Author Archives: Scalper1

Our Growing World

Photo Credit: Ejaz Asi In general, I tend not to go in for macro themes. Why? I tend to get them wrong, and I think most investors also get them wrong, or at least, don’t get them right consistently. I do have one macro theme, and it has served me well for a long time, though not over the past two years. I was using the theme as early as 2000, but finally articulated it in 2006. At that time, I was running my equity strategy for my employer, as well as in my personal account. They used it for their profit sharing plan and endowment. They liked it because it was different from what the firm did to make money, which was mostly off of financial companies, both public and private. They didn’t want employees to worry that their accrued profit sharing bonuses would be in jeopardy if the firm’s ordinary businesses got into trouble. In general, a good idea. At the end of the year, I needed to give a presentation to all of the employees on how I had been managing their money. Because my strategies had been working well, it would be an easy presentation to make… but as I looked at the prior year presentation, I felt that I needed to say more. It was at that moment that the macro theme that I had been working with became clear to me, and I called it: Our Growing World. The idea is this: in a post-Cold War world where most economies have accepted the basic idea of Capitalism to varying degrees, there should be growth, and that growth should create a growing middle class globally. This middle class would be less well-off than what we presently see in America and Western Europe, at least initially, but would manifest itself in a lot of demand for food, energy, and a variety of commodities and machinery as the middle class grew. Now, I never committed everything to this theme, ever. Maybe one-third of the portfolio was influenced by it, on average. Most of what I do was and still is more influenced by my industry models, and by bottom-up stock-picking. That said, the theme has a cyclical bias, and cyclicals have been kicked lately. I still think the theme is valid, but will have to wait for overinvestment and overproduction in certain industries to get rationalized globally. Were this only a US problem, it might be easier to deal with because we’re far more willing to let things fail, and let the bankruptcy process sort these matters out. Governments in the rest of the world tend to interfere more, particularly if it is to protect a company that is a “national champion.” But the rationalization will take place, and so until then in cyclical industries I try to own financially strong companies that are cheap. They will survive until the cycle turns, and make good money after that. That said, the billion dollar question remains – when will the cycle turn? More next time, when I write about my industry model. Disclosure: None

Market Lab Report – Premarket Pulse 2/4/16

Major averages bounced off their intraday lows yesterday, closing mixed on higher volume on continued, elevated levels of volatility. The S&P 500 reversed to close up on the day, while the NASDAQ Composite, weighed down by relative weakness in the NASDAQ 100 big-cap stocks, logged another distribution day despite closing in the upper half of its daily trading range. Oil rose sharply on speculation on a cut in production from various oil producers including Russia, though state-controlled Rosneft, Russia’s largest oil producer, denied the rumors and said the rise in the price of oil on this basis was “idiotic.” Russia ranks as the second largest oil exporter, just behind Saudi Arabia. Futures are off over half a percent, closing in one percent, after ECB President Mario Draghi warned of continued low inflation. “The longer inflation stays too low, the greater the risk that inflation does not return automatically to target,” Mr. Draghi said. Cheaper oil and other “forces in the global economy” that are holding down consumer prices “should not lead to a permanently lower inflation rate,” he said. “They do not justify inaction.” Her remarks were aimed at Germany’s Bundesbank as the ECB pushes for further easing. Unsurprisingly, Bill Gross who used to run the world’s largest bond fund wrote the following in his recent monthly missive: “[Central banks] all seem to believe that there is an interest rate SO LOW that resultant financial market wealth will ultimately spill over into the real economy. I have long argued against that logic and won’t reiterate the negative aspects of low yields and financial repression in this Outlook. What I will commonsensically ask is “How successful have they been so far?” Why after several decades of 0% rates has the Japanese economy failed to respond? Why has the U.S. only averaged 2% real growth since the end of the Great Recession? “How’s it workin’ for ya?” – would be a curt, logical summary of the impotency of low interest rates to generate acceptable economic growth worldwide.”   Indeed, governments have grown too big and too blind to understand that government debt is poison as it does little to stimulate growth while giving governments free reign to print as much as they wish. Prior to World War I, only the creation of corporate debt was allowed which directly stimulated the economy as it allowed corporations to grow. Government debt was prohibited. Taxes were also very low back then. Today, governments around the world are doing all they can to extract as much tax as possible out of their respective citizenries. 8,000 years of history showcases how governments always eventually end up devouring their middle classes as legendary futures trader Ed Seykota brilliantly writes about in his book “Govopoly”.  We are smack in the middle of a colossal sovereign debt crisis where the world governments continue to issue debt then try to service that debt by raising taxes. Martin Armstrong at www.armstrongeconomics.com  wrote: “This shrinks the private sector as governments act like black holes sucking in all the energy and light within the economy, destroying civilization and risking a Dark Age.”

Moby-Markets

“Thar she blows!” “Where away?” “Three points off the lee bow, sir.” “Raise up your wheel. Steady!” Illustration: I.W. Taber. Source: Wikipedia It’s easy to become obsessed. Melville’s famous novel Moby-Dick describes Captain Ahab’s obsession with a giant albino sperm whale. On a previous voyage, the white whale had bitten off Ahab’s leg, leaving him with a prosthesis. Ahab goes on a mission of revenge, casting his spell over the rest of the crew. His fanaticism robs him of all caution. In the end, Moby-Dick destroys the ship and drags Ahab to the bottom. When you’ve suffered a loss in the market, the best thing to do is to put it behind you. Sometimes it’s because the nature of the economy has changed. Sometimes there was an unexpected development – new management, or some external factor. Sometimes you simply miscalculated. Whatever the reason, it’s important to understand that markets are forward-looking. They take current circumstances and future expectations and try to discount all the expected cash-flows to a present value. That’s what market prices represent. Click to enlarge S&P 500 for the last 2 years. Source: Bloomberg So when they move significantly, it’s because the outlook is different. A stock doesn’t know that you own it, and it certainly doesn’t care what the price was when you bought it. Investors can get obsessed with “getting out even.” But that’s a mistake. The only reason to worry about where you bought a stock is to manage your tax-liability. In the midst of the conflict, Ahab was given a final chance to give up his fanatical quest, but he rejects this – to his doom. Investors need to be sure they’re thinking and planning rationally – and not obsessively.