Month: September 2018

Authored by Lance Roberts via RealInvestmentAdvice.com,

I recently penned an article which discussed the Fed and the risk of a monetary policy error in the future. This isn’t a possibility, it is a probability given that every Fed rate-hiking campaign in the past has led to a financial market-related event, recession, or worse.

Of course, when you publish views on a regular basis it always attracts those“individuals” who want to consistently deride and distract an otherwise informed debate. Normally, I don’t respond to comments because there is nothing to be gained in trying to persuade someone who is already convicted of their beliefs.

As my dad use to tell me growing up: “The only permanent cure of ignorance, is experience.”

I am going to make an exception this week as a recent comment brought to light many of the common media-driven narratives about investing. The comment was long, so I have broken it down to highlight the important points which need addressing.

The Lie Of Percentages

“The average bear market lasts 1.4 years on average and falls 41% on average.-The average bull market (when the market is rising) lasts 9.1 years on average and rises 476% on average. This fact confirms that Bull Markets do rise 10 TIMES LONGER than bear markets. And they last SIX LONGER. Those are facts.”

While the statement is not false, it is a false narrative. (It is important to remember the “buy and hold” revolution was developed by Wall Street firms beginning in the late 1980’s to shift the industry from a “transactional basis” to an “annuitized” income stream. It is great for them, not necessarily for you.)

Using “percentage changes” distorts to the true impact to what happens to investors over time. The chart below shows the PERCENTAGE return of each bull and bear market going back to 1900. (The chart is the S&P 500 Total Return Inflation-Adjusted index.)

Clearly, the point made is valid that bull markets rise 10x, more and last 6x as long, as bear markets.

“Lies, Damned Lies, and Statistics.” – Mark Twain

Here are the basics of math.

• If the index goes from 100 to 200 it is indeed a 100% gain.

• If the index goes from 200 back to 100, it is only a 50% loss.

• Mathematically it would seem as if an investor is still 50% ahead, the net return is actually ZERO.

This is the error of measuring returns in terms of percentages. To understand the real impact of bull and bear markets on a portfolio it must be measured in POINTS rather than percentages.

When measured in points, the damage becomes more apparent as bull markets have been almost entirely wiped out by subsequent bear markets.

The other problem, as shown in the chart below, is the lost time required to get back to even following a bear market. During these periods, wealth is not compounded and time required to achieve financial goals is lost.

(It is worth noting the entirety of the markets return over the last 118-years occurred in only 4-periods: 1925-1929, 1959-1968, 1990-2000, and 2016-present)

Since most investors only have 20 to 30-years to reach their goals, if that period begins when valuations are elevated, the odds of success falls dramatically.

Time Is An Unkind Companion

The point of “time” is critical.

While it is nostalgic to use 100+ years of market data to try and prove a point about the benefits of “buy and hold”investing, the reality is that we “mere mortals” do not have the life-span required to achieve those returns.

As I stated in my last missive:

“Despite the best of intentions, a vast majority of the ‘bullish’ crowd today have never lived through a real bear market.”

I have been managing money for people for a very long time. The one simple truth is that once an individual has lost a large chunk of their savings, they are very reluctant to go through such an experience a second time. This is particularly the case as individuals get ever closer to their retirement age.

The reader’s next comment clearly showed a lack experience in how a true bear market destroys someone’s financial, and family, life.

“Since 1950, there have 36 stock market corrections (or once every 2 years). All 36 of these stock market corrections have been completely erased within a matter of weeks and months. 36 out of 36 is a 100% success rate. Buying any major dip in the S&P 500 has been a virtual guarantee of higher returns.”

The statement is true. It just proves two points.

1. If an investor had bought the lows they would have indeed garnered higher returns. However, such means the “highs were sold” and not “bought and held.” (You can’t “buy low” if you don’t “sell high”)

2. A lack of understanding of the impact of getting back to even.

The purpose of investing is to:

 “Grow savings at a rate which maintains the same purchasing power parity in the future and provides a stream of living income.” 

Nowhere in that statement is a requirement to “beat a benchmark index.” 

For most people, a $1 million account sounds like a lot of money. It’s a big, fat round number. The problem is that the end number is much less important than what it can generate. The table below shows $1,000,000 and what it can generate at varying interest rate levels.

