Tag Archives: advice

On Currencies That Are A Store Of Value, But Maybe Not For Long

Picture Credit: Dennis S. Hurd I get letters from all over the world. Here is a recent one: Respected Sir, Greetings of the day! I read your blog religiously and have gained quite a lot of practical insights in financial field. Your book reviews are very helpful and impartial. I request you to write blog post on dollar pegs in Middle East and under what conditions those dollar pegs would fall. If in case you cannot write about it, kindly point me to some material which can be helpful to me. Thanks for your valuable time. Now occasionally, some people write to me and tell me that I am outside my circle of competence. In this case, I will admit I am at the edge of that circle. But maybe I can say a few useful things. Many countries like pegging their currency to the US dollar because it provides stability for business relationships as businesses in their country trade with the US, or, with other countries that peg their US dollar, or, run a dirty peg of a controlled devaluation. Let me call that informal group of countries the US dollar bloc [USDB]. The problem comes when the country trading in the USDB begins to import a lot more than they export, and in the process, they either liquidate US dollar-denominated assets or create US dollar-denominated liabilities in order to fund the difference. Now, that’s not a problem for the US – we get a pseudo-free pass in exporting claims on the US dollar. The only potential cost is possible future inflation. But, it is a problem for other countries that try to do so, because they can’t manufacture those claims out of thin air as the US Treasury does. Now in the Middle East, it used to be easy for many countries there because of all the crude oil they produced. Crude oil goes out, goods and US dollar claims come in. Now it is reversed, as the price of crude is so low. Might this have an effect on the currencies of the Middle East. Well, first let’s look at some currencies that float that are heavily influenced by crude oil and other commodities: Australia, Canada, and Norway: Click to enlarge Commodity Currencies As oil and commodities have traded off so have these currencies. That means for pegged currencies, the same stress exists. But with a pegged currency, if adjustments happen, they are rather large violent surprises. Remember the old saying, “He lied like a finance minister on the eve of the devaluation,” or Monty Python, “No one expects the Spanish Inquisition!” That’s not saying that any currency peg will break imminently. It will happen later for those countries with large reserves of hard currency assets, especially the dollar. It will happen later for those countries that don’t have to draw on those reserves so rapidly. Thus, my advice is threefold: Watch hard currency reserve levels and project future levels. Listen to the rating agencies as they downgrade the foreign currency sovereign credit ratings of countries. When the ratings get lowered and there is no sign that there will be any change in government policy, watch out. Watch the behavior of wealthy and connected individuals. Are they moving their assets out of the country and into hard currency assets? They always do some of this, but are they doing more of it – is it accelerating? Point 3 is an important one, and is one seemingly driving currency weakness in China at present. US Dollar assets may come in due to an excess of exports over imports, but they are going out as wealthy people look to preserve their wealth. On point 2, the rating agencies are competent, but read their write-ups more than the ratings. They do their truth-telling in the verbiage even when they delay downgrades longer than they ought to. Point 1 is the most objective, but governments will put off adjustments as long as they can – which makes the eventual adjustment larger and more painful for those who are not connected. Sadly, it is the middle class and poor that get hit the worst on these things as the price of imported staple goods rise while the assets of the wealthy are protected. And thus, my basic advice is this: gradually diversify your assets into ones that will not be harmed by a devaluation. This is one where your government will not look out for your well-being, so you have to do it yourself. As a final note, when I wrote this piece on a similar topic , the country in question did a huge devaluation shortly after it was written. Be careful. Disclosure: None.

Go On The Offensive To Preserve And Build Wealth

By Carl Delfeld I’ll never forget the advice given to me by the CEO of UBS Wealth Management. “Carl, remember one thing. Before you go out and tell your clients all the ways you’re going to make them money, try your best not to lose any.” And it’s certainly great advice for all of us, as we move into 2016 amid a high degree of uncertainty. Preserving capital should always be the top priority. Unfortunately, the traditional defensive strategy recommended to achieve this goal – high-quality bonds and blue-chip U.S. stocks – is obsolete. Rising interest rates could crush many bond portfolios, and you only have to look back at the global financial crisis to see how many blue-chip stocks lost almost half of their value in the blink of an eye. Let me share with you two potential ways to protect wealth that you won’t hear about anywhere else. They’re also a low-risk method to build wealth. One: Don’t Become Too Cautious and Defensive First, as any coach or smart sports fan will tell you, the surest way to lose a game when you’re ahead is to become too cautious and defensive. Why? You tend to become tentative, miss opportunities, and lose the initiative that built your success in the first place. It’s far better to intelligently stay on offense, pushing ahead while trying not to take any undue risks. Above all, this is never the time to try the same old tired plays. Two: Stay Open-Minded and Flexible This brings me to the second way to protect wealth, the need to be open-minded and flexible. For the past four or five years, a portfolio of U.S. stocks has performed pretty well, with the flat 2015 being an exception. Part of this is due to the Fed pumping in massive amounts of liquidity, no competition from zero rate Treasuries, and to the strong U.S. dollar attracting capital and hurting international stock returns. It certainly appears to me that at least some of these trends are reversing. This means you need to adjust by taking off the blinders and searching for new opportunities. And to do this you need to fight “home bias.” Going on the Offensive Home bias is the tendency to invest too much in your home country, thereby neglecting overseas opportunities. It’s very comfortable to lean towards the home stock market, but it is contrary to a cardinal rule of investing – not putting all your eggs in one basket. It’s also at odds with common sense since no one country – even America – has a monopoly on growth, value, and progress. When you really think about it, this home bias is puzzling. Why should the world’s best companies with the best growth prospects just happen to be in America or wherever your home country happens to be? I say this even though I’m a huge believer in America’s future, if we pursue the right policies and reforms. This is why I authored a book outlining what needs to be done: Red, White & Bold: The New American Century. In short, where a company is based means less and less; and what it does, and how well it performs, means more and more. And this is especially true for emerging markets, as the value of their stock markets plays catch-up with their contribution to global economic growth and share of the global economy. Just take a glance at these two great charts by JP Morgan. U.S. stock markets still dominate, accounting for 46% of the value of all listed companies in the world, while Japan’s share has dropped sharply from its peak in 1989 at over 30% to just 8% today. The share going to emerging markets has grown sharply, but still sits at around 13%, even though emerging markets represent 83% of the world’s population and half of global growth and output. This big gap between the value of all emerging-market-publicly traded companies and their contribution to global growth and the world’s economy will narrow – and this is your opportunity to cash in. The key trend to watch is the direction of the U.S. dollar. If the greenback levels out or begins to pull back in early 2016, undervalued emerging markets will really take off. The strategy you use to take advantage of this mismatch is critical. Stick with high quality companies showing good growth and strong balance sheets. Diversify across many countries, while favoring those that respect private capital, rule of law, a free press, and open markets. Most importantly, always use a trailing stop-loss to minimize risk. It’s the best hedge to protect your portfolio from a weaker U.S. dollar, and it could really supercharge your returns in 2016. Original Post

