Three Steps to Protect Your Portfolio from the Next Bear Market

Three Steps to Protect Your Portfolio from the Next Bear Market

ALEXANDER GREEN, CHIEF INVESTMENT STRATEGIST, THE OXFORD CLUB

In one of my recent columns, I noted that investment analysis has gotten far trickier over the last few years. 

We have entered a period of “administrative markets,” in which equity returns are affected as much by government policies as they are by economic growth and corporate profits. 

In the last few years, we’ve seen large-scale bailouts; trillions in fiscal stimulus; massive quantitative easing; nearly seven years of zero short-term rates; heavy-handed regulation; and sharply higher taxes on income, dividends, and capital gains. 

Our corporate tax rate is the highest in the developed world, driving even iconic American companies like Burger King to move their headquarters to Canada. 

These policies distort markets... and lately equity investors have been paying the price. 

A Shot Across the Bow

The S&P 500 recently plunged more than 10% in four days. 

Don’t shrug this off. According to Bianco Research, this has happened only eight other times in the last 80 years. 

Yes, the markets took a significant bounce. But I still view this as a shot across the bow, a warning. 

Here’s what makes the smart money nervous right now... 

In the past, when the economy (and the stock market) went into the tank, the traditional policy response was to stimulate the economy with lower interest rates and deficit spending. 

But interest rates are already at zero. And under the Obama administration, the national debt has soared from $7.4 trillion to $18.4 trillion. 

What’s next? Are we moving to negative interest rates (like Europe), creating a situation in which you have to pay to leave your money in the bank and even more stupendous deficits? That policy prescription didn’t work well for Greece. 

Don’t put me in the gloom-and-doom camp. I’m not a pessimist. But I’m no Pollyanna either. 

I consider myself a skeptical realist who looks at both the positives and negatives. Despite the many government policy missteps over the last decade, there are factors to appreciate as well. 

For instance, the U.S. economy posted a much bigger rebound in growth during the spring than previously reported… (The Commerce Department adjusted the annual expansion rate in the April-June quarter sharply higher to 3.7%.) 

Plunging energy prices are a huge plus for everyone outside the oil and gas industry… 

Inflation is negligible… 

Housing is roaring back… 

Unemployment is falling… 

The dollar is strong... And the outlook for corporate profits is improving...

Three Essential Steps

Given the mixed outlook, what should you do with your portfolio now? Start with these three essential steps: 

1. Check your asset allocation. The roaring bull market of the last six and a half years has almost certainly increased – and perhaps more than doubled – your exposure to equities. If it’s now larger than you’re comfortable with, pare back to the point at which you’ll be able to sleep at night. How much in stocks is enough (or too much)? Investment great Benjamin Graham used to say that no one should have more than 80% of their portfolio in stocks – or less than 20%. Look at your age, time horizon, and risk tolerance, and adjust accordingly. 2. Move those trailing stops. Make sure they are no more than 25% below your holdings’ recent highs. And if you’re using “mental stops” – no actual stop orders entered – be sure to maintain your sell discipline when your stocks trade through your predetermined price. 3. Adopt a late-stage bull market strategy. That doesn’t mean move to cash. (This bull market could last five more weeks, five more months, or five more years.) History shows that as a bull market ages, the safest and best-performing stocks tend to be recession-resistant, mega-cap value stocks, preferably ones with growing dividends. (Those dividends both support your shares and provide income during the bad times.)

All this government meddling with the market makes this a challenging time for investors. We can only wait and see what policymakers dream up next, whether it’s higher rates or QE4 or something entirely new. 

Investment legend John Templeton used to point out that no matter how strange things look, economic and market cycles are all essentially the same. 

He famously noted that “this time is different” is the most expensive phrase in the annals of investing. That statement is generally true. 

But check your history. When was the last time the national debt was bigger than our GDP and the Fed held rates at zero for nearly seven years? 

This time really is different. Govern your portfolio accordingly. 

Good investing, 

Alex Green 
Chief Investment Strategist, The Oxford Club 

Source: Bonner and Partners

Follow us on Twitter: @blacklioncm

The Fed Is Bluffing... Interest Rates Won't Rise in 2015

BY BILL BONNER
POSTED 
AUGUST 20, 2015

BALTIMORE, Maryland – What did we tell you…

The Janet Yellen Fed will not raise interest rates in any meaningful way anytime soon. Instead, she will announce new QE programs.

