Retail Sales... Yeah, Probably Just A Little Gully

April 4, 2019 Paul Franklin

Retail Sales figures were released yesterday (April 1) and it was no joke! Since the bulk of the US economy is derived from some kind of consumption- the rate of change in hawk-in’ goods and services should be front and center of your investment process. The pink line above shows the year-over-year change in this data. Let me summarize for you; going from a 6-handle down to a 2-handle in just a few short months is really bad. This is not supportive of any kind of growth narrative. When growth is slowing do you just stand in the ring with your arms by your side as Mike Tyson is pounding you? You should be looking to recalibrate your holdings. Go back in history and learn from what has worked. Where should you be focusing your attention? What data are you looking at to determine when growth is set to turn back up? Are you even looking at the data? It’s game time, and put me in coach! I’m ready to play ball.

Cheers,

P. Franklin, Jr.

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.

We're In an Earnings Recession... Now What?

March 27, 2019 Paul Franklin

It is FTM’s belief that the United States is now in an earnings recession. Now, it is fair to argue about that statement. We haven’t officially recorded even one negative quarter in S&P 500 earnings growth- let alone two. I have always had an issue with the negative two quarters rule about defining recessions. Much of this is because by the time two quarters of data are booked and in print- it’s a little too late. Capital markets are forward looking. It is my observation, based on over twenty years of observing data, that we are in an earnings recession.

There is a small probability that I am wrong. GDP could suddenly do an about face and turn higher. The government could come out and say, “you know, we don’t want to collect any taxes from corporations this year.” The employees could elect to have companies to pay them less this year. The US dollar could precipitously fall in second quarter and that would help. Overall, the chances of any of these things happening is quite low.

I believe in mean reversion. I believe in cycles. I believe that corporate profits are mean reverting which is why prices mean revert. You see, it is profits that drive price over time and and a company’s profit stream has a life cycle. Profit life cycles have varying lengths, based on a variety of reasons, from the way the companies are financially structured to the type of customer who will purchase their products and services.

So, let’s just say we are in an earnings recession that lasts the remainder of 2019. Now what? Markets will become very Darwinistic- survival of the fittest. As I stated in the previous paragraph, not all industries are the same! It is critical to your investment success that you begin to understand what factors perform best in an environment. For example, I’d be spending time figuring out which companies are more stable growers versus more cyclic growers (hint- you want stable growers). Earnings recessions are usually a precursor to economic struggles. Not always, but usually. If the economy is struggling, the Fed will do what they always do and begin to monkey with (as in lower) interest rates. We have already seen equity bond proxies like REITs and Utilities perform quite well versus the broader group of stocks. Cash and short-term bonds could be an answer to out performance.

Staying the course is usually a poor decision. I know, doing something for many people is hard. It is fraught with all kinds of baggage and F-words (uh, I meant FEAR- what’d you think?). Fear of being wrong is usually at the top of the list. Speaking of thinking, now is the time to do that. If you are saying to yourself “if I change up my portfolio, how do I know when to change it back?” That statement, which is a brilliant one, should punch you right in the nose. It screams that you have no process. There is a better way, a more consistent way, to manage your hard earning capital. If we wait to see the robins to tell us spring is here, well, you missed it!

Cheers,

P. Franklin, Jr., CEO

What's the "North Star" in Investing?

March 1, 2019 Paul Franklin

I’ve been managing other people’s money for over 20 years. Before starting my own company, I worked for two very large bank/brokerage firms each with tens of thousands of employees. I’ve professionally lived through many market cycles and have witnessed how both clients and advisors react to certain events. I can wholeheartedly state that the fact we are having a dialog about a process or how to think about financial assets is something that very few professionals are able to articulate. Why? Because to do so exposes the professional to look foolish if they get it wrong. When you get it wrong and you don’t look like everyone else, your job or business is at risk. Hence the saying, “Your clients will never fire you for holding IBM.”

