It’s Just My Opinion-Ed Foy, President and Chief Investment Officer
August 24, 2015
The last time that I posted an ‘It’s Just My Opinion’ article was October 15, 2014. It was titled ‘When The Good Turns Bad.’ In that article, which is archived on foyfinancial.com under the What’s New section, I was discussing the single biggest equity market correction of 2014. It was the fourth correction of the year and by the time it was over the S&P 500 fell -9.95%. Then, amazingly, it turned on a dime and recovered the entire six week correction in just two weeks. Mid cap, small cap, and international equities took much larger hits during that correction. It was a rough time for equity markets and we were compelled to take partial defensive positions.
Until today, nothing really inspired me to post an article. The Monthly Commentaries were pretty much summing up my thoughts and, actually, up until the past three days, 2015 has been pretty boring. Equity markets had been contained in a narrow trading range. In fact, the S&P 500’s trading range was only 4.4%, which was narrower than any other six-month range in the history of the index. It was the first year when the S&P 500 had never been up or down more than 4% at some point in the year. Boring was an understatement.
Well, we put all of that data to rest, because in the last three trading days the sleeping giant has awoken, and man, was he grouchy! This morning the DJIA fell 1,086 points in the first two minutes, recovered 990 points by noon, declined 601 points until 24 minutes before the final bell when it jumped 411 points higher in the next 12 minutes before declining into the close with a loss for the day of -588 points. Phew!
Now, as it happened to turn out back in October of 2014, the very day that I wrote that article proved to be the low point of that correction. The DJIA printed at 15,855 that day. We haven’t been in that neighborhood since, until today, when the DJIA closed at 15,871. The low point of the day was 15,370 and occurred in the 2nd minute.
It most certainly looks to me as if equity markets got caught in a computer-driven algorithm trade cascade on the opening this morning. International markets had already had a rough day and it was anticipated that U.S. equity markets would follow suit. We just got a little more drama than was necessary. Still, the DJIA did end up being -3.57% on the day.
Now, it would be nice if this article happened to mark another correction bottom, but it would be absolute pure luck. I prefer to make my own luck. So once again we have to address risk management approaches. And now I find myself longing for that boring equity market.
October 16, 2014
When the Good Turns Bad
Change wears different cloaks. When things turn from bad to good, the cloak is a pleasant surprise, a wonderful flourish. When things turn from good to bad, the cloak is a dark shadow, accompanied by dissident organ chords. One would think that in today’s high tech world changes in financial markets would be devoid of drama, but it is quite the opposite. It all depends upon who is delivering the information. News services have evolved their own level of melodrama, while financial news channels have transformed news into infomercials.
As an experienced financial professional, I regard changes in markets as situations that evoke specific actions. When financial markets turn from bad to good, I will respond by including more equities. Conversely, when markets turn from good to bad, my response will be to reduce exposure to equities and include more bonds.
Equity markets have recently turned from good to bad, and we are now in the fourth correction of 2014. The first correction started in late January. The S&P 500 fell -7.5% in two weeks and then fully recovered in three weeks. In April the S&P 500 fell -4.3% in two weeks and recovered in three weeks. The third correction started in late July. The S&P 500 dropped -4.4% and recovered in three weeks. Yesterday this current correction, which started three weeks ago, had the S&P 500 down 9.8% from its September high.
This is the most severe correction of 2014 and we have been responding by reallocating portfolios into more defensive positions. We have been selling small cap, mid cap, basic materials and emerging markets equities, and buying longer-term bonds, emerging markets bonds, and utilities securities, all of which are holding up quite well. We continue to hold large cap, health care, pharmaceutical, technology, financial and real estate securities.
It is impossible to know how long or how much farther this correction will persist. The sharpness and severity of this correction implies that it may take additional time to rebuild a good base and form a recovery rally. Should the correction worsen significantly we will take additional defensive action. When the correction has run its course, we will be going back on the offensive. Either way, our discipline and experience allows us to sidestep the drama and take appropriate steps. Bad to good or good to bad, we have a plan.
September 1, 2014
There are few things on earth more wonderful than when your horse(s) sneak up on you.
