Month: April 2022

Authored by Lance Roberts via RealInvestmentAdvice.com,

Buying stocks is easy; the hard part is knowing when to sell. I read an excellent article recently by Michael Batnick on his trials and tribulations in owning a stock. To wit:

“Now let’s talk about a company that I did care enough about to buy and lost money on. What do you call a stock that was down 58% and then fell 27% in a day? Zillow.”

The primary tenant of investing is that if you are going to put capital at “risk” in a “speculative transaction,” be prepared to lose. We have all been there.

However, where I partially disagree with Michael’s analysis is this:

“‘Buy low, sell high’ is one of the most garbage pieces of financial ‘wisdom.’ Most of the time when you buy low, you end up selling lower. Jon Boorman taught me this a long time ago but sometimes you have to relearn what you already know. Jon wrote, ‘If you want to own the strongest stocks, buy the strongest stocks. Buy something that’s already doing what you want it to. Going up.”’

Like most “financial wisdom” that has survived the ages, it gets lost on young investors who have never lived through an actual bear market. More importantly, there is a vast difference between “momentum” and “fundamental” investing.

There Is No Long-Term

There is a distinction that I must make here. Michael’s quote of Jon Boorman talks about “momentum” investing, or rather, short-term trading. Here is his precise quote.

“Buying a stock at x+1 can be a lower risk trade than buying it today at x. Forget buy low, sell high. When something is falling, it’s more likely to keep falling than it is to reverse, and vice versa. It’s called momentum, and along with value, it’s one of the most empirically proven anomalies to academic theory that the Nobel Prize winners wish would go away. Note to self: Look into buying value stocks that show upward momentum.“

That is precisely correct. In the short-term, “value” has little relevance to what positions you should buy or sell. It is only momentum, the direction of the price, that matters. As discussed in “Picking Up Pennies,” no one is a long-term investor.

Managing money, either “professionally” or “individually,” is a complicated game in the long term. In the short term, particularly amid a speculative mania, it seems exceedingly easy. However, as is the case with every bull market, a strongly advancing market covers up the many investing mistakes investors make. It is the ensuing bear market that reveals them in the most brutal and unforgiving of outcomes. 

There is a clear advantage to providing risk management to portfolios over time. The problem is that most individuals cannot manage their own money because of “short-termism.” (As shown by shrinking holding periods)”

Buying Stocks Is Easy, Especially In A Bull Market

During a bull market, which is the only market many investors have ever navigated, buying stocks is easy. As noted above, a strongly trending bull market covers up investing mistakes of buying poor quality companies. A great example is a company with sales of 3.9 billion and $0 of income, trading at 288x trailing earnings.

Yep, that’s Zillow (Z), and those numbers are after a near 70% decline from the peak.

But it isn’t just Zilliow. According to Leuthold Group, 73 companies in the S&P are currently trading at 10x sales with a median price-to-sales ratio for the entire index above 3x.

Why should 10x sales concern you? Such gets easily dismissed without context, mainly due to a speculative bull market. However, once you view 10x sales with a basis in reality, the concern becomes more evident.

“At 10-times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10-straight years in dividends. That assumes I can get that by my shareholders. It also assumes I have zero cost of goods sold, which is very hard for a computer company.

That assumes zero expenses, which is hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that expects you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10-years, I can maintain the current revenue run rate.

Do you realize how ridiculous those underlying assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?” – Scott McNealy, then CEO of Sun Microsystems, 2000.

Buying stocks is easy in a market that only seems to go up. However, investors’ lack of “experience” provides no basis for a “sell discipline” when things go wrong.

Having A Sell Discipline Is Hard

“If you are going to buy a stock on the way down, you must have a long time horizon. Don’t expect that a stock will turn around just because you bought it. The other thing you must have, and this is critical, is risk management because buying stocks on the way down is a risky endeavor. That can come in two forms. Either have some sort of level where you say I’m out, or, put on a small enough position such that if you’re really wrong, like I was, then it won’t hurt too bad.” – M. Batnick 

Selling stocks is the most difficult challenge for any investor. That single decision becomes plagued with a host of emotional biases.

