While we waited patiently in cash, the markets lost $40 trillion

30 December ~The stock and bond markets lost $40 trillion since the peak in January, according to Bespoke.com. How much is that? The total US GDP was $21.4 trillion in 2021, so $40 trillion is almost double the value of the total goods and services in the country. It is the largest dollar loss ever experienced by market investors. The graphic above compares 2022 with previous drawdowns in 2001 and 2009.

We called the top on January 16th, thanks to our proprietary algorithm, and allocated to cash.

Biggest manager predicts recession

9 December ~The planets largest asset manager, BlackRock, predicts a recession in 2023. Click here to read their 2023 Global Investment Outlook.. In our analysis, we don't give a lot of weight to economists' predictions, but thought this was worth noting. Also worth noting is that even though they predict a recession, on page 14 their strategic view is still to be 'overweight stocks'. Wouldn't it make more sense to keep cash handy to invest at the depth of their predicted recession? On page 15 their tactical view is to be 'underweight stocks'. Perhaps this way they can 'be right' either way.

In July Daily Wire reported that BlackRock lost $1.7 trillion of its clients' money since the beginning of the year --- the largest sum ever lost by a single firm over such a short period.

You can be like GE on tax day

Brett Arends wrote this for the WSJ a dozen years ago. Though some of the numbers have changed, the spirit of it remains timely, especially now at the end of the year.

There's been a firestorm this week over the news that General Electric will pay no tax -- at least, no federal corporate income tax -- on last year's profits.

But if you're like a lot of people, your first reaction was probably: "Hmmm. How can I get that kind of deal?"

You'd be surprised. You might. And without being either a pauper or a major corporation.

I spoke to Gil Charney, principal tax researcher at H&R Block's Tax Institute, to see how a regular Joe could pull a GE. The verdict: It's more feasible than you think -- especially if you're self-employed.

Let's say you set up business as a consultant or a contractor, something a lot of people have been doing these days. And, to make this a challenge on the tax front, let's say you do well and take in about $150,000 in your first year.

First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up expenses. (In subsequent years it's only $5,000.)

Okay, let's say you claim $7,000. That takes your income down to $143,000.

You can also write off all legitimate business expenses. Mr. Charney emphasizes that this only applies to legitimate expenses.

He didn't say, but everyone seems to understand, that this can be quite a flexible term. Even if you buy a computer, a cellphone and a car primarily for business use, you can use them for personal purposes as well. If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool.

So let's say you manage to write off another $10,000 a year in business expenses.

That brings your income, for tax purposes, down to $133,000.

You'll have to pay Medicare and Social Security taxes (just like GE). Because you're self-employed, you have to pay both sides: the employee and the employer. That will come to about $19,000.

However, you can deduct half of that, or $9,500, from your taxable income. So that brings your total down to $123,500 so far.

Now comes the creative bit. The self-employed have access to terrific tax breaks on their investment and retirement accounts. The best deal for many is going to be a self-employed 401(k), sometimes known as a Solo 401(k).

This will let you save $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).

Why $43,100? That's because with a Solo 401(k), you're both the employer and the employee. As the employee you get to contribute a maximum of $16,500, as with any regular 401(k). But as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income.

Yes, being the boss has its privileges. (And if you're 50 or over, your limit as an employee is raised from $16,500 each to $22,000.)

You can save another $10,000 by also contributing to individual retirement accounts -- $5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a Roth, that reduces your taxable income as well. If you're 50 or over, the limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings your income for tax purposes down to just over $70,000.

We haven't stopped there either, says Mr. Charney.

Now come the usual itemized deductions. You can write off your state and local taxes. Let's say these come to $10,000.

You can write off interest on your mortgage. Call that another $10,000. That's enough to pay 5% interest on a $200,000 home loan.

That gets us down to about $50,000 And we're not done.

If you're self-employed, health insurance is probably a big headache. But the news isn't all bad. You can write off the premiums for yourself, your spouse, and your kids.

And if you use a qualifying high-deductible health insurance plan -- there are a variety of rules to make sure a plan qualifies -- you get another break. You can contribute $3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family. You can write those contributions off against your taxable income. The investments grow sheltered from tax. And if you spend the money on qualifying health costs, the withdrawals are tax-free as well.

So call this $10,000 for the premiums and $6,150 for the HSA contributions. That gets your income, for tax purposes, all the way down to about $34,000.

If you have outstanding student loans, you can write off $2,500 in interest. And you can write off $4,000 of your kid's college tuition and fees.

Then there's a personal exemption: $3,650 per person. If you're married with one child, that's $10,950.

Taxable income: just under $17,000. That's on a gross take of $150,000. You'd owe less than $1,700 in federal income tax.

And it doesn't stop there. Because now you can bring in some of the tax credits. Unlike deductions, these come off your tax liability, dollar for dollar.

GE got big write-offs related to green energy. There are some for you too, although on a small scale. You can claim credits for things like installing solar panels, heat pumps or energy-efficient windows or boilers in your home. Let's say you use a home equity loan to pay for the improvements and take the maximum $1,500 write-off.

That gets your tax liability down to $200.

Can we get rid of that? Sure, says Mr. Charney.

If your spouse spends, say, $1,000 on qualifying adult-education courses or training programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The maximum is $2,000.)

That wipes out the remaining liability.

Congratulations. You've pulled a GE. You owe no federal income taxes at all.

OK, it's just an illustration. Few will be quite so fortunate. On the other hand, it's not comprehensive either. There are plenty of other deductions and credits we didn't mention. You could have written off up to $3,000 by selling loss-making investments. Your spouse may be able to use a 401(k) deduction as well. There are lots of ways to tweak the numbers.

In this case, you've paid no federal income tax, and meanwhile you've saved $19,000 toward your retirement through Social Security and Medicare, and $53,000 through your 401(k) and IRAs. You've paid most of your accommodation costs (that is, the interest and property taxes on your home), covered your health-care costs and quite a lot of personal expenses through your business account, paid $4,000 toward your child's college costs and had about $2,000 a month left over for cash costs.

Who says GE has all the fun?

Clipping Coupons

30 September ~ I recall as a child going with my parents to their safe deposit box at the bank, watching them clip the current coupon on their corporate bonds, present them at the teller window in exchange for cash. Those days of clipping coupons are long gone. The safety of investment grade corporate bonds remains.

These days investment is all about the Fed.The FOMC delivered a third consecutive 75bp rate hike in line with consensus expectations. A close reading of their report revealed significant changes to their projections – slower growth, upward revisions to both headline and core PCE inflation as well as the unemployment rate, and a steeper rate path. (See 'Bullard was Right') below.

On an early morning in August at the annual Jackson Hole Symposium, Chair Powell said that the Fed will "keep at it until the job is done," adding that higher rates are needed to curb inflation, and there's no "painless way to do that." Consequently we've seen spikes in yields and a further sell-off in equities.

Yields are at decade highs amid bearish sentiment. I think that US investment grade corporate credit bonds, particularly at the front end of the curve, provide a safer place for investors.

The front end is a liquid market: about $3 trillion. At current prices, the average yield is over 2% with a duration of 2.64 and A3/Baa1 credit quality. These levels already anticipate the hikes ahead that the Fed has signaled at their recent meeting. The short duration of these bonds makes them less sensitive to higher rates.

What about creditworthiness? Won’t issuers have problems if the economy slows or, worse, enters a recession and earnings decline? Interest coverage is the important metric. Interest coverage is now at 12.6x, the highest levels since the early 1990s, so higher rates are unlikely to affect credit due to these healthy coverage ratios. The combination of credit fundamentals, low duration and yields at decade highs tell me that this part of the credit market offers a relatively safe investment. These investment grade fixed and floating rate corporate bonds as well as commercial paper comprise our biggest positions now. Our average duration is 0.38 years


Bullard was right

13 September ~At Jackson Hole a few weeks ago I chatted with James Bullard and he said based on his review of core CPI data, inflation has not yet peaked. Today's CPI was higher. He was right. With this information and my hawkish view (see below), today our investment group values declined only 1% even though the indexes lost more than 4%.

Was this inside information? No. He had said the same thing to Steve Liesman a few minutes before on live TV.

Jim said Kansas City Fed President Esther George held the same view on the inflation trend.

Fed Speaks. Market Shrieks.

29 August ~ Last week I was again at Jackson Hole where the 45th annual Federal Reserve Symposium was in full swing.

On Wednesday I saw two large live hawks in the lobby. Here's a photo of one.

Friday morning at 7 am the Chair spoke. I was poised with my laptop and as soon as I heard his 'hawkish' tone, reallocated our investment group to cash and consequently avoided the -5% decline since. The Dow finished the day down 1,008 points. I reallocated based on a proprietary algorithm backed by years of R&D, and the hawk was an interesting coincidence.

Why don't more investment managers do this? One reason: the Vanguards and Blackrocks of the world can't because they are much too big. They are the market. In this case, small is beautiful, as economist E.F. Schumacher published in 1973, and The Times Literary Supplement ranked as one of the hundred most influential books since World War II.

As one who vividly recalls Volker's response to inflation, I believe Powell, with his measured, logical, data-driven pronouncements, is also courageously applying the same unpopular remedy with remarkably skill.


What does 备 战 mean?

1 August ~The CCP objected to Nancy Pelosi visiting Taiwan. In their subsequent directive to the PLA are these two glyphs : 备 战. According to Google translate, 备 means "prepare for" and 战 means "war".

Read more here.

Investment Giant BlackRock loses $1.7 trillion in 6 months

23 July ~BlackRock lost $1.7 trillion of its clients' money since the beginning of the year --- the largest sum ever lost by a single firm over such a short period. Read more here. ...

From Crypto to Kryptonite

UPDATE 30 June ~As we mentioned a couple weeks ago, biggest crypto hedge fund is being liquidated. Read here.

16 June ~ Kryptonite is that mythical substance, the only thing that can hurt Superman. Crypto is that mythical set of currencies, the only thing that can escape government scrutiny, avoid fiat debauchery and defy inflation. Kryptonite lives on in the imagination of science fiction enthusiasts. Crypto currencies are alive and well in the minds of promoters. However, crypto turns out to be even easier than other forms of wealth for governments to track, its value has declined by several factors more than inflation has increased, and it is the ultimate fiat, meaning created out of nothing. But it's limited, promoters say quantity is limited. Yes, imaginative folks got around that by creating over a thousand varieties. Others decided it was a good idea to leverage their positions, such as Three Arrows Capital. One can't actually buy much with crypto, even if the crypto banks allow withdrawals. Can't even buy a Tesla anymore. Kryptonite has no useful qualities either except to Lex Luthor. ...

"It's very hard to see the case for a pause"

2 June~This morning Fed Vice Chair Lael Brainard said "it's very hard to see the case for a pause in September." Brainard added that: “We do expect to see some cooling of a very, very strong economy over time.” Markets reacted briefly, as they did to the earlier Microsoft disclosure of FX losses, then buyers returned and we participated.

With a background at Harvard, MIT, Brookings and McKinsey, as well as twenty-five years in prestigious government positions, Brainard has earned a reputation for measured words and calm deliberation. More background here. .

Mission Produce: By their fruits ye shall know them

11 May “We didn’t predict the future. We created it,” answered founder CEO Steve Barnard, explaining the 38-year growth of his company when asked how he predicted the avocado boom. His company, Mission Produce, is now the world’s most advanced avocado network with the largest global footprint in the industry,

Inspired by his father's citrus business, Steve graduated with an agriculture degree from Cal Poly. He worked for a lettuce company that got into the avocado business in 1978, an era when CalAvo had 80% market share. He ran their avocado division for a year, then proposed to the owners to make it a separate business unit. They said no. He said I’m serious. They said so are we. So he and Ed Williams wrote a prospectus and raised $900,000 in 1983, rented a couple trucks and a building, bought a small sizer, and began June 1, 1983. At first, focused on Japan export, Dole Japan was an early customer. They flew to Hong Kong and met Dole execs on the 27th floor of a skyscraper, got their business by promising to always supply product. Since California avocado season is only in the summer, to achieve that goal, in 1985 they opened an office in Mexico where the harvesting season is in winter. When the border opened in 1997, they had a running start. They achieved their goal to have at least dual sources of supply 52 weeks a year. “We play offense all the time. We don’t look backwards. We started the avocado revolution.”.

Fast forward to 1999, Steve tells the story how they invented the “ripe” category. He loitered near the fruit bins at Ralph's in Los Angeles, watched human behavior, watched the buyers squeeze the avocados, and walk away. He surveyed shoppers and asked why they didn't buy. All of them said because they couldn’t find a ripe one. Steve gave Ralph’s in Oxnard ten ripe boxes for free, which sold out by noon on Saturday, so Ralph’s agreed to a year's delivery. Sales up 300%. On the strength of that test, Steve called Kroger, which owns Ralph's, and went national immediately. After six months, Steve went to Wal-Mart “have you seen what Kroger’s doing?” So they got Wal-Mart. With distribution booming, now they needed fruit. Opportunity came up in Peru with a 900 hectare “test plot”, got the permits to allow Peruvian avocados into the US, then built a 300,000 sq ft packing house, and last year harvested 100 million pounds from their own farm. Mission opened another center on October 17, 2021 in Laredo, Texas. Now Mission has a ripening centers in Asia and Europe, operations in nine countries and sales in twenty-five countries

Ripening avocados is part science, part art. Mission's ripening and distribution centers combine both to deliver ready-to-eat fruit to supermarkets. "Now we dominate in source. We dominate in distribution and we dominate in how the market is expanding. We like to farm without a budget, to do what’s needed to make it right.”

Mission has huge revenue and profit growth ahead. Consider these metrics: The per capita annual avocado consumption in Mexico is 15 pounds. Thanks to Mission, the per capita annual avocado consumption in the US is now up to 8 pounds from 2. The per capita annual avocado consumption in Europe and Asia is still only 2 pounds, so that’s where the growth potential is. Steve says they also are eyeing the India market. “It’s always been about not being afraid to lose.” concluded Steve.

Another exciting metric: It's not just revenue growth, their model for profit growth in the years ahead is full vertical integration, which they’ve achieved in Peru. CFO Brian Giles explained, “Why does it make sense to vertically integrate? Last year 11% of our deliveries were from our own orchards, which was 29% of our net profit.”

Last month Steve gave me a tour of their Oxnard center. For my further due diligence, he gave me a box of organic fruit, which were delicious.

We own AVO shares and plan to accumulate more as part of a diversified portfolio.

9 June Update ~Mission Produce announced earnings and the price increased +8% today. To listen to the call, click here.

A Hedge Fund Reports

3 May~ Years ago I pitched a private equity deal to a few of Julian Robertson's cubs at his Manhattan Tiger Fund office, a heady experience. Protogés who worked there eventually opened their own funds and were dubbed "Tiger cubs". One of them, Chase Coleman III, called his Tiger Global, and spent the past eleven years profiting from the Fed's relentlessly increasing balance sheet, and was one of the hedge fund world’s best performers. Not this year. Tiger Global’s long-only fund tumbled -25% last month, extending its drop for the year to -52%, according to Bloomberg. Read more here.

Mayday! Mayday!

1 May 2022~ Yes, one needs to search back 80 years, to 1939, to find a worse start of the year for the S&P500, down -13% year-to-date. Was that the worst investment? No. Bonds declined more than they ever have in their 200+ year history, with the 20+year down -19%. Was that the worst? No. The Nasdaq Composite Index finished down -21.2%, the biggest such fall for the Nasdaq Composite since its advent in 1971.

In January my analysis indicated a trend change, so I allocated most capital to US dollar cash. See 'Smiling Jay' below. Here is what the US dollar has done so far this year, up +7% against major currencies.

Of course, this gain won't show up on most of our statements because most are denominated in dollars. It will show up when you travel out of the US via increased purchasing power. Time to book that holiday.

April: An Historic Month

29 April ~There have been only four times in modern history when S&P 500 fell more than -5% and US Treasuries fell more than -2%. This April is only the fourth time since 1973 this has happened.

Deutche Banks Head of Thematic Research Jim Reid agrees with what I wrote last week (see below). Jim writes ""if inflation structurally changes for a prolonged period we may have to get used to more periods of both being down which will be a problem for 60/40 type portfolios."

The Dow has been volatile since its infancy. It was born on May 26, 1896 at 40.94. By August 8th, it had declined by half to 20.48, its all-time low. Three years later in the summer of 1899, it had more than tripled to 77. In those days the total NYSE daily volume was much less than 100,000 shares and commissions were 12.5 cents a share. So, dear reader, no use longing for the good old days. The good new days of volume and zero commissions are now.

Classic 60/40 Portfolio

23 April ~ The classic portfolio construction is 60% stocks and 40% bonds, on the theory that when stocks go up, bonds decline and vice versa. The problem? That's not always true. This year so far, that's especially not true. The S&P as of Friday is down -10%, the Nasdaq down -18%. Bonds should be up, yes? But no. Twenty-plus year bonds are down -19%.

We believe the 60/40 rule doesn't work in the near-zero rate environment. Our separate managed accounts vary, depending on authority granted, from -2% to +3% this year-to-date.

Are we surprised? Why did we outperform? See Smiling Jay below. We follow the rule: Don't fight the Fed.

Smiling Jay

16 January ~ My strategy has been to prudently avoid risk when managing retirement money. That resulted in underperformance in the first half of last year, and superior performance since the recent market top. The top? Yes. There's an old Wall Street maxim “don’t fight the Fed” The Fed has been accommodative for years, for so many years that younger managers have never seen a market when the Fed raised rates. I've seen more than several. At the January Fed meeting, Powell announced that he plans to raise rates "depending on data". The market indices have declined since. Many of the darlings of last year have already entered bear markets, defined as down -20% from their peak. My working hypothesis: this decline will continue --- with sharp countertrend rallies along the way --- unless and until Powell changes his mind and effectively says “just kidding”, or until the market says "this time it's different" and lurches to new highs.

By the way, at an annual Jackson Hole Fed Symposium, I believe I snapped the only known photo of the Fed Chair smiling.

A Growing Franchise

12 May ~ UPDATE Since November I've patiently watched for better prices and after yesterday's earning report, BROS traded at half price after hours. However, even after that overnight precipitous decline, it is still 10x sales, so I will continue to patiently watch for three signs: A company can have a great concept but poor execution. A company can have a good concept, competent execution, but if everybody already knows about it, those everybodies will bid the price up too high. So, I'm waiting for that triple-latté sweet spot of concept, execution and the right price.

28 November 21 ~ Years ago I invested in a budding franchise and it became a great profit maker. Here's another one with potential, so I'm waiting for a better price to invest in this IPO. Yes, there is always a line at our local Dutch Bros kiosk, one of 471 kiosks in eleven states.

In 1992 Dane and Travis Boersma, third-generation dairy farmers, bought a pushcart and espresso machine and began selling downtown by the railroad tracks in Grants Pass, Oregon and soon expanded to five more carts. In 2018 private equity TSG Consumer Partners invested, then this September 15, 2021 the NYSE listed BROS as a public company. The coffee business is competitive, but BROS has loyal customers and employees. The employee turnover in a typical coffee shop is 100%; at BROS it is 40%. CEO Jonathan Ricci credits customer and employee satisfaction as a key to their continued success and growth.

Personally I see similar profit metrics as my franchises years ago. One caveat: I am not the first person to notice this is a great business; the price has already been bid up, so we must be patient. By the way, an analyst who tried their ‘Annihilator’, comprised of six shots of espresso with Irish Creme, said he didn’t sleep all weekend. Good for him, I guess? I am monitoring carefully and believe we can own shares at better prices to participate in their long-term expansion plans.

Sunday in Tiananmen Square

5 September 2021 ~The black swan in the Twitter video below appeared just before the Evergrande news. Read about the company's debt here.The company defaulted on $300 billion and investors worry about the domino effects.

Meet my Marketing Manager, Mr. Bear

7 June ~No, not Joseph Bear who passed away in 1955; I mean the Bear Market itself. Let me explain. I do no marketing, and have noticed more clients come in the door during and after bear markets, because our accounts have the best outperformance then. During bull markets, most investors feel content to stay where they are. It is Mr. Bear who reveals that their wealth managers have no risk control as their accounts decline precipitiously.

Ironically, I learned risk control observing other professional managers who had no risk control, and saw first-hand how that worked when Mr. Bear inevitably arrived.They made fortunes on the way up and lost fortunes on the way down.

Some credit is due to my Scottish Great Aunt Hannah McPherson, who considered capital preservation a virtue, right up there with prayer and rectitude.

How does one know if a wealth manager has risk control? When one buys a car, one checks CarFax. In the money world, the FINRA Broker Check is the equivalent. In the auto world, one checks CarFax to see if the vehicle came from Galveston. In the money world, one reviews the 'Disclosures' section to see how many client complaints are on record. One might also check the manager's years in the business. If fewer than ten years, he/she has never even seen a real Bear. Yet.

The Evolution of Money

31 May ~The European Investment Bank issued its first ever bond on an Ethereum blockchain. Read more here. The €100 million two-year bond will settle in Central Bank Digital Currency (CBDC).

