Dow Theory – My Market Historian History Lesson

(Travis’s Note: This post was originally written on May 29th, 2015, and I am re-posting it today, October 28th, 2018.  Interestingly, both the Transportation Average (IYT), and the Dow Jones Industrial Average (DIA) are both below their 200-day moving averages today, as I write this post, so that is a nail in the coffin for the current bull market).

Dow Theory

Dow Theory takes its name from Charles H. Dow, pictured above, the co-founder of Dow Jones & Company, alongside Edward Jones and Charles Bergstresser. Investors should be familiar with at least two of those three names. It amazes me the longer I write and study market history, how intertwined today’s company names are with important historical figures. Similar to myself, Charles Dow was a historian, and a market historian. He was a firm believer in capitalism, and he frequently used the term “raw capitalism”. He aimed to report the facts objectively, and later in life, he consistently warned his reporters against accepting bribes for free stock promotion, which was common in the 1890’s, and remains common today. At the start of his writing career with the Providence Journalhe specialized in articles on regional history, focusing on New England towns, and the resulting investment implications.

He achieved notoriety for his famous “Leadville Letters”. I have posted pictures of Leadville, above, form the late 1800’s and early 1900’s. Dow’s writings from Leadville were based on an expedition Dow took to Colorado in 1879. He traveled to Leadville by train, over the course of four days, to report on the mining boom that was taking place in Colorado. Eventually Dow left his position writing for the Providence Journal, to head to New York City, where he founded the company that bears his name in 1882. On July 8th, 1889, Dow Jones & Company published the first issue of the Wall Street Journal. Market historians will probably find it interesting that Charles H. Dow ultimately sold his shares of his company in 1902 to Clarence Barron, and that is why the Wall Street Journal and Barron’s are sister publications today.

Charles H. Dow was the featured editorial writer in the Wall Street Journalfrom 1889 till 1902. During this time, he popularized the Dow Jones Transportation Average, which he had originally created in 1884, at his predecessor publication titled the Customer’s Afternoon Letter. The original Dow Jones Transportation Average contained nine railroads and two industrial companies. This index was a predecessor to the Dow Jones Industrial Average, which was formally published for the first time in 1896. Charles H. Dow used these new averages to help identify bull and bear markets. If both averages made a new high, it confirmed that a bull market was underway, from his perspective. However, if their was a divergence, that was a warning sign. Additionally, if both averages made a low, that signaled a bear market.

Calling Angelo – Remembering A Different Time

(Travis’s Note: I posted this article originally on May 22nd, 2015, however, the letter authored in the article was submitted on December 6th, 2007).

This is a flashback to a editorial, which I found this morning going through some research and then I scanned, I submitted to the Wall Street Journal on December 6, 2007. It was written in response to an editorial by Angelo R Mozilo, titled “Calling Fannie and Freddie”, which was published in the WSJ on December, 5, 2007, in which the former CEO of Countrywide implored Congress to temporarily raise the limits it imposed on Fannie Mae, Freddie Mac, and FHA mortgages by 50% in order to stabilize the mortgage markets. Here is my response:

Want Better Trading Or Investment Results – Avoid The News

  • Avoid the news.
  • Rarely is trading news profitable.
  • Find a long-term investment thesis & stick with it, even if it requires some pain & suffering.

(Travis’s Note:  I originally published this article on March 23rd, 2017, however it is one of my favorites, a foundational article, thus I am re-posting it today).

As I was checking the newswire this afternoon, looking for news about today’s congressional vote, after completing some errands, I had to stop for a minute, and remind myself, that looking for the news is often a bad idea as an investor, speculator, or trader.

There are two reasons for this, from my perspective.

First, the news is often priced in, and thus when it occurs, financial securities often move in the opposite direction that most are anticipating. The U.S. Dollar tanking on the latest Fed interest rate increase, with precious metals equities rallying, think Barrick Gold (NYSE:ABX), is one example of this all too common occurrence.

