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The Consequences Of Overvaluation: A Word Of Caution To Funeral Owners And Fund Managers

The Socratic Equity Rate is one tool investors can use to identify areas of value and over-value. Compared to past levels, a high yield might indicate areas of value. Compared to past rates, a low rate indicates investors might want to be cautious. If you ever owned a diversified mutual fund or ETF, chances are, at one time you were a part owner of a funeral services business. For those running the fund, and especially for owners of shares in a funeral services business such as Service Corporation International (NYSE: SCI ), it is essential to be familiar with the Socratic Equity Rate . Developed by The Socratic Investor, the Socratic Equity Rate was designed to assist in identifying opportunity and risk in investment securities. Intended for board of directors, company management, securities lawyers, fund managers and individual investors, this proprietary equity rate is a number to understand. The Trial of Socrates | The Death of Socrates movie trailer, by educationalmovies For an investment fund manager, the higher the current Socratic Equity Rate is compared to past readings, the more attractive an investment might be. The lower the reading, the more cautious an investor should be. For another professional, the readings will be the same but the takeaway will be different. The key is to know the historical range, be able to identify anomalies, and know what to do when those areas of value or overvalue appear again. Although the last part will be different depending on what role you play in the investment world, the concept is the same . Examine the performance of Service Corporation International after SCI’s Socratic Equity Rate reached 25% in 2000. From $1.75 to $13.81, SCI’s return was one of the best in the market. At a Socratic Equity Rate near the highest recordings ever seen in SCI’s history, Service Corporation International was a buy. For a board member, a lower number might indicate a time to incentivize management to issue equity . If private companies are cheap, management would be smart to pay using overvalued equity. A deal that won’t rest in peace, by TheDealVideo Take a look at the performance of investing in SCI when the Socratic Equity Rate was near its lowest levels ever. From $10.00 to $5.08, SCI investors experienced devastating returns. At a Socratic Equity Rate near the lowest readings ever, 1%, SCI’s overvalued equity presented management an opportunity to acquire another funeral company’s crown jewels without spending cash . On the other hand, if you are a private funeral home business owner looking to sell, and the acquiring company wants to pay in stock, you better know how overvalued the stock they want to pay with is. Knowing the Socratic Equity Rate can help protect your crown jewels from theft, as what happened to Time Warner when AOL paid using tech-bubble inflated AOL shares to merge. Ted Turner’s biggest regret, by CNNMoney From a securities law standpoint, an upstanding securities lawyer might consider using this rate as a tool to defend the innocent teacher’s pension fund or university endowment fund that lost money. By exhibiting a Socratic Equity Rate near the lowest levels ever, the lawyer could argue the fund manager breached their fiduciary duty by paying a premium substantially above historical norms. Examine what could happen to a fire-fighter pension’s investment when a supposed fiduciary buys SCI at a Socratic Equity Rate of 1%, a reading that is one of the lowest on record. If the supposed,”fiduciary” keeps ignoring the Socratic Equity Rate, one day there may not be a pension for retired fire-fighters. At a level near 2.1% today, SCI’s Socratic Equity Rate is approaching the lower end of its historical readings. Fund managers and individual investors should remain defensive. Be advised, this is not investment advice. The Socratic Equity Rate is one tool out of an entire tool box of equity valuation methods. Your decision to buy, sell or sue will depend on your profession and further research is always recommended. Thanks be to YCharts, who provides The Socratic Investor with Service Corporation International financial data.

