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I am an independent investor blogging at Scott's Investments (http://scottsinvestments.blogspot.com/). My site focuses on consolidating and tracking free online investment resources for the public with an emphasis on ETFs, portfolio strategies, and macroeconomics.
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Scott's Investments
  • David Rosenberg Makes a Case for Gold
     David Rosenberg Makes a Strong Case for Gold in his 11/5 market commentary (pdf)

    GOLD-ILOCKS

    We are still contemplating the massive gold purchase by the Reserve Bank of India — the largest in at least 30 years that took up half of what the IMF intends to sell. Look for China to come in next.

    But here is the reality. All India did was bring gold to a 6% share of its total FX reserves from 4%. Fifteen years ago, that representation was closer to 20%. China has increased its gold holdings by 76% over the past six years but they are a mere 1.9% of the aggregate 2.2 trillion of reserves and Russia’s gold holdings is just under 5%. This is not the 1990s when Bob Rubin was running a hard U.S. dollar policy, U.S. fiscal deficits were vanishing and gold production was on the rise. Today’s world is exactly the opposite. Policymakers beginning in the 1990s wanted disinflation and got it. Now they want inflation — it will take years, maybe a decade, but it will come. For the near-term, we are still optimistic on Treasury securities but be forewarned that this view has an expiry date that is earlier than the peak we are likely to see in gold.

    It is very clear that central banks are behaving in a way that would suggest that gold is now again being considered a currency within the global monetary system. As we said before, it is all about relative scarcity and a well-defined supply curve — fiat currency at this juncture does not share that quality. As a good friend reminded me yesterday, when the Fed was created nearly a century ago, it was acceptable to have at least 40% of the money supply backed by gold reserves. The U.S. now has 8,133 tons of gold in reserve, which equates to $285 billion at this year’s pricing.

    Meanwhile, the Fed has spiked the punchbowl to such an extent that the monetary base now stands at $1.7 trillion. Do the math — under the old regime (which indeed hamstrung the Fed), the U.S. alone would need to buy an incremental $400 billion of bullion or the equivalent of what would be nearly four times the typical level of annual demand. We could do the same calculation based on M2 but we don’t want anyone falling off their chairs.
    Tags: GLD, gold
    Nov 06 07:31 pm | Link | Comment!
  • Mid-Week Readings
    Below are some articles for this week that caught my attention:
     
    Get 10 Trading Lessons FREE Click Here
     
    Geoff Considine profiles the merits of a strategy which purchases 90% TIPS and 10% long-dated, at the money calls on the S&P 500. Interesting strategy which in theory should provide lower risk then just buying the S&P 500 outright.
     
    Jim Jubak gives us 7 financial stocks poised to profit. Hint: USB, TD, STD, HBC, SBGOY, SCBFF
     
    John Mauldin on Catching Argentinian Disease (pdf)
     
     
     
    Bill Gross' November 2009 Investment Outlook Midnight Candles
    Tags: USB, TD, STD, HBC, XOM, Geoff Considine, John Hussman, Bill Gross, Jim Jubak, John Mauldin, Jon Markman
    Nov 04 12:55 pm | Link | Comment!
  • Gold Separates and Accelerates and Has the S&P 500 Topped Out?
    From INO.com, a couple of brief videos discussing gold and the S&P 500. Regarding the S&P 500, Adam Hewison of INO discusses whether it has finally broken support (the free video is available here):

    In our last video on the S&P 500 (10/27), we indicated that this market may have topped out for the year. Today’s action puts in place a weekly “Trade Triangle” which indicates that a temporary or a permanent top is now in place for this market.

    In this latest video, I share with you some of the ideas that I think could potentially come into play for this market. Not only do I have some downside targets in mind, but I also see a pattern that could evolve in the next several weeks which will confirm that we’ve made a serious high in this market.

     

    Also, in his newest video, he discusses Gold and how yesterday if finally broke free from the dollar and other indicators.
    Tags: GLD, SPY, adam hewison, ino.com, gold
    Nov 04 12:54 pm | Link | Comment!
  • Readings for This Week
     As stated yesterday on my blog I won't be doing much this week besides passing on some readings:
     
     
    John Mauldin posts commentary from David Einhorn of Greenlight Capital, Liquor before Beer - In the Clear
     
     
    Jim Jubak: How to Buy the Next McDonalds (a couple of his ideas - CTRP, LFUGF, PNGAY). To get FREE trend analysis on CTRP, LFUGF, PNGAY or any other stock, click here
     
    Here are some 'Yellow Flags' according to David Rosenberg's (Gluskin Sheff) October 26th Market Commentary (pdf):
     
    SOME YELLOW FLAGS

    • U.K. real GDP, instead of edging up 0.2% QoQ in Q3 as everyone expected, contracted 0.4% instead.