Second, it is near impossible for investors to compete against sophisticated trading algorithms on a short-term basis. The advantage an investor, or even a trader, has over these short-term “news” hyperactive traders is time, and a longer-term investment view.

Simply put, trading the news, or even consuming the news, is bad for our brains. Don’t take my word for it, read this white paper by Rolf Dobelli, which can be accessed by clicking the aforementioned link, or clicking on the screenshot below. Even if you do not want to read the full article, simply read the prologue below.

Consuming the news is bad for our health, but like most things that are bad for us, (go ahead and think for a minute about your own vices), the news is addictive.

Building on this narrative, while trading off of short-term news can be addicting, it is generally a losing battle unless you are a high frequency trader armed with the right computer equipment. If you do not fall into this category, my suggestion is to look for other areas of opportunity in the markets, and I say this from my hard earned, personal experience over a long, active investment career.

As a contrarian, value-focused investor, I do not have too much in common with dividend growth investors, at least today, since I believe dividend stocks are overvalued and too much in-favor at the moment.

However, while I believe dividend growth stocks are in a bubble, amidst a series of bubbles that could get bigger before they burst, and I believe dividend growth stocks are set for a long period of under-performance, after completing a long period of out-performance, I will say that at least most dividend investors get two things right.

Specifically, they “avoid the news”, sparing themselves unnecessary trading costs, and additionally, they have a longer-term investment strategy.

In summary, it is paramount, from my perspective, for investors, speculators, and traders to have a long-term investment strategy, or at least an intermediate-term investment thesis, and then stick to this strategy, even if it goes against you initially.

In fact, consider averaging in to a losing position, if you have a high conviction in your thesis. Another word for buying something at a discount is value investing. The temporary pain and suffering will be worth it, if your intermediate-term, or longer-term thesis is correct.

Have a good weekend,

WTK

P.S. Look closer at The Dallas Morning News image above, which is from the March 27th, 2012 issue, and scan your eyes to the bottom middle of the page. What do you see? Five years and nothing has changed, yet everything has changed.

(Click the picture below for more information…)

Disclosure: I am/we are long ABX, AND POSITIONS IN “THE CONTRARIAN” PORTFOLIOS.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Bruised, Beaten, And Battered, But Not Yet Broken

  • Resilience is one of the keys to market success.
  • It has been a long, difficult stretch, yet there is light at the end of the tunnel.
  • Prepare accordingly for the opportunity.

(WTK’s Note: This picture shows how I want to feel after downtrodden, out-of-favor value equities reclaim their rightful mantle of the stock’s markets best performers…actually poor Andy suffered long after this scene…so really I want to feel how he felt upon reaching Zihuatanejo..for more of my take on the Shawshank Redemption and how it applies to investing…read this post).

When I was sixteen, which is now twenty-five years ago, I bought a brand new GMC Sonoma blue pick-up truck, which I drove right until it died on me in an apartment parking lot roughly a decade later.

The blue GMC pick-up truck was partially funded from my paper route, which I had since the age of 9, and partially funded through ongoing work during high school, including as a dishwasher, cook at a restaurant (Schoops in NW Indiana…I could grill a hamburger with the flattened edges to perfection), and as a jack-of-all trades at St. Anthony’s Hospital, with much of my time as a stock boy.

Not that kind of stock boy, but rather actually stocking shelves, though I was already knee-deep in the stock market, actively trading at that time (without the technology comforts, or access to the markets, of today…perhaps that was a good thing).

One night when I was 16, after a long shift cooking, and closing at the restaurant, I was driving home around midnight, on an almost empty four-lane road, and I looked down briefly to adjust the radio.

Before I could look up, a car had veered in front of me, taking a sharp angle to a convenience store, that I had not anticipated.

Boom…my new blue GMC Sonoma pick-up truck rear-ends the car.

Thankfully, nobody is seriously injured.

It is my fault.

I have insurance, but what a night.

