Sunday, February 28, 2010

Well Respected Man

Before I get into the multitude of issues I have with Harry Dent, I'd like to begin by saying that I think he's an intelligent man and not the charlatan one financial Web site called him. After all, he's in the market timing business and to get it right once is almost a curse because your followers expect you to be on the money each and every time you open your mouth. It just doesn't happen that way. Even being in the ballpark doesn't cut it when day traders have you under the microscope. As a disclaimer, I'd like to say that I'm not a subscriber to Dent's newsletter and hot line, but do have access to them through a fellow investor that shares them with me. I also have read all of his books and find the majority of his material useful because he's an excellent researcher. His prowess as an investor is questionable, but we'll get to that in a moment.

Dent was a raging bull in the 1980's, 1990's and 2000's. I'm going by the seat of my pants here only because it's been a long time. But during the 1990's, Dent wrote both The Great Boom Ahead in 1993 and The Roaring 2000s in 1998. In The Roaring 2000s, Dent claimed that the DOW would reach 25,000 in a matter of years, only to see it come crashing down after reaching a high of 11,722 the week of January 10th, 2000. In 2004, he came out with another book, The Next Great Bubble Boom where he made another bold prediction of the DOW reaching 40,000 by the end of the decade. We all know what happened here. The Dow reached a high of 14,093 the week of October 8th, 2007 and never looked back as it went spiraling downward to the lows of March, 2009.

In fact, in the Fall of 2008 when the market imploded, Dent hung onto his bullish predictions until November when he advised clients to raise cash and get out of the market. It was a few months later at the beginning of January, 2009 that Dent wrote in his monthly newsletter urging subscribers to get back in. The market then proceeded to tank once more, but he garnered a 20% gain for his followers in 2009 if they stayed fully invested to take advantage of the current rally we are still experiencing. However, Dent is by no means a perma-bull. He's quite bearish right now (although he does see this rally continuing for another few months) and has been predicting another great depression for more than a decade. His 2009 book The Great Depression Ahead is a New York Times bestseller and rightfully so. It's a good read and I recommend it.

What I don't recommend is investing in Harry Dent's relatively new AdvisorShares Dent Tactical ETF (DENT) because it is an actively managed Exchange Traded Fund and because Harry Dent has had poor performance in the past when he ventured into the mutual fund business. As Larry Swedroe of CBS MoneyWatch wrote in September of 2009: "In 1999, the AIM Dent Demographics Trend Fund was launched, based on the demographic, economic and lifestyle trends identified by Dent. Unfortunately, the fund's results were miserable. From 2000 through 2004, the fund lost more than 11 percent per year and underperformed the S&P 500 Index by almost 9 percent per year. In 2005, its sponsor put investors out of their misery by merging it into the AIM Weingarten Fund.". Although I realize the AdvisorShares Dent Tactical ETF (DENT) is a new venture for Dent and I should give him the benefit of the doubt, I am opposed to actively managed ETFs because of their high expense ratios and believe ETFs should just be index based.

I've had the opportunity to read many investment newsletters and find Dent's to be one of the better ones because he does such thorough research and backs up his findings with cold, hard data from a variety of sources. However, I think it's how you interpret the data that gets Dent in trouble at times. He tends to be more of a technical analyst and I am a value investor and many times don't see eye-to-eye with his interpretations of the statistics he presents. He's also in the dangerous business of making short-term projections as to where the market is heading. He reports these projections in his almost weekly updates. As stated earlier, The Great Depression Ahead is an excellent book and I found it to be instrumental in determining some of my bearish stances. The rest of his books are outdated now, so they are best to avoid. I'll continue to read his newsletter while taking them with a grain of salt.

Monday, February 22, 2010

Eating Crow

Two weeks ago while the market was in a downward trajectory, I made the prediction that we were heading for a well needed 15%-20% correction and came up short. The market did correct, but only by 9% from peak to trough. Does this deter my long-term stance that we will be retesting the lows of March 2009? No. Absolutely not, although I'll probably be lambasted for being foolhardy until I meet that benchmark, or at least get close to it. In actuality, the mini-correction of a fortnight ago actually strengthened my resolve that the market will take a nosedive sometime in the next six months because it really hasn't had a healthy pullback in almost a year. November, December, January and February tend to be the four best months for the market. I'm just going to bide my time because we are almost through a seasonably advantageous time for stock prices.

