April 2016

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I think I prefer this even to the 998.

Certainly more fun looking at this than the market over the past few days.

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Bought this yesterday at $11.14.

This is going to be a very volatile stock, both to the upside and downside.

*I have just placed an order to sell 100 shares at $14.78

*Just cancelled that order. Rather, I will sell 1 Option contract at $15.oo and 1 contract at $18.oo, expiry May. This better corresponds with a monthly rebalance.

Sold 1 contract at $15.oo for $2.00 and 1 contract at $18.oo for $1.05. This is just a bog standard covered call strategy.



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I’ll allocate a $10K position to this stock and compare how it fares against the more stable portfolio.

I’m guessing it will either outperform – or go bust.

This is the issue with speculative stocks, they simply are too damn risky. However, the odd one, in an other wise ‘safe’ portfolio, in a small % of the over-all portfolio, can, at times, juice the returns.

If it blows up, then the damage is contained.

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Employment case for constructive dismissal and $200M in damages.

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CHAPEL HILL, N.C. (MarketWatch)—Might a recession be averted after all? The odds that it might got a major boost earlier this week, when the Conference Board reported its index of leading economic indicators rose in March, breaking a three-month downtrend.

The Conference Board concluded the economy for the rest of this year would experience “slow, although not slowing, growth.”

Even so, corporate profits remain in a serious earnings recession that shows no signs of abating. Even if Wall Street analysts’ forecasts are correct (they’re usually too optimistic), earnings per share for the S&P 500 SPX, +0.00% over the four quarters through the end of March will be 16.2% below than where they were in the third quarter of 2014.
Furthermore, those forecasts (if correct) will show that the first three months of 2016 are the fourth consecutive quarter of lower year-over-year earnings for the S&P 500. The last time that happened was in 2008 and 2009, and I need not remind you of the Great Recession that accompanied that earnings downturn.

Why wouldn’t the same thing be happening now?

Realizing that “this time is different” are the four most dangerous words in the investment lexicon, I searched the historical record for any prior instances of an earnings recession that wasn’t accompanied by an economic recession. Surprisingly, I found several.

This time might not be all that different, after all.

Take a look at the chart at the top of this page, which plots corporate profits since 1980; economic recessions are shaded. Notice that while economic recessions are reliably accompanied by earnings recessions, the reverse isn’t always the case.

One stark example occurred between the third quarter of 1985 and the fourth quarter of 1986, during which total corporate profits fell by 26%. Yet, as you can see from the chart, a recession was nowhere in sight.

Perhaps even more surprising is what happened earlier this century: Corporate profits bottomed out in the fourth quarter of 2000 and thereafter began to rise at an impressive pace. Just one quarter later, they were already 5% higher. And, yet, according to the National Bureau of Economic Research, a recession began in March of 2001—after corporate profits had begun growing.

Why might the current earnings recession be one of these occasions in which an economics recession doesn’t occur? One obvious possible explanation is the extent to which recent quarters’ earnings losses have been concentrated in just one sector: energy.

After excluding that sector, Standard & Poor’s data reveal that earnings per share in the first quarter would be at an all-time high. This means the recent earnings recession is far different than those in the past in which earnings declined across all sectors—as they did, for example, in 2008 and 2009.

To be sure, this doesn’t guarantee that a bear market isn’t imminent. As the historical record also shows, many past bear markets have occurred unaccompanied by a broad economic downturn.

But you should think again if you were bearish on stocks because you believed the recent earnings recession would inevitably lead to an economic recession.

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With stock market prices fluctuating wildly during the first quarter, it’s important to consider the longer-term movements of equity prices when trying to decide what to do with your money. As I’ve said many times, making investing decisions based on short-term price movements can be dangerous. Here, I’d like to examine the long term a little bit closer to see if it can tell us anything about the future.

I was born in the middle of 1965. A full 50 years have passed since then. That’s been enough time for me to get married, have three children, and sprout some gray hairs. But it’s also enough time, I think, to consider whether it’s been a decent time to be invested.

If you had invested $1 in the S&P 500 on Jan. 1, 1966, and reinvested all dividends (and somehow endured no costs), then you would have ended up with $102.17 at the end of market trading on Dec. 31, 2015.

That’s 102 times your money. That sounds outrageously good. But was it?