To my credit, I took responsibility.  The car was fixed, lessons were learned, though I did hit a mailbox driving with my friend Marc Vassallo to work out later that summer, which was the last car accident that I had, hopefully I do not jinx myself with my remembrance.

Note to self.  Be careful with oldest children (daughters) as they get close to driving age.  They are too close already.  Some in our family think they should not drive until 18 or 19, however, there is merit in diving in and learning, though perhaps not in a new car.  They need to take risk driving to learn, to be independent, at least that is my view.

Similar to my accident when I was 16, the last several years, really a long stretch since 2012, with the notable exception of 2016, have been very difficult for my investing style, coming out of nowhere after my most successful stretch trading and investing, as value and concentrated investing approaches have been out-of-favor, and trend following, and passive investment strategies have been dominant in their performance.

Looking back, I have to take responsibility for the wrecks I have caused, meaning investing mistakes, and believe me, these hit home, as I have invested millions and millions of my own capital into what I believe are the best equity return candidates.

Eating my own cooking is the only way I know.  It has worked for me before to a degree I never would have imagined, and it has failed me too, even when I was sure of something that ended up being right, but I was still wrong.

That is the cruel irony of markets, and of life too I suppose.

Additionally, I am stubborn to a fault, loyal to a fault, and competitive to a fault, while having the drive and ambition to research something for years if need be, all ingredients for big successes and big failures.

One lesson I have learned in the stock market, after 25 plus years speculating, and investing, is that you have to ask, “what may go wrong?“, even in seemingly the best situation.

Opposite, and not natural when thinking about the aforementioned question above, but a necessary ingredient too, is that investors and speculators must keep in mind “what could go right“.

Looking back on this note, my biggest mistakes in Dollar terms, has been selling something too early, after building a big position, typically in a value equity, and initially thinking I was right, and then taking profits too early.

Hubris and a need to do something are enemies in the stock market.  Personally, every time my ego has ballooned, something happens to let out the air.

Patience, and acting when presented with an opportunity, are allies in the stock market.

Most importantly, though, in my opinion, is resilience, and the tenacity, and persistence to stick with an idea.

What is the point of my late night reminiscing and rambling?

It boils down to a couple things.  We are all going to make mistakes investing and speculating (and in life too).  Sometimes these are big mistakes.  When this happens, we have to take responsibility, learn from them, and then, and this is key, not be afraid to take risk.

What is risk anyway right now?

Is somebody fully invested in the stock market very risky?  I would say so, given my views on market valuations, which are echoed in this long running table that I have put together that I get laughed at now for posting.

Looking at the table above, the broad U.S. equity market looks historically risky to me, with the caveat that I would have said this, using the same information, for a long time now.

So to me, U.S. equities are historically risky, with strangely many very cheap bargains, however, another person may say someone all in cash is risky.

This question of risk is all in the eye of the beholder, however, I would say after nearly a decade of the “winner’s” winning, there may be more risk in these winning equities that investors, speculators, and long-time holder imagine, and alternatively, there may be a good risk/return reward ratio (say that five times fast) in many of the out-of-favor, downtrodden equities that have generally not participated in the bull market the last decade.

Ironically, many investors would not touch these equities today, and really, who could blame them.

You would have to have the patience of Andy Dufresne, the famous flawed, resilient protagonist in Shawshank Redemption to be interested in many of these downtrodden, out-of-favor equities.

“Not participated”, by the way, is a kind term, as many out-of-favor equities, even some household names, have been crushed, far out of sight of the shiny, roughly decade long bull market in the S&P 500 Index (SPY).

The discussion of where to invest, what is risky, and what is historic opportunity, is a lively topic at The Contrarian, which is my premium research service platform on Seeking Alpha.

I am biased, of course, but I think we have the best group of investors and traders anywhere, seasoned by nearly three years of commentary for some members, with many members actively contributing their unique perspectives to a robust Live Chat discussion on a daily basis, particularly when volatility surfaces.