I personally find this professional attitude weak and self serving at best and mentally fraudulent at worst. I won’t get into all of the conflicts and bad advice individuals receive from their “trusted advisors” at this time, but I will point out that such lazy, non-thinking approaches to managing your wealth (which is how most private client money is positioned) it is critical you, their client, understand what you are signing up for. You are signing up for the fact that at some point in the cycle you are going to lose 50% (give or take) of your financial assets. All of the colorful pie chart in the world will not hide that!

So, the question becomes can we build something that is better? “Better” is always a judgement of the client. However, when I am speaking about better, I am specifically speaking to consistency. While there are zero risk-taking portfolios that will be immune to draw-downs (unless you are Bernie Madoff), is it possible to create a disciplined process that shifts assets around based from quantitative approaches that attempt to capture risk when we want to and avoid risk when we don’t? We want to move the conversation from judgments of what is expensive or cheap (because that is opinion…or lying) to a dialog about what is the data telling us? Is it possible to avoid the landmines? Obviously, I believe you can. I not only believe, I know. I’ve experienced it.

From here, we can now transition into a process of identifying the what and when of buying and selling. This reminds me of the only J.M Keynes concept that has any application to my thinking, which is “when the facts change, I change my mind. What do you do?” So to identify “the facts,” one needs to be grounded in something - right? No fake news! So then what is our North Star going to be? What will our filter be to everything financial? By what method do we use as the basis in which to identify whether you go to the right or go to the left or turn around? At this point we’ve ruled out 90% + of all financial professionals who don’t even think in terms like this. It is my personal experience that their North Star with your money is “the market is open, so it is a good time to buy!” My other personal experience is that the few remaining professionals who don’t fall in that camp are more “dooms-day” minded advisors who are closet gold bugs. Their North Star is to base all financial assets in terms of gold. The problem with this approach is you are anchoring your sense of righteousness in something that is manipulated. So, my research has led me to understand that when you base your sense of “value” of one asset from the “value” of another asset, you are in very dangerous territory. Think residential home prices in 2007! The value of your home based on your neighbors home was terrific, right up to the point your neighbors home went into foreclosure. The point is you need something else to judge price.

My financial journey, which includes many mistakes, has led me to understand how assets are priced. The result is an economic compass if you will. All assets are price from changes at the margin in growth and inflation and thus profits. I have to give credit to most of this discovery to Ray Dalio. Ray Dalio is the very successful steward of capital at Bridgewater Associates, LP. So our North Star to successful investing is not derived from a thing like gold or real estate or whatever, but from an observation in the changes in these two easily observable economic data points - growth and Inflation.

So pictured above is our economic compass. If we are seeing the rate of change in both growth and inflation (like we are as I write this) decelerate, you would know that profits are in the SW quadrant. Conversely, if you are seeing the rate of change in both growth and inflation accelerating, you would know that profits are in the NE quadrant. Your investment allocation looks completely different when the profit cycle is taking a trip to the southwest vs. the northeast. In fact, if you maintain the same investment allocation when profits are cruising in the NE and now find profits in the SW - you will literally crush your portfolio. Each location on our economic compass will require a different investment mix. This is not based on how we feel or opinions, it is base on data. The military use a term called situational awareness. To strive for better and/or consistent results with your portfolio you need situational awareness. They say, “what the wise man does in the beginning, the fool does in the end.” Let’s use use more objective data and less subjective “opinion” or our feelings to deploy our portfolio resources. Approaching the capital markets with the aid of the economic compass will hopefully allow us to make decisions that are a little bit more wise and a bit less foolish!

Sincerely,

P. Franklin, Jr., CEO

Not All Price Declines Are The Same

February 21, 2019 Paul Franklin

If you view things strictly from your account balance, one can absolutely argue that all price declines are the same. That is the Financial Media Entertainment Complex (aka CNBC) approach to the market. They can tell you with great precision the point gain of this and the dollar loss of that. It is all BS and quite clown-like. No professional money manager worth their weight in salt looks at the capital markets this way. So if you are reading this and you get an alert that the Dow Jones is down 500 points and this causes you to look at your account or call your broker, you need to stop. You’ve got no process. While we are not going to re-invent an investment discipline in the next couple hundred words, I hope you will begin to view that markets in a little different way.