    • Global trade flows, as per the just-released Netherlands Bureau for Economic Policy Analysis, fell 2.0% in August from July — an indication the recovery that has everyone so excited may be a tad more fragile (didn’t Mark Carney use that word?) than generally expected.

    • The Dow Transports are sending off a troubling signal — down 3.5% on Friday in the fourth decline in a row as well as the worst showing in two months. In fact, the index has not made a new high since September 15 and have put in a classic double-top.

    • In another sign of a possible investor move to lighten up on risk, the Russell 2000 also closed the week down 2.5%.

    • The market, last Friday, continued to post declines on higher volume; and, a majority of the up days in market were on lower volume. We realize that some will guffaw at the technicals, but in a technical as opposed to fundamental market rally, the technicals need watching. As the Investor’s Business Daily correctly points out, “six distribution days on the Nasdaq and eight on the S&P 500 would in most circumstances be enough to kill an uptrend.”

    • Did you see the VIX index (a measure of volatility in the equity market) jump 7.0% last Friday, to 22.3 — a bit of the complacency (but not nearly all) may be coming out of the marketplace.

    • The financials sagged 1.6% on Friday and have done squat now for 5½ weeks.

    • Just as the economists are taking their housing numbers higher, in classic “sell the fact” mode, the S&P Homebuilding index just closed down 18% from the mid-September high. That almost classifies, dare we say, as a … bear market!

    • Oh yes — this is surely a sign that the credit crunch is behind us. Regulators closed seven more regional banks last Friday, bringing the tally for the year to 106. There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks — but there is limited downside risk because Uncle Sam has deemed them all to be ‘too big to fail’. Those who were investors in American United Bank, well, we are sorry to have to tell you that you were involved in an institution that was small enough to close down.

    • We realize that this did not make it anywhere in the weekend press (outside of a microscopic piece in the IBD) but the ECRI leading economic indicator actually fell (by 0.2 of a point) for the second week in a row (and the smoothed annualized growth rate declined 1.6% —- now what is that all about?).

     
    Tags: David Rosenberg, John Mauldin, Niall Ferguson, John Hussman, Jim Jubak
    Oct 28 01:19 pm | Link | Comment!
  • Building a Long-Term Portfolio Strategy
     I wrote in my last article about diversifying your strategies in order to hedge your bets. I will be taking a few days off, so I thought it would be a good time to come full circle with some ideas I have been discussing the past several months.
     
    Several strategies and services have been detailed in-depth onScott's Investments. My desire to detail so many strategies is to help myself become a better investor and research what works (historically) and what has not worked. My goal, as I wrote in early July, is to diversify not only my securities but also my strategies. I encourage you to read that article if you have not already done so. Also, another good place to start is by looking under the ETF and Timing Portfolios on the right hand side of my blog. This is a list of strategies I have begun tracking on a monthly basis.
     
    What I have learned to date is that there are viable alternatives to buy and hold. Some of my favorite strategies include the following (Please keep in mind these ideas are not investment recommendations, they are simply for educational and entertainment purposes. In addition, historical returns are not a guarantee of future performance):
     
    1) A long-term moving average system, detailed in depth by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets is superior on a risk-adjusted basis to buy and hold. Historically, buying a diverse portfolio of securities when they are above a long-term moving average and selling when they are below the moving average has produced superior risk-adjusted returns. Nominal returns are very similar to buy and and hold, in some cases greater, but with much less risk.
     
    2) Options can help reduce risk and potentially increase returns. CBOE.com has some excellent free material and studies showing the historical returns of a buy-write (covered call) strategy and selling cash-secured puts. For a summary click here.
     
    3) The Fundamental Index appears to be a historically superior index to cap-weighted indexes. This strategy was detailed in The Fundamental Index: A Better Way to Invest and I wrote a book review here.
     
    4) Following the 'smart money', while still in its early stages of historical tracking, shows promise. Mebane Faber (yes, the same guy from point 1) stated the following on his site:
     

     

    I started tracking a portfolio of 10 hedge funds way back in 2007. Long time readers of my blog will recall how I used to backtest these funds by hand – it took me a couple months with a co-worker to do only a few funds (which now takes seconds on AC).

    I started tracking a group I called World Beta. It simply invests in the 10 most popular stocks amongst these 10 managers: the Baupost Group, Berkshire Hathaway, Blue Ridge Capital, Eminence Capital, Greenlight Capital, Lone Pine Capital, Maverick Capital, Okumus Capital (we did a real time switch to Appaloosa in 2009), Private Capital Management, and Tiger Capital Management. When I backtested the returns we found outperformance of a stunning 15% a year.

    Real time, out of sample results are annualized returns of 25% a year vs. -6.8% a year for the S&P500. That equates to a difference of over 100% in total return in that time period. While the S&P500 lost almost 20%, the World Beta clone almost doubled.

     

     

    Investors interested in tracking 'smart money' can sign up for Faber's new project, AlphaClone. The full service is not free (you can track one or two clones for free) but is worth heavy consideration if you have even a modest portfolio and have an interest in owning individual stocks.
     
