Retirement

Maybe This Year

On Jan 2, 2018 I walked into Melanie’s office and told her I had set a goal for myself to see if I could double my small, trading account IRA account in one year (achieve a 100% return).  An ambitious goal but something that is doable with good risk management, some leverage, active trading and of course must include a dash of luck and a cooperative market.

With 2018 now in the rearview mirror and a tally of the results I have to come clean, I did not achieve my goal. In fact, I was far below it. Disappointing no doubt as at one point in the year I was up more than 70% with about 40% of the year left to go I thought it was going to be a slam dunk. I had it all mapped out, I was going to sell everything once I hit that 100% mark and sit in cash and wait for December 31. But, alas, Q4 happened. I didn’t react fast enough to the rapid change in sentiment and so I fell hard with the market. Deal with it big boy, the market is talking and doesn’t care what I want or think. Oh yah, the “Woulda-Shoulda-Coulda” game is a waste of emotional and brain capital too so don’t do it. Its non-productive. If you don’t like the results, change your process.

My return for the year was 25.7%, not bad as I outperformed the SP500 by almost 32%. But those that know me understand “not bad” is not what drives me. So, being the uber competitive individual I am, I will, once again, set another goal to double my account for 2019. The odds are I will fail even worse than I did this year. Why? Because I am human. 2018 provided me the opportunity to fly under the radar with only one person knowing my goal. No external pressure or embarrassment if I failed, just my pride was at stake. You see the sad thing is as humans we have a tendency to act differently the more sets of eyes that are scrutinizing what we do, especially when money is involved. Even though I have the same set of trading rules, because of emotions that drive decisions, I am more than likely going deviate from them even though I know I should not***. Hopefully my genetic stubbornness, adjustments to my process and most importantly my real goal for doing this can keep my emotions in check. I want to make it clear, if I achieve the goal it’s not because I want to gloat or brag, or even because I want a bigger IRA (although I don’t mind this), instead I have something that is way more important to me. I want all clients and readers to know beating the market (and hopefully substantially) is doable in spite of Wall Street’s mantra it’s not possible. If Wall Street is too dumb (and this has nothing to do with intelligence) or lazy, that doesn’t mean it’s not possible. Peter Brandt taught me this and it changed my life. My goal is to do that same for some of you.

Let’s be real. Can beating the market be done every year?  Nope, not going to likely ever happen every year over a long run by anyone let alone me. All of my mentors and people I follow and compare methodologies and processes with do it regularly, but not every year. Each of them has experienced underperforming years, some terribly so. That is going to occur with random markets, it’s inevitable. And what is a common trait is that those individuals become better when they fail. They key-in on and learn from their mistakes/failures, something all of us should do if we want to get better at anything in life. They are also in a continuous loop, never staying idle or complacent but always improving. To be a successful investor all that is required is 1) have a process that provides positive expectancy 2) insure steadfast discipline following the process, 3) access to multiple markets to invest in (more than just stocks and bonds) and 4) an unwavering desire to outperform (a politically correct way of saying being an overly competitive pain-in-the-^%$.

Maybe this year.

Any doubters feel free to email me as I will be more than happy to provide a validation of trades and account values. And no, in case you were going to ask as others already have, I can’t do this for anyone else’s account.  Sorry. On the other hand, if you would like to learn how, please send me an email as I’d love to share with anyone what I have learned (what’s the old Chinese proverb about teaching a man to fish?).

***If you want to learn more about this human trait, there is a really interesting and true investment story you can read, just google the “turtle traders” or email me and I can send you an ebook.

Uncharted Territory

Almost every prior stock market crash was caused, or at least exacerbated, by market illiquidity.

As you can see in the chart below, the FED’s recent activity of unwinding their balance sheet by selling a small fraction of their QE accumulated holdings coincided with the most recent 12% stock market consolidation (not the sole reason for the correction mind you).  It is important stock investors understand the correlation between the FED removing liquidity and lower stock prices. When you combine this balance sheet activity with a simultaneous push higher in interest rates we are entering into uncharted territory knowing just how the market will react.  

Regardless, the current consolidation in the SP500 has a clearly defined upper and lower boundary, 2670 & 2530 respectively, making it a much easier task to manage whatever happens.  Above I add exposure, below I decrease.

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What You Want vs. What You Need

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” - John Maynard Keynes

 “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” ― Sam Ewing

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We all understand the destructive effects of inflation has over time but what happens when inflation is as low as it has been over the past 20 years? What you say, inflation has not been low? Your personal experiences says otherwise? Our Government’s Bureau of Labor Statistics (BLS) begs to differ. Prices on average over the past 20 years has been 55.6% which works out to be an annualized rate of ~2.02%. One of the lowest 20 year periods …. Ever. So who’s right?

 The problem as we uncover when peeling back the onion, is how the BLS calculates its numbers. To avoid going down that rat hole into a hornets nest, it’s safe to say that inflation is the sum of the prices of things that are rising and the rest that are rising more. Unfortunately, as it works out, the things that you want are rising while the things you need are the things that are rising more. This has never been so apparent than in the most recent 20-year data presented in the chart below.

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 One scrutinizing the chart may point out that food and beverage prices (a need) have been rising at an “average” rate. The devil is in the details here too. Looking under the hood you will see the things that are healthier (unprocessed and natural foods) are rising at a much faster rate than things like fast food. Oh and while I do have some millennial readers, no, cellphone service is NOT a thing you need.

Will 2018 Bring the Return of Inflation?

The strength of the global economy is one reason why the stock market has started 2018 in a buoyant mood (with the Dow passing 25,000). At some point, in any expansion, businesses find it harder to recruit workers or get the materials they need; these bottlenecks cause wages and prices to rise. Central banks then start to tighten monetary policy, a process that can eventually turn the market (and the economy) down (recession). For years the US has been in a deflationary environment in spite of the FED’s ongoing attempts to do everything possible to create inflation but that looks like 2018 may signal a change.

Because commodities rise in an inflationary environment, following their price can be very profitable for investors in the back-end of the business cycle. The $CRB index is a basket of 19 liquid and highly diverse individual commodities is about the best proxy I have found which can help determine the direction of commodity prices. Taking a look at the chart of $CRB we see the index has been in a severe downtrend from 2014-2016 and after bottoming has consolidated sideways for 2 years. But it looks like it may soon change as it is attempting to breakout to the upside.  The consolidation is forming an inverse head and shoulders bottom pattern which projects, if it breaks out and confirms, to the 2015 highs, almost 30% higher.

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I have learned the hard way that commodities are a fickle group and are not as reliable as stocks are when looking at charts and attempting to interpret what is next. As such I prefer to get additional confirmation before committing investment capital. What better confirmation than looking at the biggest market of all, bonds and see what, if anything, they are saying. You may be asking what do bonds have to do with commodities. The common thread is inflation so checking in on TIPS (Treasury inflation protected securities) makes a lot of sense.

In the chart of TIPS below you can see that they, like the $CRB index are knocking on the door looking as if they want to break out to the upside. The cup and handle continuation pattern that has formed points to a target move of 5% higher (don’t scoff, that’s a big move for bonds)

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Whether we see inflation or not will only be known later in time. With both commodity prices and TIP bonds looking as if they want to go higher, is a signal the markets believe inflation may not be too far around the corner. As with all pattern breakouts, you should never invest unless the pattern triggers and confirms, which neither the $CRB or TIPS have yet done. Until then, it will pay to watch these two closely in the coming weeks/months for investment opportunities. 2018 may be shaping up to be a great year for inflation hedged investments