In over four decades in the investment business, I have found that the most reliable economic indicators are not those released by government statistical agencies, but those that are available real-time in the stock, bond, and commodities markets. Three charts I have been monitoring regularly to gauge the strength of the economic recovery are Young Research’s Moving the Goods Index, lumber prices, and copper prices. Young Research’s Moving the Goods Index is a market-cap-weighted, non-airline transportation index. If the Moving the Goods Index is in a bull market, chances are the … [Read more...]
Simple Arithmetic Vital to Your Investment Success
My arithmetic of portfolio losses chart shows the return necessary to break even after incurring a loss. The horizontal axis shows the assumed portfolio loss incurred. The vertical axis shows the portfolio gain required to break even. My chart clearly illustrates that the bigger the loss you take, the harder it is to recover. You can recover from a small loss. If your portfolio drops 10%, you only need a gain of 11.1% to get back to even. But if your portfolio drops by 50%, you need a gain of 100% just to get back to even. And if you take a loss of 70%, you need a staggering 233% return … [Read more...]
A Strategy for Picking ETFs
Since the first ETF was launched in 1993, assets under management have increased to $830 billion as of April 30, 2010. Over the last 10 years the compound annual rate of growth in ETF assets has exceeded 30%. The remarkable success of ETFs is grounded in their many advantages over actively managed open-end mutual funds. ETFs offer intraday liquidity; open-end funds can only be purchased once per day at the closing price. ETFs disclose their entire portfolio daily; open-end funds are only required to disclose their portfolios semi-annually. Through the use of in-kind transfers, ETFs are able to … [Read more...]
A Gift from Greece
The debt crisis that started in Greece and is now engulfing Europe has acted as a catalyst for a sell-off in global risk assets. Investors are liquidating stocks, risky bonds, and commodities and loading up on U.S. Treasury bonds. The 30-year Treasury yield has fallen from a high of 4.84% in early April to a low of 4.05% earlier this week. If you own long Treasury bonds, you have just been given an opportunity to liquidate your position before prices collapse. And collapse they will. Investors are flocking to long Treasury bonds because they perceive them to be risk-free. That’s a farce. … [Read more...]
A 500% Return in High-Yielders
Do you invest in master limited partnerships (MLPs)? MLPs are publicly traded limited partnerships. They combine the tax benefits of a limited partnership with the liquidity of a publicly traded security. MLPs pay no entity-level tax. They are pass-through entities. MLP unit holders are allocated a proportionate share of the revenue and expenses of the partnership. Most of the publicly traded partnerships in the U.S. are in the energy transportation and storage business. These are the companies that own the pipelines and storage terminals that move oil and gas from the oil fields to the … [Read more...]
Avoid Financial Ruin
Did you know that the S&P 500 is down 5% since year-end 1999? That’s not just price; I’m including dividends here. What an atrocious return. And for the privilege of losing 5% of your capital, you’d have had to endure two of the most severe bear markets in history with peak-to-trough declines of 50% or more. Investors who retired at year-end 1999, at the height of the tech bubble, undoubtedly had too much invested in the stock market. The weekly asset allocation survey conducted by the American Association of Individual Investors showed that in January of 2000, investors were putting … [Read more...]
A Wake-up Call for Investors
The Dow Jones Industrial Average fell more than 5% this week. Up until this past week, U.S. stocks marched higher despite the increasing risks of a government debt crisis in Europe. This week’s sell-off indicates investors may finally be waking up to the significant headwinds the global economy still faces. If the debt crisis in Greece spreads to other Euro-zone countries, it would wreak havoc on the Euro-zone economy and neighboring countries as well. The global economy would also be impacted. The Euro-zone economy is almost the same size as the U.S. economy. If Europe dips back into a … [Read more...]
My Favorite Leading Indicator
My favorite leading indicator is Young Research’s Moving the Goods Index. Moving the Goods is a market-capitalization-weighted index of non-airline transportation companies. Transportation companies are some of the first businesses to realize a change in economic activity. You have to move the goods before you produce or sell the goods. Young Research’s index is a real-time leading indicator of economic activity. GDP data show the economic downturn started in the third quarter of 2008. I recognize that the National Bureau of Economic Research, the official arbiter of U.S. recessions, dates the … [Read more...]
Beat the S&P 500 by 2 to 1
My chart shows the long-term performance of $1 invested in the consumer non-durables sector in June of 1926 to $1 invested in the S&P 500 at the same time. The consumer non-durables industry includes companies that make and sell everyday items. Demand for non-durables, or what are more commonly referred to as consumer staples, is not heavily influenced by the business cycle. You don’t stop eating or brushing your teeth just because the economy is in recession. The consistency and stability of consumer staples companies definitely appeals to investors in or nearing retirement, but all … [Read more...]
Stay Defensive
Confidence in the economic recovery is improving, and retail investors are moving back into equities. Here are four reasons to remain defensive in the face of this renewed optimism: Stocks are now discounting a sustained and robust economic recovery. A second contraction in economic output is no longer priced into the market. If the economy contracts or comes up short of expectations, stocks could be in for a significant correction. Taxes on income, capital, and possibly even consumption are going up. Higher taxes resulting from Obama’s health-care boondoggle are only the tip of the … [Read more...]
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