November 13, 1997

Avoiding Risk

As wealth vanishes around the world in multiple currency devaluation, guess what benefits along with the strong currency of choice such as the US dollar and the US treasury debt market,....... hated hard assets. Maybe the eighteen or so year habit of the US dollar and treasury market being the place to hide could be ending in this rapidly changing economic environment. The notion of a US budget surplus happening soon might not happen as quickly as anticipated. The lack of quality debt paper had been sending long term interest rates lower but world debt may flood the system again forcing interest rates higher reflecting the risk.

Common people of the world may trust more what is in their hands or in front of them than what is kept behind the banks door. Banks with no or scarce reserves to back their highly leveraged endeavors of profit. It was interesting to hear today about a major money center bank having trading losses last month that will affect their earnings. More to come?

Let the central banks threaten to sell all their gold reserves. It brings on perhaps the greatest buying opportunity. Not so much the bullion, but the stock of the companies that own the reserves. Buying silver seems to be one way investors are handling the threat of central banks artificially suppressing the gold market.

Well once the interest of the individual investor moves into this sector again, you could see some amazing percentage moves. Of course there are some special situations in the mining sector such as Brush Creek finding diamonds that kicked that stock price up over 300% in a few weeks. Just as this sector has been slammed in recent months, it can jump extremely fast right back to the old highs and then some. A tiny bit of interest can propel this sector and up to now there has been very little interest forcing the stock values to rock bottom prices.

If Sadam wants to cause a real commotion, a terrorist act of attacking Federal Reserve Chairman Greenspan would annihilate the financial markets. Why don't we see him protected more than he seems to be. To have the three Americans killed in Pakistan brings back the idea that traveling to meetings is too dangerous and maybe internet conferencing will be more the practice in the near term. That could be good for 3M and Softboard .

Here we are with the Dow Jones Industrial average sitting on critical support that, if violated, could mean another thousand points lower and very few investors are ready. Chopping into next weeks option expiration may hold things together for that period of time, but the risk of a larger sell off is getting higher.

September 8, 1997

Yield Competition

Princess Diana. Mother Teresa, ....... Mother of all Bull Markets? The momentum in the market may have been slowed reflecting the risk and return relationship at the current time. Return Of Capital is a biggy, too! If someone feels that their stock price is at best going to move in a sideways channel for a three month period or more, they can increase the yield over any dividend by selling covered call options. Otherwise, new investment money invested in a simple non-bank money market or T-bill may be the best yielding asset for such a period.

Sales increases and the earnings ratios are a couple of the important elements causing the stock market to continue higher. Inflation may be beneficial to many companies with pricing power such as the airlines that can increase their prices faster than the rate of inflation. Such may be the influences that can bring back terms like spiraling inflation. Long before that can happen, you could see competition from cash yielding attractive rates of return with little risk of capital that should draw investment dollars out of the economy and the stock market.

June 22, 1997

Nonchalant Naiveté

Baffled by it all in a way not felt in a decade. Could it be true that too much money is chasing financial assets to cause a slow down in the economy because of not enough spending on real tangible assets? This could have an effect similar to having interest rates go higher as a constraining measure by the Federal Reserve to draw money out of the economic system to slow things down a bit.

Maybe the future world economic environment is so fantastic especially for the United States. A description of the amazing time we live is in the new issue of Wired. Think of how things will change when fusion finally is a viable source of energy. Massive changes are occurring that creates these great expectations for the future.

But for now, nobody cares if it seems that more money is going to the shares of stock in companies than in their products. Shielding for yield at any point in time works for me. The Conservative Full Shield strategy allows you to step in and invest basically at any time or condition committing a certain amount of money for a specific period of time. The comfort level can be high because you know your risk level and potential gain for the duration. Institutions with a consistent infusion of cash needing to be put to work can utilize the strategy very well by staggering the investments in the same company but with different shield characteristics reflecting the moments economic conditions. Hence, you rely on the math and not the myth so you stay solvent if something happens like ten years ago.

May 14, 1997

Financial Asset Appreciation

The US dollar seems ready to weaken further against most other currencies and could be a reflection on a developing view that our economy should slow or decline soon. Higher short term interest rates may not have a positive effect on our currency which has rallied extensively already on the expectation of higher interest rates. This may be due to the long term T-bond moving lower in yield because of an expectation of a slow growth rate for the economy, continued low real asset inflation and less supply from the treasury. If the Federal Reserve tightens further, the long rates may fall further expecting even more of an economic slow down and an eventual lowering of short rates.

It seems nobody sees inflation. If the price of your home went higher at a rate of 25% a year, would you consider that as inflation? You should because it would have a direct effect on other people trying to buy a home. Stock certificates and their perceived value do not directly affect the lives of most people but indirectly. Through the wealth affect of financial asset appreciation, many people are able to afford a beautiful new home. There are home buyers who can afford a new home with their regular income without ever investing in the stock market but that would stop when prices exceed incomes. My point being, is that the rate of increase in the value of the stock market is inflationary because it has been creating wealth at an excessively rapid pace that soon may be transferred to real assets.

I see little difference between the current financial asset appreciation and the real estate appreciation in the late 1970's. Real estate made me very happy then owning a custom home at the age of 27 and several other properties. I am scared of real estate now due to the illiquidity of that type of asset market, especially with rising short term interest rates. There may be better areas to put your money like money markets or state-tax-free T-bills.

January 5, 1997

Fed Action Impotent

An early 70's style round of inflation fighting by raising interest rates may have no effect on curtailing any supply and demand inflationary situations in real tangible assets such as agricultural products, building materials, industrial metals, energy costs and wage demands. Who remembers Former President Nixon's price controls?

Supply and demand may be why long term interest rates may rise higher than anyone expects due to all the over leveraging similar to back before the Orange County problem arose. In my opinion, that situation was caused by a man refusing to recognize the signs of a changing trend that started with the utilities, banks and brokerages selling off months before it happened. I guess he was a long term investor, too. If you feel that the Federal Deficit will continue to improve to a point that there is a very limited supply of new debt offerings for the financial markets thereby causing rates to fall, well, you may have to wait a long time. Balancing the budget is one thing and paying off the accumulated debt is another.

What can bring interest rates down this year is a twenty or thirty per cent fall in the valuation of the stock market averages. This could happen by having an ever increasing amount of investors move from the financial asset to real tangible assets such as plant and equipment expansion. Soon after, there could be evidence that inflation is building and the Federal Reserve may need to raise interest rates again that could cause a further sell off in the stock markets with the money going to cash, debt instruments or real assets.

More and more money chasing real assets may cause inflation to continue regardless of interest rates unless they are excessively high enough to cause everyone to like cash in a money market account yielding 12% again or more, Volcker style. Emperor Greenspan has his vocabulary where Volcker had his strong actions and presence.

All this may take years to unfold and it seems that there may be a wide spread between the high and low points for interest rates and not such a sweet annual 50 to 75 basis point trading channel. The Fed has provided liquidity necessary to deal with the stock market crash in '87, the S&L crisis, then the Banking crisis and their refusal to lend to business. Now an irrationally exuberant equity market along with a very angry Mother Nature.