’s trading volumes have been continuously breaking records since its launch in September. At the end of November, daily volumes on the platform hit a new all-time high of over $42.5 million — or 4,443 BTC at the time.
Also in November, Bakkt’s chief operating officer Adam White announced the firm’s move to include a cash-settled option in an apparent bid to further increase the platform’s popularity among investors. The Intercontinental Exchange — Bakkt’s parent company — later confirmed the launch of the option for Dec. 9.
Bakkt’s management could also soon start influencing United States’ cryptocurrency regulation. As Cointelegraph reported on Dec. 1, Georgia Governor Brian Kemp is expected to appoint Bakkt chief executive officer Kelly Loeffler for a United States Senate seat.
Perfect Storm: Trump Admin To Cut 750,000 From Food Stamps Ahead Of Recession
In a bid to end the massive welfare state, the Trump administration is expected to announce new measures Wednesday that would end food stamp benefits for nearly 750,000 low-income folks. The new rules will make it difficult for “states to gain waivers from a requirement that beneficiaries work or participate in a vocational training program,” according to Bloomberg sources.
Republicans have long attempted to abolish the welfare state, claiming that the redistribution of wealth for poor people keeps them in a state of perpetual poverty. They also claim the welfare state is a system of command and control and has been used by Democrats for decades as a political weapon against conservatives, hence why most inner cities vote Democrat.
House Republicans tried to cut parts of the federal food assistance program last year, but it was quickly rejected in the Senate.
The new requirements by the Trump administration would only target “able-bodied” recipients who aren’t caring for children under six.
Sources said the measure would be one of three enacted by the Trump administration to wind down the massive federal food assistance program.
The measures are expected to boot nearly 3.7 million recipients from the Supplemental Nutrition Assistance Program (SNAP). Though it comes at a time when employment is in a downturn, manufacturing has stumbled into a recession, and the US economy could be entering a mild recession in the year ahead.
As to why President Trump wants hundreds of thousands of low-income folks off SNAP ahead of an election year while the economy is rapidly decelerating could be an administrative error that may lead to social instabilities in specific regions that will be affected the hardest. Then again, no turmoil could come out of it, and it’s hailed as a success during the election year.
The Department of Agriculture estimates that the new measures could save the agency $1.1 billion in year one, and $7.9 billion by year five.
Nearly 36.4 million Americans in the “greatest economy ever” are on food stamps. At least half of all Americans have low-wage jobs, barely enough to cover living expenses, nevertheless, service their credit cards with record-high interest rates.
The economy as a whole is undergoing profound structural changes with automation and artificial intelligence. Tens of millions of jobs will be lost by 2030. It’s likely the collision of these forces means the welfare state is going nowhere and will only grow in size when the next recession strikes.
Cutting food stamps for low-income folks is the right move into creating a more leaner government, but there are severe social implications that could be triggered if the new measures are passed.
And while President Trump wants to slash the welfare state for poor people, his supply-side policies and bailouts of corporate America have been record-setting in some respects.
Actions by the administration clearly show that corporate welfare for Wall Street elites is more important than welfare for low-income folks. Perfect Storm: Trump Admin To Cut 750,000 From Food Stamps Ahead Of Recession
“Psychology is probably the most important factor in the markets, and one that is least understood.”
– David Dreman
A motive of the financial industry is to blur the lines between investor and trader. I’m convinced it’s to make investors feel guilty for taking control of their portfolios. After all, Wall Street firms ares the experts with YOUR money.
How dare you question them?
Sell to take profits, sell to minimize losses, purchase an investment that fits into your risk parameters and asset allocations; it’s all enough to brand one as ‘trader’ in the buy & forget circles that are paid to push the narrative that markets are on a permanent trek higher and bears are mere speed bumps. Wall Street has forgotten the financial crisis. You can’t afford such a luxury.
And, if you’re a reader of RIA, you’re astute enough to know better.
“You’re a trader now?”
Broker at a big box financial shop.
A planning client called his financial partner to complete two trades. Mind you, the only trades he’s made this year. His request was to sell an investment that hit his loss rule and purchase a stock (after homework completed on riapro.net). His broker was dismayed and asked the question outlined above.
Investors are advised – Be like Warren Buffett and his crew: You know, he’s buy and hold, he never sells! Oh, please.
From The Motley Fool:
Here’s what Berkshire sold in the third quarter:
During the third quarter, Berkshire sold some or all of five stock positions in its portfolio:
750,650 shares of Apple.
31,434,755 shares of Wells Fargo.
1,640,000 shares of Sirius XM.
370,078 shares of Phillips 66.
5,171,890 shares of Red Hat.
What Do Paul Tudor Jones, Ray Dalio, Ben Graham, and even Warren Buffett have in common?
A strict investment discipline.
Despite mainstream media to the contrary, all great investors have a process to “buy” and “sell” investments.