Yesterday, red was showing up just about everywhere – U.S. stocks, European stocks, Asian stocks, emerging markets stocks, crude oil…

But it could have been worse…

U.S. stocks recovered some of their losses for the day, after the minutes of the most recent Fed meeting showed Yellen and team still won’t pull the trigger on a rate hike until certain unspecified conditions are met.

According to the Fed, the conditions for a rate increase are “approaching” but haven’t been met yet.

Well, guess what… Conditions will never be met.

It doesn’t work that way. This economy will never recover – not as long as it is under the current Keynesian management. It is like a patient attended by quack doctors – doomed to get sicker from their quack “cures.”

Market Morphine

Today’s economy depends on large doses of cheap credit…

And like morphine, you have to up the dosage just to stay in the same place. Take away the drugs, and the pain rises.

The pain caused by falling stock prices, for example.

Take away the cheap credit… and the buybacks on Wall Street dry up. That means earnings per share – the ultimate driver of stock prices – fall, too.

With falling corporate earnings and stagnant household incomes, the inevitable direction for stock prices is also down.

As we discussed in last Friday’s Diary, we’ve already seen that today’s stock prices are not the result of sober reflection on the part of investors.

They do not sit down with a yellow pad and a No. 2 pencil and calculate streams of income over the next 10 years. Instead, they count on the cronies to rig the market for their benefit.

As regular readers know, corporate execs have been borrowing at ultra-low rates and using the money to buy and cancel shares in their own companies. This clever piece of financial engineering reduces the count of outstanding shares and pushes up their value.

The insiders get bonuses… by looting the company’s capital and replacing it with debt. And shareholders get a nice bump in their portfolios.

Since 2009, the market cap of the S&P 500 has risen by almost $11.7 trillion.

And according to a new report from Aranca Investment Research, S&P 500 companies have spent almost $2.3 trillion on buybacks over the same period.

So about one-fifth of the increase in market cap is due to buybacks.

Cheap credit is essential to the looting process. Take it away and the flimflam falls apart. So do stock prices.

The “Recovery” Illusion

But the Fed can’t allow a real crash in the stock market. The “recovery” illusion is based on rising prices for equities.

Supposedly, this leads to a “wealth effect.” According to Fed doctrine, as investors see the values of their investment portfolios rise, they start to spend like drunken capitalists.

The economy is then supposed to explode with growth as “animal spirits” return to shoppers… leaving shiny coins all over the street for the poor to pick up.

Of course, it doesn’t happen…

Instead, the real spoils of cheap credit go to the C-suite cronies, who manipulate the stock market by pumping borrowed funds into buybacks. Stocks go up. But the real economy goes nowhere.

At the Sprott-Stansberry Natural Resource Symposium in Vancouver last month, our friend and Stansberry Research analyst Dr. Steve Sjuggerud debunked the idea that a rising interest rate cycle always coincides with falling stock prices. He pointed out that stocks have tended to rise in value during periods of rising rates.

Don’t worry about the Fed tightening, he told the audience. It doesn’t have to mean lower stock prices.

We don’t doubt that Steve is right. Typically, when the economy heats up due to organic growth, interest rates rise… and so do stocks.

But this is no typical bull market… and no typical economy.

The stock market is being driven higher by ultra-low rates, QE, and clever financial engineering. And the economy is not in the kind of healthy expansion mode that pushes up stock prices and interest rates at the same time.

Instead, much of today’s economy is as cold and lifeless as a corpse.

Commodities are plumbing record lows – most notably oil and “Dr. Copper,” widely seen to signal a deteriorating economy worldwide.

Shipping and freight prices reveal a slowdown in trade. (See today’s Market Insight below for more on that…)

A strong dollar, slowing exports, and falling commodities prices are hammering many of the emerging markets.

And China is struggling to avoid its own Great Depression.

That’s why Ms. Yellen is reluctant to raise rates. She knows it will be painful when she does.

Instead, she’ll administer another dose of morphine…

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

Caution! Corporate Cronies At Work...

TIVOLI, New York – U.S. stocks flat. A bump in Tokyo. A bump up in Shanghai. Gold registered a $7 loss in New York trading.

Noise, in other words. Nothing to worry about. So let us remind readers, and ourselves, of what is really going on.

This is a Great Zombie War. The fight is between zombies and their crony allies and the rest of the world.

That is the real struggle in Greece, for example.

The insiders – taking advantage of the Greek government’s ability to borrow at low interest rates – enjoy benefits that would otherwise be unavailable.

Now, Athens is deeply in debt… and the insiders are desperate to keep the credit flowing (to them!).

