Weekly Wrap Up (October 09, 2015)

by FI Fighter on October 9, 2015

in Weekly Wrap Up

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The stock fire has been ON FIRE this week! For those who are still active participants in this game, I’m sure it must feel pretty good, right? It’s no secret to readers that my own stance is rather bearish on the current market, but don’t worry, I don’t plan on playing that side of the coin for too long (I much prefer to be a bull!). Having said that, watching the market continue to climb in spite of all the negative headlines this week can’t help but cause me to chuckle quite a bit… 😉

The following requires you to proceed with a sense of humor. Sarcasm is advised!

Here’s a summary of news for you:

Job Creation Misses By 30% (October 02, 2015)

This story was actually reported last Friday, but it’s worth mentioning since it’s a great segue into this week, which kicked off earnings season.

From CNBC:

Screen Shot 2015-10-09 at 7.46.36 AM

How did the market respond? With a big fat YAWN! Actually, quite a bit better than that — The S&P 500 closed the day the news broke out up 1.43%!

More succinctly put by David Stockman:

If you don’t think financial markets have been utterly destroyed by central bank intrusion then how can you explain Friday’s 460 Dow point reversal higher after the post-nonfarm payroll low? It was pure machine rage triggered by another implied “lower for longer” Fed policy signal.

If this story was important enough to headline every major news outlet, then how can a 30% miss be deemed acceptable and a non-event by these same talking heads? Perhaps because everyone is just so damn fixated on an immaterial 25 basis point rate hike that may or may not ever occur? That’s like the only story that even remotely matters these days!

I still remember the days when the interest rate on my checking account was fluctuating 1%+ each month and I didn’t even care…

Deutsche Bank “Shocker”(October 07, 2015)

Next up we have Deutsche Bank, the unquestioned King of Derivatives. Back in June, both co-CEO’s abruptly announced their resignations, which led many to believe at that time that trouble may be brewing behind the scenes…

From CNN Money:

Anshu Jain and Jürgen Fitschen, who have shared the chief executive job for the past three years, are leaving “early” after an “extraordinary” meeting of the bank’s board, Deutsche Bank (DB)announced Sunday. 

Jain will step down on June 30, but Fitschen will remain in his role until next May “to ensure a smooth transition,” the bank said. Both had been expected to run the bank until at least 2017. 

At the same time, the bank named John Cryan, a member of its board since 2013, to be co-CEO with Fitschen for the time being. Cryan, a longtime banker, will become sole CEO when Fitschen leaves for good.

 

Well, it turns out we only had to wait a few months before this most recent “shocker” hit the press:

Screen Shot 2015-10-09 at 7.56.39 AM

From The Guardian:

Deutsche Bank has warned it will lose more than €6bn (£4.4bn) in the third quarter in a record loss.

In a late-night announcement that shocked analysts, Germany’s biggest bank blamed huge impairment charges of €5.8bn for the unexpected losses. Forecasts had been for profits of about €1bn.

Deutsche is one of the pillars of corporate Germany, along with Volkswagen, which has been rocked by the emissions-rigging scandal.

Deutsche’s new boss, John Cryan, who took over in July, set about cleaning up the bank and hinted at cuts to bankers’ bonuses, while dividend payments to shareholders could also be reduced or scrapped altogether.

Analysts and investors welcomed the cleanup, and Deutsche shares rose 1% after falling 3% earlier. One top 10 shareholder told Reuters: “Long-time board members often hesitate to do drastic cuts. Now there’s a wind of change.”

 

After the warning issued in June, can these most recent events really be all that surprising? But bad news is bad news… until it isn’t.

And right now, as has become the norm, the markets simply don’t care. I was thinking about shorting Deutsche Bank (DB), but luckily I knew better than to make any sudden moves. Long-term, though, I think this is a fantastic short opportunity… Just gotta figure out when to punch the ticket.

As I’m typing this entry, here is how the stock is performing:

Screen Shot 2015-10-09 at 8.07.12 AM

What bad news? Co-CEOs resigning, a few billion in losses, and the possible suspension of the dividend? Man, quit worrying so much! Don’t you know that everything is AWESOME!?!

