Archive for January, 2015

Swiss Surrender in Currency War

Friday, January 16th, 2015


For the past three years, the Swiss National Bank has kept the Swiss Franc pegged to the Euro so that it did not appreciate too much and make their exports to the rest of the continent too expensive.

To do that, they had to buy a steady stream of Euros and sell an equal amount of Swiss Francs. This was designed to drive down the price of the Swiss Franc. They were successful to the point where the Swiss Franc had weakened significantly. Look at the chart below which is simply the chart of the Swiss Franc with the Euro superimposed over it:


The big question is why did the Swiss change their policy? They are not telling, but given their history as a financial safe haven, my guess is that they see what a crap shoot the Euro has become and did not want to devalue their currency any further.

Unfortunately, there are lots of repercussions:
>Swiss exporters will have their sales fall due to the 20% increase in the cost to a foreign buyer due to 20% increase in value of Swiss Franc;
>lots of Europeans have their home mortgages denominated in Swiss Francs – particularly Hungarians – and they now have mortgage payments that are 20% higher;
>there will probably be a number of corporate and individual bankruptcies in Europe because of this move, which will put capital strains on an already strained European banking system;
>currency traders on the wrong side of this trade (those short the Swiss Franc – and there were $8 billion worth of shorts last week according to an article from Mike Norman) will lose a lot of money; and
>very likely several other issues I have though of yet.

However, one thing that this will do is make Gold break out to the upside. Take a look at the chart of Gold below:


You can see that gold peaked up in October but fell to a low in November. Since then, it has moved higher with the increasing problems in Europe. The move by the Swiss caused the price of Gold yesterday to move above that October high. This is a breakout that could last given the issues the world faces, and provides an opportunity for investors that are watching the geopolitical issues for investment clues.

We are raising our allocation to Gold in client portfolios to 4% from 2.5% with the purchase of Royal Gold. To fund this, we will be lowering our allocation to European equities by 1.5%.

Royal Gold is a royalty company that is leveraged to the price of gold. They own no mines, no mining equipment, and pay no miners. They simply own royalties and as the price of gold rises so does their stock price.

This is a crazy time in the Equity markets. You can count on one hand the number of positive days in the S&P 500 so far in 2015, a much different scenario than 2014. This will be a year where you need to be selective in your investment holdings to focus on companies that are able to drive their stock prices higher even if the broader markets are ratcheting up and down (or mostly down as we’ve had so far this year).

If you have an interest in reading more about my thoughts on 2015 being the year of the stock picker and definitely not the year of the index investor, you can check out this post from about a month ago:

Enjoy your weekend!


Meet The New Year, Same As The Old Year

Friday, January 9th, 2015


With apologies to the band The Who for subverting one of their lyrics for the title of this post, as 2014 ends and we begin 2015, I wanted to give you a recap of 2014 and some thoughts on how the new year could mirror last year.

It was a tough year for growth stocks, small cap stocks, energy stocks, and foreign stocks. It was a great year for value stocks, blue chip stocks, and health care stocks. Many of the market darlings ended the year in the red: Tesla, Netflix, and Google are prime examples. The Utility sector was the leading economic sector for the year – which concerns me, bull markets are typically led by technology, industrial and financial companies, all from economic sectors that that expand as GDP expands. Utility stocks are the ultimate defensive investment, and bull markets – unlike the Chicago Bears – are not built on playing defense.

The biggest economic and financial issue of 2014 was the dramatic drop in oil prices. I’ve included a graph of oil prices over the last year at the top of this blog post. You can see that we have fallen from a high of over $100 to $48. The benefit to the economy is notable as consumer have more money in their pockets to spend or save. Corporations that are big users of energy increase their profits to their shareholders benefit. However, the overriding concern is that global economic activity is faltering and global GDP – as well as that of the USA – could slow.

The supply/demand imbalance in oil is definitely an issue as the world is producing one million more barrels of oil per day than it is consuming. Over-supply always leads to lower prices which in turn stimulates demand – the fact that the fourth quarter saw the auto companies sell more SUV’s than cars seems to back that up. Low prices also lead to cuts in production as higher cost wells are capped in an effort to equalize supply and demand. Unfortunately, as we look around the globe, we see deflationary forces at work in Europe and Japan, and Chinese growth is slowing as its exports are not as strong as they once were. This seems to back up the theory that global growth is slowing.

So far in 2015, volatility in the stock market has been high. We started the year with several down days in a row, only to followed by a huge day to the upside yesterday. The biggest known issue facing investors this year is the statement by the Federal Reserve that they could begin to raise interest rates. Based upon the global deflation we are seeing, the lack of domestic inflation pressures, and no upward pressure on wages, I have a difficult time believing they will justify a rate increase – but you never know what a government bureaucrat can justify.

As long as US GDP continues its low single digit march higher and interest rates stay low, I think we are likely due for a pattern similar to 2013 and 2014 in the stock market: a volatile move higher from January to April/May; a correction in May/June; a move back to the highs in July/August; a correction in September/October; and a rally to the highs in the fourth quarter. Naturally, anything can happen to impact this sort of seasonality so investment managers have to be nimble and have a plan of action at the ready.

We monitor price trends and valuations, raising cash when our indicators tell us that the market is likely to pull-back and we reinvest that cash when we see a pull-back has run its course. That strategy has allowed us to manage stock market risk successfully over the years and should do so for years into the future.

With this first blog post of the new year I want to wish you all a very healthy and prosperous 2015!

[Hard to believe this was 30 years ago – I remember it like it was yesterday]

And for those of you who just want to listen to what might be THE classic rock album of all time, check out The Kids Are Alright in its entirety – they just don’t make music like this any more