Investment rules keep “emotions” from ruling investment decisions:
Rule #1: Cut Losers Short & Let Winners Run.
While this seems logical, it is one of the toughest tenets to follow.
“I’ll wait until it comes back, then I’ll sell.”
“If you liked it at price X, you have to love it at Y.”
It takes tremendous humility to successfully navigate markets. There can be no such thing as hubris when investments go the way you want them; there’s absolutely no room in your brain or portfolio for denial when they don’t. Investors who are plagued with big egos cannot admit mistakes; or they believe they’re the greatest stock pickers who ever lived. To survive markets, one must avoid overconfidence.
Many investors tend to sell their winners too soon and let losers hemorrhage. Selling is a dilemma. First, because as humans we despise losses twice as much as we relish gains. Second, years of financial dogma have taken a toll on consumer psyche where those who sell are made to feel guilty for doing so.
It’s acceptable to limit losses. Just because you sell an investment that isn’t working doesn’t mean you can’t purchase it again. That’s the danger and beauty of markets. In other words, a stock sold today may be a jewel years from now. I find that once an investor sells an investment, it’s rarely considered again. Remember, it’s not an item sold on eBay. The beauty of market cycles is the multiple chances investors receive to examine prior holdings with fresh perspective.
Rule #2: Investing Without Specific End Goals Is A Big Mistake.
I understand the Wall Street mantra is “never sell,” and as an individual investor you’re a pariah if you do. However, investments are supposed to be harvested to fund specific goals. Perhaps it’s a college goal, or retirement. To purchase a stock because a friend shares a tip on a ‘sure winner,’ (right), or on a belief that an investment is going to make you wealthy in a short period of time, will only set you up for disappointment.
Also, before investing, you should already know the answer to the following two questions:
At what price will I sell or take profits if I’m correct?
–Where will I sell it if I am wrong?
Hope and greed are not investment processes.
Rule #3: Emotional & Cognitive Biases Are Not Part Of The Process.
If your investment (and financial) decisions start with:
–I feel that…
–I was told…
–I heard…
–My buddy says…
You are setting yourself up for a bad experience.
In his latest tome, Narrative Economics, Yale Professor Robert J. Shiller makes a formidable case for how specific points of view which go viral have the power to affect or create economic conditions as well as generate tailwinds or headwinds to the values of risk assets like stocks and speculative ventures such as Bitcoin. Simply put: We are suckers for narratives. They possess the power to fuel fear, greed and our overall emotional state. Unfortunately, stories or the seductive elements of them that spread throughout society can lead to disastrous conclusions.
Rule #4: Follow The Trend.
80% of portfolio performance is determined by the underlying trend.
Astute investors peruse the 52-week high list for ideas. Novices tend to consider stocks that make 52-week highs the ones that need to be avoided or sold. Per a white paper by Justin Birru at The Ohio State University titled “Psychological Barriers, Expectational Errors and Underreaction to News,” he posits how investors are overly pessimistic for stocks near 52-week highs although stocks which hit 52-week highs tend to go higher.
Thomas J. George and Chuan-Yang Hwang penned “The 52-Week High and Momentum Investing,” for The Journal of Finance. The authors discovered purchasing stocks near 52-week highs coupled with a short position in stocks far from a 52-week high, generated abnormal future returns. Now, I don’t expect anyone to invest solely based on studies such as these. However, investors should understand how important an underlying trend is to the generation of returns.
Rule #5: Don’t Turn A Profit Into A Loss.
I don’t want to pay taxes is the worst excuse ever to not fully liquidate or trim an investment.
If you don’t sell at a gain – you don’t make any money. Simpler said than done. Investors usually suffer from an ailment hardcore traders usually don’t – “Can’t-sell-taxes-due” itis.
An investor which allows a gain to deteriorate to loss has now begun a long-term financial rinse cycle. In other words, the emotional whipsaw that comes from watching a profit turn to loss and then hoping for profit again, isn’t for the weak of mind. I’ve witnessed investors who suffer with this affliction for years, sometimes decades.
Rule #6: Odds Of Success Improve Greatly When Fundamental Analysis is Supported By Technical Analysis.
Fundamentals can be ignored by the market for a long-time.
After all, the markets can remain irrational longer than you can remain solvent.
The RIA Investment Team monitors investments for future portfolio inclusion. The ones that meet our fundamental criteria – cash flows, growth of organic earnings (excluding buybacks), and other metrics, are sometimes not ready to be free of “incubation,” which I call it; where from a technical perspective, these prospective holdings are not in a favorable trend for purchase.
It’s a challenge for investors to wait. It’s a discipline that comes with experience and a commitment to be patient or allocate capital over time.
Rule #7: Try To Avoid Adding To Losing Positions.
Paul Tudor Jones once said “only losers add to losers.”