Volkswagen Blames “Rogue” Engineers (October 08, 2015)

The bad news just keeps pouring in, so it seems. Next up we have Volkswagen (VLKPY), who was most recently caught up in an emissions scandal, cheating their way to victory through software. Volkswagen just admitted that to fix these problems in the U.S. alone would take a few years since the software “glitch” impacts nearly half a million vehicles.

But what’s the big deal, anyway? It’s not like it was the intent of the company to cheat its loyal customer base, who will most likely brush off this incident and continue buying their cars, right?

As VW executive Michael Horn explains:

“This was a couple of software engineers who put this in for whatever reason,” Michael Horn, VW’s U.S. chief executive, told a House subcommittee hearing. “To my understanding, this was not a corporate decision. This was something individuals did.”

 

I’m a software engineer and you’re absolutely right Mr. Horn… We just don’t ever quite receive enough work at work… So we take on side projects to pass the time…

But you’ve got me convinced! Me, along with the rest of the world.

Just check out the stock price below!!!

Screen Shot 2015-10-09 at 8.12.29 AM

Glencore Cuts Back! (October 09, 2015)

Finally, we arrive at Glencore, the Switzerland based “natural resources” company. Glencore earns its keep by mining: zinc, copper, iron, nickel, etc. among many other metals and minerals. The company is also involved with energy and agricultural products.

But due to the recent weakness in commodity prices, Glencore has been taking it hard on the chin. All that volatility has been concerning for investors, who have started to worry whether Glencore can service its monumental debt burden in a weakening deflationary type of environment.

Most recently, the bond yields have started to price themselves like junk:

Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors. 

A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13 per cent yield on an annual basis.

Oh but before we forget, let’s also mention that Glencore also happens to just “dabble” slightly in derivatives trading. Just a couple billion here and there, so no harm, no foul… Rest assured, we don’t have to worry about any type of Lehman incident occurring because of their positions.

And what’s $100 billion of liabilities on the balance sheet, really?

It’s not like Glencore can contaminate the too-big-to-fail (TBTF) banks in any way…

From Bloomberg:

Bank shareholders and regulators may be concerned that Glencore’s debt and trade finance deals, of which a “significant majority” are unsecured, will reveal higher-than-expected risk and require more capital once the lenders are put through U.S. and U.K. stress tests, BofA analysts said Wednesday. Adding an estimated $50 billion of committed lines to the company’s own reported gross debt, the analysts say financial firms’ exposure may be three times larger than Glencore’s reported adjusted net debt of less than $30 billion.

“The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market,” analysts including Alastair Ryan and Michael Helsby said in a note titled “The $100 Billion Gorilla In the Room.” The commodity-price bust and “stress in Glencore’s share price and debt spreads may spur a review by investors, supervisors and bank management,” while “bank shareholders may pressure managements to reduce exposures,” they said.

 

So, what’s a good way to contain the fear? Why, simply cut back on supply! In the process, you’ll drive up commodity prices to the moon!!!

Funny, how come no other major mining company has been smart enough to initiate this same type of initiative thus far? Some big player out there could have spared the gold and silver stocks that I’ve been buying up a lot of pain these last 4 years!

The London Metal Exchange’s three-month copper contract was up 3.8% at $5,329 a ton, while the LME’s three-month zinc contract was up 9.1% at $1,818.50 a metric ton. 

Aluminum was up 3.8% at $1,619.50 a ton, nickel was up 3.5% at $10,535 a ton, lead was up 5.4% at $1,761.50 a ton and tin was up 0.7% at $16,010 a ton.

 

The entire mining sector is riding Glencore’s induced wave quite nicely this morning!

Oh, and Glencore’s stock isn’t doing so shabby either:

Screen Shot 2015-10-09 at 8.21.01 AM

Alcoa Kicks Off Earnings Season In Style! (October 09, 2015)

Lastly, that brings us to Alcoa (AA), who kicked off earnings season last night, announcing Q3 results.