Bill Clinton, Larry Summers, Alan Greenspan, Barton Biggs and Jean-Claude Trichet among a host of others all gave glowing praises to David Smick's The World is Curved: Hidden Dangers to the Global Economy and I really looked forward to reading it. If you have been following this blog, you know I try to review at least one book a week to inform readers about what is going on in the financial press and to buttress my conviction of more widespread panic in the market. Smick believes that the two decades before the sub-prime crisis were an anomaly of growth and that: "During this quarter-century, the Dow Jones Industrial Average climbed from 800 to 14,000, before the financial crisis hit. To match that stock market success in percentage terms over the next twenty-five years, the Dow would have to exceed 170,000.". So if you have a short-term time horizon and think you can keep racking up gains of 15% almost every year like we have from 1982 to at least until 2000, you are grossly mistaken.

The praise bestowed upon The World is Curved: Hidden Dangers to the Global Economy reminded me of the glowing recommendations for How Markets Fail by John Cassidy. With both books, I didn't see what all of the excitement was about. To be quite frank, reading Smick's book was quite a chore. Like with all economics books, I did get something out of it, such as the stance that China is in a bubble and that when it bursts, it will send share prices of securities from all over the globe cascading downward. This bubble could bust faster than you think because: "Most Western experts suggest that if the Chinese growth rate drops to below 7.5 percent, serious unemployment would set in, furthering political unrest and threatening the stability of the entire economic system. During 2009, the economy officially grew between 6 and 7 percent.". Smick is an experienced international financial consultant and feels China is another house of cards, just like our interconnected worldwide banking system, but only worse from its lack of transparency: "Compared to the Chinese banks, today's troubled, large American and European financial institutions look like paragons of financial purity.".

I got a lot out of Smick's chapter on China. While most soothsayers will tell you China is the engine that will drive the markets forward, he takes the opposite stance: :"...all but the most sophisticated media paint a picture of China as the great Asian Promised Land. Perhaps it will be. But in my view, China is attempting to accomplish something never achieved in the history of mankind - to marry a market economy with a Marxist political regime.". The World is Curved is a good book, but not a great book because as much as I learned about China, it wasn't enough information to warrant reading it in it's entirety. However, I did read it and it gave me added ammunition to remain in my short positions. I don't know if China will be the catalyst, but something is going to trigger another avalanche because there is just too much sovereign debt, especially in the United States. I was wrong two weeks ago and I could be wrong again, but I'll hold steady with my convictions until I see evidence that sways me in another direction.

Wednesday, February 17, 2010

Peter Schiff

I'm not one to kick a guy when he's down, but that's what some segments of the media did to Peter Schiff in 2008 when his client's holdings at Euro Pacific Capital allegedly decreased by 60%-70%. Mish's Global Economic Trend Analysis, a very popular financial blog, really piled on and threw him under the bus with a scathing review of Schiff's investing acumen in January of 2009. Schiff in return has written a rebuttal to all of his detractors in Crash Proof 2.0 which basically stated that he is a long-term investor and those that chided him were myopic in their leanings. Crash Proof 2.0 is the newest edition of Schiff's Crash Proof that was published in 2006 and correctly called the housing bubble and subsequent implosion in 2008. I'll give credit where credit is due and Schiff did call the financial meltdown of the housing and stock markets. His timing was impeccable, but some of that is attributed to riding with lady luck. Crash Proof 2.0 essentially reprints most of the first book and gives addendum's at the end of each chapter that were written in the aftermath of the crash.

If you are not familiar with Schiff, besides being president of Euro Pacific Capital, his resume also reads economic advisor to Ron Paul's presidential campaign, so you can infer he is to the right of right. As he says in both books: "I, along with a handful of others using the same lens, am simply applying the basic laws of classical Austrian economics. The Austrian school is not considered mainstream these days, so guys like me are few and far between.". That's probably a good thing. I've written at length about the Austrian School of economics in previous posts so I won't go into great detail about it only to say that they essentially believe in ending the Federal Reserve, going back to the gold standard and minimal government intervention. While I don't agree with Schiff and the Austrian economists who seem to be coming out of the woodwork these days, on 99% of the dogma they adhere to I do concur that there is still more fallout in the market. In the author's note to Crash Proof 2.0, Schiff states: "while most believe that the economic collapse is over, the reality is that it has only just begun. What we have witnessed thus far are merely the events that have set the collapse in motion. It will take some time for all of the dominoes to fall.".