I have been fortunate to care for, and be cared for, by three horses for the past thirteen years. Certainly, one can question the ‘fortune’ of caring for horses. They are consistently expensive, and often worrisome, troublesome and exasperating. If you don’t love them, it’s not worth it at all. But I do love horses in general and my horses in particular. I also understand how much my horses have cared for me over the years. They keep me grounded when my head is in the air, teach me precious secrets about patience and tolerance, and allow me to unravel the riddles that make great and powerful beasts want to do your bidding.Today was Labor Day, the office was closed and the front gate was closed. This is when I will open up the gates from the pasture through the barn onto the many kinds of grass that constitute a ‘yard’ when you live in the Nebraska countryside. I don’t even know how many varieties of grass I have introduced over the years and with the recent rains, all of those grasses were springing forth. One day a week I open the gates and the horses are invited to the banquet.Tonight I went down to the barn late. All of the gates were open, reminding me of the horses’ earlier open invitation. When I entered the barn there was no sign or sound of a horse, nor was there any indication of horses in the yard. I decided to close up the chicken coop first and deal with the horse absenteeism later. Two minutes later when I returned to barn, there stood my three horses in the barn aisle, as if they had been there all the time.
I believe that horses truly do love to sneak up on humans. It messes with our minds, as we wonder how, and why? They must receive special blessings from our Maker every time they nuzzle a baby, tolerate a child’s inquisitive hands, and yes, silently sneak up on their owners, surprising us with their gentle, inquisitive natures. Tonight my horses successfully sneaked up on me, and once again filled me with wonder. Interestingly, financial markets can behave in much the same manner and have the same effect on me. Our current market is very much like that. It’s best not to overthink it, and just be thankful, attentive and grateful.
August 27, 2014
Benchmarks and Rabbits
Financial benchmarks are useful in identifying how well or poorly specific markets are behaving. I say ‘specific markets’ because for a benchmark to be truly useful and relevant, you need to understand what it represents. One of the oldest and easily identifiable stock market benchmark is the Dow Jones Industrial Average (DJIA). It is an index that is most-often quoted on the daily news report and in the local newspaper. When it goes up, it is perceived that the stock market in whole went up. And when it goes down, the stock market goes down. In reality, the DJIA is an index that only includes 30 stocks. In contrast, the Russell 3000 Index maintains that it represents 98% of the stock market capitalization of U.S. stock markets.
A common compromise between the two is the Standard & Poor’s 500 Index (S&P 500), that includes (you guessed it) 500 stocks. All are based in the U.S. All are very large companies. The S&P 500 is often used by investors to measure their own relative performance. In fact, that is most unfortunate, because the S&P 500 has three huge advantages that no investor, even a professional, can equal. 1. The S&P 500 is managed and maintained by the Standard & Poor’s Corporation, which does not calculate any costs or fees associated with the stocks in the index. No costs to buy or sell or reinvest, as well as no management fees or advisory fees. This is not how the real world operates. 2. The S&P 500 does not make allowances for the many inherent risks associated with owning stocks such as execution risk, opportunity risk, liquidity risk, and information risk. These are very real factors that affect both civilian and professional investors. But the real kicker is, 3. The S&P 500 composition can be changed quarterly by Standard & Poor’s. With perfect 20-20 hindsight, they selectively change its composition, adding in companies that are more successful and subtracting less successful companies, building an advantage that only compounds over time.
So what’s this got to do with rabbits? We are going to make a quick segue to greyhound racing. The greyhounds are released from a gate and run counter-clockwise around a track chasing a ‘rabbit’, which is actually a mechanized bit of fluff that they can never catch. The faster they run, the faster the rabbit advances. The purpose of the rabbit is to keep the greyhounds going the correct direction. It is not designed to be caught and possesses several advantages over the greyhounds. It never needs to eat or drink or rest, all realities for the greyhounds. Now, quickly correlate that back to the S&P 500, which also has several advantages over actual managed accounts. The S&P 500 is not bound to run counter-clockwise and in reality can move in either direction, but it always will have those advantages. So, when you hear or read that mutual funds or advisors can’t beat the S&P 500, remember, ‘of course, not! The S&P 500 is just the rabbit!’
May 7, 2014
Ruby really played me Sunday night. Actually, all three of my horses have been mostly ignoring my hay offerings (3rd cutting, last year, very good hay) because the pasture is greening up and they have lots of new candy. Sunday night, they all came to the back gate of the barn and I threw them a few flakes, which they all poked at politely, except Ruby. She just stood over her hay. Strange, since she is normally the little piglet when it comes to any feed. I went out to check on her, and she does this ‘circle twice then lay down thing.’ Right in front of me, head flat on the ground. No movement. She was bloated as the dickens. Hmm.
Now, once upon a time, I would have thrown myself down by her side, cradling her head and cooed, “Be quiet, daddy’s here, I’m going to make it all better.” An expensive emergency vet call, three hours of lost sleep, watching her get sedated, then mineral oil pumped into her belly, and her push it out the back end, and everything would be better. Colic averted. Problem solved.
