Thursday, September 25, 2014

Jim Rickards On Financial Warfare, Complexity Theory & U.S. Dollar Weakness

One of the world's brightest minds in finance and geopolitics explains the new financial cold war between the United States and Russia, the three pillars of U.S. dollar strength (and how they will be removed), an update on the global currency wars and complexity theory.

Jim Rickards has 35 years of experience working on Wall Street, he was the principle negotiator in the 1998 bailout of LTCM, he has worked with the U.S. Department of Defense on financial warfare exercises and he authored one of the year's best books; The Death Of Money.

Wednesday, September 24, 2014

Which Is The Better Buy Today; Corn or Gold?

I'm buying both right now, but in terms of relative value corn is cheaper than gold at the moment. The chart below shows one ounce of gold buys the most bushels of corn since at least 1975. The blue line shows the destruction in corn prices over the last three years.

The First Stop After Receiving A College Degree In America

Jack Bogle On The Efficient Market Theory & Index Funds

During cyclical market highs the Efficient Market Theory becomes the dominant mantra in the financial markets. Investopedia defines this theory as:

"An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments."

I do not follow this theory, and for a good understanding of why I would highly recommend reading the excellent book Contrarian Investment Strategies. It provides an illustrated walk through history with examples of how the Efficient Market Theory has failed investors time and time again.

In addition to discussing the EMT in the video below, John Bogle (the founder of Vanguard) also discusses the importance of seeking out low fee vehicles when investing. On this topic I am with him 100%. Fees, along with taxes (for those trying to trade the market over the short term), end up being an often overlooked part of the average investor's portfolio, and the losses become enormous when compounded over many years. Vanguard has revolutionized the business with low fee investment funds, and their share of the market has grown substantially because of this strategy.

Tuesday, September 23, 2014

Silver Destroyed: 96% Polled Believe Prices Headed Lower From Here

Silver prices have been in free fall over the last week, collapsing down to $17.60 on Monday and resting at 4 year lows. The daily sentiment index is now at 4%, meaning 96% of traders polled believe silver is going lower from here.

This is a very emotional time for many people that own precious metals in their portfolio. Investors love to buy assets when prices are high and they hate to own assets (or purchase more) when prices are low. It is one of the most fascinating parts of human psychology surrounding the financial markets, and it doesn't exist anywhere else in normal life (no one rushes out to purchase a TV because a store just promised to raise the price $2,000 for "one day only").

Silver trades like a technical beast. Stop loss triggers are set up on the charts, meaning computers are programmed to sell when prices reach certain levels. Professionals that know where these stops are clumped together, and have the ability to move the (extremely tiny) market downward in the short term, can push the price down to those levels and trigger the stop losses. It creates a cascading waterfall selling effect on the way down. It also washes away any sellers or stops remaining in the market.

The bearish argument is that the momentum is in your favor on the downside. The dollar has experienced incredible strength over the past few weeks and it looks like it has no signs of stopping.

Let's briefly walk back through the bigger picture more bullish supply/demand factors that may impact the market over the longer term.


Every year new industrial uses are created for the metal increasing the demand potential in the years ahead. As the Fed winds down its QE program for now, the dollar is strengthening which is hurting both silver and gold in the short term. However, precious metals trade on a global stage and while the Fed is tightening, Europe is just beginning a new QE program while Japan continues to unleash a steady stream of printed currency. China has experienced a $15 trillion growth in their credit markets since 2008, which is larger than the entire size of the U.S. financial system. While the U.K. temporarily has QE on hold, they (along with every developed country in the world) have interest rates at 0.0%. It is possible that some day we will wake and find that the world would like to own just a small percentage of their portfolio in currency that is not purposefully being devalued.


Silver is currently priced well below the cost of production which is taking a large chunk of the ready mining supply off the market and removing the potential for additional supply completely in the years ahead. Imagine trying to put together a group of investors to build a new mine knowing that what you take out of the ground will lose money. Investors will laugh at you and tell you to take your money and go fund a hot new app in San Francisco.

After a 65% drop in price over the past 4 years, silver has first been forgotten, then hated and now despised as an asset class. I was not buying silver on the way up during the last $17.50 to $50 run because I prefer to buy assets after major price declines when sentiment is washed out. I never dreamed this opportunity would appear again. Can it fall to $15, $10, $5 from here? Sure. This market has the potential to do anything in the short term.

I still believe, and I am probably the only person left on the planet today, that there will be consequences for the central banks policies over the last 6 years (which are still in effect today). The world now believes that there are no long term consequences for holding rates artificially low or printing money to stimulate the economy in the short term. They believe central banks are gods.

Maybe this time is different, but I'm betting with my portfolio that it's not.

Sunday, September 21, 2014

Stock Buybacks & Dividend Payments Create A Trap Door Under U.S. Stock Prices

The following is the definition of "share repurchase" from Investopedia:

"A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can buy shares directly from the market or offer its shareholder the option to tender their shares directly to the company at a fixed price."

I have been discussing the incredible rate U.S. companies have been repurchasing shares throughout 2014. For a deeper look at why companies are using this strategy I would highly recommend reading:

Share Buy-Backs: The Repurchases Revolution - The Economist

Profits Without Prosperity - Harvard Business Review

The quick and easy summary goes like this: Companies (hopefully) have profits at the end of every month and quarter they must decide what to do with. Repurchasing stock reduces the total "float" or shares available for trading in the market. With a reduction in the available supply of shares it boosts the share price.

The why is a bit more complicated. Boosting share prices in the short term has an obvious benefit to the people who decide when and how many shares to repurchase; a large part of their compensation is determined by how the company's stock price performs.

Another reason may be that the company believes share prices are undervalued (this should quickly be dismissed because companies always invest heavily at market tops and invest little or nothing at market bottoms).

A third reason; companies cannot find a way to put the money to productive use. If the economy is only purchasing X amount of the products made at your factory, why would you build another factory that is just going to warehouse unsold product? A few quotes and charts will be coming from StreetTalkLive as we continue on.

“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."

"The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of non-electronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.”

If a company decides not to invest profits in future business growth or use it for share repurchases, it can give the money back to share holders through dividend payments. This is another simple way to boost share prices because it provides an attractive income stream to investors interested in purchasing the stock.

"Companies are not just borrowing to complete share buybacks but also to issue out dividends. According to the most recent S&P 500 company filings, the level of cash dividends per share has now reached $9.76 which is the highest level on record. It is also the greatest deviation from the long-term trend of dividends per share since the financial crisis."

Is it a long term problem that companies are spending all their profits (and in some cases going further into debt) to repurchase shares and issue dividends instead of using the capital to invest in future business growth?

Of course it is.

As a quick side note, Berkshire Hathaway, the company managed by Warren Buffett, has never issued a dividend and never will. For a detailed understanding why, I would highly recommend reading this piece from one of his annual letters posted by Business Insider: Warren Buffett On Dividends.

This discussion explains part of the reason why the S&P 500 is sitting at all time record highs while the real economy has not recovered. When profits come in they are not being used to grow the company (which would lead to jobs and income growth), the funds are circulated within the organization to artificially turbocharge share prices.

The following chart illustrates this divergence. The middle class no longer experiences the benefits of corporate growth and profitability.

Corporations will not have the ability to artificially levitate their stocks higher forever. Either the real global economy must catch up to what share prices have priced in, or share prices must return to levels the real economy can support. We will be discussing the slow down in the global economy both outside and within the U.S. economy in depth over the coming weeks.