In Search of the Perfect Investment

Squirrely this summer, then up later this year. That’s the most likely stockmarket movements this year.

Three things are affecting the market:

1. Flat to awful corporate earnings, with exceptions. But not many.

2. General election. No incumbent standing. General election years are yuchy in the market.

3. Talk about rising interest rates. Maybe one even in June. (See Economist article below.)

Hence, short-term down. Wait for the bargains.Put in ultra-low bids on your favorite stocks. Your return for the second half of the year should be good.

The news shows hedge funds are heavily short. But hedge funds haven’t been smart for the last 18 months. Not good to pay attention to them.

My most successful stockmarket gurus are presently day-traders. They play the fluctuations of the day for a few pennies — typically 10 to 25 cents.

Not easy. I put in an order to buy 10,000 VZ at $49.50. I snagged 504 before it bounced to $49.69, where it is now. I happily would have sold all 10,000 at $49.64 — for a quick profit of $1400. Many stocks follow a sort of a sine wave during the day. Find several you follow and study the charts. The stocks must be highly liquid. The key is to be out of them at day’s end.

Here’s the Economist’s piece on an upcoming rate increase. Maybe.

THE members of the Federal Reserve’s monetary-policy making committee have been desperate to hike rates, often, for most of the past year. They were keen to begin hiking in September, but were put off when market volatility threatened to undermine the American recovery. In December they managed to get the first increase on the books, and committee members were feeling cocky as 2016 began; Stanley Fischer, the vice-chairman, proclaimed that it would be a four-hike year. Instead, markets spent the first two months of the year in a near panic, and here we are in mid-May with just the one, December rise behind us.

But the Fed is feeling good about the state of the state of the economy and is ready to give higher rates another chance. Over the last few weeks, every Fed official to wander within range of a microphone warned that more rate hikes might be coming sooner than many people anticipate. And yesterday the Fed published minutes from its April meeting which were revealing: “Most participants judged that if incoming data were consistent with economic growth picking up…then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”

The committee members in favour of hiking make a few key arguments. Many of them reckon that labour-market slack is just about used up, and wages will soon rise at a much faster clip. Combined with higher oil prices, that should push up inflation, possibly above the Fed’s target, possibly high enough that the Fed would need to rush through a lot of rate hikes to regain control, risking recovery in the process. Some argue that rates are excessively low, and are encouraging risky financial behaviour, sowing the seeds of future crises. Amusingly, some think that, “further postponement of action to raise the federal funds rate might confuse the public…and potentially erode the Committee’s credibility.” Amusing, as the one thing the committee can credibly generate is confusion.

Pushing against these arguments are some quite substantial considerations. Worries about runaway inflation are based on a view of the relationship between inflation and unemployment that looks shakier by the day. Looking across the world, countries not suffering an acute political collapse seem to have an awful lot of difficulty sustaining even modestly positive inflation. It isn’t hard to understand why. Many global labour and product markets are glutted (just this week, America put up punitive tariffs on China in an effort to stanche the flow of cheap steel imports). That constrains firms’ and workers’ ability to wield bargaining power. There is a global glut of investable savings too, which has pushed down long-run real interest rates around the world. That, in turn, constrains central banks, which cannot lift their rates very high without attracting a deflationary flood of capital. Over the last thirty years, central banks have found it much easier to push inflation down than up.

And it is worth focusing on the fact that the Fed does not have cause to try to push inflation down. Its preferred measure of inflation continues to run below the Fed’s 2% target, as it has for the last four years. Somehow the Fed seems not to worry about what effect that might have on its credibility. All that undershooting has depressed market-based measures of inflation expectations, which suggest the public expects inflation to remain below target for some time. If the Fed’s goal is to hit the 2% target in expectation, or on average, or most of the time, or every once in a while, or ever again, it might consider holding off on another rate rise until the magical 2% figure is reached. You know, just to make sure it can be done.

But the single biggest, overwhelming, really important reason not to rush this is the asymmetry of risks facing the central bank. Actually, the Fed’s economic staff explains this well; from the minutes:

“The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. In addition, while there had been recent improvements in global financial and economic conditions, downside risks to the forecast from developments abroad, though smaller, remained. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside.”

The Fed has unlimited room to raise interest rates. It doesn’t want to have to jack up rates dramatically and quickly in response to surging inflation, but if it had to it could. It has almost no room to reduce rates. If an unexpected stretch of economic weakness comes along (and such a stretch is far more likely to come along than is dangerously high inflation) then the Fed is in a very serious bind indeed. Even if it is up for cutting rates as deep into negative territory as other central banks have dared to, that still leaves it very little room to cut. It has its unconventional tools available, but the Fed has proven none too anxious to roll them out in the past. If wages were growing as fast as they typically do during a healthy expansion, and if inflation had finally made its way back to and above target, then the Fed could be fairly confident that a rate increase wouldn’t unexpectedly leave the central bank face to face with deflation and with few tools to respond.

But the economy isn’t there yet. Hiking now is a leap off a cliff in a fog; one could always wait and jump later once conditions are clearer, but having jumped blindly one cannot reverse course if the expected ledge isn’t where one thought it would be.

