by ilene - March 3rd, 2015 2:40 pm
Dr. David Kelly, Chief Global Strategist, J.P. Morgan Funds, believes three assets are currently and temporarily mispriced: oil, the US dollar and bonds. He suggests that interest rates will be raised in June. Although cheap oil is suppressing inflation, Kelly argues, the Federal Reserve recognizes this as a temporary phenomenon and will "continue to prepare for a long-overdue monetary normalization."
By Dr. David Kelly
Oil is in the basement, the dollar is in the attic and the bond market’s sleeping in. In short, the house of financial assets is a house of confusion. While the passage of time and a steady flow of new data should restore some order, this progress could yet be halted or even reversed by significant geopolitical distractions. However, for investors, it is both important to understand the market’s mispricing of key asset classes and logical to invest on the assumption that the gravitational forces of macroeconomics and supply and demand will gradually bring markets to heel.
More jobs with rising wages should keep the Federal Reserve on track to begin to raise interest rates in June. Indeed, the only domestic fig leaf for a more dovish stance is the increase in labor force participation seen in this January report. This is improving with a 1.1% gain in labor force over the past year, more than the previous five years combined.
However, it is crucial to recognize that this is a temporary effect…
Oil prices are also being watched closely as surging short-term supply interacts with long-term fundamentals. For the moment the former seems to be having a bigger impact. However the reality is that while the world is currently producing excess oil, both production and consumption trends are calibrated to oil selling at over $100 a barrel. A sudden drop in prices to half that level will inevitably affect supply and demand. As just two examples of this, in January the share of U.S. light vehicle sales accounted for by relatively gas-guzzling light trucks reached 55.8%, its highest level since June of 2005, while employment in oil and gas drilling, which has boomed in recent years, fell by almost 1% in the month of January alone.
Full article: 3 Key Asset Classes That Are Mispriced – Barron's.
by phil - March 3rd, 2015 7:21 am
Boy is this getting silly.
Apparently, we never learn. Well, we at PSW learn. We've been hedging the crap out of this rally for reasons that should be entirely evident on this chart – earnings are NOT GOOD!
If earnings aren't good, then why are companies racing up to all-time high valuations? Simply because (as I noted yesterday) monetary manipulation is at work.
It's not like we haven't gone along for the ride – we're still up 30.7% in our bullish, Long-Term Portfolio, which is the where the vast majority of our allocations are put to work (see "Smart Portfolio Management" in the PSW Wiki). Sure it's been 15 months now, so less impressive than 30% in a year – but not a bad pace (2% per month), nonetheless.
Our Short-Term Portfolio, where we do our hedging, has taken a beating in February as we have spent a good deal of money adding protective short positions to protect the $150,000+ we gained in the Long-Term Portfolio – just in case the market isn't as safe as people seem to think it is. Our STP has dropped from $204,000 in February (up 104% in the same 15 months) to just $193,720 as of yesterday's close, down $10,000 but still a nice, combined $844,000 – up 40.6% as a pair.
We spent that $10,000 on purpose, re-investing part of our 2014 profits into hedges that will (in theory) protect us from a market correction. Long-term, we are still bullish and we intend to ride out a pullback but short-term, it's hard to imagine the market crushing through these nose-bleed levels without some sort of pullback. That's why we're hedging in a nutshell.
As you can see from Doug Short's S&P chart, we're "only" up 151% from our 2009 low on the S&P on an inflation-adjusted basis. In raw numbers, we're up 217% at 2,117 from 2009's Hellish low of 666 but that still doesn't bring us to the levels of those 5 other historic bull runs. It does, however, mark the biggest move made without a significant correction since before…
by ilene - March 2nd, 2015 5:06 pm
By David Stockman, Former Director of the Office of Management and Budget
David Stockman needs no introduction, but I’ll give him one anyway. He’s a former US Congressman who, upon assuming responsibility as Ronald Reagan’s budget director in 1981, became the youngest presidential cabinet member of the 20th century.
Following a 20-year career on Wall Street, David is now an outspoken critic of government stupidity. He argues on behalf of outdated notions like a balanced budget, free markets, and for the government to just plain leave us alone.
Below, David shares a scathing financial analysis of Tesla… and that’s putting it nicely. He argues that Elon Musk’s company is a crony capitalist creation that owes its very existence to government handouts and bailouts.
Managing Editor of The Casey Report
[Tesla picture credit here.]
Editor's Note: This article was originally published in Casey Daily Dispatch's Midweek Matters. Click here to receive Casey Daily Dispatch in your mailbox.
The trouble with the money-printing madness in the Eccles Building is that it generates huge deformations, misallocations, and speculative excesses in the financial markets. Eventually these bubbles splatter, as they have twice this century. The resulting carnage, needless to say, is not small. Combined financial and real estate asset markdowns totaled about $7 trillion after the dot-com bust and $15 trillion during the 2008-2009 financial crisis.
Yes, the Fed has managed to reflate this cheap money bubble for the third time now, but the certainty that it will splatter once again is not the issue at hand. What gets lost in the serial bubble-making process of modern central banking is that vast real resources—labor, capital, and materials—are misallocated owing to mispricing of stock, bonds, and real estate during the bubble inflation phase.