Right now, we have an open free trial at The Contrarian, so if you have ever had an interest in test driving our group, now is a good time.

From my perspective, as I said in my blog post yesterday, it would be worth taking a look, simply to view the Live Chat dialogue.

The price point of The Contrarian is a little steep, coming in as one of the more expensive services in SA’s Marketplace.

Over the years, I have had quite a few requests for a lower-priced, more streamlined research product, and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate this official launch, which includes a deep-dive research report on what I believe is an extremely timely equity (delivered via email upon membership), I am offering a limited time $299 annual membership for the first 100 members. To get this discounted price, simply use the coupon code “first100”.

Ultimately, I think we are now at a major inflection point in the financial markets, which has been ongoing in slow motion for three years, but which could suddenly accelerate. Being different, being contrarian, has been extremely painful for a long time now, however, resilience and persistence, two necessary qualities for success in contrarian investing, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

Hope you enjoyed my trip down memory lane as much as I did (I still remember running stairs every morning at the high school football field trying to build up calf strength to dunk a basketball…different worries today),

WTK

Disclosure: I am/we are short spy as a market hedge, and have put more money into commodity equities that i ever should have, yet the opportunity remains IMO.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Volatility Is Opportunity

  • An inflection point that began in 2016 is now accelerating.
  • 2017 lulled most investors and speculators back to sleep in the financial markets, yet change continued under the surface.
  • Volatility is providing tremendous opportunity, both in the short-term, and on a bigger picture level.
  • Now may be a good time to take a look at “The Contrarian”.
  • If price is a barrier, I have an answer, actually two answers.

Wow, what a wild few days of price action in the financial markets, specifically in the stock market, in what is shaping up to be a much more volatile year in 2018, than in 2017, as shown in the charts of the S&P 500 Index (SPY) below.

SPY 2018

SPY 2017

Looking at the charts above, clearly investors would prefer 2017 over 2018, though for me personally, 2017 was very painful, as I was on the other side of some one way trades, and frankly I destroyed capital.

Bigger picture, the price action since 2016 reminds me of the price action from 2006-2008, though I think the ultimate resolution this time will be different that the historic unwind we had from 2007-2009.

During 2008 and 2009, I was able to make a small fortune personally, using volatility as opportunity, and I think that scale of opportunity is present today, specifically in commodity equities, as commodities prices have historically under-performed stocks and bonds, shown in the relative chart below.

From my vantage point, I believe the opportunity in commodities, specifically commodity equities, is greater on a relative, and absolute basis. than it was in 1999/2000.

Meanwhile, real asset class return prospects for traditional equities and bonds have rarely looked worse in modern market history.

The very recent drop in U.S. equity prices has improved future real returns, however, this improvement is barely noticeable from a longer-term perspective, and it will take a much larger equity drop to improve future real returns meaningfully.

The discussion of where to invest is a lively topic at The Contrarian, which is my premium research service platform on Seeking Alpha.  I am biased, of course, but I think we have the best group of investors and traders anywhere, seasoned by nearly three years of commentary for some members, with many members actively contributing their unique perspectives to a robust Live Chat discussion on a daily basis, particularly when volatility surfaces.

Right now, we have an open free trial at The Contrarian, so if you have ever had an interest in test driving our group, now is a good time.

From my perspective, it would be worth taking a look, simply to view the Live Chat dialogue.

The price point of The Contrarian is a little steep, coming in as one of the more expensive services in SA’s Marketplace.

Over the years, I have had quite a few requests for a lower-priced, more streamlined research product, and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate this official launch, which includes a deep-dive research report on what I believe is an extremely timely equity (delivered via email upon membership), I am offering a limited time $299 annual membership for the first 100 members.  To get this discounted price, simply use the coupon code “first100”.

Ultimately, I think we are at a major inflection point in the financial markets, that has taken an extremely long time to develop.  Being different, being contrarian, has been extremely painful for a long time now, however, resilience and persistence, two necessary qualities for success in contrarian investing, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

In the next several weeks, I am going to pick up my pace of writing on Seeking Alpha, as I believe we are in the heart of the opportunity.