Here is a quick summary:

From USA Today:

  • Alcoa reported an adjusted quarterly profit of $0.07/share, missing analysts’ $0.13/share estimate.
  • Revenue of $5.6 billion, down 11% year-over-year. Off the mark by $110 million.

Shares were down ~2.5% after hours on Thursday, October 08, 2015.

Buy hey, what do you know! Bad news CAN actually be interpreted as bad news. The market has decided to punish AA today, as shares are now down 4.81%.

Screen Shot 2015-10-09 at 8.40.58 AM

Summary

To recap the most recent news, we’ve got the following — a lousy jobs report, Deutsche Bank in trouble, Volkswagen working to rebuild its reputation, Glencore caught up in God knows what, and Alcoa kicking off earnings season with a swing and a miss.

And despite all that, the markets would have you believe that everything is just fine and dandy. It’s back to business as usual, as evident by the recent rally (or short covering), or whatever this uptick happens to be.

It’s all rather breathtaking, if you ask me!

Just check out the S&P 500 over the last 7 trading sessions or so… UP, UP, UP!!!

Screen Shot 2015-10-09 at 8.45.04 AM

Yes, I’m guessing a lot of this rally also has to do with the latest FOMC minutes (released yesterday)… A no Fed rate hike until 2016 (or beyond) is good for the markets… The U.S. dollar has been getting pummeled as of late too (sigh).

But really, how long can we live in a world of disconnect, completely detached from reality? In other words, when will fundamentals matter again? You know — unemployment (non-Fed stats), labor participation rates, jobs growth, revenue growth, earnings growth, innovation and new ideas/products, and you know, just all-around REAL, non financial-engineering (shares buybacks) GROWTH?

From Business Insider: Labor Force Participation Rate at 38 year lows!

labor-force-participation-rate-june-2015

Frankly, I really don’t care if the stock market goes up or down… I’ve already removed myself from the equation and I don’t have a horse in the race… I’m just trying to be a realist here and as an American citizen, I’ll admit that I am deeply concerned for my country and fellow citizens.

There has been a massive wealth transfer going on in this country, with the rich getting richer and the middle class getting wiped out. That trend isn’t going to be reverting anytime soon in the near future either.

And these days, there really are no safe havens where an investor can go to earn an attractive livable yield. This makes things especially tough for those people who are living off of fixed-income (e.g. seniors in retirement)… The system has forced almost everyone into the stock market in search of income…

But in the casino that is Wall Street, can you really be so sure that nothing bad will happen? In a rigged game, the house always wins. Sooner or later…

Sure, the Dow could keep climbing and maybe it’ll clear 20,000 and soar all the way up to 30,000. Are you willing to take that gamble? The other side of the coin says that the Dow could also get sliced in half… So, you’ve always got to play that risk vs. reward game.

By no means am I suggesting that anyone has to liquidate or get out of all their positions… No, I’m not saying you have to go load up on canned food, guns and ammo, and get off of the grid and go live somewhere out in the boonies either… But the days where we could buy ANY stock and watch it appreciate day after day, month after month, and year after year without fail are going to come to an end. Moving forward, anyone still playing in the stock market is going to have to be that much more careful and calculated with their purchases. Investors can lose money in the stock market… At this point in the cycle, that’s hard to believe, right?

Some shrewd investors that I have spoken to have taken up some rather aggressive hedged strategies as they “hope for the best but prepare for the worse“. I think that what they are doing is absolutely brilliant! By taking precautions now, they stand to benefit regardless of what the markets ultimately decide to do, but most importantly of all, they’re able to sleep well at night.

 

I’ve benefited quite a bit from Zero Interest Rate Policy (ZIRP) and easy money (both printing and lending), but I’m also not naive enough to allow myself to live in some delusional fantasyland where I close my eyes off to what’s really going on in the economy… It’s been 7 years since the last crash!

I can’t believe how easy it is for people to forget that markets need to go both up AND down. Right now, with all these headwinds, I just can’t see how anyone out there can really be convinced that we’ve experienced a genuine recovery… Or invest in the market with no fear. Just look at the numbers, any numbers, they are abysmal across the board!