The Dow Jones Industrial Average at 4,000-5,000. Gold at $5,100 an ounce. The dollar bottoming at 20, maybe lower. These are all eye-popping predictions Schiff makes in his book. He claims he is not your run-of-the-mill perma-bear who are like stopped clocks and can be right a couple of times. But, he has been bearish for as long as I have been aware of him. He even states in Crash Proof 2.0 that he had his clients stay out of tech stocks in the 1990s. He contradicts himself more than once during the book. For example he advises readers to invest in only conservative dividend paying foreign stocks while warning about the evils of investing in ADRs because the stocks are too big and well known. I'll call off the dogs here because the purpose of this article is not to trash Schiff, but to take another "expert's" opinion on why the market is going to correct. However, at the risk of belaboring a point, he and John Downes (who co-wrote the book) do contradict themselves at times.

The investment advice Schiff gives can be summed up as follows: Put 70% of your money in foreign stocks, 30% in gold and sit tight and wait out the crash, not in worldwide securities, but in American stocks. He deems the sun is setting on the American Empire because of all the debt the government has accumulated. Schiff believes in markets decoupling, that the greenback will no longer be the world's reserve currency and probably be replaced by the Euro. I couldn't disagree with him more. Crash Proof 2.0 is well written, but I have a problem with it in that it is like a lot of other books written by Austrian School economists. They all say the same thing except for Robert Prechter in Conquer the Crash. Prechter believes in deflation, not hyper-inflation like the rest of the herd. I tip my hat to Schiff for predicting the 2008 real estate meltdown in Crash Proof, but cannot recommend his newest book because it's a couple of years too late.

Saturday, February 13, 2010

Behavioral Investing

Publisher John Wiley & Sons has done it again with its Little Book Big Profits series and come up with a gem in James Montier's The Little Book of Behavioral Investing. Anchoring, confirmatory bias, over-optimism, illusion of control, self-serving bias, hindsight bias, myopia and many other behavioral finance topics are covered in this excellent read for not only the novice, but the experienced investor as well. Most of the books in this series come from the vantage of the value investor and Montier's is no exception to the rule. In fact, besides being a value investor, Montier is a contrarian with not necessarily a disdain, but an aversion to economists, analysts and institutional investors. Montier quotes well known value investors and behavioral economists throughout The Little Book of Behavioral Investing and builds a strong case for being an independent investor, one not following the herd for out sized profits. Here is a quote from Robert Shiller demonstrating why there is so much of a lemming mentality on Wall Street: "Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.".

Overconfidence is a topic that surfaces again and again throughout the book with the professionals getting the brunt of Montier's rancor: "When I asked a sample of more than 600 professional fund managers how many of them were above average at their jobs, an impressive 74 percent responded in the affirmative...Similarly, some 70 percent of analysts think they are better than their peers at forecasting earnings - yet, the very same analysts had 91 percent of their recommendations as either buys or holds in February 2008.". To sum it up best: "Perhaps the most striking example of overconfidence among professionals is their general belief that they can outsmart everyone else - effectively, get in before everyone else and get out before the herd dashes for the exits.". As a value investor Montier believes you should get out of the market when valuations become too rich and not follow the momentum crowd: "...when the bottom-up search for opportunities fails, investors would be well advised to hold cash. As the Sage of Omaha has said 'Holding cash is uncomfortable, but not as uncomfortable as doing something stupid.'".

The Little Book of Behavioral Investing continuously takes pot shots at the powers that be in economics and finance and spares no one: "We'll start at the top with the economists. These guys haven't got a clue. Frankly, the three blind mice have more credibility at seeing what is coming than any macro-forecaster. For instance, the consensus of economists has completely failed to predict any of the last four recessions (even once we were in them)...When an analyst first makes a forecast for a company's earnings two years prior to the actual event, they are on average wrong by a staggering 94 percent. Even at a 12 month time horizon, they are wrong by about 45 percent!". So what is an investor to do if you can't believe the professionals? Montier believes you should follow the teachings of Benjamin Graham and value companies for their intrinsic worth.

I admired Montier's moxie for taking numerous jabs at the financial "establishment" and he has every right to do so being a strategist himself with impressive credentials. I have read other behavioral finance books and still, I got a lot out of this book because it is written from the perspective of the value investor. Like Montier states: "...the curse of the value investor is to be too early - both in terms of buying (known affectionately as premature accumulation) and in terms of selling. Unfortunately, in the short term being early is indistinguishable from being wrong.". So far in the Ithaca Experiment portfolio I have been wrong because I was early to the game. I have patience though and will ride out the storm.