1. What if I am wrong and the stock keeps going up?

2. If I sell now, I am locking in my loss.

3. If I sell the position, what will I do with the money?

4. I read an article or listened to someone that said the company is still good so that it might go back up.

5. I will sell it when I get back to even.

6. If I double down and the stock goes up, I can get out.

These are all rationalizations to avoid one thing – the admission that you made a wrong decision. It is purely an emotional bias that all investors must deal with.

As Howard Marks once stated:

“If I ask you what’s the risk in investing, you would answer the risk of losing money. But there actually are two risks in investing: One is to lose money, and the other is to miss an opportunity. You can eliminate either one, but you can’t eliminate both at the same time. So the question is how you’re going to position yourself versus these two risks: straight down the middle, more aggressive or more defensive.

I think of it like a comedy movie where a guy is considering some activity. On his right shoulder is sitting an angel in a white robe. He says: ‘No, don’t do it! It’s not prudent, it’s not a good idea, it’s not proper and you’ll get in trouble’.

On the other shoulder is the devil in a red robe with his pitchfork. He whispers: ‘Do it, you’ll get rich’. In the end, the devil usually wins.

Caution, maturity and doing the right thing are old-fashioned ideas. And when they do battle against the desire to get rich, other than in panic times the desire to get rich usually wins. That’s why bubbles are created and frauds like Bernie Madoff get money.

How do you avoid getting trapped by the devil?

I’ve been in this business for over forty-five years now, so I’ve had a lot of experience.  In addition, I am not a very emotional person. In fact, almost all the great investors I know are unemotional. If you’re emotional then you’ll buy at the top when everybody is euphoric and prices are high. Also, you’ll sell at the bottom when everybody is depressed and prices are low. You’ll be like everybody else and you will always do the wrong thing at the extremes.

Therefore, unemotionalism is one of the most important criteria for being a successful investor. And if you can’t be unemotional you should not invest your own money, period. Most great investors practice something called contrarianism. It consists of doing the right thing at the extremes which is the contrary of what everybody else is doing. So unemtionalism is one of the basic requirements for contrarianism.”

This is why being unemotional is tough to do when it comes to your money.

Emotions of “greed” and “fear” cause individuals to take on too much exposure or worry risk is too high. Ultimately, emotion-based arguments are inherently wrong and lead individuals into decisions that harm their financial health.

7 Rules To Manage Risk When Buying Stocks, or Selling Them

Here are the rules for managing risk– they are not unique or new. They are time-tested and successful investor approved. If you follow them, you succeed – if you don’t, you won’t.

1) Sell Losers Short: Let Winners Run

It seems like a simple thing to do, but the average investor sells their winners and keeps their losers.

2) Buy Stocks Cheap And Sell Expensive

You haggle, negotiate, and shop extensively for the best deals on cars and flat-screen televisions. However, you will pay any price for a stock because someone on TV told you to. Insist on making investments when you get a “good deal.” If it isn’t – it isn’t. So, don’t try and come up with an excuse to justify overpaying for an investment. In the long run, overpaying will end in misery.

3) This Time Is Never Different

Our psychological makeup wants us to always hope for the best. However, this time is never different from the past. History may not repeat exactly, but it often rhymes exceptionally well.

4) Be Patient

As with item number 2, there is never a rush to invest, and there is NOTHING WRONG with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue; it is an excellent way to keep yourself out of trouble.

5) Turn Off The Television

Any good investment is NEVER dictated by day to day movements of the market, which are nothing more than noise. Suppose you have done your homework, made a good investment at a reasonable price, and have confirmed your analysis to be correct. In that case, the day-to-day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television is increasing your blood pressure.

6) Risk Is Not Equal To Your Return

Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only equates to the permanent loss of capital incurred when you are wrong. Invest conservatively, and grow your money over time with the LEAST amount of risk possible.

7) Go Against The Herd

The populous is generally “correct” in the middle of a move higher in the markets. However, they are seldom correct at major turning points. When everyone agrees on the direction of the market due to any given set of reasons, generally, something else happens. However, this also cedes to points 2) and 4); to buy something cheap or sell something at the best price, you generally buy when everyone is selling and sell when everyone else is buying.

