This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, May 31, 2009

Testing Obama

The past few weeks many investors have learned a valuable lesson: safety comes at a price. Since the beginning of the year, the prices on 30-year Treasury bonds have been steadily falling. When we made our New Year’s predictions we stated that, in our opinion, bonds, particularly Treasury bonds, would be the worst investment for 2009.

Now, less than six months later, the 30-year treasury bond has lost nearly 40 percent of its value year-to-date. Hit particularly hard are those investors who rode the stock market down in fall 2008, decided to make a change at the end of the year, after suffering 30 percent losses or worse on average, only to buy “safe” treasury bonds and compound their losses with another 40 percent so far this year.

This scenario is a sobering illustration of why we constantly tell investors that they can’t make money investing for the past. In order to be successful, investors must look forward, anticipate future market conditions and invest accordingly.

For example, at the turn of the New Year, we predicted that oil would creep up and end the summer somewhere in the range of $70 to $85 per barrel. Currently, it’s just more than $62/barrel, up from its low near $35, and gas is more than $2.60/gallon at the pump. Furthermore, oil looks poised to move higher, especially considering current events in the Middle East and the Far East.

Recently, Iran sent six warships out into international waters. One is causing particular worry as it headed straight for the Gulf of Aden, directly adjacent to the Red Sea. Of course, if it made its way up the Red Sea it would be capable of firing rockets into Israel.

Making even more headlines was North Korea’s nuclear test, followed by the firing of three short-range missiles from its east coast. North Korea also stated that it would no longer honor the 1953 armistice agreement that ended the Korean War. All of these events seem to be signs that the country is preparing to resume its conflict with the south.

Many of these events, despite their implications, are not overly surprising. Even Vice President Joe Biden has said that President Barack Obama would be tested. It’s seems now that there is a race to see who will test him first. While we may not agree with Obama’s policies, we wish him the best of luck, as our national security depends on his ability to guide us through this tough time.

Despite tense foreign relations, however, things seem to be looking up at home. The economy is beginning to pick up again as credit is resuming a normal flow and consumer confidence recovers. In fact, consumer confidence numbers released on May 26 show the biggest one-month jump since 2003, when the United States was coming out of its last recession.

The stock market continues to surprise people on the upside. Many investors thought of recent market action as simply a bear market rally that should have turned back down by now. However, the market seems content to continue its upward trend, supporting our view that this could be the start of something much bigger than people think.

Sunday, May 24, 2009

Dock’s Top 10

We have advocated buying in this market for months. For readers who are unconvinced, here is a list of developing market conditions, all of which we view as the 10 best reasons to be buying stock.

1. Low TED spread. This indicator is a gauge of the confidence that European and U.S. banks have in one another. A low TED spread is indicative of confidence and also means that capital is flowing freely between banks so they can finance ongoing operations on a short-term basis.

2. Incredible amounts of liquidity in the system. The measures taken by the Treasury and Federal Reserve, as discussed in previous articles, have provided the financial system with significant excess capital.

3. This liquidity is beginning to move through the system, evident by the fact that home sales have been picking up lately, especially in markets hit especially hard in the recent collapse.

4. Low VIX. The VIX is a market index that measures perceived volatility in the market. Recently, the market has resumed its upward trend and been remarkably stable.

5. Much of the recent stability is because there hasn’t been nearly as much emotion surrounding the markets as there was in the fall. This is due in part to the fact that many investors are steering clear of the markets because the anguish suffered last year.

6. Since putting in a marginally lower bottom earlier this year, the stock market has resumed an upward trend, moving slowly higher, but not moving too fast.

7. In fact, so far the market is 30 percent off its most recent bottom. This is evidence to many investors that there are good returns to be had in this market, particularly for those who do their research and invest wisely.

8. The lack of emotion, namely fear or panic, as well as the stable building of an upward trend have all created a kind of calm confidence in the markets. Most of the investors still intimately involved with the markets for industry professionals are better at maintaining objectivity and making clear, rational decisions. These investors, as well as some individuals, since regrouping after 2008, are recognizing the bargains available in the market and working with professions to take advantage.

9. While it is not such a widely publicized fact, over the history of the stock market, the years with the largest gains on a percentage basis tend to closely follow the years with the biggest losses. Last year, was one of the worst years the stock market has ever experienced, so if history holds true, 2009 and 2010 could be very good for investors trying to recover. In fact, there is a growing group of investors, us included, who believe that this may be the start of a bull market in stocks. And while it wouldn’t be surprising to see the market correct, we believe that the next few years in stocks are going to be among the best in a generation or more.