The SNB Catalyst For GLD

Summary SNB surprised the market by its sudden decision to abandon the EURCHF floor and reduce its deposit rate further to -0.75%. Existing push factor of GLD such as current deflation, strong USD and holding cost is being pushed aside by negative interest rates and market concern about market stability. Global negative interest interest rates is attracting bids for GLD especially when conservative investors cannot hold their funds in safe deposit and bonds without attracting a penalty. Deeper market concerns over the ability to grow the economies of Europe and Japan without destabilizing the economic system. SNB Surprise served as a catalyst to bring these concerns to the front of investors mind and is responsible for the gap up of GLD. The Swiss National Bank (SNB) surprised the market on 15 January 2015 by announcing the abandonment of the floor of the Swiss Franc (CHF) 1.20 to the euro. In addition, the SNB announced that it has reduced its sight deposit rate from -0.25% to -0.75%, effective 22 January 2015. The rationale that the SNB imposed this floor in 2012 is to prevent importing deflation from Europe but it has done it at the cost of a ballooning balance sheet to GDP from at least 60% to 85%. The SNB has finally accepted that deflation of -0.1% for this year and have made it clear that even if they do prevent deflation from Europe, they can’t prevent deflation from the U.S. through a strengthening USD. In this article, we will look at how the conflicting pull and push factors which affect the attractiveness of gold. In my previous articles, I have been bearish on gold as I consider opportunity cost of holding gold when the U.S. economy is rising and the fact that the strengthening USD will weaken gold. In addition, I have considered the fact that there is very little inflation worldwide given the low energy price. Hence gold would lose its allure as an inflation hedge, especially when it is increasingly clear that major economies like Japan and Europe is nearer to deflation than inflation. Negative Interest Rates Even as I consider these factors to be relevant, it would appear that other factors are now raising to the forefront to challenge these push factors of gold. The most prominent factor would have to be the negative interest rates. We are seeing a number of major countries imposing negative interest rates. The latest and deepest negative interest rates come from the SNB at -0.75% of deposit rates. The European Central Bank (ECB) has set its deposit rate to -0.1% and there are Japanese Treasury Bills that are having negative interest rates . This is because investors prefer these treasury bills even when key interest rates are zero and they are willing to pay a premium for it. Negative interest rate means that investors have to pay the banks to keep their money and this has offset the cost of gold purchase. For investors who are conservative, they are not likely to invest into equities which they perceive to be of high risk. Given that they can’t deposit their money safely in banks or bonds without attracting a penalty, they are more likely to be attracted to gold as a store of value. Market Concern about Economic Stability Then there is the risk of unintended consequences. With the ECB and Bank of Japan (BoJ) determined to ease monetary conditions further, they are increasing the risk that these actions will cause a bubble in the future. The issue is that inflation might surface in other form with all these QE efforts. These QE measures are described as emergency measures by the Fed and this is why they are being rolled back by the Fed right now. The question remains unanswered in the market as to whether a prolonged dosage of QE will actually help or harm the economy. We have to remember that the Fed used QE to purchase banks asset to restore confidence in the system and this is done with a bank stress test. The banks subsequently healed as investor confidence were restored and were able to lend as they have a clean balance sheet. They also have incentive to lend as the economy recovers amid a low interest rates environment. As the economy recovers, people consumes and we naturally see inflation which stands at 1.3% in December 2014. This will have been higher if not for low energy prices. There might be a question as to whether the banks started to lend first or the economy recovered and people consumed first before the banks were willing to lend. My opinion is that QE and the bank stress test cause the recovery in confidence first and the bank lending and consumption happened in tandem. The big question for Europe and Japan is that despite all these efforts in QE, we do not see a recovery in their economy. Europe is still having sub 1% growth and Japan has slipped into recession again with the second and third quarter of contraction in 2014. This might point to a bigger problem to their economies than what QE can solve. SNB Catalyst on GLD The SNB move to abandon the peg and lessen the deposit rate serves as a catalyst which brought the issue of negative interest rates to the forefront of investor’s mind. This is a signal to investors that there might be a paradigm shift in how major economies will operate from now on. The fact that the SNB has to surprise the market instead of following the usual central bank communications strategy which has been the norm for the past 10 years also hints at future uncertainty. In this environment, we are likely to see more demand from gold. We can see this from the SPDR Gold Trust ETF (NYSEARCA: GLD ) chart below. GLD tracks the performance of gold bullion after expenses and it is listed on the New York Stock Exchange. It is liquid with $27.54 billion of market capitalization and 17 million of last known daily transactions. (click to enlarge) Despite this liquidity, we see that GLD gap up on the SNB surprise. This is a clear sign that there are issues in the Europe and Japan which the market is concerned about. The market’s concern seems to be that despite the QEs, Japan and Europe would not be able to solve their issues. The side effect of these QE besides the massive purchase of securities, is to resort to negative interest rates which is forcing conservative investors out of safe deposit. These issues have always come along with QE and the market assumption has been that the recovery prospect will outweigh the risk involved as mentioned above. However the SNB surprise suggest otherwise and this is serving as a catalyst for these issues to surface and for GLD to gap up. Of course, the market has been wrong before and GLD was up from 2009 when the Fed started its first QE to 2011 when it was clear that the U.S. economy has recovered before GLD became bearish again. There is a possibility that this will be the start of a new bullish trend for the medium term if Europe and Japan is not able to get their act together. It would appear that even the strong USD cannot hold down GLD and this shows the depth of the market concerns.

