Friday, August 12, 2011
Warning: Your Gold Might Be Taxable
For a variety of reasons, gold, precious metals, grains, and a variety of other commodities asset classes have been on a roll over the last several months. Some commodities like copper or iron ore soar in response to development and prospects for growth in the world economy. Other commodities, and gold in particular, rally when fear is pervasive in the global economy. If a country's sovereign debt has roiled out of control to the point where you might question the true value of its currency or its real purchasing power, then gold really shines. The extent to which all types of commodities have rallied is indication of the schizophrenia in today's global economy and financial markets. For everyday investors, a vast majority of this commodity exposure has come from allocations to funds that come with little known tax implications.
Commodity exchange-traded funds come in three varieties: funds that invest in bullion or the physical commodity held in a vault, funds that invest in futures contracts to garner commodity exposure, and exchange-traded notes that some financial entity issues to guarantee the performance of an index. Each type of fund has a separate tax consequence.
Funds that invest in the physical commodity to be held in a vault issue a tax form 1099, but they do not benefit from the reduced preferential long-term capital gains treatment, which is currently 15%. Instead, they are treated by the IRS as "collectibles", and taxed at the 28% rate attributed to collectibles. This collectibles rate is applied to any gain associated with owning the fund even if it were held over the twelve month period required to take advantage of the long-term capital gains rate.
A futures contract is a contract between two parties to exchange a specified asset at a specific established price today with delivery occurring at some specified future date. Investment funds seeking commodity exposure most commonly invest in futures contracts. There are several tax consequences associated with investing in these types of funds which are little understood. First of all, let's say that you bought a gold fund of this type in January of the year. And let's say the value of your fund increases 30% for the year. Well, even if you do not sell your fund at the end of the year, you are taxed on the market value of the fund at the end of the year. Imagine getting a tax bill without collecting the proceeds! As disruptive as this may be, the tax rate on the gains, regardless of the holding period, is 60% at long-term capital gains rates and 40% at short-term capital gains rates, which are substantially higher. To make matters even worse, this type of fund issues a K-1, which is very concerning because companies can issue the K-1 well into the following tax year, substantially beyond the issue date for the more common 1099 form.
Exchange traded notes are the third type of commodity-based fund. With these an issuer guarantees to match the performance of an index and issues shares in accordance with that guarantee. This type of fund is guaranteed by the financial viability of the issuing company. It is not protected by the price of the underlying commodity. It does however, issue a more favorable 1099 tax form and the gains that it generates qualify for the preferential long term capital gains rates.
The point of this outline is to be aware and educated, and to appreciate that the world of investing is not as simple as your father's Oldsmobile. Beyond supply and demand, and relative strength, and sector rotation, there are several underlying variables that can directly impact your returns. Without such knowledge, all that glitters may not be gold.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.
Precious metal investing is subject to substantial fluctuation and potential for loss.
Principal risk: An investment in Exchange Traded Funds (ETFs), structured as a mutual fund or unit investment trust, involves the risk of losing money and should considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks: not diversified, the risks of price volatility, competitive industry pressure, international political and economic developments, possible trading halts, Index tracking error.
Structured notes may not be suitable for all investors and involve special risks such as risk associated with leveraging the investment, potential adverse market forces, regulatory changes, and potentially illiquidity. There is no assurance that the investment objective will be attained.
Investors should consider the investment objectives, risks, charges, and expenses of the investment company before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read the prospectus carefully before investing.
Monday, May 16, 2011
Baseball and Investments
Last fall, Shane Justis joined Gann Partnership, LLC. In Shane's previous life, he played professional baseball for both the Los Angeles Dodgers and the Milwaukee Brewers. As a child, Shane was intrigued with investments, and always planned to go into the profession after baseball. When he interviewed, my first question for Shane literally was, "why in the hell do you want to go into this crazy business?" When Shane immediately without any hesitation responded that he truly wanted to help people, we knew that we had found the one. I had been interviewing other strong candidates for over two years, and this was the answer that I was seeking, but only heard from Shane. Shane has integrated very well, and he is a vital member of our team.
Shane has made numerous comparisons as to how he managed his baseball career and how we manage clients' assets. Even I, who was never a jock, am now thinking in terms of baseball references, and wish to share some of the insights that Shane learned on the baseball field and how we are applying these principles into our field of investment management.
A) Going for Singles and Doubles and Avoiding the Strike Outs
Our investment mandate is first and foremost to do no harm. This means that above all else, we evaluate the global macro and domestic micro economic conditions, including trends, breadth, relative strength of specific market sectors, supply and demand, and institutional investment participation to determine how and where we should allocate to avoid losing principal. Achieving steady, consistent positive returns is the holy grail for true investment success. The power of compounding is magical. But compounding works in both directions. It is overwhelmingly favorable when returns are positive, but it is extremely destructive and often fatal when returns are negative. The batter who consistently hits singles and doubles has a much better batting average and is a more valuable member of the team than the batter who swings for the fences each time at bat, but gets fewer hits. There are times where we hit investment triples and home runs, but when we approach the plate, we are swinging for consistent hits and avoiding strike outs.