The dilemma with ‘averaging down’ is that it reduces the return on invested capital trying to recover a loss than redeploying capital to more profitable investments.
Cutting losers short, like pruning a tree, allows for greater growth and production over time.
Years ago, close to 30, when I was starting out at a brokerage firm, we were instructed to use ‘averaging down’ as a sales tactic. First it was an emotional salve for investors who felt regret over a loss. It inspired false confidence backed up by additional dollars as it manipulated or lowered the cost basis; adding to a loser made the financial injury appear healthier than it actually was. Second, it was an easy way for novice investors to generate more commissions for the broker and feel better at the same time.
My rule was to have clients average in to investments that were going up, reaching new highs. Needless to say, I wasn’t very popular with the bosses. It’s a trait, good or bad, I carry today. Not being popular with the cool admin kids by doing what’s right for clients has always been my path.
Rule #8: In Bull Markets You Should be “Long.” In Bear Markets – “Neutral” or “Short.”
Whew. A lot there to ponder.
To invest against the major “trend” of the market is generally a fruitless and frustrating effort.
I know ‘going the grain’ sounds like a great contrarian move. However, retail investors do not have unlimited capital to invest in counter-trends. For example, there are institutional short investors who will continue to commit jaw-dropping capital to fund their beliefs and not blink an eye. We unfortunately, cannot afford such a luxury.
So, during secular bull markets – remain invested in risk assets like stocks, or initiate an ongoing process of trimming winners.
During strong-trending bears – investors can look to reduce risk asset holdings overall back to their target asset allocations and build cash. An attempt to buy dips believing you’ve discovered the bottom or “stocks can’t go any lower,” is overconfidence bias and potentially dangerous to long-term financial goals.
I’ve learned that when it comes to markets, fighting the overall tide is a fruitless endeavor. It smacks of overconfidence. And overconfidence and finances are a lethal mix.
We can agree on extended valuations; or how future returns on risk assets may be lower because of them. However, valuation metrics alone are not catalysts for turning points in markets. With global central banks including the Federal Reserve hesitant to increase rates and clear about their intentions not to do so anytime in the near future, expect further ‘head scratching’ and astonishment by how long the current bullish trend may continue.
Rule #9: Invest First with Risk in Mind, Not Returns.
Investors who focus on risk first are less likely to fall prey to greed. We tend to focus on the potential return of an investment and treat the risk taken to achieve it as an afterthought.
Years ago, an investor friend was excited to share with me how he made over 100% return on his portfolio and asked me to examine his investments. I indeed validated his assessment. When I went on to explain how he should be disappointed, my friend was clearly puzzled.
I went on to explain how based on the risk, his returns should have been closer to 200%! In other words, my friend was so taken with the achievement of big returns that he went on to take dangerous speculation with his money and frankly, just got lucky. It was a good lesson about the danger of hubris. He now has an established rule which specifies how much speculation he’s willing to accept within the context of his overall portfolio.
The objective of responsible portfolio management is to grow money over the long-term to reach specific financial milestones and to consider the risk taken to achieve those goals. Managing to prevent major draw downs in portfolios means giving up SOME upside to prevent capture of MOST of the downside. As many readers of RIA know from their own experiences, while portfolios may return to even after a catastrophic loss, the precious TIME lost while “getting back to even” can never be regained.
To understand how much risk to consider to achieve returns, it’s best to begin your investor journey with a holistic financial plan. A plan should help formulate a specific risk-adjusted rate of return or hurdle rate required to reach the needs, wants and wishes that are important to you. and your family.
Rule #10: The Goal Of Portfolio Management Is A 70% Success Rate.
Think about it – Major League batters go to the “Hall Of Fame” with a 40% success rate at the plate.
Portfolio management is not about ALWAYS being right. It is about consistently getting “on base” that wins the long game. There isn’t a strategy, discipline or style that will work 100% of the time.
As an example, the value style of investing has been out of favor for a decade. Value investors have found themselves frustrated. That doesn’t mean they should have decided to alter their philosophy, methods of analysis or throw in the towel about what they believe. It does showcase however, that even the most thorough of research isn’t always going to be successful.
Those investors who strayed from the momentum stocks such as Facebook, Amazon, Netflix and Google have paid the price. Although there’s been a resurgence in value investing since October, it’s too early to determine whether the trend is sustainable. Early signs are encouraging.
Chart: BofA Merrill Lynch US Equity & Quant Strategy, FactSet.
A trusted financial professional doesn’t push a “one-size-fits-all,” product, but offers a process and philosophy. An ongoing method to manage risk, monitor trends and discover opportunities.
Even then, even with the best of intentions, a financial expert isn’t going to get it right every time as I outlined previously. The key is the consistency to meet or exceed your personalized rate of return.
And that return is only discovered through holistic financial planning.