What is all this new stuff? In 1704 Sir Isaac Newton wrote of the fifth element, ether, the name for the medium through which all energy flows. James Maxwell devised his famous equations with the ether model. Russian Canadian computer scientist Vitalik Dmitriyevich Buterin liked the name and in 2014 gave it to his digital currency and blockchain, which he called "the world computer" and which is now the most actively used blockchain in the world, used by the World Bank and European Investment Bank among many others. Early in May I researched this, and saw huge institutional buying, so we invested a small amount and it gave our accounts a boost this month. The institutional buying waned, so we have cashed in our profits.

By the way, on May 12, 2021, Buterin donated $1 billion to a relief fund in India. Spend an hour with Vital in this 2017 interview.

Money has evolved with civilization. Cowry shells were currency in parts of the world, so much so that traders would load entire ships with these small snail shells at the Malabar Coast and sail to Africa and China to trade them. Paper money was an improvement, though governments can't resist eventually creating too much when they can. Money first began to go digital in the 1960s with the credit card revolution. Money became a plastic card. So, it's not too surprising now that the world consciousness lives mostly in cyberspace that money would begin to go there too. Other than cowry shells, the changes have been cumulative. One can still use paper and plastic, in addition to Ethers.

Robot Farming

24 March ~ It might require a computer science degree to grow food in the near future. In the Jiangsu province, China is rapidly advancing research and development in unmanned tractors, pesticide applicators, and transplanters. These machines working in tandem with data, GPS and 5g connectivity are able to greatly increase yields. Along with the expansion of automated farming, China could see greater yields and cheaper food production. Increase in efficiency could result in decreased use of pesticides and fertilizers since these automated machines can more accurately pinpoint which areas require added chemicals and which don’t.

This expansion does not come without a cost, however. The 250 million people who are still farmers in the Chinese workforce may find themselves replaced and out of work. With over 20% of the remaining farmable acres contaminated by industrial development and loss of arable land to urbanization, increased efficiency is greatly needed to feed China’s 1.4 billion people. Although there is a risk in many farmers losing their jobs, automation in China could help create new jobs in maintenance and repair, as well as development and coding. Those who stick to farming will need to develop new skills to keep up with developing technologies roaming their fields.

While machines are becoming a common sight in the farmlands of China, The U.S. has also been incorporating more and more technology to increase efficiency in farming. Deere & Co. has been applying GPS to tractors to reduce overlapping row laying and, in turn, fuel consumption for over 16 years. GPS has also been used to survey and indicate areas with infestation and other correctable problems enabling farmers to make informed decisions. Robotic milking machines have been sold in Europe since 1992 and demand in the U.S. has accelerated over the past few years. Many new robotics companies are sprouting up to spearhead automating farming procedures and providing robotic assistance and creating new opportunities in the fields.

Investing in Autonomy: Here are companies in the United States developing robotic farming. Major vendors in the agricultural robots market include Deere & Company (US), Trimble (US), AGCO Corporation (US), AgJunction (US), DJI (China), Boumatic (Netherlands), Lely (Netherlands), DeLaval (Sweden), Topcon (US), and AgEagle Aerial Systems (US). Apart from these, Abundant Robotics (US) and Iron Ox (US) are among a few emerging companies in the agricultural robots market. These are not investment recommendations, and they may form a small part of our diversified portfolio.

What do Bill Gates, Old MacDonald, and our Portfolio have in common?

1 July ~“Farmland has had a remarkably consistent ability to hedge against inflation,” Ag professor Bruce Sherrick says. Read more here. For years we've invested in farmland.

Robot Solves Rubik's Cube with One Hand

14 February ~ This is not so much about Dactyl's astounding accomplishment --- solving Rubik's Cube with one hand --- as it is about deep learning AI, the ability of computers to learn and to program themselves. In the not-too-distant future, this trend will create even more accelerated development in many arenas, create the next generation of computing platforms for conversation with humans, autonomous deliveries and vehicles, education and affect every aspect of our lives.

Opportunities? Data centers need to upgrade their GPUs and install TPUs to process this AI software. Some of the biggest companies are reaping profits: Amazon, IBM, Microsoft, Nvidia, Google. Why these well-known names? Because they voraciously gobble up the small companies that look promising in the AI space.

From Wall Street to Hale Street

21 December ~ It's not widely known but "Wall Street" has been a misnomor for years, since trading is digital and the trade matching engines in the Equinix data centers are across the Hudson River in New Jersey, as well as around the world since network topology is so advanced. What's left of the NYSE open outcry trading floor is basically a CNBC television show set.

Most equity investment these days is done through exchange-traded funds (ETFs) and many of those companies are located much further afield in Wheaton, Illinois. One newer entry: Innovator Funds, developed by Bruce Bond and John Southard, who previously founded Powershares in 2002. Where? In Wheaton, Illinois. In 2006 they sold Powershares to Invesco for $260 million. Bond became CEO and grew Invesco Powershares to $41 billion AUM, then retired in 2009. After their non-compete agreement expired, Bond and Southard came out of retirement because they saw defined outcome funds as a significant way to provide value with low risk to investors. They bought and developed Innovator Funds, which now has AUM of $3.3 billion, located on Hale Street in Wheaton.

What are defined outcome funds? For many years sophisticated large investors, banks and insurance companies, have hedged portfolios against loss with options. It is a tried-and-true strategy. The ‘innovative’ part of the Innovator funds is that they are the first to implement this strategy in index ETFs so that it is available for any size portfolio. My first foray into these funds beginning in January yielded success. They performed exactly as expected during the February crash. On March 11th near the year’s low, I invested in a tranche with a 29% buffer. That is, the market could decline 29% more and this fund would only decline 7% from its purchase price.

The second innovation is the annual rebalance of each of their funds. Every twelve months the funds invest in options which guarantee a minimum price structure within a market range. The macro view? These defined outcome funds are a significant new feature in the ongoing democratization of the investment world.

By the way, what's left of Wall Street may move to Texas. On November 20th Wall Street exchange executives met with Texas governor Greg Abbot to discuss moving to Dallas. New Jersey has proposed a quarter of a cent tax for financial transactions, which they project would generate $10 billion annually for the state. New Jersey income tax is almost 11%. Texas income tax is zero. Texas has wide open spaces where companies can build to suit instead of renting. Schwab has already built a 700,000 square foot campus headquarters north of Ft. Worth and has left San Francisco. Goldman Sachs also has back office operations in Dallas. My mentor, Ed Seykota, moved to Austin a few years ago too.

The Road Ahead

31 October ~ Use this matrix to predict what is ahead economically.

At a Senate hearing

22 September ~ Something extraordinary about this photo of Fed Chairman Jay Powell and Treasury Secretary Steven Mnuchin before testifying at Maxine Water's House Committee on Financial Services this morning.

Dalio down -18.6% year-to-date

18 September ~The famous Bridgewater, world's largest hedge fund, Ray Dalio's fund, is down -18.6% through August. Troubles include internal computer models misreading the market again and $3.5 billion in redemptions. Read more here.

Masayoshi Moves Markets

6 September ~The market indices rose more than most expected, then corrected Thursday and Friday. Of the 500 stocks in the S&P index, there were six stocks responsible for the rise: Apple, Amazon, Facebook, Google, Microsoft, Tesla. The other 494 stocks generally went down. What happened? Third generation Korean immigrant, Masayoshi Son, head of the Japanese Softbank conglomerate, spent the month buying an estimated $4 billion in call options on these six. Consequently derivatives dealers such as Citadel and Goldman, who were on the other side of those transactions, needed to buy shares of those stocks to balance their books. It's called gamma exposure. So Softbank's derivative campaign in effect pulled up the indices. Strange, but true, and you won't read about this in economics textbooks.

In July Goldman reported an historic inversion in the stock market: for the first time ever, the average daily value of options traded exceeded shares, with July single stock options volumes hitting 114% of shares volumes. In early August we learned that for the first time SoftBank was planning investments of more than $10 billion in public stocks as part of a new asset management arm, far exceeding what founder Masayoshi Son outlined to shareholders in the company's latest earnings call, and a radical departure from the company's private venture strategy. But there it was, deep inside the company's latest quarterly report on page 68, SoftBank revealed that it has established an investment management subsidiary to manage excess cash and diversification of assets and which would consist primarily of highly liquid public listed stocks where investments would either be direct or via derivative transactions.

The brains behind SoftBank's audacious gambit is Akshay Naheta, an MIT Electrical Engineer, formerly Head of Principal Strategies responsible for proprietary trading and structured deals at Deutsche Bank. He is now a SoftBank senior VP in Abu Dhabi, the head of SoftBank's new asset management team.

So how much money did SoftBank make using this strategy? According to the FT, SoftBank is currently holding unrealized profits of about $4 billion. This is the same amount SoftBank risked on call premiums over the past few months, so a 100% gain. Investors apparently not impressed with this style drift though, as Softbank shares are down -5% Monday in Japan. Latest, Softbank reports that of their $10 billion equities investment, they have cashed in $7 billion.

Infinite Fiscal Space

16 August ~"We should provide relief as needed, but not act as if we have infinite fiscal space," said Raghuram Rajan, former India central bank governor and current economist at Chicago Booth, while addressing the Reuters Global Forum this month.

Visualizing money flows in fiscal space has always been my approach to understanding the otherwise abstract realm of investments.

In a recent interview, Rajan reflected on his tenure at RBI, "you were relatively autonomous to do things on your own. You don't have to depend on permissions from elsewhere," said Rajan, adding that there were a number of days he got back home feeling like he did something today, and that feeling was hard to beat."

Fed Governor spoke today about the Pandemic

14 July ~On this Bastille Day one wonders if there are parallels with today's world and the French Revolutions, where the feudal hierarchy eventually changed to a new government.

Fed Governor Lael Brainard spoke today at an NABE forum in Washington. She conveyed that there is data suggesting the economy bottomed in April. She reiterated the Fed is ready to provide more money for citizens and our businesses. Read her full speech here. Or watch the video here.

Blueberry Love

11 July ~In the wide Willamette Valley of Oregon, in the French Prairie appellation east of the river, last September I inspected our 209 acres of organic blueberries planted on this broad alluvial plain. The fertile silt, thousands of feet deep, was deposited by the Missoula Floods which inundated the Valley many times at the end of the last ice age 15,000 years ago. How do we know? We know thanks to the research of geologist Ira Allison in 1930 who documented the hundreds of non-native boulders washed down the Columbia River gorge during those floods. He also solved the mystery of Tomanowos, the sacred 34,000-pound ten-foot iron meteorite, the largest in North America, discovered 33 miles north of our farm. How had this landed without creating a crater? Allison theorized it landed much farther north, embedded into a glacier and was rafted to the valley in an iceberg along with the hundreds of other erratics during the Missoula Floods deglaciation.

Tomanowos means ‘Heavenly Visitor’ in the Clackamas Chinook language. They revered this huge iron meteor for its healing powers and understood it came as a representative of the ‘Sky People’. Rainwater collected in the meteorite’s basins healed and empowered tribes people “since the beginning of time.” Tribal cultural interpreter, Travis Stewart, said “To even see Tomanowos or even a piece of it, it has this quality you want to touch. It’s buzzing. It’s got this life.” In 1850, the Clackamas Tribe relocated to the Grand Ronde Reservation. Tomanowos was left behind, but not forgotten. Songs and dances today still recount the blessings of the water from ‘the Visitor’.

Thanks to the popularity of Lewis & Clark’s 1805 exploration, this ‘promised land of flowing milk and honey’ became the destination of choice for the oxen-drawn wagon trains of emigrants who undertook the perilous trek along the Oregon Trail. Nowadays the Valley is the ‘Oregon wine country’ comprised of 19,000 acres of vineyard and 500+ wineries.

We own a proportional interest in these blueberries and 112 other farms comprising 88,000 acres via our Gladstone Land investment. These 209 acres were planted in wheat when Mr. Gladstone bought them and replanted with blueberries. The property has five wells. It’s his policy to acquire farms with wells, so there will always be a source of water, despite droughts and politics.

This investment is an implementation of our Dharmic Investing policy, placing one’s capital where it produces good for the world.

How has the pandemic affected our farms? Almost all the buyers for our berries are large supermarkets, not restaurants. So, sales are up, because our masked citizenry now buy more groceries and have time to consider eating healthier food. Contracts for sales and delivery of produce are traditionally signed long before the harvest season begins. In December farmers were making contracts for delivery of berries all through the spring and summer. Delivery trucks are working fine. There’s plenty of diesel at cheap prices, so delivering to market is not a big cost. All is well.

How about valuation? Based on third party appraisals and prices paid for the 113 farms, CEO David Gladstone estimated fair value is about $892 million. This translates to a book value of $12.98 per share as of July 2020. Seventy non-affiliated farmers agreed to favorable leases. We have 100% occupancy. There is only one slow payer. We receive our share of lease payments each month.

As I took in the pastoral landscape, I pondered that much of the grand complexity of all this is unspoken, unseen. The farmers' production is inspired by the consumers' needs. What a process to fulfill that. There is much infrastructure behind those supermarket shelves brimming with fresh berries, the electricity that runs the coolers, the lights, the automatic doors which royally greet customers. We can marvel at these visible phenomena. Behind the scenes each is the successful result of uncounted experiments and innovations. Eisenhower commissioned the interstate freeway, so our berries are easly trucked up I-5 in perhaps a new Peterbuilt, manufactured by another of our investments, Paccar, or a used one from another, CoParts. Perhaps we drove to the grocery store in our hybrid. Village workers tidied up the streets, the parking lot, anticipating our arrival. The berries are packed in the most efficient boxes. Hi-tech AI scanned the QRC and debited our purse by $4.99. The capital markets drove this efficiency, guided by prices of goods.

Other unseen forces are more subtle, such as laws regulating farms and protecting consumers, and even subtler are the customs we each expect in a transaction. We have shared unspoken agreement of right and wrong, a sense of the boundaries that define civilized behavior. This all works with astonishing success and remains hidden to most. It’s a wonderful world based on love. Say what? Yes, love, the subtlest yet most obvious of all. Farmers love to farm. Plants love to siphon mineral-infused groundwater and grow toward the sun. The citizenry love fresh fruit. Each and everyone of us involved in these acts and intentions large and small, are doing what we love.

Parisian economist M. F. Bastiat articulated some of these insights in his 1850 treatise, Ce Qu’on Voit et ce Qu’on ne Voit Pas. Figures that a Frenchman would be writing about love, doesn't it? Nevertheless, we appreciated it all that day amidst the blueberries.


26 May ~Since the March crash and a month following while institutions adjusted their allocations to the airline sector, as well as Buffett divesting, recently our analysis of fund flow data indicates serious new investments, so we invested too with a broad spectrum including Southwest, American, Delta, United, Skywest, Alaska, Jetblue, Hawaiian, Mesa, Ryanair, Qantas, Japan, Lufthansa, Aegean, Air France, Dart, Finnair, Air Canada and New Zealand.

Negative Gilts

20 May ~The U.K. Debt Management Office sold 3.75 billion pounds(USD $4.6 billion) of bonds maturing in 2023 with a yield of minus 0.003%.

Since central banks have created so much money, negative rates are inevitable. It has already happened in Switzerland, Germany, Japan. With such rates, the Keynesian 'euthanasia of the rentier' is complete.

Not a bad trick: borrow trillions, then arrange it so the lenders pay for the privelege.

Negative Rates in America

25 March ~An historic day, US treasuries have negative interest, which for a couple of years I've been forecasting as inevitable. Why? Too many dollars in the world seeking safety. Investors are willing to pay to park cash in America. More.

Infinite Cash

23 March ~ At 5 am, the FOMC announced they will provide infinite cash to bolster the financial system. Read their announcement here..

The Asymmetry of Percentages

22 March ~Now that we have big percentage moves every day, let's revisit the problem with percentage measurements: With upward moves, there is no limit, while with downward moves it is a bound scale of 100 to zero. Measurements of up and down are asymmetric. To illustrate with an extreme example, suppose a financial instrument rose +400%, then descended 80%. At first glance, camparing those two numbers, one might casually surmise it is still profitable, right? Wrong! The price is break even. This principle applies to some degree with even small percent moves. This is one reason why we exert such effort to keep losses small, as we have successfully done with this recent crash, as well as in 2018, 2008 and 2002.

Powell moves to Zero on a Sunday

15 March ~Just now Jerome Powell cut rates to zero before Asia markets opened on Sunday, a move without precedent. Futures are limit down. Click here to read the FOMC statement. .

Faithful readers know I've been forecasting negative US rates. Two years ago I submitted a paper to the Kansas City Fed entitled The Positve Effect of Negative Rates, observing in the conclusion that "The market will eventually provide the stimulus, as Keynes predicted eighty years ago. It will not happen all at once. There will be no revolution. It will continue as it has started, gradually, and then accelerate, as the rentiers seek a safe place to keep their capital from eroding too fast. Negative rates will be most extreme in the safest refuges, as already evidenced in Switzerland. This is the future."

What will happen next? The Administration will refinance the trillions in government debt with long-term bonds at these historically low rates.

One Billion 56 46 23 Million Quarantined

21 March ~Details here.

16 February ~For perspective, in this flu season 19 million Americans contracted the regular H1N1 flu, 275,000 hospitalized, and 19,000 died. According to he CDC, the flu typically kills 12,000 to 56,000 people in the U.S. in a year. Source.

25 January ~Xi admits virus accelerating. Hong Kong declares state of emergency. Here is John Hopkins University CSSE live map of WHO, CDC, NHC data.

24 January ~Now 46 million quarantined—the biggest quarantine in human history. Neither earnings declines for a year, fundamental economic numbers nor inflation could stop the bull market. It purportedly took someone eating bat soup in Wuhan to cause this 1% drop on Friday.

23 January ~ Investment markets are nervous about the coronavirus outbreak, which began in Wuhan Huanan South China Seafood Market which sells a range of processed and live meat including donkeys, poultry, camels, foxes, badgers, hedgehogs, bats, frogs and rats. Latest report: 23 million quarantined and Chinese New Year festivities cancelled. China stocks down. Fears increased when Chinese health officials confirmed human to human transmission. Some researchers believe the virus shares genetic markers identical to the coronavirus strain in bats.

Fed transition

2 January ~ Tucked away on page five is the key phrase in the FOMC Minutes. I've circled it in red. They plan to begin to withdraw liquidity mid-January through April. Those of us not wishing to "fight the Fed" will begin cashing in profits then.

We Bridged the Ravine

29 December ~Measured from January 1st, the market percentage increase is dramatic. Measured from three months earlier, not so much. The media seldom mentions the -20% ravine in the index charts which spanned October 2018 through April 2019 and bottomed on Christmas Eve 2018. Our accounts bridged that ravine and so even though this year the market measured from the -20% ravine depths shows impressive stats, our accounts are right up there too — even though our 2019 percentage change is more modest — since we avoided that big dip.

12 December ~Looks like a trade deal will happen soon. Here is a clear view of what we trade with China. Click the graphic to enlarge.

Stocks are Here

7 December~ Stocks are here.

Retail Trends

1 December ~Amazon continued to take market share this shopping weekend. Consumer data shows retail traffic at brick-and-mortar stores during Thanksgiving Day and Black Friday was unimpressive as the shift towards online shopping is one of the significant cotinuing trends.

Fed Rules

6 November ~ Our investment thesis --- that the Fed under Jay Powell is the prime price discovery mechanism of this market --- continues to be validated. In January Powell propelled markets higher with his “flexible” speech. Every single corrective activity this year has found a sudden end with a Fed announcement. The March pullback ended after Jay Powell’s 60 Minute interview. The May correction ended when Powell signaled readiness to act at the beginning of June, and act he did. He cut in July. On August 23rd, amid market uncertainty, Powell signaled more rate cuts to come and markets rallied. In September he delivered with a second rate cut. More was needed as suddenly overnight rates spiked and repo activities were launched in the middle of September. The Fed launched $60B per month in “not QE” at the beginning of October. Markets haven’t had a single down week since. The cumulative picture: This is the most interventionist Fed since Ben Bernanke. Look at the balance sheet since September: Fed balance sheet now more than $4 trillion again increasing by over $261 billion in just two months. Looks like a new QE to me, but the Fed says it’s not.

Bellwether crashes

18 September ~First major stock to report in the earnings season, bellwether Fedex price is down $22 this morning, -13%, after reporting earnings. As a small part of our diversified portfolio, we profited from our option position. Fedex shares have continued their descent this morning as fears of higher fuel prices add to the panic.

Big Oil Price Increase

15 September ~ Pre-dawn drone attacks caused major damage Saturday to the Aramco Abqaiq oil processing facility and the Khurais oil field, Saudi Energy Minister Prince Abdulaziz bin Salman said, which may take months to repair. Oil prices increased as high as +19% during the weekend. The attackers were Yemeni Islamist Houthi terrorists, funded by Iran. News is confused: Production will either be halved or not affected. Take your pick. President Trump authorized release of US strategic reserves to calm price panic.

All Swiss Government Debt Now Negative

31 July ~The trillion dollar trend toward more negative debt achieved yet another milestone, as all Swiss government debt is now priced to negative yield. What does this mean? This means investors are willing to pay a fee to park their money in a very safe neighborhood.

This NIRP affects clients. UBS now charges clients who deposit more than CHF 2 million -.75% interest to hold their cash. In contrast, our asset custodian pays our clients +2.2% on deposits greater than $100 thousand.