Best of luck to everyone,

WTK

P.S. Send me a message with any questions about anything.

Disclosure: I am/we are short spy as a market hedge.

Additional disclosure: Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Paypal Issue Currently Being Resolved

(WTK’s Note 3:11 EST 10/25/2018 – This has been resolved.  PayPal is up and running).  We have had a very positive response to the discount offer for the first 100 members/subscribers to the annual membership, using the coupon code “first100”. However, we have had a back office issue, revolving around Paypal, where at checkout, the screen is frozen and says “Contacting the merchant to update your shipping address”.  If you get this screen, your payment has not gone through, and you do not have an active membership to our research service. This issue is currently being resolved. Thank you for your patience. Will post a comment/update when this is resolved, so sign-ups can be completed.

WTK

Author’s Highlighted Posts – A Golden Age For Active Investors

  • Passive investing, and ETF investing, have dominated the last decade.
  • These unsustainable investing trends have created giant price distortions.
  • The next decade will be extremely lucrative for active investors and we are at an inflection point today.

(Travis’s Opening Note: This article was originally authored and published on September 21st, 2017, and it remains a “foundation article”, in my opinion, for my current investment stance, and it one of my favorite articles that I have authored.  It is being republished today, on 10/23/2018, to launch a new series category, which will be titled “Author’s Highlighted Posts”.)

“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years,” …”We are profoundly worried that this could be a risky allocation over the next 10.”

Sanford C. Bernstein & Company Analysts (January 2017)

“Be stubborn on vision and flexible on journey”

Noramay Cadena

Life and investing are long ballgames.”

Julian Robertson

Opening Note From WTK

When I worked at Oxford Financial Group, Limited, which was, and remains one of the largest RIA’s in the United States, I was hired by the CIO, Howard Harpster, who was the former head of BP Amoco’s (BP) pension plan. Howard was an intelligent, calculated risk-taker who cultivated relationships in the then opaque, and relationship-based, private equity, private real estate, and hedge fund arenas.

Howard eventually returned to his native Texas, which is near and dear to my heart, as I have many close relatives and friends in Texas, to sort through a family estate, and then take the role of CIO at the Texas Children’s Hospital.

Oxford conducted an executive search, on which I served a role, and narrowed the candidates for CIO to two individuals, ultimately hiring their current CIO in roughly late 2006 or early 2007.

The new CIO, who came from a background at Okabena, which was the family office created by the founding family of Target (TGT), embraced passive investing.

This firmly contrasted with my belief that the markets were not efficient, and we had a rousing discussion and debate for several years, both between the CIO and our broader investment strategy group, which was composed of four key decision makers, including myself, before I ultimately resigned, with good relationships in-tact, to start my investment firm in February of 2009.

At the time, I was full of confidence, as I had made money in 2008, when most investors and speculators lost money, and then I procured a small fortune, at least for me, from timely investments made in 2008 & 2009.

In the middle of 2008 and 2009, I thought it was a dream environment for active investors, and I could not see how the passive investment craze, that characterized the market’s rise from 2003-2007 could continue.

I was spectacularly wrong with this prediction.

Passive investing has dominated the past decade, making the shift to passive investments from 2003-2007 look like a blip on a long-term chart.

This has driven many active managers out of the investment industry (Travis’s Updated Note 10/23/2018: This purge has continued into 2018), accelerating the dispersion between passive investors and value investors, which has resulted in hedge fund closures, the decline of once prominent mutual fund families, and the downgrade in reputation to value investing and value investors.

This seemingly never ending, self-reinforcing, investment cycle has resulted in a bi-furcated market, where the favored investments of passive indexes, dividend growth strategies, and popular ETF’s are traded at some of the highest valuations in history, while equities outside these favored strategies trade at some of the lowest valuations in history.

