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kirkydu (93.96)

Letter from my investment advisor:

Recs

9

May 06, 2009 – Comments (4) | RELATED TICKERS: GE , CSCO , EXAS

Today we spend the day looking forward at what is likely to be our reality in the next decade.  While it is understandable that most of us are almost always preoccupied with the here and now in our daily lives, from time to time, it is vitally important to look ahead.  Today is one of those days.

As is always the case when I write these letters, I write an outline of what I'd like to say, write the letter, then come back and put together a little introduction.  What I discovered in reading this letter surprised me a bit because I feel very at ease saying what I am saying, even though it is not in line with the financial industry.  In other words, my level of confidence in this piece is very high.  With that, let's begin

America the Beautifall  

Four years ago, I wrote that there were a host of problems with the economy:

Net job losses

Lower median incomes

Energy price increases

Hard asset/materials price increases

Increasing environmental damage costs

Healthcare cost increases

Reduced access to affordable education

Record Trade Deficits

An expanding National Debt

A bear market in U.S. Stocks

A weaker dollar

Today some of these problems still persist, and of course we have new issues facing us.  At the moment however, we are feeling the effects of a strong dollar.  It is a welcome reprieve that the U.S. dollar has firmed up and is supporting lower energy, food and hard asset prices in virtually all households.  At a time when jobs are uncertain and corporations are cutting compensation, lower food and energy prices are saving many families while they tighten their collective belts.

The future of the dollar is not likely to be pretty however.  In printing money and running massive deficits to keep from falling into a depression, I believe we have all but assured that the dollar will fall in value over the next several years.  This will ultimately create inflation at home, especially as the emerging world restarts its growth trajectory.  We have also likely assured that working through our problems here in American will take much longer than ordinary demand driven recessions. 

Please, do not take this observation as a criticism of the current administration.  I believe they had two choices to decide between.  On one hand, the government could have allowed the economy to fall even further in 2009 and 2010, driving unemployment probably up to at least double the current levels and potentially causing civil unrest, or on the other hand, bail like there is no tomorrow in order to support the economy and deal with inflation later.  What the current government inherited from the past several governments and a morally deficient financial system, was so overwhelmingly terrible (we have covered that before), that the choices were between bad and worse.  I believe we have chosen bad, which in the end is good.

What Is Coming

The uncertainty of job security, stagnant wages and overwhelming debt is going to continue to have a chilling effect on most American households for several years.  Our consumer driven economy is for lack of a better word "toast."  Do not believe the hype, whoever says it, about a sustainable recovery in the American economy or stock market for the next few years.  Such statements are naivete, dishonesty, ignorance or some combination thereof.  It is a trap to think that because things used to be good, that they will magically become good again soon.  Upticks will be met with downticks for an extended period, especially in the American stock market.

Put simply, because Americans simply can not and will not be able to consume using debt for a number of years, demand will stay contracted.  Even when Americans personal balance sheets improve, I believe people will be much more restrained for a long time from over-extending again.  The initiatives to stabilize the economy will take several years to take hold.  The world economy, though it will grow, will not produce consumers as quickly as expected after this financial debacle.  There is going to be a global demand issue for awhile.  Eventually however, growth abroad will create growth at home again.   

On a not so side note, the coming inflation will largely solve the coming crisis in Social Security, sort of.  Expect cost of living increases on Social Security to fall well below real levels of inflation in the next two decades, which will likely preserve that system.  This reality makes it extremely important that you position your retirement assets correctly so that those assets can sustain you.  Those who are about to retire or early in retirement need to face and deal with the dual issues of generating income while protecting principal against inflation.

Investing In Reality

Many people I talk to repeat the mantra of "I'm in it for the long run, my broker told me to just hang on."  I hear it in the media too.  These "financial advisors" on CNBC each night are mostly fools, or as Jim Rogers calls people like them, "flunkies."  I am sorry, but what credibility does the buy and hold argument really have coming from people who have not made any absolute returns- that is beat inflation- in a decade or more? 

Well, if you own the right assets "buy and hold" actually does carry a lot of water, ask Warren Buffet.  If you buy and hold second best assets or outright junk, buy and hold will crush you.  The major problem many people have is that they have been told to buy and hold the wrong assets for a long time by people who they trusted to know or care about the difference. 

I know I am different from most other financial representatives at the retail level in that I listen to a small universe of great investors (Jim Rogers, Warren Buffett, George Soros, Bill Fleckenstein, Bruce Berkowitz, Mike Avery, Dave Iben...) and generally ignore the industry guidance and product hype, and especially ignore the mass media.  I am very comfortable with this approach.