Back to reality. I did none of that. I just watched her quietly. After a couple of seconds she lifted up her head and looked at me, as if to say, “Hey! Are you missing this?” Then she got back up on her feet. Interesting. But she still wouldn’t eat. And just in case I was missing it, Ruby actually repeated the whole scene twice.
I decided to bring her and her two brothers into the barn for the night. Private stalls, fresh water, a little hay, no weather, no danger. The Shangri-La Hotel for a horse. In the stall, she repeated the drama one more time, just in case I questioned my decision. I watched without a sound. When she was back on her feet, again, and quiet, I said good night, turned out the lights, and went back to the house. If she was still rough in the morning I would bring the vet out.
The next morning all three horses were on their feet, nickering for hay and attention and hay. Ruby’s belly was half the size of the night before, and her manure was normal in shape and volume. Emergency averted. She just had gas, and a big bellyache. Too much cotton candy. The night before, Ruby was unhappy. She wanted attention. And a private room for the night. She got all of that, though maybe not all of the attention she expected. I had assessed the situation, avoided an unnecessary vet call and got a demonstration how dramatic my mare could be. Bravo!
Like, Ruby, stock markets can command an audience from time to time. Especially when they have had too much candy, interpreted as too many easy advances. Sometimes the bellyache is just gas. Sometimes it represents real danger. Overreacting is rarely the best course of action, but under-reacting when there is a real emergency can be dangerous. How do you know the difference? You refer to the judgment of the experienced professional.
With Foy Financial Services, you have a team of professionals with decades of experience and access to excellent resources. We don’t throw ourselves on the ground at every dramatic performance. We are prepared to take all necessary steps to protect your interests and to assist you in your financial endeavors. Your best interests are our best interests, with no compromises. We truly appreciate the trust that our clients/business associates/friends share with us, and in return we warmly regard all of you as family. (Like Ruby, the Diva.)
April 11, 2014
High Frequency Trading, VWAP’s, and Selling Tomatoes
There has been a recent stir in the media about High Frequency Trading (HFT) and its impact on financial markets and investors. Coincidentally, (or not,) Michael Lewis, the person stirring the HFT soup had just written a book about HFT called Flash Boys, and had obviously hired a very good publicist. You know things have really gotten out of hand when a Congressman announces that he/she is going to launch an investigation to determine if any harm had befallen his/her voting constituency. Another marvelous example of our tax dollars at work.
High Frequency Trading first surfaced back in 2010, and has already been the subject of scrutiny from almost every financial regulatory authority in the world. Very simply, it is a system for processing huge trading volume in very short periods of time. As may be expected, this can result in very high market volatility. However, it has not been demonstrated that this volatility alone is disruptive to prevailing market trends, and in fact is merely a device for enhancing market liquidity.
Consider this example. You are growing and selling tomatoes. If you have a few dozen tomatoes to sell you will probably deal with a local produce retailer that you know and trust. But what if you have a few hundred dozen tomatoes you need to sell? Now you become less particular about who is buying your tomatoes and more concerned about moving as many tomatoes as possible, because more are ripening on the vine every day. Enter stage left a tomato marketer who tells you that he can sell all of your tomatoes, and that he will guarantee that you receive the average price of all the tomatoes sold. This sounds interesting. You won’t get the best price, but you won’t get the worst price either, and all of your tomatoes will be sold. In the securities world, this is called a VWAP trade, or Volume Weighted Average Price trade. The tomato marketer is a company that does high frequency trading utilizing computer algorithms. He is helping you solve your problem, and yes, he is making money doing it. The end users are still getting tomatoes, hopefully in a more timely fashion so there is less waste, and they are also seeing average prices.
Granted, HFT and VWAP’s are far more sophisticated that selling tomatoes, but the process is actually quite similar in its execution. They are mechanisms for effecting transactions. They are not tools of Satan, or some otherwise evil device designed to take advantage of innocents. They are used by very large institutional investors who employ legions of experts and attorneys to protect their interests, in addition to enjoying the oversight of regulatory authorities. So fear not, don’t submit to the paranoia, and don’t bother reading the book. I just mentioned it by title so you may more specifically avoid it.
February 24, 2014
Couldn’t Be More Proud.
Last weekend my oldest grandson, Nathan, competed with his high school team at the Academic Decathlon State Championship. Nathan is a senior and this is his second year on the team. For those of you not familiar with the Academic Decathlon, it is a scholastic competition between high schools. The competitions are organized by school size, so Very Small, Small, Medium, and Large School teams compete directly with teams from other schools of the same size.