B) What's a good batting average
A baseball player with a long career of earning a batting average of 300 can easily qualify for acceptance into the Hall of Fame. This average indicates that this player is good for a hit 3 out of the 10 times he bats. It also means that even though he fails 7 out of 10 times to get on base, he is nonetheless a hero and likely a Hall of Famer. An exceptional batting average would be 330. A weak average would fall around 250, and an average player's average would be somewhere between 250-275. This is huge for two reasons. First, it shows that there is not that big a difference numerically between being average and being exceptional. Second, it is proof that you don't have to be profitable on every investment decision to still be a "hall of famer". We are consistently seeking ways to increase our investment batting average with full awareness that not every trade, regardless of the logic behind it, will work out.
C) Owners, General Managers, Coaches and Players
Teams in professional baseball are comprised of owners who appoint general managers, who hire the coaches, who in turn recruit the players. In many ways, we are structured very similarly. We are the investment general managers, who work on behalf of our clients, who are the owners. As the general manager, we assemble and monitor the investment management teams and determine the appropriate asset class mix and investment strategies. The investment management teams which we appoint and monitor serve as the coaches, who pick the "players" by analyzing and selecting the specific investment opportunities based on a disciplined investment process. We pull the team together and make changes to the lineup as markets and opportunities evolve. The pitcher is clearly an integral part of a baseball team and its success. Team managers must not only be on the prowl for good pitchers to add to their club, but to consistently win games, they must know when it is optimal to pull the starting pitcher from the mound and have a relief pitcher ready and able. Just as there is a right time to pull a pitcher from the mound in both winning and losing situations, there are times when we must reassemble our investment teams. Being independent and not tied to any one investment firm is critical to being objective and remaining unbiased to make the right changes on behalf of our owner clients. Investing for us is a team effort, and there is great power in having a strong team.
D) The Science Behind Baseball and Investing
Ted Williams is recognized as "the greatest hitter who ever lived". He was the last player in Major League Baseball to bat over .400 in a single season. He also holds the highest career batting average of anyone with 500 or more home runs. Although Ted was born with innate talents, there has never been a more devoted student of the art of baseball hitting. In fact, Ted Williams is the author of The Science of Hitting where he enumerates 77 zones of hitting. He approached baseball as a science, and studied it from all angles.
Good baseball players have to study the strengths and weaknesses of opposing pitchers. And fielders have to study the strengths and weaknesses of batters. For amateurs, baseball might appear mostly as raw talent intersecting with luck and randomness. However, for professionals, it is a game of study and practice.
As investment professionals, our work similarly may appear to be luck and random. However, in reality, mastering our art involves a tremendous amount of discipline and study. Wayne Gretzky, arguably the best hockey player ever, is known for his quote, "I skate to where the puck is going to be, not where it has been". Knowing what investments have done requires no skill. Studying markets to project what they will do, is the true art of investment management. Sports, like investments, can either be a game and a hobby, or they can be studied from a variety of disciplines, and mastered as a profession. Knowing where the market is likely to trade requires as much dedication as knowing where the "puck" is going to be or the baseball is most likely to be hit.
We invite you to forward this to others who would appreciate the analogies between sports and business. And, if you are curious and want the inside scoop on what life is like for a professional athlete, or wish to speak directly with Shane about how specifically he is incorporating his on the field baseball skills into the field of investment management, we invite you to call our office.
Wishing you all the best,
Greg Gann
Shane has made numerous comparisons as to how he managed his baseball career and how we manage clients' assets. Even I, who was never a jock, am now thinking in terms of baseball references, and wish to share some of the insights that Shane learned on the baseball field and how we are applying these principles into our field of investment management.
A) Going for Singles and Doubles and Avoiding the Strike Outs
Our investment mandate is first and foremost to do no harm. This means that above all else, we evaluate the global macro and domestic micro economic conditions, including trends, breadth, relative strength of specific market sectors, supply and demand, and institutional investment participation to determine how and where we should allocate to avoid losing principal. Achieving steady, consistent positive returns is the holy grail for true investment success. The power of compounding is magical. But compounding works in both directions. It is overwhelmingly favorable when returns are positive, but it is extremely destructive and often fatal when returns are negative. The batter who consistently hits singles and doubles has a much better batting average and is a more valuable member of the team than the batter who swings for the fences each time at bat, but gets fewer hits. There are times where we hit investment triples and home runs, but when we approach the plate, we are swinging for consistent hits and avoiding strike outs.