Above is a picture of a stock that has fallen about 50% from its high point. I wouldn’t touch this stock with a 10-foot pole. This is an exciting company. With the wild ramp higher in 2016 and 2017, you can bet this was darling on CNBC. Look at the points (that’s sarcasm)! Allow me let you in on a little secret. In the long-run, stocks pretty much are 100% correlated to their earnings or business value. Sure, from time to time the stock price (in black) will gyrate wildly from business value (in orange), but the two will ultimately converge at some point in the future. I’ll be the first to admit that it is people hitting the buy and sell button actually move price. However, the large, sustainable moves in price are driven by managers who can take sizable positions based on reasonable growth of the business for new buys and will subsequently scale out of those positions when the price moves too far too fast from the economics of the business.

Now let’s look at stock number two. For full disclosure, this is a stock that I own personally and so do my clients. The stock price has declined about 40% from the highs. Not quite as extreme as the first stock, but significant none-the-less. Here is the big difference - business value increased! It not only increased, it increased by a lot. Stock prices do not trade in relation to good or bad. “Is the business getting a little bit better or worse?” is the question to be asking. In this case, the business is getting a bit better.

These concepts are something CNBC would never discuss, because they have no clue. Prices, numbers, points are all meaningless unless that are relative to something else. Please remember that. Not all down moves are the same. Not all down moves should be acquired. In fact, many stocks that fall by 50% should be sold because they could be still significantly above business value and thus subject to further declines.

Sincerely,

P. Franklin Jr., CEO

I'm Sure This is What it Feels Like to Throw an Open House And No One Shows...

February 21, 2019 Paul Franklin

Above is another data point pointing to further weakness in residential housing. The run-up in years past surrounding housing prices is a direct result from the manipulation in interest rates. Homes are sold today only on payments - not value! If the cost of the payment goes up, then you delay your purchase or the price has to come down. It is a sad relationship we are faced with. In many cities, home prices are 20% to 30% above their long-term trends. All assets eventually revert to average. The reversion process from above trend to below trend is quite painful. The demographics is the US and Europe do not help and in fact will most likely exacerbate the price adjustment. Just remember, when price begins to reflect true reality, it never adjusts like the landing of a 747 jet. Adjustments are always swift and jarring. Real Estate is an illiquid asset which is subject to major gaps in price.

Sincerely,

P. Franklin, Jr., CEO

My Head Hurts... And No, I'm Not Hungover.

February 13, 2019 Paul Franklin

My head hurts every time I look at this table of global interest rates. Above is a list that shows the insanity of central bankers around the world. Now, I have the ultimate respect for anyone who can maintain conviction when an investment hypothesis goes in the opposite direction than initially thought. Being wrong is a common outcome when dealing with an unknowable future. Like baseball, a few strikeouts is part of the process to your next hit. However, just standing in the batter’s box randomly swinging is not acceptable. This is what many central bankers are doing with their negative interest rate policies. The notion of moving interest rates around to simulate investment is absent of one key ingredient……if I have zero confidence in investing my money in other stuff, central banker’s moves will do nothing to simulate. In fact, it is has been fairly obvious to every real-time money manager (and not the central-bank/academic money manager) that negative rates actually make the velocity of money contract rather than expand. This is so damaging at this point, I feel sorry for the citizens of Europe. I am honestly not sure what are the long-term, negative consequences of these policies. Decades of financial pain and turmoil at best and complete civil unrest at worst are a few scenarios. The stability of the European banking and pension system should be in serious question. Any investor who can willingly deploy capital around the world, is just not thinking clearly if they have money here. This is not a “value.” It is a trap. At least with a carnival barker you know what you get.

