JR Snell Capital Management, LLC

OK, I’ll shut up now. I’m taking my ball and going home.

If you’ve been reading my comments for any more than a month, you’ll see that I can’t shut up about Treasuries… “They’re a good investment, that you need to own them, that they look like a good trade, that the biggest bond buyer in the world hates them… and then he was wrong.“ Starting with this post in February of this year (2011) where I laid out my original rationale for owning longer treasuries through the exchange traded fund, the TLT.

…and now I’m gone. Done. Sold them all. Why? Because everyone wants to own them now. There’s a bit of stock market panic in the street and everyone’s rushing toward treasury bonds.

Here’s a chart along with my narrative. You can plainly see that something is “out of whack” on the right hand side of the chart:

The last time I personally observed panic demand for these bonds was during December of 2008 and we happened to own a bunch of them back then too…. and I was more than happy to sell them out of client accounts back then too.

A couple of days ago I wrote an article about how we reserve part of a portfolio for bonds and a part for stocks, and we move in and out of the asset classes as appropriate. You can probably guess that most (if not all) of the bond portion of our accounts have been filled out with TLT since February.

Now, the tactical bond portion is empty again… as you probably figured out.

Here’s where it gets interesting… We’ve been unloading stocks out of client accounts since my May 2011 post called, “Time to Start Digging?”. As I write this post, we’re left with only about 6% to 8% of our capital in stocks because of it.

For clients, this means that for the last couple of months and doubly the last week or so, we’ve made more on the bond side than we gave up on the stock side… which is exactly what I tried to explain what I was shooting for a couple of days ago.

Of course, the tactical cupboard is bare. We’re out of stocks and out of bonds. And you know what? Given all the goofiness in the world at the moment, I can’t imagine a better place to be right now. Not to mention I’ll finally shut up about those damn bonds!

Asset, Bond market, Business, Exchange-traded fund, investing, stock market, stocks, United States Treasury security

If you’ve read any part of my blog or any part of my business philosophy, you should know that I went all “Black Swan” a few years ago and decided to jump off the crazy train that is Modern Portfolio Theory (MPT). I don’t need to tickle more QWERTY about the whys and wherefores of the whole argument. If you want to get up to speed with me you can browse a couple of my past articles about it, visit my “How Investing Got Broken” page or do a little serious reading, which I’ve so conveniently provided here.

I’ve listened to preachers/ I’ve listened to fools/ I’ve watched all the dropouts/ Who make their own rules/ One person conditioned to rule and control/ The media sells it and you live the role.  -Crazy Train, Ozzy Osbourne

I’ve jumped off of the MPT crazy train because I came to the conclusion that for the foreseeable future the world is most likely going to be a more unpredictable place (as if it ever were predictable). Ergo, this should introduce more volatility into all markets which for Modern Portfolio Theory translates into “more risky”. (Here’s the MPT definition of risk as volatility) Add this to the fact that US growth and global growth will be slower going forward, and we’re left with the most probable scenario of higher risk and lower returns in our futures. Yuck.

Given a future risk-reward ratio that falls out of whack with the statistical past, there’s a better than even chance that investing in stock and bond markets may fall out of favor for most non-professional investors in the future. Especially if most casual investors and their casual advisors invest according to a “buy and hold” theory within the context of Modern Portfolio Theory. Average investors may soon begin to realize that the promises of achieving historically normal returns by simply doing nothing (aka buy and hold) are not being achieved. To wit, the total return of the S&P 500 for this century is 8.6% while the CPI for the same period is 34.1%.

Jumping off of the MPT crazy train doesn’t achieve anything unless we’re jumping on to something more suitable for present times. Ironically, the path that I’ve pursued has at it’s

core the math that is at the very heart of MPT: The first part of the equation is alpha. In investing parlance, the returns that a manager like myself can generate in excess of what MPT says should theoretically be generated is called alpha.

The second part of the equation is absolute return. The concept of an absolute return has been around a bit longer than MPT and was the basis for the first hedge fund formed in 1949. The basic objective is to generate a return regardless of what the underlying asset class does. As an example, working toward a consistent, incremental monthly positive return, regardless of whether the stock market goes up down or sideways would be an example of an absolute return objective.

The last part of the equation is another MPT gem: Asset allocation. Except I like mine with a tactical twist. Generally, MPT says that you would hold some percentage of bonds and some percentage of stocks at all times. The theory is that if they are non-correlated (bonds do well when stocks do poorly and vice-versa), then this will smooth out the bumps in your portfolio, thereby lessening your risk. True enough, except your overall return gets squashed as well. So, I like the twist: Rather than invest in both asset classes simultaneously, we invest sequentially. We simply reserve a portion of our portfolios for stocks and a portion of our portfolio for bonds. We don’t actually put any bonds in the bond side until bonds are attractive to buy… and by the same token we get rid of the bonds when they look overpriced. And we do the same for stocks. There could be periods of overlap too, and this method will handle that as well.