Jackass Codes

You’ll recall that zombies are people who live at others’ expense. They are not bad people, but the system either allows them… or condemns them… to take advantage of others.

Some of the ways the zombies do this are obvious. They get subsidies, guarantees, and direct payments from the feds (who claim to be providing an essential service).

Other ways are less visible. Extensive regulations, for example, keep out competitors, raise profit margins, and provide zombie jobs for inspectors, regulators, and assorted hacks.

Charles Hugh Smith, the chief writer at the Of Two Minds blog, gives a good illustration, relaying the experience of one of his correspondents:

For many years, many of my friends and family who have come to my home and experienced my cooking, have told me that I should ‘open a restaurant’… 

About five years ago, there was a restaurant for sale, not too far from my home and business. I thought about buying the restaurant, but at that time, the economy was not doing well, and I wanted to take a wait-and-see attitude before I committed to anything. 

Eventually, the restaurant closed down and a different type of business opened up in the space that had been a restaurant. That business went under in the middle of 2014, and I decided it might be time to open a retail food establishment in the space that used to be a restaurant. How hard could it be?

How hard?

Too hard…

The story is too long for us to repeat here. One permit led to the need for another. Then he needed an inspection. The inspection led to further requirements – enlarge this, replace that, put in this system, take out that… one after another… month after month… paper after paper.

Pettifogging standards… jackass codes… pointless rules… every one of them expensive and time-consuming. Finally, even a seasoned entrepreneur was forced to give up:

Essentially, I spent seven months trying to not only figure out what I needed to do, while I was paying rent and utilities, but I also spent many hours trying to figure out the complexities of what the state required. 

The law in Nevada is called the Nevada Revised Statutes, or NRS. The statutes for retail food are about 500 pages thick. That’s just the codes that cover food. This does not cover the building, electrical, plumbing, and service codes (such as ADA compliance, handicap parking, etc.). 

So, I quit. They beat me. 

It always amazes me when politicians use the sound bite of how they will ‘create jobs.’ Well, I am an entrepreneur and have created thousands of jobs over the past 25 years… 

But here are at least six jobs that I won’t be creating.

Profits Without Prosperity

Meanwhile, the Harvard Business Review reports a shocking figure: Between 2003 and 2012, companies listed on the S&P 500 spent 54% of their profits buying back their shares (reducing the number – and raising the price – of outstanding shares).

These companies devoted another 37% of their earnings to dividends. That means 91% of profits of America’s top corporations went to shareholders. Just 9% went into capital investment, research and development, expansions, and wage increases.

When we first saw that number we thought it must be a mistake. In our business, we have reinvested about 90% of our profits over the past 20 years – the opposite of the 449 S&P 500 companies in question.

What kind of business would be so shortsighted as to give up so much of its capital?

What kind of corporation would spend so little on R&D… business development… and capital investment?

Ah… then we realized: It’s the cronies at work!

Cronies in the C-Suite

First, as to why a company would do such a foolish thing, the Harvard Business Review gives us the answer:

In 2012, the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards.

By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings-per-share targets.

The cronies are paid to do it.

You’re probably wondering how this fits into the Great Zombie War. Isn’t this just capitalism at work? Isn’t this their own money… and they can do with it what they choose?

We answer these questions with questions of our own: How is it possible for them to do this? In the normal course of business you’d think they would need to hold on to more of their money. They are capitalists, aren’t they? They must need capital, don’t they?

Well, you are underestimating the subtlety of the zombies’ war plan.

It is fueled almost entirely with credit… provided at ultra-low cost by their cronies at the Fed. The cheap credit permits corporate America to borrow heavily at little cost and distribute this cash to shareholders… and, more importantly, to corporate insiders.

C-suite cronies are looting America’s top corporations of their capital and replacing it with debt. The public will shoulder the cost of so much cheap credit in the form of future inflation. Meantime, corporate insiders enjoy the spoils in the form of blowout bonuses.

That is why the zombies are fighting so hard to keep the credit bubble inflated – not, as commonly advertised, because it stimulates a recovery.

Cheap credit gives them a way to take what isn’t theirs.

And the war goes on…

Regards,

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

Are You Ready for the Coming Debt Revolution?

Bill BonnerMay 15, 2015

There is a spectre haunting America…and all the developed nations of the world.

It is the spectre of a debt revolution.

We left off yesterday talking about how the economy of the last 30 years — and especially that of the last six years — has favoured the old over the young.