The numbers do not support a recovery! If anything, they 100% contradict one… But as always, as long as the stock market keeps kicking ass, I really doubt that most everyday Americans will even care…

Really, I’m not trying to be all doom and gloom with everyone (I seriously much prefer to be a perma-bull), but I can’t spin bad news and try to pretend that it’s something other than what it is!

I’m just calling it how I see it… If that ruffles a few feathers, so be it. If the masses out there just paid a little attention and stopped living in a bubble, well, then when the bubble finally bursts, we won’t be left clueless, wondering, “How the hell did that just happen? No one could have saw this crash coming…

Stock market crashes don’t happen overnight.

As a matter of fact, anyone paying attention has ample time to get well prepared. Warning signs are issued out years in advance…

For those who choose to ignore the signs, I still wish you the best of luck. I’m going to support anyone on the path to early financial freedom, regardless of what path you elect to take to get there. After all, we are all on the same team and trying to create a better life for ourselves and our loved ones.

You’ve got my respect.

I just sincerely hope no one gets hit by a nasty black rock on the way to early FI:

screen shot 2015-09-29 at 8.50.17 am

 

Happy Investing/Speculating! Have a great weekend and stay careful my friends! 🙂

 

P.S.

Here’s a new “investment product” for you to try! 😉

Screen Shot 2015-10-09 at 10.18.46 AM

{ 25 comments… read them below or add one }

1 No Nonsense LandlordNo Gravatar October 9, 2015 at 8:51 pm

My portfolio is reaching new highs, breaking my previous records. Keep buying and know that while it may be different this time, more likely it is like the last 130+ years…

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2 FI FighterNo Gravatar October 9, 2015 at 11:54 pm

Eric,

Congrats to you and keep at it.

The market has no appeal to me right now. In fact, I’d rather short it than go long at this point.

But I could be totally off base here and even higher highs might be reached. If I miss out on those gains, I’ll just have to accept it.

Cheers!

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3 george puckNo Gravatar October 9, 2015 at 9:41 pm

I think one of the things worth keeping in mind is that many sectors have gone thru a bear market.

I have been pounding the table a while on KMI as an example, started the year around 44, hit 25 last week and has come back to 32. Pays a yield today of 6.61% and has committed to growing the dividend 10%/year for the next 5 years. Even if they dont increase the payout that much you likely see the stock double in price and capture an 8-10% effective cash flow 5 years from now.

Look at apple. 52 week high 134, now trading at 112. PE ratio of 12.95, and its a lot less when you back out 200B in cash sitting on the Appl books. Company just broke a weekend record for iphone sales, Carl Icahn is a big fan and holds a huge position. Room for the company to buy back stock and and increase the dividend. I dont see much downside there.

I like GE….pays you 3.3% to wait, just now the stock is starting to move. Nelson Peltz just took his biggest position ever. They are sitting on a ton of cash after divesting a ton of financial assets, and oil and gas looks to have bottomed. The company is expected to return a huge chunk of money to its shareholders via buybacks and increased dividends. The price is like half of what it was in ’08.

Rinse and repeat for DIS having gone thru a bear run. And they are about to print money with Star Wars.

For growth, and I think these are a little early, very out of favor with the market, but Regeneron, Celgene and Palo Alto networks are well off their highs 15-20%, they have huge growth, and I dont think that changes even in a downturn.

I think we just saw the main downturn in the market. Oil and gas, and Financials are way off. Sooner or later they will return.

My point is the averages have hidden that there has been a bear rotation in a lot of sectors. I think there are some opportunities in some quality names that have already taken a 15-20% haircut. AS long as these companies continue to have large free cash flow tand can borrow on the cheap at near zero rates, it makes sense for them to buy back stock. Borrow at less than the cost of capital, repurchase stock. Heck in a lot of cases these companies are selling bonds at a lower interest rates than the dividends they are saving by buying back stock.