B) What's a good batting average
A baseball player with a long career of earning a batting average of 300 can easily qualify for acceptance into the Hall of Fame. This average indicates that this player is good for a hit 3 out of the 10 times he bats. It also means that even though he fails 7 out of 10 times to get on base, he is nonetheless a hero and likely a Hall of Famer. An exceptional batting average would be 330. A weak average would fall around 250, and an average player's average would be somewhere between 250-275. This is huge for two reasons. First, it shows that there is not that big a difference numerically between being average and being exceptional. Second, it is proof that you don't have to be profitable on every investment decision to still be a "hall of famer". We are consistently seeking ways to increase our investment batting average with full awareness that not every trade, regardless of the logic behind it, will work out.
C) Owners, General Managers, Coaches and Players
Teams in professional baseball are comprised of owners who appoint general managers, who hire the coaches, who in turn recruit the players. In many ways, we are structured very similarly. We are the investment general managers, who work on behalf of our clients, who are the owners. As the general manager, we assemble and monitor the investment management teams and determine the appropriate asset class mix and investment strategies. The investment management teams which we appoint and monitor serve as the coaches, who pick the "players" by analyzing and selecting the specific investment opportunities based on a disciplined investment process. We pull the team together and make changes to the lineup as markets and opportunities evolve. The pitcher is clearly an integral part of a baseball team and its success. Team managers must not only be on the prowl for good pitchers to add to their club, but to consistently win games, they must know when it is optimal to pull the starting pitcher from the mound and have a relief pitcher ready and able. Just as there is a right time to pull a pitcher from the mound in both winning and losing situations, there are times when we must reassemble our investment teams. Being independent and not tied to any one investment firm is critical to being objective and remaining unbiased to make the right changes on behalf of our owner clients. Investing for us is a team effort, and there is great power in having a strong team.
D) The Science Behind Baseball and Investing
Ted Williams is recognized as "the greatest hitter who ever lived". He was the last player in Major League Baseball to bat over .400 in a single season. He also holds the highest career batting average of anyone with 500 or more home runs. Although Ted was born with innate talents, there has never been a more devoted student of the art of baseball hitting. In fact, Ted Williams is the author of The Science of Hitting where he enumerates 77 zones of hitting. He approached baseball as a science, and studied it from all angles.
Good baseball players have to study the strengths and weaknesses of opposing pitchers. And fielders have to study the strengths and weaknesses of batters. For amateurs, baseball might appear mostly as raw talent intersecting with luck and randomness. However, for professionals, it is a game of study and practice.
As investment professionals, our work similarly may appear to be luck and random. However, in reality, mastering our art involves a tremendous amount of discipline and study. Wayne Gretzky, arguably the best hockey player ever, is known for his quote, "I skate to where the puck is going to be, not where it has been". Knowing what investments have done requires no skill. Studying markets to project what they will do, is the true art of investment management. Sports, like investments, can either be a game and a hobby, or they can be studied from a variety of disciplines, and mastered as a profession. Knowing where the market is likely to trade requires as much dedication as knowing where the "puck" is going to be or the baseball is most likely to be hit.
We invite you to forward this to others who would appreciate the analogies between sports and business. And, if you are curious and want the inside scoop on what life is like for a professional athlete, or wish to speak directly with Shane about how specifically he is incorporating his on the field baseball skills into the field of investment management, we invite you to call our office.
Wishing you all the best,
Greg Gann
Wednesday, March 16, 2011
Horizons Newspaper Interview
I was recently interviewed by Horizons Newspaper. Please click on the link to read the article:
http://issuu.com/tmann/docs/horizons2011feb
Please consider the following when reading this article:
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing involves risk including possible loss of principal. No strategy assures success or protects against loss.
http://issuu.com/tmann/docs/horizons2011feb
Please consider the following when reading this article:
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing involves risk including possible loss of principal. No strategy assures success or protects against loss.
Wednesday, March 9, 2011
Is World Hunger Necessary?
An op/ed in the January 18, 2011 edition of Investors Business Daily stated that governments around the world and in particular in Africa promote famine. While it referenced corruptions amongst governments which sold their nation's grains and kept the profits for themselves, it raised the more controversial issue of African nations which have declined American food aid due to their policy of accepting food from the United States because our nation's food is genetically modified. In 2002, Zambia declined food aid from the U.S., mostly in the form of corn, deeming it "frankenfood", notwithstanding a famine that would affect nearly one-third of its population. In light of recent rebellions in Tunisia, Egypt, Bahrain, and Libya which have been sparked by food shortages and vastly escalating food prices, I was motivated to learn more about genetically modified food (GMF), and its potential impact on solving world hunger and perhaps more geopolitical revolutions.