30-years ago, when prevailing rates were substantially higher, and living standards were considerably cheaper, a $1,000,000 nest egg was substantial enough to support retirement when combined with social security, pensions, etc.

Today, that story is substantially different. Again, the REASON we invest is not to “beat the market,” but rather to “grow” our hard-earned “savings” at a rate to offset inflation over time. 

Let’s use an example. An individual who earns $75,000 a year in 1988 starts with a $100,000 investment. The purple line shows the portfolio value required, on an inflation adjusted basis, to replace a $75,000/per year income stream at a 3% withdrawal rate 30-years into the future. The gold line is our reader’s “buy and hold” approach. The blue line uses a simple 12-month moving average to switch from stocks to cash, and vice versa, whenever the S&P 500 breaches the average. Both charts are inflation-adjusted total return indices with $625 monthly contributions (a 10% annual savings rate). 

While “buying and holding” the S&P 500 index did indeed achieve a respectable outcome, spending numerous years getting “back to even” devastated the compounding effect of the portfolio. Even with “dollar cost averaging,” the benefit of three major bull market advances, and falling rates of inflation, investors were still left extremely short of their investment goals. Only by avoiding the two major drawdowns would investors accumulate enough money to fund their retirement needs.

But that statement almost always elicits two more comments: 1) You can’t time the market, and 2) active managers always underperform their benchmark.

• First, I am not a “market timer,” which is being “all in” or “all out” of the market at any given time. However, I do believe there are times I want less capital exposed to equity risk than others. Using breaches of long-term averages are just one method to determine when to have more, or less, exposure to equity-related risk.

• Secondly, active managers do indeed underperform their benchmark indices from one year to the next quite often. But it is the long-term performance that is the most important. (Also, benchmark indices do not pay taxes, have expenses, operations, transaction costs, distributions, etc. which impact short-term performance.)

I quickly grabbed 5-major mutual funds and compared them to the Vanguard S&P 500 Index. Each fund manager indeed underperformed their benchmark at one time or another. They also all vastly outperformed over time.

(Note: Looking at 1, 3, 5, and 10-year records are misleading as it assumes you invested, and held, from the start of each period. If you invested at any other point, your outcome is very different.)

Let’s take the same 12-month average switching strategy mentioned above but reduce performance by 2% annually on the upside. In other words, in every up year for the S&P 500, the strategy made 2% less than the index.

Clearly, under-performing a random benchmark index is not what investors should be concerned with.

The message is clear: “getting back to even” is not the same as “growing savings.” 

Oh, yes, about those losses.

“According to a study by J.P. Morgan Asset Management, buying and holding the S&P 500 between Jan. 1, 1995, and Dec. 31, 2014, would have netted an investor a 555% return, which works out to almost 10% per year. But missing just the 10 best days out of this more than 5,000-day trading period would have returned only 191%, less than half. If you missed a little more than 30 of the best trading days, your gains would have completely disappeared.”

While that statistic is often bantered about, it is “missing the losses” that are far more important to returns.

Where You Start Determines Where You End

As we have discussed previously, it is the starting level of valuations which are most important. Today, those valuations are the second highest level on record.

“What is clear, and unarguable, is that when valuations are elevated, future returns on investments decline. There are two ways in which the ratio can revert back to levels where future returns on investments rise. 1) Prices can rapidly decline, or 2) Earnings can rise significantly while prices remain flat. Historically, and as shown above, option 2) has never been a previous outcome.“

While such isn’t a hard concept to understand, in the rush to make a point about “buy and hold” investing, statements like the following are made:

“Timing is irrelevant, it’s all about TIME IN the market. But WAIT. it gets even Better.-The 500 Index has had ZERO negative 20-year periods, while averaging 10%;-Out of all Rolling 5-Year periods since 1954, only 7 of them have been negative, the worst one was -2.4% (1974).”

That point is only true if you don’t adjust for the impact of inflation over time. However, once you add inflation into the calculation, a far different picture emerges.

But, we also need to include dividends to be factually correct. Even on a 20-year real total return basis, there was a negative return period. But while the three other periods were not negative after including dividends, when it comes to saving for retirement, a 20-year period of 1% returns isn’t much different from zero.

Unfortunately, we are just mere mortals, and using 100+ years of market data misses the real point.

As stated above, the single most important ingredient to investing success is the level of valuations at the start of your journey.