I think the rotations suggest that it is important to stay diversified, yeah maybe raise up a little more cash. Maybe the overall averages dont go up much more from here, but I do think there are some stocks worth buying.

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4 FI FighterNo Gravatar October 9, 2015 at 11:57 pm

George,

Agreed, there are some good deals out there still, but they are getting more and more difficult to find. At some point the risk vs. reward profile is going to get tougher and tougher to navigate through.

The mentality these past 7 years has been to simply “buy the dip”. That may have worked before, but as we can see with anemic growth companies like CAT, just as an example, that dip has not been so quick to recover…

At some point, fundamentals will start to matter and the weak companies can’t just keep getting a free lunch by buying back more and more shares… It makes sense for some companies but share buyback should never be seen as a positive catalyst for growing a company/business. It juices EPS in the short-term, but it’s not a long-term fix.

At any rate, I still think we have a long, long ways to go down… I’m seeing some attractive valuations as well, but am in no rush to buy back in.

All the best!

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5 The DudeNo Gravatar October 9, 2015 at 10:26 pm

It is important to put this news in a bit of context.

Sure, the jobs report may have come in under expectations, but it is equally important to understand the context of why it came in under expectations: a strong dollar hurt manufacturing jobs. So if the dollar is pulling back, you can understand why there might be less of a reaction. Sorry, I can’t help but chuckle when you’re quoting David Stockman, as if he has much credibility given his past.

And Volkswagen. Who cares if their stock is up. They are down almost 25%. Perhaps some are thinking that this is a buying opportunity and are thinking that penalties are priced in. I don’t think it’s evidence of a irrational market on its own.

Labor force participation rate: this is expected due to demographics. 10k baby boomers retire every day! Every month 300k people will voluntarily withdrawal from the workforce. This is just normal demographic activity.

WRT recovery, the unemployment is 5.1%. At what point are you satisfied with a recovery? This is generally considered full employment. Job reports fluctuate month over month. Things don’t move in a straight line. It’s not to say that unemployment won’t shift in the future, but it’s about as good as it gets at the moment…by definition.

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6 FI FighterNo Gravatar October 10, 2015 at 12:05 am

The Dude,

You’ve got a much more optimistic view in regards to the markets, I’ll definitely give you that.

There’s so much bad news out there right now I have trouble filtering through all of it. The writing is very much on the wall…

Yes, the fact that 10k baby boomer are retiring every day is terrible for an economy (as Japan can attest to). Spending has slowed down and will continue to slow down as the baby boomers unwind and enter retirement. That’s doesn’t bode well for stimulating an already stagnant economy.

Unemployment is officially 5.1% but everyone knows you can’t take those numbers seriously… Median salary has continued to drop and many of the new jobs being created are part-time waitressing/fast food positions. Further, once you’ve been out of the work force long enough, you are no longer counted as a statistic.

I didn’t even mention it in the article, but just look at all the layoffs taking place right now… Twitter just announced some more today, on top of:

http://fortune.com/2015/10/02/biggest-layoffs-2015/

I work in semis and people on the inside are already telling me about hiring freezes and forced vacation coming up… Not a good sign.

I really would prefer to be a bull, but you really have to be an optimistic person to see passed all this negative news and not think twice about it.

Being a bull was great fun and it served me well… I’m starting to believe you can make just as much, or even more money being a bear, though.

Take care!

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7 The DudeNo Gravatar October 10, 2015 at 12:58 am

I am not saying that I am optimistic per se. It’s just really not that bad. 2001. That was bad. 2008, that was bad. The news today? Meh. It’s really nothing in the larger context and once again, it needs to be put in perspective.

None of this stuff can be thought of in isolation. It is all connected and everything ebbs and flows. It’s normal.

For example, the layoffs. Do you see a recurring macro theme in there that would indicate the layoffs are due to poor economic activity? I don’t. I see a lot of oil services companies on there. I see companies that are divesting of assets or splitting into two. I see planned layoffs of military.

Twitter? Once again, not evidence of widespread economic issues.