A common area of study, or time frame, is assigned to all of the schools for that year’s competitions. This year’s assignment was World War I. Teams are tested for that period on subjects of Art, Music, Mathematics, Science, Economics, Language and Literature, etc. In addition, there is a Super Quiz, during which teams are simultaneously asked complicated multiple choice questions and given seven seconds to write down their answers. The questions are scored immediately and points awarded to the teams for correct answers.
This was the 30th year for the Academic Decathlon competitions in Nebraska, but Nathan’s high school fielded their first team just four years ago, in the Large School division. Competitions are first held at the Regional level, then top-scoring schools can advance to the State Championship level. In their second year of competing, Nathan’s high school Academic Decathlon team finished third in State. Last year, they finished second in State. And last weekend, they won the Large School State Championship.
Gold, silver, and bronze medals are awarded for top-scoring individuals, as well as top-scoring teams. My grandson, Nathan, won Gold Medals in Art, and in Music and a Bronze Medal in Science. He was also on the six person Super Quiz team that out-scored all other teams by a significant margin. Another Gold Medal. Top scoring Large School team. Gold Medal. Top scoring over-all team. Gold Medal. Wow.
The sweetest part is that now they will compete at the National Championships which are being held in April, in Honolulu. Exactly. Better than a Gold Medal. All of the members of the team, and their coaches, and their families, understand that they won not because they were the smartest. (In fact, the teams are purposefully structured to include students from three different grade point average brackets.) They won because they worked the hardest, studied the hardest, and supported each other the most. How great is that?
Nathan is one of the finest young men I have ever known. I could list his most excellent qualities for another page or two, and everyone who knows him, even his brothers and sisters, would agree. I am equally proud of his parents, who have instilled in him, as well as his brothers and sisters, a work ethic that is second to none. Understanding that all of this is just my opinion, I quite simply couldn’t be more proud.
January 28, 2014
Finally. A Correction. Phew!
This might sound a little strange, but I was starting to get a little worried… about NOT having a correction for such a long time. The reality is that it had been over 400 days since U.S. major equity indexes had experienced a decent correction. Since corrections are as natural as recycling and revolving seasons, the mere absence of one for such a long period of time was becoming a point of concern. To temper that concern, it doesn’t foretell any sort of doom and gloom.
Market corrections and Bull Markets go together like peas and carrots. They complement each other. They enable each other. One of the prevalent problems of a long-running Bull Market is that it can outrun its supply lines, not unlike General Patton’s tank brigades in WWII. At some point you have to take a break and let your ammunition catch up and replenish.
First, a quick definition of terms. A minor correction is of the -3 to -5% variety. A moderate correction falls in the -5 to -7% category. A major correction registers near the -10% level, and a severe correction clocks in at the -15% mark. And of course, there is the Bear Market, which enters the stage with a negative price movement of -20%.
At this writing, the S&P 500 is at 1781, down a total of 69 points from the all-time high of 1850 set less than two weeks ago. That calculates out to a 3.7% decline. Not only is this quite acceptable as a total price move, it has occurred in just three days, which is quite efficient. In general, and historically, the quicker the correction takes place, the sooner it gets completed. I wouldn’t be surprised to see the S&P 500 decline into the moderate levels of -5% to -7%. Then I suspect that capital, both foreign and domestic, will reenter the equity markets with great aplomb. This is not rocket science or mystic wizardry. It is human nature.
November 11, 2013
Veteran’s Day Thoughts
The other day when paying the bill at a restaurant, the cashier said to me, “You look like you are a Veteran.” My response was, “No, I never had that privilege.” Now, I understand that the young man was probably trying to offer their Veteran’s discount during the Veteran’s Day weekend. I do not know what a Veteran looks like, only that I do look old enough to have been a veteran of something or another.
The fact is, while my father and several uncles were Veterans of WWII, my younger brother is a Veteran of Iraq and Afghanistan, and my son-in-law is a Veteran of Afghanistan, I never even served in the military. In the late sixties, my draft lottery number was 363, which was interpreted as God’s indication that he had other plans for me.
Now in my sixties, I consider the military as another choice fraternity in which I never had the honor of directly participating. I say directly, because Kathy and I have spent considerable time on Air Force Bases and Army Posts around the country visiting grandchildren and their parents. Our support for the mission of the military has been unyielding, as our respect for their professionalism continues to grow.
We continue to pray for the safety of those who are in harm’s way, knowing that there will always be a duty call to stand up for those less fortunate or capable. We are forever thankful for their sacrifice. And we salute our Veterans every day of the year.
October 23, 2013
Something to get excited about.
