In Search of the Perfect Investment

Friday:

Last week — all five days:

Year to date. Volatile.

VIX year to date, calming down a little:

It went down because job numbers were awful.

Then it went up because the awful job numbers meant the Fed wouldn’t raise interest rates this year.

The Fed affects stock prices more than corporate earnings apparently do.

My friend Steve who’s up 12% this year writes, presciently:

My gut feel is that we are in for continued volatility for as far as the eye can see. My guess is that this is the new normal, enabled, in part, by increasingly faster, more accessible, and more extensive networks to carry data, information, opinions,  and rumors that influence investment decisions.

I was impressed with Steve’s 12% YTD, especially when compared with David Einhorn’s down 16.9% YTD (end September).

I sat down with my trusty Excel spreadsheet and plotted his returns compared to the S&P500. I then sent my chart to Michael, my son, the Excel genius, to ask him to figure out who did better — Einhorn or the S&P500? Don’t use averate annual return. Use CAGR.

The key numbers are CAGR — compound annual growth rate. Over the 12 years, you’ll see that Einhorn’s has returned 7.03%, versus the S&P 500 which returned 4.93%.

In short Einhorn beat the market by 2.10% per year on average., which over 12 years is “great,” according to my son. And not very good, according to Steve.

The key to becoming a billionaire, which Einhorn allegedly is, is to own the hedge fund, not to participate in it.

I found Einhorn’s results on this web site. Click here.

If you can’t read the chart above, here’s the original Excel spreadsheet. Click  DavidEinhorn.

Some of my shorts are now losing money. Some are still making money. I’ve covered some. But I still feel comfortable with shorting BHP, IRDM, VLKAY, and CAT. Being short some stocks is my little “hedging” strategy.  Meanwhile, I’m up this morning with my longs, ike favorites HD, FB, V and S&P 500 index funds.

We’re stuck with high volatility and low long-term returns.

In February Bloomberg Business had a piece on Einhorn that begun:

(Bloomberg) — For almost two decades, David Einhorn has told clients he would aim for annual investment returns of 20 percent. The hedge fund manager has largely delivered with some of the best performance in money management.

Times have changed. The 46-year-old founder of Greenlight Capital told his investors last month at a dinner in New York that he was doing away with the fixed return target and replacing it with relative goals to account for lower interest rates and the record prices of stocks, according to two people with knowledge of the matter. Einhorn’s annualized return fell below 20 percent in 2012.

Einhorn, who oversees about $12 billion in assets, is joining money managers such as Howard Marks’ Oaktree Capital Group LLC and Pacific Investment Management Co. in telling clients to lower return expectations after six years of near-zero interest rates and monetary stimulus sent asset prices surging. Hedge funds have struggled to keep up, trailing U.S. stocks for the past six years, and some of the largest investors are questioning whether the complexity of the funds is worth the cost.

You can read the full article here.

From John Mauldin this weekend:

“We’re lost, but we’re making good time.”

– Yogi Berra, 1925-2015, RIP

The Yogi Berra quote above, which was brought to my attention this week, seems an apt description of where the markets and the economy are today. Nobody is quite sure where we are or where we’re going, but we all seem to think we’re going to get there soon.

I think it’s pretty much a given that we’re in for a cyclical bear market in the coming quarters. The question is, will it be 1998 or 2001/2007? Will the recovery look V-shaped, or will it drag out? Remember, there is always a recovery. But at the same time, there is always a recession out in front of us; and that fact of life is what makes for long and difficult recoveries, not to mention very deep bear markets.

The problem is that our most reliable indicator for a recession is no longer available to us. The Federal Reserve did a study, which has been replicated. They looked at 26 indicators with regard to their reliability in predicting a recession. There was only one that was accurate all the time, and that was an inverted yield curve of a particular length and depth. Interestingly, it worked almost a year in advance. The inverted yield curve indicator worked very well the last two recessions; but now, with the Federal Reserve holding interest rates at the zero bound, it is simply impossible to get a negative yield curve.

Understand, an inverted yield curve does not cause a recession. It is simply an indicator that an economy is under stress.

So now we are in an environment where we can look only at “predictive” indicators that are not 100% reliable. Actually, most are not even close. Some indicators have predicted seven out of the last four recessions. Some never trigger at all.

All that said, looking at data from the last few weeks suggests that we need to be on “recession watch.” Global GDP is clearly slowing down, and the data we are getting from the US suggests that we are going to see a serious falloff in GDP over the next few quarters. I want to look at the recent (very disappointing) employment numbers, earnings forecasts (and some funny accounting), credit spreads, total leverage in the system, and the overall environment where credit, which has been the fuel for growth, is under pressure. The totality of this data says that we have to be on alert for a recession, because a recession will mean a full-blown bear market (down at least 40%), rising unemployment, and (sadly) QE4.