I know you think it’s terrible out there, but I’m not seeing the same thing. I think it’s all a difference in perspective though. I’m not saying it’s great, but it’s certainly not bad. Certainly nowhere near 2001 or 2008 levels.

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8 FI FighterNo Gravatar October 10, 2015 at 9:16 am

The Dude,

I can definitely appreciate a different viewpoint on things, and perhaps you’re right and things will keep marching along unabated. I’m not really sure where we are at right now… If I had to guess, I’d say 2006 or 2007… The cracks are forming.

The fact that the Fed can’t even raise interest rates by 25 basis points has got to be concerning. First it was June, then it was September, now it’s “December”, which means it’s probably not gonna happen this year, if ever.

In a normal market, you don’t get ZIRP for 10+ years… This doesn’t feel natural.

In terms of widespread economic issues, I guess we’ll just have to wait and see. Earnings season is just starting and it should be really interesting to see what we get. We’ve had enough time for low commodity prices, oil, and a strong dollar to work their way into the bottom line.

We’ll just have to wait and see…

All the best!

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9 The DudeNo Gravatar October 10, 2015 at 10:13 am

It’s very different than either 2006/2007, when the economy was on the brink of meltdown due to the financial industry and counterparty risk.

ZIRP isn’t the default state, but neither is recovering from economic meltdown. The fact that an interest rate hike is even on the table is great news! Headline inflation is around 1.25, just short of the 2 target. If the dollar weakens and commodities rise, we’ll likely get the hike. But think about Japan and ZIRP. It takes time for these kind of economic conditions to unwind.

In terms of cracks, what are they? I’m just not seeing it. Certainly nothing structural like in 2001 or 2007.

I think you have it the other way around. The strong dollar will hurt earnings, not help earnings. In fact, it’s remarkable things have gone as well as they have given currency headwinds.

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10 FI FighterNo Gravatar October 10, 2015 at 10:48 am

There is more debt and derivatives out there than ever before; I think last I read somewhere along the lines over over $1.5 quadrillion or so… Deutsche Bank and JP Morgan being the frontrunners with over $70 trillion or some other obscene number.

These “weapons of mass destruction” as Warren Buffet likes to call them are a ticking time bomb. How can they do anything else but introduce more systemic risk? I don’t care what Deutsche Bank is telling the public, it isn’t normal to have 2 co-CEOs announce their resignations at the same time (June) and then later come out and say you’re only going to lose a few billion (October)… For certain, there is more behind this story…

But until something blows up (ala Lehman), it’ll just be speculation and guessing, so investors/speculators will just have to interpret that however they want… Maybe nothing will come of this and maybe derivatives are “harmless”, but I don’t think so.

I didn’t say that a strong dollar would help earnings, yes, it will hurt it. That’s why I’m expecting a lousy earnings season across the board, and if Alcoa is a sign of things to come, that’s not good for the economy. But at this point, I wouldn’t be surprised to see the markets rally on bad news, that’s the new trend these days. And if things get really bad, you can be certain the PPT will step in and intervene just like they did during Black Monday.

When in doubt, hold gold. It’s been money throughout history and has no counterparty risk. It has intrinsic value and is what it is.

11 The DudeNo Gravatar October 10, 2015 at 11:55 am

Yeah, there is more debt…and this is a problem on its own because why???

The world is recovering from financial crisis. Government spending was necessary. Look at Europe. Bernake had a great article in the WSJ about this recently. It is a good read.

Warren Buffet called derivatives WMDs 13 years ago and he was right in that instance. It was not difficult at the time to see the same thing. I wrote a paper on it in 2005. Not all derivatives are bad.

It doesn’t mean he doesn’t hold them himself. Look at their balance sheet.

Co-CEOs resigning is not surprising. Investors had been asking them to resign for a long time.

While Alcoa used to be the harbinger for earnings season, I don’t think it would be fair to use them this time since commodities are not doing well. As for earnings season…we’ll see. I personally don’t think they’ll be that bad.

Gold is not money. It has intrinsic value in some cases. Stating that because it’s been used as currency in the past so it should be used as currency in the future is like saying because papyrus was used as a recording medium in the past it will continue to be valued in the future.

