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Where Is The Market Going? Separating The Signal From The Noise
No one “knows” where the market will close tomorrow, let alone this year. That doesn’t stop gurus, seers, and writers from telling us which indicators will give us that inside edge. Read enough of them — or even two — and you realize you’re right back where you started. Instead, just concentrate on these important questions for your portfolio strategy. Journalists have to write x number of stories every week to fulfill their contracts. That doesn’t mean you have to read them and, if you still find amusement in so doing, it doesn’t mean you have to act on their advice. Thank heavens. Case in point. At 6:56 p.m. EST on January 6th, Mark Hulbert posted this piece on Marketwatch.com: “Opinion: A bear market in stocks just became more likely .” The gist of the article was summed up neatly in his first two sentences: “Bad news, investors: The Dow Industrials’ 300-plus-point drop Monday markedly increases the likelihood that the bull market has neared its end – if it hasn’t already. That’s because the stock market’s performance in the first two trading days of January has a surprisingly good record of forecasting the direction for the next 12 months.” Mr. Hulbert goes on to describe his pleasure at discovering this new tool, which is even better, he believes, than using the first five days of January as a tool to decide whether to consider investing for the year, and to note that the 1.8% decline in the first two trading days of 2015 were “even bigger than the 1.6% decline the Dow posted over the first two days of 2008, a fateful year that would later experience the worst bear market since the 1930s.” Give’s one pause, doesn’t it? Ah, but hot on the trail of this article comes one the very next day from Reuters titled, ” Here’s What Happened Those Other Times The S&P 500 Started the Year With 3 Down Days. ” The distinction is important, you see – this “indicator” uses the first three days of the new year, not merely the first two. Reuters’ Myles Udland reports on an e-mail sent by Jonathan Krinsky of MKM Partners that says, “During the eight years since 1928 that the S&P started with three-day losing streaks the index has returned 8.36% on average,” better than all years for the S&P since 1928. Well, there you have it. Since Mr. Hulbert’s data goes back to 1896 and Mr. Krinsky’s only until 1928, we are forced to draw one of two conclusions: There were a preponderance of less-than-pleasant market years prior to 1928 that began with 2 down days the first two trading days of the year, or It just doesn’t matter. I am firmly in the latter camp, call it the “Who Cares?” camp. What actionable offensive might an investor take armed with this information? I suppose if one were schizophrenic enough, they could have gone to cash after the second day and rushed back in the fourth day (after the “first 3 days” had passed.) But, really now, who makes their lifetime investing decisions like this? (I know, I know; more than I’d care to imagine.) Forget the First 2 Days / First 3 Days / First 5 Days Indicators and ask yourself this: Does the macro-economic and geopolitical environment favor the geographic and political regions in which you are investing? Are the sectors you favor undervalued or, if you anticipate superb results based on the first question, are they at least currently fairly valued? Do you currently have the appropriate mix of asset classes and individual funds, bonds and stocks to benefit from (or defend against) the market the first two questions lead you to invest in? Then, as the famous investment guru Aaron Rodgers recently said, “R-E-L-A-X.” Invest rationally. Read fewer articles written breathlessly about tea leaves, bones in a circle, or statistical correlation. There may be more kittens born in January than other months, too. Does that mean we should faithfully track the number of kittens born this month? Of course not; correlation does not mean causation. Sometimes it doesn’t mean anything at all… ________ As Registered Investment Advisors, we believe it is our responsibility to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
GAMCO Natural Resources, Gold & Income Trust: Similar But Different Discounted CEF Opportunity
Summary GNT invests in hard assets and trades at a discount to NAV, like its sibling GGN. GNT, however, has a more diversified portfolio and doesn’t use leverage. Although GNT has a lower yield than GGN, it may be a better option for some investors. GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ) is a sister fund to GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ), another closed-end fund, or CEF, that I recently wrote about . GNT shares many similarities with its older sibling, but the differences could make it more appropriate for some investors looking for a combination of hard asset exposure, income, and “outsourcing.” The same but different Like GGN, GNT is heavily invested in the precious metals, mining, energy, and energy services sectors (this quartet makes up around 80% of its portfolio). That fits tightly with its name and is roughly similar to GGN’s allocation. GNT, however, has more leeway in its security selection, putting another 15% of assets in the specialty chemicals, agriculture, and machinery sectors. This is likely the reason for the very slight difference in the naming of these two closed-end funds. (Note the switched places of natural resources and gold in the two names.) What it means for investors is that GNT is a bit more diversified. That can be a good thing on one hand, but also tells you that this CEF isn’t a pure play precious metals and energy fund. If that’s what you are looking for, you’re better off with GGN or some other option. Another big difference between the two is the use of leverage. GGN uses leverage, GNT does not. That could limit performance at GNT in an up market, but won’t exacerbate losses in a down market. And since weak gold prices and recently plummeting oil prices have been a big issue for the fund, that’s not such a bad thing right now. GNT, however, does make use of options, like its sibling, to meet its primary goal of income generation. That’s why income investors should like this CEF and its monthly dividend. Currently it’s paying $0.07 a share, a reduction from $0.09 a share paid in December. The yield based on the lowered dividend is a touch over 10%. Although that’s nothing to sneer at, GGN’s yield is closer to 12%. But that higher yield comes with the added risk of leverage and with a less diversified portfolio mandate. A trade off worth spending some time considering. But don’t forget the dividend cut, because such dividend changes are a risk inherent to both CEFs. On sale Last year wasn’t any kinder to GNT than it was to GGN (down nearly 24%), with GNT shares falling around 22% (total return, which includes dividends was a loss of around 13%). That’s largely because commodities of all sorts were out of favor. Gold, for example, has been a laggard for some time and oil’s quick fall is filling the headlines right now. However, such hard assets, including other commodities like food, can be a haven in a storm. Gold, for example, is an inflation hedge and a safety vest when the market gets stormy. It’s why asset allocation models include such securities, they provide diversification. That doesn’t mean load up on either GGN or GNT, but it does mean that adding a little of either to an otherwise diversified portfolio could be a good long-term decision. And now is a good time to consider it if you haven’t already. First off, the fund had a bad year last year because the sectors on which it focuses underperformed. There are various reasons for that, and fear of further downside risk could keep you away, but it also means that these sectors are on sale. If you wanted to own them, but haven’t pulled the trigger, they’re cheap right now. But that’s not the only sale going on. GNT is a closed-end fund, which means its market price often deviates from its net asset value, or NAV. NAV is the actual value of what GNT owns on a per share basis. Over the last couple of years, GNT has traded at a discount to its NAV in late December and early January, with the gap narrowing as the new year progresses. Investors selling shares that have gone down in value to lock in losses for tax purposes is a part of this. The discount is currently nearly 9%, larger than sibling GGN’s 5% or so. And while GNT doesn’t have as long a history, the trends for the two are roughly similar. So you could view GNT as being on double mark down. That allows you to pick up a high yield, the chance for the discount to narrow, and exposure to out of favor hard assets. Very similar to what GGN offers, but without the leverage and with a bit more portfolio level diversification. Author’s Note: The comments on the GGN article referenced above brought up some valid points that will be similar for GNT for long-term investors. They are worth a read if you haven’t seen them. This article, like the one about GGN, speaks more to new investors. I plan to address some of the thoughts presented by long-term investors in a future article. It’s number four or five in the cue of ideas brought out by recent comments on articles I’ve written. And I want to thank those who have respectfully disagreed with me. Respectful discussion makes this community better and more fun.