The jobs report on Friday was just ugly. Private payrolls increased by just 118,000, which is about the minimum level needed for unemployment not to rise. Government payrolls added 24,000. There were serious downward revisions to the last two months, as well. August was taken down by 37,000 jobs, and July was reduced by 22,000. The last three months have averaged just 167,000 new jobs compared to 231,000 for the previous three months and 260,000 for the six months prior to that.

His newsletter is called Thoughts from the Frontline. You can easily subscribe. Google it.

How fast can WiFi go? This is my DSL line in Columbia County, courtesy Fairpoint:

This is my FiOS fiber speed in New York City, courtesy Verizon:

My friend checked her granddaughter into a dormitory at the University of Chicago. He measured 185 Mbps download and 165 Mbps upload. Wireless no less. He and I have never seen Internet speeds that fast. I asked him how it felt.  His answer: “Like the instant picture that you see when turning on a TV set. Actually startles you.”

You can check your own speed at Speakeasy Speedtest. Click here. Run the test three times.

The best weekend viewing and reading — some political stuff.

+ Mark Steyn speaks in Copenhagen on the tenth anniversary of the publishing of the Mohammad cartoons. The speech is gripping.

To watch his wonderful gripping speech click here.

+ Nicholas Kristof on “A New way to Tackle Gun Deaths.” Excerpts:

… Actually, cars exemplify the public health approach we need to apply to guns. We don’t ban cars, but we do require driver’s licenses, seatbelts, airbags, padded dashboards, safety glass and collapsible steering columns. And we’ve reduced the auto fatality rate by 95 percent.

One problem is that the gun lobby has largely blocked research on making guns safer. Between 1973 and 2012, the National Institutes of Health awarded 89 grants for the study of rabies and 212 for cholera – and only three for firearms injuries.

Daniel Webster, a public health expert at Johns Hopkins University, notes that in 1999, the government listed the gun stores that had sold the most weapons later linked to crimes. The gun store at the top of the list was so embarrassed that it voluntarily took measures to reduce its use by criminals – and the rate at which new guns from the store were diverted to crime dropped 77 percent.

But in 2003, Congress barred the government from publishing such information.

Why is Congress enabling pipelines of guns to criminals?..

You can read Kristof’s entire piece here.

+ The Hypocrisy of `Helping’ the Poor by Paul Thereoux, who just visited many depressed communities in the south. Excerpts:

EVERY so often, you hear grotesquely wealthy American chief executives announce in sanctimonious tones the intention to use their accumulated hundreds of millions, or billions, “to lift people out of poverty.” Sometimes they are referring to Africans, but sometimes they are referring to Americans. And here’s the funny thing about that: In most cases, they have made their fortunes by impoverishing whole American communities, having outsourced their manufacturing to China or India, Vietnam or Mexico.

Buried in a long story about corruption in China in The New York Times a couple of months ago was the astonishing fact that the era of “supercharged growth” over the past several decades had the effect of “lifting more than 600 million people out of poverty.” From handouts? From Habitat for Humanity? From the Clinton Global Initiative?

No, oddly enough, China has been enriched by American-supplied jobs, making most of the destined-for-the-dump merchandise you find on store shelves all over America, every piece of plastic you can name, as well as Apple products, Barbie dolls or Nike LeBron basketball shoes retailed in the United States for up to $320 a pair. “The uplifting of impoverished people” was one of the reasons Phil Knight, Nike’s co-founder, gave in 1998 for moving his factories out of the United States. …

The strategy of getting rich on cheap labor in foreign countries while offering a sop to America’s poor with charity seems to me a wicked form of indirection. If these wealthy chief executives are such visionaries, why don’t they understand the simple fact that what people want is not a handout along with the uplift ditty but a decent job?

Some companies have brought manufacturing jobs back to the United States, a move called “reshoring,” but so far this is little more than a gesture. It seems obvious that executives of American companies should invest in the Deep South as they did in China. If this modest proposal seems an outrageous suggestion, to make products for Nike, Apple, Microsoft and others in the South, it is only because the American workers would have to be paid fairly. Perhaps some chief executives won’t end up multibillionaires as a result, but neither will they have to provide charity to lift Americans out of poverty.

Read the entire depressing article here.

Harry Newton, whose “big” moment has come. His second granddaughter Sophie is now crawling. This short video shot by mother Claire is about as good a it gets. Check out the pure enjoyment on Sophie’s face as she topples the blocks.

Click SophieCrawling.