Shanghai Showdown

29 July ~ The wild card for investors this week will be the outcome of the trade meeting taking place in the historic art deco Fairmont Peace Hotel on the Shanghai Bund, known for its distinctive copper pyramid roof. Forecasters don't have high hopes, so any positive news will inspire buying in the markets, while a lack of progress will elicit a shrug. Either way, after meeting with Chinese Vice Premier Liu He, US Treasury Secretary Mnuchen is likely to announce after hours.

Modern Architecture: Form Follows Finance?

23 July ~ Architect Louis Sullivan, a mentor to Frank Lloyd Wright, once famously said "form follows function" and was considered the father of the American skyscraper.

The European Central Bank conducted a conference celebrating the 50th Anniversary of the Journal of Money, Credit & Banking. It took place in their new German skyscraper. In my humble opinion the design of this building doesn’t shout “stability”, does it? It looks like one top-heavy obelisk leaning on another. Symbolic of the ECB? Coincidentally, we recently made a small profit on the decline of Deutsche Bank, whose balance statement including their trillions in derivatives looks a lot like that building, so I believe we are ready, whatever the future may bring. Of course, this little anecdote is not an investment recommendation. It was a small part of a diversified portfolio.

Nobel Prize Winner Quips

6 June ~ Last week our favorite hedge fund manager, Dr. Anil Sharma, chatted with world-renowned economics Nobel Prize winner, Myron Scholes, co-inventor of the Black-Scholes Options Pricing Model. He asked him if he personally traded options. Myron replied that he tried, but lost money, so he stopped.

Dr. Sharma's fund, available only to qualified investors, is up +52% this year so far, primarily due to option profits.

Queued Up on Everest Peak

28 May ~ Click on this amazing photo, taken May 22, 2019, to see the detail of a long queue on Mt. Everest summit. Multiple climbers' deaths have been attributed to increased "traffic jams" involving hundreds attempting to ascend the same narrow single-file path above Camp 4 known as "the death zone" that leads straight to the summit. Most die due to exhaustion after they "run out of oxygen supplies after spending too long at extremely high altitudes," according to one climbing expert. International reports have counted a shocking eleven deaths in only ten days. The world's toughest mountaineering challenge can cost $50,000. What is it in human nature that wants to do things like trek 29,029 vertical feet to join a crowd at the top of Everest... or buy Uber at 8.5 times sales and minus infinity times earnings?

This is What Computing Looks Like in the Distant Future

16 May :: Quantum computing may increase speeds dramatically. In this age when science fiction becomes reality, Berkeley-based, privately-owned Rigetti is working on it. How distant? Well, programmers can lease time on a Rigetti quantum computer right now and code.

20 April ~ As of last month, no-one who has invested or worked in finance fewer than ten years has seen or felt a bear market. Even the most sophisticated can become mesmerized by the market spell.

Irving Fisher (1867-1947) was the pre-eminent celebrity economist of his day. A Yale professor, he personally leveraged his investments in the stock market with margin and bank loans and infamously proclaimed in September 1929 that the market had reached a "permanently high plateau". He was wiped out in the October crash and survived the rest of his life due to the kindness of lenders.

Since I've done it before, I know how to preserve capital when a bear market occurs. Very important for those in or nearing retirement.

Investment Bots in the Headlights

December 22 ~`The time has come to see how the robots who run Betterment, Wealthfront and other robo-advisors will handle a bear market. In their ten-year life, they've never experienced one. Betterment has more than $13 billion passively invested. Wealthfront more than $10 billion. How low will the market go before the hypnotic spell breaks that "it always comes back". Does it always come back? Often, yes, but always? No. Look at Japan. It peaked in 1990, and is still below that level 28 years later. OK, granted, the US is not Japan. There is the Nasdaq 100 which took sixteen years to come back. It only did because they replaced the many companies that went to zero with other, more prosaic businesses.

Will it come back this time? I don't know, but there seems to be too much complacent certainty that it will.

Fed Data Dependent

December 7th ~ Fed Governor Lael Brainard said "The policy path increasingly will depend on how the outlook evolves.”

Chatting with Fed Governor Lael Brainard at the 2018 annual Fed Symposium at Jackson Lake Lodge. Photo credit: Bill Crockett

Wall Street has a bad case of Irritable Powell Syndrome.

Hedge Funds, October and year-to-date

22 November Here are selected hedge fund returns in October and this year so far.

Organisation / Fund Return YTD * AUM **
Abraham Trading1
Altis Partners2
Aspect Capital3
Beach Horizon4
Campbell & Company5
Chesapeake Capital6
Clarke Capital7
Covenant Cap. Mgt.8
Drury Capital9
Dunn Capital10
Eckhardt Trading11
EMC Capital12
Estlander & Partners13
Graham Capital14
Hawksbill Capital15
Hyman Beck & Co.16
Lynx Asset Mgt18
Man AHL Diversified19
Mark J. Walsh & Co.20
Millburn Ridgefield21
Mulvaney Capital22
Quantica Capital23
Rabar Market Research24
Sunrise Capital25
Tactical Investment Mgt26
Winton Capital28
Summary Figures***

Data source

Fourth Quarter

18 October ~ On October 1st our analysis indicated time to increase cash allocations, so we did. Since then we have continued with high cash allocations and modest short positions in the Nasdaq and Russell.

First Half >>> Second Half

16 July ~ It's summertime. Your investments are diversified and actively participating in trending sectors of the economy. Beginning early morning here in California before markets open in New York, I monitor accounts each day, and exert best efforts to adjust when needed to preserve capital and increase profit.

During this year’s first half the biggest buyers of US stocks were companies themselves, especially high tech, banks and health care. This was an effect of the new tax law, which allowed multinationals to repatriate overseas profits at lower tax rates. Institutions were net sellers of stock, anticipating Fed rate hikes later this year. Stocks and bonds are the components of a retirement portfolio. Stocks in the first half were up a little, and bonds down a little.

In theory stock buybacks reduce the number of outstanding shares, so each remaining share is worth a little more. In practice, though some companies use buybacks to mask their own executives’ egregious stock option grants. The result is not much float reduction and an effective transference of wealth from shareholders to executives. SEC regulations are lax, so shareholders don’t even know the amount of buybacks until a month after quarter’s end. Compare this with the UK and Japan, which require next-day reporting, and Switzerland, which provides buyback information in real time.

The merger and acquisition trend completely dried up, as too many discovered the opportunity. So we haven’t made money there as we did in the past. In Buffett’s 1997 annual letter where he writes extensively on the topic, he observed these same cycles. We rode the wave ‘til it crested.

There is a story about one of the smartest people of the 20th century, Leo Szilard, which you can read below, titled "Solving the Puzzle". The gist of the story is that some rules are immutable, such as Newtonian physics, and some change, such as the investment world.

Legendary Benjamin Graham’s famous book, The Intelligent Investor, was published in four editions and in each one the formulae for investing changed because markets changed. Before he passed in 1976, Graham was asked whether detailed analysis of individual stocks ---his original claim to fame--- remained a good strategy. He answered ‘no’ and explained “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity forty years ago, when our book was first published, but the situation has changed a great deal since then.”

So investing is more like studying a mutating virus than immutable laws of physics. Gravity doesn’t get arbitraged away due to popularity the way M&A profits do.

So, what’s next? What is the current mutation? We researched and vetted 41 hedge fund managers and have invested with the best. For the first half of 2018, this strategy is up +18% net. Even better, the strategy is more robust than M&A, and depends in part on one thing we know is constant: time. The SEC Rule 205-3 allows me to offer this only to Qualified Investors. If you exceed the $2.1 million net worth and other requirements, please contact me for a Private Placement Memorandum.

There have alway been sectors of innovation for investment: canals in the 1790’s, railroads in the 1840s, radio in the 1930’s, telecoms in the early 90’s, the internet in the late 90’s. Now the sector is genomics. We want to have capital poised to profit from this developing technology, including CRSPR, DNA sequencing of model genomes using both Next Generation and Sanger sequencing, gene expression analysis by microarrays, high throughput SNP genotyping and copy number variants, EST clone collection, parentage testing, As any new sector there are worlds within worlds, and a safer investment is in providing the shovels and jeans to gold miners, so to speak. In genomics, these are the companies providing commercially viable genetic tools such as Illumina, Editas, CRISPER Therapeutics AG, and Pacific Biosciences, among others.. Our plan is to invest in a basket of these companies to participate in this megatrend while mitigating individual company risk.

With all investments, and especially innovations, the art is to participate in the trend and exit before the inevitable speculation resets. This is possible through trend analysis. The trends will usually last years longer than one would imagine, and there will be extreme volatility along the way.

Since bond yields are so low, we look to real estate and other infrastructure to provide income. The energy sector is also now regarded favorably by the administration and is the beneficiary of reduced regulation. A new investment sector bought at recent lows are energy partnerships such as Andeavor, Tesoro, Plains American. These are income-generating pipeline and storage facilities. All of these energy investments are neatly wrapped in a closed-end fund, Central Coast, which pays a dividend each month annualized at 11.25%.

Another diversification to balance the equity holdings is Brookfield Real Assets Fund. Click here to read their 152-page prospectus. This fund’s monthly payouts total a 10% annual yield. Among other things, it holds financing on the Waldorf Astoria Boca Raton Resort. It also owns interests in Hong Kong’s famous Jardine House, as well as ultra-blue-chip London real estate near Piccadilly Circus, Regent Street and Oxford Street. The more I’ve analyzed Brookfield Real Assets, the more I like it.

This is what I see in the investment world at this time.

Adam Smith's Birthday

5 June ~ Adam Smith was born on June 5, 1723 in County Fife, Scotland. He never married and in 1776 published what is still considered today, 240 years later, the great book on economics, An Inquiry into the Nature and Causes of the Wealth of Nations.

My father gave me the two-volume edition pictured here. His father gave it to him on Christmas Day, 1920.

The last line of the book reads "If any of the provinces of the British empire cannot be made to contribute to the support of the whole empire, it is surely time that Great Britain free itself of the expense of defending those provinces in time of war, and of supporting any part of their civil or military establishment in time of peace, and endeavor to accommodate her future views and designs to the real mediocrity of her circumstances."

We bought a Central Bank

22 April ~ Next to the Swiss Parliament building in Berne, the stately edifice of the Swiss National Bank projects conservative prudence, a breed apart from the rough 'n tumble investment world. Surprise! The Swiss National Bank buys US stocks directly every month and is a large owner of Apple, Microsoft, Exxon, J&J, AT&T, Amazon, General Electric, Facebook. They own an $80 billion stock portfolio, dwarfing all but the largest hedge funds.

Ten years ago, if someone had predicted the conservative Swiss central bank would own shares of Facebook, he would have been ridiculed. Yet, here we are. The investment world has changed.

Unlike the private US Federal Reserve, the Swiss National Bank is publicly traded. Cantons own a majority, but there is an individual who owns 7%, Theo Siegert, a German businessman. We bought shares in SNB too via the Zurich Stock Exchange.

Earn $5.6 billion, pay no tax

28 February ~ That is what Amazon did for tax year 2017. Read article here. Some hints on how Jeff Bezos reduces taxes are in this 2016 Newsweek article. Link

It's the season to reduce your taxes too. Your 1099 forms and 8949 worksheets, as well as dividend reports, are now available on our asset custodian website. Contact me for assistance to access and interpret.

Are We Worried about the Crash?

11 February ~ Update: After this week when the Dow dropped 1,000 points on Monday and 1,100 points on Thursday, from the January peak our average accounts are down 1% to 2% while the markets are down 9% to 10%.

5 February ~ Several clients called today after the Dow closed down more than a thousand points, and I was happy to inform that our accounts were about even today, and didn't suffer the -4.6% loss the markets did, as we worked proactively last week to protect against such loss.

Happy Birthday, Ben

17 January Today is this founding father's birthday. Everyone knows Ben Franklin, but not many know of his experiment in compound interest which continued for two hundred years, until 1990. Described in a codicil of his will, he left a thousand pounds Sterling each to the cities of Boston and Philadelphia with instructions that it should be lent to married young tradesmen at 5% interest to help them start out in life. This was done, more or less faithfully, and after two hundred years (1790 to 1990) Boston's fund balance was $5 million and Philadelphia's fund was $2 million.

$2.5 Million FDIC Insurance

29 November ~ Our custodial broker now has a wonderful new program whereby cash in an account can be FDIC insured for $2.5 million. As you may know, the SIPC insurance is only $250,000. After enrolling in this program, any cash in excess of the SIPC maximum is swept into interest-bearing accounts at FDIC-insured banks. There is no cost to participate and funds are immediately available for investment. Contact my office for more details and enrollment procedures.

You Have a Ticket in the Anti-Lottery :: How to Fix That

12 September ~ Last week hackers stole 143 million identities from Equifax, the greatest heist in history. This is much worse than the theft of Target customers, because a customer can cancel a credit card. We can't cancel our social security number and entire credit history, and that's what thieves stole. You are at risk. Every bank and lender you've ever dealt with during your life has sent your data to Equifax.

So we have all effectively been entered in the anti-lottery, 143 million people, every adult in the country, has been entered into a lottery that no-one wants to win. Some of this data will be sold to other thieves and used to steal identities. Perhaps not likely, but we want to reduce that chance even further.

There is a way. Call all three reporting agencies and ask them to freeze new credit applications. Then no-one can attempt to borrow money in your name without you being notified. The agencies have waived any fees for freezing, so no cost for this protection. It won't affect current accounts.

Here is who to call:

  • TransUnion 1-888-909-8872
  • Equifax 1-800-349-9960
  • Experian 1-888-397-3742
For complete protection please call all three. You can do it online, but Equifax's site has been crashing often since the breach was announced, so better to use the phone. It is an interactive computer, so no human contact.

To stop thieves from unfreezing, each agency will provide a long PIN. Write it down and save it in two places. Important: do not hang up, repeat the message until you have written it down.

These are the essentials. For more details, contact me by clicking here.

Solving the Puzzle

2 September ~ by Morgan Housel ~ Leo Szilard was one of the smartest people of the 20th Century. He conceived the idea of nuclear energy, patented the process of using it in a power plant, and helped Albert Einstein write the letter that sparked the Manhattan Project. All in his 30s. Like any genius, Szilard’s curiosity was diverse. After World War II he became a biologist, attracted to a field that hadn’t been explored as deeply as physics. The new field didn’t just change what he learned, but how he learned. Szilard spent hours a day in the bathtub, solving physics problems in his head. Biology ruined that routine, because, as Szilard later said, he constantly had to get out of the tub to look up a fact.

Physics is guided by rational laws that have never, and will never, change. A master like Szilard could reason his way through problems like nuclear energy with only his mind as a tool. If an idea in his head followed the laws and reason of physics, it would in real life, and would continue working forever. That’s how a guy designed a nuclear bomb in the bathtub. Biology is different. It’s guided by things like accident and mutation, so specific behaviors sometimes defy logic and can change entirely as evolution bulldozes the past. The flu virus has killed 731,000 Americans in the last 40 years – more than died in World War II – and not for lack of effort by the medical community. A virus that mutates and evolves means a vaccine that might work today won’t work tomorrow. And since the mutation itself is an accident, researchers are kept in perpetual scramble. Like an unsolvable puzzle.

The physics vs. biology analogy is relevant in investing. Too many investors view their field like a physicist in the bathtub, searching for something that’s logical and permanent, while not enough view it like a virologist, needing to update their knowledge and tactics to evolve with the chaos of what happens to work now.

Benjamin Graham’s book The Intelligent Investor was published almost 70 years ago, and is still one of the best-selling investment resources. It sells because so much of its message is timeless. But investing evolves, and Graham’s book did, too. It went through four editions before his death in 1976.

Jason Zweig, who annotated Graham’s book, once wrote about using it as a practical guide in modern times: Graham was constantly experimenting and retesting his assumptions and seeking out what works — not what worked yesterday but what works today. In each revised edition of The Intelligent Investor, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that “those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.” One of the common criticisms made of Graham is that all the formulas in the 1972 edition are antiquated. The only proper response to this criticism is to say: “Of course they are! They are the ones he used to replace the formulas in the 1965 edition, which replaced the formulas in the 1954 edition, which, in turn, replaced the ones from the 1949 edition, which were used to augment the original formulas that he presented in Security Analysis in 1934.” Ben Graham’s brilliance was grasping what part of investing was timeless and what part required revision. His philosophy was rooted in principles of investor behavior that rarely change, but for tactical matters he wasn’t afraid to get out of the tub and look up new facts.

Just before he died, Graham was asked whether detailed analysis of individual stocks – a tactic he became famous for – remained a strategy he favored. He answered: In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook was first published. But the situation has changed a great deal since then.

What changed was: Competition grew as opportunities became well known; technology made information more accessible; and industries changed as the economy shifted from industrial to technology sectors, which have different business cycles and capital uses. Admitting this in real time is a hard skill. And it’s rare, because abandoning past strategies feels like defeat, and creates anxiety over what to do next. Obliviousness and denial are more common responses. But it’s a mandatory skill in any field where competition hacks away at the existence of outperformance, and social and regulatory forces evolve.

Think about the investment factors that have changed in just the last 20 years. Private equity assets have gone from $600 billion to more than $5 trillion. The number of public companies has halved. Index funds have attracted effectively all public equity asset flows. Annual reports went from being sent in the mail to being scanned for keywords by supercomputers. The cost of storing industrial amounts of data went from millions of dollars on rack servers to thousands of dollars in the cloud. Social media connects what used to be walled off. Stocks went from being traded by humans to high-frequency traders, and now the HFTs have competed themselves down to zero profits. The Federal Funds rate averaged 6.5% from 1960 to 2000. Now it’s been below 1% for 105 of the last 188 months.

Looks what’s changed just this year: ICOs have raised more money for startups than venture capital funds. SoftBank launched a fund that is larger than all U.S. IPO proceeds raised from 2010-2012. I’ve heard rumors that things are unusual in Washington.

Buying stocks for less than hard book value worked, until it didn’t. A dividend yield below Treasury yields was a sign of an overvalued stock, until it wasn’t. Discounted cash flow models were an edge, until a spreadsheet could make one. Convertible bond arbitrage was profitable, until other investors realized just how profitable. This doesn’t happen in a field like physics. Gravity doesn’t get arbitraged away due to popularity.

It’s hard to look at how much markets evolve and expect a successful investing strategy to remain stagnant over time. There’s an irony in the number of investors who expect the companies they invest in to adapt and keep up with competition, but they, themselves, expect to invest like a physicist in a bathtub.

We solved the nuclear energy puzzle, the how-to-put-a-man-on-the-moon puzzle, and the send-information-around-the-world puzzle. But we will never permanently solve the investment puzzle, because solutions have shelf lives, and expiration dates that are usually only obviously in hindsight.

There will come a day when investing strategies and norms that work today will grow old and expire. Two groups will form: Those who embrace the reality of the industry’s chaos and adapt, and those who stay in the tub, embracing a world that adheres to the logical rules stuck in their head.

The hard part is that most of investing is stable over time. Most tactical changes are regretted. It’s difficult to tell, without hindsight, whether a strategy is expired or just temporarily out of favor. Long-term investing tends to work specifically because all strategies go out of favor from time to time, testing investors’ wills at the cost of returns. Distinguishing a paradigm shift from a temporary cycle is what separates good investors from momentarily lucky investors.

The investing industry is filled with brilliant people and terrible results. The reason is that the field has less to do with the kind of knowledge that makes a good physicist, and more to do with the rare intellectual flexibility and nimbleness that makes a good flu vaccine researcher. Leo Szilard once said: “If you want to succeed in the world, you don’t have to be much cleverer than other people. You just have to be one day earlier.”

Nineteen European Countries Have Negative Rates

29 August ~ From Switzerland at -0.923% on her 2-year sovereign note, to Germany, Netherlands, Sweden, Denmark, Austria, Ireland, France, Spain, Italy, Portugal and others, there is so much currency that owners must pay to store it.

For years I've postulated this is one practical way to eventually pay down otherwise unsustainable debt. With negative rates, borrowers pay back less than they borrow. Negative 2% for about fifty years, and the debt disappears.

One could logically argue that much of the US has negative rates too, since banks pay almost nothing, then charge fees which more than offset the minuscule rate.

Another Dissonance between Politics and Reality

27 May ~ The average American state or local government pension fund assumed it would earn a nominal annual return of 7.69%, according to the National Association of State Retirement Administrators. Based on history that seemed reasonable. College endowments use similar assumptions: they target a return of 7.4%, on average, according to a survey from the National Association of College and University Business Officers. The average annual return during 2005-14 was 7.1%.

Since then that estimate has been overly optimistic. Elroy Dimson, a professor at both the Cambridge and London Business Schools, is a co-author of a study of investment returns, covering 23 countries and more than a century of data. He predicts the likely future long-term real return on a balanced portfolio will be 2%. AQR, a large fund management group, came up with a similar figure, 2.4%. These are lower projected returns than at any time in the past. However, last year, many public pensions didn’t even get to 2%.

Most public retirement plans returns in fiscal year 2016 were below 1.5%. The nation’s largest plan, CalPERS, return last year was 0.6%. The LA Times headline: CalPERS Posts Worst Year Since 2009. CalPERS annual results are watched closely in the investment world, as it is considered a bellwether for US public pensions. CalPERS stock portfolio actually lost -3.68% but they valued other assets in a way which made up the difference. Others were similar: NY State Pension Fund 0.2%. Maryland 1.16%. NY State Common Retirement Fund earned 0.19% last year. Because all pensions have struggled due to years of low bond yields, many have increased allocations to stocks. Even though they have more than half a million retired members already, 51% of CalPERS $306 billion is in stocks. Those investments declined 3.68% last year.