If we’re trying to be alpha dogs hunting for absolute return between various asset classes, then we don’t have to get much right to achieve a gently upward-sloping account equity curve heading toward some future objective (retirement, college, etc.) regardless of the vagaries of the stock and bond markets. If we are to compare our returns to the stock market, sometimes we’ll be the bug and sometimes we’ll be the windshield.

But then again, shouldn’t we be monitoring our progress toward an achievable investing goal that matters to us personally rather than something as random and nebulous as a stock index?

You tell me who’s on the crazy train?

Absolute return, Asset, Asset allocation, Black Swan, Business, Investment, Modern portfolio theory, Ozzy Osbourne

I like being an investment advisor. Though sometimes when people ask me what I “do”, I’m not sure what to answer. I’m not sure whether to answer with what I like the best about what I do, or what I feel is the most important aspect of what I do, or whether to answer with some sort of a Zen expression like, “I do what financially needs most to be done.”

But when I get down to really thinking about it, I think my most important function is to force people to question authority… not in a 1970′s bumper sticker or an LSD-laced-Timothy-Leary sort of way, but more in a Ben Franklin kind of way, “It is the first responsibility of every citizen to question authority.”  (Note: It’s probably all the same, but quoting Ben Franklin in a financial article is smarter than quoting Timothy Leary.)

My real answer thus becomes, “I force myself to question the basic tenets and accepted wisdom of conventional investment management theory in an attempt to better our client’s futures in an increasingly sophisticated and less-predictable world environment in order to protect them from unknowable financial risks and to take advantage of as yet unknown financial opportunities.”

But if I’m in an elevator and you ask me, I’m more likely to say that, “I do what financially needs most to be done.”

Which brings me to what this post is about. Even though I have an entire page devoted to scholarly articles that scientifically refute the basic mathematical assumptions of Modern Portfolio Theory, I am always asked something like the following, “How can the entire industry be doing it wrong and you’re the only one doing it right?” Or something like that… you get my drift.

First, I’m not the only one doing it right. But, we are few and far between. So, I get a little bit excited when I find ANOTHER article published in a respected financial journal by a respected financial colleague. This one is entitled, “Is Portfolio Theory Harming Your Portfolio”, and is written by Scott Vincent of Green River Asset Management. It is published here on the Social Science Research Network and I have it listed on my “…for further study” page now also.

The gist of the article can be summed up in this quote from the article:

That these quantitative financial models don’t work in practice isn’t controversial. The theories have been losing the battle in scholarly articles for the last three decades. Even many of the influential researchers behind modern portfolio theory admit to their shortcomings. Markowitz is quoted as describing his book on Portfolio Theory as “really a closed logical piece” – i.e., something that only works in the lab.  Eugene Fama called CAPM “atrocious as an empirical model” and said “CAPM’s empirical problems probably invalidate its use in applications” Fama & French (2004).  Even the ardent supporter of EMH, Paul Samuelson, noted “… few not-very-significant apparent exceptions” to micro-efficient markets, and admitted the existence of some exceptionally talented people who can probably garner superior risk-corrected returns.

and following…

The real controversy is that, even though its chief architects admit the quantitative theories are ill-suited for practical use, and empirical data confirms it, they are still embraced,(indeed some might say “worshipped”) by operators in our capital markets, and heavily relied on to make important financial decisions. The theories have become so deeply ingrained in our financial system that we can’t see their folly. Their mathematics, as well as the precise nature of their output, gives us a sense of comfort which is critical in deploying large sums of money. They also lead to a misallocation of resources, however, causing giant distortions.

So why not question authority? I believe your biggest investment risk comes from NOT questioning authority.

Image by UGArdener via Flickr

Bill Gross doesn’t even know me. I’m a bug on the windshield of the Mack truck that PIMCO is. Except that I haven’t been squished… somehow I sneaked in the driver’s side window and I’m flying around the cab. For now.

I was implying (and actually acting on my implications) that we are poised for a rally in US Treasury debt. You can cruise some of my past posts about it here and here. At just about the same time that I was expressing my conviction that we were bound for a bounce off of the Treasury bond lows (February-ish), the biggest bond manager in all of the world announces that the treasury bond market rally is OVER… not just over-over, but really OVER! Done and done, no more rallies ever.

Don’t believe it.