In summary, this has created another dream environment for active investors, which is even better than 2008-2009 time-frame, in my opinion, and a golden age of active investing is right in front of investors and speculators, in my opinion.

We got a taste of this opportunity in 2016, but the market has not made the pendulum shift from passive investing being in-favor to active value investing being in-favor easy.  In fact, 2017 has been one of the most difficult, if not the most difficult years, of my investment career, thus far, but that should not take away from the scope, or magnitude, of the opportunity that is at hand.

Someday in the near-future, it is my prediction that investors will rue the fact that their equities are part of the benchmark indexes, and popular ETF strategies.  Thus, we sit on the cusp of a historic inflection point.  On this note, I came across a past issue of Grant’s Interest Rate Observer, from last October, about a week ago, that reinforced this point, and I wanted to write something about it, so here is that observation as part of my Investment Philosophy series.

Selected Prior Member Articles Of Interest On Investment Philosophy & Related Topics

Selected prior articles of interest for members on investment philosophy, market history, and portfolio strategy include:

Investing Philosophy – Abandoning Ship & Capitulation – 8/3/2017

Investment Philosophy – Identifying A Good Opportunity Is Only Half The Battle – 7/16/2017

Investing Philosophy – Staying Focused Is Hard To Do – 5/27/2017

Market Historian – What Happens When The Fed Raises Rates – 3/16/2017

Investment Philosophy – The Fallacy That You Always Need To Be Fully Invested – 2/2/2017

A Matter Of Perspective – Commodities & Commodity Stocks – 1/6/2017

Interview Series – Part II Of WTK’s Take On Edward Chancellor’s View With A Focus On Precious Metal Equities – 12/15/2016

Interview Series – WTK’s Take On Edward Chancellor’s View On “Intelligent Contrarian Investing” – 11/21/2016

Investment Philosophy For The Contrarian Subscribers – A Take From John Hempton @ Bronte Capital – 10/20/2016

The Contrarian’s Top-Ten Lists & Thoughts On Portfolio Strategy – 9/29/2016

Reviewing Lucas White’s And Jeremey Grantham’s Research On Commodity Stocks & A Market Note From WTK – 9/9/2016

Working Investment Thesis

It is my belief that we are in the final innings of the bull market that began in March of 2009, with bonds topping now, then stocks, and then commodities.

The Inspiration

Last week, I was reading, and researching, and I came across an October 14th, 2016 issue of Grant’s Interest Rate Observer, which was a recap of a presentation that Steven Bregman gave at Grant’s October Investment Conference.

I have been a subscriber to Grant’s Interest Rate Observer, and I am a fan of James Grant, who was born in New York City, but attended undergraduate college at Indiana University.  Mr. Grant has maintained ties to Indiana, including speaking as a guest speaker at the CFA Society of Indianapolis functions, which I have been involved with as a current member and past board member (I have also been a member of the Chicago CFA Society where Grant’s work has been featured).

This particular issue caught my eye, because it delved into the index/ETF bubble, which has been a topic that I have been writing about, and which I have been thinking about a lot lately.

A Passive Investing ETF Bubble

The opening paragraph describes the topic up for discussion, and the second paragraph spells out the views of Steven Bregman, president and co-founder of Horizon Kinectics, who presented at Grant’s October 4 th, 2016 Investment Conference, and like the famous line from Jerry Maguire, the presentation had me at hello.

Specifically, here is the opening paragraph and then the second paragraph, and then a screen shot that captures the broader discussion.

“A golden age of active investment management awaits only one signal event, Steven Bregman, president and co-founder of Horizon Kinetics, told the Grant’s conference-comers on Oct. 4. A collapse of the index/ETF bubble is that intervening disaster. To hear Bregman tell it, no crash would be so well-deserved

He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

Re-reading this piece, the amazing thing to be is that the passive investing/ETF bubble appeared to peak in 2016, yet roughly a full year later, the excesses have only been amplified.

