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The Secret Behind Macroeconomics & Value Investing (Part 2)

mad money investwithalex

With that said, how do you perform proper macroeconomic analysis that is useful for picking stocks?

It is very easy.

Step #1.  Read, Listen & Follow

Read and listen as much as you can. Yet, be very selective. Here is what I DON’T want you to read and/or listen to.

  • Most Economists
  • Professors of Economics/Finance
  • Technical Economic Papers (they are worthless when it comes to market applications).
  • Talking Heads On TV
  • News, Newspapers or Magazines
  • Politicians
  • Market Pundits

Be aware of these sources, but do not take them at their core value.  Simply put, their interests are not aligned with yours. They either want your attention or they are trying to sell you something. Plus, in the majority of the cases,  all of these sources are simply recycling the old news and putting their own spin or analysis on it.  Yes, their view could be accurate, but it is rarely so.

At the same time, here is what I DO want you do to.

I want you find market practitioners (money managers, hedge fund manager & investment advisers) who have a very good track record when it comes to stock market or economic predictions. I want you to start following these people. I want you to read, listen and study everything that they have to say.  These people have a proven track record and for the most part they do not have time for nonsense.  Just as your money is on the line, so is theirs. This aligns your interests and ensures that their opinion is at least backed by capital.

For example, you can follow my blog at www.investwithalex.com if you believe the opinion I share on it is an accurate one. There are too many other smart and capable money guys that I can recommend, but I will not. Discovering these people is part of the process of learning who you should follow and who you should avoid.  Just as you should never buy/sell stocks based on somebody else’s advice, you should never blindly follow someone and their opinion.  Even though they might sounds very smart, they might also be wrong.  Remember, you must always perform your own research in order to form your own conclusions.

With that said, here is the best part. Being an independent thinker in the investment world pays off….big time. 

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Are All Economists Retarded?

Bloomberg Writes: Why Germany’s Export Machine Is Under Attack

 EconomistsMessedUp

Imagine someone who runs a thriving luxury car dealership, yet does the weekly shopping at a no-frills discount store. That pretty much describes the Germans. The global No. 3 exporter is famously thrifty at home, so Germany runs a trade surplus equaling nearly 7 percent of its economy.

Now, imagine telling the Germans that this is bad. That’s what is happening as a growing chorus of international critics warns that Germany’s trade surplus is endangering global growth, and putting Germany’s own future at risk.

On Nov. 5, the European Union threatened to probe Germany’s trade surplus, which since 2007 has exceeded EU guidelines of a maximum 6 percent of gross domestic product. Germany must boost consumption and raise wages “to open the bottlenecks to the growth of domestic demand,” EU Economic and Monetary Affairs Commissioner Olli Rehn said.

Rehn’s comments follow recent criticism from the International Monetary Fund, which says German export policy is hindering Europe’s economic recovery. A “significantly smaller current account [surplus] would be useful,” David Lipton, the IMF’s first deputy managing director, said in Berlin last week.

The U.S. has weighed in, too, with a recent Treasury Department report (PDF) warning that German policies were placing “severe pressure” on troubled European economies and creating “deflationary bias for the euro area, as well as for the world economy.”

Not surprisingly, the Germans are furious. Trade surpluses “are a sign of the competitiveness of the German economy and global demand for quality products from Germany,” the country’s Economy Ministry said on Oct. 31. “There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,” spokesman Martin Kotthaus told reporters in Berlin. An article in the magazine Spiegel 

The critics, though, aren’t really asking Germany to export less—although that certainly would help such EU trading partners as Spain and Italy, which are struggling to export more of their own goods. The Germans are mainly being asked to spend more money on themselves. Over the past decade, Germany has dramatically lowered labor costs and reduced unemployment by creating a large number of low-wage and part-time jobs.

Read The Rest Of The Article Here

Sometimes I feel like I live in the parallel universe where only stupidity is rewarded.

Germany is running its economy as any responsible country should (well, besides being a part of the European Union) and IMF/USA have the balls to tell Germany to that it is doing everyone a disservice by not spending more.  I have never heard anything more ridiculous.

While I understand the reason behind such a statement, this is equivalent to having a friend who has already maxed out all of his/her credit cards telling you that you should live it up a little and instead of saving money should blow it all on coke and hookers.