The World's population is projected by the United States Census Bureau to grow from approximately 7 billion in 2012 to 8 billion by the year 2025. To put this into perspective, there were only 6 billion mouths to feed in the year 2000. Today, tragically, eighteen percent of the population of the developing world lacks sufficient food. In a nation like China where the need for food production is expected to increase sixty percent by the year 2030 to keep pace with population growth, boosting food production has always been a national priority. Africa has the highest population growth rate in the world, making it difficult to maintain adequate food supplies.
Compounding these problems are recent draughts, floods and fires and the diversion of food crops to produce bio-fuels as well as export bans imposed by nations in light of shortages. Some examples are the cost of wheat which has almost doubled in the last six months and oil prices which have surpassed $100 per barrel, putting more pressure on farmers to use corn for fuel production, rather than for food. On February 16, 2011, Josette Sheeran, the Executive Director of the United Nations World Food Programme, asserted that we are on "red alert". World Bank Managing Director, Ngozi Okonjo-Iweala, said, "I feel we have now entered a danger zone. National food security issues are becoming a global food security issue. This is a challenge for the world. Almost one billion people are going to bed hungry."
Biotechnology used for purposes of human food supply no doubt is unsettling for many. Terms like "genetically modified", particularly when this term relates to food is foreign and scary. I don't know what the alternative is, especially for hungry people. Farmers have been battling pests for centuries. Chemicals such as pesticides and herbicides are very common and widely-used. Because of environmental and health concerns, many of which have been raised by European scholars who are not surrounded by famine, development of new chemical treatments has been curtailed in recent years. Today, scientists are using the tools of advanced molecular technology to fortify plants with genes to help them resist pests. Although breeding practices have been used for years to grow crops with desirable traits, scientists can now identify genes from similar species or even from completely unrelated organisms, and transfer those genes into crops.
Sharon Bomer Lauritsen, Executive Vice President, Food and Agriculture for the Biotechnology Industry Organization, states, "biotech crops help to provide for more sustainable agricultural production. The benefits include a reduction in the environmental impacts of agriculture, increased production on the same amount of acreage, improved food quality, and increased farmer incomes."
The reality is that much of the controversial science involved in agriculture is used and is more widely accepted globally when it comes to pharmaceuticals or many other industrial products. With staggering world population growth, radical weather events, famine, and political upheavals, food and the efficacies of food production will surely continue to be a major economic theme and investment opportunity over the course of the decade and beyond. I will do my best to keep you informed.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
The World's population is projected by the United States Census Bureau to grow from approximately 7 billion in 2012 to 8 billion by the year 2025. To put this into perspective, there were only 6 billion mouths to feed in the year 2000. Today, tragically, eighteen percent of the population of the developing world lacks sufficient food. In a nation like China where the need for food production is expected to increase sixty percent by the year 2030 to keep pace with population growth, boosting food production has always been a national priority. Africa has the highest population growth rate in the world, making it difficult to maintain adequate food supplies.
Compounding these problems are recent draughts, floods and fires and the diversion of food crops to produce bio-fuels as well as export bans imposed by nations in light of shortages. Some examples are the cost of wheat which has almost doubled in the last six months and oil prices which have surpassed $100 per barrel, putting more pressure on farmers to use corn for fuel production, rather than for food. On February 16, 2011, Josette Sheeran, the Executive Director of the United Nations World Food Programme, asserted that we are on "red alert". World Bank Managing Director, Ngozi Okonjo-Iweala, said, "I feel we have now entered a danger zone. National food security issues are becoming a global food security issue. This is a challenge for the world. Almost one billion people are going to bed hungry."
Biotechnology used for purposes of human food supply no doubt is unsettling for many. Terms like "genetically modified", particularly when this term relates to food is foreign and scary. I don't know what the alternative is, especially for hungry people. Farmers have been battling pests for centuries. Chemicals such as pesticides and herbicides are very common and widely-used. Because of environmental and health concerns, many of which have been raised by European scholars who are not surrounded by famine, development of new chemical treatments has been curtailed in recent years. Today, scientists are using the tools of advanced molecular technology to fortify plants with genes to help them resist pests. Although breeding practices have been used for years to grow crops with desirable traits, scientists can now identify genes from similar species or even from completely unrelated organisms, and transfer those genes into crops.
Sharon Bomer Lauritsen, Executive Vice President, Food and Agriculture for the Biotechnology Industry Organization, states, "biotech crops help to provide for more sustainable agricultural production. The benefits include a reduction in the environmental impacts of agriculture, increased production on the same amount of acreage, improved food quality, and increased farmer incomes."
The reality is that much of the controversial science involved in agriculture is used and is more widely accepted globally when it comes to pharmaceuticals or many other industrial products. With staggering world population growth, radical weather events, famine, and political upheavals, food and the efficacies of food production will surely continue to be a major economic theme and investment opportunity over the course of the decade and beyond. I will do my best to keep you informed.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
Monday, January 31, 2011
Interesting Tidbits About Today's Investors
1) USA Today polled adults "How will you save enough in 2011?"