No Factor For Valuation = No Price Discovery

The crux of Bregman’s case, and my argument too, is illustrated on page 2 of the linked report.  In these paragraphs, he deconstructs the iShares Emerging Market Bonds High Yield ETF (EMHY), and in doing so, he exposed the flaws of indexing, particularly when accomplished through ETF investing.  Here is a highlighted portion that I think makes a convincing point.

“By operation of law,” Bregman went on, “new money in EMHY is allocated based on float. In other words, the more debt a nation issues, the greater the allocation to its bonds because it has a greater capitalization. Petrobras (PBR) issues more bonds: greater index weight. Yes. The allocations must be done promptly and according to their precise index weights.

There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

The emphasis added through formatting was mine, because that is what is going on in the investment management industry.  As the former second CIO I worked under at Oxford aptly discovered, probably from “career threatening” mistakes at his prior CIO position at Okabena, there is no reason to take “career risk” when everybody is embracing the same way of investing, namely passive investing, and investing through ETF’s.

Building on this narrative, active investors, particularly active value investors, who were steamrolled from their purchases of financials and real estate equities in 2008 and 2009, negating their typical out-performance in bear markets, have been unable to serve as a check-and-balance to the “blind” passive money, because they have rapidly gone extinct.

Ultimately, this has harmed price discovery and further distorted valuations.

The ETF Divide

During the conference, Bregman highlighted how ETF’s have influenced stock valuations.  One specific example that stands out, and was illustrated, was the impact of ETF’s on Exxon Mobil (XOM).  Here are the paragraphs discussing its valuation and price performance from 2013-2016.

“Bregman lingered for a while on Exxon, a kind of ETF Swiss Army knife: “Aside from being 25% of the iShares U.S. Energy ETF, 22% of the Vanguard Energy ETF, and so forth, Exxon is simultaneously a Dividend Growth stock and a Deep Value stock. It is in the USA Quality Factor ETF and in the Weak Dollar U.S. Equity ETF. Get this: It’s both a Momentum Tilt stock and a Low Volatility stock. It sounds like a vaudeville act.”

Bregman proposed a mind experiment: “Say in 2013, on a bench in a train station, you came upon a page torn from an ExxonMobil financial statement that a time traveler from 2016 had inadvertently left behind. There it is before you: detailed, factual knowledge of Exxon’s results three years into the future. You’d know everything except, like a morality fable, the stock price: oil prices down 50%, revenue down 46%, earnings down 75%, the dividend-payout ratio almost 3x earnings. If you shorted, you would have lost money”—because the financial statement didn’t mention the coming bifurcation of the stock market that Bregman called the “ETF divide.”

On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Again, the emphasis added was mine, as the impact of ETF investing has been particularly pronounced in the commodities sector, and specifically the energy sector.

The larger market capitalization companies that have dominated the energy ETF’s, notably Exxon and Chevron (CVX), have relatively flourished while most of the mid-capitalization and smaller capitalization equities have been in one of the worst energy equity bear markets in modern market history.

Thus, even relatively large exploration and production companies, like Chesapeake Energy (CHK), and Southwestern Energy (SWN), which are the second and third-largest natural gas producers in the United States, have been cast aside due, in part, to their market capitalization’s, which shrink further as they are not included in the exalted passive indexes and chosen ETFs.

Risk Is Misinterpreted

From my writing, you can already probably tell how much I enjoyed this presentation, and the corresponding write-up.

Here is another nugget, via several paragraphs about risk, specifically related to the REIT sector, think the Vanguard REIT ETF (VNQ), or the iShares U.S. Real Estate ETF (IYR), that I think will hit home for many investors.

“Now came a question: “So how do they—the big ‘they’—address this risk?”

And an answer: “In the financial realm, risk has come to be measured by historical price volatility. Consequently, enormous effort is devoted to finding low-volatility sectors with sufficient liquidity. The most prominent statistic for volatility is beta. Go to Yahoo Finance, type in ‘IBM,’ (IBM) and there, front and center alongside price, market cap and dividend yield, is beta.