It is terrifying, but that is the state of our economic leadership today.   It leads to nothing more than an eventual  decline in economic standard or worse…..an economic collapse that is just around the corner.  

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China Wants 7.2% Economic Growth, I Just Want A Ferrari For Christmas

BusinessWeek Writes: China Needs 7.2% GDP Growth for Jobs, Says Premier

 china-bubble-investwithalex.

Thanks to the Workers’ Daily, we now know a little bit more about how Chinese economic growth translates into jobs creation—or at least how top Chinese officials view that crucial equation.

Speaking at a national congress for China’s official trade union two weeks ago, Premier Li Keqiang said that China needs economic growth of at least 7.2 percent in order to ensure adequate employment, the Beijing-based newspaper reported on Nov 4. “The reason why we want to stabilize growth, in the final analysis, is to preserve jobs,” Li said at the union meeting on Oct. 21.

Li also pointed out how important the rest of the world remains for ensuring adequate employment in China. All told, China has some 30 million workers who are directly dependent on China’s export industries, and an additional 100 million serving in supporting industries, Li said. “If exports fall rapidly, it will create an employment problem,” he said.

Read The Rest Of The Article Here

China is going to be an exciting case to watch and study over the next couple of years. It is no doubt understandable that Chinese officials want fast economic growth rate, but we don’t always get what we want.  Particularly, considering my forecast for the US Economy and its financial markets.

At least at this stage, I do not believe that 7.2% economic growth is feasible for China over the long run.  Not even close. The problems stems from the fact that about 25-50% (some claim much more) of Chinese economic growth over the last decade came from capital misallocation and pointless infrastructure projects.  Also known as, empty cities, rail networks, roads to nowhere, etc….  That is one of the reasons Chinese banks are sitting on a time bomb called bad loans that thus far they have been able to ignore.  The problem for China is, there isn’t that much more infrastructure or capital misallocation work left to do and bad loans increasingly becoming a huge problem.  As such, I believe China has no room left for 7.2% economic growth.

Add to that an upcoming global recession (based on my work), subsequent export slowdown and China finds itself sitting on a powder keg of economic trouble. What happens if all of the issues above come home to roost at the same time and instead of 7.2% economic growth China ends up with 2-3% or god forbid even goes negative.  With massive unemployment and certain public unrest  it would be fascinating to see how China comes through.  Will its communist government be able to survive or will Chinas pain be so great that a new political system will be established.

That is why it will be so exciting to watch China over the next few years.

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The Secret Behind Macroeconomics & Value Investing

The Secret Behind Macroeconomics and Value Investing

 macroeconomics investwithalex

By now we have looked at value investing and what it is, how to determine the intrinsic value of any stock, what the margin of safety is and how to apply it properly, what types of stocks to look for and what to avoid.  Still, there is one more thing to consider. Macroeconomics.

I am a firm believer that as an investor one should understand Macroeconomic factors prior to making any sort of an investment.  While not an important part of an equation for short term traders, it is an incredibly important factor for most value investors who’s investment time frame is oftentimes counted in years. A miscalculation on macroeconomic front could have severe consequences on your overall investment. Let me give you an example.

For simplicity sake and without going into too many details, let’s assume that you have looked into buying a home building stock in early 2007. After doing a lot of research and valuation work you cannot believe your eyes. For some reason the stock is selling at 60% discount to its Intrinsic Value and the growth rate remains over 20% on all fronts.  Everyone is excited about the real estate market and your work shows that this stock should at least double over the next 12 months.  Based on your work you are 100% confident that this particular stock is a Rocket Ship. You can’t believe how lucky you are as you begin drool just thinking about how much money you are going to make.   

Yet, you have just missed an incredibly important point that only macroeconomic analysis can provide.  You have missed the fact that the overall US Economy and the Real Estate/Financial industry in particular are in a giant bubble that is about to blow up.  You have missed the point that when that bubble does blow up it will take the entire economy and the real estate/financial sector in particular down with it. Big time. Further, when that happens your significantly undervalued home builder stock price is likely to collapse even more because it is directly tied up into that sector. 

That is exactly what happened. Even though home building stocks were already down significantly at the start of 2007 (indicating substantial value), they proceeded to decline even further (50-80% further) when the credit bubble of 2007-2009 finally blew up.