Going forward, as I mentioned in February, I will focus on a number of investment ideas that I believe will sustain my clients going forward. 

First, the consumer demand driven economy is in a coma and will remain there for several years, thus: 

We will be under-weighted in investments that need consumer spending to sustain profits. 

Second, the dollar is going to fall soon, back to at least the levels of a couple years ago, therefore:

We will be over-weighted in investments that rise in price due to inflation.  In the near future we will own very few or no U.S. fixed income.  Because U.S. dollar denominated investments will suffer as the dollar falls, our allocation to U.S. equities will be roughly equal to the proportion of the U.S. economy to the world economy, until we receive prices low enough to justify over-weighting American investments again.

Third, the emerging markets will ultimately drive global growth, thus.

We will seek out investments that benefit from the emerging economies reigniting around the world.  Eventually we will find investments that normally do well when consumerism starts to rise again, probably in a few years.

Finally, because the United States is still a large economy and will rebound if it follows through on plans to reform its financial industry, rebuild its energy, transportation and communication infrastructures, reduce health care costs through modernization and ground level reforms without a government take-over and support broader education in skill based professions (v. service based):

We will invest our U.S. allocation to investments that take part in the above aspects of the economy and/or have some direct or indirect backing of the government.  Our domestic allocation will be unusually small compared to the past few decades.  This is a very important point.

While every portfolio is of course a little different based upon when a person invests and their personal circumstances, time horizon and risk tolerance, the above are the broad guidelines we will be following.  Only if some huge shift occurs will we deviate much.  I will trade to the extent that I am highly confident in the trade, whether it is a defensive or offensive move, however, we will stick to the game plan overall.

Contact me to discuss my rationale, the supporting data and how you can benefit by being positioned well in a rough economy and rough markets.

No pictures in this month's letter, sorry.  Make sure you visit next month, I will have some good pictures then. 

Until next month. 

4 Comments – Post Your Own

#1) On May 06, 2009 at 9:15 PM, ChrisGraley (30.30) wrote:

You have a pretty great investment advisor. Do the guy a favor and reccomend him to everyone you know and if they have doubts show them that letter.

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#2) On May 06, 2009 at 9:36 PM, soycapital (< 20) wrote:

Off topic but I took a bath in ESLR some time back and pretty much gave up hope on it. How does it look to you at this point in time? I do like ABB at this time, see your strong on it. GE also have. Your quote on ESLR below: Thanks, Dave 

One of the few undervalued solars. It's string ribbon tech is top notch for conserving silicon. It's silicon deals are solid for ten years and EverQ is a Euro winner. Sustainable growth is over 30% for a long while. Very possibly to follow STP and SPWR chart.

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#3) On May 06, 2009 at 10:58 PM, kamuirei (< 20) wrote:

Interesting. 

That's fairly similar to the portfolio I'm planning.  My logic is to invest in the companies you pay monthly bills to.

I'm just out of college, going into teaching.  The economy is bad, not even schools are hiring - plenty of time to work out the kinks while I sub and job search.

 - keep transaction fees < 1%

 - individual stocks impractical for the time being

 - mirror geographic distribution of global market

 - <50% in largecap stocks

 - 15% allocation to each sector (see below)

(In practice it works out to 13-14 to meet other requirements with current tools - M* X-ray is awesome)

 

 

Global:

Domestic Mid Value: IJJ     (or VBR / VOE)

Small International: GWX   (or VSS)

Small/Mid Emerging: EWX

 

Sectors:

Consumer Staples: KXI

Healthcare: IXJ

Telecommunications: IXP

Utilities: JXI

Materials: MXI

 

The resulting expense ratio for this portfolio is 0.49% (Acceptable in my view for global exposure)

 

It could be lowered by substituting vanguard etfs

 - VBR or VOE for IJJ (though I already own IJJ)

 - VSS for GWX: EWX would still be needed to balance out the sector etfs lack of emerging market exposure.

 

What do you think?

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#4) On May 12, 2009 at 1:24 PM, kirkydu (93.96) wrote:

soycapital

While ESLR has some financing issues partially tracing back to Lehman, from these prices they appear to be a very legit chance at a ten bagger over the next decade.  If you like solar's future, I think a full position (I define as 4%) is warranted.  I have another 8% in PBW as I like their formula for inclusion in the ETF and it's pretty well diversified in the space, and every now and then trade some of the other solars on news I expect.

Chris,

yeah, he works hard to stay informed and ignores the industry bs.  He's promised a doozy of a letter in a week or so.

 

kam,

I only use broad based etfs to short the market.  We are nowhere close to efficient right now so no point in using etfs to go up, you need a manager with great judgement.  Might I suggest FAIRX and WASAX as core holdings.

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