Thursday, February 8, 2018

End of the bull market?

I've always been planning to move money into bonds after rates rise above 3% and had been targeting that move as 2019 because that is when the 10-year bonds the Federal Reserve has purchased begin maturing and won't be repurchased(1). Lack of demand for bonds will drive up interest rates offered to attract investors. (This simultaneously drives down the value of bonds issued at a lower rate.)

I didn't start considering that we might be close to the bull market top until I started hearing so many average joes talking about Bitcoin and other cryptoscams in November and December 2017. Bitcoin and the crytoscams are wacky stuff and the fact so many people are buying into them set off alarm bells for me. To be clear, Bitcoin is not a currency. Currencies don't move 10% in a day. It's a pyramid scheme. Maybe blockchain is a cool technology but that doesn't mean Bitcoin is worth a dime.

The stock market was on fire in 2017 and I completely missed it. I thought the instability in the White House would freak out markets, but it hasn't, yet. The healthy market turned parabolic because a very large number of people and institutions didn't sell stock in 2017, anticipating lower tax rates in 2018.

What we have now is a convergence of willing sellers due to the new tax year and the Bitcoin crash. What I didn't see adding fuel to the fire was collapse of a 3X volatility ETF. The use of volatility options and ETFs as portfolio protection is reminiscent of the portfolio insurance that contributed to the 1987 crash. Add on top of that rising interest rates (a good thing but destabilizing) and rising input costs lowering corporate profits after this quarter and we have more headwinds than we have faced since 2011 during the debt ceiling crisis.

We may have seen the high for the year, we may not have. The final report of the special counsel investigation and indictments could add political pressures to the market this spring and summer. Right now I have 50% cash in my portfolio and have a shopping list ready for the when the S&P 500 hits 2475, probably on Monday. Then I will be selling positions when we got back up to 2700 to test the 50-day moving average as resistance.


Wednesday, February 7, 2018

The End of King Chaos

Since the month Donald Trump won the 2016 Presidential election, Vegas has put the odds on his time in office as two years. I'm taking the under. The Trump presidency has been a circus of bizarre tweet after national insult after bizarre tweet, and there's no reason to think his term will end peacefully or conventionally in four years. Trump's multiple violations of federal laws while in office and his history of questionable business practices in an industry rife with corruption makes a plea deal and resignation likely.

Many of us have spent much of 2017 refreshing ourselves on the crimes committed by Richard Nixon and how his abuse of power came to an end, but an even better comparison might be Nixon's vice-president, Spiro Agnew, who resigned in September 1973 after copping to a plea for tax evasion. Agnew had begin taking kick-backs while governor of Maryland and continued receiving kick-backs while vice-president. Rather relevant to our current situation, the Maryland attorney was the prosecutor who uncovered the crime.

The relevant parallel is that Trump's money laundering will likely be the crime that trips him up. Conspiracy with a foreign enemy and obstruction of justice are difficult cases to prove, but money laundering leaves a concrete paper trail. Mueller is going to bring Trump and his lawyers together in a room and say, "here's what I have on Kushner, here's what I have on Don Jr., and here's what I have on you. Are you ready to take a deal?" Mueller let's all three plead no contest to a minor offense with three years probation in exchange for Trump resigning.

That leaves us with Pence as president. Many people have said, "oh no, Pence is worse!" No, he's not. Pence will continue to appoint far right judicial nominees, but he will clean all the rats out of the White House and work with GOP leaders to install more rational leaders at the top of federal agencies. The humiliation of Trump should translate into a Democratic Congress in January 2018 and a return to responsible governing.

Thursday, December 8, 2016

Big stock moves possible in 2017

Following the presidential election, the US stock market confirmed what had already been a new uptrend in 2016. PMIs and GDP have been strengthening since a weak first quarter. Steel and copper prices have risen meaningfully, breaking their downtrend.

The question I'm trying to figure out now is how does the stock market move in 2017 and 2018. It certainly looks headed higher with money moving out of bonds into stocks. One unusual scenario keeps picking at the back of my brain: the stock market may go up 40% the first half of 2017 then crash in the fall, much like 1987. We haven't had a true 20% bear move since 2007 and it does seem likely we get a move like the 1987 blowoff before the market resumes a strong uptrend.

Two reasons point to a possible big move up and down. The first is that retail investors are finally getting back into the stock market. Politically conservative American have kept their money out of the market due to irrational political bias under the Democratic president. They now feel all is well again and are putting their IRA savings back into stock funds.

My second point of logic is investors are buying cyclical stocks on the belief the new Congress will eliminate banking regulations, repeal the Affordable Care Act, force corporations to repatriate overseas profits, and pass a large infrastructure spending bill. Republican legislators are still fractured and will not pass all these measure. We likely see Republican legislators basking in the glow of a Democratic defeat the first 100 days, then returning to their inflexible stances that have frozen Congress the last six years. (The ACA likely is repealed pretty quickly.)

One hundred days after inauguration puts us in May, and Sell in May could be the smart move in 2017. But all this is speculation, I have no clue what will actually happen. Experts see the most likely move is a 10% drop after the inauguration, because that is what typically happens.

If we do get a huge move up into May 2017, I will sell half my stock holdings and move that money into bonds, gold, and a VIX ETF. One last note that most people forget, the stock market was actually positive by the end of 1987.

Monday, November 3, 2014

Oil and Gold Headed Lower in 2015

The recent drop in crude oil prices caught most of us by surprise. Many global forces affect the price of crude oil, but the primary factor lowering oil prices in the U.S. is the strong dollar. Crude oil will likely stay above $75/barrel over the winter as Americans turn on their furnaces, then weaken again in February or March when the ECB starts printing money to stimulate inflation.

The strong dollar and lower oil prices got me thinking about 1981-1985 when the dollar strengthened swiftly. Here is a chart of the dollar index:

Crude oil fell significantly during that period (crude oil adjusted for inflation):

This chart shows the long-term movements of the dollar, oil, and gold.
A stronger dollar in 2015-2016 will mean lower oil prices, which will translate to oil companies losing money under a certain price threshold, much like the natural gas and coal companies have been losing money since 2012. Good for the U.S. economy, but bad for oil companies who do not have a substantial refinery division. American oil companies wisely have been announcing capital expenditure reductions, which means they are not drilling new wells.

Today Bloomberg published a very useful chart of threshold barrel costs:

Friday, August 26, 2011

Take profits and stop listening to the TV experts

My portfolio reached its highest value in March of this year, within reach of the goal I had set for year end.  I sold a few stocks that had reached the price targets I had set, but didn't sell more because that would have triggered large short-term gains.  I sat back, looked at charts of stocks that had doubled or tripled over recent years, and reflected that I should be holding stocks longer to enjoy the lower tax rate on long-term gains.  Plus most of the experts on CNBC were predicting a move 10% higher by the end of the year.

Then I made the really big mistake of investing in risky stocks I thought could double within a year.  I should have put that money into bonds and protection, although I hadn't learned how to buy protection without buying puts yet.  When my portfolio gets back to where it was in July, I will move 5% into TZA and VXX.  (I don't buy or sell options because I don't want my broker lending my shares out to traders.)

I did move into 10% cash in July because the Tea Party was threatening national debt default.  Once the debt ceiling agreement was signed, I thought we were headed back up and bought stocks.  (I had debated whether to wait until the end of August because the stock market typically takes off at the beginnng of September.)  If I had booked those gains back in March, I could have sold a few stocks at a loss on the way down to raise cash.  I'm not beating myself up too badly and instead trying to learn the rhythm of the markets and perform better in the future.