When nearing retirement age, we are investing conservatively, yet allocating more to stocks as well. Financial talking heads breathlessly tell viewers about market highs, but then warn we should invest less in the market when nearing retirement.

Although analysts know pension return expectations should be lowered, politicians block, because taxpayers are obligated to make up the difference, an unpopular idea.

What’s ahead? Central banks around the world have bought equities, unprecedented before 2009. Major central banks bought more than $1 trillion in Q1. A case in point, the Swiss National Bank buys US stocks directly every month and is a large owner of Apple, Microsoft, Exxon, J&J, AT&T, Amazon, General Electric, Facebook. Ten years ago, if someone had predicted the conservative Swiss central bank would own shares of Facebook, he would have been ridiculed. Yet, here we are. The investment world has changed. The governments are so indebted that central banks can’t afford to raise rates, yet this means pension funds who depended on higher bond yields search for return in the stock markets. We look forward to an enhanced investment policy to adjust to that change and boost returns going forward.

Ransom 'Round the World!

14 March ~ A client asked, "could our asset custodian be hacked by ransomware?"

As you may have read, the hackers are aiming at 'softer' targets, like hospitals, trains, delivery services. Around the whole world there was only one small brokerage targeted, and that was in Taiwan. US brokerages are 'hard' targets because they long ago expected to be targets, and so have higher security. Our asset custodian is more secure than most. They have a huge cybersecurity team. If you ever request a large withdrawal, you will see. First they have algorithms that check patterns of withdrawals. Next they immediately check with the advisor to make sure it is really the client. That extra third-layer authentication you need to log in makes brute force hacks impossible.

Apple, Chromebook and Linux operating systems also protect us because the ransomware only targets Microsoft Windows, so little chance of your computer getting a bug which might capture passwords. Even if there were one, third-layer authentication generates a new random number each log in, so our accounts are safe.

Market in Neutral

22 April ~ A few days ago JP Morgan analyst Adam Crisafulli wrote “The S&P is stuck in purgatory and hasn’t moved in one and a half months.” One could guess he was sent to parochial school as a young lad, yet that’s an apt metaphor for the equity markets. Another less devout analyst used the term 'twilight zone'. Bonds have been more volatile recently. The 20+ year treasury ETF dipped -3.6% in March before recovering.

The three biggest world central banks bought $1.6 trillion of investments during Q1. That's an all-time record. That may be why the market hasn't declined even though nuke threats are in the headlines daily. "Should California start panicking?" Spoiler alert: No.

One of those central banks, the ECB, bought 2-year German bonds at a price so high the yield is -1%. For every billion, the ECB is guaranteed to lose $10 million. This is another extreme example of the problem generating income from savings when big players are willing to buy not only no income but a guaranteed loss. Back in 1995 we could simply invest in US treasuries at 9 percent and retire. Those days of a high interest "sure thing" are gone. These days we risk more without the guarantee of a maturing bond and endure the ups and downs.

Another milestone: Schwab announced that during Q1 retail investors opened new accounts at the fastest pace in seventeen years, up 44%. Remember what happened seventeen years ago? The Dot-com bubble burst after a few years of parabolic gain. The Nasdaq declined 80% and wiped out trillions. At 26, the S&P 500 P/E ratio is the highest ever, except for two other times: 2008 and 2000.

Margin debt is at an all-time high at $528 billion. Add to this another estimated $250 billion of shadow margin debt from brokerages now encouraging customers to go on their dream vacation with a loan from their investments.

Yet another milestone, whacko investments appear: Click here to see how you too can invest in record album royalties.

Various famous hedge fund managers predict doom. Paul Tudor Jones, echoing other high profile manager warnings, expects a significant correction this summer or early fall. Philip Yang, who has run Willowbridge Associates since 1988, predicts a plunge down as much as 40 percent. Seth Klarman opines in his recent investor letter "valuations ....full or excessive." Even the ever-bullish Leon Cooperman wrote to his investors that he expects a 10 percent correction this year.

When hedge fund managers believe a decline is ahead, they sell short, hoping to profit. When a fund manager has sold short, he becomes a nervous buyer if the market doesn't decline, since brokerages charge shorts high fees. So the fund flows work like this: First they increase short positions with these predictions, then become new panicky buyers, causing an already over-valued market to rise. Ironic, yes? The "market" is nothing but the sum of its participants, and they move it by their own action. The market seems more about money flows these days than fundamental analysis. The central banks are the new giants, dwarfing hedge funds.

Oil had a big loss this past week, and about 8% of the S&P 500 is energy. Some investment folk complain the US dollar isn't backed by anything real anymore, but it is. The US dollar is backed by oil, the biggest commodity in the world. How and when did that happen? Gold was too rare, and not very useful commercially. Everyone needed oil. So a few years after Nixon announced that he wouldn't trade gold for US dollars anymore, in 1974 the Saudi royal family agreed to trade all their oil exclusively in US dollars and use the proceeds to buy US guns, jets, bombs and very secretly, loan billions. The Saudis, and consequently other oil producers, agreed to back the US dollar with their oil.

You can be like GE on tax day

Brett Arends wrote this for the WSJ a few years ago.

There's been a firestorm this week over the news that General Electric will pay no tax -- at least, no federal corporate income tax -- on last year's profits.

But if you're like a lot of people, your first reaction was probably: "Hmmm. How can I get that kind of deal?"

You'd be surprised. You might. And without being either a pauper or a major corporation.

I spoke to Gil Charney, principal tax researcher at H&R Block's Tax Institute, to see how a regular Joe could pull a GE. The verdict: It's more feasible than you think -- especially if you're self-employed.

Let's say you set up business as a consultant or a contractor, something a lot of people have been doing these days. And, to make this a challenge on the tax front, let's say you do well and take in about $150,000 in your first year.

First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up expenses. (In subsequent years it's only $5,000.)

Okay, let's say you claim $7,000. That takes your income down to $143,000.

You can also write off all legitimate business expenses. Mr. Charney emphasizes that this only applies to legitimate expenses.

He didn't say, but everyone seems to understand, that this can be quite a flexible term. Even if you buy a computer, a cellphone and a car primarily for business use, you can use them for personal purposes as well. If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool.

So let's say you manage to write off another $10,000 a year in business expenses.

That brings your income, for tax purposes, down to $133,000.

You'll have to pay Medicare and Social Security taxes (just like GE). Because you're self-employed, you have to pay both sides: the employee and the employer. That will come to about $19,000.

However, you can deduct half of that, or $9,500, from your taxable income. So that brings your total down to $123,500 so far.

Now comes the creative bit. The self-employed have access to terrific tax breaks on their investment and retirement accounts. The best deal for many is going to be a self-employed 401(k), sometimes known as a Solo 401(k).

This will let you save $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).

Why $43,100? That's because with a Solo 401(k), you're both the employer and the employee. As the employee you get to contribute a maximum of $16,500, as with any regular 401(k). But as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income.

Yes, being the boss has its privileges. (And if you're 50 or over, your limit as an employee is raised from $16,500 each to $22,000.)

You can save another $10,000 by also contributing to individual retirement accounts -- $5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a Roth, that reduces your taxable income as well. If you're 50 or over, the limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings your income for tax purposes down to just over $70,000.

We haven't stopped there either, says Mr. Charney.

Now come the usual itemized deductions. You can write off your state and local taxes. Let's say these come to $10,000.

You can write off interest on your mortgage. Call that another $10,000. That's enough to pay 5% interest on a $200,000 home loan.

That gets us down to about $50,000 And we're not done.

If you're self-employed, health insurance is probably a big headache. But the news isn't all bad. You can write off the premiums for yourself, your spouse, and your kids.

And if you use a qualifying high-deductible health insurance plan -- there are a variety of rules to make sure a plan qualifies -- you get another break. You can contribute $3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family. You can write those contributions off against your taxable income. The investments grow sheltered from tax. And if you spend the money on qualifying health costs, the withdrawals are tax-free as well.

So call this $10,000 for the premiums and $6,150 for the HSA contributions. That gets your income, for tax purposes, all the way down to about $34,000.

If you have outstanding student loans, you can write off $2,500 in interest. And you can write off $4,000 of your kid's college tuition and fees.

Then there's a personal exemption: $3,650 per person. If you're married with one child, that's $10,950.

Taxable income: just under $17,000. That's on a gross take of $150,000. You'd owe less than $1,700 in federal income tax.

And it doesn't stop there. Because now you can bring in some of the tax credits. Unlike deductions, these come off your tax liability, dollar for dollar.

GE got big write-offs related to green energy. There are some for you too, although on a small scale. You can claim credits for things like installing solar panels, heat pumps or energy-efficient windows or boilers in your home. Let's say you use a home equity loan to pay for the improvements and take the maximum $1,500 write-off.

That gets your tax liability down to $200.

Can we get rid of that? Sure, says Mr. Charney.

If your spouse spends, say, $1,000 on qualifying adult-education courses or training programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The maximum is $2,000.)

That wipes out the remaining liability.

Congratulations. You've pulled a GE. You owe no federal income taxes at all.

OK, it's just an illustration. Few will be quite so fortunate. On the other hand, it's not comprehensive either. There are plenty of other deductions and credits we didn't mention. You could have written off up to $3,000 by selling loss-making investments. Your spouse may be able to use a 401(k) deduction as well. There are lots of ways to tweak the numbers.

In this case, you've paid no federal income tax, and meanwhile you've saved $19,000 toward your retirement through Social Security and Medicare, and $53,000 through your 401(k) and IRAs. You've paid most of your accommodation costs (that is, the interest and property taxes on your home), covered your health-care costs and quite a lot of personal expenses through your business account, paid $4,000 toward your child's college costs and had about $2,000 a month left over for cash costs.

Who says GE has all the fun?

Chartered Accountants Unite in San Francisco

5 March ~ Last weekend I spoke at the inauguration of the San Francisco Chapter of the Institute of Chartered Accountants of India, a 253,369-member statutory body established in 1949 by an Act of Parliament. In the photo is Mr. Nilesh Vikamsey, newly-elected president of ICAI and Chairman of HLB International, a network of accounting firms with 2,100 partners in 130 offices worldwide. Looking on is the popular Fremont Mayor Lily Mei. The Chartered Accountancy exam is considered one of the most difficult in the world, with a 4% pass rate.

Lowest Audit Rate in Twelve Years

4 March update ~ There are fewer audits in 2016 because of government budget cuts. Taxpayers' chance of an audit have rarely been so low.

12 February ~ In 1909 my great-great grandfather State Senator Alexander Perry Johnson argued that the authority for the government to levy income taxes was not in the Constitution, and therefore was not legal. The government needed money, so his view didn't prevail, and on February 25, 1913 Secretary of State Philander C. Knox, whose nickname was “Sleepy Phil,” since he dozed off during board meetings, and because he was cross-eyed, declared the 16th Amendment ratified . It states "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived". The infographic below shows selected tax rates in North America, Australia and Europe. Click here for a larger view.

Our asset custodian informs me that 1099s and Form 8949 worksheets, as well as dividend reports, will be available on Wednesday, February 15th, under the 'Reports' tab on their website. Contact our office and we will be happy to email these reports to you and your CPA.

In an unrelated bit of history, ironic in light of the Oroville dam news this week, Sleepy Phil was a member of a secretive group of fifty wealthy businessmen, including Andrew Carnegie, known as the South Fork Fishing & Hunting Club, which maintained an earth-filled dam upriver from Johnstown, Pennsylvania. After years of maintenance neglect, that dam failed on May 31, 1889, releasing 20 million tons of water which killed 2,209 citizens of Johnstown, and was the worst disaster in US history to-date. Though club members gathered to form the Pittsburgh Relief Committee for assistance to the flood victims, they decided together to refrain from speaking publicly about the club or the flood, and despite years of litigation, Sleepy Phil's law firm was able to fend off all lawsuits that would have placed blame upon the Club’s members.

Trump did not kill the Fiduciary Rule

3 February The media has hundreds of articles about the president killing the fiduciary rule today. Only problem is, he didn't.

First, what is this rule? This is a new rule for the financial world that says financial advisors have to act in their customers' best interest. I am already a fiduciary, as that is the ethical way to operate, yes? Put clients' interest first. It may surprise readers to learn that stockbrokers like Merrill Lynch, Goldman Sachs, Morgan Stanley, Edward Jones do not have to put clients' interest before their own. In fact these firms have spent millions lobbying to keep it that way. It's true. Representative Ann Wagner, standing next to the President in the photo, sponsored legislation to kill the fiduciary rule. I looked up contributors to her campaign and found Edward Jones among the largest. Standing on the President's left is Gary Cohn, former president of Goldman Sachs, who made millions trading against their customers' best interest.

Click here to read the actual final text of what the president signed. He directed further study of the rule. It's implementation, which was scheduled for April 1, is in limbo for now. So, for the time being, it remains up to each client to ask his or her financial advisor "are you a fiduciary, bound by law to put my interest before yours?"

A Year of M&A

12 October ~ Though it received no media attention, in August I found Lockheed was selling their IT division to Leidos in a very complex tax-advantaged arrangement known as a Reverse Morris Trust. Not only that, they were offering an odd-lot exemption, a rare event these days. If this sounds complicated, it’s because it is. Even my friends who are retired fund managers, who I talk with often, thought this was too complicated. I’d seen it before and knew it was a very good deal with low risk, so I bought for our accounts. Everything that could go right went right. The position gained +25% in a couple of weeks.

Coincidentally, I knew two founders of Lockheed. In 1932, in the depths of the Depression, Cyril and Pat Chappellet paid $10,000 to buy their quarter share of a defunct airplane maker from a bankruptcy judge. That company was Lockheed. The company prospered during World War II and became the largest government contractor. Their corporate history included a government bailout in 1971, which was dutifully repaid by 1977, as well as a $1.4 billion overfunded pension plan which attracted corporate raider Jim Simmons in 1980. Their hundreds of aircraft designs included the secretive Blackbird as well as conventional passenger jets. They built the Vesta, which Amelia Earhart successfully flew across the Atlantic.

This past summer I attended a private memorial in Napa Valley for Donn Chappellet, Cyril’s only son. Donn was also successful businessman, first in coffee vending, then as an early Napa Valley vintner. It was a touching celebration of his life, on a perfect California end-of-summer day, with church bells pealing in the distance and 350 assembled in a meadow to pay our respects. Among the guests were Robert Redford and Martha Stewart. Donn’s children each spoke about their father, as did long-time friends and business partners. From the many stories emerged a nuanced portrait of a rare thing these days: a multi-generation family business, where all the generations work together farming, harvesting, production, bottling, marketing, legal, even label design.

Other activities so far this year: In our recent very profitable Niska merger, it felt good to be investing alongside the very smart partners of Riverstone, a private equity group of ex-Goldman folks who specialize in energy. We profited as they did, pari passu. Niska was the top of our list of completed merger deals this year. Here are others: British mega-pharma Shire bought our shares of Dyax. The famous Omaha Oracle bought our shares of Precision CastParts. Tiny Canadian pharma Tribute bought our shares of even tinier Pozen. Respected private equity Thomas Bravo gave us cash for our shares of Solar Winds. EIG bought our shares of Constant Contact. The heirs to the Motorola fortune gave us cash for our interest in Campus Crest Communities. The Reimann family increased their caffeine-based empire with their purchase of our Green Mountain Coffee interest. Suhail Rizvi, an early Facebook and Twitter backer, bought our shares of RealD. After two years of courting, CalAmp finally bought our shares of LoJack. Two suitors chased our shares of Affimetrix, which we eventually sold to Origin Technologies. Microchip quietly bought our shares of Atmel. Hong Kong-based BTG bought our shares of Chinese hotelier HomeInns. Two private equity groups bought our shares of 70-year old chain saw maker Blount International for cash. Eyal Waldman bought our shares of EZ Chip and although we have completed the required paperwork twice, we are still waiting for the Israeli tax authority to release proceeds from this deal; both companies are located near Mt. Carmel in northern Israel. The diciest one: Louisiana Power & Light was held up for months by the local utility board vote. Old National Bank bought our shares of Wisconsin-based Anchor Bank. After waiting almost as long as we did for Niska government approval, Southern Company bought our shares of AGL Resources. Caveat: Each position was preceded by in-depth analysis and was a small part of a diverse portfolio

It's Ironic

28 September ~It's ironic that while the most systemically dangerous bank on the planet, Deutche Bank,is having huge problems, the US markets flirt with all-time highs. What's wrong with the bank? The most immediate issue is a proposed $14 billion fine by the US Department of Justice for mis-selling mortgage-backed securities. Add to that ongoing litigation over Russian money laundering and gold price-fixing. Read more here.


7 September ~ During the past 40 days the Dow's high-to-low range was only 2.27%. That is the narrowest 40-day range in at least 100 years. The next narrowest range, 2.5%, occurred from December 1922 to February 1923.

September 1st a Big Day for REITs

1 September ~ Click here for an extensive list of REITs in Elliott's second chapter.

28 August ~ Our newest intern, Elliott Froissart, debuts on Seeking Alpha, with news about REITs.

Brookfield Acquires Niska

29 July 2016 ~ A million birds call the nine acres of riparian forest and marsh in the Gray Lodge Wildlife Area home each winter, important because most of the great alluvial plain of California’s central valley has been drained or filled for farming. Across the road we owned the Wild Goose Storage plant through our shares of Niska Gas Storage Partners LLC, a small, $142 million market cap, gas storage company based in Houston, Texas, with operations in Calgary, Alberta and Wild Goose, an hour’s drive north of Sacramento near the town of Gridley. Niska was heavily indebted and not a normal candidate for our investment. However, last year I discovered some special circumstances which made Niska very interesting.

In June 2015 Brookfield Infrastructure Partners LP offered $4.225 cash to buy Niska. Niska was trading around $1.50 before this offer. After the offer, the price rose to $3.76. Brookfield and Niska each approved and signed the deal.. Their boards voted yes. Private equity Riverstone Investment Group LLC owned 53% of the LLC units. They delivered a written consent approving the transaction. No additional unitholder action was necessary for the deal to close. Since the buyout offer was announced, three Wall Street analysts upgraded the stock. The price drifted down to $3.03 in December, 2015. My channel checks told me the deal was still intact. We began acquiring shares.

We bought shares of Niska and tendered them last week to Brookfield for $4.225 per share cash when the deal closed on July 20, 2016, a +38% gain in six months. Years ago, when Warren Buffett bought Mid-America Energy, I did a similar thing. The shares traded at a discount to Buffett’s cash offer price, so I purchased, and we profited with almost no risk. We did it again in February when Buffett bought our shares of Precision Castparts

So, that was the profit side of the opportunity. What were the risks?

The sale was subject to the vote of the California Public Utilities Commission, because of the California asset. Even though they meet in San Francisco bi-monthly, they were not likely to vote for about six months, maybe longer. Niska submited the required official filing within three weeks but a delay in their vote, or a ‘no’ vote was one risk.

Another risk: the usual law firms which extort companies involved in buyouts made their usual noises with their usual press releases. So, they caused delays and extra expense.

We are on the lookout for another buyout opportunity with such a large profit potential.

Basic Profit

7 July Who would’ve thought we would profit with blueberries grown on a small organic farm on the Skagit River? That’s Cascadian Farm, and they would love to have visitors this summer. Okay, Cheerios, Wheaties and Haagen Dazs also had something to do with it, because all these companies are part of General Mills, whose share price rocketed upwards after Brexit. We bought a basket of these good solid companies including Kellogg, Clorox, Church & Dwight, Procter & Gamble, Republic Services and Waste Management. They each rose after Brexit.

All's Well

24 June Today the S&P500 closed down -4.2%. Banks worse: Citigroup down -8%. European banks much worse: Deutsche Bank -17%. Credit Suisse -16%. Royal Bank of Scotland -24%. Lloyd's -23%. That's in one day. Our accounts moved between -0.5% and -1% today, due to balanced allocations in bonds, US dollar, REITs and gold, which all rose. There will be great opportunities in the days ahead.

US Negative Rates: the first glimpse

23 June ~ For more than a year I've written about the coming of negative interest rates. They arrived in Japan. Then in Europe. Now there are trillions in sovereign bonds trading at negative rates. Today I saw the first hint of negative rates in the US in this announcement:

"TIAA will end the voluntary expense waiver for the CREF Money Market Account by April 14, 2017. After the waiver ends, unless interest rates rise sufficiently, the CREF Money Market Account may have negative yields." Source

Others see this as a sign of doom. As noted last year, instead of messy defaults or grinding inflation, this is simply the least painful way to begin to reduce the otherwise unpayable government debt. It's a by-product of too much central banks money creation. If this first announcement goes over reasonably well, expect an avalanche of money market fund announcements of negative yields.

