Friday, November 6, 2015

Being a Contrarian is Never Easy!

Global Trade In Freefall: China Container Freight At Record Low; Rail Traffic Tumbles, Trucking Slows Down

Over the past year we have regularly contended that a far greater threat to the global economy than either corporate earnings, currency devaluations, rate cuts (or hikes), reserve outflow, or even the stock market, is the sudden, global trade crunch which has been deteriorating rapidly since late 2014 and has seen an even more dramatic drop off as 2015 is winding down. Actually, that is incorrect: global trade is merely a manifestation of the true state of the above listed items.
 

US-Load-to-Truck-ratio-2013_2015-09
DYI Comments:  Continue to watch developments for the world wide economy as the odds of a global recession are increasing.  So far the U.S. has been the lone wolf of growth (what little there is) how long this will last is the big question.  The U.S. has been growing since 2009 making this recovery(prosperity) of sorts long in the tooth.

For those of you who desire to speculate that a recession is just around the corner the 30 year Treasury bond is yielding 3%.  A downturn would manifest itself into a deflationary bust dropping all interest rates as investor's have a flight to quality.  Treasury securities fit that description.  If this were to occur (deflationary bust) the 30 year could very easily trade under 2% with notes and bills 5 year or less in maturity going negative.

DYI's formula for bonds now has a small 4% holding at the long end of the market.  The weighted formula is based upon interest rate rate movement for the 10 year Treasury.  As rates increase dropping the duration (lower the duration faster you get your money back) DYI's formula increases its commitment.  Once rates go higher than the average (4.61%) pushes you to increase proportionally more; hence a weighted formula.  Higher the yield faster your compounding our goal of staying ahead of taxation and inflation.

DYI's four asset categories are highly correlated to the general prevailing economic conditions and over long periods of time highly uncorrelated assets to each other.

Four Assets Correlated to Four Economic Conditions
Uncorrelated assets Stocks, bonds, cash, gold

1.)  Prosperity
Stocks and high grade corporate/U.S. government bonds

2.)  Deflation
Stocks and high grade corporate/U.S. government bonds

3.)  Recession
Short term notes and bills

4.)  Inflation
Gold Precious metals mining companies

The formula plays off the valuation averages for stocks, bonds, and gold.  Cash is our default asset when our commitments are low for stocks, bonds, or gold.  The pull pen, using a baseball analogy, to purchase when valuations improve to purchase or a holding place for profits.  This is a valuation formula based contrarian investment method.

There's a bull market somewhere

The idea is buying assets that are unloved by investors and wall street.  This will occur when valuations are cheap.  It seems that no one ever wants bargains (except historically motivated value players).

CONTRARIAN

Being a contrarian is not easy, you are always going against the grain of the prevailing consensus.  For those reasons is why I'll never have a large following for this blog.  For those who do will be that special breed contrarians.  When the masses are buying you're selling and when they are selling you're buying.  That is what our formula does not just for gold, but for stocks, long bonds, and when needed cash.

GOLD

Anyone talking about gold?  In 1998 when stocks were all the rage with the latest dot.com company going public the Dow/Gold Ratio applied to our formula would have you 60%(our maximum) in gold mining companies.  Looks so smart today.  You would have side stepped the high tech wreckage along with the general downturn in stock prices.  For those two years most folks would have thought of you as being stupid with everyone making money so easily (until the big smash). Only til 2003 did gold stocks take off; like a rocket ship.  And then as everyone was going gold crazy our formula had you sell down (slowly) your commitment from 60% to 15%.  Yep that 15% got smashed, but your stocks, bonds, and cash were all making more money than the drop of those gold shares.

Currently today gold mining companies have been smashed from peak to trough of around 75% or so.  Our formula has a small commitment at 17% as the Dow/Gold is close to its long term average of 16 to 1 (currently 15 to 1).  There is value on a macro basis; gold shares on a micro basis are bargains compared to the yellow metal itself.

STOCKS

Currently stocks are priced to the moon way above their long term average as measured by price to dividends.  At 50 times dividends the market is now 117% above its average(23).  After 100% the formula "kick us out of the market" and rightfully so; its nuts.  Until the economy changes from prosperity to either inflation, deflation, or recession prices will remain overvalued.  Stocks are very correlated to the general economy, but just as you think nothing will change, BANG, economic forces will change to one of those other three affecting stock prices.

BONDS

Bonds yields have been rising a bit enough for our formula to have a small percentage in bonds at 4% of the portfolio.  Is this a harbinger for additional increases in rates?  Is the economy making a shift from prosperity and the bond market is signaling this?  Maybe.  What ever the reason as rates rise duration falls for bond investors.  That is what we are most concerned about is adding only to bonds as the duration falls (higher yields) increasing the compounding.

CASH

Cash.  With 79% in cash for whenever the economy makes it's shift from prosperity(what little there is) to deflation, inflation, or recession will have plenty of fire power to put to work as asset prices change.       

   Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION -  11/1/15

Active Allocation Bands (excluding cash) 0% to 60%
79% - Cash -Short Term Bond Index - VBIRX
17% -Gold- Precious Metals & Mining - VGPMX
 4% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
[See Disclaimer]

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.
This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!
The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.
The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.
Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
DYI

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