These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them, you will succeed in your investment goals over the long run. You most likely WILL NOT outperform the markets on the way up, but you will not lose as much on the way down. Such is important because it is much easier to replace a lost opportunity in investing. It is impossible to replace lost “time.”

As an investor, your job is to step away from your “emotions” and look objectively at the market. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend significantly on how you answer that question and manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

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The Allianz Group, one of the world’s largest insurers and asset managers, published a statement Friday detailing how it will no longer insure and invest in new oil and gas fields starting in 2023. This comes at the worst possible time for extremely tight oil markets as Russian production drops due to hard-hitting Western sanctions, igniting fuel shortages in Europe, the US East Coast, and other parts of the world. 

Allianz said it won’t offer new single-site and stand-alone property insurance and casualty insurance coverages (and renew existing contracts after July 1, 2023) and will halt new funding for exploration and development of new oil and new gas fields (upstream), construction of new midstream infrastructure related to oil, construction of new oil power plants, and projects in the Arctic. 

The new guidelines come as the company is “accelerating the deployment of its climate strategy and has announced new ambitious commitments in both its core business and operations … limit the greenhouse gas emissions (GHG) deriving from Allianz’s sites and activities in over 70 markets to net-zero by 2030, instead of 2050 as originally planned.” 

The timing of such an accelerated climate strategy will undoubtedly mean a reduction in capacity for new oil projects globally because it will be harder or perhaps more expensive for oil and gas companies to insure projects. This is a sure way to collapse supply even more, when the US is acting as a barrel of last resort to a tight global energy market hungry for supplies as Russia’s production sinks. 

Allianz said it was “committed to actively driving the transition towards renewable energy sources, supported by significant underwriting and investment capacity and appetite for renewable risks.” 

The world is about to experience a second energy shock, and Allianz’s move to abandon insuring and funding fossil fuel projects may lead to continued disorderly decarbonization of the economy. In other words, elevated energy prices are here to stay. 

Here’s Allianz’s full press release. 

By Ven Ram, Bloomberg macro commentator and reporter

Policy makers in a much-overlooked corner of the world made a bold and telling statement on Thursday: the Swedish central bank raised interest rates, sparking optimism about the krona. In itself, that doesn’t sound like a big deal. But there is more to the increase than meets the eye. While a hike was eventually expected, the timing of it was a surprise. 

For, just at the previous meeting in February, the central bank had offered this guidance:

The forecast for the repo rate indicates that it will be raised in the second half of 2024, which is slightly earlier than in the assessment in November.

From there, the central bank opted straight to raise rates yesterday.

So much for policy guidance — though I mean it as a compliment.

For, after its February guidance, the inflation outlook had become pretty skewed that warranted a change of heart — and a prompt response.

Forward guidance isn’t all that virtuous as it is touted to be. Policy makers need to act when they need to, and promptly at that. There is little point in preparing the markets well ahead of time and hand-holding them all the way before central banks can act. (And the point is that the markets don’t really need it in any case, thank you. A case in point: money markets had been pricing in a significant degree of tightening in Sweden even before the central bank’s February statement that was dovish.)

I find the idea that central banks must wear their hearts on their sleeve ahead of a policy meeting a fundamentally repugnant concept.

For if the Fed has to prepare the markets for what it is going to do well ahead of time — as it has been doing for some time now (witness the chorus of Fed voices that have blessed a 50-basis point increase in May), then it should rightfully be called monetary-policy choreography rather than a policy review.

More importantly, such orchestration introduces a lag before a central bank can act, which is unacceptable when inflation is raging as hot as it is now. Fire engines need to get on with what they need to do when they need to do it, not after the forests have been burnt down. So if the Fed has to come out and raise rates in an emergency policy meeting, the markets will learn pretty quickly about risks embedded in their pricing and be well prepared for such shifts.

The markets are a lot smarter than the central banks would have us believe. So policy makers just need to get on with it.

Earlier today we observed that the Nasdaq was on pace for the worst month since 2008, and judging by the ongoing collapse in the tech index which is now down more than 2% and trading reading near session lows ahead of today’s margin calls that’s pretty much assured.

But thanks to Deutsche Bank we have stumbled on an even more remarkable state.