A Real Estate Deal

20 June ~ A little company, Gyrodyne, has an interesting history. It was founded in 1946 to make specialized helicopters. That business is long gone. What remains is the prime real estate they own. I manage money for a SUNY anesthesology professor. His department holds their annual meetings in Flowerfield, a Gyrodyne property ​on Long Island. In 2005, SUNY Stony Brook used eminent domain to take 245.5 acres from GYRO for $26.3m. Gyrodyne argued that this payment was not enough and eventually won a huge trial award against the state of New York. You can read a bit more background on the company and trial history here. GYRO is in the process of liquidating and has already paid most of that cash to its shareholders, and the share price reflects that. The question for current investors is what is the remaining value? Liquidations tend to be overlooked opportunities given the lack of a natural buying constituency and their returns are relatively uncorrelated to the market. GYRO is no different: we bought around $27 per share, and the company's most recent estimate of liquidation value is $31.24/share (see p. 35 of its most recent 10-Q). A great milestone last week: from the sale proceeds of two properties, they announced a special $9.25 / share dividend to distribute the cash proceeds from those sales. I​ look​ at ​GYRO​ ​as a part of a long-term growth portfolio​, a unique opportunity​

Two Great Money Managers You've Never Heard Of

4 June ~ As clients, this week you will receive an invitation to the annual shareholders meeting of the Pimco High Income Fund, to be held on the 42nd floor in Paramount Plaza at 1633 Broadway in Manhattan on Thursday, June 30th at 9:30 am, where you can submit your ballot to elect directors in person. Of course, you can also mail them in. I recommend a 'yes' vote with management.

While you're on Broadway, catch a play. The same Paramount Plaza houses the Gershwin Theater where, for $234 a seat, you can sit front row center to see 'Wicked', a prequel to the Wizard of Oz.

But we're here to celebrate two great money managers you've never heard of: Alfred T. Murata and Mohit Mittal. Alfred is a Stanford PhD. Mohit is an ITT computer science and Wharton School graduate. Together they run Pimco bond funds including Pimco High Income Fund, which is where we often park cash, as it pays a monthly dividend yielding 15%.

Before you mortgage the farm to invest, be aware these managers themselves need managing. That is, the share price bounces around more than the dividend income. As of this writing, they are up +23% year-to-date, handily trouncing the general market, but we must trim, take profits, and manage the significant price trends. The fund is not without risk, as it is so perennially popular that it trades at a steep premium to NAV — 35% average premium over ten years. No other fund has ever done that. From time to time, analysts including Barron's, have attempted to explain how awful this premium was, not to mention the leverage, but each resulting down move has been a buying opportunity ‖

It's a Wonderful Bank

7 May ~ One addition to the portfolio in February was Anchor Bancorp of Wisconsin, merging with Old National Bancorp. This deal has been approved by each Board of Directors. According to the Form 8-K filed with the SEC on January 12th, we had the right to receive $48.50 in cash or 3.5505 shares of Old National common stock. I bought shares for $43.70. If we receive cash, that’s an 11% profit, a good gain in three months.

A real-life incarnation of the classic movie It’s a Wonderful Life building and loan, Anchor Bank was founded in 1919 and operates 46 branches, including 21 in Madison. As Clarence, the angel-second class, told Jimmy Stewart, “you see, George, you’ve had a wonderful life.” The buyer, Old National Bank, was the first bank in Evansville, Indiana, founded in 1834 and now operates 160 branches.

Finally, Gold

29 April ~ Since the trend change a few months ago, we have invested in precious metals and mining and exited the general market indexes.

Aside from the trend change in many commodities, recently Deutche Bank and Barclays admitted artificially holding the price of gold and silver down and were fined. These banks also agreed to cooperate to expose others who participated. During these settlment negotiations, the prices of gold and silver began rising.

Flying with Sir Richard Branson

7 April ~ When investing in merger deals, our goal is to make a few percent in a few months. Sometimes serendipity strikes. Last week after studying the news reports on Virgin America, we purchased shares, and were delighted when the following Monday the price leapt up +42% as Alaska Airlines announced their all-cash offer to buy our shares.

Sharpening the Chain Saw

21 March ~ Around the corner from Trump Tower, Claus Moller, chief of P2 Capital Partners looks out over the world from the 25th floor of 590 Madision Avenue for investments to put his hedge funds' $600 million to work. Last year he began a position in Blount, then offered to buy the company. For 70 years Blount has made and sold chain saws worldwide. As shareholders, this weekend we received proxy materials for the buyout. I recommend a 'yes' vote, as this will give us a reasonable profit with little risk. Read their 8-k here.

Cashing in our EZChips

11 March ~ Last week Eyal Waldman sent us cash for our shares of EZChip. Mr. Waldman runs Mellanox and has been trying to buy EZChip for over a year. Both companies are located in the Yokne'am High Tech Park near Mt. Carmel in northern Israel. Clients may have received a notice to complete a withholding exemption form for the Israel Tax Authority. We're taking care of that for you.

Today Motorola heirs sent us cash

2 March ~ Today Mike and Chris Galvin, heirs to the Motorola fortune, are sending our client group cash, our capital and profit for our shares of Campus Crest Communities

After a successful career running Motorola, Mike and Chris started a private equity fund called Harrison Capital, since their grandfather's original company began life as Galvin Manufacturing Company at 847 W. Harrison Street, Chicago in 1928. Today they need good deals to make partners happy and employ capital, so they needed this acquisition. I did this background research so I knew they were anxious and solvent.

Campus Crest Communities owns 33 apartment buildings, comprised of 6,234 apartments, which it rents exclusively to college students. We are content with our brief, profitable ownership and short-term gain.

Bears and Corrections

20 February ~ The dark red on this world map marks countries whose stocks are in bear markets, defined as down 20% from a peak. The orange demarcates markets in correction, defined as 10% from a peak. We are content with specific bonds and our special situations while world markets descend.

Seeing Profits in 3D

5 February ~ Rizvi Traverse, a private firm, is buying our RealD for $11 a share, all cash. They expect to consummate the deal in Q1 2016. The company makes and sells cinema systems so viewers can watch movies in 3-D, a fad which peaked awhile ago, but still has a following. You can see Star Wars in 3-D at a properly equipped theatre. In any case we recommend tendering shares acquired for $10.36, a 5% profit in three months, which is like earning 20% a year. The buyer, Suhail Rizvi, was an early investor in Facebook and Twitter, where he made more profit than the founders from Twitter's IPO. He is said to be a very private person, who hired someone to do nothing else than erase internet references to him, so if this little notice is gone soon, you will know why.

Thank you, Mr. Buffett

1 February ~ Today Warren Buffett's payment of $235 per share for our Precision CastParts arrived in our accounts. Pictured above, he enjoys a comfortable seat in a Boeing Business 737, which uses more than a few titanium parts made by the company. A cousin who flies a Bombadier Challenger 600 corrected my previous description of the plane. It's not often we get cash from Omaha's Sage. In 1999 he sent us cash to buy our Mid-America Energy shares.

In addition to his long-term investments, it's not well-known that Mr. Buffett also engages in merger arbitrage, as we are doing now. In one of his famous Chairman's Letters he describes his profits in detail, which you can read here. It's a long letter, so search for 'arbitrage' to find the relevant section.

In a Safe Place During Market's Worst Days

16 January ~ These first two weeks were the market's worst January since the Great Depression. Due to this extraordinary event, we want to update the comparative charts published here last week. This chart below, updated through Friday, January 16, compares our average accounts (top line) with the Dow (green), Europe (yellow) and China (blue).

10 January update ~ Note received: "Thank you. Thank you. Thank you."

9 January ~ The markets went straight down this first week of the new year. We are generally invested in safe places. Where? Because of the niche aspects of some of the investments, I would do clients a disservice to disclose all, but bonds and inverse ETFs played a part.

Here is a graph comparing the percentage change in our accounts (top blue line) with the three main indices, Dow, S&P and Nasdaq, during these historic first five days of 2016. Historic? Yes: These first five days were the worst beginning to a year in the entire recorded history of the stock market.

Worst first five days ever. Read that a couple of times to let it sink in. Worse than 2008, 2000, 1987, 1974, 1969, 1929 or 1900. Market participants lost $1.5 trillion this week. The Dow was down -6.2%. Markets were down around the world as well. Shanghai finished down -10% for the week. Europe down -7%. As of this week, the indices are down -10% from their peaks in May 2015.

Banking stocks declined more than the indices. Why? Here's how the cars in that logic train are connected: the Fed raised rates in December and indicated they are likely to raise four times more this year depending on employment data. Friday employment data was positive, so that encourages them. However, with stock markets around the world declining, money has bid up long bonds, so long-term bond rates declined. Short rates up, long rates down, that's known as a flattening of the yield curve. The caboose? banks make less profit when the yield curve is flat.

Please do not tender your Fairchild shares

3 January ~ You may have received a notice of tender election from our custodial broker regarding Fairchild Semiconductor (FCS). I recommend you do not tender your shares for $20. Here is why.

Earlier this month ON Semiconductor offered $20 for each Fairchild Semiconductor share. Both boards approved. However, a consortium led by China Resources has now bid $21.70 per share. We believe the Fairchild board will carry out its fiduciary duty to accept this higher bid on our behalf.

Fairchild, founded in 1957, invented the silicon integrated circuit, which has changed the lives of billions. Pictured above is their early prototype. Many of the great leaders of Silicon Valley began at Fairchild, including Gordon Moore, Robert Noyce and Jean Hoerni. Before Fairchild, germanium transistors were standard. Fairchild made them from silicon, so the materials consisted of sand and a few fine wires. (Little-known factoid: In 1957 competitor Philco had just completed a $40 million plant to make now-totally obsolete germanium transistors.) Within a few years, every other transistor company copied or licensed the Fairchild process. The company grew from these eight original employees to over 12,000.

The new bidder is listed in SEC documents only as “Party G”, but revealed by Bloomberg as China Resources (華潤), a huge state-owned group of companies based in Hong Kong. Chinese private equity firm Hua Capital is part of the bidding consortium. This group has purchased other semiconductor companies this past year, so we don’t expect objections from the Committee on Foreign Investment in US.

Queen Mary's Hairdresser

11 December ~ The Steiner/Catterton deal closed earlier than expected and we realized the 5% profit within a few weeks of our investment.

9 December ~ Herman Steiner opened his first salon in 1901 in London. After 114 years of successful operation and much growth, a private equity group called Catterton is buying them for $65 a share. We bought Steiner Leisure at $62, so will realize a 5% profit in a month. The risk in all merger arbitrage deals is that they don’t close for one reason or another, so one must research, analyze and monitor carefully.

Life Insurance for Abraham Lincoln

6 December ~ The American Temperance Society was at its height in 1851. There were 8,000 chapters comprised of people who pledged to abstain from distilled alcohol. Civic, business and religious leaders who were members in Hartford, Connecticut formed the American Temperance Life Insurance Company, which only wrote policies for teetotalers. The company prospered. It insured Abraham Lincoln's life in 1865. Along the way, the name changed to Phoenix Life and eventually listed on the NY stock exchange, as well as eventually offering policies to everyone.

We like Phoenix because its Board accepted a bid from Nassau Reinsurance Group to acquire the company. As shareholders we received an invitation from the Chairman, John Forsgren, to attend the upcoming special meeting on December 17th at 10 am at their National Historic Registered Landmark headquarters (known as the 'boat building', the world's first office tower with only two sides) on Constitution Plaza in downtown Hartford to vote on the deal. We recommend you vote 'yes', since we bought at $33.88 per share and Nassau's bid is $37.50 cash, which will give us a realized 10.7% profit after our few months of holding. You can review the 188-page proxy statement here. They expect to close in early 2016.

We Invested in this 109-year old Louisiana Electric Company

1 December ~ It all started in 1906 with a 25-kilowatt Corliss steam-driven motor to make ice in a sultry central Louisiana town called Bunkie, named after the original landowner's daughter. This contraption also generated that new-fangled stuff called electricity, which citizens found useful. From there the utility grew and was named Louisiana Ice & Electric. After much growth, lighting up Alexandria, Natchitoses along with hundreds of other villages and hamlets for sixty years, they listed on the NY stock exchange in 1968, and shortened their name to CLEC, an acronym for Central Louisiana Electric Company.

Fast forward to today when yield-starved public pension funds and insurance companies are buying infrastructure — something solid that will generate the long-term returns they need to pay their beneficiaries. On October 20, 2014 a group of these investors announced they would like to buy CLEC. Utilities deals take a long time to close, because regulators need to approve. In February, shareholders voted to accept the offer. In July, the Federal Energy Regulatory Commission approved. The all-important Hart-Scott-Rodino Antitrust Improvement Act review period has passed, which means the government doesn't consider this a monopoly. This morning I called CLEC, and they told me they expect the deal to close in the first quarter of 2016.

The terms are $55.37 cash per share. We recently bought shares around $50, and plan to hold for the closing, hoping to realize a short-term gain of about 10% in a few months. Complete your due diligence before participating.

Expedited Fed Board of Governors Meeting

23 November ~ This morning I called the Federal Reserve and they said this was a regular meeting, and since they wouldn't have a quorum, no policy vote would take place.

22 November ~ The title of the Fed notice seems ironic: "Government in the Sunshine Meeting Notice" considering it's a closed door meeting and they've just lobbied strenuously to avoid an audit. Nevertheless, the Fed Board of Governors is holding an expedited meeting Monday, November 23rd, at 11:30 am In spite of market exuberance, there are a number of sobering data points in the economy, as I wrote about on October 17th (see below). Here is a current chart of shipping rates, at an all-time low. Is there an explanation? Maybe they just built too many ships. That's true, they did, but retail stocks have also crashed. Those who observe container terminals report volume is down. Copper, which once was so predictive that investors called it Dr. Copper, is near multi-year lows, as is aluminum and iron. Oil has crashed.

We are prepared as possible to invest in alignment with the Fed's response to this mixed bag of indicators, as they've already said their decision will depend on ongoing data points, economic metrics, many of which will be released this week. It's not a matter of guessing what the Fed will do. They themselves don't know what they will do yet.

Buffett Wants to Buy Our Shares

19 November update ~ The motion was voted on by shareholders, and passed: 88,730,022 for, and 17,572,738 against.

7 November ~In today's mail I received an invitation to a special shareholder meeting on November 19th in the Bella Vista Room of the Aquariva Restaurant overlooking the Willamette River in Portland to vote on the sale of our Precision CastParts shares for $235 each to Warren Buffett.

After talking with CEO Mark Donegan for about 25 minutes, Mr. Buffett made the deal, subject to Board and shareholder approval. Mr. Buffett said he didn't do any due diligence, he just looked into Mr. Donegan's eyes — a $37 billion look — Mr. Buffett's biggest acquisition ever. Personally it will mean $53 million for Mark Donegan, who has run Precision CastParts since 2003. Before that he was a GE executive, after graduating with a BS in accounting from Villanova University.

Mr. Donegan cordially invites our clients and other shareholders to attend, and I recommend you vote 'yes'.

Mega Caps Pulled Nasdaq Index Up

1 November ~ In the quarterly reports we've learned that sales in many companies were not impressive, yet the indexes moved up most of October. The indexes are market cap weighted, so it is strength in five companies which caused the move: Apple, Amazon, Biogen, Gilead, Netflix. While our investment approach mitigated the effects of the moves down in the summer, it trailed this steep move in October. To sum it up, these Big Five did all the heavy lifting. The effect of the other 95 stocks in the Nasdaq 100 were slightly negative.

Speaking of negative, Bank of America reports there are $6.3 trillion of government bonds worldwide which trade at less than zero percent interest, negative yields.   Another $20 trillion trades at less than 1% interest.  


9 October ~ We have moved back in to index funds, general and sector, to participate in the October bounce. We also acquired shares of the BioMed Realty Trust a week before they received a buyout offer from Blackstone for a quick +12% gain. The Trust owns 3 million square feet in the San Francisco Bay Area stretching from Hayward in the East Bay to Brisbane on the Peninsula. In addition to the San Francisco area, BioMed's other hotspot is Boston and Cambridge, where it has a total of 3.4 million square feet portfolio. Some 2.5 million square feet of BioMed’s Boston-area portfolio is located in Cambridge’s Kendall Square, home to Genzyme's current headquarters.

Biotech Trend Ends

28 September ~ We've been short a basket of biotechs, including Celgene, Amgen, Biogen, Vertex, all conveniently wrapped in the ProShares inverse biotech fund, for those accounts which allowed this. That mitigated the effects of the recent general market contraction. The healthcare sector prices have contracted the most in the recent selloff.

Rate Unchanged Makes REIT Sector Rise

18 September ~ The Fed left interest rates unchanged and the broad market is looking weaker. However, our focus on the REIT sector has paid off with our purchase of a single family rental home REIT, which is up 10% since we bought last month. Our thesis was that the Fed would not raise rates. The REIT sector has sold off all year anticipating higher rates. We bought near the low ---found one for less than book value---and now prices are rebounding.

It's Time to be Very Very Selective

2 September ~ This week world-respected Bill Gross advised "near cash", by which he means short-term treasuries. Chris Ailman announced his giant CalSTRS may sell $20 billion of stock and do something else. Newsletter writers haven't been this bearish since the market bottom in March 2009, which is often considered a contrary indicator, but not right away..

We are interested in bills, notes and leased single-family homes, and this week bought a few dividend-paying blue chips.

Biggest Down Week of the Year for the Market

21 August ~ But not us! Our accounts did well, thanks in part to a recent investment in the big bull market in cash (see article below), as well as inverse funds and what is known in the money world as 'long volatility'.

Both Sides Now

7 August ~ In 1969 folk singer Joni Mitchell recorded the song Both Sides Now which describes both sides of clouds, love and life. If she had been an economist instead of a songstress, she would no doubt have observed that there are two sides to every price trend depending on our measuring unit. We usually measure in our own currency. It is useful to think of both sides. For instance there has been a 4-year bull market in cash when measured in gold. The value of cash has increased substantially by that measurement. Four years ago one needed 52 ounces of gold to buy USD $100,000. Now, one needs 91 ounces to buy USD $100,000. Said another way, the value of USD $100,000 has increased from 52 ounces to 91 ounces --- a big bull market in cash.

Imagine measuring wealth in Apple shares as a base unit. A few weeks ago USD $100,000 was worth 763 Apple shares. On Friday USD $100,000 of cash was worth 862 shares. In the past few weeks, the value of USD $100,000 cash went up from 763 to 862 --- another bull market in cash when measured in Apple. In the past few weeks we acquired more cash and 10-year bonds, as well as inverse funds.

There’s always a bull market somewhere. This way of looking at both sides of price trends lets us see that investing in the cash bull market when stocks are descending is prudent.

Recent Positions

4 August ~ Since the July 19th market top we have increased our position in cash and inverse funds. Most large tech companies estimate their profits will shrink compared to last year, but even Apple, which predicted growth, has fallen in price, a sign of a weak market. There will be a dip to buy, perhaps mid-month.

California Wild Fires Too Close

24 July ~ Clients who live in a beautiful mountain-top villa estate near Napa Valley sent this photo yesterday. It is a 6,700 acre fire burning out of control. They evacuated soon after.

Lull Between Crises

11 July ~ Greek news in the headlines, but a much bigger event equal to fifteen Greeces in China, where their stock market crashed over -30%. Their government has declared short selling illegal. Pension plans and insiders are not allowed to sell any shares for six months. Chinese brokerages are required to buy shares. As of Friday, both Europe and China were up as things went from worst to merely bad. Janet Yellen gave a long talk which boiled down to the possibiity of a rate raise unless something else unexpected happens. Meanwhile, this week companies begin reporting Q2 earnings. Goldman analysts predict S&P 500 earnings overall will drop -4.4% year-over-year and sales -2.2%. So, this summer a time to patiently await opportunity and choose non-correlated investments.

Greeks Vote 'Oxi'

5 July ~ ...which means 'no' but the word has historic emotions embedded, as there is a national Oxi Day to commemorate Greek refusal to admit an invading army during World War II. Today 61% of Greeks voted no to the referendum. They plan to not pay the IMF or live under its imposed austerity rules. This evening Greeks are dancing in Syntagma Square to celebrate. Greece is a small nation, so it is the reverberations throughout Europe that we are watching, since Ireleand, Spain and Portugal also owe the IMF money they don't have.

This is nothing new for Greece, which has announced five external defaults during the past 200 years and has spent 48 years since 1800 in default, the most of any developing nation.

Big Week Ahead

14 July ~ This week tech companies, Intel and Google, as well as big banks, Goldman, JP Morgan, Bank of America will report earnings, providing some extra inspiration for buyers and sellers.

Despite concerns about the bond market, investors submitted $3.4 trillion of bids for the $1.12 trillion of notes and bonds sold so far in 2014. That is a bid-to-cover ratio of 3.06, the second-highest on record and up from 2.88 last year.

The high stock market and great appetite for bonds are each signs there is too much money chasing too few investment opportunities.

Central Banks Worldwide buying Stocks

22 June ~ Central banks around the world have bought stocks and intend to buy more, according to a study released last week. This is important news. It could prolong the market move upward.

The report was issued by the Official Monetary and Financial Institutions Forum (OMFIF), a think tank for central bankers. Here is a quote: "A cluster of central banking investors has become major players in world equity markets." It was reported in London in the Financial Times, and discussed for a few minutes on CNBC. I'm surprised it hasn't received more attention.

This means the population of buyers has changed—it's unprecedented for central banks to become giant hedge funds. Worldwide, central banks have assets of about $11 trillion. So far, I estimate 25 banks have admitted allocating up to 10% of their reserves to equities. So, they have much more money to continue to prop up prices, dwarfing any other investor. I suggest we go along for the ride, but keep an eye on the eventual exit, because when this megatrend ends, our relatively small size will be a distinct advantage.