Tuesday, February 9, 2010

Hair of the Dog

The mantra that is continuously repeated throughout Keith Fitz-Gerald's Fiscal Hangover:How to Profit From the New Global Economy is: "You must begin investing on a global scale, with a special focus on China. Fail to do so and I can almost guarantee that you will be left far, far behind.". Fitz-Gerald, who has a subscriber base of 500,000 with his daily missive Money Morning, believes that a decoupling has taken place in the worldwide economy and that the BRIC (Brazil, Russia, India, China) countries with China as the lead sled dog pulling: "the world's economy and its investment markets out of the mire.". I don't agree with his decoupling theory and am from the school that the world economies commingle and are interconnected through a vast spiderweb of financial and trade relationships. In fact, I don't agree with a lot of what Fitz-Gerald proposes in his well written book except for his premise that: "this U.S. economic collapse may become the toughest in recorded history - far more destructive in financial terms than the Crash of 1929 and the subsequent Great Depression.".

I got the feeling from reading Fiscal Hangover that Fitz-Gerald has his roots in the Austrian School of economics because he stated many times in the book that the stimulus programs were a mistake. He sums it up here: "...we should never have begun the bailouts. The concept of 'too big to fail' is a total myth. History is littered with failed institutions of all kinds - from banks to brokerage companies to automakers and airlines. In the end, U.S. taxpayers will be on the hook for all of the bailout costs, either directly through higher taxes or indirectly through still more inflation.". Again, I beg to differ. If there hadn't been a bailout program, the entire free world's economic infrastructure would have come to it's knees, if not worse. Throughout the book I got the impression that Fitz-Gerald thinks he's breathing rarefied air and that he somehow cracked the code on how to solve the world's economic problems. It's just not that easy.

Fitz-Gerald spends an adequate amount of time in Fiscal Hangover giving practical investing advice, some that I agree with, some that I don't. What I concur on is his belief that right now investors should be preserving liquidity and hoarding cash. He doesn't feel we are out of the woods yet as far as the financial crisis is concerned here in the United States, but despite that, you should be putting your money into overseas securities, particularly those from the BRIC countries. As he advises: "I still firmly believe that, while maintaining a diligent safety-first attitude, you should have at least 40 to 60 percent of your assets allocated to international investments...". I don't see eye-to-eye with him on this stance for two reasons. First, I think stocks worldwide are overvalued, especially in China. Secondly, he doesn't think that ADRs are the best way to go when investing in foreign securities.

Fitz-Gerald believes in investing directly in overseas stocks by going to the foreign exchanges via specialty brokers. He recommends Euro-Pacific Capital run by Peter Schiff and International Assets Advisory if you need a full service broker in this arena. For discount brokers, he suggests Interactive Brokers, Charles Schwab Global Investing Service or E-Trade. I still believe that if you want to invest in overseas companies, the best and safest way to go is with ADRs. With an ADR, you won't need a specialty broker. Investor's Business Daily has many BRIC country ADRs to chose from. You just have to read the paper on a regular basis to see which ones are up and comers or hot established companies. If you would like more information about specific stock recommendations, the author does offer a small smattering of individual securities in Fiscal Hangover, but the best route would be to subscribe to his newsletter The Money Map Report which goes for $99.95 a year. A reasonable price for a stock newsletter.

Saturday, February 6, 2010

Clawing Back

The Ithaca Experiment portfolio gained ground last week in a very volatile 5 days of trading. Nothing to get excited about, but still moving in the right direction. The S&P 500 broke a resistance level of 1065 and spiraled downward towards the next resistance level of 1035, but managed to rally back into positive territory in late trading Friday afternoon. That 1035 level on the S&P would put us at a 10% correction, which many have been predicting because these 10% corrections are healthy for the market, but still I believe we are in for a nasty downturn. Besides the Ithaca Experiment portfolio, the rest of my money is in cold, hard cash in the form of money market accounts and CDs. We are in a crisis of confidence right now with the sovereign debt problems over in Europe and the high unemployment rate here stateside, if not worldwide. I do not believe these problems are just going to blow over.

