Friday, June 06, 2014

Good Morning America, How Are You?

It is a fantastic Friday, and I look forward to the weekend. 

I have a place right in front of my house where the maple trees sprout and grow.  If you don't know, maple trees put out thousands of little helicopter seeds per year.  Not many sprout, but I have a border covered with large river rocks just in front of my house.  That area rarely gets sun anytime of the year.  The maple seeds sprout there, and grow in the dirt that blows in and gathers in the rock.  I get anywhere between 8 to 20 trees per year there, and to my knowledge, the seeds do not sprout anywhere else. 

I dug many of the sprouts up yesterday.  Mostly the deer eat the small trees, and they die, but I always have a few that make it.  I planted 2 trees along my driveway.  Sadly, I have not much hope they will survive as the roots were shallow.  I soaked them for several hours in compost tea, and then planted them in a mixture of compost, dirt and covered with last year's maple leaves. 

My ice-cream sunday peonies are just starting to bloom.  They are a very unusual color, and the color is not what we bought.  They are a orange-pink-whitest color mix.  The blooms will cover every part of the plant, and unlike other peonies you would not see much green foliage for all the flowers.  My wife bought a twig 10 years ago, on sale for like a $1. It took over 3 years before the first bloom.  Now, it is the most beautiful of all my peonies (well the Tree Peonies are huge (14+ inches across) gold on purple flowers, but they only produce 3-5 blooms per year.)   I've tried splitting it to grow more.   I've not had one survive yet. 

Have a great day.  Enjoy your food, wine and your family. 

Summary:  JUNE 5 - The EURO Show Is Over

In my opinion, there was no surprises to the ECB announcement yesterday.  However, the traders and investors world-wide obviously enjoyed the results as the stock markets worldwide were up substantially.

The one thing he did do was to cut the benchmark rate to .15% (that is very close to zero, right?  Now ECB joins the USA and Japa in ZIRP.  Is ZIRP a disease?  Well as I explained yesterday, once some large country starts this, others must follow  or the citizenry of the country who tries to remain fiscally responsible will oust the politicians.

Of course, there is no currency wars [NOT]. 

Super Mario also announced plans to get banks to begin to make loans with LTRO.  LTRO was long term money from the ECB to help banks shore up their balance sheets.  This was the point, I think, that investors and traders liked.  The problems this may cause in the future are pushed aside.   When will WE ever learn?

Then the EURO got hammered.   Then a remarkable thing happened (that I explained yesterday) the EURO rebounded and closed above the price it was before the meeting.  Today in Europe the EURO is trading higher. 

The jobs report is out, and the report beat expectations.  The pre-opening futures markets likes the report, and the S&P 500 is again shooting well beyond historical highs (set yesterday). 

From BLS: http://www.bls.gov/news.release/empsit.nr0.htm "Total nonfarm payroll employment rose by 217,000 in May, and the unemployment rate was unchanged at 6.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, health care and social assistance, food services and drinking places, and transportation and warehousing." 

Ha... I've told everyone that would listen that ObamaCare was good for jobs.  (and that is all I will say about that).

For those who might have other concerns about the numbers, the jobs report is used by investors worldwide to understand the health of the USA economy.  All the other negative news in the economy is discounted if employment is improving.  The BLS adjustments often seem ridiculous, and they always adjust after the fact (usually negatively).  Don't worry, be happy...

Looking at the labor participation rate I can't help but wonder if there is paradigm shift.  What is the average length of unemployment now?  The post-recession duration of unemployment remains disturbingly high at 34.5 weeks.  The paradigm shift in unemployment is likely the result of global outsourcing and efficiencies of technology from robotics to almost everything else. 

After yesterday's trading and this morning's spurt after the jobs report, the stock market is even more overvalued than it has been.  Don't worry be happy... Well, you should worry.  One of these days (probably soon), investors are going to wake up to the fact the market cannot continue the vertical rise since May 15, 2014 with almost no correction.  But until then, the markets just go higher.  Cycle data would indicate we are due for a significant correction right now, but as Keynes noted, the market can stay irrational longer than you can stay solvent.  Don't buy put options or short the market, but do take out insurance for a fall. 

Look for the stock market to be choppy the rest of the day.  If you have time, look at Econoday's history of job reports.  Then look at SPY or $SPX on Stockcharts.com and you very often observe a big spike in the early morning before NY Opening, and then a choppy day.  Will that happen today?  The probabilities are high it will be a choppy (even a down bias) with a close above yesterday's close. 

Basically, The Stock Market Pricing Mechanism is Broken...