Today, the Bureau of Economic Analysis released August import and export numbers. Even though I am a devout technical analyst and as such believe that all known data is almost instantly distilled down to current prices, I still look at the economic numbers, knowing that they are continually revised. Today it was reported that exports declined $0.1 billion and imports were unchanged from the previous month, with a net trade deficit in goods and services of $38.8 billion. That’s a big yawn.
But this is what caught my eye. In the last year, petroleum export exports are up 3.9% and imports are up only 0.9%. Hmm. Now comes the best part. In the last year, petroleum exports are up 31.7%, while other exports are up 1.2%! Wow. Petroleum imports are down 6.1% while non-petroleum imports are up 2.4%. Now that is a big deal.
Since August of 2007, petroleum exports have almost quadrupled while petroleum imports are up only 13%. In the past two years, petroleum imports are down 15%. This shift is being driven by horizontal drilling and fracking. If the current trends continue, and the U.S. fixes its pipeline and refinery issues, the U.S. will be a net exporter of petroleum within four years. That is a really big deal, and in my opinion, something to get excited about.
September 5, 2013
I’ve got a real good feeling about this…
I am a market technician. Market technicians watch prices fluctuate day in and day out. We update charts and verify indicators and experiment with oscillators. Pretty dry work, really. It involves lots and lots of chores. Yes, chores. Those things that you do daily to maintain your sense of purpose and confirm there is order in the universe. Chores can be mighty mundane, but they can also create fertile ground for new ideas to sprout. Everyone has had a marvelous idea while in the process of completing a mindless activity. It’s strange, but it works.
Another positive about doing chores is that you develop a consistent process for getting the job done. You mow the lawn in a certain pattern, sweep the floor in a particular direction, stack the dishes with a specific purpose. Its efficient. And it gives you landmarks to measure how much of the job is left. With technical market analysis you also develop a consistent process. You record support and resistance levels, calculate trendlines, and evaluate price oscillators.
There is a lot of cyclical rotation in the financial marketplace, and market technicians spend an inordinate amount of time watching things build, then dissipate, only to build, and once again dissipate. But every once in a while, these rotations start to develop a rhythm. We see a cycle that doesn’t lose all of its energy before it circles back up. As the rhythm builds, there are more indexes and sectors involved, like dancers gravitating towards the band.
(This doesn’t even sound like doing chores any more, does it?!?) When you first see it, you tend to discount it. Coincidence goes a long way, and cyclical action by nature is repetitive. But then you notice more subtle changes, catch more minor details, and you realize that something pretty exciting could be developing.
This is what I am seeing in the equity markets right now, as I do my chores day after day, week after week. This is just my opinion, but I’ve got a real good feeling about this…
August 12, 2013
The minute you drive a new car off a dealer’s lot it begins to depreciate. It’s a fact of life. The first minute it drops in value by about 9%, according to Edmunds.com. That’s because a whole lot of people need to get paid, including the salesman, the manager, and the owner. After one year, the average ‘new car’ is worth 81% of its original cost. After two years, it’s down to 69%. In three years, 58%. Four years, 49%. And in 5 years, 40%. Some cars depreciate even faster. Few depreciate slower. If the car was financed at today’s single digit interest rates, double digit deflation means you are ‘under water’ on your car loan immediately, and likely to stay there for the entire length of the loan. You can’t sell your car for enough money to say off the loan. Yikes.
If you are planning on driving the new car until the wheels fall off, depreciation really doesn’t matter. It’s your car and you love/like it and it meets your needs. After ten years any vehicle’s greatest value is in the eyes of owner. I own several ‘mature’ vehicles. My SUV is 14 years old and I love it. My sedan is 11 years old and I still love it. My convertible is 11 years old and I still get compliments when the top is down. My pickup is ten years old and it never disappoints. I have no plans on selling or buying them so their market value is of little consequence.
Cars cost so much money these days! Those depreciation rates in the first paragraph would bother me to death if I were the ‘new owner.’ On the other hand, from a prospective buyer’s standpoint the numbers get mighty interesting. Cars these days are designed to last twice as long than just a decade ago. Our fathers’ generation’s vehicles were at death’s door with over 100,000 miles. Today there are manufacturer’s warranties for 100,000 miles.
What if I WERE in the market for a vehicle? What rules would I follow? 1. Determine how much money I am going to spend and make no exceptions. Ever. 2. Determine the mission for the vehicle. Is it going to haul kids or kitchen sinks? In what kind of weather? 3. Factor in the math and the miles. I would gladly consider a well-maintained vehicle 3-5 years old with less than 50,000 miles and half the price of new. I could be equally happy with a 6-8 year old vehicle with 80,000 miles and one-third the new price. 4. Go to AutoTrader.com and get price ranges by make and model from dealers in a 25-250 mile radius of where I live. (They aren’t really in business if they aren’t on the web.) 5. Tighten up my options. I can do this on AutoTrader.com. Add leather, or all wheel drive, and see how many hits pop up. 6. Make the phone call to tell them you are coming, remember the check book, and go take a look. It’s too easy. Good thing I’m not in the market for a vehicle.