‘Rise up, ye young’uns,’ we as much as said, ‘you have nothing to lose but your parents’ debts.’

We showed how the value of US corporate equity, mainly held by older people, had multiplied by 28 times since 1981.

That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.

But what did it do for young people whose only assets are their time and their youthful energy?

Alas, the real economy has increased by only five times over the same period.

A grim and menacing spectre

And when you look more closely at work and wages, the spectre grows grimmer and more menacing.

Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen — from $57,000 to $52,000 — in the 21st century.

But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why?

Was this huge shift — of trillions of dollars of wealth from young working people to old asset holders — an accident?

Was it just the maturing of a market economy in the electronic age?

Was it because China took the capitalist road in 1979?

Or because robots were competing with young people for jobs?

Nope…on all three counts.

First, old people, not young people, control government.

Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap.

Old companies fund most Washington lobbyists, too.

And old people decide elections: There are a lot of them…and they vote. They know where the money is.

Second, the government — doing the bidding of old people — restricts competition, subsidises well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the greybeards.

Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending. This rewards the current generation while pushing the costs into the future.

Grandparents prey on grandchildren

None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.

This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have.

We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971.

It was behind the eight ball, fearing foreign governments would call away America’s gold.

Few in the White House realised they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren…for the next 44 years.

And it’s still not over.

The new credit money — which could be borrowed into existence with no need for any savings or gold backing — was just what old people needed.

We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.

That spending lifted the value of the geezers’ assets and increased their living standards.

Meanwhile, the average 25-year-old reporting for work in 2015 can’t expect a single dollar more in real hourly wages than his father did in 1980.

The total value of outstanding US corporate bonds was 17% of GDP in 1981. Now, it’s $11.6 trillion — or 65% of GDP.

What did corporations use that money for?

Some of it went into capital investment that made companies more productive and more profitable. But much of it went where you would expect it to go: to buy back shares…to acquire other companies at inflated prices…and to pay off executives as the value of their share options went up!

Who did this benefit?

Mostly people over 50.

Government debt is even worse. Unlike most personal debt, it doesn’t go to the grave with the person who borrowed it. It sticks around to burden the next generation — who got nothing from it.

Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs — few of which provided any benefit to young people.

An accident? A mistake?

Partly. But old people must have known what they were doing.

Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they pocketed much of the money.

When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when their credit balloon popped in 2008, they whined to the feds to protect their ill-gotten gains.

Honest capitalism? Not if they could prevent it.

Creative destruction? Not on their watch.

Pay for what you get? Not if they could put the bills on the next generation.

Young people of the world, unite!

Regards,

Bill Bonner

Source: Daily Reckoning

Follow us on Twitter: @blacklioncm

The One Thing I’m Going to Teach My Kids About Investing

The One Thing I’m Going to Teach My Kids About Investing 
By Porter Stansberry, Editor, Stansberry Alpha

Over the years, I've explained a lot of Wall Street's "secrets"...

I've explained how discounted bonds are sometimes vastly better investments than stocks. I've covered how selling naked puts is almost always safer and more profitable than buying stocks outright.

These concepts (and others) are critical to active investors. They all play a role in giving you the tools you need to increase your returns. You ought to know all about them and be able to use them tactically to take advantage of opportunities in the market.

I've written about these concepts many times over the years. And I've said they're the "most important" thing I could teach you from time to time. I wasn't lying. All of these strategies have their "time in the sun."

Believe me... having this tool bag and knowing when to use these strategies will make you a much better investor. It will allow you to profit from opportunities the market always creates.

But... how can you learn to be patient enough to wait for these opportunities? That's what I'd like to show you with today's essay. I hope you'll print this one out... mark it up... and keep it near your desk.

The Real Secret…
The real secret is in this one...

So what's the most important idea I've discovered in finance? What's the one thing I'm going to teach my kids beyond the obvious stuff about saving, compounding and risk management? What do I believe is the real secret to investment success? 

And... the biggest question of all... How do I invest my own money in securities?

Over the long sweep of your investing lifetime, strategies that only work extremely well in certain market situations are unlikely to play a dominant role. The big secret, therefore, is something you can use all the time, for your entire life, as an investor. And here it is: Some companies are much better than others at compounding capital. Much better.

If your goal as an investor is to compound your savings over time, wouldn't it be easier to simply figure out which companies will compound your capital at an acceptable rate, buy those firms (and only those firms) at reasonable prices and then do something else with the rest of your time?

Here's a simple but powerful example...