How did these bags of white powder cause a gold spike?

21 June ~ On the western shore of the Yellow Sea, in nondescript warehouses in the seaport of Qingdao, a city of 9 million souls, eighth busiest port in the world, investigators are looking for a hundred thousand tons of missing alumina, a white crystalline powder that is used for smelting aluminum. The missing alumina is collateral for a bank loan—maybe more than one bank loan—and therein is the tale.

Using commodities for loan collateral is common in China. Copper, iron ore, rebar, rubber, even cotton, is stored in bonded warehouses which are legally "offshore" and thus not subject to taxes and duties. Banks loan hundreds of millions with these commodities as collateral in every one of the thirty-four major seaports from Yingkou to Behai.

On Wednesday State-owned CITIC Resources admitted it could not locate 123,446 metric tons of missing alumina, which had been mortgaged and supposedly stored in a Qingdao bonded warehouse. News of the investigation sparked fear of a crackdown on commodities financing in other ports, causing skittish traders to unwind their financing deals and move their money elsewhere, selling iron ore, rebar, zinc, copper, cotton—any commodity where they stored value for the duration of their financing deals. They moved to gold and silver,which spiked to levels not seen since April. On June 19th alone, half a billion in gold futures were purchased. Meanwhile, nervous bankers are double-checking their collateral all over China. Some report warehouses haven't let them in, making them even more nervous.

Disclosure: Last week we purchased GDX and GLD.


6 June ~ As you probably know, ZIRP means 'zero interest rate policy'. As of Thursday , Europe now has NIRP, 'negative interest rate policy'. The European Central Bank announced negative interest rates. Depositors need to pay to keep money on deposit. This is an unprecedented event by a major Central Bank. It didn't bother the stock markets, as Europe and the US rose on the news. They also announced they are planning QE. The Fed QE buoyed US stocks for a long time, as I wrote here. Now it is time to buy European stocks for similar reasons. We own Total, Sanofi, Bayer, Santandar, Siemens, Daimler, Allianz, and may buy more.

Thinking ahead—I'm just brainstorming now—central banks could take more interest rates negative and solve the debt crisis. For example, if the average bond rate were -2%, debts would be extinguished in less than 50 years. Debt crisis solved.

Enough brainstorming for a Sunday afternoon.

Why is Gold down?

31 May ~ Gold prices posted their biggest weekly decline in eight months. We have not owned investment gold for a long while, but want to understand why it fell below a solid support level. When something moves in a big way, one looks first to the biggest traders. For gold, that’s China and India. With their new government, India has relaxed gold import restrictions, so there is less smuggling. Small-scale gold smuggling added up to big business for a few years. In one recent flight from Dubai to Mumbai, when authorities checked, every single passenger had some gold. My theory is that now Indian citizens know of the easing of gold import restrictions, and know they don’t have to pay the smuggled prices anymore, so aren’t buying much, while waiting for further easing. In addition, the Sensex is up, so investors are selling gold to buy stocks. On top of this, there is complacency, no fear, in any investment sector, as measured by the VIX, which is at a seven-year low. People buy gold when they fear other investments.

Bonds still the place

14 May ~ Many stocks have retraced all of Monday's gain — especially small caps — while our bonds continue to move up in value. That's why I'm still smiling and so is California State Controller, John Chiang, as seen in this photo from a March event, which I wrote about earlier (scroll down).

This year most economists and analysts predicted interest rates would rise and bond prices would fall. The reverse happened. Interest rates are difficult to predict. The forecasts seemed logical, since the Fed has begun tapering, and US economic reports show improvement. Our approach of participating when price trends begin, whether they seem logical or not, helped us in this case.

Many fund managers shorted bonds, so they are in the midst of a slow-motion painful capitulation during these months, which usually ends in a big price spike up as the last of the shorts are forced by their margin desks to cover. Read more here.

Our View

5 May ~ Most of the profit we've made in April came from bonds. Bonds and indexes are each near highs. Usually they move in opposite directions. Who's right in this case? In the past, it has usually been bonds. Consequently, we are keeping an extra close watch on the stock market. Margin debt has declined from a record peak. Some sectors are down big: Social media stocks have crashed already. Biotechs have crashed already. The blue chips have been good, so we are in large cap, dividend-paying companies with enough profit to buy back their own shares, including Oracle, Time Warner Cable, Direct TV, AT&T. I think of buybacks like recycling money.

View from a European banker: The American Dream

30 April ~ "America’s GDP growth has ranged between 1.3% and 3.3% since its economy pulled out of recession in late 2009. Judging by the forecasts of our econometric model, this upbeat (if uneven) movement is likely to continue. US GDP should rise 3.0% this year before edging back down to about 2.3% in 2015 (see left-hand chart below). That is quite good compared with other developed countries.

The main reason for the American economy’s relative strength is that it can claim strong fundamentals. Growth in private consumption, accounting for 68% of overall GDP, has remained almost continuously above 2% a year for the past three decades. (By comparison, consumer spending in Euroland has ranged around zero growth for several years.) Actually, US consumption amply counterbalances the government’s recent budget cuts.

Some of the credit for the buoyant mood of US consumers is due to the corporate sector. Again in 2010, as in 2002, companies invested massively in equipment without waiting to be absolutely sure that the economy was bouncing back. They put their cash to work to upgrade and expand their production facilities, at a time when capacity utilisation was still running at less than 80%. This capital expenditure was followed, quite naturally, by hiring. That explains why job creation has been relatively high in the past four years."

from Banque Privée Edmond de Rothschild Macro Highlights

This week

22 April ~ Wednesday Apple, Facebook, QualComm report earnings, and Thursday Amazon, Visa, Starbucks, Microsoft, Caterpillar report. These bellwethers provide a view of the economy, and so will likely move markets. Even after six days up, the trend continues until the market informs otherwise. We've seen two instances, one in February and one in March, where selloffs were met with a rip above the previous high, so that's our operating thesis for this current move too.

California Municipal Bonds

24 March ~ On Friday I talked with California State Controller, John Chiang, about the state's municipal bonds. Very citizen-centric and articulate, I think he will be the next state Treasurer. The California Municipal Bond Advisor noted, "State Controller Chiang has been a hero of sorts to us during California’s recent distress because he did just what he was supposed to do to protect bondholders by conserving cash flow to make sure California could cover top-priority funding requirements such as education and debt service."

Municipal bonds, irrespective of tax bracket, and even for retirement accounts, now pay more than CDs or treasuries. One can assemble a decent portfolio with a minimum of $1 million. For smaller accounts, there are other folk who have already assembled portfolios of muni bonds. Those are known as closed-end funds. Some of these funds are trading at a 9% discount to the value of the bonds they hold, the Net Asset Value, (NAV). The interest yield is about 6%. Good in itself, and even more attractive for those in high tax brackets, as it is equivalent to a 10% pre-tax yield. Muni interest is exempt from Federal taxes, including the new 3.8% medicare tax. So we advocate buying these for conservative high interest and further capital appreciation.

The difference between bonds and CDs? Bond funds capital value and NAV fluctuate, whereas a CD capital value is set. (In my opinion, CD capital value really does fluctuate with inflation and purchasing power, but the numbers on the statements don't change, and that's another story.)

What to buy? I've researched the possibilities. Amazing, but there are still bond mutual funds with 5% commission loads being sold. I recommend avoiding those. A better choice are publicly-traded closed-end funds (CEF). Last year, 2013, they dropped double-digits to a deep discount after Bernanke hinted in June the Fed might taper. Now in 2014 the taper is old news, and with Yellen's recent statement of prolonged near-zero interest, the CEF's value has risen and may continue to narrow the discount. Some CEFs are up more than +5% so far in 2014 already.

Though the asset class is huge, the world of municipal bonds is murky and often illiquid. For many issues it is difficult to get a two-sided bid/ask, and when one does, it is often very wide. We have direct access to the most cutting-edge, state-of-the-art, bond trading desks and platforms, and can search for inventory and availability. We can compare the relative merits of individual bonds with closed-end bond funds.

Municipal bond owners are unheralded heroes of our society. Behind the scenes, those who buy these bonds help build the libraries, schools, highways, airports, seaports and other infrastructure of America.

Bank Rule Change Creates Opportunity in 2014

22 February ~ Before the Great Recession, Royal Bank of Scotland was briefly the largest company in the world. Now, after layoffs of 34,000 since then and another 30,000 announced today, the bank is much smaller. The UK government owns 81% of the bank, as a result of a $850 billion government bailout.

Fascinating, I'm sure, but what does all that have to do with us? We look for a decent reward with low risk, and believe we've found it in a part of RBS capital structure: their preferred stock. During the crisis, RBS bought ABN-Amro. To finance the purchase they issued several series of preferred stock, which now yield about 7% in dividends. The regulators allowed RBS to count the preferred stock as Tier 1 capital. However, as of January 1, 2014, regulators will phase out that allowance, which means RBS is likely to refinance these shares, and likely to do that at par, $25. We purchased shares at a discount around $21.

Generally, preferred shares aren't too interesting, because they don't have the upside potential of common stock. However, when there is a catalyst for change, such as we have with RBS, then we want to invest for that reward, implicitly backed by the English government, and collect 7% while waiting.

Rental Homes: Is it Time?

15 January ~ After the boom and bust where we saw prices drop a greater percentage than they did in the Depression, one can't be blamed if just the thought of rental property makes one ill, but of such feelings are cycle bottoms made. Have you thought this might be a good time to invest in rental homes, but don’t want the management headaches? I felt that way, so bought rental homes. Several REITs now specialize in single-family rental homes.

Forty-two percent of US homes purchased in December were all-cash deals, up from 18% a year before. In the chart below the jump in 2013 is clearly visible. The publicly-traded companies which own single-family homes bought most of theirs in 2012. Analyst speculate the buyers are from all over the world. The NAR successfully lobbied to have real estate purchases exempt from the Patriot Act's onerous money-laundering provisions. The French are buying certain parts of South Florida. Chinese are buying too. US stock markets are too high to buy now many think, so single-family real estate is attractive. It's a significant trend.

Hakuna Matata

3 February update ~ The sellers got serious today and sold each rally attempt. The Dow closed Monday down -326 points. We remain in bonds, cash with a few inverse ETFs, so had another good day.

Those with shorter memories are calling this a buyable dip, and the emerging market currency woes transitory. Those with longer memories recall it was emerging market currency problems which eventually snowballed into the demise of the huge hedge fund, Long-Term Capital, in 1998 and one of the early Fed bailouts.

31 January update ~ The S&P ended January -3.5%; the Dow -5.2%. Our accounts fared much better, due to early increased allocations to bonds and cash.

24 January ~ We raised cash this week and early Friday morning allied with a relatively rare species in the investment jungle: the inverse exchange-traded fund. These investments rise in price when the market descends. So we didn't have a lot to worry about Friday as the Dow worked its way down -318 points, and don't have a lot to worry about this weekend.

Stock market analysts are worried about emerging countries economic weakness, specifically Argentina and Turkey, about growth slowing in China, about more Fed tapering announcements. There are also big earnings reports in the week ahead: Apple, Google, Facebook, Caterpillar, Pfizer, AT&T and 3M. We plan to let their worries play out, and watch for a time and place to buy again.

Yes, we are not perfect, but we are ferocious about protecting capital on days like this. As those with children of a certain age know, 'hakuna matata' is Swahili for 'no worries' popularized by the Lion King.

So Far

9 January ~ While US markets see-sawed all day again, Europe and emerging markets have descended this year so far. Last week we began a short position in emerging markets, prices of which have moved down faster than the US. That short position is up about 6% so far year-to-date. Investment capital is leaving Brazil and other emerging markets. We thought they might go up this year, but the market doesn't care what we think, so we go with the flow.

Allocation Allocation Allocation

10 December ~ Similar to the familiar real estate mantra, asset allocation is important to balance risk and reward long-term. The traditional formula is one hundred minus your age. That difference is the percent of investment which should be in stocks. The rest should be in bonds. It's one formula on which most ---from John Bogle to Jim Cramer--- agree. For older folks that wasn’t very profitable this year, as stocks went up and bonds went down. In hindsight, everyone now wishes they had more of their assets in stocks. So great is the mixture of euphoria and emotion now that risk is forgotten; allocation is forgotten.

A few weeks ago I read a paper suggesting planners use 120 instead of 100, which would increase stock market exposure. So, 120 is the new 100? Maybe it will get some traction, at least until the next bear market.

We have a doubly interesting situation due to the Fed-fueled economy: When they taper QE, it is likely both stocks and bonds will decline in value. Many investors have high allocations to cash anticipating this event. Others sought refuge in precious metals. This year gold has gone down about the same percentage the S&P has gone up. They were mirror images.

Asset allocation is an age-old issue which has perplexed the brightest of people. Below is a chart of Sir Isaac Newton's investment history. He struggled with the bubble of his time, the South Sea Company. In February 1720 Newton invested a little and cashed out at a profit. Then after enviously watching his friends get richer, risked his life savings and went broke by November. Newton later lamented, "I can calculate the movement of stars, but not the madness of men."

A lesser-known but wiser investor of the same era, Anton Fugger, advised "hold one quarter in each: stocks, bonds, gold, real estate, and expect one to go down each year." The Fugger family maintained their wealth for many generations.

GM is back

9 December ~ No longer Government Motors, as Treasury Secretary Jack Lew announced today the government has completed selling all its shares. Chairman Dan Akerson expressed gratitude for a second chance. We bought GM shares recently, so we’re profiting from Wall Street's positive reaction. GM, its subsidiaries and joint venture entities sell vehicles under the Chevrolet, Cadillac, Baojun, Buick, GMC, Holden, Isuzu, Jiefang, Opel, Vauxhall and Wuling brands. Car sales have increased to 2007 levels, helped by zero percent financing. Not often reported, but the Canadian government owns 7% of the venerable automaker. We're not making a public recommendation here, as our position is part of a diversified portfolio purchased at lower prices.

In its early days, GM was the high-tech superstar of its time.
Its share price rose 471% after World War I, and the company became an icon of American success and prosperity.

Mine Rescue

1 December ~ Recently I rescued someone trapped in a gold mine. Actually, it was his future, his retirement account, trapped in many gold mines. A month ago a friend said he needed help with his portfolio. I reviewed it and saw it was all in mining and precious metals on the advice of his former money manager. It was down -24%. From chart analysis I saw each investment remained in trends down, so I sold them all. Since then, gold has descended another -5% and mining another -7%. He was trapped by a confidence cave-in, by the fear if he sold he would miss the long-awaited rally. I expalined how to overcome the fear, how to participate in the rally if and when it happens, and how to stop the bleeding in the mean time.

The bullish case for gold is logical and makes sense, but the market trend hasn't agreed for the past two years. I do my best to never argue with the market trend. I'm not anti-gold; just waiting for it to start trending up.

About the art: In the 1930s, as America worked its way out of the Great Depression, the government held national contests for art to decorate public buildings. Fletcher Martin submitted this entry, “Mine Rescue”, for the post office of the mining town of Kellogg, Idaho. This mural study is now at the Smithsonian.

Central Bankers Gone Wild

27 October ~We are revisiting an historic era in the money world: the political necessity to create money to buy government debt. The Fed must keep buying bonds, because there is not enough demand otherwise to continue to fund the US spending. I’m not alone in this analysis. Socgen and Deutche Bank agree. Deutsche Bank now argues that there 'won't be any tapering at all', while SocGen as gone a step further and is now saying 'QE may be increased'.

Historic because money creation has many precedents. This time it’s not just one country, but the world, according to this article. Canada’s central bank has decided to continue 'easing', as has Norway, Japan and the EU, as well as emerging markets from Hungary to Chile.

Therefore the stock market may enter a hyper phase, as did historical German and Zimbabwe markets after relentless money creation. Yes, I know the US is not Zimbabwe, and I'm not predicting those extremes, but our stock market is beginning to act a bit as theirs did. So is Argentina’s stock market. Every dip was bought.

Historically these mega-trends don't happen overnight. They occur over years, with much denial along the way by most participants, especially bondholders, who have the most to lose.

Meanwhile, bonds are down for the year. Among older investors, there is a great yearning to abandon traditional stock/bond allocation, where one invests one's age in percent in bonds (ie, if one is 60 years of age, inveset 60% of one's assets in bonds and 40% in stocks). Those who allocated to metals are down, as gold, silver and copper are each down double digits year-to-date. Fundamental analysis doesn't seem to matter much in times like these, only the unbridled power of central bankers gone wild.

Starting Small

7 October ~With each investment in equities and fixed income, I hope to hold forever, as long as the price trend continues upward. As you’ve seen over the years in your statements, often there are small buys. These are initial investments, which may turn into big trends to add to and hold for a long time. As the greatest mutual fund manager of all time, Peter Lynch, observed, about half of the stocks he bought didn’t continue up. So, we need a way to deal with this uncertainty in the market. I deal with it by starting small, and increasing as trends develop, and exiting if they don’t continue. The exit may be after a month, a week, or a day. The object is to not let small losses turn into big ones. It's like planting seeds in a garden, then weeding out the weak plants while the strong ones flourish. Sometimes that means buying the same investment again if a trend resumes. Of course, this requires daily vigilance, and gains are not automatic.

Day to Day Work with Exchange-Traded Funds

4 October ~ From that day in the '90s when I attended the London launch party for the first ETF 'til today, they've been part of our work. I use index ETFs to hedge and adjust equity exposure as news, economic data, and price trends develop. There are two useful ones with plenty of liqudity: the SSO and SDS. They aren’t designed for long-term holding, but to help manage risk and capture profits from the S&P index.

Incredible Fed

19 September ~ This week is the second time this year Bernanke first gave strong indications 'taper' is about to happen, then didn't do anything at the FOMC meeting. Each time the market sold off first then zoomed up instantaneously (ok, it took 150 milliseconds this week) when tapering didn't materialize. Yesterday, an economist wrote, "Fed credibility and its communication strategy are in tatters."

The Fed can't end their bond buying because interest rates would rise and the US government can't afford to pay higher interest. As we've seen this year, if the market even suspects the Fed might stop buying, it begins to sell off.

Real Estate vs. Stock

9 September ~ Real estate vs. stock; two different worlds of investment. We’ve learned over the years there is a time and place for each, and a time and place to avoid each. Similarities? Each has dramatic price changes. Each can be leveraged, increasing risk and return.

Differences: Stock price trends and cycles are much shorter than real estate cycles. Real estate costs of buying and selling are much higher, and the purchase process much more time consuming and complicated. Stock shares are generic and commoditized. Real estate is usuallly site specific. Stocks can be sold in a few seconds; real estate needs months. One can instantly borrow secured by stocks up to 50% at 1.3% interest. One can borrow 80% secured by real estate but it is a complicated process involving tax returns, loan documents, title insurance. You’ll never have to fix a toilet with a stock, but you can’t live in the Dow Jones.

What if your house price was quoted each day like the Dow Jones Industrial Average? It would probably drive the homeowner to distraction. Zillow creates historical and current estimates, and displays the occasional ‘trade’. On a million dollar property the bid might be $900,000 and the ask $1.1 million, or $200,000 wide. In stocks the bid and ask is often a penny wide. Stock bids, ask and trades are quoted every second for six hours monday through friday. The bid and ask on real estate is very far apart on each and every day except the escrow closing.

Perhaps one could recreate the dynamics of the good parts of real estate in a brokerage account. Buy a high dividend REIT, leveraged as one would with a mortgage. Then hold through the daily barrage of quotes, news and analysis. Would we then have the best of both worlds?

After Many a Summer

1 September ~ Soon after British writer Aldous Huxley departed England to settle in California, he wrote a novel about an aging millionaire seeking immortality, perhaps somewhat like this aging US stock market rally. The novel didn't have the Fountain of Fed to provide the elixer of eternal life the way the US market does, so maybe the ending will be different.

The longevity of this US rally is unique, in that emerging markets of India, Russia, Brazil, China have already descended, as have REITs, and bonds. Often, the US market trend and volume pick up after Labor Day. So after many a summer, this week we shall curiously turn a page to begin the next chapter.

Income Investments More Stable in July

30 July ~ At the beginning of May the value of high-dividend stocks moved precipitously downward, due to fear of increasing interest rates. We exited a few days after that began, and have waited patiently for the buyers and sellers to find a balance. It looks like that is happening. After the FOMC meeting this week, one can more safely own those again. So many are looking for a return on capital these days, and some retired have most of their portfolio in fixed income.

Worst have been the municipals, which we don't buy, but I got a close-up look recently when someone sent me their muni portfolio to liquidate so they could buy a farm. It has been difficult to even get decent bids, in such disarry is the income market, even though we sent requests to many bond houses.

The retired worldwide look enviously at US equities compared to their own fixed income losses, and as the chart below revealed, are joining in to buy at these recent highs. With the Fed QE program injecting billions, the rally may continue.

Quantitative Exuberance

Fed Chairman comments have caused US dollar volatility in June and July.

14 July ~ One can't help but notice the May-June selloff on the mere hint Ben might taper off Fed purchases sometime next year, and the big rally back when he assured the markets he will continue his spending spree, as yet another remarkable example of the power of the spoken word to move billions in stocks, bonds, and currencies. To exert that power, one needs to be holding the biggest credit card on the planet.