The results are as follows:
Saving portion of income-51%
Cutting back on luxuries-25%
Winning the lottery-22%
Saving tax refund-17%
Selling items-17%
2) Could you come up with $2000 in 30 days for a major car repair?
This was the question asked by The TNS Finance Personal Risk Assessment and Risk Literacy Survey. In the United States only 46% of those polled could raise these funds through savings, borrowing, friends or family. Those in the UK and Germany scored similarly. However, in Mexico, only 42% of the population polled could raise these funds.
3) Yahoo Finance and Bankrate.com featured a story on lifelong investing, which highlighted the financial view of retirement for a Florida resident by the name of Leonard McCracken, who is presently 107 years old. Leonard has been retired since 1969, when he left a sales position with a now-defunct steel company in Ohio. For the last 41 years, he has been living on savings, Social Security, and a lifetime annuity purchased prior to retirement. His 73 year old son said, "Dad never made more than $10,000 a year in his life." At 107, and 41 years without a paycheck, Leonard is still paying his own bills and living off his own resources.
What most caught my attention about this story is that Leonard always avoided the stock market, preferring CDs and bonds instead. In addition to CDs and bonds, he consistently bought and sold real estate during his working career. In fact, he had bought and sold 35 houses during his life. He had very little debt, worked even when jobs were hard to find, saved religiously and made it a point to remain healthy.
Leonard is a man who has been completely self-sufficient for more than twice the average length of retirement. He did this by living within his means, and minimizing risks with his investments. How many people believe that they have to shoot for the stars in terms of investment performance to make up for the huge losses they have incurred in the stock market?
At Gann Partnership, LLC, we are all about growth but with strategies to minimize risk. We are about balancing offense and defense. We are about preserving principal and protecting gains. Leonard's son, Bob said, "when the economy tanked, he made a lot of us look real silly." Because of our defensive strategies, we might be missing some of the tremendous and unsustainable surge in today's stock market, but I am confident that we will endure and we will never look "real silly".
No one person has a monopoly on all the good ideas and strategies. Connect with us if you would like non-sales oriented, objective feedback or a second opinion.
Also, I encourage you to pass this along to anyone else who might appreciate these perspectives.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
The results are as follows:
Saving portion of income-51%
Cutting back on luxuries-25%
Winning the lottery-22%
Saving tax refund-17%
Selling items-17%
2) Could you come up with $2000 in 30 days for a major car repair?
This was the question asked by The TNS Finance Personal Risk Assessment and Risk Literacy Survey. In the United States only 46% of those polled could raise these funds through savings, borrowing, friends or family. Those in the UK and Germany scored similarly. However, in Mexico, only 42% of the population polled could raise these funds.
3) Yahoo Finance and Bankrate.com featured a story on lifelong investing, which highlighted the financial view of retirement for a Florida resident by the name of Leonard McCracken, who is presently 107 years old. Leonard has been retired since 1969, when he left a sales position with a now-defunct steel company in Ohio. For the last 41 years, he has been living on savings, Social Security, and a lifetime annuity purchased prior to retirement. His 73 year old son said, "Dad never made more than $10,000 a year in his life." At 107, and 41 years without a paycheck, Leonard is still paying his own bills and living off his own resources.
What most caught my attention about this story is that Leonard always avoided the stock market, preferring CDs and bonds instead. In addition to CDs and bonds, he consistently bought and sold real estate during his working career. In fact, he had bought and sold 35 houses during his life. He had very little debt, worked even when jobs were hard to find, saved religiously and made it a point to remain healthy.
Leonard is a man who has been completely self-sufficient for more than twice the average length of retirement. He did this by living within his means, and minimizing risks with his investments. How many people believe that they have to shoot for the stars in terms of investment performance to make up for the huge losses they have incurred in the stock market?
At Gann Partnership, LLC, we are all about growth but with strategies to minimize risk. We are about balancing offense and defense. We are about preserving principal and protecting gains. Leonard's son, Bob said, "when the economy tanked, he made a lot of us look real silly." Because of our defensive strategies, we might be missing some of the tremendous and unsustainable surge in today's stock market, but I am confident that we will endure and we will never look "real silly".
No one person has a monopoly on all the good ideas and strategies. Connect with us if you would like non-sales oriented, objective feedback or a second opinion.
Also, I encourage you to pass this along to anyone else who might appreciate these perspectives.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
Friday, January 7, 2011
2010: The Year in Retrospect
A) 2010 was a year characterized by two "seasons". In the first half of the year from January through June, the S&P 500 was negative 7.87%. From July through December, the S&P 500 was positive 22.41%.
