Wednesday, July 24, 2013

I updated my performance numbers for June as well.  Sorry for the delay.

Stories like this highlight the "problem" with the current US economy.  Inefficiencies are created by laws like the Jones Act.  Inefficiencies do not have to have any moral value positive or negative in my view, but they can have an effect on prices.  The Jones Act serves to protect an industry (US shipbuilding) at the expense of consumer prices.  I find it funny how the supporters of the repeal even talk about how it will create jobs.  Perhaps in some industries, but clearly US shipbuilding would suffer.  And perhaps, it should.  In unfettered capitalism, the destruction of one industry would spawn other opportunities and that has been one way the US has grown to be the strongest economy in the world.

So, in the end, I'm all for becoming more efficient.  I would also suspect most Americans would be as well.  There can be no denying though, that, at least in the short term, in the process of becoming more efficient, there will be losers. The American worker is one of those.  Structural unemployment in the guise of improving efficiency will put a cap on economic growth in the short term.

The Detroit situation is also telling.  We have a lot of infrastructure that is underutilized.  Idle factories, idle cities!  The economy has to work through that which also puts the brakes on growth.  I am watching the muni situation closely as there will be some precedents set on the handling of who takes losses.  Unfunded liabilities caused by defined benefits to a population that lives longer with every medical breakthrough is a crushing load on the current taxpayer.  I believe that there will have to be haircuts taken by said benefits earners.  Tax burdens are ever increasing without commensurate increases in services - why? Because the population earning defined benefits keeps getting larger.  In the private sector, companies switched to defined contributions a long time ago, but governments have not and until that changes, we will be in this conundrum.

Good companies will continue to become more efficient and create earnings for their shareholders.  Perhaps not a lot of top line revenue growth, but earnings.  I believe this will be good for stocks and I suspect we will come out of earnings season with higher prices.

I like IWM (smaller cap stocks) in addition to the solid dividend paying larger cap names.

Tuesday, July 23, 2013

Hello Sports Fans,

I'm baaack!

As I've expected/hoped, the market finds a way to keep muddling along.  There are some substantive changes, though.  For one, the sizeable negative correlation between stocks and bonds has broken down to almost zero.  Put another way, the "fear trade" that is often discussed is not to go into bonds.  Investors seem to have lost an appetite for US treasuries at these yields.

I think this is driven by a desire to "get in front" of the market - i.e. time it, but I am not convinced this is a good idea.

I still have not seen any evidence that the economy is heating up in any way.  I think the developments are positive, but to me that only means some of the really risky scenarios are off the table, for now.  It does not mean we are going to be growing at 3-5% any time soon.  I suspect we will be in the 1-2.5% range for a while as the employment picture still remains muddy and we are undergoing a structural shift upward in efficiency.  While this will be good long term, short term, there will be higher unemployment and this will serve to temper any gains for a while.

Thus, I find myself still liking bonds at these levels.  The 10 year bonds are now somewhat attractive as well as the long end and probably have less risk.  The funds are riskier than the physical bonds because the bonds maturity is always getting shorter whereas the funds tend to stay constant.

In addition, the ETF's like MHN, JTP, VTA seem very attractive to meas they offer very high yields which will protect them if rates start rising and they are trading at discount which also helps.  Even when stocks are rallying, I would not sneeze at 7-10% pre-tax returns, so I do not understand the current price levels except under that maybe investors are going back to cash and taking risk off the table.

If that is the case, investors are woefully underinvested.  Stocks continue to perform well in the real world.  I am a believer in stocks that pay their owners and run efficiently.  There are many examples of that.  Fluctuations in the stock price don't matter to the company.  They do provide buying opportunity. Keep that in mind as things gyrate in the coming months.

The market tends to shift focus as if it had ADHD.  Remember a few months back, AAPL was gyrating 5-10% in no time based on nothing concrete.  Now, it barely moves.  Currently it is bonds that are the focus and they change by 1+% on very little.

Volatility is transitory.  Stay with solid companies and use volatility to establish good entry points.

On a side note:

Spending less is a lot easier than finding ways to earn more, so here is a link I found right on target.
I especially like the delaying a purchase advice.  It works like a charm.