Living on the Edge. These Markets are on Borrowed Time.
By: Tim McPartland,
While we haven’t had much time to work on our website in May we have had time to read–as we always do. It doesn’t take much to conclude that both the stock and bond markets are on the edge of a big time tumble—and that is exactly what we have concluded. Honestly this is a feeling we have had for the last month or two and we have resisted either acting on it or even sharing our thoughts. On a historical basis it has been very easy to feel negative about the news–whether it be economic or geopolitical news–one has to step back and determine whether it is simply a short term ‘feeling’ or whether there is real data behind the feeling. Even if we have a legitimate reason to be fearful just what does one do about it? Now understand that we believe there are no such individuals as ‘experts’. We don’t listen to bulls and we don’t listen to bears–we read and we decide.
We follow the Greek situation here. We continue to monitor the European situation here and here (Spiegel online). We follow the current and coming crisis in healthcare everywhere we can find news (costs now rising 8% annually and tons of uninsured people regardless of Obamacare). A newly refreshed dollar spiking to historical highs today–absolutely threatening U.S. corporations that do substantial business abroad. In Minnesota the ‘Iron Range’ is taking a shellacking as layoffs just keep coming–global demand is slack and the dollar strength is not helping although Minnesota’s economy as a whole has performed very well–will it remain strong? The ag economy is on the ropes as spring growingconditions have been excellent keeping corn and soybeans prices locked in money losing territory for many farmers (although land owned outright with savvy operators is still profitable). Again the strong dollar makes our crops less competitive on a global basis. The new home market continues to struggle—if you live in a metro area it appears strong–for the rest of the country it is a struggle. In our little town of 4100 people there has not been a ‘affordable house’ built in 5-6 years. There have been custom built homes put up by folks with plenty of coin in their pockets–the end result value is less than the cost to build. Home sales in all areas of the U.S. that are non metro have been entirely (well–almost entirely) financed with FHA and Rural Development guaranteed loans–the next recession will bring a crisis in the low end of the housing market. We are amused about the articles we read about the median house prices flying upward–no surprise as the ‘have nots’ can’t buy houses and more and more it is just a market for the ‘haves’ so yes the median price moves up. Housing is a sick market and a 1/4 to 1/2% rise in mortgage rates will kill it.
Now the employment number last month were pretty decent–but we have less confidence in these numbers than almost any other government statistic. Additionally layoffs are shooting higher everywhere–April layoffs are at a 3 year high. The GDP number for Q1 was horrific and we really don’t foresee a great current quarter. We have gone 6 years with zero interest rates and while we have saved our asses for now we continue to live on the edge—and there is a high likelihood the FED starts to move rates higher this year–this makes no sense at all. Oil prices after moving to the low $40’s per barrel are now back up in the high $50’s–the ‘tax cut’ with lower gas prices (which never materialized into bigger spending anyway) is evaporating. Job losses (of high paying jobs) in the energy sector have been very damaging to the economy—forget that no one is talking about it.
We could go on and on–but we will stop. We have had no success (ever) hedging our portfolio—but just the same we are considering doing it again (I think that is the definition of insanity–doing the same thing time after time with the same result). Last year we had a small hedge on the 2014 Blended Income Portfolio and it cost us around 1/2% in losses. This time we would go in with a larger hedge–and we might use the Proshares Ultra Short SP500 ETF (ticker:SDS) (movement is around twice the SP 500 index movement). The problem with using SDS is there is a decay in value simply with time passing–but with the potential correction we see out there this modest decay is not important.
REMEMBER–we are about capital preservation. If we were looking for our investments to toss off current income that we would spend we would have less concern with capital preservation and concentrate instead on buying quality assets that gave us the income we needed to maintain our lifestyle. We have a 3.73% ytd gain (although it has been as high as a 4.75% gain) and we won’t give it up without a fight. We will keep you posted on our decisions.