Actually, it didn’t match historical averages. The past 50 years’ stock returns, on the whole, haven’t quite been up to snuff compared with either the longer-term historical averages or the 50 years that immediately preceded that half-century. Let’s take a closer look at the returns, keeping in mind the significant impact inflation has on the real returns of the market.

 Period Annualized Return (Nominal) Annualized Real Return (Adjusted for Inflation) $1 Becomes (Nominal) $1 Becomes (Adjusted for Inflation)
1966-2015 9.69% 5.38% $102.17 $13.74
1916-1965 10.36% 7.90% $138.16 $44.75
1871-2015 9.05% 6.86% $285,436 $15,086

When not factoring in inflation, all these time periods look fairly similar, but as you know, inflation matters. Because of the dramatic effects of compounding over long periods of time, the real returns of the market from 1916 to 1965 were more than triple the returns of the past 50 years.

So, though it isn’t covered all that frequently, why have the past 50 years been such a relatively “poor” time to invest? And even if the past 50 years haven’t been outstanding, does that mean you shouldn’t have invested in stocks 50 years ago?

These are important questions, because right now, stocks are just about exactly as expensive as they were at the end of 1965, at least according to one of the more popular valuation metrics available.

The Shiller cyclically adjusted price-to-earnings ratio (the “Shiller CAPE,” or just “CAPE”) takes the price of the stocks in the S&P 500 and divides that figure by the average earnings of the previous 10 years in the market. By dividing by the average of the previous 10 years, rather than only the preceding 12 months as the “normal” P/E ratio does, it adjusts for the typical cycles in earnings. Earnings are highly variable over any 12-month period.

At the end of 1965, the Shiller CAPE stood at 23.6, and today it stands at 24.3. The historical average is 16.7.

So, using just this one measurement, stocks are about as expensive today as they were 50 years ago. If the next 50 years show returns in the same ballpark as the past 50 — and they are working off roughly the same valuation starting point — then investors will do acceptably if they’re expecting returns in the area of 5.5% over that time period. They might do better; they might do worse. But if they do better, it will be because growth in per-share profits is better than that of the past 50 years (possible, though not looking likely in the near term) or multiples go up from here (less likely, especially given the likelihood that interest rates will beeven lower 50 years from now than they are today).

I have as little idea about what the next 50 years will bring as the next guy, but it’s worth remembering that the past 50 years’ decent returns didn’t have the most promising start.

Period Annualized Return (Nominal) Annualized Real Return (Adjusted for Inflation) $1 Becomes (Nominal) $1 Becomes (Adjusted for Inflation)
1966-1969 3.14% (1.15%) $1.13 $0.95
1966-1974 (0.08%) (5.37%) $0.99 $0.61
1966-1981 5.89% (1.04%) $2.50 $0.85
1966-2015 9.69% 5.38% $102.17 $13.74

I’ve selected those periods — the beginning of 1966 through the ends of 1969, 1974, and 1981 — specifically to show what returns would have been after particularly bad years for the market. (Immediately following 1981, 17 of the next 18 years showed positive returns.) You’ll see that there were both short and long periods that didn’t pan out so well for buy-and-hold investors. History tells us that 16-year holding periods generally go pretty well for equity investors, but if you choose your starting and ending dates carefully enough, you’ll find ones that don’t. Of course, that particular time period was in large part defined by the wild rise of interest rates from around 4% to more than 15%, rather than a collapse in company earnings.

I bring these numbers up not as a prediction of what is likely to happen next for investors in today’s domestic market, but as a reminder that the rewards of long-term investing come with occasional declines, and those slumps can last a long time. Attempting to predict when they will next occur is a fairly popular game in the world of financial media, but it’s generally an exercise in futility.

The very long-term returns available for today’s equity investors continue to look promising, but retrospectives like this can help us set expectations for future returns (perhaps in the 5% real-returns category over the long term) and remind us that not only can it take decades to realize those returns, but those higher longer-term returns will inevitably include some shorter periods of low or negative returns.

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The huge double top of the 1970’s market looks familiar to the market 1999 to 2007.


Then from 2009, we mirrored the market of the 1980’s


And the eighties morphed into the nineties, which was the most ridiculous bull market ever.

Many things were different in the seventies and early eighties, PE’s were lower, thus returns should have been expected to be higher. The nineties saw some crazy valuations however…on the back of the birth of the internet.

Well currently we have the Internet II, on really, really low interest rates, with no end in sight. Undercover inflation is everywhere. Stocks are one way to hedge inflation.