10 Reasons Why Every Serious Investor Should Read Barrons

All serious investors investing for their future should subscribe to and read this weekly newspaper. Barrons is an antidote to main-stream financial news media that carries articles with screaming headlines of euphoria or disaster that intimidates investors. Barrons uses analysis and facts in addition to speaking with some of the most respected investors on Wall Street when setting out their opinions. Barrons follows up their stock picks periodically with continued analysis as to why they were right or wrong in addition to whether such picks are still valid. Barrons provides information, market data and columns covering all aspects of the U.S. economy and markets, world markets and other useful commentary. Many years ago we knew someone who was an equity-derivatives trader on Wall Street. That trader, who made almost $1 million in a year at the age of 27, told us we should read The Economist and Barrons each week. We read The Economist for a year or so, but the volume of reading required each week was overwhelming. Then, however, we started reading Barrons and we have never stopped. Barrons’ regular subscription cost is about $200 a year, but the publisher is always running special subscription offers. Currently an investor can obtain their first 26 weeks for $1 a week. We purchased our current Barrons subscription using 1900 airline miles. However you pay for Barrons, we believe all that serious investors investing for their future should subscribe to and read this weekly newspaper that arrives on Saturday mornings. We are not alone in our appreciation for Barrons. Here are some other articles discussing why Barrons is a valuable financial resource and how a reader should use the information contained within. Why we read Barrons generally As readers of our articles know, we do not look highly upon the most mainstream of financial-news-media outlets. Mainstream financial news media includes CNBC, Fox Business News and any news feed Internet financial web site that carries articles with screaming headlines of euphoria or disaster. Such mainstream financial media is not designed to truly help individual investors in a calm and sober manner. Rather, such mainstream financial news is designed to attain large viewership numbers. In our minds, mainstream financial media is on par with tabloid journalism. Harsh? Yes, but all too true. Barrons is different in that whether their news is bullish or bearish, they do not hit the reader over the head with histrionic language. Rather, Barrons uses analysis and facts in addition to speaking with some of the most respected investors on Wall Street when setting out their opinions. In addition, they have cartoons on par with New Yorker magazine to make you smile even when your recent investment performance is making you frown. In this article, we will briefly discuss why we read Barrons specifically. 1 – Up and Down Wall Street This article basically outlines the mood of overall markets, world economies and politics. This section is valuable to establish an overall investment mood for readers. This article typically starts with outlining the previous week’s trading and then interweaves economic data, political news both American and Foreign, significant events and commentary by well-known Wall Street players to establish a current mood for past week of trading and the mood that may lead off the upcoming week of trading. Reading this article is a must. 2 – Follow up to Barrons stock picks One thing you will rarely if ever see in the majority of financial publications is a follow up to buy and sell recommendations with regard to individual stocks, industry-related groups of stocks or overall market calls. Barrons is different. Barrons periodically reviews their stock picks whether they were good or bad calls. In a Barrons follow up, they will either say why a stock continues to be a buy, sell or whether their opinion has changed based on intervening news and set out an explanation for their opinion. Accountability for opinions is a rare commodity, and Barrons willingness to stand behind their successes and failures gives us confidence to consider and act on future Barrons recommendations. 