July 10, 2013
The Greatest Risk
Yesterday I was visiting with a gentleman in my office who asked me a wonderful question. What is the greatest risk of being an investor? It was our first face-to-face meeting, and we had already been talking for over two hours about a wide variety of topics. Our commonalities were many, and we were well down the road to becoming new friends. His question was genuine. As were my answers. I listed four, and they are all ‘nots’.
#1. The greatest risk of being an investor is not being diversified. This means having too much money in too few investments, or even a single investment. If an investor is highly concentrated, a single torpedo could not only sink one ship, but the entire fleet. Never gamble with your financial future by placing a big bet on a single stock or idea. That is why I prefer mutual funds, and do not trade individual stocks. It’s just too risky for me. (This does not mean that an investor should have multiple advisors! That is like having multiple dentists, or accountants, or gynecologists. It is redundant, expensive, and stupid. Work with people you trust and trust the people you work with. If you don’t, find someone else.)
#2. The second greatest risk is not being liquid. In my thirty-three years in this business, the biggest disasters have come from investments that you couldn’t get out of, you couldn’t sell, when you felt you needed to. You were trapped, either by deferred sales charges, lack of active/daily pricing, or other illiquid features of the investment. Illiquid investments are difficult/impossible to accurately price, and even harder to sell. (This is not only true with securities, but in real estate, sales of businesses, fine art, jewelry, even vehicles. If you put money into an exotic, illiquid, hard-to-price deal, good luck. Been there, done that, rarely worked, don’t do that any more. And another reason that I trade mutual funds.)
#3. The third greatest risk is not working with an experienced advisor. Inexperience leads to mistakes. It goes with the territory. An experienced, successful advisor may be a little more expensive, or a little harder to locate. It’s true in any profession. Top physicians, top attorneys, top businesspeople, and the top advisors are not the cheapest. They are just the most effective and, in the long run, the most efficient.
#4. The fourth greatest risk is not having a plan. Investing is like any other major undertaking in your life. It is rarely successful by accident or by luck. It is frequently successful when you have a plan and work the plan. I am not talking about a detailed, complicated financial plan or investment strategy. This is about basic steps, such as having and sticking to a budget, learning how to save money, and then systematically adding money to an investment program, and eventually systematically receiving money from an investment program. It’s just my opinion.
June 28, 2013
Beware the ‘Talking Heads’
The ‘talking heads’ on the television constantly chatter that ‘investors were worried’ or ‘investors were cheered’ as markets rise and fall, as if we were in a giant stadium watching our favorite team. Nothing could be further from the truth.
Institutional investors managing hundreds of millions and billions in assets are the ones that are actually moving the market. They don’t get frightened and they don’t get giddy. They also don’t get worried, cheered, disappointed or overconfident. They are not the Cleaver family and ‘The Beaver’ is not making investment decisions with your hard earned money. These institutional investors make very calculated decisions based on very long-term end games.
When these ‘talking heads’ seek to personalize this highly sophisticated investment machine by attributing emotional responses that could be edited out of an afternoon Disney TV show, they minimalize the very real actions and reactions of professional investors. No wonder their listeners are confused. Rather than educating the listeners, they make it appear as though financial markets are being directed by a boy picking petals off a flower saying, “She loves me, she loves me not.”
If you want to know what’s really going on in the financial markets, talk to a professional. And if that professional starts to sound like they are going to break into song, find a different one. Investing is serious business that is critical and crucial to our basic capital structure, and ultimately our primary freedoms and quality of life. It is highly regulated and closely scrutinized. The good guys help make dreams come true. The bad guys go to jail. That’s just my opinion.
June 25, 2013
Keeping ‘a hand on the hip’ of institutional investors
When I first introduce one of my grandkids to my horses the discussion always starts with two safety rules. Rule #1. Always know where the horse’s feet are. #2. Always know where the horse’s head is. We start there because these are the two most dangerous parts of a horse when you are a youngster. The concern about the feet has nothing to do with getting kicked. A good horse knows to only kick predators (and other horses, when necessary.) The horse absolutely knows that a child is not a predator. When you are around a horse you have to know where the horse’s feet are so that they don’t inadvertently step on your feet. That hurts when it happens to an adult and it absolutely crushes the child, not so much physically, but it is very painful and generally a pain they have never encountered. In addition, their wonder and joy about being around the horse is shattered. Sadly, I know this from experience.