10. With all this in mind, we think it’s safe to say that investors can disregard the old stock market adage of “sell in May and go away,” as it doesn’t seem likely to hold true this year. With the recent action in the markets, combined with the fact that investors are still reeling from last year and trying to remake money lost, it seems more likely that investors will working through what is traditionally a lull in trading.

All of these observations are positive for the market, and while conditions will undoubtedly change in the future, currently the reasons to buy stocks outweigh and outnumber the reasons to avoid investing. However, we do recognize that not everything about investing is logical; there is often emotion involved. We can go on and on with the reasons that people should be buying in this market, but investors need to look at their individual circumstances and determine what is right for them. We’ve said it before and we continue to tell people that they have to be able to go to sleep at night. You’re investments should help your comfort level, as they exist to help you prepare for the future. If the adviser or the strategy that you are currently using has been causing you to lose sleep, then it’s time to make a change.

Sunday, May 17, 2009

Preapring for a weak dollar

Since the market bottomed in March and started back up, investors have split into two groups. While some believe recent market gains are nothing more than a short bear market rally, others think it’s the start of something bigger. It seems that the battle to determine whether or not this is simply a bear market rally is being waged right around the 8500 level in the Dow, where we are currently.

While some investors focus more on recent activity – the past five years or less – others look at longer-term charts to determine trends. These two methods show two different pictures of the market, and this is likely causing much of the divide.

A five-year chart of the Dow paints a bleak picture: a massive rally ending mid-2007, a double-top followed by a massive decline, finishing with a small rally. It’s certainly understandable while many in the market see this as a head-fake before the market heads lower.

The 10-year chart tells a different story. It shows a Dow that has traded sideways for a decade, give or take fluctuations. To many investors, such a chart is a screaming buy signal. Many will remember the 1970s when the Dow traded sideways, more or less, for approximately a decade before going on an explosive run to new market highs. It has happened other times, and could easily happen again.

While we personally believe that this is the start of something bigger, it wouldn’t surprise us to see some profit-taking around currently levels, causing a correction in the Dow. This doesn’t mean that the market will fall to new lows, and more importantly it doesn’t mean that every sector will see losses.

We have argued in previous articles and still firmly believe that there are particular sectors in the market that are poised to do extremely well in the near future, regardless of the overall direction of the market. We especially like commodities because of their recent demand worldwide.

We believe that many people underestimate China and India. Both of these countries are progressing significantly in their economic development and have burgeoning middle classes. These new middle classes are going to demand goods and services that were previously considered unattainable luxuries.

For this reason both countries, China especially, are still buying resources in massive quantities. In fact, in the past few days, China has announced that it is looking to acquire more oil companies. All of this buying by China, India and others has been done to position them for after the global economy begins to recover, when they can improve the quality of life for their massive populations.

To investors all this means one thing: inflation. With India and China controlling larger proportions of the world’s resources, expect to see a weaker dollar in the near future, as well as the higher prices that come with it. If possible, position yourself to take advantage of the weakening dollar by investing in commodities, companies that produce them or investments in foreign countries whose currencies are likely to benefit.

The paradigm is changing and the investment world is being turned on its head. Astute investors can no longer limit their options to large U.S. stocks. In this new global market investors must search the world over for the best investments available. If this seems too daunting a task, please speak with a financial professional who can help you with your search.

Sunday, May 10, 2009

Determining the future before it happens

For years to come, people will write books about the events of the last year or so, trying to piece together the puzzle to determine what exactly happened, and more importantly why. Included in those books will be explanations of how things played out; events that we have not yet seen.

Unfortunately, by the time those books are written, even those events still to come will be old news. The opportunity to profit from them will be past. As investment advisers, it’s our job to use our knowledge of history and the markets to predict those events before they come to fruition. After all, that’s the only way to benefit from the future. So, the following is the shorthand version recounting events that lead us here, a summary of where we stand now and our prediction of where we go from here.

By now it’s common knowledge that the collapse of the housing market triggered the bursting of the credit bubble in the summer. After the collapse, the financial system grounded to a halt and new loans essentially ceased. In response, the Fed, along with the U.S. Treasury, flooded the financial system with “liquidity,” in this case a fancy term for new money.

All this was done in an effort to maintain bank solvency and keep the system moving, but the result was that taxpayer dollars were used to prop up big banks, many of which had poor policies and bad management. Moreover, this bailout craze totally wiped out consumer confidence in the financial system.