So what’s happened since then? Here are a few recent headlines that pretty much tell the story without my usually indelicate prose…

Related articles

• Pimco Adjusts Holdings to Show Gross’s Fund Owns U.S. Debt (businessweek.com)
• Gross Buys Treasurys But Remains Bearish (online.wsj.com)
• Bill Gross Tiptoes Back Into Treasurys – Still Short, Though (blogs.wsj.com)
• Bill Gross Is In A Hole, And Now He’s Digging Like Crazy (businessinsider.com)
• Investors love U.S. Treasury bonds despite debt worries (usatoday.com)
• “PIMCO head Bill Gross tells investors to stay away from Treasury bonds” and related posts (thenewspundit.com)
• Pimco’s Long-Short-Long Position in U.S. Debt (paul.kedrosky.com)

and…

Gross Says ‘No Regrets’ Over Missing Short-Term Treasury Rally

and this quote from Joe Weisenthal of the Business Insider…

The “bond god” — who has been one of the worst performing managers this year thanks to his bearish view on Treasuries — is now sounding like Marc Faber or some other doomsayer, warning that the US is in worse shape than Greece.

I think that the one mistake he is making is that his bet is out sized for reasonable asset management strategies AND it is totally out of character even for him (OK, that’s two, sorry). It makes me question whether he’s gone all “Charlie Sheen” on us.

I’m humble enough to admit that Bill might very well be right… eventually. Whether he’s still managing anyone’s money at that point is a different question entirely.

It doesn’t matter though, I plan that we will be long gone from the Treasury market and onto the next opportunity well before Bill is ever right.

(Disclosure… my clients, the firm and myself own positions in US Treasuries (TLT))

Bill Gross, buy and hope, Charlie Sheen, interest rates, investing strategies, Pimco, timing, treasuries, treasury, United States Treasury security

There really hasn’t been any earth-shattering reason to get that lump in my gut telling me to be careful. Maybe it’s because we have guided our portfolios to some recently handsome returns and I’m nagged by a nutty old saying that occasionally bounces around in my head, “If things couldn’t be better, then things can only get worse!”

It’s difficult to check your hunches at the door, but I still manage to stay disciplined and only act on what the actual facts are saying. It also serves to remind me of the title of one of my favorite author’s books, “Dig Your Well Before You’re Thirsty.”  (Harvey Mackay, if you’re interested).

Although sales related, the basic tenet of Harvey’s book is that you need to build your network and to prepare your groundwork BEFORE they are needed. If you wait until you find yourself unemployed or looking for some other professional assistance, it is far too late to attempt to build a plan.

Now, while things are good, is the most important time to prepare a plan of action for market malfeasance. Paradoxically, this one best time also happens to be the least motivational time to do it. And it is this very recent market history with its unbroken chain of recent successes that makes me an even more vocal voice in the woods… and the same reason it gets so danged hard to get people to listen right now.

If you haven’t already done it, it is time to build in a backstop of courses of action to keep you and your investment portfolio on course to your personal goals regardless of what might lurk around the boom-bust corner that the markets have become in the past few years. My clients and I already have. See how we accomplish this here.

Why? Because things couldn’t be better.

buy and hope, investing, investing strategies, investments, Market Comments, market timing, safety, stock market, strategy

My wife is an aficionado of the second-hand; a fiend for yard sales, flea markets, estate sales, and the like. It’s not a bad thing like many people might think. Mainly because the major difference between her and the people you see on television collecting diapers and cat feces is that 1.) She knows what she’s doing, 2.) She has limits, and 3.) She loves what she does.

Oh yeah, and she’s damn good at it. Seriously… like professional-grade damn good.

Yes, she has rules too. One of her rules is that if something’s coming into the house, another item must go out. We’re way past the “accumulation” stage of our lives and we’re now in the “upgrade” stage.

(My rather crude translation of this is, “You can’t put ten pounds of sh** in a five pound bag”, but now that I’ve actually written it down, it doesn’t sound very bright.)

Another rule is that it has to be actually worth something. You would be surprised at the amount of good stuff that some people will practically give away. I can’t figure out why people do this, but they do. Too tired? Too lazy? Just way too sick of looking at their own junk? I have no idea.

But because these people are out there, my wife never goes anywhere without a jeweler’s loupe and a diamond tester. These are admittedly odd things to keep in your purse… but the payoff can be handsome for the trouble. That and she’s addicted to the hunt.

And all along the way of the Never-Ending-Great-Treasure-Hunt that her travels are, along with the gold and platinum and various diamonds, rubies and what-not gems and doo-dads and unwanted heirlooms come the oddball bits and pieces of the equivalent of the precious metal family’s loser child: Silver.