Sincerely,

P. Franklin, Jr., CEO

A Follow Up To My Negative EUR/USD Call

February 13, 2019 Paul Franklin

This is a follow-up to my November, “Dude, where’s my Euro?” call. When investing, I feel it is important to take a multi-factor approach to making buy and sell decisions. While I generate most of my investment ideas through a fundamental lens, I always verify my hypothesis with price. Price to me is the ultimate judge and jury, so it is a critical component to my process.

I’ve done my kindergartner mark-up on this chart - with blue for the long-term trend and red for the medium-term trend. Basically, from my long-term opinion, the Euro has been biding time for several years now, but remains in a over-all downward trend. The range here is huge (1.24 - 1..04). The EUR/USD pair is currently at 1.12. I have a medium term target at the low of the range at 1.04 (which is the lower blue dotted line). A decided break through the 1.04 level would be significantly negative for the Euro. With Italy, France, Germany, and Spain all under severe economic pressure and general decline compiled with an extremely negative demographic make-up, I don’t believe the price has discovered the true realities facing Europe. These fundamental factors compounded by really stupid (and when I say stupid, I mean like Dumb and Dumber kind of stupid) monetary policy, I have a high degree of confidence that a long-term target price of zero may be too conservative (kidding, kind of).

Sincerely,

P. Franklin, Jr., CEO

"Why" Doesn't Matter In A Bear Market!

January 10, 2019 Paul Franklin

Above is a picture of the S&P 500 or a proxy for “The Stock Market.” Before I get into the main message of this blog post, I think it is important to understand that there are different types of bear markets. It is also important to know that “corrections” are different than “bear markets.” The market action we are experiencing is definitely not a correction, but most certainly a bear market. “Corrections” in the stock market tend to short and swift and tend to look like the letter “V” as the price bounces and quickly moves to new high ground. “Bear markets” are more painful as they take longer to correct and the price action tends to look similar to the letter “H” or “W.

Bear markets will correct either through time, as it did in 2015-2016, or in price decline as we are experiencing now. It is often coined that bear markets will either scare you out or wear you out. Two years of chop is just about the right amount of time for investors to throw in the towel and look for “better” opportunities for their money. Also a 30% decline in price is just about the right decline to scare investors out of their money. While these are just guidelines, this could serve as a useful road map for how this plays out. It is also important to keep in mind that anything, and I do mean anything can happen in the market. It is critical that we remain objective to the data. As the facts change, we need to change.

If we look at the most recent price movements, we need to think about what would it take to really wash as many investors out of the market as possible? But before the washout, it is key to understand that market has to suck in as much new money back into the market. To make that happen I would expect that we would see a rally up to 2650 in the S&P 500 (which is the very first arrow). That would usher in a new crowd of bull money. By this point our trend indicator would have drifted down to reject that price action like my 14 year old son trying to shoot hoops against Kevin Durant! Ugly, From here, the path of least resistance will be to re-test the lows. This will give us our “H” or “W” pattern. It is quite common for the re-test to go a bit below the prior low - you know - just to pour a bit more salt in that open wound. So from a rally up to 2650 (and KD standing there to reject us) we should expect a re-test of 2361 or 2182. This is most likely the base case at this point. This would be, give or take, a 25% correction. This is pretty typical. Now, if the stock market gnomes really want to send a message, and really rattle some cages, 1892 on the S&P 500 would be interesting. 1892 on the S&P would accomplish the “scare out.” Investors would be freaking out. 1892 would be a 35% decline from the top. This is definitely a possibility, but not highly probable at this point. This is not my base-case, but again keep in mind that selling will beget more selling and it is best to just step aside to see where price finally settles in. It is all ego at this point.

