Alex Trias

The Coming Economic Nightmare: Part 1

The Dow Jones Industrial Average started to rally at the front end of the Great Depression, and never looked back. Conclusion: contrary to common sense, the state of the macro economy and the state of capital markets were not that closely related during the last century. Has that changed? Does anything ever change? I wouldn't bet on it. Unemployment, earnings, fundamentals - that stuff matters only insofar as they have an impact on how eager a buyer of stock is relative to a seller of stock. The question you should ask is not "how bad off is the economy" but rather "are investors greedy or frightened right now". Plenty of investors are plenty greedy during recessions, and as a reflection of that are happy and able to bid up asset prices.

What's Wrong with Making Only the Safest Loans?

Great article. I often hear that there was a debt bubble over the last few years which is popping, and that has caused a credit crisis. Most people suggest that the issue was too much debt issuance. What I take from your article (and I agree with this) is that bubbles are nothing more than a mispricing of risk. The credit crisis is not about the volume of debt out there, or even the quality of debt. It is about the price of that debt. At the moment, banks are not willing buyers of risk and, indeed, as safety and soundness regulations start to kick in on top of banker's reluctance to issue high risk loans, my guess is that it may be a while before banks are willing or able to step in to make high risk loans. That sort of depressed demand for risk is great news for investors who want to pig out on high yield sub-investment grade bonds.
Another point I'd add is that rating agencies are getting very, very conservative in how they rate bonds. There is some junk out there today that would have garnered a AAa rating two years ago. I am not sure anyone cares about what Moody's says anymore (I guess Warren Buffett dumped Moody's stocks for just about that reason). But some people must be listening to them, and so to the extent Moody's, Standard and Poors', and Duffy are lowballing the price of risk, there's another reason to be chipper about the prospects of owning junk bonds.
At the moment, I own two ETFs that track junk bonds - HYG and JNK. Both seem very overbought at the moment, but notwithstanding the prospect for a pretty large pullback, I am following what I see as the thinking of this article and looking to add to my positions in these securities over the intermediate term.

Some Graham and Dodd Type Thoughts on Stocks vs. Bonds

Interesting article, although I'd be nervous about relying on the TIP vs. stock analogy. As at least one commentator pointed out, stocks are riskier than Treasuries, so there is a potential apples to oranges comparison problem you have. Second, you haven't accounted for corporate growth rates. Investing in a company because it has a low price to book ratio is all fine and good - provided the shareholder equity is growing, rather than shrinking, over time.
Third, dividends can change based on corporate policy - companies might opt to scrap dividends for buybacks, for instance - sometimes for reasons having nothing to do whatever with corporate earnings. If you want to value a company, you might want to at least take corporate earnings into account somewhere in your equation.

Wide Fund Survey: Prices vs. Primary Trend

The primary trend can give some false positives - meaning, it is not unusual for a bear market rally to go as high, or indeed higher, than a 200 day simple or exponential moving average. A more useful tool, I believe, is seeing whether a 50 day moving average can cross above a 200 day moving average on heavy volume. We're seeing a convergence on some index ETFs - notably FXI and EEM.
More interestingly, we've seen the 50 day cross below the 200 day on a number of short ETFs - I just ran these averages on Yahoo finance and found this formation on SH, DOG, RWM, EFZ. If the short etfs are heading into bear markets, it strengthens the case that primary uptrends may form up on the corresponding long indexes (although you wouldn't expect that 100% of the time given the performance lag you typically see with short ETFs).

Rethinking Diversification

Well, as they say, diversification is a terrible way to get wealthy, but a wonderful way to stay wealthy.


On Dec 14 06:18 PM Robert Nabloid wrote:

> I personally hate diversification. It ties me to market average -
> and if I'm just going to do average, why get involved or worry about
> anything at all? It's out of my hand if that's the road I take. Why
> bother reading or writing anything on SA if I'm tied to average?
> I'd just be waisting my time and it would be better spent working
> overtime or with family/friends.
>
> I'd rather do research and use knowledge and education to try and
> pick companies and industries I know (think) will do better than
> average. You will never achieve success if you strive to be average.
>
>
> For some people the stock market is nothing more than a retirement
> fund they hope maintains value or goes up a little and for them the
> average diversification strategy is just fine and it is probably
> the best strategy for them!
>
> Show me someone that got wealthy off the stock market by being ultra
> diversified? As they achieve success, then most starting moving their
> wealth around and diversifying it to keep it safer. The closer I
> get to retirement the more diversified my portfolio will become.
> To me, diversification is a wealth protection strategy, not a wealth
> building strategy. So it really depends on what you are trying to
> accomplish. .

Rethinking Diversification

Great point - I should have added a fuller picture of my model portfolio which, in full disclosure, contains plenty of stuff besides US stocks and bonds. As far as commodities exposure, I tend to favor a cash-flow associated, rather than supply/ demand driven, approach. So, for instance, I own oil and gas master limited partnerships, and stock in mining companies, as opposed to (for instance, commodity linked ETNs). In addition, for currency exposure, I'm spending more time in non-dollar denominated equities, although I'm exploring some absolute return strategies. Again, based on what I find of interest, I hope to write an article about how currencies should fit into a diversified portfolio as well.

Thanks for your comment.




On Dec 14 04:10 PM bearfund wrote:

> Owning great companies is a fine strategy, but it doesn't really
> help as far as diversification is concerned. The problem with your
> portfolio is that it's not diversified at all if everything in it
> is denominated in dollars and pays out income in dollars. With such
> a portfolio you are at the mercy of the volatile market for paper
> money. Right now, if you own stocks, or bonds from dubious issuers,
> you are taking it on the chin in a dollar short-squeeze. Later you
> will take another beating as hyperinflation cooks off your bonds
> and leaves your stocks mired in a growthless cost squeeze. I hope
> they pay dividends monthly.
>
> A diversified portfolio contains many assets that have nothing to
> do with the dollar, or act as hedges against its movements. Too many
> advisors recommend 5-10% in "commodities"... or real estate or other
> hard assets, which is not nearly enough unless you also have a very
> large and very poweful dollar hedge in your portfolio (like 5x leveraged
> gold futures).
>
> Better would be 10% mixed agricultural futures, 10% real estate,
> 10% oil and gas futures, 10% international hard asset producer stocks
> (miners, agriculturals), 30% gold and silver, 35% dividend-paying
> stocks with varied global market, industry, and currency exposure
> but biased toward the best balance sheets and management, 15% global
> bonds in mixed currencies, and a 20% short position in government
> bonds, especially Treasuries. Such a portfolio is far better diversified
> than any dollar-denominated ETF, especially one centered on a particular
> country or region. It's not nearly as good as a dynamic portfolio
> that takes advantage of opportunities to short or avoid bubbles and
> capture arbitrage spreads, but as a hold-and-forget mix it's hard
> to do better. If you owned this for only the last 6 months you are
> probably ready to commit suicide. If you owned it for only the 6
> months before that, you were probably feeling like a genius. But
> if you owned it for the last 20 or 50 years you are probably feeling
> just fine, and have obtained a decent return when measured in terms
> of the goods and services you need to buy. And that's the point.