Her silver hoard was mostly represented by orphan spoons, charms, bracelets, candlesticks, and the like that have kind of come along for the ride like barnacles on the Cutty Sark. But every now and again, even the great sailing ship comes in to dry dock to scrape off the barnacles. And such it was recently for the accumulation of silver whatsits and doodads that she decided the time was ripe to be unceremoniously “scraped off”.

And in the “scraping off” process, she matter-of-factly inquired of me about the price of silver. Out of curiosity I suspect because she’d heard a blip about it on the news. Even though I don’t personally trade commodities, I still keep a sideways eye on them because they can occasionally affect the stock and bond markets and at the moment they seem to be on everyone’s mind. But I only peek out of curiosity, or if someone asks me about something commodities-related and I need to sound smart.

I was thinking it had been somewhere in the $20’s, but I was wrong… very wrong: Silver had gone vertical. After about thirty years of languishing between $5 and “who cares”, the loser child had suddenly gotten a PhD! It was almost 50 bucks an ounce. Of course, I had to check a couple of times… but, yep it was closing in on $50.

So she hustled “the hoard” down to a friend who owns a jewelry store that buys such things for a percentage of the melt value. She had a quicker step to get down there this time, I suspect because the price of the stuff seemed a bit out of line with reality. But, other than that it was all rather routine and typical. She’s a frequent customer.

The deal was done, a check was pocketed and it was back to business as usual for the Never-Ending-Great-Treasure-Hunt that her travels are.

And during the next two weeks (right up to today even) the price of silver has collapsed. It’s lost about a third of its value: It was around $48-plus an ounce and now it’s in the low $30’s. It’s been an historic selloff… dramatic and speedy.

I know my wife doesn’t care. She accumulated a large position at cheap prices over a long period of time. She then sold her entire position, without emotion when the market appeared to have lost its senses. And then she moved on to “business as usual” without another thought.

She just executed the perfect trade.

cash, humor, investing strategies, investments, market timing, merchandise, strategy, timing

Just when we thought the credit rating agencies might have learned their lesson, this little tidbit popped up earlier this year, very low on the radar, “Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why?” wherein it refers to a recent press release, quietly put out by S&P, that it was about to downgrade nearly 1200 mortgage securities that it had recently assigned a AAA rating due to a faulty analysis.

It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.

Expertise we can count On?

The subject of this recent mis-analysis were re-remics, a securitized mortgage instrument (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.

Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.

Lessons for the Taking

Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.

• First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.

• Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.

• Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.

None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”

The big takeaway here  is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts.  With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.

bailout, bummer, credit crisis, s&p 500, safety, scheme

Today I present to you a guest article written by a respected columnist and advisor to advisors: Sean Bailey, Editor-in-Chief of Horsesmouth.com

Regulators are cracking down on reckless and misleading language. New CleanMind regulations require advisors to purge such familiar but nonfactual terms as “bull,” “bear,” “swings,” or “dips” from client discussions. Even “modern portfolio theory” could pose a problem.

— Sean Bailey, Editor-in-Chief, Horsesmouth

Government regulators announced today that financial professionals would be barred from using metaphors when speaking about the markets and investments.

In a joint release, the SEC and FINRA said new neuroscience research demonstrated conclusively that metaphors are actual things that exist inside people’s brains.

“We can’t have advisors just putting things inside people’s brains,” said SEC chair Mary Schapiro.

Under the proposed regulations, expected to take effect after a short comment period, advisors will have to immediately stop using a wide range of metaphors, including the long-standing favorite references to “bull” and “bear” markets.

Schapiro said the SEC and FINRA convened an unusual joint briefing with neuroscientists from Stanford and MIT to review recent research based on a new imaging technology, nanomagnetic resonance imaging (nMRI).

Scientists explained that images of the brain now display actual locations where specific thoughts and ideas exists, and that repeated use of certain words, phrases, and concepts literally grow and strengthen these regions of the brain.

“Metaphors are the equivalent of untested food additives,” said Schapiro.

“It’s clear from the research that any discussion of the market and its direction is totally metaphorical. The market is not a thing. We’ve got to stop talking about it vaulting, slipping, inching, bouncing, pushing, resisting, rebounding, rallying, and clawing. This is a sober business, not a Las Vegas cage fight.”

She also said markets cannot “flirt” with anything.

Schapiro said FINRA will take the lead in offering guidance to advisors on how best to implement the new set of rules, called the CleanMind regs.

FINRA is expected to hire 50,000 new compliance officers who will act as “metaphor minders” and will spend their days sitting in meetings with advisors and their clients to ensure metaphor-less conversations.