B) The month of December saw the S&P 500 gain 4.28%. This is equivalent to an annualized return of 51.36%.
C) From March 6, 2009 to December 31, 2010, the S&P 500 rallied 84.03%.
D) Putting these returns in context, it is important to appreciate that from March 31, 2000 (almost eleven years ago) to December 31, 2010, the S&P's performance is negative 16.08%, and that is after including all the above referenced rallies.
E) Another sobering fact is that the S&P 500 last made a high on October 5, 2007, and from this date through December 31, 2010, the index is negative 19.26%.
F) Over the last fifty years, the S&P 500 has been up 53% of all days and down the other 47%, as documented by BTN Research.
G) Domestically, small cap stocks were the leaders for the year over every other major asset class. Alternative energy and solar in particular was one of the worst performing sectors.
H) In addition to commodities, the real winners in 2010 were emerging markets. In particular, Peru, Thailand, Chile, Philippines, Indonesia, Malaysia and South Africa showed the greatest strength in descending order per Dorsey Wright's January 4, 2011 report.
I) With respect to currencies, 2010 was again a year of two halves. The first half witnessed a rise in the U.S. Dollar, but in the second half it fell, erasing most of its prior gains. The Australian Dollar and the Japanese Yen were the strongest currencies for the year. In contrast, the Euro and the British Pound were the weakest currencies per Dorsey Wright's January 4, 2011 report.
Short Term Risks Heading Into 2011
A) Currency wars present unusual risks that are not easily calculated. There is sort of a tug and a pull when it comes to manipulating currencies. To stimulate exports, countries seek to weaken their currencies. However, when currencies become too weak, that can undermine investment into the economy. Chile represents this dilemma perfectly today. According to Siobhan Morden, a Latin American strategist at RBS Securities, Inc., Chile has practically no debt and no fiscal deficit. Chile is the world's largest copper producer, and the surge in copper prices has resulted in a much stronger Chilean Peso. Just recently countries such as Chile are selling their home currencies on the open market, and using the proceeds to buy US Dollars, so as to puff up the relative value of the greenback. Considering that most commodities and other global products are priced in US dollars, this type of currency manipulation could result in dramatic and quick reversals from emerging markets which have been on a tear in the last year.
B) The impetus for the market's second half year surge is the Federal Reserve's commitment to buying back government bonds. With improved statistics and optimism, it is more likely that future economic stimuli will be halted. In fact, there is a risk that the US might move closer to European austerity measures if it is perceived that the storm is over. Also food prices are at inflation adjusted all-time highs, and gas prices are steadily increasing, both of which can cause a drag on the economy.
C) Warren Buffett advises to be greedy when the majority is fearful, and to be fearful when most are greedy. At the start of 2011, 63% of retail investors are bullish, as reported by the American Association of Individual Investors. And the most recent survey by Investors Intelligence shows that advisors are now more bullish than at any other time since the peak in October, 2007. These are very bearish indicators. The best time to buy stocks is when no one else wants them.
D) The weakness in the economy resulted in unprecedented strategies to grow the economy. These have not been normal times. In fact, a new term has been coined for this period as the "new normal". Believing that companies were too big to fail, governments around the world have been changing the standard rules. There has been anything but certainty in the last two years. We have kicked the can down the road by borrowing. The analogy that comes to mind is the festive holiday shopper who overspends in December by putting more and more on his credit cards. There is exuberance at the holidays, but reality sets in in January when all the bills arrive. The problems which created the great financial meltdown were brewing for a long time before they were recognized, much less erupted. As comforting as it may feel to convince ourselves that everything is now behind us, we still need to face the music about how to unravel the mass of global debt. I am sorry to say that it will not all be pretty. This is still a market that requires 'rowing" strategies, notwithstanding the fact that the majority believes it is time for clear sailing. I have both my oars and sails on board. Stay tuned.
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International and emerging market investing involves special risks such as currency fluctuation and
political instability and may not be suitable for all investors.
The prices of small cap stocks are generally more volatile than large cap stocks.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
B) The month of December saw the S&P 500 gain 4.28%. This is equivalent to an annualized return of 51.36%.
C) From March 6, 2009 to December 31, 2010, the S&P 500 rallied 84.03%.
D) Putting these returns in context, it is important to appreciate that from March 31, 2000 (almost eleven years ago) to December 31, 2010, the S&P's performance is negative 16.08%, and that is after including all the above referenced rallies.
E) Another sobering fact is that the S&P 500 last made a high on October 5, 2007, and from this date through December 31, 2010, the index is negative 19.26%.
F) Over the last fifty years, the S&P 500 has been up 53% of all days and down the other 47%, as documented by BTN Research.
G) Domestically, small cap stocks were the leaders for the year over every other major asset class. Alternative energy and solar in particular was one of the worst performing sectors.
