Saudis Meet to Announce No Deals?

First Russia announces it will meet with the Saudis to discuss oil…then nothing.  Then the Saudis meet with Venezuela and…no deal is announced???  Smells like there is a deal brewing.  What would happen if a deal is announced?  I have just sold positions in ADRU and ADRA and bought oil.  This is a time to make sure you are positioned where you want to be if there is a turn around.  I do not want to be in ADRA because there have been to many days when there was no trading and I have other holdings in Asia.  I do not want to be in an ETF of Europe.  This is where you need to be very selective and that requires active management.  This research project does not allow me to buy mutual funds.

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Is The Wind at My Back?

This Portfolio Navigation research project beganon 2/2/2015 with $100,000 of my money that I placed in the PRI account at Charles Schwab. The following graph shows the major asset allocation changes for this first year of a five year planning horizon2-2-15 to 1-29-16

However, results reported in my account one year later were:

Final value 1-29-16

How could such fortuitous asset allocation decisions end up losing more than if I invested  100% in the the S&P 500 index? Well, that’s why I put FXI (a China index) and XLE (an oil index) in the graph.  Those two positions and $735 in fees were the main culprits.  But literally everything I bought did worse than the S&P.  That is why I added substantially to the Vanguard S&P 500 index (VOO) in January:

YTD Transactions

VOO is now 27% of the portfolio, FXI is 10% and XLE is 9%. Those are my 3 largest holdings.  I decline to show the entire list of holdings at this time as some might take this as a recommendation.  I am not offering investment advice.  I am simply allowing the reader to look over my shoulder to see what I’m up to.  I may not achieve my investment goal of compounding at 8% for 5 years.  In golfing lingo, I hit one into the woods between point C and point D in the graph.  However, I am only 1/5th of the way through the course.  The question remains, do I have the right equipment (Portfolio Navigation) and do I have the skills to use this to shoot par for this course?

The operative question is: what rate of return do I have to earn for the next 4 years, given that I lost -8.4% the first year.  Where did that come from?  Schwab said the portfolio lost -7.12%.  That is how everyone measures the manager’s performance.  The internal rate of return the portfolio earned was -8.4%.  What matters is what is the new DTR that I have to steer to reach my goal?  It is 13.7% . Here are three portfolio distributions I can choose from to reach my goal; from left to right they are: DTR 8, DTR 10 and DTR 12.

2015 Distributions

There is only one that has the potential to achieve that, the DTR 12, but when you take into consideration the downside risk, via the Upside Potential ratio, we see that portfolio has 60% more downside risk than upside potential.  I knew the market was at an all time when I started this project, but that is perfect for testing this theory.  Any theory will work if you start out at the beginning of a Bull market.  I will have to keep this new information in mind in future decisions and be ready to cut back to the DTR 8 asset allocation if the wind turns out to be in my face.

Should the flood of money from central banks cause a blow off in the market, as described in the December 18th posting (Trapped Again) and the portfolio reaches 117,000 this year, I would try to lock that in.


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The Davos Agreement

One thing they all agree on in Davos, China did it!  The WSJ this morning reported: ” market turmoil in recent months has coincided with the hard-to-discern shifts in China’s exchange-rate approach.” ” Until there is more certainty over what’s going on in China, it’s better to stay away,” said Raymond Nolte, chief investment officer at Skybridge Capital.

Now be honest Mr. Nolte, just how does one value fiat currency?  What is the equation?  There isn’t any!  Currency traders are not using well defined formulas for determining which FIAT currencies to buy and which to sell.  They get paid for making bets that pay off.  There are no old experienced currency traders because they quickly burn out or become thieves and go to jail.  The reason China has been devaluing their currency is because WE (meaning the IMF that WE control) told them it was a condition for being allowed to join OUR club.  The reason no one in their right mind would tell US what they are going to do is that WE would trade on that inside information at China’s expense.