The Fed’s incautious behaviour is especially worrying given the state of the world. Not only would it struggle to restore growth if it turned out to have overestimated the strength of the American recovery; it would also push the world’s largest economy into a slump at a moment of serious global economic and political vulnerability. The state of the world has been better. The Brazilian state and economy are looking dangerously weak. China continues to accumulate debt at a pace that cannot go on for much longer. Britain will vote on whether to leave the EU just a few days after the June Fed meeting; Austria is about to elect a far-right president-just the latest far-right leader to enjoy political success on the continent. This might not be quite the right moment to take a relaxed attitude about the possibility of inducing an American slump.

What is most unfortunate, however, is that committee members seem not to realise the effect their statements send. Yesterday, before the minutes were released, the estimated probability of a rate hike in June (derived from futures prices) was about 6%. This morning, that probability rose above 30%. With that shift in expectations, all the other market prices one would expect to move have moved. Emerging-market currencies began falling against the dollar, equities are off, and so on. The market ructions will deliver much the same effect an actual rate hike would. Ironically, the market wobbles might be enough to dissuade the Fed from pulling the trigger when the June meeting rolls around. But a lot of harm will already have been done.

Useful tips:

+ Airport security lines are stretching into hours and will get worse this summer. The TSA has cut its staff, thinking more of us would sign up for PreCheck. PreCheck allows pre-screened members, who pay $80 to join, to skip the long lines and move through security faster. But fewer people have signed up than the TSA guessed. Hence today’s long and longer airport lines. I believe some credit cards — like Amex — will pay your  $80. Please join PreCheck for your sanity.

+ eBags sells great bags and delivers quickly for free. Get on their emailing list. Wait a few days. They’ll drop the price on your chosen bag a third. It’s happened to me twice.

+ Norton Internet Security is the best protection for your laptop. It’s not expensive. Worth every penny.Customer service is great, too.

+ I went into Bloomingdales main New York store trying to buy a nice suit. I need one for weddings and funerals. I found one for $3,000. But they didn’t keep “longs” on the floor. They were in the bowels of Bloomies’ basement. The nice saleslady went away to check her computer. She took so long, I finally gave up. That night I found what seems to be the identical suit at Amazon for $1900 or so — more than a third less. Store-based retailing is appallingly bad. Long live Amazon, which is up today.

+ Check. Check. Check. Check that the plumber really fixed the leak. Check that your paperwork and money made it. Check. Check. Check.

+ Your laptop is your Stradivarius. It’s  amazing how many of my friends don’t now how their primary business tool works, or how to fix it when it doesn’t work. They know less about their laptop than their car, yet spend far more time with their laptop and smartphone than they do in their car.

Weekend reading. I’m very selective in what I recommend you to read:

+ How to lose a fortune. Listen to Wall Street’s superstars. Click here.

+ R.I.P., GOP: How Trump Is Killing the Republican Party
Donald Trump crushed 16 GOP opponents in one of the most appalling, vicious campaigns in history. His next victim? The entire Republican Party.
Click here.

+ When drugs don’t work.

In short, don’t take antibiotics unless you’re 100% sure you have something bacterial. Antibiotics don’t work on viral sicknesses. Most upper respiratory tract infections, such as the common cold and sore throats are generally caused by viruses – antibiotics do not work against these viruses.. For the full piece, click here.

Larry Ellison explains  why life isn’t about money:

Quotes from his commencement address:

+ “When people start telling you that you’re crazy, you just might be onto the most important innovation in your life.”

+ “Deep inside all of us there is a primal desire to do something important in life.”

+ “There’s a TV advertisement for the military that says it’s not just a job, it’s an adventure. That’s exactly how I feel about my years in Silicon Valley.”

+ “Like any ongoing adventure, I have no idea how it ends. But I know it will.”

+ “Your generation will change the world, as every generation does. You will invent new technologies and new forms of art.”

+ “In a constantly changing world, what is possible is a moving target – challenge the status quo.”

+ “Don’t let the experts discourage you when you challenge the status quo. Like Mark Twain says, what’s an expert anyway? Just some guy from out of town.”

+ “Each of you has a chance to discover who you are and not who you are supposed to be.”

+ “Each of you has an obligation to commit to a righteous cause – one that improves the lives of humanity and the planet.”

+ “Keep searching until you find a job that ignites your passions. Like I did.”

+ ‘At some point, you can’t spend all of it. Trust me, I’ve tried.’

For a video of Ellison’s commencement address, click here.

Favorite election year cartoon:

Puns to try on your grandchildren:

How do crazy people go through the forest?
They take the psycho path.

What kind of coffee was served on the Titanic?
Sanka.

And what kind of lettuce?
Iceberg.

Where does the one-legged waitress work?
IHOP

How do you catch a unique rabbit?
Unique up on it.

How do you catch a tame rabbit?
Tame way, unique up on it.

What do you call a boomerang that doesn’t work?
A stick

A duck walked into a drugstore and asked for a tube of ChapStick.
The cashier said, “That’ll be $1.49”
The duck said “Put it on my bill”.

I read a book on helium once.
I couldn’t put it down!

I used to be indecisive. Now I’m not sure.

Harry Newton, who’s been a bit under the weather this week with stomach flu.

Docs on the the latest real estate syndication just came in. Send me an email if you want to see them. Have a great weekend.