H) In addition to commodities, the real winners in 2010 were emerging markets. In particular, Peru, Thailand, Chile, Philippines, Indonesia, Malaysia and South Africa showed the greatest strength in descending order per Dorsey Wright's January 4, 2011 report.
I) With respect to currencies, 2010 was again a year of two halves. The first half witnessed a rise in the U.S. Dollar, but in the second half it fell, erasing most of its prior gains. The Australian Dollar and the Japanese Yen were the strongest currencies for the year. In contrast, the Euro and the British Pound were the weakest currencies per Dorsey Wright's January 4, 2011 report.
Short Term Risks Heading Into 2011
A) Currency wars present unusual risks that are not easily calculated. There is sort of a tug and a pull when it comes to manipulating currencies. To stimulate exports, countries seek to weaken their currencies. However, when currencies become too weak, that can undermine investment into the economy. Chile represents this dilemma perfectly today. According to Siobhan Morden, a Latin American strategist at RBS Securities, Inc., Chile has practically no debt and no fiscal deficit. Chile is the world's largest copper producer, and the surge in copper prices has resulted in a much stronger Chilean Peso. Just recently countries such as Chile are selling their home currencies on the open market, and using the proceeds to buy US Dollars, so as to puff up the relative value of the greenback. Considering that most commodities and other global products are priced in US dollars, this type of currency manipulation could result in dramatic and quick reversals from emerging markets which have been on a tear in the last year.
B) The impetus for the market's second half year surge is the Federal Reserve's commitment to buying back government bonds. With improved statistics and optimism, it is more likely that future economic stimuli will be halted. In fact, there is a risk that the US might move closer to European austerity measures if it is perceived that the storm is over. Also food prices are at inflation adjusted all-time highs, and gas prices are steadily increasing, both of which can cause a drag on the economy.
C) Warren Buffett advises to be greedy when the majority is fearful, and to be fearful when most are greedy. At the start of 2011, 63% of retail investors are bullish, as reported by the American Association of Individual Investors. And the most recent survey by Investors Intelligence shows that advisors are now more bullish than at any other time since the peak in October, 2007. These are very bearish indicators. The best time to buy stocks is when no one else wants them.
D) The weakness in the economy resulted in unprecedented strategies to grow the economy. These have not been normal times. In fact, a new term has been coined for this period as the "new normal". Believing that companies were too big to fail, governments around the world have been changing the standard rules. There has been anything but certainty in the last two years. We have kicked the can down the road by borrowing. The analogy that comes to mind is the festive holiday shopper who overspends in December by putting more and more on his credit cards. There is exuberance at the holidays, but reality sets in in January when all the bills arrive. The problems which created the great financial meltdown were brewing for a long time before they were recognized, much less erupted. As comforting as it may feel to convince ourselves that everything is now behind us, we still need to face the music about how to unravel the mass of global debt. I am sorry to say that it will not all be pretty. This is still a market that requires 'rowing" strategies, notwithstanding the fact that the majority believes it is time for clear sailing. I have both my oars and sails on board. Stay tuned.
The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
International and emerging market investing involves special risks such as currency fluctuation and
political instability and may not be suitable for all investors.
The prices of small cap stocks are generally more volatile than large cap stocks.
The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
Past performance is no guarantee of future results.
Thursday, December 23, 2010
Red, Green, or Yellow? ( I think yellow)
John Hussman, Ph.D. is a well-regarded institutional investment manager. He holds a Ph.D. from Stanford University, and was formerly a professor of economics and international finance at the University of Michigan. He has also published the Hussman Econometrics newsletter since 1988. In his December 13, 2010 newsletter, he cites significant parallels between today's market environment and others during which outcomes were not pleasant.
First, allow me to present some context. From September 1, 2010 to December 16, 2010, the S&P 500 index has soared nearly 18.5%. Yes, that's eighteen and a half percent.
Dr. Hussman identifies five criteria which identify a market characterized as overvalued, overbought, and overly bullish. He further goes on to say that past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning". These criteria are as follows:
1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller Price/Earnings Ratio greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27% (Investor's Intelligence)
He further provides the historical instances corresponding with these conditions as follows:
December 1972 - January 1973 (followed by a 48% collapse over the next 21 months)
August - September 1987 (followed by a 34% plunge over the following 3 months)
July 1998 (followed abruptly by an 18% loss over the following 3 months)
July 1999 (followed by a 12% market loss over the next 3 months)
January 2000 (followed by a spike 10% loss over the next 6 weeks)
March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)
July 2007 (followed by a 57% market plunge over the following 21 months)
January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks)
April 2010 (followed by a 17% market loss over the following 3 months)
December 2010
Whether history repeats itself again remains to be seen. Often a signal that the market may be near or at a "top" is when retail investors take the plunge and buy stocks. Throughout the market rally from the March 2009 lows, notwithstanding impressive gains in stocks, the vast majority of funds invested by retail investors since this time period has been to bonds; not stocks according to the Wall Street Journal and Investors Business Daily. Within the last two to three weeks, the flow of funds invested by non-institutional investors has shifted out of bonds and into stocks. Defense is out, and risk is in. When sentiment changes and soars, and prices rise feeding the sentiment change, it is often a huge warning sign.