There are many investors today who started investing after the “financial crisis.” Also, there are over 13-million newly minted financial advisors who have never seen a “bear market.”

I have lived through several bear markets in my career and have learned to have great respect for what markets can do to portfolios, retirement plans, and families lives.

You can’t time the market? I agree.

However, you can manage the risk.

Every great portfolio manager over time from Warren Buffett to Ben Graham had one simple concept in managing money – “buy low, sell high.” 

Not one of them ever practiced “buy and hold” as an investment strategy.

If they didn’t. Why should you?

Currently, with the bull market now the longest on record, monetary policy becoming more restrictive, and valuation levels at the second highest level in history – starting your investment process today is likely going to have similar results over the next 20-year period as we have seen throughout similar periods in history.

Such is how all cycles end, and at the extremes, opposing views are always disregarded.

“People don’t want to hear the truth because they don’t want their illusions destroyed” – Fredrich Nietzsche

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The Russian ruble tumbled as much as 2%, sliding to 69.63, the lowest level against the dollar since March 2016 and its biggest drop since August 8 after Russia’s prime minister admitted that US sanctions are starting to bite, and said that he is hopeful that the Bank of Russia becomes “active” as rates are high.

“It’s necessary to move from neutral to stimulating oversight of the credit sphere to create conditions for more confident economic growth,” Medvedev said at conference in Moscow, adding that “Interest rates remain quite high despite the successes in holding back inflation.” The prime minister also urged the central bank to take an “active position” to address the issue of elevated rates.

According to Rabobank’s Piotr Matys, “market participants are especially sensitive to any comments on monetary policy from prominent officials in current environment” adding that the USDRUB could approach 71.40 in coming weeks.

“It seems that the market has interpreted comments from PM Medvedev as political interference in the monetary policy. Such remarks may undermine credibility of the central bank and Governor Nabiullina, who is well respected by investors for acting decisively during the ruble crisis only a few years ago.”

“From the perspective of technical analysis comments from PM Medvedev may provide USD/RUB with sufficient momentum to break higher from the consolidation pattern that formed over the past few weeks. This bullish breakout would allow USD/RUB to extend gains towards the next important level at around 71.40 in the coming weeks”

As the ruble tumbled, bond yields rose, with the benchmark 10Y Russian bond rising above 9% for the first time since 2016.

Earlier, Russia’s Deputy Finance Minister Vladimir Kolychev told Bloomberg TV that Russia is ready to take the emergency step of buying its own ruble debt if a new wave of U.S. sanctions threatens to upend the market.

“In a very stressful scenario when we see the conditions of a market failure” both “the central bank and the government have the tools to intervene on the open market to cushion the adjustment period,”

A coordinated response would be a first since the Finance Ministry and the Bank of Russia teamed up early in 2015 to support the ruble at the height of the country’s currency crisis. As turmoil spreads across emerging markets, Russian assets have been battered by harsh U.S. sanctions in April and a “nuclear” option proposed in Congress that could target sovereign debt.

Prompted by fear about US sanctions, foreign holdings of Russian sovereign ruble debt have since declined to the lowest since 2016, and have handed investors a 12% loss since July, the fourth-worst performance among Russia’s peers tracked by Bloomberg.  The share of non-residents in Russia’s ruble-denominated debt has fallen to 26-27%, according to Kolychev. That’s down from a peak of 34.5% in March and 28 percent in July, central bank data show.

Still, despite the threat of the harshest U.S. measures to date, officials say Russia is prepared for the worst. At a forum sponsored by the ministry in Moscow on Thursday, Kolychev and colleagues from the central bank, Economy Ministry and a big state bank downplayed the risks from painful new measures, arguing that Russia’s in a strong position to weather any further instability, Bloomberg reported.

The U.S. Senate is set to debate new sanctions to punish the Kremlin for alleged election meddling, including a raft of measures dubbed “the bill from hell” that could bar Americans from buying new issues of Russian sovereign debt and ban the largest state banks from using dollars.

If U.S. actions forced foreign investors to sell Russian debt, Kolychev said in the interview that the first move would be to halt new issuance to keep pressure from building in the market.