Point being, looking at the company or the sector alone, is not good enough. You must have an overview of the overall economic environment  in order to avoid situations as described above.   A value investor with a clear macroeconomic point of view would have never even looked at home builders in 2007. Well, maybe from the SHORT side, but that’s about it. Bottom line is, any good investor worth his salt should always be aware of where we are in the economic cycle. That is where macroeconomic analysis comes in.

Do not despair.  You do not need a fancy degree from a business school to understand macroeconomics. It is probably best that you don’t have one. That way you have an open mind to see how easy and straight forward this analysis can be.

First, you must understand something very important. Do not pay any attention to the financial media (or media in general) and/or professors of economics and/or the economists themselves.  All of that data and all of their fancy economic models are nothing more than garbage. If their models worked, these people would be on Wall Street making millions of dollars instead of playing with their numbers and/or teaching others.

Let’s make it as simple as possible when it comes to economists with their own interest on the line.  Simply ignore ALL of them.  Don’t give them even a split second of your attention. 

To be continued…..

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How To Tell If You Live In The Bubble

CNBC Writes: Hong Kong luxury home buyers queue amid talk of last hurrah

hong kong investwithalex 

People often tell me that it is impossible to spot the bubbles in financial markets. They claim that if Mr. Greenspan or Mr. Bernanke can’t spot the bubble, then neither can they. Well, understand something. Mr. Greenspan and Mr. Bernanke are responsible for creating bubbles that will hurt the US Economy for decades to come, not spotting them.

With that said, bubbles are incredibly easy to spot.  Case and point, the Hong Kong real estate market.

In a shopping mall in one of Hong Kong’s prime retail districts, more than 100 people wait patiently to take a lift to the sales floors – not to buy luxury bags or clothes, but high-end apartments with price tags of up to $4.4 million.

Foster Lee, a 30-year-old banker, was among the lucky ones who won the chance to buy a unit after a ballot in which more than 1,600 people signed up for just 80 luxury units on offer.

Wow, 1,600 applicants and 100 people fighting over $4.4 million apartments. Most likely a very small “luxury” apartment.  Do I even need to say anything else?

Signs on the ground point to a clear pick-up in demand from local and Chinese buyers, thanks in part to steep discounts offered by developers to offset higher stamp duties imposed a year ago to cool prices that have jumped 120 percent since 2008.

“You see that people who earn less than you have caught up with you because they bought then. It’s like a girl you liked got married,” Lee said.

Greed and “if everyone is doing it so should I” psychology has set it. This happens during last stages of a bubble. Everyone knows the prices are unsustainable and most people can’t afford it, yet prices keep going up and people keep buying based on psychological factors alone. Yet, when the fuel of psychology runs out, the drop is always sharp.

Last weekend, long queues at one project prompted developer Hang Lung Properties to postpone pre-sales and change the first-come, first-serve rule to a ballot system, in which more than 400 buyers competed for just 80 units priced from HK$8 million to HK$15 million ($1.93 million). Read The Rest Of The Article Here

Bottom line is, bubbles are easy to spot.  The hardest part comes when one has to open their eyes and see things for what they truly are. 

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What Does The Bear Say?

friendly bear investwithalex

People keep asking me why I don’t short the market right now if I am such a bear and believe in my forecast.  I believe this is a very good question that requires an explanation.

First,  I am not a bull or a bear. I am a money manager and an investor. My job requirements are fairly straight forward. To make money in both bull and bear markets.  My current bearish stance does not come from a position of being a “Permabear” (as some people out there), but from a very well researched and analyzed position of being a money manager.  Further,  I often shift gears but only when the time is right.

For example,  I was a BIG bear starting in 2006 warning anyone who would listen that our credit markets, real estate, the stock market and the overall economy would blow up shortly. Not many people have listened to my advice. Then in early 2009 as everyone was freaking out I came out and said that the bear leg is almost over and the time to buy will come in March of 2009. I was an all out Bull when everyone was crying and shorting the market.

Now, with the market approaching all time highs and fundamental picture deteriorating significantly, I am once again a bear.  Both my fundamental and my mathematical timing work clearly indicate that the stock market and the overall economy are about to implode again.  As I discuss on this blog I have no doubt about that.