This is not to say that I believe we are about to repeat the precipitous decline of 2008. And, I am truly not a pessimist. It is just that mathematical and universal laws dictate a reversion to the mean. For every action, there is an equal and opposite reaction. When things go up or down too quickly, caution must be imposed. When sentiments rise and values soar, it is very scintillating to want to hop aboard for fear of missing out on the "big one". We have some market exposure today, but the exposure has safeguards strategically incorporated. The bottom line is that the issues which created the great world-wide great recession are not all corrected. Debt is a looming problem that will continue to rear its head. Revenue estimates are being revised upwards, which can lead to disappointments. I believe that we are in a sideways market. By this I mean that we will have big upturns followed by dramatic, quick reversals. The Euro is still an experiment. No one knows for sure how it will unfold. I have difficulty understanding how Germany who is meticulous, disciplined, restrained and has been fiscally responsible can share a currency with others on the continent such as the Italians and the Spanish whose cultures are completely different. Is it really fair that all these nationalities have their single currency adjusted uniformly? If the debt has to be unwound and reallocated to different currencies, how will values be determined? In short, we are acting nimbly, making sure we have offense as well as defensive strategies in place. Particularly when retail investors are accepting more risk and are more euphoric, it is essential that we tighten our hedges.
After all, we're in a yellow zone, so we're proceeding with caution.
The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Past performance is no guarantee of future results.
First, allow me to present some context. From September 1, 2010 to December 16, 2010, the S&P 500 index has soared nearly 18.5%. Yes, that's eighteen and a half percent.
Dr. Hussman identifies five criteria which identify a market characterized as overvalued, overbought, and overly bullish. He further goes on to say that past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word "warning". These criteria are as follows:
1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller Price/Earnings Ratio greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27% (Investor's Intelligence)
He further provides the historical instances corresponding with these conditions as follows:
December 1972 - January 1973 (followed by a 48% collapse over the next 21 months)
August - September 1987 (followed by a 34% plunge over the following 3 months)
July 1998 (followed abruptly by an 18% loss over the following 3 months)
July 1999 (followed by a 12% market loss over the next 3 months)
January 2000 (followed by a spike 10% loss over the next 6 weeks)
March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)
July 2007 (followed by a 57% market plunge over the following 21 months)
January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks)
April 2010 (followed by a 17% market loss over the following 3 months)
December 2010
Whether history repeats itself again remains to be seen. Often a signal that the market may be near or at a "top" is when retail investors take the plunge and buy stocks. Throughout the market rally from the March 2009 lows, notwithstanding impressive gains in stocks, the vast majority of funds invested by retail investors since this time period has been to bonds; not stocks according to the Wall Street Journal and Investors Business Daily. Within the last two to three weeks, the flow of funds invested by non-institutional investors has shifted out of bonds and into stocks. Defense is out, and risk is in. When sentiment changes and soars, and prices rise feeding the sentiment change, it is often a huge warning sign.
This is not to say that I believe we are about to repeat the precipitous decline of 2008. And, I am truly not a pessimist. It is just that mathematical and universal laws dictate a reversion to the mean. For every action, there is an equal and opposite reaction. When things go up or down too quickly, caution must be imposed. When sentiments rise and values soar, it is very scintillating to want to hop aboard for fear of missing out on the "big one". We have some market exposure today, but the exposure has safeguards strategically incorporated. The bottom line is that the issues which created the great world-wide great recession are not all corrected. Debt is a looming problem that will continue to rear its head. Revenue estimates are being revised upwards, which can lead to disappointments. I believe that we are in a sideways market. By this I mean that we will have big upturns followed by dramatic, quick reversals. The Euro is still an experiment. No one knows for sure how it will unfold. I have difficulty understanding how Germany who is meticulous, disciplined, restrained and has been fiscally responsible can share a currency with others on the continent such as the Italians and the Spanish whose cultures are completely different. Is it really fair that all these nationalities have their single currency adjusted uniformly? If the debt has to be unwound and reallocated to different currencies, how will values be determined? In short, we are acting nimbly, making sure we have offense as well as defensive strategies in place. Particularly when retail investors are accepting more risk and are more euphoric, it is essential that we tighten our hedges.
After all, we're in a yellow zone, so we're proceeding with caution.
The opinoions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Past performance is no guarantee of future results.
Subscribe to:
Posts (Atom)