On Wednesday, the Finance Ministry canceled a bond auction – the second time in recent weeks – amid rising borrowing costs. In another sign of increasing volatility, the governor of the Bank of Russia said policy makers at next week’s meeting will consider the first increase of the key interest rate since 2014 as inflationary risks grow due to the ruble’s weakness, which however appears to be at odds with what the Russian Prime Minister wants in a situation that is starting to looks similar to what is going on in Turkey.

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As was no doubt their intent, the mainstream media has succeeded in overshadowing the Kavanaugh confirmation hearing with a flurry of stories about a mutiny allegedly brewing inside the West Wing that has set more than a few tongues wagging about the possibility of Trump’s cabinet invoking the 25th amendment (an eventuality that was once reportedly discussed by former White House Chief Strategist Steve Bannon). But while White House officials have already vehemently denied the quotes gathered by Bob Woodward in the strategically leaked (to his own newspaper) excerpts from the Watergate reporter’s upcoming book, speculation is shifting to who might be the mystery author of a scathing NYT op-ed reportedly penned by a “senior administration official” that portrays Trump as unfit for office.

Fortunately for Trump, several voices of moderation have come forward to condemn the attacks (amid speculation that the Times’ “senior” source may not be so senior after all). But this incipient backlash didn’t deter Axios (a media org that, like the Times, is notoriously critical of Trump) from piling on with a story about President Trump’s intensifying distrust of those in his inner circle. Trump, Axios claims, is “deeply suspicious of much of the government he oversees” from federal agency grunts all the way up to those privileged few with unfettered access to the Oval Office. The piece even goes so far as to quote yet another anonymous “senior administration official” as saying that “a lot of us are wishing we’d been the writer.”

“I find the reaction to the NYT op-ed fascinating – that people seem so shocked that there is a resistance from the inside,” one senior official said. “A lot of us [were] wishing we’d been the writer, I suspect … I hope he [Trump] knows – maybe he does? – that there are dozens and dozens of us.”

And in case you couldn’t figure out why this is important, allow Axios to elaborate:

Why it matters: Several senior White House officials have described their roles to us as saving America and the world from this president.

A good number of current White House officials have privately admitted to us they consider Trump unstable, and at times dangerously slow.

But the really deep concern and contempt, from our experience, has been at the agencies — and particularly in the foreign policy arena.

In what was perhaps the most bombastic claim included in the piece, Trump reportedly once carried around with him a list of suspected leakers. “The snakes are everywhere but we’re getting rid of them,” he reportedly told Axios.

For some time last year, Trump even carried with him a handwritten list of people suspected to be leakers undermining his agenda.

“He would basically be like, ‘We’ve gotta get rid of them. The snakes are everywhere but we’re getting rid of them,'” said a source close to Trump.

Trump would often ask staff whom they thought could be trusted. He often asks the people who work for him what they think about their colleagues, which can be not only be uncomfortable but confusing to Trump: Rival staffers shoot at each other and Trump is left not knowing who to believe.

And just in case you haven’t read enough about Trump’s purported obsession with “snakes” – here’s some more.

“When he was super frustrated about the leaks, he would rail about the ‘snakes’ in the White House,” said a source who has discussed administration leakers with the president.

“Especially early on, when we would be in Roosevelt Room meetings, he would sit down at the table, and get to talking, then turn around to see who was sitting along the walls behind him.”

“One day, after one of those meetings, he said, ‘Everything that just happened is going to leak. I don’t know any of those people in the room.’ … He was very paranoid about this.”

All of this reinforces the idea that Trump truly believes that there is an organized “deep state” conspiracy to take him down. Of course, what Axios neglects to say, is that he’s not wrong.

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Authored by Mac Slavo via SHTFplan.com,

One of the most well-known makeup stores is now in the crosshairs of the social justice warriors and their ilk. Sephora is being accused of “cultural appropriation”  by witches because the company came out with a “starter witches kit.”

Beauty brand Sephora is kicking off the season with its ‘witches starter kit’ made by Pinrose. The kit includes perfume, tarot cards, sage, and a rose quartz crystal. But witches, who identify with the pagan religion of Wicca (or simply practice witchcraft), are not happy with the French company making a quick buck out of their beliefs, according to Metro UK.

Although Sephora declined to comment, they will still sell the witches kit. The starter kit will be available both in Sephora stores and online starting on October 5, according to Fast Company. Not only is that in plenty of time to get every little girl hexing by Halloween, but it’s more than enough time for “real Wiccans” to bemoan the mainstreaming of witchcraft and others to be upset and launch their own inevitable boycott over the pagan display.