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I haven’t had much time to write about economic theory in a couple of years, but this snippet is worth a response.

“People work in order to convert their time into a unit of account,” he said. “We call that money, and it’s an invention that allows us to store time.” Most people have stored little or none. So when they receive money, they quickly purchase necessities; food, shelter, health care. “People who are able to save money inevitably purchase real estate, stocks, bonds – all of which are alternative vehicles for storing time.” One share of Google stores 30 hours of work for the average American, or 30 minutes of copying-and-pasting formation documents for the average hedge fund attorney. “Bill Gates has stored enough time to fund a 1bln person army for 20 years.”

As the gulf between people’s income has grown, the amount of stored time has accumulated in fewer hands. “Wealthy people convert their hours into financial assets so that they can accumulate excess hours relative to their fellow man. But the average worker is simply thinking how to exchange hours for dollars and then exchange those for food.” Central banks face a different problem altogether. They need to get people who’ve saved time to exchange it for something other than clever inventions that store it. They’ve largely failed. So now, everything that stores time is extremely expensive and offers little or negative return, while the pace of economic activity slows. “The problem that we face now is that there is simply too much time that’s been saved. Another way of saying it is that there’s too much capital in the world, in too few hands.”

To restart the system, capital needs to exchange hands or be destroyed, spurring people to rebuild their store of time, rather than just save it. “It is an elemental truth that at some point, through inflation, war, or confiscation and redistribution, this imbalance will correct, and the system will then restart.”

The quote addresses ‘time preferences’. It addresses the choices available to any individual who is involved in an exchange of property rights. This is only addressed tangentially. Property rights are exchanged and stored as ‘money’. This rather begs the question, what exactly is money?

An individual can: [i] exchange money directly, [ii] hold money as cash, [iii] save [invest] money. These are all time preferences.

Investing requires free market interest rates. We do not currently have these as the Central Banks around to world seek to hold nominal interest rates low. There is still however the ‘natural rate of interest’.

In paragraph three, the author asserts that capital needs to be destroyed or change hands. Capital will likely be destroyed, but these are mal-investments.

Mal-investments  are predicated by artificially low nominal interest rates, which, we currently have and have had for quite some time, since the late 1980’s when Greenspan took over the Fed Chair.

Currently we are reaching the end game of artificial rates.

Of course should ZIRP/NIRP end, all business that exists because of these artificial rates, the mal-investments, will likely collapse, which is the destruction of capital that the author refers to.

This would almost certainly lead to a major bear market, which is the bear case. We saw a taste of it in 2008. The unemployment shot through the roof. There are not many ‘depression proof’ industries, the pain is felt everywhere.

Currently, the next internet/housing bubble is most apparent in social media, which relies on advertising revenue for almost 100% of its revenues. This is a problem and is a major destination of current mal-investments.

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Get ready to step over some landmines, investors. The number of companies defaulting on their debt is hitting levels not seen since the financial crisis, and it’s not just a problem for bondholders.

So far this year, 46 companies have defaulted on their debt, the highest level since 2009, according to S&P Ratings Services. Five companies defaulted this week, based on the latest data available from S&P Ratings Services. That includes New Jersey-based specialty chemical company Vertellus Specialties and Ohio-based iron ore producer Cliffs Natural. Of the world’s defaults this year, 37 are of companies based in the U.S.

Meanwhile, coal producer Peabody Energy (BTU) and surfwear seller Pacific Sunwear (PSUN) this week filed plans for bankruptcy protection. Shares of Peabody have dropped 97% over the past year to $2 a share and Pacific Sunwear stock is off 98% to 4 cents a share.

The implosion of oil prices is the top reason for the rise in defaults as it makes it harder for energy companies to repay debt. The Federal Reserve’s decision to hike short-term interest rates last year along with slowing global growth are also putting pressure on companies’ ability to service their debt.

Defaults are clearly an issue for bondholders, since these events mean they no longer receive payments on money lent to these companies. But the situations can be brutal for stock investors, too, as restructuring after a default can leave shares essentially worthless as the bondholders often become the new owners of the company. The rise of defaults hold several lessons for stock investors, including:

* Beware speculating on energy stocks. Brave investors have been trying to call a bottom in energy companies’ profits for several quarters now. But the sector’s pain continues as interest payments get all that more onerous given the massive drop in energy prices. Of the 46 global defaults this year, 13 are in the oil and gas sector, says Diane Vazza, head of global fixed income research at S&P Ratings Services. The surge in defaults is largely “fallout from multi-year lows in commodity prices,” she says. Energy profits keep falling. Energy sector profits are expected to drop another 107% in the first quarter of 2016 – even worse than the 55% drop in the first quarter of 2015, says S&P Global Market Intelligence.