The final question is over what time frame are we talking about? Because it is very unlikely this is a precursor to a recession, it should be short lived. (Gasping for air) GFA: But Paul, everyone on TV is saying that a recession is coming. Don’t you look at Oil? ME: Yes. GFA: What about Copper? ME: Yup. GFA: They are all signalling a global slowdown! The end of time is upon us! Hold me. ME: Well a slowdown is much different than a recession. And I also actively watch, ISM figures, employment stats, the yield curve, credit spreads, restaurant data, retail figures, and on and on. I can definitely see some softening in the data, but there is a lot of holes of golf left to be played. Hacking your way out of a sand trap is much different than sticking your arm in the pond to retrieve your ball only to be eaten by an alligator! Now where was I again? Oh yes, time frame. Cycle dates point to March-ish. This would be about a 6 month correction, which seems about normal. Like anything, we will just have to see how this plays out. I am hopeful that the bulk of the price decline is behind us, but history does not support this.

The bigger picture is very much intact. It would not surprise me to see at some point in 2019 take out the 2018 highs. The US equity market is still definitely in a secular bull market. This very well could last another 10 years. So, let’s review the landscape now and for the foreseeable future:

Global Geopolitical and civil unrest will drive capital to the US seeking safety.
As the global decline in socialism continues, capital moves away from governments into private capital.
The normalization of interest rate (read:mean-reversion is a bitch sometimes) will severely penalize home values and fixed income.
Continued strength in the US dollar because of 1,2 and 3 above, will create the merry-go-round from hell for US dollar denominated debt and force more and more capital to the US.
Tremendous advancement in medical tech and digital health are just beginning.
Market moves away from previous cycle leaders - FAANG stocks - into new growth names.

I guess I should close talking about the title of this post; “Why” Doesn’t Matter In A Bear Market. It was pounded in my head and my brokerage statement many years ago, that “why” is really not an important question to be asking in order to make sense of something that is too complex to make sense of. “Why” is a question that comes from ones ego. The successful investors that I’ve learned from do not operate from the ego. They operate free from ego and stay in a constant state of observation. “Why” is the chatter from the talking heads on TV. They look good and come up with very reasonable sounding explanations. But, does it really matter? It is only after the fact that the “why’ reveals itself. By then it is too late. Staying in a place of observation and open to the possibilities is where I’ve found success. Going with the path of least resistance, ahem, the trend, has served me well. The trend is down for now, but i think we have laid out a pretty good road map in the short-term. S&P 500 levels to keep in mind 2650, 2361, 2182, and 1892. Look for a rally high into mid-January and a re-test of the lows into March.

Cheers,

P. Franklin, Jr.

Is Your Money Managed By A Thermometer Or A Thermostat?

December 20, 2018 Paul Franklin

Prior to starting my company, I worked for 20 years at two of the biggest brokerage firms in the US. I’ve had the luxury of seeing, from behind the curtain if you will, many different approaches to how your money is managed. Some approaches are well thought out, but most are not. Many have no approach at all. The bulk of client money is managed by some model, most likely created by someone at the home office or “puzzle-palace” as we would affectionately refer to the corporate location. Which at face value, the model isn’t necessarily bad, but when “theory” meets capital markets “reality” you end up with the equivalent of bad hospital food for dinner. Sure… it will keep you alive, but there has to be a better way!

Most advisers simply read back to their clients what the temperature is today. Client assets are simply managed in a backward-looking approach. Most client assets are managed by taking past returns and correlations and then extrapolating those results out into the future. Yet every piece of sale literature states that past performance has no guarantee of future results right? This is true. In fact, I could go a few steps further and state that past performance has absolutely no relation to future results.

Let’s take this lazy, non-thinking approach a bit further. Your money is literally managed by the equivalent of the saying “April showers bring May flowers,” so your portfolio is going to wear a rain coat and carry an umbrella around for the month of April, and every April in the future. What if a foot of snow dumps in April, or it’s 90 degrees outside in April? But no, your adviser will simply want to re-balance your portfolio to a rain coats and umbrellas. This is the thermometer. It makes no sense. It is my experience that clients really want and expect the idea of a thermostat to be managing their funds. The all too often reality is they are dealing with a thermometer.