Your thoughts on gold are religion, not fact.

PPT = LOL. Dude, stop reading the conspiracy blogs.

12 Income SurferNo Gravatar October 10, 2015 at 4:34 am

Haha, nice recap Fighter. Any time you specify in history has a few bad, or really bad, headlines on the news wire. I’m with you though, we’re due for a bear market. May be another year or two, but I hope it has begun. It will be good for us to put some money to work again…..but we have to be patient, my friend. I Hope you have a great weekend!
-Bryan

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13 FI FighterNo Gravatar October 10, 2015 at 9:21 am

Bryan,

You’re right about that, if you look hard enough for good or bad news, you’re sure to find it. But I’m finding bad news without even trying, and many of the headlines are just really bad.

But we’ll see. Bull market or bear market, I’ll be prepared either way.

Have a great weekend!

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14 JonNo Gravatar October 10, 2015 at 6:21 am

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Peter Lynch.

My portfolio has returned 17% over the last 2 months. How much do you expect it to dip in the imminent upcoming crash?

Also, non farm payrolls are generally considered BS and are highly volatile.

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15 FI FighterNo Gravatar October 10, 2015 at 9:25 am

Jon,

That’s a nice sounding quote but when it comes to market crashes, I gotta stick to my gut and past experiences. Not saying that’s the right strategy, but I’ve seen first hand what happens to folks who are ill prepared for a market crash. They get decimated and lose everything. After 2008, I said I would never let that happen to me again and I would always be on the lookout for warning signs.

The fact is, if you know what you are doing, you can make a lot of money on the upswing and the downturn… Most investors purely focus on making money in a bull market environment.

Markets go up and down. Not sure why most people choose to ignore the down part of the equation… Probably because we’ve had 7 years of straight growth which is unprecedented in history. Nobody remembers a year in which the Dow or S&P 500 posted negative returns. The markets today are synthetic and decoupled from reality.

Most stats are BS… But I really don’t know how someone can filter all the news/data out there and reach a conclusion that the economy is robust and healthy…

All the best to everyone, whether you are a bull or bear.

Cheers!

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16 The DudeNo Gravatar October 10, 2015 at 10:32 am

Q2 GDP 3.7% vs. 3.2% expected (despite strong dollar)
Unemployment 5.1% –> once again considered full employment
Inflation 1.5%

What’s wrong with that?

Is important to note that full employment/low inflation is very unusual. Typically you’ll see inflation in times of full employment.

Instead of trying to guess the direction, why not focus on building a portfolio that contains your desired level of non-correlated assets. If it’s beta you don’t like, engineer your portfolio for it (and by portfolio I mean all investments, not just stocks).

Focusing on the engineering aspect of your portfolio is a great investment in time because then you don’t really have to worry as much about what the markets are doing. Your assets will have the desired level of market correlation.

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17 JonNo Gravatar October 10, 2015 at 10:33 am

It’s a nice quote from one of the most successful money managers in history.

US markets have looked overvalued now for a couple of years. If you chose to sell back then you wouldve missed out on c.40% returns. A market crash big enough to offset that gain has historically only been seen 2-3 times in the last 100 years.

I think people actually remember 2008 too vividly and assume the next crash will be of the same magnitude, which is incredibly unlikely.

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18 JonNo Gravatar October 10, 2015 at 10:37 am

http://fortune.com/2015/08/20/american-economy-worries/

Pretty funny take on things. I agree when we enter a prolonged rate hike cycle upside is limited…but that certainly doesn’t mean there will be a crash. And who know how long it will take until we are actually in a hiking cycle (and not just one 25bps hike).

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19 The DudeNo Gravatar October 10, 2015 at 11:16 am

LOL. That article is awesome.

This article pretty much sums up my views.

Seriously, if anyone thinks this is bad, they are either processing the data with some inherent bias, or they have not been investing long enough to know what bad looks like.

