June 2017 Desert of the Real Economics Investment Newsletter
GRIND AND WIND
Two terms the Author hears with some frequency are “Wind and Grind.” First, the markets are still grinding a little higher with low volume.
On June 2nd, the DJIA closed at 21,197.15, up .25% on the day and up 7.23% Year-to-Date(YTD). The NASDAQ closed at 6,305.80, up 17.14% YTD. On a related pace, the S&P 500 closed at 2,437.11, up 8.86% YTD.
The term “Grind” refers to the methodical, slow, but generally unabated set of moves higher. Grinding moves with generally low volume. Many analysts predict a correction. But they are by no means unanimous.
The “”Wind” is the series of small increases again paired with low volumes. Wind up a spring or a rubber band and what happens at some undetermined future point that cannot be pinpointed.
OPINIONS, OPINIONS, OPINIONS
The Author Ro/b picks up some stock names from Investors Business Daily (IBD) . IBD has a very bullish predilection. Almost perma-bullish. But in a market that is moving, it is a relatively low-priced investment service. Heck, it’s free at larger public libraries.
In addition to financial and other general news, IBD provides stock recommendations and has provides an investment methodology that works well in an upward moving, high momentum, high volume market.
The Author Rob has used IBD picks in moving markets for momentum plays. In 2000, in 2003, and earlier in this year. `
IBD also uses a rather common methodology for predicting a correction, distribution days. A distribution day is a 0.2% decline in a major index with volume higher than the previous day. This IBD page provides a good description of distribution days and reading the signals. You might keep an eye on it. The Authors will take a peek or two.
MAULDIN AND MODERN PORTFOLIO THEORY
John Mauldin provides investment services and sponsors events that assemble some of the finest minds in the business arena. These events also include political analysts. George Friedman, founder of Geopolitical Futures. Friedman predicts that the US is preparing to attack North Korea. On his site, Friedman discusses this potential conflict. The Author Rob addressed the prospects and potential for a War with the PDRK in a blog entry from last week. The Author Rob does not believe that the current CIC is capable of planning beyond the choice between a Big Mac or a Whopper. But blundering into a conflict is a possible outcome. With Horrific results.
Modern Portfolio Theory (MPT) was developed by Harry Markowitz as far back as 1952. MPT as defined on Investopedia as:Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk.
Speaking a bit dismissively, if you want higher reward, you merely dial up the risk knob. The Author Rob once has a risk knob that went from zero to eleven. But he digresses.
MPT earned Markowitz a Nobel Prize in Economics in 1990.
BACK TO PIE CHARTS???
As stated in Investopedia, one element of MPT to maximize return and lower risk is asset allocation. A very simple explanation would be a stock type/bond reallocation every few years as an investor works towards retirement. For example, a single dude quits his job at Silgan and goes to work for GM. He has about $20,000 in his 401K. His dad tells him he should take his 401k as a rollover and invest it with the guy he uses, Main Street Investment Services. The Dude takes his payout as a rollover into an account at Main Street. The advisor/broker at Main Street will put him in a managed account that has a mixture of domestic stocks, foreign stocks, bonds and maybe a small slice in a REIT (Real Estate Investment Trust).
The dude and the advisor at Main Street will talk a couple times a year and as the dude gets older and approaches retirement, the mix will move to less risky, lower returning investments. More bonds, more large cap and value stocks. These mixes will reduce risk and attempt to preserve capital as the dude closes in on retirement. Main Street will use a rough form of MPT, seeking to maximize return given the dude’s imputed risk tolerance as he ages.
Two problems present themselves. One is long periods of bear markets. The Author heard as recently as two weeks ago his barber sloughing off “paper losses” in his investment account. Brokers and investment advisors will tell investors that since you do not need the money until you retire in ten years, you really haven’t “lost money.” I’m here to tell you, Cuz, that market loses are real losses and mean you have less green paper when you cash it out. Active account management is a way to minimize “paper losses,” and that it what this Newsletter is all about. Without active account management, an investor is setting herself up for long periods to recoup market losses. Remember that if you portfolio falls 25%, the account will have to increase by 33% to break even again.
Another risk is implicit in many asset allocation strategies. Correlation. Simply put, as a general rule, when stocks retreat, the value of bonds rise. (Interest rates fall so people are willing to pay more for the underlying instrument to get the same return.) This is a negative correlation. Correlation, at its worst, is just another way of regressing to the mean. This goes up, that goes down, we’re all even-steven.
One way to overcome correlation limits on gain is to put non-correlated assets in the portfolio. An article in Seeking highlights a good number of non-correlated assets. Another class of noncorellated assets are Inverse Funds. These are ETFs managed to return the inverse of a specific index. Direxion provides a broad menu of inverse ETFs. These inverse ETFs trade derivative instruments and futures with an appropriate strategy. As one might imagine, management expenses are high for these funds.
The Quantum Multiplier Portfolio is a slim place. Here are the long stock holdings:
FDX 203.11 40.94%
AMAT 46.80 108.08%
AERI 55.15 34.09%
CE 88.04 00.99%
The rest of the Portfolio is in a few options, some cash and long RSP ETF.
THE DESERT OF THE REAL IS ON IMPEACHMENT WATCH. WE ARE ALREADY AT OBSTRUCTION OF JUSTICE. EXECUTIVE PRIVILEGE MAY SOON BE INVOKED. IT WON'T WORK. IT HAS BEEN TRIED BEFORE. UNITED STATES V. NIXON, 418 US 683 (1974).
DESERT OF THE REAL ECONOMICS IS A MEMBER OF THE FEIGHTNER CONSULTING LLC FAMILY COMPANIES AND IS ALSO AN ASSUMED BUSINESS NAME OF FEIGHTNER CONSULTING LLC. (DAMNED LAWYERS ALSO WANT SOMETHING OUT OUT OF US.)