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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • “Surprise Job Number” – Not To The Prepared It Wasn’t… 3 comments
    Feb 25, 2010 1:44 PM | about stocks: BCE, NRP, PVR, MMP, BWP, EEP, KMR, BPL, PGH, ERF, CM, ATLIF, NZTCY, ORAN, TBT, TMV, TIP, VXX, GG, KGC, FNV, RGLD, SLW

    Avoid Surprises.  Expect the “Unexpected.”

     

    If it weren’t so sad, it would be amusing to see the financial headline writers’ competition to feign the most astonishment when the most obvious news is reported. 

     

    Today it is the “Surprising weakness of jobs data” (Marketwatch).  A couple days ago it was the “unexpected plunge” in the Consumer Confidence Index from 56.5 in January to 46 in February. 

    Why should any of this be “stunning”, “shocking”, or some other hyperbolic bolt from the blue?   Here's a news flash for those headline writers and the commentary that inevitably fills page after page beyond the headline:

     

    No market goes straight up forever.

     

    No market goes straight down forever.

     

    No market goes in either direction in a straight line. 

    "Surprising news," good or bad, often acts merely as the catalyst that may add a bit more amplitude to what the market was going to do that day anyway, but it gives the talking heads on TV something more concrete to say than, "Ummm...I don't know why the market moved.  I guess there were more sellers than buyers today?"

     

    The market always ratchets its way up and down just enough to confound those who think there is some simple way to make money in the stock market, like “I just find some technician who knows when it’s going to go down and I short.  Then when my guru tells me to go long, I buy and make money on the upside!”

     

    Many investors read financial articles in print or the Internet because the author validates their opinions.  If one has a “bullish bias” it makes us feel good to read some expert who tells us we are correct, that, say, the market is bound to rise.  Or vice versa.  If they write well or are entertaining we give them even more credibility.

     

    But I’d like to suggest an alternative.  Whether the author agrees with your bullish or bearish bias or not, whether they write well or not, whether they are entertaining or not, just doesn't matter.  In fact, I look for writers who disagree with me.  They are the ones from whom I might learn the most!  Instead of seeking writers who agree with you, especially at a site like SA, where the contributors' track record is there for all to see by following the chain of their previous articles, find writers, advisors, brokers, et al, who make you money

    Yet, I'll wager that many folks who read an article they like or see a stock recommendation they agree with, buy it based on the strength of the author's writing and/or convictions without ever even looking at their last dozen or hundred articles to see if a single one of those previous recommendations worked out!

     

    Isn’t that why we invest?  Isn’t that why we read Seeking Alpha, consult other websites, read the Wall Street Journal or Barron’s, or other financial publications?  We figure that's why the subscribers to our financial letter subscribe to our publication and not someone else's. 

    Forget all the hyperbole and fluidity of writing style and just ask, “Which gurus, experts, CNBC talking heads, CEOs, companies, financial advisors, and writers make me money?”

     

    At the advisory firm I am Chief Investment Officer for, we were not "surprised" by the consumer confidence numbers or the employment report.  Not because we have a crystal ball that is any less cloudy than anyone else’s but because we expect surprises.  We expect our national government leaders to massage the numbers to get themselves re-elected.  We expect those numbers to be revised weeks or months later when they are buried on column 6, page 6 and lost in other, more recent news.   We expect the market to fluctuate day-to-day rather than for today to be a mere continuation of the trend from yesterday. And we invest accordingly.

     

    Regular readers of our articles know that we ratchet our investments just as the market ratchets its movements.  We don’t go “all in” because some magic – and arbitrary – number is reached or panic out because of some piece of news.  And lately we've been ratcheting down because we’ve become uncomfortable with the current market. 

    A market that can’t go up – will go down.  So on January 8, we sounded the warning on bonds and began selling out our long bond positions and began buying inverse ETFs on long Treasury bonds (here). 


    On January 11, we sounded the caution signal for muni bonds in particular (here). 

     

    On January 17, in “Something Wicked This Way Comes” we continued to “ratchet” down our market exposure and buy some positions that would better prepare us for any decline (here). 