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Market Hits Front Page

Market Plunge

When the stock market hits the front page it is because the news media thinks it will sell more papers than murders. In the past that has been a good indicator of a top or bottom.  The media is notorious for scaring you out of buying at market lows and encouraging you to buy at highs.  If you’re looking at that heads and shoulders pattern on the right, it is too late.  How is an unsophisticated investor supposed to buy when they read headlines like this?


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This morning I sold the remaining fixed income position (FLOT) and increased equity 10%.  The current asset allocation is shown below:

No More Fixed 2-20-16

At this point the portfolio performance reported by Schwab is -14.37 percent.  That is how Schwab (and everyone else) measures the performance of the portfolio manager.  What is more important to the investor is the internal rate of return, that is, how much did I make or lose?  That number is -12.1% [($87,895/$100,000)-1 x 100]  What neither of these numbers capture is the power of initial cash reserves of 30%, that were increased to 40% to protect on the downside.  Then those cash reserves were steadily invested as the market declined until the final 10% increase in equity today.  THAT IS WHAT I CALL PORTFOLIO NAVIGATION.  My expectation is that we will be back on course before year end.  Stay tuned.

Is this a global bear market?  Does the Stock Market predict a coming recession? Does the stock market cause recessions or depressions?  Can monetary policy cause economic growth?  What or Who caused this sell off?

Only the last question is worth commenting on, the rest are misleading.  The answer is: The Saudi’s caused this by flooding the market with oil.  Will cheap oil cause the global economies to collapse?  Only if the world slogs on will we I be able to achieve the stated goal of compounding at 8%.  Therefore, I welcome this opportunity that makes that possible.

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What a Difference a Day Makes

On Thursday the headlines announced a long anticipated rally to end the scary first of the year selloff:

what a difference a day makes -14th

How can an ETF have a thousand percent increase in volume if it is not the beginning of a new Bull Market? I believe it was just another attack by financial terrorists who use securities like JKF to lure investors into a high speed computerized trading trap.  It is a game our regulators allow them to play and that makes this market unlike any market we have seen.

The next day they sprung the trap:

Black Friday

On the evening news Scott Pelly asked two Wall Street experts in a solemn voice, “Is this 2008 all over again?” It cannot be compared to 2008 or 1990 or any previous period.

“No”, one expert said, “in 2008 it was caused by Wall Street, this time it is China.” Yes, it was the China slow down causing investors to sell stocks and buy bonds. Not this investor. When the Dow was down over 400 points I increased the S&P 500 allocation 100% to 15% of the portfolio.  I am now down to 15% left in cash equivalent- FLOT.

Then on Saturday China said, wait a minute, it wasn’t us; our economy grew 7% in 2015, not 5% as the experts said.  Who can you believe?  When have you ever seen an economic indicator that wasn’t revised before the ink was dry on your morning newspaper? The indicators of what happened are flawed and the indicators of what is going to happen are even more flawed.  So stop believing someone KNOWS what is going to happen.

I did not know the market was going to sell off ten months ago.  I believed it was at an all time high when I began and the downside risk was high.  I have been trying to navigate from where I was financially on February 1st, 2015 to where I need to be financially in 4 more years in order to accomplish my goal of compounding at 8% over a 5 year interval.  The head winds have been strong and I know I am going to have to increase equities if I am to accomplish my goal.  That means I am going to have to compound at almost 12% for the next 4 years.  Therefore, I have to take advantage of selloffs like this by increasing equity.

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Buy the Culprits

Today I increased the holdings in XLE by 50% and the holdings in FXI by 50%.  The word on the street is that China caused the sell off because they are not growing fast enough and therefore the demand for commodities has tanked.  I blame the Saudis.  However, if the economy is ever to recover, then China must grow faster than the U.S. and the price of oil will have to increase.  Another reason to buy the worst performing sectors in the world is that behavioral finance studies have shown that the market undervalues the dogs that are down more than 30%and over values the darlings that are down only 10%.  I still have approximately 24% of the portfolio in cash and FLOT.  I would love to see another 500 point sell off.

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