However, I am not the dumbest bear in the woods.  That means you have to follow the market and only short when the time is right. The timing is not right…… just yet.  As I have mentioned many times before on this blog it is highly probable that the bull leg that started in March of 2009 will complete in March of 2014. Once it does, the market should roll over and head down hard.

Until that happens and until we get the confirmation that the bear market is in full swing there is no reason to go short.  Quite the opposite. The market is still trending up and smart investors should continue to HOLD their LONG positions if they have any.  Just as my advice indicates. (Although I wouldn’t buy any more right now).

I hope this helps with the understanding. 

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Warning: Not All Stocks Are Created Equal (Part 4)

catch-a-falling-knife-investwithalex

 Further, there are three more important points that deserve a quick note.

1.  Never try to catch a falling knife

These are known as stocks that have had a huge drop in value over a short period of time.  Sometimes as much as 50-80%.  Imagine for a second that you were considering an investment opportunity only to see it drop 50% over the last 2 days. You can’t believe your eyes. You thought it was a good value before the collapse, yet now the stock is being given away. Literally. You can’t stop salivating and/or thinking how much money you are going to make. STOP.

NEVER invest in falling knifes. Forget about your fundamental analysis or Intrinsic Value calculation. NEVER buy into this situation from both technical and timing perspective. I will describe this further in the timing section, but the chances are high that such stocks will continue to decline even further before experiencing stabilization or a recovery.  Do not worry, in 99% of the time you will have plenty of time to pick up such stocks long after the collapse. Very rarely will you see stocks that have experienced a large drop in value over a short period of time show a “V” shape type of a recovery. It happens, but very rarely.  

I have made this mistakes a number of times in my early days, but will never make it again. As such and as a general rule, avoid falling knifes like your life depends on it.  

2.  Avoid Penny Stocks.

It is very tempting to buy a $0.25 stock in hopes that if it goes to just $5, you will walk away with making 20x on your money. We always hear stories how someone, somewhere has made such a killing and turned their $5,000 into $1 Million within a year.  Clearly understand, this is just hype perpetuated by day traders and people trying to sell you newsletters or the penny stocks themselves.

I don’t know of a single person who has made any real money investing in the penny stocks over an extended period of time. You might get lucky here and there, but the risk associated with investing in penny stocks is just too much for an average person. You don’t see Warren Buffett, George Soros, Jim Rogers and other top fund managers investing in penny stocks and neither should you.

3. Concentration or Diversification

A whole book can be written about pros and cons of both concentration and diversification. Which one is better? Well, that really depends on your personal specification and your risk profile. For me, concentration is a much better way to invest especially if you concentrate only on Rocket Ships and Waking Beasts described above.

The problem is, if you concentrate only on two such categories chances are you will not be able to identify more than 3-10 such stocks (in normal market conditions).  Personally, I like concentration on such stocks as they provide me with the lowest risk and the highest return profile.  Warren Buffett has the same approach.

Yet, it also depends on how you define risk.  Is it more risky to hold 1 stock purchased at a significant discount, a stock you have fully analyzed and know everything about, a stock that you expect to appreciate significantly -OR- is it more risky to hold 30 stocks your don’t really know that well.

One again, that is a personal choice that you would have to make. If you are new to investing, I would recommend you to diversify at first and then slowly move towards concentration as you gain more knowledge and experience.

Summary:  This chapter discusses various attributes of different value stocks by showing you that not all area created equal. It further suggests that you should concentrate on Rocket Ships and Waking Beasts as your primary investments vehicles. Such stocks tend to provide investors with the lowest risk and the highest return profile.  Further, the chapter encourages you to avoid falling knifes and penny stocks.  Finally, it shows that diversification or concentration should be based on your personal preferences and/or risk profile. 

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Secret Government Calculation Guarantees Full Employment By 2017

BusinessWeek Writes: The U.S. Job Market Won’t Be Normal Until 2017, Says Goldman

 labor market inveswithalex

Two economists at the Federal Reserve Bank of Kansas City concluded recently that at the current rate of progress, the U.S. labor market won’t get back to normal until the summer of 2015. That’s bad enough. But Goldman Sachs (GS) economists, examining the same data, conclude in a report today that normal might not arrive until the beginning of 2017.