My sweet granddaughter, Jenna had this experience. I was actually taking pictures of her holding Rio’s lead rope and in the last picture I took you could see that he was going to step forward with his left front, and Jenna was posing in exactly the wrong place. Major tears and crying ensued. The second time that Jenna and I were with the horses, after considerable time had passed and her fascination with the horses had returned, she was leading Ruby and they found themselves boxed in. While they were turning, Ruby stepped on Jenna’s foot. Ouch. But this time Jenna didn’t crumple to the ground, shrieking. She was hurt all right, but the first thing she said to me was, “I lost track of her feet and she stepped on me.” There were tears alright, but Jenna, only 8 years old, already knew who was responsible, and that it was an accident. It has not happened since.
If you want to stay safe, you want to have your hand on the hip of the closest horse, staying alert as to the location of the feet and their head. People that are inexperienced around horses will say that you should be touching the horse so they know where you are. Believe me, they know exactly where you are! You want to be touching the horse so you will know if they suddenly tense up, the precursor to a potential big move! A horse is a big animal with big muscles that flex hard. A hand on the hip may be the only warning that you have to step back.
In the investment world, institutional investors are the big horses. When they make big moves they require a lot of energy. If you are not paying attention to their movement you run the risk of getting stepped on, or knocking heads (the horse’s head always wins), or even getting knocked over. At Foy Financial Services, Inc., we trend-follow institutional investors because we want to be as safety conscious as possible. This doesn’t mean we can’t get hurt. That’s part of being around horses and part of investing. As professional investors we believe that the rewards of investing outweigh the risks if you trust your experience, use good judgment, have a disciplined approach, and stay alert. I love my granddaughters and we all love horses. They get that risk/reward thing figured out real soon.
May 28, 2013
A Bond Market Breakdown Countdown
Just one month ago bond markets were hitting new highs for the year alongside equity markets. It was the best of both worlds for conservative and balanced investors as they watched both of the primary components of their securities accounts rise together.
Three weeks ago equity markets went into hyper drive, a.k.a. light speed for you Trekkies, and money started to rotate out of the bond markets to fuel the ongoing equity market surge. That did not present a problem for bonds. They are a huge and liquid market, and the demand for additional capital to buy equities was nothing we hadn’t seen before. Conservative and balanced investors were losing some traction, but their account values were still rising.
Two weeks ago bond markets were 1% off their highs. They were starting to trigger technical sell signals, but were consolidating a very nice run-up in prices that started back in early March. There was room for this correction. Moving averages, support levels, and trendlines were intact.
Last week things started to get a little squirrely. Equity markets were on the decline, but so were bond markets. Instead of bonds being buoyed up the equity market’s decline, they were sliding down through those moving averages and trendlines. These moves were gradual, as most bond prices moves are. But the trend was insidious. The upcoming, long Memorial Day weekend probably tempered some concerns.
Today, bond markets got clobbered. A bond market clobbering is nothing like an equity market clobbering. When equity markets get clobbered, their single-day declines may be -3% to -4%. When bond markets get clobbered, their single-day drop is more like -0.50% to -1.50%. Today the Barclays Aggregate Bond Index fell -0.62%, the Barclays TIPs Index fell -0.91%, and the Barclays 20-Year Treasury Bond Index fell -2.54%. That is a clobbering.
To put this into perspective, in the last month the Aggregate Index gave back all of its price gains from the last month, the TIPs Index gave back its last nine months of price gains, and the 20-Year Treasury Bond Index surrendered three months of price gains. It is not a disaster. But it does reset the bar going forward. As an old friend would say, “Gol’ darn it, anyway.”
May 9, 2013
When Equity Markets Expand.
There are many words in ‘financial advisor-speak’ to describe when markets rise and fall. Bull Markets (rising) and Bear Markets (falling) are the most colorful and apply to longer term trends. Varying descriptions of what exactly defines a Bull Market and a Bear Market complicate the historical statistics. I prefer to measure by the double-duty standard of a minimum price move of plus/minus 20% over a minimum time frame of 6 months. We are currently in a Bull Market that started on March 9, 2009, making it four years and two months old. That’s pretty close to the average length of a Bull Market over the last 50 years. But one of the oldest and most dependable adages in equity market lore is to never underestimate how high, how low, or how long a security or market will go. As Yogi Berra used to say, “It ain’t over till its over.”