Value Stocks Struggled This Year. Try These 3 Tips For 2016

Summary Value stocks often struggle in down markets. 2015 was a hard year for value investors. Employing these 3 simple tips may help value investors have a better 2016. Value investing is attractive because you get more for less. Well, academics won’t put it exactly that way – they might be inclined to say that you get more excess return on average for greater risk taking. What does that mean? If I get more return on average isn’t that, by definition, less risky? Portfolio123 has a value screen with common factors such as price to sales, price to book and price to earnings ratios. Since 1999 if you held the 50 top ranked value stocks in the S&P 500 and replaced these holdings weekly, the result would have been a return of 13.5% annually. Where is the risk there? Just look at the bear markets. In 2002 the S&P 500 took a turn for the worse. The blue line is the S&P 500 and the red line represents the value strategy. (click to enlarge) Wash and repeat for 2007-2009. (click to enlarge) 2015 was also a tough year for value investors. Holding the 25 highest dividend yielding stocks resulted in some ugly under-performance. (click to enlarge) Holding the 25 lowest price-to-earning ratio stocks also resulted in below average returns. (click to enlarge) If we had invested in the 25 highest ranked value stocks, according to the Portfolio123 ranking system, with a minimum 3% dividend yield, this would have been our year. (click to enlarge) It almost doesn’t matter which value factors you go for – the response for 2015 is pretty much the same – YUCK! Now I see the risk. If you are a value investor, how can you manage some of the downside risk? Here are 3 pointers that seem obvious – but that doesn’t make the advice any less beneficial. 1. Diversify. A well-worn cliche, but for a good reason. Although bear markets have a way of pulling everything down at the same time, you will still minimize the risk of being loaded into one sector that goes poof! 2. Check short interest. Check on the percentage of shares sold short (try saying those ‘shares sold short’ 3 times really fast). If short interest is high, a lot of people are betting for an additional downside loss. It may not turn out that way, and it could even flip into a short squeeze, but if you want to play it safe stay away from these volatile tug-of-wars. I prefer stocks with short interest of 2% or less. 3. Get less active. When things go wrong it is only natural to want to fix it. So you sell your value stocks in order to buy different value stocks with an even better earnings or dividend yield. Those stocks tank so you jump ship and try again. You need to slow it down! Profits can compound when things go right but losses compound when things go wrong. When in doubt – stop. Wait. Ride it out. Don’t try to fix it. Value Investing 2015 Re-visited Let’s add the first 2 of these simple guidelines into our trading system (top 25 value stocks in the S&P 500 with minimum 3% dividend yield) to see what effect it would have had in 2015. We add a rule that says no more than 1.5% short interest and a maximum of 3 stocks per sector. (click to enlarge) That’s a bit more palatable. The lesson I am taking with me into 2016 is to slow things down, keep an eye on short interest and yes – as we’ve been told before – diversify. Here is a sampling of a few dividend value stocks that would currently meet the above criteria. Ticker Name Value Rank MktCap SectorCode PEInclXorTTM ProjPECurFY Yield (NYSE: MET ) Metlife Inc. 99.8 54634.58 FINANCIAL 9.52 9.77 3.06 (NYSE: WRK ) WestRock Co 95.19 11788.59 MATERIALS 14.38 13.11 3.27 (NYSE: ETN ) Eaton Corp Plc 92.18 24565.42 INDUSTRIAL 12.29 12.53 4.14 (NYSE: ADM ) Archer-Daniels-Midland Co 82.36 22291.09 STAPLE 12.88 13.64 3.02 (NASDAQ: CSCO ) Cisco Systems Inc 77.35 141127.14 TECH 14.93 12.22 3.02 (NYSE: DTE ) DTE Energy Co 64.53 14616.53 UTIL 15.4 16.95 3.59 (NYSE: VZ ) Verizon Communications Inc 59.72 192091.5 TELECOM 18.81 11.9 4.79 If you are a value investor, what is your approach for 2016?