What if an asset is not of value, then why would you allow someone to commit your capital to the space? For example, how many client portfolios around the country are still sitting with emerging markets assets in their accounts? Or even a greater sin, adding into emerging markets? Oy vey! (I’m slapping my hand against my forehead). Emerging markets peaked at the beginning of the year and have been in an obvious downtrend since May! The thermometer has you dollar cost averaging into this space. Wrongo! Dollar cost averaging is a concept invented by Wall Street and the mutual fund industry, so they can keep collecting fees. Being wrong is fine but staying wrong is totally unacceptable.

Being a thermostat means you are thinking about value, about risk, and about the future. Managing risk puts the adviser in the position of looking stupid. I’m totally fine looking stupid from time to time if (and when) a bear market strikes, I’ve protected my client’s assets from long, protracted declines. Managing money is a risk management business. It is really the only aspect of your portfolio you can control. You cannot control how much an asset goes up, but you can control how much you will lose. But that takes a process. That takes a discipline. That takes the emotional fortitude with being okay standing outside with the birds looking in. That takes being a thermostat.

When the investment tide goes out, the way “asset allocation” is practiced will not protect you. The humongous bank and brokerage fantasy laboratory of “asset allocation” gets destroyed when real life market participants behave like real life participants. Real life decisions are situational. Real life decisions are based on the available facts. If history is your guide, then why doesn’t every protracted decline in stocks stop when interest rates go down to 3%? or 2%? Why did going to negative interest rates not work? Because is it situational. It depends on the opportunity set.

Act like a thermostat - think!

P. Franklin, Jr.

December 20, 2018

Dude, Where's my Euro?

November 12, 2018 Paul Franklin

Have you ever left a store and for the life of you, cannot remember where you parked? Yeah, me neither :). The Euro is, with high probability, in the elevator heading down to level P1 - 10933. The time frame is expected within the next couple of weeks. If the Euro can’t find its car on parking level 1 (P1), P2 is at 10487.

Cheers,

P.Franklin, Jr

November 12, 2018

Put/Call Ratio Peaking

October 23, 2018 Paul Franklin

The 10-day moving average of the Put/Call ratio has surpassed the prior highs from February and April of this year. High Put/Call figures point to extreme bearishness in the market. Not sure if this has fully flushed itself out, but based on this indicator, we are getting close. Shorts will definitely cover here.

Cheers,

P. Franklin, Jr.

October 23, 2018

I Guess This Is Going To Be Currency Friday

August 10, 2018 Paul Franklin

I'm not intrinsically a pattern-guy. I'm fully aware that if I were to seek out a particular price pattern in the market, I would be able to identify those patterns everywhere. The brain is a very sneaking organ. That said, if I already have a fundamental macro view (such as a new up-trend in the $DXY), and I begin to spot price action or price patterns that support my narrative, I'll take notice. This is a very different approach than to seek out price patterns to justify a loosing or wrong position.

I think the head and shoulders topping formation makes sense to me in support of a short EURO thesis. If we think about the FO-SHO-BRO dynamic, 2016 was a year with an overly-crowded short EURO trade. This can now be viewed as the Fake Out (FO). 2017 would have been a year with a "rip your face off rally" if one were short or Shake Out (SHO). Now that the market has forced those to cover short positions and most likely go long the Euro for a variety of ill-formed and bogus ideas, the time only makes sense to me for the "real" short move to begin in the Euro or the real Break Out (BRO).

Got popcorn?

P. Franklin, Jr.

* I own in client accounts long US Dollar instruments

Just a Small Observation! (Part 2)

June 15, 2018 Paul Franklin

On April 25th, I posted a note about a company who's stock price signaled to me it was about to lift higher. The price was about $44 per share (see the previous post). As of this writing, the price of the company is about $20 per share higher. Now, I did not have 100% certainty that this was going to work out. I make many decisions in the stock market that don't work. This is why it is critical to operate with some sort of stop loss - both in price and time.

There are only four outcomes to every investment decision: 1. Win big 2. Win small 3. Lose small 4. Lose big. Now my job as a professional money manager of other people's money is to hope for winning big, accept that winning small or losing small is part of the process, and avoid, at all costs, losing big.

One cannot compound capital at a high rate of return and take big losses. The math doesn't work.