3 – The Trader This article generally begins sets out the recent week’s movements in the market indexes by the numbers and ties in news related events that may have moved the markets up or down. Quotes from well-known Wall Street veterans are frequently set out in the beginning of this article. As this article moves forward there are usually one or two specific stock recommendations that a reader may further research and then act upon. Overall this article is one we read every week. 4 – Insider Transaction filings This section, while small, sets out a small but useful section of the top 20 largest insider buys and sales for the week along with an insider transactions ratio. Although insider transactions are available in many places, we like that the information is gathered all in one small place. In addition, the insider transaction ratio is a chart that indicates whether an overall market mood is bullish or bearish based on recent insider activity. We have used this tiny section successfully as a partial basis for some of our past investment decisions. 5 – Speaking of Dividends This article is valuable in that it recounts the previous week’s dividend activity such as dividend increases, reductions or special dividends. When the previous week did not have a significant amount of dividend news, this article recounts dividend trends in the overall markets that are valuable to consider for any dividend investor. 6 – Market Laboratory Barrons is old school so to speak in that it still gathers a significant amount of economic, commodity, market index, short interest, individual stock, dividend, bond, currency, foreign market and earnings calendar data. While a reader may be able to find much of this data in other places on the Internet, in Barrons, it is all in one place. Not all of the information will be valuable to every reader. We like the earnings calendar announcements, short interest tables, weekly new high/low tables, dividend data and research reports. 7 – 13D Filings A 13D filing is a filing with the Securities and Exchange within 10 days of attaining a greater than 5 percent position of a company’s securities. This information is valuable to investors interested in high or low profile investment stakes built up in a particular company’s stock by an investment entity such as an investment group. 8 – Weekly stock profiles This article or group of articles profiles one or two stocks a week in the small, medium and large capitalization range that provides a valuable starting point for an investor to research new investment ideas. Be careful of buying too quickly though as Barrons profile articles are known to provide a bounce in a profiled company’s stock in the week or so following the profile. A profile of a stock an investor already owns is still valuable as such profile provides a continued thesis for holding a stock into the future. 9 – The weekly headline article The weekly headlines article may focus on individual stocks, industry stocks, mutual funds, economic trends, various economies around the world. This headline article may not always be of interest to a reader but still should be read for the sake of deepening one’s knowledge in regard to various topics as they relate to the U.S. or world economies. 10 – Everything else Not everything in Barrons will interest a reader, but for the sake of completeness and increasing knowledge a reader should try to read most of the articles and columns which tend to run one page or less. There is: 1) Editorial Commentary by Thomas Donlan which tends to express his quite conservative views about politics, business and the economy; 2) D.C. Current by Jim McTague which focuses on American politics and the business world also with a conservative viewpoint; 3) CEO spotlight which focuses on the CEO of a company and their life and the performance and future direction of the company the CEO heads; 4) Technology week which we believe is one of the weakest links in Barrons as this column gushes over Apple, Inc. (NASDAQ: AAPL ) on a seemingly weekly basis; 5) the European Trader, Asian Trader, Emerging Markets and Commodities Corner columns; 6) Current Yield which focuses on bonds; 7) a mutual fund or investment group and their investments along with their outlook for the U.S. and world economies; and 8) Striking Price which focuses on the options market and market volatility. There is more, but to keep this article brief we have set forth the highlights of Barrons. Conclusion We have noticed that many people who have attained some form of monetary “success” either through their own efforts or inheritance read Barrons. We read it because their analysis is intelligent, informed and rational. The articles contained within Barrons address an investor with respect and do not scream their opinions to gain attention. Barrons, however, with their long and storied history is respected, incisive, listened to and quoted on a weekly basis year after year. As such, every investor who seriously wants to succeed for their own well being should read it regularly.