Those market reactions mean there is a massive, yet-unnamed asset bubblem which, after five years of Fed stimulus, perhaps not even a robust economy can replace. If the move at even the hint of tapering is any indication, then there is a chance asset prices are going to fall once the Fed stops injecting $85 billion each month.

Since the US government can't really afford to pay higher interest, the unwind of this bubble isn't likely to happen this summer or this year but some time in the long-term. In 1914, the first British acceptance of US dollar-denominated bonds was a tipping point as the world's reserve currency transitioned slowly from the Pound to the buck. Looking far ahead, when the US accepts Yuan-denominated bonds—which no-one is predicting now— will be another tipping point.

Long-term musing aside, this week Ben will speak to Congress again, and banks will report how they profited from him buying their toxic mortgages. Twenty or so other blue chips will report earnings as well.

Surprise: Ray Dalio's Fund

25 June ~One of the hedge fund world's most closely watched managers, Ray Dalio, runs the $70 billion All Weather Fund at Bridgewater Associates. He practices transcendental meditation, lives in Greenwich, and is the 44th richest person in America. In 2013, his All Weather Fund, widely held by major pensions, is down -$5 billion, or -8% year-to-date. Click here to read the Reuters press release. Click here for the CNBC video.

Ben Speaks, Market Squeaks

19 June ~ Today Fed chairman hinted he might stop propping up the bond market. Gold dropped -1.2%, the S&P -1.4% and the TLT bond fund -1.0% at market close, and more after hours. Our accounts, hedged, were -0.1% today.

Like London and Paris

2 June ~ If Charles Dickens had been an investor this year, he might have penned the same words he did in 1859 to describe London and Paris at the beginning of A Tale of Two Cities. If one put everything into S&P (+12%) or Nikkei(+9%) funds it was the best of times. If one put everything into gold (-18%) and mining (-37%), or Yen (-13%), it was the worst of times. Most of us are diversified somewhere between these extremes.

Fundamental analysis hasn't helped. Following the Fed and other central banks has been the principal correlation with market movements.

What's Happened to the Stock Market

16 May ~ This is no ordinary rally. This is what was supposed to happen to gold. According to some past year predictions, currencies and stocks were supposed to all collapse and gold soar to new heights. Instead, investors worldwide chose the US stock market, fueled by years of zero-interest rate handouts to financial institutions. I’m not saying “this time it’s different” because this rally will end as all do, but it is motivated by a perfect storm of forces which have already taken it farther than ordinary seasonal rallies. Some signs of the unusual strength: (1) IPOs which go up; (2) secondaries which go up; (3) shorts capitulating each day in the final hour; (4) eighteen consecutive up Tuesdays; (5) rising markets in spite of weak seasonal tendency; (6) markets rising in spite of negative economic figures — all indications of buying beyond ordinary.

Happy Arbor Day

26 April ~ Perhaps it is a coincidence that a company which grows 50 varieties of tree seedlings reports earnings on Arbor Day. In any case, we've enjoyed profits from our holding of Weyerhaeuser but needed to sell today, as the trend up appears to have ended.

This 112-year old REIT manages 20 million acres of forest and pays a 2.23% dividend. We will watch closely for an opportune time and price to invest again.

The Great Gold Crash... of 1869 !

22 April ~ In 1869 the US was on the gold standard and President Grant was in the White House. Two speculators, Jay Gould and James Fiske, attempted to trade gold using inside information. The Treasury Secretary, George Boutwell, retaliated by selling $4 million of the Treasuyr's gold to keep prices low, so the speculators' plan failed. More details here.

The civil war debt, the railway boom and bust (the high-tech investment fad of that era) led to a general depression by 1873. The lessons here are that the country on the gold standard still had severe economic ups and downs, and that government adjustments to gold prices are nothing new. Click here to read more.

Who is Behind the Gold Drama?

15 April ~ A year ago big hedge funds were sure quantitative easing would double, triple gold priced in US dollars. So they bought millions of ounces—Soros, Bass, Paulson, and others.

The severity and timing of this two-day plunge indicate some big hedge fund, possibly in India or China, may have had a big margin call. The first leg down in the morning below a significant quadruple bottom support triggered stop losses creating further selling, which triggered the call, then the hedge fund(s) needed to sell to meet the margin requirement before market close. Monday, the Shanghai Gold Exchange announced trading margins for the gold forward contract would be raised to 12 percent. Monday the CME raised gold margins to 18%. This causes more forced liquidation, and gold is drifting lower after hours.

Why India? Because there it is common to use gold holdings as collateral for business loans or investments. Lenders will have triggers in their documents that stipulate if the collateral value decines below a certain percentage of the loan, the agreements must be adjusted.

Worldwide, investors in general have become discouraged by the two-year decline from $1,900, and have sold: Holdings of gold in exchange-traded funds plunged 900,000 ounces over the past week. Holdings are now down 7.2 million ounces (223 metric tons) since the start of the year, nearly wiping out the 9-million-ounce increase during 2012.These are significant numbers. For context, 7.2 million ounces represents 5% of annual global gold demand. As prices continue to plummet, investors sell to preserve capital. It's a cycle: As investors liquidate, prices adjust for the extra supply. As prices decline, that spurs another round of liquidation.

My son is into rock climbing these days. He has a joke: "Where can you find lots of high-quality climbing equipment for free?" Answer: "At the bottom of Half Dome." The chart below depicts the number of ounces held by all gold-related ETFs in 2012 and 2013 ytd. You can see the mountain of buying ahead of the election and the fear of the fiscal cliff. This year the Half-Dome side of the mountain formed, as hedge funds and investors sold.

To preserve fingers, I don't want to catch a falling piton, not even a golden one. Before buying I would like to see the huge sell orders filled and out of the way, and see big buyers appear. That could be Monday or five years from now. I'm ready either way. The price and volume pattern will reveal them as the days go by. My job is to employ capital elsewhere until that time. These days the deep discount commissions, massive liquidity and penny spreads make such sector re-allocation easier than it's ever been. More importantly, this means I don't have to be caught in the many imaginary future predictions, both up and down. I can respond in the moment as events unfold. There is no time like the present.

I remember in 1975, when gold ownership became legal again, our family bought gold at $35 and higher prices. Contemplating the long-term chart, I now see that the run up from 1975 to 1978 was a result of other Americans reinvesting in gold as we did after so many years when it was forbidden. We bought from a local coin dealer who guaranteed to buy back gold at the price he sold in order to get customers to his shop rather than the competition. After the 1980 crash, we went to his shop one day, and he was gone. Shop closed. No forwarding address.

Somehow it's ironic that it's April 15th, the day when the Federal and state governments take 29% of all American's' income, on average. Though this is the biggest two-day drop in thirty years, on a long-term chart it is a minor pullback after the precious metal's long, long rally.

What the Fed did: QEternity

13 September ~ Today the Fed announced it would buy MBS. What does this mean in practical terms? Buy from whom? The Fed will buy MBS from banks, who have hidden this trash on their books at face value, through the abdication of mark-to-market accounting, while their real value is much less. Presumably, the Fed will pay full price, and effectively hand the bankers more billions borrowed from taxpayers. What is an MBS? A mortgage security, so the Fed will end up owning the mortgages on millions of US citizens' homes.

All told, the Fed plans to spend $85 billion a month buying. To put this in perspective, with that same amount they could pay every unemployed person in the US an annual salary of $81,000.

The spike in gold and silver prices tell us this is a tipping point.

Contributing to your IRA

4 September ~ The question has come up "can I make current contributions to my Rollover IRA?" The answer is yes. To do that, log in to your account, select 'Funds Management' in the left blue menu, then select 'Fund Transfers'. In the page which appears, choose 'Deposit', then 'ACH from a US Bank', then 'Proceed...". Complete the form which appears. The broker will initiate two small transactions for a test, then you can start the regular monthly deposits to your IRA.

One caveat is that once you contribute to a rollover, then it can't be transferred to a 403b employer plan again. However, most have no intention to ever do that. Another is that deductibility of the IRA contributions depends on your income, so please ask your tax advisor about how an IRA contribution benefits you for 2012. Please email easan@easankatir.com or phone 1.530.231.5646 for further discussion on the topic.

Slow August

31 August (update) ~ The last day of August was anything but slow. Gold +$33. Stocks down, then up. Bonds the same. It's an unusual day when stocks, bonds and gold are up together. The underlying reason: dollar down, fearing further money flooding by the Fed. We navigatred successfully, and look forward to a new month beginning Tuesday. Happy Labor Day!

28 August ~ Almost every day this month the S&P 500 index has moved less than 1% up or down. Trading volume is at historic lows. Not much happening. This often changes the day after Labor Day, so we are looking forward to next Tuesday, and have high cash positions until then, since Bernanke's speech from Jackson, Wyoming this Friday may depress the market. I've always wondered why central bankers meet in Jackson —a ski resort—in the summertime. Maybe there's a brochure somewhere which says "Things to do when visiting Jackson, Wyoming: 1) hike 2) climb 3) decide the fate of the world." Friday morning we will hear their plans, and respond accordingly.

Apple Wins High Tech Trial of the Century

26 August (update) ~ Apple wins a billion. Shares open gap up Monday.

22 August ~ One block east of leafy Plaza de Cesar Chavez in San Jose, inside the Bauhausian Robert F. Peckham Federal Building, the ‘High Tech Trial of the Century’ jury received hours of detailed instructions from the Honoroable Judge Koh before beginning deliberation following almost a month of testimony. Resting on their shoulders is the fate of Apple and Samsung. The dispute? 700+ patent issues. Since Samsung hardware uses Android, one could say this is really a dispute between Apple and Google. The jury’s decisions will move the share prices of all companies involved. In the synchronicity one sometimes notices in dates and numbers, this same week as the trial’s culmination, the Empire Steve Built became the most valuable company of all time. Apple is valued at almost two-thirds of a trillion dollars. To compare, the previous high watermark valuation for a public fortune was Microsoft in 1999 at $613 billion. We owned Apple during its recent run-up, though you might not have noticed because it was neatly gift-wrapped inside the QQQ shares along with Google and Qualcomm.

Paying to Lend Money :: G8 solves their debt crisis

19 July ~ Once upon a time, governments had to pay interest to borrow money. Not now. Now lenders pay them. This week, the US government borrowed money through TIPs bonds with a negative (-0.655%) interest rate. France, Denmark, Germany and Japan are also borrowing money at negative rates. Governments are deeply in debt, so it makes sense they would turn the tables and receive interest for borrowing more! The more they borrow, the more they receive in negative interest. Problems solved!

Governments already spend more than they collect from taxpayers, so as we all know, they borrow the difference. One has to admire this elegant further solution for the redistribution of wealth. At -0.655% interest, the world debt will be paid off in less than two hundred years.

Of course, this is not very good news for those who must invest in government debt: public and private pension plans and insurance companies. In the case of many state pension plans, taxpayer residents are legally obligated to make up the difference if their state pension doesn't earn 7.5% a year.

These great slow, seismic shifts in wealth will eventually affect us all.

A profit you won't see on your P&L (even though you got it)

July 6 ~ The chart above is the US dollar vs. the Swiss Franc yesterday on July 5th. Your account profited, but it won't change the P&L because the P&L is denominated in dollars. It means the dollar is now worth more than the Franc, the Euro, the Yen, the Yuan, and gold than it was a day before. What caused this spike? The Bank of England, the People's Bank of China, and the ECB—three of the planet's largest banks—each cut rates in an effort to make their own currencies cheaper. So our dollars' value benefits, even though it doesn't show up on our P&L.

We Invest in Communities

12 May ~ Student Transportation (STB) takes students from home to school and back again in those familiar yellow shool buses. In most school districts, the need for cost reductions and capital investments has never been more urgent and STB can help school districts immediately by putting real money in their hands for reinvestment in education as well as replacing worn-out buses with new ones.

STB is run by Denis J. Gallagher, and traces its roots to a bus service established in 1922 by Gallagher's grandfather.

This is a way one can invest capital in a helpful community service. The drivers are mothers and fathers, neighbors and friends with deep roots in each community. 70% of student transportation is still run by districts, so this is a niche destined for consolidation and growth. The only other large school bus operators are privately owned.

Investment income is scarce in this era. STB shareholders a check each month, annualizing at 8%. This simple, steady service delivers a needed ride to students and an attractive profit on our savings.

STB also environmentally-friendly. They converted more than 200 yellow school buses in Ontario, Canada, to biodiesel fuels. Their Parkview Transit division was the first school bus company in Ontario to run a biodiesel fuel blend in a large number of its buses and the program continues to expand replacing diesel fuel with fuels made from renewable resources like soybean, corn and canola oils. The resulting reduction in emissions is providing a healthier environment for our young passengers and cleaner air for employees and the community at large.

Unlocking 2012

31 December 2012updated ~ Looking at the overview, the big picture, thinking long-term, here are a few trends I've noticed. First: The end of the financial world is postponed until further notice due to unstoppable fiat currency creation. It's now obvious that money printing, disguised by many acronyms, is the central banks' solution for every problem. This may postpone any true reckoning for years. In the meantime a Hawaiian friend informs me the Kona airport private jet parking is maxed out this week with 70 jets, with overflow in Maui and Oahu. In Florida, the theme parks are so crowded, they temporarily shut the gates this week. Many Las Vegas hotels are sold out for New Year's Eve. Here in California restaurants and malls are filled. Last week someone even bought a house on our street. More US citizens will continue to suffer from too much food than too little. Americans make up half of the planet's wealthiest one percent.

Consider the Gallup poll results of the "World Giving Index" in which the US ranks number one in the world, with 66% of Americans giving money to charity, 43% volunteering time, and 73% helping a stranger within the past month. A local homeless shelter reports their population is down from last year. Yes, there are big problems and crises brewing. There are always potential crises. Some have been 'immanent' for years now. All considered in perspective, things aren't so bad.

Another trend: The internet has just begun to change everything as the world's tutor, communicator, even its conscience. Libraries, phone books, even classrooms, are fading in importance, as millions do all this online. We are entering the hyperweb era, defined as over half the internet nodes being non-PC devices. Yesterday evening at a holiday party I spoke with a young teenager who I've known since birth. I remembered him as taciturn, withdrawn, quiet. Now he is articulate, intelligent, brilliant. I asked him what had changed. He said talking every day with his gaming friends online changed him. We realized that browsing the internet now we learn more in a month than we would learn in a year before. Intelligence is ramping up, as is the development and sharing of ideas, plans, solutions. The transparency and immediacy of Youtube and Twitter news tends to inspire governments to improve. The internet has changed the investment world dramatically for the better too, and there is much more on the way. A big problem in the investment world is too much information and outright misinformation. Investment success these days depends on successfully blocking and filtering all but what makes money now.

A trend that wasn't: 2011 was a year without a big trend in the S&P 500, closer to unchanged than any year since 1947, as the 50-year chart below shows clearly. This chart is drawn in the Japanese style of analysis. Much like their intricate, precise joinery, tea ceremony, calligraphy and art, centuries ago investment analysts created charts which at a glance provide more information than the line charts one sees on financial tv. In the upper portion of the chart below, each vertical line represents one year's price movement. Red for down years, green for up years. The thick part shows where the market began and ended. The small lines above and below the thick portion trace the high and low prices during the year.

This is fifty years of S&P prices at a glance, so you can see in the 90's, five consecutive up years, where buy and hold worked well. You can see the up and down years in the 00's, where trend investing worked well. Finally, look at 2011, the single skinny line on the right, where the S&P traveled up and down 3240 points and ended virtually unchanged --- a very unusual year --- with only one other similar year, so one could conclude it is not likely to repeat in 2012. The Japanese analysts word for this type of line is 'doji' and they interpret it to mean 'indecision'. The bottom portion of the chart, by the way, is an annual volume histogram.

The investment opportunities have never been better than now. First, the cost of adapting to changing conditions is lower than it has ever been, and flexibility is the key to survival and success these days. If one of the many simmering crises boils, we can reshape our portfolio in a few minutes. Second, one can invest all around the world, in most commodities, and every industry, without ever leaving the US exchanges. I'm not recommending worldwide investing at the moment: India's Sensex was down -25%. Japan down -17%, China down -22%, to name a few of the emerging market disasters of 2011. Third, most investors are confused, indecisive and discouraged, a warm composting environment for growth of new trends. In our accounts we are endeavoring to take full advantage of improvements which will reduce investment costs, while broadening opportunities.

So, yes, the European banking system is teetering, yes, the middle east is a powder keg, yes, real estate markets are moribund, yes most emerging markets and value investors were down double-digits, and yes, most governments are spending too much and will consequently hyperinflate their fiat currencies. Bring it on! There are always problems. Things are never perfect. That's what creates the opportunities. Our goal is to generate absolute profits no matter what, and now we have better tools and a better environment than ever to accomplish this in 2012.

Historic Volatility

7 December ~ In the past four months the index has seen sixteen moves of 5% or more. To put this in perspective, there have been entire years in past markets without moves of 5%. Another factoid of note: Though this line chart makes the price changes look continuous, most of the percentage changes gapped overnight, while the US market was closed.

Recollection of Lunch with Steve Jobs

Once upon a time twenty other wealth managers and I gathered in a private dining room at the Savoy in London, invited by Steve Jobs to view an eight-minute clip from something called "Toy Story". Jobs was doing his road show for the Pixar IPO. After the vegetarian fare, he rolled the tape, and we were hooked. I bought Pixar shares, which did well. Up close he had a slightly unbusiness-like air, more like a friendly alien delivering new tech to this backward planet. In fact, in his last public appearance he unveiled the Mother Ship, a new HQ in Cupertino for twelve thousand people.

"Apple has lost a visionary and creative genius, and the world has lost an amazing human being," Apple CEO Tim Cook wrote in a letter to employees. "We will honor his memory by dedicating ourselves to continuing the work he loved so much."

During his more than three decade-long career, Mr. Jobs transformed Silicon Valley as he helped turn the once sleepy expanse of fruit orchards into the technology industry's innovation center. In addition to laying the groundwork for the high-tech industry alongside other pioneers like Microsoft Corp. co-founder Bill Gates and Oracle Corp. founder Larry Ellison, Mr. Jobs proved the appeal of well-designed products over the sheer power of technology itself and shifted the way consumers interact with technology in an increasingly digital world.

"The world rarely sees someone who has had the profound impact Steve has had, the effects of which will be felt for many generations to come," Mr. Gates said in a statement Wednesday.

The most productive chapter in Mr. Jobs's career occurred near the end of his life, when a nearly unbroken string of successful products like the iPod, iPhone and iPad changed the PC, electronics and digital media industries. The way he marketed and sold those products through savvy advertising campaigns and its retail stores, in the meanwhile, helped turn the company into a pop culture icon.

"Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose," Mr. Jobs said in a commencement speech at Stanford University in June 2005, almost a year after he was diagnosed with cancer.

I join millions in mourning the departure of the best CEO of the greatest company --- by any measure --- of our generation. Rest in peace, Steve P. Jobs. We will appreciate your creations for years to come. You truly made the world a better place.

Beware of Greeks bearing Gifts, Paying Taxes, Moving Markets

1 October ~ For the past six weeks the US stock market has moved according to the announcements and follow-up denouncements from Europe. Germans voted to help the Greeks pay their bankers ( if the Greeks will at least pay something in taxes) and the market went up. The Deputy PM in Greece said the taxable resources of his small islands are exhausted and the US market went down. This 9% up and 9% down S&P move has happened seven times in the past six weeks. Unprecedented! The most recent word, beyond the Greeks promising to promise to promise to someday try to collect taxes which were due in 1999, takes the cake. The word is that the Greek tax authorities can't collect taxes just now because you see --- I am not making this up --- they have run out of ink to print the tax forms, according to London's Financial Times. I don't know why the market gets so surprised about all this. After all it was Greeks who came up with the Trojan Horse. They've been fooling people since the Bronze Age.

Ups and Downs of Wealth

20 September ~ One summer day in the ‘90s, my two dear children and I were walking along the Thames in London. We passed an ice cream cart and they clamored for an ice cream cone, for which the vendor wanted £ 1.25.

“No! We have to economize!” I blurted. My kids looked up at me, a bit stunned and confused. Then my inner brain asked itself “What are you doing?” During those years I was managing an emerging markets fund in the City, and although i handily outperformed my benchmark index, there were down days, and this had been one of them, with the fund down a healthy five figures, which was unusual for my style of management. Even though it was less than 1% of the fund, now, i realized, I was telling my dear children to economize on ice cream cones because of my bad day --- because I was thinking in dollars, not percentages.

From that day onward I vowed to train myself to think in percentages, for peace of mind, and because that is closer to reality. When responsible for wealth, no matter what it is invested in, the account balance can fluctuate daily by the value of an expensive car, the value of a house, or in extreme cases, billions. One needs to think in percentages to manage it correctly.

So, if one has newly acquired responsibility for wealth, my advice is to think in percentages, to stay in the realm of reason and out of emotions of elation or despair. A $5 million account, up 5%, is $250,000. That amount may be cause for elation. Down 5%, one might think of the small house they could have bought with that money. Realizing it is 5% of the ‘mother lode’ is the mature ‘old money’ way to look at it. Be kind to yourself and think in percentages.

... and yes, I did buy them each an ice cream cone. Then, to teach them about income taxes, I ate 38%.