This week I read David Faber's And Then The Roof Caved In about the root causes of the housing crisis. Faber is a high profile reporter with CNBC and I wanted to read what he has to say about the real estate implosion because I have always enjoyed his broadcast journalism. The book is very well written and is informative, but not as good as advertised. When I read a finance or economics book, I am looking for ways to increase my assets or for solutions to economic problems and this one came up short. Part of the problem with the book is that it is just straight forward unadulterated reporting with very little editorializing. I don't regret reading it because it solidified my belief that we are not in your run of the mill recession. But it just wasn't enough to recommend it.

One thing I've always liked about Faber's interviews on CNBC (and one of the reasons I bought the book), is that he tends to call the interviewees on the carpet and not let them gloss over missed predictions in previous encounters. This is a glaring omission with many of the anchors at CNBC, that they don't make guests fess up to previous mistakes. It is too bad with all of the technology that we have that CNBC, or even Bloomberg for that matter, don't have databases on their Web sites that would allow visitors to drill down for previous projections. As is, we are just taking the guests' market pronunciations at face value, whether they have been right or wrong in the past. Don't get me wrong, I like the financial cable channels, but sometimes feel they are just broadcasting for the moment and not the long-term. It is reporters like Faber that make for better viewing. I just wish he had written a better book.

Tuesday, February 2, 2010


Real estate, stocks and bonds down 90% from their peak values. 40% to 60% unemployment. A depression lasting more than 20 years. These are some of the future scenarios envisioned in David Wiedemer, Robert Wiedemer and Cindy Spitzer's Aftershock, the sequel to their 2006 book America's Bubble Economy where they predicted the 2008 housing market implosion and stock market collapse. The authors believe we are currently in the midst of six co-linked bubbles which have been growing since the early 1980's and that all of these bubbles are destined to pop in the next 2 - 4 years. The six bubbles in question are: real estate, the stock market, private debt, discretionary spending, the dollar and government debt. Of the six bubbles, the first four are already in motion and once the dollar and government debt spiral downward, our economy will be rocked to the core: "...and send deep and destructive financial shock waves around the globe.". Not a pretty picture.

In many places throughout the book, the authors caution about the current government bail-out and temporary reprieve from doomsday and sum it up best: "But the dramatic government intervention only served to temporarily blunt (not stop) the effects of the underlying fundamental trend, which is why falling housing, private debt and stock market bubbles are still on their way down. In time, these trends will also include a major Aftershock that few others are anticipating: the busting of the dollar and government debt bubbles.". It's a ticking time bomb right now, at least that's what the authors claim, and in a matter of months: "multiple failed treasury auctions will mark the beginning of the government bubble collapse.". Aftershock stipulates that: "if no one will buy our future debt, we will have no way to make payments on our past debt. The U.S. government will be in default on its debt, and the big government debt bubble will fully pop.". This is when all hell breaks loose causing the dollar to contract, too.

Although timing the market is an inexact science, Wiedemer, Wiedemer and Spitzer think these interlinking bubbles will explode sooner rather than later and dole out advice for not only maintaining your assets, but building them too. The first thing they want you to do is go into cash, and when they mean cash, they are talking about short-term government bonds like T-bills. However, when the dollar bubble pops, they feel you should move your money out of government debt and into gold: "The coming gold bubble could easily last 10 or more years, and at its height, gold prices could become truly stratospheric - so high, in fact, we won't even mention our best guess for fear of losing credibility.". I don't see why they wouldn't give us a ballpark figure on gold prices. After all, they already made bold projections on unemployment rates and stock market prices. Why not go the extra mile? One problem I have with putting all of your eggs in one basket with gold is that Uncle Sam confiscated all the gold back in the 1930's during the last depression. Why wouldn't he do it again? Other ways to make money during the crash are to short the market using ETFs, the same strategy the Ithaca Experiment is utilizing, or to invest in Euros with ETFs.

Aftershock fans the flames of my current belief that we are in for a sloppy and choppy market to the downside for the next few years. Although the authors caught lightning in a bottle with their first book, it is difficult to believe they can hit the bulls eye for a second straight time, but if they are close, my current strategy will be an optimal way to increase my holdings. Like Robert Prechter's Conquer The Crash, Aftershock paints a gloomy picture of what is right around the corner not only for Americans, but people all over the world. There are two sides to every trade and right now I'm on the short side. I'm just going to bide my time and let the chips land where they may.