     

     

    And so on and so on until our most recent article that index investing may be dangerous to your wealth! (here)

     
    Do we have a crystal ball?  No.  But we believe that preserving capital comes before risking capital in order to maximize one’s reward.  So we invest as if the following were true:

    No market goes straight up forever.

     

    No market goes straight down forever.

     

    No market goes in either direction in a straight line. 

    "Surprising news," good or bad, often acts merely as the catalyst that may add a bit more amplitude to what the market was going to do that day anyway.


    So we ratchet in and we ratchet out.  We are seldom “surprised” by a “sudden turn of events” this way, and we and our clients sleep better at night.  Right now we are positioned out of bonds, but in income-producing securities; for anticipated volatility; for the unexpected crisis or two that will send investors fleeing to gold and other safe havens; and for the likelihood that there will be some terrific bargains down the road. Here are some thoughts for your further research….
     
    For income, we have been buying coal “royalty” firms like Natural Resource Partners (NYSE:NRP) and Penn Virginia Resources (NYSE:PVR), holding on to 50% of our pipeline MLPs like Magellan Midstream (NYSE:MMP), Boardwalk (NYSE:BWP), Enbridge Energy (NYSE:EEP), Kinder Morgan (NYSE:KMR), and Buckeye (NYSE:BPL) and a couple Canadian Royalty firms Enerplus Resources (NYSE:ERF) and Pengrowth (NYSE:PGH), as well as some Canadian banks like Canadian Imperial Bank of Commerce (NYSE:CM) and Royal Bank of Canada (NYSE:RY) and utilities like Atlantic Power (OTC:ATLIF), as well as selected foreign telecoms like New Zealand Telecom (NZT), France Telecom (FTE) and Deutsche Telecom (DT).  [To which I must add, thanks to an astute reader who asked about the absence of a previous recommendation in this list, also Bell Canada (NYSE:BCE).]

    Against the probability that yields will rise and bonds will fall we’ve bought the iShares TIPS Bond ETF (NYSEARCA:TIP), the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) and the Direxion Daily 30 YR Treasury Bear 3X (NYSEARCA:TMV) – recognizing the inherent volatility of leveraged ETFs in these latter two.

    The way we’ve chosen to play the possibility of extreme volatility is via the iPath S&P 500 VIX ETF (NYSEARCA:VXX). Since most people will wait to sell until all others are selling, we’re betting, via VXX, that volatility will rise.

    In the precious metals / crisis protection arena, I provide for your further research Goldcorp (NYSE:GG), Kinross (NYSE:KGC), Agnico Mines (NYSE:AEM), and Yamana Gold (NYSE:AUY), as well as the royalty firms Franco-Nevada (FNNVF.PK), Royal Gold (NASDAQ:RGLD) and Silver Wheaton (NYSE:SLW). (For more on what makes these last three unique, see here.)

    Finally, for those bargains I expect down the road, we have a solid cash position. This will harm us if the market roars ahead as it did in 2009 and we are on the sidelines with up to half our funds – but it will keep us in good stead in any other scenario.

     

    Author's Disclosure: We and / or clients for whom these investments are appropriate, are long BCE, NRP, PVR, MMP, BWP, EEP, KMR, BPL, PGH, ERF, CM, ATLIF.PK, CM, NZT, FTE, TBT, TMV, TIP, VXX, GG, KGC, FNNVF.PK, RGLD and SLW – while maintaining a very large cash cushion.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: 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.

    Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but did not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

    It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, 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.

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Comments (3)
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  • Philo Beddoe
    , contributor
    Comments (37) | Send Message
     
    Another great common sense article Joe. Thanks for the stocks recommendations.
    25 Feb 2010, 02:47 PM Reply Like
  • Joseph L. Shaefer
    , contributor
    Comments (1563) | Send Message
     
    Author’s reply » Mr. Beddoe, I can think of no greater compliment than thanking me for "common sense." That's a commodity in rather shorter supply than I believe it should be these days...

     

    Thank you,
    JS
    25 Feb 2010, 05:00 PM Reply Like
  • paul_sterk
    , contributor
    Comments (11) | Send Message
     
    Whether I agree with you or not, Joe, you always make me think about whether my current strategy is still the best for me. Thanks for a very informative article!
    26 Feb 2010, 12:21 PM Reply Like
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