    5) In my opinion, momentum and trend-following can lead to superior long term returns. I have detailed several momentum strategies - for a high yield momentum system click here, a rotation system here or here. There are several other articles I have written on the topic so I would suggest just typing 'momentum' on the search engine on my blog. Much of it is inspired by Faber and research done by cxoadvisory.com.
     
    There are also pay-services which do the trend following for you and issue buys or sells. One service, Marketclub (of which I am an affiliate) is a service that historically done well in trending markets. Choppy/sideways markets lead to undperformance but the system has done very well in volatile markets. For an article I wrote showing backtest results of their system click here.
     
    I also did a backtest of my own on Marketclub's monthly trade signals (they also have shorter duration weekly signals). The first buy on SPY was issued on 11/18/05 at an unadjusted price of $124.74. Had you invested $10,000 using Marketclub's signals on that date, excluding dividends and commissions, you would have $10,454.04 on 10/21/09. There were 11 trades in the roughly four year time period. Including dividends, buying and holding SPY on 11/18/05 would leave an investor with only $9341.25 on 10/21/09. My test assumed only round number of shares were purchased and any leftover cash was put in a cash account earning 0%. To be fair, their monthly system would have lagged buy and hold on SPY through the first part of 2008 - thus, their signalsappear to be of most benefit when markets make significant, sustained up/down moves (see late 2008 and most of 2009).
     
    I did the same backtest on DBC. The first buy signal was issued 5/2/06 at $26.21 unadjusted. Nine trades later, you would have $12093.13. If you had bought and held DBC on 5/2/06 at an adjusted price of $24.57 (thus, including dividends), you would have $10012.21 on 10/21/09.
     
    If interested, you can try the Marketclub service risk-free for 30 days.
     
    6) Value historically produces superior long-term returns. Dividends also significantly add to a portfolio's long-term returns. I have yet to identify a service and/or method for screening and picking superior value stocks. The Fundamental Index (see point 3) is the closest I have come. I will try to place a greater emphasis on this going forward.
     
    As always, please make sure to do your own due diligence and feel free to send comments my way.
     
    At the time of writing I do not own any of the securities mentioned.
    Tags: SPY, DBC, mebane faber, the fundamental index, moving averages, cxoag
    Oct 24 01:22 am | Link | Comment!
  • Backtesting Marketclub's Trade Triangles as a Portfolio Strategy
     I previously detailed a potential trading service for retail investors from MarketClub. I found a backtest of the MarketClub Trade Triangle technology at the Shocked Investor blog. The results have been reproduced below.
     
    Here is my no BS interpretation of the backtest: My first impression is that Marketclub has held up very well the past 3-4 years, with the exception of leveraged ETFs (which I would not be trading/holding over long time periods to begin with) and one stock (GG). Any trend trading system is going to perform well in trending markets (strong up/down moves). The volatility in recent years helped Marketclub's system. Flat/choppy markets typically are the toughest markets on any trend system. In addition, if you decide to try their system you are still going to need to have your own money management system. In other words, stop losses and position sizes are up to the individual investor.

    That being said, if you are interested in a free 30 day trial of Marketclub, click here or check out their free video here. The backtest from Shocked Investor below, unverified by myself:

    The methodology is incredibly simple to use. I ran the same methodology they describe on several different stocks, backtesting from 2005/2006, wherever there was available data.

    Here are the results for an initial capital at risk of $10k:



    Sorted version:


    He concludes that:

    Out of 22 stocks that I normally trade or pay attention to, there were 19 winners. The average of the winners was 61.3%. This is not bad at all. It is quite impressive for such an easy to use tool (you just follow the buy and sell alerts).

    There were three losers: Goldcorp, SDS, and SKF. Goldcorp was ran twice, using extended time frames. The losses were reduced by using a longer timeframe. SDS is an ultra short (leveraged) ETF that tracks inversely the SPX. SKF is also an ultra-short that inversely tracks financials.

    It seems that the methodology works well on regular stocks, and also on long leveraged ETFs. It does not work so well on the short (bear) versions, at least the oens we ran. The stocks that are not too volatile do fine. The indicators alerts tend to lag and it seems as if the tool awaits for clear confirmation of trend changes before issuing an alert. With fast moving stocks, this may lag too much and it may or not work. For regular, solid companies this seems ok. Now it also wokrs fine for the bull leveraged versions.

    The above was all based on the monthly timeframes. It is also possible to use weekly and daily timeframes
    Disclosure: I am a Marketclub affiliate, primarily because I find their services of use.
    Tags: SKF, SPY, SQM, SSO, UNG, UYG, AUY, C, EWZ, FXE, GG, GLD, GOOG, IBM, INTC, NOK, PBR, QQQQ, Marketclub
    Oct 20 11:12 pm | Link | Comment!
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