Either way it’s pretty depressing, considering that the recession began in December 2007. The financial markets are betting that the Federal Reserve’s rate-setting Federal Open Market Committee will start tapering purchases of long-term bonds sometime in early 2014. But the FOMC has said that the purchases will continue“until the outlook for the labor market has improved substantially in a context of price stability.” If the FOMC sticks to that commitment, bond purchases could continue longer than many people expect.

I really have no idea how they come up with these numbers. Maybe they have a supercomputer in their office churning out billions of calculations per second or maybe they just throw darts at the calendar. I think the latter is more plausible.

The problem with their analysis is they are discounting continual economic growth over the next 5 years. Well, let me ask you something. What if instead of economic growth our financial markets and our overall economy go through another severe contraction as I constantly argue? Are we going to normalize by 2017 or will the chart above take another dive? I think you know the answer to that.

The labor market in the US is facing strong headwinds. I think the situation we have today is the new norm and even that will continue to deteriorate.  With our economy, financial markets, Obama care, outsourcing, robotics and higher productivity rates all putting negative pressures on full time employment, the labor market picture going forward is not pretty. 

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Rich Families Are Hoarding Cash, Should You?

CNBC Writes: Rich families are hoarding cash: Citi

 hoarding-cash-investwithalex

A new survey of family offices by Citi finds that the wealthy are cash heavy-meaning they may fall short of the investment returns they’re expecting.

Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.

Most of the families surveyed expected interest rates to rise. About 60 percent projected long-term market rates to rise 50 basis points and 17 percent said they would increase 100 basis points or more. Just 2 percent expected U.S. rates to fall.

Read The Rest Of The Article Here

While not always the case, the rich are typically more savvy when it comes to investing and/or managing money. They typically have a better understanding of the economy and the financial markets.  So, why are they hoarding so much cash?

Maybe they are following my advice (to accumulate as much cash as possible) or maybe they are simply aware of what is going on in our economy and our financial markets. They look around and they realize that all major asset prices (stocks, bonds and real estate) are way overpriced.  Maybe they have a hunch that the only direction interest rates can go is up. Maybe they have a clear understanding that when the interest rates do go higher, it will have a severe negative impact on the overall economy.  As such, they hoard as much cash as possible to A. Prevent downside and to B. Have it available when lower prices present themselves.

Don’t believe me? Find the richest person you know and ask them. 

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Stock Market Update, November 1st, 2013

daily chart Nov 1, 2013

Summary: Continue to maintain a LONG/HOLD position

Not much has changed since our last weekly update. Even though the DOW set a new high by a few points, it doesn’t really matter. In fact, I will leave my last weeks update mostly intact while adding a few little things here.

1. Trippe tops spread out over weeks or months are notoriously dangerous. That is exactly where we are. They typically indicate the end of a move and beginning of a counter move (or bear market in our case). Unless the market breaks to the upside here, this might be the end. 

2. My mathematical work is showing that this energy level is tapped out. The market has no room nor energy to go higher here. That is why we are seeing the triple top. 

3. The market left a huge gap around 14,800, it must go back there before any sustained rally can take place. 

LAST WEEKS MARKET SUMMARY: Still Valid 

This is where the picture gets a little bit fuzzy.  According to my mathematical work there is no doubt that we are at the inflection point with two possible outcomes.

  1. September 2013 top was indeed the top and the bear market down leg will resume shortly.
  2. The final top (a little bit higher or lower than September 2013 top) will be set in March of 2014. Thereafter the market will roll over and begin its bear phase.

As I have mentioned many times before, my mathematical work is clearly showing that the bull is ending and the 2-3 year Bear market is just beginning.  I would call the exact date, but there is just too much interference right now.  Unless a severe down leg starts over the next 2 weeks, we will have to wait until March of 2014 for the Bear to start. Until that happens a lot of ups and downs without so much as going anywhere.  The rest of my analysis remains the same.

Over the next few weeks we will find out if the if the bear market has already started or will start in March of 2014. Should the market break below 14,600 over the next two weeks, the probability is high that we have already started the bear market leg into the final 2016 bottom.  The market is certainly going back into the 14,800 as it left a huge gap there, but a firm break below 14,600 will give us a confirmation that the bear is back.

At the same time we cannot yet ignore the technical picture with the market being near an all time high. As such, I continue to advise you to maintain a LONG/HOLD position while waiting for the confirmation that the bear market has indeed started.  

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