“Sephora is definitely guilty of culture appropriation,” said Indigo, who practices witchcraft, to the Metro.co.uk. 

“I don’t think they’re doing it to spread awareness about the craft, they’re doing it just for profit in my opinion. Although most witches do use what’s in the Sephora box, most of us feel that it’s wrong for just anyone to grab those things and be like “oh hey I’m a witch now” because it’s sacred to us,” Indigo continued.

The packaging itself is a juvenile display of pinks and happy yellows that often are not as often associated with witchcraft as maybe the color black. But that hasn’t stopped witches from being offended and ramping up the blizzard of snowflakes seen in every aspect of everything.

Siera, who identifies with Pagan Witchcraft, told Metro.co.uk,  “Sephora selling ‘witch kits’ actually makes me really upset. Witchcraft isn’t something you just throw around, people put their entire being into this way of life and work so hard at it. I’ve been made fun of way too much for being a witch for it to just become another trend.”

Others, however, see the witches as the ones being guilty of the cultural appropriation they pretend to be offended by.

Modern “witchcraft” as practiced in the Western world is largely based on cultural appropriation ,, you all were the ones who took and twisted indigenous culture to make it a white ppl trend, so cry harder https://t.co/PUPFBedbNq

— Nabigal-Nayagam Haider Ali (@ab_varaham) September 1, 2018

Still others pointed out that it’s the Native Americans who should be upset about cultural appropriation too since white sage comes in the kit.

no offense but white people who insist they’re witches are way more heated about sephora selling witch kits than they are about the fact that the over harvesting of sage bc of new trendy demand for it is making it so native americans are no longer able to perform sacred rituals

— b i c t h (@art_vandeIay) September 1, 2018

Perhaps our society is just a bit over sensitive.  After all, no one is putting a gun to your head and forcing you to buy the kit, unlike Obamacare. Everyone is manufacturing their own anger.  Maybe people just want to be mad anymore.

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Contagion continues…

The tech stock rout, which accelerated during yesterday’s Congressional hearing on social network bias, accelerated on Thursday, this time led by a selloff in chipmakers dragging the Nasdaq Composite to a two-week low.

The biggest loser was KLA-Tencor, which sank 7.8%, pulling the semiconductor space lower by 1.7%. Casino shares were also under pressure with Las Vegas Sands down 2.8 percent. The threat of fresh tariffs by the Trump administration on Chinese goods loomed over equity markets.

After some early gains, the S&P 500 also slumped further away from its recent all time highs and further below 2,900 as investors were spooked by the imminent announcement of some $200BN in in new Chinese tariffs and ahead of Friday’s jobs report.

After initially falling, the dollar rebounded as emerging market stocks stumbled into bear market territory after enjoying an early morning respite from the selling. Meanwhile, Treasuries edged higher after a disappointing ADP report.

“There are many risks out there,” Chris Rupkey, chief financial economist at MUFG Union Bank in New York, wrote in an email to clients.

“Emerging markets causing market chaos (forget US stocks are at all time highs and could care less), rising trade tensions threatening long-established world trade patterns and disrupting company supply-chains.”

EM Equities have slumped into a bear market…

Predictably, attention remains on emerging markets which hold the key to sentiment, with recent losses fueling fears that turmoil could spill into developed markets. While focus remains on efforts from Argentina to Indonesia to sustain confidence, the potential for President Donald Trump to announce another round of tariff hikes on Chinese imports as soon as Thursday also looms large.

Mega-Tech stocks are under pressure once again as FANG slumps to 3-Week lows…

 

With all members slumping..

Treasuries are bid and the dollar is rising.

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Senator Cory Booker (D-NJ) on Thursday said that he would release “committee confidential” documents related to Supreme Court nominee Brett Kavanaugh, in a move he admits would be “knowingly violating the rules” and may result in his ouster from the Senate. 

Booker said “I am right now before your process is finished, I am going to release the email about racial profiling and I understand the penalty comes with potential ousting from the Senate.” 