During the bust phase, of course, these excesses are written-down on financial statements and often liquidated entirely on an operational basis. But that’s just the problem. These bust-phase corrections amount to deadweight losses to the economy—a permanent setback to growth and societal prosperity.
by ilene - March 2nd, 2015 1:38 pm
Courtesy of Michael of Bankers Anonymous
[Mint.com] As a former Wall Street insider, what do you think is the average person’s largest misconception about investing?
[Michael] The average person thinks that what Wall Street does is so complex that it requires extremely bright specialists to handle the complex needs of individuals. And the average person thinks implicitly that complexity and special skills naturally justify high fees.
And while it is true that many to most people on Wall Street are bright and there are complex things happening there, all that intellect and complexity is irrelevant for the vast majority of individuals. For most Americans, including high net worth individuals, a very simple and inexpensive approach will serve them best.
If you had the ability to get every person in the United States to adhere to three financial principles, what would those be? Why?
Great question. More than principles, I would go with three financial attitudes. Those would be:
a) Optimism – You kind of have to trust that markets are going to work out fine in the long run, even when the short run and medium run look extremely frightening.
b) Skepticism – Most financial solutions you get pitched with constantly are irrelevant or overly costly.
c) Modesty – Be realistic and modest about your own ability to ‘beat the pros,’ and realistic and modest about the ability of professionals you hire to ‘beat the pros.’ Also, modesty about attributing one’s investment success can avoid mistakes due to excessive confidence.
How does life change when one has more financial literacy? What does it take to be financially literate?
Financial literacy is a process that most people need to engage in, but a process for which there are too few guides. Most of our parents don’t know how to help. Certainly our teachers and professors are mostly unhelpful guides. Most of the ‘experts’ in the media are in fact salespeople in one form or another, so while they can tell you the positive features
by ilene - March 2nd, 2015 12:53 pm
Courtesy of Wade of Investing Caffeine
What’s “your number?” The catchy phrase has been tried on 30-second television commercials before, but the fact remains, most Americans have no clue how much they need to save for retirement. The ever-shifting and imprecise variables needed to compute the size of your needed nest egg can seem overwhelming: lifespan; career span; inflation; college tuition; healthcare expenses; rising insurance costs; social security; employer benefits; inheritance; child support; parental support; etc. The list goes on and with near-zero interest rates, and stock prices at record highs, the retirement challenge has only gotten riskier and more difficult.
I understand this task may not be easy and could eat into your House of Cardsviewing, Candy Crush playing, or football watching. However, if you can spend two weeks planning a family vacation, you certainly can afford devoting a few hours to scribbling down some numbers as it relates to the lifeblood of your financial future. The project is definitely doable.
Here are some key steps to finding “your number.” If you’re not single then calculate the figures for your household:
1). Calculate Your Budget: Where to start? A good place to begin is with is a boring budget (or your monthly expenses). The budget does not need to be down to the penny, but you should be able to estimate your monthly spend with the help of your bank and credit card statements. Make sure to include estimates for periodic unforeseen potential expenses like annual auto repairs, home repairs, or emergency hospital visits. Once you determine your monthly spend, extrapolating your annual spend shouldn’t be too difficult.
2). Compute Your Income: Your sources of income should be fairly straightforward. For most people this includes your salary and potential bonus. Some people will also generate income from investments, a business, and/or real estate. Before getting too excited about all the income you are raking in, don’t forget to subtract out taxes collected by Uncle Sam, and include a possible scenario of rising tax rates during your working years. Obviously, the economy can also have a positive or negative impact on your income projections, nevertheless, if you conservatively plan for some potential future setbacks, you will be in a much better position in forecasting the amount…
by phil - March 2nd, 2015 7:12 am
March Madness Begins!
While team Euro's coach Draghi has practically guaranteed an EU victory with a $1.2Tn blast of monetary easing set to begin in March, other countries are NOT going to take this lying down and already we've seen a February easing of reserve requirements by the Chinese team and already, this weekend, they've kicked March off with a surprise 0.25% rate cut and THE GAME IS ON!!!
WHO will devalue their currency most in March? Already Switzerland, Sweden and Denmark are commanding negative rates – that means YOU PAY THEM to hold your money. Monetary-policy makers are seeking to spur spending over saving. The risk is that negative rates backfire and result in even less demand. That could happen if people begin stuffing their cash under mattresses, or if rates below zero eat into the profit margins of banks, which we're already beginning to see, as negative rates distort financial markets.
Willem Buiter, Citigroup’s global chief economist and a former Bank of England monetary policy maker, said in a January note that an interest rate of minus 5% should be no harder to set than a positive rate of 5%.
This is the way monetary policy is heading – it punishes you for NOT putting your money into high-risk assets. In fact, logically, we can't really call stocks high risk if the market always goes up (supported by monetary easing) and rewards you with rising equity valuations while the banks, by comparison, GUARANTEE TO TAKE YOUR MONEY.
This is another reason companies are buying their own stock at record levels ($450Bn last year, which is 8% of the Nasdaq's entire market cap), which has decreased the number of shares available for sale at the same time as cash is being forced into the stock market to avoid the Central Bank tax that is being imposed.
The Central Banks are also artificially depressing bond rates by snatching them up at auction, leaving few of those available to the general public, who then have to bid lower rates on the money they lend – even to countries and…