* Cut losses. “It will come back” are famous last words for investors. When investing in individual stocks, especially some that could be even remotely flirting with default, it’s best to cut losses short. Investors in coal producer Peabody Energy defaulted on March 18, leading to the company to file for bankruptcy protection in April. Don’t think it’s just a problem for investors holding the company’s debt. Stock investors watched $1.3 billion in shareholder wealth burn up in just a year as the stock dropped from $73 a share to roughly $2 a share now. Had investors cut their losses at 10% of what they paid, they could have avoided this catastrophe.

* Mind companies on the bubble. Companies don’t usually just default without warning. Ratings agencies routinely rate companies’ credit worthiness and sound an alarm when the financials deteriorate. S&P Ratings keeps a list of the companies with the very lowest credit ratings at risk of a downgrade. The number of such “Weakest Links” jumped to 242 in March from 235 in February.

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Romanticizing that you are a contrarian when you are indistinguishable from consensus can’t be good.

The quote above comes from Adam Parker, Morgan Stanley’s U.S.equity strategist and director of quantitative research. He set the Internet abuzz this past weekend with a research note in which he wondered why he keeps getting questions from money managers about why stocks rose in the past two months and what will happen next. Most, he said, preface their queries by noting that they are contrarians. They then proceed to ask the same questions:

What is this price action telling you?

What are other investors asking you about?”

How are other people positioned?

What’s the current sentiment?

The belief among many managers is that their perspective is unique or contrarian, while everyone else’s is mainstream, seems to be surprisingly common.

Therein lies the paradox of looking at sentiment data. Everyone thinks of themselves as above average, just like the children of Lake Wobegon. Of course, believing yourself above average is a very average thing to believe.

Let’s use Parker’s comments as a reminder about why it is only when sentiment data hits extremes that it has much use as a signal for the above-average investor.

Recall our earlier admonitions on the topic:

One of my favorite pastimes is dissecting accepted Wall Street wisdom to see if it contains any value for investors or traders. Often, upon examination, the widely held beliefs turn out to be closer to magical thinking than financial acumen . . . One of the more recent examples is the way some analysts use data on sentiment to determine how much an investor should allocate to equities. The problem is that the sentiment data is inconclusive and sometimes contradictory. There is no signal within the noisy data.

Remember, most of the time, the contrarian investor is wrong. The vast majority of the time, the market is the crowd. Hence, making a bet against the crowd means you are fighting the market. The majority of investing dollars are the fuel that moves stocks and bonds along their long-term, multiyear trends. It is only when sentiment reaches terrific extremes that taking a position opposite the crowd can potentially produce a huge score. Even then, the timing is very, very tricky.

As we learned in “The Big Short,” the folks who made the contrarian bet against subprime mortgages and derivatives still had to absorb a lot of punishment before their wager paid off. Even when the market finally moved their way, the index that tracked this asset class took a long time to catch up to the reality of the meltdown.

Right, but even a little early, is a very difficult trade to maintain.

Perhaps this is the reason that not many assets are managed purely on the basis of sentiment. Most of the time, sentiment correctly reflects the positioning of most market participants. It is beta (market-matching returns). Occasionally, it is spectacularly wrong, and that is beta as well. Hence, if you are pursuing an index-based strategy of beta (as I do) and not trying to outperform what the markets give you, there isn’t a whole lot you can do about sentiment.

Taking what the wily Mr. Market offers means that at times you will be buying when sentiment reaches an exuberant extreme, and at other times you will be buying when the market is in the depths of despair. The good news is that regular rebalancing allows something of a contrarian trade, selling a bit of what has run up and buying a bit of what has gotten clobbered. Do that for a few decades and theacademics promise that you will pick up anywhere from 50 basis points to 100 basis points in additional returns. It’s the closest thing to a free lunch in investing.

The big problem with sentiment as an indicator is that the data is often noisy and inconclusive. An even bigger issue is that some managers think they are not part of the crowd that produces this noisy, inconclusive data. This helps explain why so many managers — believing themselves to be contrarians when they are really holding a consensus view — so rarely outperform the market.

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