Greece: Default Delayed is Debt Denied

18 September ~ This coming Tuesday, Greece owes a € 769 million coupon payment to bondholders, unless they agree to modify the bond terms, but why would they want to add another billion Euro on top of the already unpayable debt?

Several interesting voices have recently declared Greek debt unpayable: First, former UK Prime Minister, Gordon Brown, said the 2011 crisis is worse than 2008. Second, Dominique Strauss-Kahn, who five months ago ran the IMF, declared Greece can't repay its debts and bondholders must simply accept their losses. Funny, how people see things differently when they aren't part of the status quo anymore, isn't it?

Finally, a subplot to this tragedy of the absurd, it also appears banks may own more insurance, in the form of credit default swaps, than they sold, and more than the amount of bonds which Greeks owe, so the net benefit to the banks of a Greek default may actually be positive. As Europe agonizes over all this, our Fed meets on Tuesday. Almost a divertissement, Monday our President will announce an unpassible plan to raise taxes by $1.5 trillion to pay the US debt. Our financial seat belt is fastened this week.

Not even their famous army knife...

... can fix what the Swiss did to their franc. For thirty years a stable currency as solid as their granite Alps, the SNB decided to link their currency with the dubious Euro instead of gold. It is the end of an era. I recall in the 80's moving accounts into Swiss francs when the dollar was descending and profiting thereby. Now that the Swiss have joined the worldwide 'race to debase', literally the only measure of value is the price of gold. Like it or not --- and with it's current volatility there are those who find it hard to like --- that is the new reality.

A colleague pointed out that SNB governing board chairman, Philipp Hildebrand, was a former hedge fund partner with Moore Capital, and estimates the SNB made a $25 billion profit the day of their announcement. It is also rumored that much of UBS recently revealed $2.3 billion trading loss was due to the SNB revaluation.

Bank of America Buffeted

6 September ~ In the wonderful world of the equity markets, we invest capital by determining risk/reward. One such event last week was Warren Buffet's deal with Bank of America [BAC]. Immediately the stock price began moving, and I invested. After a few days of careful monitoring, the price didn't act quite right, so I cashed in for a +2.5% profit on August 30th. As of today's close, BAC is -13.8% below our sale price. My goal was not to make a 2.5% profit, of course. My goal was to be positioned to make a large profit if the price continued up while protecting capital if the price didn't.

This is why our accounts have a number of investments which are around break-even. One doesn't know for certain when a big move will occur. My job is to get in position to profit when a big move is more likely to happen. This is a lot of work, but the best way I've found to preserve capital in down markets while profiting in up markets. It is not a new phenomenon either. Peter Lynch, famous past manager of Fidelity's flagship Magellan Fund noted the same thing: that account profits are generally made from several big moves during a year, while most investments in a portfolio muddle along, and he was never sure which ones would be the big winners. That's just how it is, he wrote in 1994.

This week's Bank of America share price movement is yet another example of price action preceding news, as I wrote about on August 6th, further down on this page: Today, four days after I saw a sign to get out, the FHFA announced it is suing BAC to recover billions in losses from bad mortgages. Someone knew this was coming earlier and sold. I saw the price action and joined them.

Earlier this week a dear client who lives in a beautiful home in a leafy, peaceful enclave wrote asking about BAC. I replied: In spite of Mr. Buffet's enthusiasm, the market's reaction to his buy tells us BAC still has problems.   I bought some for your account, but had to exit with small profit as developments got murky.  Price is now lower than when we sold. Probably can re-enter cheaper.

Twenty-eight years of managing wealth provides perspective on Buffet and banks: During the era when Buffet bought a big stake in Wells Fargo [WFC] at $80 I was managing the family money of a Wells Fargo Bank board member. He explained the rationale:   The bank had over-reserved, and they would be bringing those reserves back into profits. Through the magic of corporate accounting, earnings growth was a sure thing. Earnings were literally already in the bank. Yet soon after Buffet bought at $80, the share price was cut in half to $40. So, i think we have time to wait for a better entry on BAC. Years afterward Wells Fargo went on to earn shareholders a handsome profit. All I'm saying is why not wait for a better entry price during this time when every bank stock in the world is going down due to massive lawsuits filed today by the FHFA. To read the official FHFA notice, click here.

To answer your question about buying dividend stocks now: When the market goes down and the growth outlook is gloomy the folks on tv say buy income stocks.   I've analyzed this idea over the years, and it doesn't work well.  They go down too in a market which is highly correlated, as it is now. To study this yourself, pick any ten high dividend stocks they recommend.   Measure their percent decline in August.   It will be a bigger loss than the entire year's dividend income. It does sometimes work to buy big macro-market dips in companies that are likely to recover, as long as one is prepared to exit and preserve capital if the dip is only the preface to a larger move down.

High Noon at the SP Corral

29 August ~ An analysis of this months sharp sell-off in equities reveals the S&P 500 three-month correlation is 0.73, the highest in at least 20 years, and up from just 0.44 at the start of August. This is bad news for the average long-only equity mutual fund, whose prices descended even more than the index. What is an investor to do? Our solution was to avoid picking individual stocks, because they were all moving together like a frightened flock of birds. Instead we held high cash positions and gold, then began edging back into the market using S&P ETFs near the end of the month, thus outperforming those whose mandates force them to grimly hold no matter what. Astute trend analysis is the new alpha.

Investors are asking "is this 2008?". The answer is no. In 2008 the US dollar appreciated and gold prices fell. This year the reverse happened: the dollar dropped and gold reached all-time record highs. What does that signify? It means that 2008 was a deflationary bear market, and 2011 is an inflationary one.

Other signs of a difference: in 2008 money market funds froze. The banks didn't have enough cash. This year, banks have too much. They don't want any more. So they charge customers for depositing too much of Ben's newly created paper. Read more here.

Worldwide Bear Markets

21 August ~ The definition of a 'bear' market is an index 20% below it's peak. Many of the world's markets have achieved that dubious distinction this month. The S&P 500 is 2% away, as of Friday's close.

Why we didn't wait for news announcements

6 August ~ The news of the S&P credit downgrade of the US, released only after hours Friday, after the market plunged all week, illustrates once again that as prudent investors we can't wait for news announcements to conserve capital, as those who have the inside information move the market before the news. Read here how the S&P was in meetings with US government officials this past week before announcing the downgrade. Our move to cash when the market first began to weaken saved our capital. Responding to price moves is mandatory. Knowing why is optional. The most important line in the article: "...further downgrades may lie ahead."

Five Famous Funds Fumble

Warren Buffet

18 June ~ This is a strange year in the markets. Many troubles wherever one looks, yet the market ignored them until May. Five famous fund managers have had trouble all year though. The ubiquitous Dennis Gartman's fund is down-12% year-to-date, yet he continues to reign on financial television, answering the hushed questions of genuflecting interviewers. Ken Heebner's CGM Focus Fund --- which was up +80% one year when we owned shares --- is down -13% this year. Bill Miller, the famous value investor is not faring any better, down -12%. Fourth, Bruce Berkowitz was sure enough banks would outperform that he loaded up his $14 billion portfolio, is down -13%. Finally the fifth: Warren Buffet's Berkshire is down -8% year-to-date.

Argentina: 25% Inflation

4 April ~ As noted in this space on 14 and 17 February (scroll down) hyperinflation has begun. One can read about the euphoric effects in Argentina in this article. Citizens of that country have seen it all before and recall how to deal with prices which rise daily.

As an advocate for those in or near retirement, I protest government policies which declare 'inflation is good' and 'a weak dollar is good'. Those policies are good for corporations, but very bad for citizens who have prudently saved. Governments won't change, so the way out, of course, is to exchange dollars for those items rising in price, as the Argentines do.

Profits Non-Linear

29 Jan ~ Investment profits are not usually linear. An account will drift along for a period of time, a little up and a little down. Then just about the time one questions the whole thing, there will be a big move in account equity. Historically, the stock market has trended for about 20% of the time, and consolidated for about 80% of the time. The work and vigilance necessary to manage a portfolio is to be ready for the trending periods, and participate in the moves up, yet guard against moves down.

This revaluation happens occasionally with most possessions, with one’s home, art and other assets. The difference is that one doesn’t get minute-by-minute quotes on one’s home. So, market quotes are two-edged: If one worries about each tick up and down, it can be nerve-wracking. Yet, it is a wonder of the modern world that there is such global liquidity that one can buy or sell when one wants, unlike many other types of investments.

In the tax information, clients will see a number of small profits and losses. This is a behind-the-scenes look at what happens in many mutual funds. The portfolio manager starts a position, and increases it if things remain positive, growing into large gains. However, keeping any loss small. Similar to planting seeds, then weeding out the weaker sprouts to leave the healthiest plants to grow.

POMO d'oro

Dec 23 ~ POMO is an acronym for the Fed's Permanent Open Market Operation, which has been buying billions in US debt almost every day recently. The Fed is kind enough to pre-announce the dates of their purchases, and often announces the exact debt they plan to buy. Coincidentally, the US stock market has closed up almost every day the POMO bought debt. Some economists theorize that large traders are front-running the Fed, buying low before the POMO date, then selling higher to the Fed when they buy, and investing the resultant liquidity in the stock market.

In Greek legend a golden apple, pomo d'oro, was awarded to a beauty contest winner who had bribed the judge. Discontent over this unfair act led to the Trojan War. Today's discontent over bankers receiving these continuing riskless profits is similar, though the bankers have won the war already, according to Marketwatch.

Always Available

Did it ever seem annoying when you couldn't reach your wealth manager after hours or on weekends? It did to me years ago. Consequently, I've carried forward my father's policy of giving a number to clients where they can call day or night, 24/7/365. Though the old saying is "money isn't everything", in my opinion it is important enough to have the facility to talk at any time. You can read about our other policies here. One of our asset custodians, Interactive Brokers, also effectively has this facility, as one can call their London or Hong Kong office when their US office is closed.

Tipping Point: Fed owns $1t US treasuries

Updated Dec 23 ~ In September mainland China bought far less US government agency debt than ever before, as the chart below shows. In fact, they were net sellers of $26 billion. This includes Fannie Mae and Freddie Mac bonds. On November 22nd, the Federal Reserve passed the Chinese government as the largest holder of US debt. You can read that whole story here. In December, the Fed owned $1 trillion of US debt, a milestone, or perhaps a millstone. Taken together, this is a tipping point, where others are not buying as much US debt, so the Fed is buying it, under the fuzzy label of "quantitative easing".

This news is not mentioned by the major media, even though this gigantic milestone is arguably more important to America's future than even Bristol Palin's dance moves.

Balanced Accounts

Although our accounts sometimes are up more than the S&P, our main goal is prudent capital growth and preservation. Because of this our accounts often have yields more like balanced mutual funds, comprised of stocks and bonds. In classic portfolio theory, the original point of stock/bond allocations was to mitigate the dramatic drawdowns which periodically overtake the S&P. We achieve similar goals by analyzing trends and entering when uptrends begin and exiting when they end. So our accounts are safer than 'buy-and-hold' S&P index accounts, whose theoretical risk is substantial. I feel ours is a responsible way to grow capital as our account beneficiaries approach retirement.

A Few Words about Income

Updated Dec 22 ~ The past few weeks I've received questions about income portfolios in 2010.

For those depending on their savings for income, now is the worst of times. T-bill interest is almost zero. Bond interest is low. High-yielding CDs don't exist. Most now are under 2% per year. Many of the old, tried-and-true investment maxims don't work anymore.

Not too many years ago we used to get 9% from a US treasury bond, and all was happy for income investors. Those days of a 9 percent "sure thing" are gone. That's reality. There are too many dollars seeking a return, and their competition drives rates down. The Fed is keeping rates artificially low, which in effect transfers money from savers' pockets to banker's pockets.

So, as clients know, my solution is to invest in income stocks when they are trending up, and move to cash when they are trending down. Generally, January and February are weak months in the market, so I increased cash, and March often recovers, so I invested again in income stocks. The market looks more stable this year than during the past two years. This approach, of course, is more risky than CDs, but the choice is (1) earn almost zero and spend principal each month; or (2) risk some capital value fluctuation with the goal of higher returns.

This method requires constant daily vigilance monitoring price trends, and hours screening thousands of stocks, researching the ever-changing world of high dividend stocks and bonds.

This approach has two benefits: First, of course, collecting income from high-dividend stocks. As you may know, stock dividends are not like bond interest. When one owns a bond, one is paid interest pro-rata for the days one owns the bond. For dividend-paying stocks, one only needs to own the shares on the record date of the dividend. For example, with a stock paying quarterly, one technically only needs to own the shares four days out of the year. Practically speaking, it's a bit more complex, because the capital value often drops the approximate amount of the dividend on the ex-dividend date. So, in times like these, the arduous management work is to buy right, ramp into the dividend, and move to cash when a stock stops trending up.

Second, applying this trend analysis to our accounts moves us to cash before big moves downward take too much, thereby tending to protecting capital, as we did in 2008, though there is principal fluctuation, and the occasional market-moving surprise. It is not glamorous, but has worked well in the past, which of course is not a sure indication for the future. This is how I invest for current income.

Easan Katir is a Registered Investment Advisor in California and Texas, providing fee-only planning, investment advisory and retirement services throughout California, including, but not limited to: San Diego, La Jolla, Newport Beach, Los Angeles, Santa Barbara, San Luis Obispo, Big Sur, Monterey, Carmel, Pebble Beach, Santa Cruz, Silicon Valley, Woodside, Atherton, Berkeley, San Francisco, Santa Rosa, Redding, Sacramento, Davis, Grass Valley, Nevada City, Roseville, Fresno, Bakersfield, Riverside, Lancaster, and in Texas including Midland, Odessa, Austin, Dallas, Ft. Worth, Houston. Please contact Easan Katir if there are any changes in your financial situation or investment objectives, or if you wish to modify investment account goals. Easan Katir transacts business per applicable state registration regulations and the "de minimis" exception. All information herein has been prepared solely for informational purposes, contains no guarantees of any kind and is not an offer of case specific advice. One is advised to carefully consider each idea only as part of a diversified portfolio suitable to one's circumstances. Investment views subject to change. We offer no legal or accounting advice. Charts should not be used exclusively for investment decisions. A list of the advisor's investment recommendations is available by request. Our state law requires us to offer our clients a copy of the Firm Brochure annually. Our state law also requires us to inform you if there were any material changes to our business since that last annual update to our Firm Brochure. Our last annual update was March 18, 2017 and we do not have any material changes to report since that update. If you are interested in receiving a copy of our Firm Brochure, we will provide one to you at no cost. Please call us at 530-231-5646. © 2010-21.

Professor Aswath Damodaran

The Global Margin Call 10 October

The gilt and bund derivative crisis. Hedge pricing most expensive ever. Read more here

Shakespeare, the Capitalist 14 March

The Bard arbitraged grain and lent money. Click here for the revelation by researchers from Aberystwyth University in Wales.

Bank Run in China 14 June 2022

Ignored by media, there are bank runs in China. Click here.

Digital Dollars 26 March 2022

To read about the US digital dollar, click here.

OMFIF says dollar safe 25 March 2022

No threat to dollar global dominance. To read the report, click here.

The $5 billion Roth IRA 25 June 2021

How Peter Thiel did it. Click here.

Negative Rates Checklist 22 December 2020

Read the Securities Industry and Financial Markets Association white paper on what to do about possible negative interest rates in the US here.

50th Anniversary of NYT publication of the Friedman Doctrine 22 September 2020

The late celebrity economist Milton Friedman's surprising statement on social responsibility NYT Magazine September 13, 1970

Summer Reading 21 September 2020

Well-known economist James Grant's little-known history of a couple of years in the early 20th century The Forgotten Depression, 1921: The Crash That Cured Itself

Long-Term Effects of Pandemics 22 April

A peer-reviewed paper with surprising conclusions. Click here to read.

The Most Consistent Constant is Change 29 March

White paper on the Evolution of Risk Premia Click here to review.

Ninety Years of Minutes 2 January

90 years of Fed Minutes, which you can view here.

Million to Billion 8 July

How Long did it take billionaires to make their first million? View infographic here.

Older Entrepreneurs have 70% success rate 11 March

A 66-year young entrepreneur tells his story, which you can read by clicking here.

Brokers and Order Flow Leakage: Evidence from Fire Sales 11 February

A study from the Swiss Finance Institute, which you can read by clicking here.

New Study on Bias 4 September

The first step toward overcoming investment bias is to realize we are biased, according to a just-released paper from the Institute of Cognitive Neuroscience, which you can read by clicking here.

World Awash in Capital 27 February

There is cash available like never before. Click here to read a Harvard Business Review essay on how companies adapt.

Why Sports are a terrible metaphor for business 3 February

It's Superbowl season, so read a Harvard Business Review essay about how games relate to business by clicking here.

A 2016 View of the Future 15 December

Read about future mega-trends by clicking here.

Dallas Pension Stops "Bank Run" 8 December

The Dallas Police & Fire Pension stopped lump sum withdrawals. This is a watershed moment in the pension world, as many other pension plans are also underfunded. John Bury, the great actuary we work with, reported the Dallas problems back in August, which you can read here in his blog.

NIRP arrives in Japan29 January

For years I've written about a solution to the world debt problem: negative interest rate policy, or NIRP. To everyone's surprise, Japan announced that very event today, and so joins Germany, Denmark and Swizterland in the NIRP club. Read more here.

Fed Funnies20 January

Friday the Fed released transcripts of previous meetings. In one meeting, staffer Brian Sacks says "To help gauge market expectations, we conducted an extensive survey that asked respondents about how they expect the FOMC to exit from its current policy stance. We expanded the survey beyond the economists who are typically included in our dealer survey, because many of you at the last meeting indicated that you don’t actually trust economists. [Laughter] This may be a good time to remind you that most of you are economists."

Where is all that "cash on the sidelines"? 2 June

Famed market research analyst, Ned Davis, can't find any. Click here to read full story

Latest research: Money does buy happiness 15 April

On this tax day, thought you would like to know a recent scholarly study shows a high correlation between wealth and well-being. Click here to download the 79-page pdf.

Deflation = Progress 24 January

"Many years ago, falling prices were a sign of improved efficiency and expanding wealth, and of widening consumer choice. Thanks to the spread of electricity and other such wonders in the final quarter of the 19th century, prices dwindled year by year at a rate of 1.5% to 2% per year. People didn’t call it deflation – they called it progress." ~ Jim Grant

Private Debt an Indicator 10 December

A new study of past crises reveals private debt levels are a better indicator than government debt levels. A solution included. To read more, click here.

Central Banks Have Bought Equities 16 June

A survey of 157 central banks reveals they have increased investments in stocks. To read more, click here.

Disney Family Feud 21 May

A report on the sad saga of Disney heirs. Click here to read about their decade's long money squabbles.

Working, Happiness & Retirement 11 April

A surprising new study indicates those who voluntarily work past retirement age are generally happier than those who retire. Click here to read the entire 30-page scholarly paper.

Volatility and Illness Measured 6 January

Scientists correlate -1.5% market drops with more hospital admissions. To read more, click here.

Many holding cash 5 November

Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.

Retirement Myths 14 May

Generally I'm not a fan of The Motley Fool, but this article has interesting statistics to frame how we think about retirement. To read, click here.

Keeping it in the family 10 May

Japan is home to some of the oldest family-run businesses in the world. How do they do it? The answer may surprise. To read The Economist article, click here.

39,000 citizens declare $5.5 billion 26 April

The IRS amnesty programs have inspired thousands of US citizens to report foreign bank accounts. To read the GAO summary click here.

Optimism vs Fear 14 December

What makes investors bold or fearful? As Hoffman and Post demonstrate in their recent white paper, investors tend to risk more money when they have experienced profit without regard for risk.

Jeff Bezos Says

The CEO of Amazon shares a character trait he's noticed in those who are right a lot of the time. Read more.

A BIG Money chart

22 Nov ~ Don't click this link unless you want to spend a few minutes mousing around a huge chart which puts money in perspective. Click here.

Ever wondered what happens to your gas money?

About 12% to taxes, 8% to refiners, 5% to gas stations, and most of it to the crude producers, who pay big royalties to Saudi Arabia. How is your former money distributed in the house of Al Saud? Click here to to read the amazing numbers uncovered by Wikileaks.

The Crisis in Household Terms

We are bombarded daily with reports in the trillions, couched in language designed to obfuscate. It's really pretty simple. Click here to see the debt crisis expressed in household terms.

Value Investing Not Working

Famous value investor Whtney Tilson writes to clients that his fund is down -13% in August and -21.9% for the year. Click here to read his letter. He is not alone, as most value funds are down big this year.

Conversely, Jim Simon's secretive Renaissance Fund is unofficially +25% year-to-date, according to a source I spoke with this afternoon..

And smartest-of-the-smart, Goldman Sachs giant hedge fund GlobalAlpha is down -12% this year. They've announced plans to close it. Why would they do that? Because the have only a small chance of collecting their 20% profit, since they have to dig out of the loss first. More profitable for them to just close Alpha and start a new fund.

A City with No Debt

Most cities are drowning in debt. Is it possible to run a city at a surplus? Less than an hours drive from Washington, you can find one. Welcome to....

Why didn't India have a financial crisis?

India and Canada avoided the 2008 deflationary collapse due to their sound banking practices. Who in India made those good decisions? Read the answer here.

© 2010 Easan Katir. Right to link granted.