“It’s still fine for advisors to shoot the breeze with clients,” Schapiro said. “But when it comes to actually discussing the markets and investments, they’ll need to clean up their act. The metaphor minders will be there to help them bite the bullet on these poisonous phrases. It’s a bitter pill but necessary.”

Schapiro said the metaphor research has clear implications for the way markets operate, and especially their influence on pricing. Most metaphors have a built-in bias in favor of a future expectation that prices will continue to go up.

In order to dampen “expectation bias” in the investment process, Schapiro said she expected new market pricing reforms as part of the metaphor clean-up program.

Investments will be priced only once a day, at 9:30 a.m., and their prices will be totally random, thereby erasing price-rising market metaphors such as “momentum,” “demand,” “strength,” and “weakness.”

“Research is clear now. There really is no single ‘market’ out there. It’s really a collection of totally separate companies with few actual connections. So the whole ‘market’ metaphor must go, and with it we’ll lose other nasty metaphors such as ‘crash,’ ‘swings,’ and ‘dips.’ That’s a good thing.”

She added, “The only real ‘invisible hand of the market’ is what goes on underneath the anchor desk at CNBC.”

Schapiro said that even though the metaphor-cleansing program is aimed at stemming undue influence over investors, there is a concern among FINRA officials that some advisors may also need help. She pointed to “modern portfolio theory” as one deeply ingrained, problematic metaphor.

“You know, I’m not sure what’s ‘modern’ about it, and as far as theories go, well, the flat Earth was a theory, too. So the compliance metaphor minders will certainly be looking at that one.”

April Fools' Day

And, now the debate has shifted to the issue of whether we are seeing a “gold bubble”.  I suppose if you accept the notion that the fundamental characteristics that have marked other market bubbles currently exist within the gold market – that is, herd induced price inflation accelerating past intrinsic values – then perhaps we are.  Many analysts insist that we aren’t because gold prices are reactionary and linked to so many other political, fiscal and economic factors that strengthen gold’s position as a hedge against instability. Possibly.

The Greater Fool Theory

I say, what does all of that have to do with the price of tulips in Holland (a snide reference to the great Tulip Bubble of 1627, which, interestingly, bears some resemblance to the irrational exuberance we are seeing in the gold markets today)?  Very little, if you accept one the most fundamental rules of investing which is that assets that are sitting near their all time highs should be avoided lest you enjoy selling them after their prices have plummeted .

Does it make sense to buy any asset, whether it’s houses or metals, while it is still riding the wave of a 400% gain? Investing is about looking forward, and the question investors have to ask themselves is whether the risk going forward is greater than the potential gain that is left to be realized.  And, considering the fact that gold has no real intrinsic value other than what somebody else is willing to pay at any given time, the risk you do take cannot be an educated one, but simply a guess.

I’m not against gold, per se. If you have held gold in your portfolio, and have been enjoying the ride, it can still play the role of a stabilizer.  But, I am against buying assets that are overvalued even if the long term trend is up.

We always ask our clients to put their risk considerations ahead of rewards because, invariably, when they only think about the rewards, the risks will ultimately prevail.  Your thoughts on the subject are always welcome, so please drop me a line.

I’ve had my eyes glued to the TV screen the last few of weeks, watching the angry mobs descending upon their governments and forcing them to the brink for their abdication of responsible fiscal and economic policies. Tunisia, Egypt, Libya, Yemen, Bahrain, Syria, London and Wisconsin, it has all become a blur of angry faces, shaking fists and frightened leaders. Hey, is what’s happening right here in the U.S. any different than what’s going on in the rest of the world?

While there may not be any bloodshed, the folks here at home are filling the city squares for essentially the same reason as the people in Europe, the Middle East and North Africa.  The media plays up the popular uprisings as “democracy in action” and a stand against tyrannical rule, ignoring, as the world’s governments have, the cancer that festers deep beneath the surface.  Yet, the events unfolding, that actually began last year with Greece and continued on through the more benign Tea Party demonstrations, are merely a symptom of a problem that is exacerbated by the inept solutions of its originators.

The contagion of economic malaise that has led to this mass anarchical behavior was created in a vacuum of economic leadership that has existed for several decades. Real solutions are too politically risky so the expediency of denial and masking problems has trumped over leadership for politicians and tyrants (redundant?) whose only objective is to remain in power.

Didn’t mean to get on geopolitical rant. It’s not my style. But, all of this is a stark reminder that the cause of social unrest, in all of its forms, is rooted in government induced economic strife.  Clearly, we’ve only seen the beginning.

I’m interested to know your thoughts on this.