As the bank’s head of thematic research Jim Reid writes, and sparing us the obvious TS Eliot references, today is the last business day of the month and we could see something in April we’ve only seen three other times since our data starts in 1973: a month where S&P 500 returns fall more than -5% AND US Treasuries fall more than -2%.

At the time Jim wrote his note a few hours ago, the S&P was down -5.3% and TSYs were -2.6% in total return terms. Since then it’s only gotten worse, a move which shows how profound are the disconnects in the market at the moment.

To be sure, while there have been plenty of bigger down months for equities, it’s very rare for Treasuries to fall as much as this on those down months as well. Another remarkable statistic: of the 52 months where the S&P 500 has been down more than -5% over this period, 37 have seen Treasuries have a positive total return in a flight to quality trade.

In other words, it’s also a total disaster for Risk Parity and 60/40 balanced funds which are by definition long both legs.

Obviously the problem here is inflation, inflation which was unleashed not by Putin, or by evil oil corporations but by the Fed monetizing $5 trillion in liquidity in the past 2 years and by profligate, MMTesque fiscal policies that have sparked the worst inflationary fire the US has seen since the days of Volcker.

As Reid concludes, “if inflation structurally changes for a prolonged period we may have to get used to more periods of both being down which will be a problem for 60/40 type portfolios.” And by problem, he of course means, the end although with stocks and bonds both set to crater much more, it is safe to say that nobody will enjoy what is coming in the market in the next few months.

Authored by Michael Snyder via TheMostImportantNews.com,

Should the fact that the U.S. economy actually contracted during the first quarter actually surprise any of us?  Since the start of 2022, there has been crisis after crisis, and now the war in Ukraine is depressing economic activity all over the planet.  What we are facing could most definitely be described as a “perfect storm”, and the truth is that this storm isn’t going to go away any time soon.  But where do we go from here?  Will the U.S. economy bounce back, or will this new economic downturn soon become even worse?  Most economic optimists are assuming that the former will be true, while many economic realists are issuing dire warnings about what is ahead.

I was actually thinking of writing about something else today, but I knew that my regular readers would want me to talk about this…

Gross domestic product unexpectedly declined at a 1.4% annualized pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984, the Commerce Department reported Thursday.

The negative growth rate missed even the subdued Dow Jones estimate of a 1% gain for the quarter, but the initial estimate for Q1 was the worst since the pandemic-induced recession in 2020.

We already knew that inflation had started to spiral out of control in the United States, and now the “stag” part of “stagflation” has arrived.

So what caused this “sudden” downturn?  According to CNN, there are quite a few factors that can be blamed…

A push by the Federal Reserve to raise interest rates and combat high inflation. Supply chain shortages. An ongoing global health crisis. And of course, the geopolitical earthquake caused by Russia’s invasion of Ukraine, which is also threatening to create a world food crisis.

If the U.S. economy shrinks again in the second quarter, that will officially meet the definition of a “recession”.

But as John Williams of shadowstats.com has pointed out, if honest numbers were being used the U.S. economy would still be in a recession that started all the way back at the beginning of the COVID pandemic.

Everybody pretty much realizes that economic conditions are not great right now.

So are brighter days just around the corner?  That is what some pundits seem to think…

The US economy will return to growth during the second quarter, according to RSM chief economist Joe Brusuelas. “Without a doubt,” he said.

“This is noise; not signal,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a report. “The economy is not falling into recession.”

Maybe they will be right.

But if the economy is so strong, then why are foreclosure filings absolutely soaring?…

Last month, 33,333 properties across the U.S. faced foreclosure, a 181 percent jump from March 2021 and 29 percent pop from February, according to a report by foreclosure tracker Attom. The first quarter saw 78,271 properties with a foreclosure filing, a 39 percent from the previous quarter and 132 percent from last year.

Needless to say, there are other experts that have a much more negative view on what is ahead.

For example, Nancy Lazar is warning of a “synchronized” global recession…

Piper Sandler chief global economist Nancy Lazar warned on Monday that the world is in the early stages of a “very significant” and “synchronized” recession.

In an appearance on “Mornings with Maria” Monday, Lazar noted that a recession is expected outside of the United States.

“It’s going to be a global recession pulling down [the] Euro zone in particular,” she told host Maria Bartiromo. “It looks like China GDP [Gross domestic product] in the second quarter could also be negative.”