Well-run insurance companies can produce what's called an "underwriting profit." They are literally paid money in advance to manage your capital. And they get to keep not only the investment profits, but profits from the premiums, too. 

That's like paying the bank to keep and use your money. No other business can compound capital so consistently.

Insurance companies have other fantastic advantages, too. They're able to legally defer most of their taxes. They're nearly immune to economic factors. They're scalable. I could go on...

They're a focus for us because well-run insurance companies are legendary compounders of capital. Buy them at reasonable prices, and it's impossible not to do well.


Natural Wealth Compounders
In the March 2012 issue of my Stansberry Investment Advisory, we explained that insurance stocks had rarely been cheaper. We recommended several through the year. Since then, stocks of all stripes have exploded higher... but they haven't outpaced insurance companies. 

Insurance stocks as a whole – as measured by the SPDR S&P Insurance Fund (KIE) – have far outpaced the S&P 500.



It's not an accident that the greatest investor in history, Warren Buffett, has long focused on insurance stocks and other companies that are highly capital efficient. That is, companies that are natural wealth-compounders.

Starting with his 1972 investment in See's Candies, Buffett gradually over the years shifted the bulk of his wealth into a simple, long-term compounding strategy...

While Buffett didn't abandon all other forms of investing, his largest allocations since 1972 have all used this compounding strategy. That famously includes his 1988 purchase of Coca-Cola... when Buffett put roughly 25% of Berkshire's capital into a single stock! 

And it wasn't a cheap stock, either. At the time, Coke was trading for 16 times its annual earnings. Buffett had figured out the one real secret of finance... the one secret to "rule them all." 

Three Important Questions
To use a long-term compounding strategy effectively, you really only have to answer three questions:

•		First, is the company in question able to produce very high returns on its assets? In other words, is it a great business?
•		Second, are these unusually high returns very likely to continue for decades, without requiring large and ongoing capital investments?
•		Third, can the management of the company be trusted? Will bankruptcy never be even a remote possibility?

If the answer to these questions is "yes," then all you have to do is simply not pay too much when you buy the stock. Most of the companies that fit these criteria are branded consumer-products companies – stocks like McDonald's, Coke, Heinz and Hershey.

Long-Term Earnings Power
Buffett explained in his 1983 shareholder letter how he thinks about these companies. The secret to their long-term earnings power is very simple: It's their brand and the relatively unchanging nature of their products. 

These companies' products are so well known (and adored) by customers that these firms can constantly raise prices to keep pace with inflation.

Meanwhile, the brands – while requiring some advertising – aren't like factories, gold mines or drugs...

They don't require massive investments of new capital. There's no new gold mine to find and build. There's no patent that's going to expire. And there's not even any new product that must be created: Coke's fans went crazy with anger when the company tried to change its product in a small way back in 1985.

All these firms have to do is continue to deliver the same thing, year after year. And that means they can afford to return huge amounts of capital to shareholders.

Merely buying and holding any of the stocks I mentioned above would have made you 15% a year if you'd just reinvested the dividends for the last 30 years. 

Even if all you did was invest $10,000 and then nothing else – not a penny more – you'd still end up with $575,000 at the end of 30 years. If you invested $10,000 annually, you'd end up with $4.3 million.

And the best part? This approach can be used by anyone.

Simple Math
The math is simple. And is it really that hard to realize that Heinz is the best sauce company... that Coke is the leading soft-drink business... or that McDonald's makes the best hamburgers for kids? 

The No. 1 objection I get from readers when I talk about this strategy is: "That's great, Porter. Wish I'd known about that when I was 25. But it's too late for me now. I don't have 30 years."

That's nonsense. Think about it this way... Buffett was born in 1930. He didn't buy Coke until 1987. He was 57 years old. It has been one of the greatest investments of his life – bar none.

If that doesn't convince you, just think about it this way. How often do you make more than 15% on your portfolio in a year? Whether you've got three decades to invest or only one, you should aim to produce the highest possible annual return without putting your capital at undue risk.

There's no safer investment approach than this one, as your returns are being manufactured by great businesses. You don't need a "greater fool" to pay too much for your shares to make a profit. In fact... the biggest risk you face is selling at all because that will trigger taxes (in most accounts).

It's this seemingly invisible power that allows these companies to return massive amounts of capital to shareholders – a factor that sets them apart and greatly reduces investor reliance on capital gains. This is incredibly important over the long term.

Source: Bonner and Partners

Follow us on Twitter: @blacklioncm