An additional way to measure a market is by its breadth. This refers to how broad, or how many different types of market sectors are advancing or declining. The more the merrier! A broad advance means that institutional investors are being generous in the number of sectors they are including in their buy programs. Conversely, a narrow advance indicates that institutional investors are being more cautious, more particular, more stingy, and more selective in what securities and sectors they feel comfortable buying.
Over the past few months, although we continued to enjoy a rising market environment for equities, the market breadth had been declining. Large and mid cap indexes were steady, but small cap indexes fell behind. Fewer market sectors were rising and many had seen their trends change to trading ranges, or horizontal zones with little progress. The good news is that started changing last week. Almost simultaneously, breadth expanded. One after another, market sectors broke above resistance that had collared their price for the last 2-3 months. Even the market leaders pushed into new territory. The Bull Market is running again.
These moves came at the expense of the bond market and some of the more defensive sectors such as the utility sector where we got a strong proprietary sell signal. Hey, the money had to come from somewhere! That tends to sort itself out over time, but the equity market breakouts were nothing but good news. They give us renewed confidence in the ‘legs’ of this Bull Market and its prospects over the coming months.
April 16, 2013
The trouble with Gold.
Gold has always been a Good News/Bad News commodity with regards to the investment community. This is much different than its role in the consumer community where it is a regarded as an excellent gift or a symbol of one’s love or a prize for a superior accomplishment or a reward for a job well done. Investors have a totally different viewpoint on gold’s worth, and it is measured entirely in dollars and cents. Gold is valued relative to all of the other investment vehicles currently available, and that value is not honored nor cherished nor devoted through thick and thin.
Gold does have some traditional usefulness in society with regards to its utility for jewelry and industrial markets. An interesting fact is that 27% of the world’s gold jewelry market is in India, and even more interestingly, 26% of the world’s gold jewelry market is in China. The U.S. is absorbs only 5% of the world’s gold jewelry demand. The industrial demand is worldwide.
But gold has an additional responsibilities. It is used by several nations as a currency hedge, a topic that could never be adequately discussed in this blog. It is also regarded by some as an ultimate holding against international socio-political meltdown, a topic that would require volumes to explain. Finally, it is considered to be a ‘safe-haven’ when other more traditional investment vehicles such as stocks and bonds are held to hold greater downside risk.
Currency hedges and disaster scenarios aside, it is of interest when the supposed ‘safe-haven’ is being openly abandoned. Especially in the face of a quite favorable financial securities market. It’s just my opinion, but it would appear that institutional investors, such as foreign governments and massive domestic retirement plans are abandoning gold in favor of more traditional mainline investments such as stocks and bonds. Which bodes well for those investments.
April 8, 2013
Sometimes it’s worth taking the detour.
Road construction is one of the scourges of long-distance travelers but it is a necessary evil. Road repair is absolutely necessary. And I specified long-distance travelers because the locals always know the shortcuts. The biggest question facing the long-distance traveler is, “How long is this going to take and how much time will it cost me?”
Long-term investors address the same questions when they encounter road construction, a.k.a. market corrections. Market corrections are a necessary evil and absolutely necessary. Short-term traders/travelers are relatively unaffected because they know the shortcuts.
Foy Financial Services, inc. and our money management program, SELECTOR Money Management are active managers and don’t lose our cool when the detours/market corrections pop up. We recognize them as part of the journey. And we look for the shortcuts.
Equity markets are currently engaged in a detour on their long-term journey. The alternative is making a major course-reversal, which I would do if I felt the detour was too hazardous or torturous. But not this time. It’s just my opinion, but this looks like a detour worth taking.
March 27, 2013
It always surprises me when someone says, “Your job must be hard because the stock market is so unpredictable. It’s like a crap shoot.” Nothing could be further from the truth. When billions of dollars are in play, you can be sure that those with the biggest stakes are taking great pains to ensure that their money is not in a crap shoot. Rather, the investment world is a very technically sophisticated, scientific, competitive, aggressive, and oftentimes unforgiving arena. If you know what you are doing, have a process and a discipline, it can be rewarding. If you don’t have any of the above, you had better know someone who does or you had better stand clear.
I have been in this business for 33 years now, have made my share of mistakes, and have been mislead by countless ‘experts.’ If you haven’t been developing an intuition, a process, and a strong sense of confidence after 33 years, why in the world would you be in the business? It can be the toughest in the world, especially if you fail to develop your own foundation of information and experience. I am very happy to say that with my foundation, I am having the best time of my life right now. The investment business is definitely not a crap shoot, or a loser’s game, or a mystery to me. I have sophisticated tools at my disposal and I know how to use them. Every situation is simply a situation to me, with multiple solutions depending on the circumstances. And I love it!