Actually, if all we suffer is a significant global recession that will be really good news.

Because right at this moment inflation is dramatically spiking all over the globe, we are witnessing the largest land war in Europe since World War II, and the UN is telling us that we are heading into a horrific worldwide food crisis.

An increasing number of Americans are starting to realize that things are moving in the wrong direction.  In Gallup’s April survey, only 18 percent of Americans rated economic conditions as “good”, and only 2 percent rated them as “excellent”…

The GDP news comes on the heels of newly released polling data from Gallup that suggested that economy confidence is extremely low among the American public.

More than four in ten (42%) of Americans said that economic conditions in America were “poor,” while another 38% said that they were only “fair” in Gallup’s April survey. Just 2% said economic conditions were “excellent,” while 18% said they were “good.”

Those are terrible numbers, and they have very serious implications for the Democrats in the fall.

But instead of focusing on fixing the economy, Joe Biden wants Congress to give him another 33 billion dollars for the war in Ukraine…

President Joe Biden is asking Congress for another $33 billion to help Ukraine resist Russia’s invasion and provide humanitarian aid to the Ukrainian people.

The proposal, which the White House will send to lawmakers on Thursday, includes $20 billion in additional security and military assistance for Ukraine, another $8 billion for economic assistance and $3 billion in humanitarian aid.

This is complete and utter madness.

To put this in perspective, the military budget for Ukraine is normally about 6 billion dollars for an entire year.

And much of the equipment that the U.S. is sending to Ukraine is being blown up by the Russians before it can even get to the fighters on the front lines.

With each passing day it is becoming clearer to everyone that this conflict is really a proxy war between the United States and Russia.

And nuclear war is increasingly becoming one of the hottest topics on Russian television.  For example, the following is a recent exchange between two Russian television personalities that is making headlines all over the globe…

“Everything will end with a nuclear strike is more probable than the other outcome,” she continued. “This is to my horror, on one hand, but on the other hand, with the understanding that it is what it is.”

It was at that point Solovyov chimed in, “But we will go to heaven, while they will simply croak.”

“We’re all going to die someday,” Simonyan agreed.

“We’re all going to die someday”?

I certainly don’t like the sound of that.

Unfortunately, many Russians are now entirely convinced that nuclear war is coming.

But instead of pushing for peace, Joe Biden and his minions just keep escalating the conflict.

If we continue to go down this path, it will end in a nightmare.

Our current economic problems pale in comparison to the possibility of a nuclear conflict, but most Americans still don’t understand the implications of the decisions that our leaders are making.

Because if they did understand, there would be giant protests in the streets of every single major U.S. city right now.

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It is finally here! Michael’s new book entitled “7 Year Apocalypse” is now available in paperback and for the Kindle on Amazon.

Authored by Bryan Jung via The Epoch Times (emphasis ours),

An Austin rancher has offered to donate free land to Elon Musk for the use of a new Twitter headquarters in Texas, if he chooses to relocate the company from San Francisco to the Lone Star State, reported Austonia.

The board of Twitter accepted Musk’s deal to buy the social media platform for $44 billion on April 25, after weeks of media speculation.

Gov. Greg Abbott of Texas put out a public invitation to the tech billionaire to move Twitter’s headquarters to the state, where three of Musk’s other companies are already located.

Kim Schwertner, president and CEO of Schwertner Farms, soon made his own private bid to Musk.

“Elon Musk, Move Twitter to Schwertner, TX. 38 Miles North of Austin in Williamson County, and we will give you 100 Acres for FREE,” Schwertner said on Twitter on April 26.

Musk, who already has a business relationship with the Lone Star State, announced last year that he would move Tesla’s headquarters from California’s Silicon Valley to Austin, Texas, after complaining about the Golden State’s unfriendly business environment.

The tech entrepreneur is also building a manufacturing plant for his SpaceX operations in Austin and his Boring Company is headquartered there as well.

The billionaire had purchased more than 2,500 acres southeast of downtown Austin in the city’s extraterritorial jurisdiction for his three companies.

Musk built a $1.1 billion factory on a small portion of the land, which is also Tesla’s new headquarters.