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20 FI FighterNo Gravatar October 11, 2015 at 9:08 pm

There are two sides to every coin. Most everyone is familiar with the mainstream message, but there are also alternative messages. Thanks to the internet and Youtube, it’s becoming increasingly effortless to access information.

I would encourage everyone to watch and subscribe to the following channel:

https://www.youtube.com/watch?v=SfTfsWhZi5E

Please note, I am not saying anyone should take any message verbatim. We are all adults — consider your sources, process and filter the information, and then form your own conclusions.

Best wishes!

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21 Midwestern LandlordNo Gravatar October 12, 2015 at 6:54 am

There is a lot of data out there which we can interpret in different ways. At the end of the day, I boil things down to my own personal experience. The “crash” of 2009 eventually planted the seeds for several factors that allowed me to become financially independent. 1) Real estate values decreased / became out of favor which allowed me to buy class “A” rental properties at a discounted rate. 2) 30 year fixed interest rates went to historic lows which allowed me to make a nice monthly profit on these properties and enhance my overall cash flow. The Fed certainly played a role in #2 which I am thankful for. From my experience, chaos in the marketplace is a good thing if you can position yourself to be on the right side of it. How do you do that? By not being fully invested which is exactly what you are doing FI Fighter.

As far as where we are headed? I am a believer in cycles and there are risk signs and imbalances that may have bad outcomes. But again, I boil it down to my own personal situation. I invest in a basic need (housing) in a market that is barely recovered from the last meltdown (so no bubble in place). I would much rather be in this position than have my entire nest egg in the stock market which we have very little control over.

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22 FI FighterNo Gravatar October 12, 2015 at 7:18 am

Midwestern Landlord,

Definitely, similar to you I used the real estate crash of 2008 to help propel my progress to early FI. Without such a sharp downturn, none of the progress I made over these last few years would have been possible.

With that said, just like you, I believe in market cycles and don’t believe that any asset class can keep rising in perpetuity (like stocks since 2009). And I don’t believe in the nonsense that preaches an investor has to stay fully invested for 30+ years to reach retirement.

No you don’t.

Some of the most savvy investors that I have ever met in my life increased their cash flow/net worth by many orders of magnitude by buying into the cycle at precisely the right time. You don’t need 30+ years to get to the finish line. Just 1-2 cycles where you buy in at the bottom.

This isn’t rocket science, but the mainstream media and publications would never tell you that. According to them, the markets will just keep soaring so you had better buy the dips.

At this stage of the game, just give me one more correctly timed market cycle and I should have more than enough cash flow to sustain early FI forever.

There are many warning signs out there telling me to be careful right now. So that’s what I’m doing.

All the best!

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23 The DudeNo Gravatar October 12, 2015 at 4:42 pm

I watched the first video and am unimpressed.

The narrator takes two more or less unrelated metrics and says they are related because they look inversely correlated. Correlation is not causation.

The video states that since money supply increased and at the same time labor participation decreased at the same time, they must be related.

If you’d really wanted to see labor participation drop off a cliff, it could have easily been seen by not increasing the money supply. This was a big problem during the Great Depression: money supply couldn’t be increased without adding more gold (a topic we’ve covered previously).

And, as mentioned previously, if you want to see what happens when you don’t do this, look at Europe.

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24 AlisaNo Gravatar October 12, 2015 at 5:26 am

I started reading FI blogs earlier this year and became convinced that the stock market was the place to invest to retire earlier. I really appreciate how your analysis of the situation in the US (and beyond) is broken down in your posts, and how the posts themselves have changed since I started reading it. The other blogs are just treating what’s going on now as another market cycle but there’s too much whispering that there’s something bigger at play.
Reading from Trinidad and Tobago.

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25 FI FighterNo Gravatar October 12, 2015 at 7:37 am

Alisa,

You bet! I can’t claim to know what’s going to happen down the road, but if I find interesting material I’ll do my best to post it, good or bad.

As investors, I think it’s most important that we learn to play both sides of the coin, bull and bear. That way, when the market flips directions (which it always will at some point), we will be comfortable enough to proceed forward.

Take care!

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