Dramatic moment when Booker pledges to release committee confidential documents whether Republicans agree or not and Cornyn threatens to to try to expel him from the Senate

“Bring it,” Booker says

(via @atrupar)pic.twitter.com/0WMOrUAdl5

— Judd Legum (@JuddLegum) September 6, 2018

The email in question was part of a massive Monday night document dump from a Bush administration lawyer, hours before Kavanaugh’s confirmation hearings began. 

While Democrats are technically unable to prevent Republicans from confirming Kavanaugh, Booker’s announcement appears to be aimed at discrediting or otherwise casting Kavanaugh in a poor light in order to derail the confirmation. 

Booker questioned Kavanaugh on Wednesday night about his stances on racial inequality referring to emails from his time as a White House counsel for President George W. Bush. But, Republicans later pointed out, one of the emails he was referring to was labeled as “committee confidential.” –The Hill

Booker’s threat frustrated Senate Judiciary Chairman Chuck Grassley (R-IA), who shot back: “How many times you going to tell us that?”  

Sen. John Cornyn (R-TX) admonished Booker as well, telling Booker – a 2020 Democratic hopeful: “Running for president is no excuse for violating the rules of the Senate,” adding “This is no different from the senator deciding to release classified information. … That is irresponsible and outrageous.”

Kamala piles on

Another Democratic hopeful in 2020, Kamala Harris – who got her start in politics working underneath powerful California State Assembly speaker Willie Brown, 30 years her senior, began to browbeat Kavanaugh during Wednesday’s confirmation hearing over whether the USSC nominee had discussed the Mueller investigation with anyone – alluding to a specific person at the Kasowitz Benson Torres law firm. 

.@senkamalaharris asks if Judge Kavanaugh has discussed Mueller Investigation with anyone at Kasowitz Benson Torres law firm.#Kavanaugh: “I would like to know the person you’re thinking of.”

Sen. Harris: “I think you’re thinking of someone and you don’t want to tell us.” pic.twitter.com/pI2XEHNba9

— CSPAN (@cspan) September 6, 2018

Harris seemed less interested in building a case for recusal than making sure Kavanaugh knew that she knew that he knew someone at Kasowitz and that she could introduce that fact into the record at any given moment between now and the final vote on the floor. –Above The Law

Let’s see if anyone from Kasowitz appears on the witness list…  

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WTI has traded sideways (below $69) since last night’s smaller than expected crude draw from API, but algos could not figure out what to do as crude inventories dropped notably but products and Cushing saw stocks rise.

Investors “will look at export numbers to get a handle on global demand to see if it is softening,” Phil Flynn, senior market analyst at Price Futures Group, says. At the same time, focus will be on refiner demand for crude with fall maintenance season beginning, he says.

NOTE – Tropical Storm Gordon won’t have any impact on this week’s report. It should show up in next week’s report.

API

• Crude -1.17mm (-2.9mm exp)

• Cushing +613k (+600k exp)

• Gasoline +1.0mm

• Distillates +1.8mm

DOE

• Crude -4.302mm (-2.9mm exp)

• Cushing +549k (+600k exp)

• Gasoline +1.845mm (-1.5mm exp)

• Distillates +3.199m (+700k exp)

Crude inventories drewdown by a4.3mm – considerably more than API and expectations – but Cushing stocks rose for the 4th week in a row and Gasoline and Distillates also both saw inventory builds.

Production was unchanged last week (remember that unless production rises by 100k, the incremental change in the new data is ignored).

Interesting, as the 2018 summer driving season draws to a close, Bloomberg notes that it hasn’t been a memorable one as far as gasoline demand is concerned. Consumption — measured on a four-week moving average basis — has lagged last year’s level, as stubbornly high pump prices crimped driving. Low deliveries in early August may support demand for a couple of weeks, but the trend is likely to be downward over September and October.

WTI drifted lower into the DOE data (touching $68.50) but kneejerked higher on the DOE print that showed a bigger than expected crude draw, then faded back to unchanged as the rest of the data showed builds…

 

Meanwhile, the WTI-Brent spread soared to $9…

“The Brent forward curve has returned to backwardation as of Sept. 3, reflecting a tightening market that is already feeling the effects of U.S. sanctions on Iran,” Jefferies analyst Jason Gammel wrote in emailed report.

It seems most of the world is ‘bending the knee’ to US sanctions and winding down its Iran crude imports…

And the Permian pipeline discounts tumbled to near record highs…

 

 

 

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