At present there is tons of new money sitting in the big banks that comprise the global financial system. With the economy beginning to turn toward recovery, particularly in the housing sector, loans are finally picking up again as the system slowly comes back to life. And while many around the world are still skeptical of governments and their collusion with big banks, there is some cautious confidence returning to the markets.

The beginning stages of this recovery can already be seen in the bursting of the recent bubble in Treasury bonds. For example, take investors who purchased the most recently issued 30-year Treasury bond at its issue in February. Because of bond prices falling as money re-enters the stock market, these investors have lost more than 10 percent of their investment in the past three months.

The way we believe that things will play out in the coming months and years is as follows. First, as the economy continues to improve, loans should accelerate. As the velocity of money in circulation increases, the massive increase in money supply caused by the past six months of Federal Reserve policy is going to be realized in the marketing and inflation is going to quicken.

With inflation running wild through the global financial system, the natural tendency of the Fed will be to raise rates in order to keep inflation in check. Unfortunately, unemployment will still be too high for the Fed to raise rates, as doing so would slow down the economy, which will still be early in its recovery.

With the Fed caught between the rock (unemployment) and a hard place (inflation), policymakers will have no choice but to allow inflation to continue until economy mounts a sufficient recovery as to permit interest rate hikes.

All this basically creates a good-news-bad-news scenario. The good news is that the economy will recover. The bad news is that when it does, the U.S. dollar will be worth a small fraction of what it is now, in terms of real value (relative to hard assets, e.g. gold).

Some are undoubtedly skeptical about our assessment of how things will play out. Unfortunately, we are not alone in our stance. I refer you to the following YouTube video of Ron Paul questioning Fed Chairman Ben Bernanke during congressional testimony. Pay particular attention to the question and note how Bernanke skirts the issue.

In conclusion we would like to emphasize to readers that inflation, despite its significant impact on the economy, is not inherently bad. There is nothing wrong with inflation, provided investors are able to hedge against the declining value of their currency by owning real assets like gold, oil and real estate. Further evidence of the coming inflation can be seen in the recent price movements of all three of these commodities as housing prices have risen lately, gold has topped $900/ounce and oil on May 6 pushed through the $55/barrel level.

Inflation is on its way. Those who are prepared stand to benefit greatly, while those who aren’t will likely suffer when the purchasing power of their dollars declines substantially. If you feel you are unprepared, speak with a financial adviser about how to position yourself for the coming months.

Sunday, May 3, 2009

A new era in government control

Testimony has been released in the Wall Street Journal showing that Federal Reserve Chairman Bernanke and then-Treasury Secretary Paulson forced Bank of America President Kenneth Lewis to go through with a deal to purchase distressed brokerage giant Merrill Lynch.

Paulson and Bernanke apparently argued to Lewis, who wanted out of the deal after Bank of America analysts had delved into Merrill’s financials, that backing out of the deal would make Merrill’s poor financial health public and kill investor confidence, potentially causing a meltdown in the financial system. For good measure Paulson and Bernanke also threatened to remove the management and board of directors at Bank of America, including Lewis, if the deal did not go through.

In the financial industry we have a term for this. It’s called securities fraud, and it is a crime. In this case, the U.S. Treasury, as well as Bernanke and Paulson personally defrauded investors of billions of dollars, not just by failing to disclose Merrill’s dire circumstances, but by taking action specifically aimed at deceiving investors and spread false confidence.

Not that it was their first trip around the block. Since the fall, Bernanke and Paulson regularly acted outside the law pursuing “noble” motives. By now it’s common knowledge [I hope] that together they raided the Treasury and used taxpayer dollars to help bail out their cronies on Wall Street and further spread the government’s sphere of influence in our nation’s economy.

I’m sad to say that it seems we are entering new era in this country. One that will have a degree of government ownership and control in business that Americans never would have dreamed of a generation or even one year ago.

We can debate whether the recent growth of government is right or wrong until we’re blue in the face, but talk is cheap. For better or for worse, it is what it is. Que sera, sera. The more important question we as investors must face is this: How can we profit from these changing circumstances?

Everybody has political opinions, beliefs and tendencies. While there’s absolutely nothing wrong with having and expressing opinions, as I’ve written in previous columns [seel Jan. 11 blog], the most important thing when it comes to investing is maintaining objectivity.

There is a time and a place for debate, but when the dust settles and one candidate or policy comes out on top, we must accept circumstances for what they are and move on. Focusing on reality, not the ideal, allows us to assess the situation without emotion or bias and make the best decisions possible with regards to our investments.