The Stock Market exists to bring together buyers and sells with a free-flow of information.  The price moves to discover the most appropriate price for any given asset.  This element of price discovery is very important.

Real Price discovery is no longer functional for the USA  and now European stock markets in my opinion.  There is a plethora of reasons for this taking place - complexity being one of them. However, the biggest is since the start of the "Great Recession" the Federal Reserve's words and actions are all that drive price exploration. 

When many retail investors invest in stocks, they are no longer investing in the business.  They are gambling on the whims of the Central Banks (Federal Reserve and ECB - and somewhat Japan BoJ). 

I built a systematic way to build a long-term portfolio of uncorrelated assets.  I gave this away to my newsletter readers, but not one of them wanted to invest long-term in any assets.  They wanted to make large returns speculating (which they called investing) on Gold's bottom, junk bonds, growth stocks (like Tesla), corn, soybeans, and so-on.  What in the world?  People that are building wealth take a long term approach; not emotionally charged speculation.   

1.   Where is the reality? 

a.    On April 30, the US announced that US economic growth was nearly zero for the first quarter. 

b.    China, Japan and Europe continued to release troubling economic news.

c.    How did the S&P and DOW react?  The DOW hit and closed at historical highs. 

d.   And if we add in economic data for May?  Awful - The ISM manufacturing dropped to 53.2, significantly missing expectations. Sub-Indices across the board were disappointing with rising prices paid, falling new orders, falling employment in manufacturing and production falling.  What did the market do?  Rally...

e.    Margin debt was the highest on record, which may indicate a correction coming.  It is coming down now, but what happened?  Rally...

2.   Is it economic rot? or the weather?

a.    Most of the bad economic news was blamed on the weather. 

b.    Mass-consumer retailers form WalMart to Amazon to Ford posted significant earnings declines (and sales in most cases) as compared to the same period last year, and the reason?  Reason was out to lunch.  It was toooooo cold for consumers.

c.    However, luxury brands exploded in sales from Tiffanies to Burberry to Lamborghini.  Are the ulta-rich impervious to cold?

d.   And what did the market do?  It rallied to new historic highs. 

3.   What is up with Junk Bonds (debt)?

a.    Yield on junk bonds are down to around 5%.  iShares High Yield Corporate Bond ETF is trading a record high. 

b.    What would retail traders be thinking when they think 5% is all that is required when junk bonds are defaulted on over and over again? 

c.    Think about this: in 2001 US government 1-year Treasury yield was 5%. 

d.   Why are junk bonds acting like this?  Well reveiw the ECB announcement yesterday, and yield on safe investments (if there is anything safe) was nearing zero, and US 10 Year Treasuries yield was headed lower after the ECB announcement. 

e.    Retail traders are looking for yield IN ALL THE WRONG PLACES. 

Ultimately, these irrational valuations will correct.  The pricing defies common sense.  Retail Traders may have reached peak stupidity (and I thought they had done so with the sub-Prime and DOT Com fiascos early in this century). 

Have you considered farm land?  If you can find good farmland with a decent valuation, please inform us.  World-wide population is expanding, and food demand fundamentals suggests farmland and water will be great investments (over the very long term). 

If I was younger, I would invest in a vegetable and grains farm, and go learn how to make a business of it.  I enjoy Praxxus on YouTube.  Maybe you would as well, if you have an open mind.  Ok, I agree he is not a farmer, but I like him.  I have many neighbors that are cattle and alfalfa farmers, and they are not likeable, but you have to be very tough mentally and physically to farm with the wolves and the big cats; and not to forget the land squatters and druggies who are into rustling.     

In the meantime what should you do?  You should own assets, and forget irrationality.  You should then have a systematic way of knowing when to enter (and why), when to exit, and know position sizing inside and out.  Know that someday you will sell those assets.  You DO NOT want to be holding the hot potato when Mr. Market comes to collect. 

Actually, the retail investors success does not lie in getting the timing right.  Success is following a plan and sticking to the plan.  

Super Mario is following the Bernanke playbook; pulling out all most of the stops.  He is also prepared to go much further if he feels it necessary.  Follow the Draghi blueprint.  That blueprint will drive up asset prices, and decrease yield on fixed income assets (such as Sovereign bonds, corporate bonds, and so-on).  You don't need to make it complicated.  FEZ (SPDR DJ Euro STOXX 50 ETF) would allow you to hold 50 of Europe's leading companies. 

Negative interest rates are here, and they may land on the USA shores soon.  They will pus European citizen money out of savings accounts into equities just as it did with the Bernanke plan in the USA. 

It would be irrational not to follow the blueprint, even if temporarily we have to ignore fundamentals.  Price is what it is.

Good Investing