I'm no Einstein, but......

P. Franklin, Jr.

June 15th, 2018

Just A Small Observation!

April 25, 2018 Paul Franklin

I've noticed over many years of watching stock prices that when people get all worked up over market volatility, they tend to miss the stocks that launch into a major price moves. While the siren-sounds of the stock market's demise are blaring, that is the time to do the necessary homework. For you see, market corrections sow the seeds for the next big winners. This is how the world of stocks work.

Now there are no guarantees in the stock market. It is a business of probabilities. One must think in terms of odds. There is no certainty that this stock pictured above is going to launch into the next big winner, but the price movement is tapping me on the shoulder. Successful stock investing is about observation. Successful stock investing is really quite boring, but someone has to do it! So, it might as well be me. I'm in cougar-mode right now. My kids think I'm just napping in a tree, but I'm fully prepared and on guard. There are a lot of stocks that I'm stalking and ready to make my move.

Big Game Hunter,

P. Franklin, Jr.

April 25th, 2018

Are We Sowing The Seeds For Our Next Crisis?

March 15, 2018 Paul Franklin

The graph above is an image of the 3-Month LIBOR, based in U.S. Dollar. This is a key benchmark for short term interest rates. This is the interest rate that large financial institutions pay to borrow funds. Customers (you and me) will pay a mark-up from this rate when they borrow.

So interest rates have been kept artificially low for far too long based on the totally baked idea (and widely accepted by most economists) that by moving around key interest rates that some how these "levers and knobs" will create changes in individual's appetite for risk taking. The foolish notion that by dropping rates will create demand is really, well...dumb.

But, here we are! Almost 6 years of low to zero to negative back to low interest rate environment only sows the seeds for the next crisis. Isn't it ironic that the government's solutions to past problems only seem to create the next crisis? We should all take a moment to ponder that one!

Anyway, it would not surprise me if 2018 was termed "LIBOR's Revenge!" This spells all sort of issues for of assets that are based on credit. The top of this list is residential real estate. Next on the list would be US pension funds, and then I suppose I'd throw in Life & Annuity Insurance Companies just for good measure.

Cheers,

P. Franklin, Jr.

March 15th, 2018

Don't Watch This Graph!

January 11, 2018 Paul Franklin

I'm guessing a lot of people are watching this graph of 10-year treasury yields. The bond market is a large market and an important data point for sure. Graphically, rates do look to want to move higher. I've indicated the line of least resistance, in that a break above the green, dotted line would signal a reasonable move to the second red line. Why not the first red line? Because it is too obvious. Most professionals are looking at the first red line. Rates probably move through this point. My guess is that IF that happens, the potential move I just described would happen quite fast. If rates happen to get to the third red line, bonds might finally look attractive again (assuming the US continues to pay its debts - which is an assumption).

In my opinion, the bond market is the side show. The bond market has been a pretty crappy place to try to make money for some years. So, I think the best thing to do is look for cracks in other markets. The dead bodies will begin to rise to the top. IF rates begin to rip higher, trust me, there will be bodies. Astute investors should only care about rates, in so far, as they will guide you into the areas of opportunity. Complacency has ruled the capital markets for too long. The capital markets need a good blow-up because that is what capital markets do. They punish the misappropriation of risk. In the late summer of 1998, we had a 3 month draw down in the SPY of over 20%. We saw Russia default. We had the Asian contagion. We had the "geniuses" at LTCM blow up. This set the stage for a sling shot move to the upside for US equities. In times of chaos is where the real easy money is to be made!

I feel there have been too many asset classes that move in tandem. There is no need for diversification if everything moves in unison. There will be a break down because in the capital markets there are winners AND losers. It is not like youth sports today where everyone gets a blue ribbon. The market is not like colleges and universities today with safe spaces and language police. The market is designed to take your money, but give you wisdom (colleges just take your money). IF rates move meaningfully higher, I'll be watching the game board for opportunities.

Happy Returns!

P. Franklin, Jr.

1/11/18