“Let’s examine this,” Bregman went on. “The iShares REIT ETF (IYR), with a 2.8% yield—which I personally see as 35x earnings—has a beta of 0.72. That is low-risk by definition. But which beta should be used for that definition? The beta for the three years through August 2016? Why not the beta for the three years to March 2007?

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

The problems that we had evaluating risk in 2007 are even worse today, in my opinion, as correlations are higher, and the amount of listed equities in the United States has shrunk by roughly half.

In summary, the accelerated adoption of passive investing and ETF investing has heightened risks, but investors and speculators do not realize this, because volatility in the markets has been so low, and the lack of draw-downs has provided and eerie calm and complacency that supersedes the 2007 investing landscape, in my opinion.

The Opportunity

For someone who has spent the past 25 years actively investing and speculating, but who has gone through a very rough period of performance, I can empathize with the following quote from the write-up of the conference.

“So much for life on the sunlit side of the ETF divide. What about life in the darkness? “In the past two years,” said Bregman (Author’s  Note: Remember this presentation occurred in October of 2016, but the trends have continued through today, nearly a year later), “the most outstanding mutual fund and holding-company managers of the past couple of decades, each with different styles, with limited overlap in their portfolios, collectively and simultaneously under-performed the S&P 500. We’re talking 10 to 20 percentage points in a given year. There is no precedent for this. It’s never happened before.

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for under-performing—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From my perspective, I agree with the bulk of this commentary, with the exception of the comment about the under-performance by the best money managers.  It has happened before, and it happened fairly recently, specifically in 2007 and 2008.

During this time-frame, active managers, particularly value managers, under-performed, as traditional bastions of value, notably financial stocks, suffered the worst declines.

I can remember than time-frame clearly, and what I remember is that very few analysts and investors could value anything, similar to today.  It was confusing, and confounding, but it offered substantial opportunity, as does the investing environment today.

When valuations have no anchor, prices can fluctuate wildly.  For us, as contrarian investors, that means some of our big losers on the year, or since inception, have the potential to rapidly reverse course, but it is hard for us to realize that right now, as we have been battered by the non-stop declines, constant negative news headlines, and price action that is seemingly negative every day and every week.

Conclusion – Embrace Active Investing & Being Different Than The Indexes

Here are some quotes I highlighted in the article, directly from the presentation, which again occurred in October of 2016, but is even more relevant today, in my opinion, and I wanted to list them again, because they provide a conclusion that practically writes itself.

“He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

“There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?”

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

“On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for underperforming—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From the presentation, its documentation, and my chronicling, and commentary, it should be clear that the markets have reached extremes (they had already reached these extremes in 2016 but have extended these extremes further in 2017), perhaps beyond any prior valuation extremes in modern market history.  Absolute valuations certainly rival 1999, but relative valuations between the “have’s” and the “have not’s” is even more pronounced.

The lack of price discovery, and valuation analysis, which is accelerated in a self-reinforcing cycle by the massive fund flows into passive and ETF investing, has created a market that is ripe for price discovery, which should be a dream environment for active investors.

In summary, simply surviving to get to the price discovery phase has been difficult, however the rewards should be similar in magnitude, and perhaps even greater than the 2008/2009 opportunity, which rivals any period of potential returns in modern market history.

To close, the market has a dividing line today, which is even more pronounced than 2016, and the stock market remains extremely bi-furcated.  The opportunity lies on the other side of this dividing line, in sectors, like commodity equities, which have very little weight in indexes.  Drilling down further, commodity stocks that reside outside the “halo” of wide-scale ETF ownership, offer return potential that is every bit as good as the depressed financial and real estate shares in the Spring of 2009.

Two Research Services

To get in on the ground floor of this opportunity (yes it is still a ground floor, maybe even lower after energy prices bottomed nearly three years ago in 2016), please consider one of the two following research services.

First, is The Contrarian, where we have a live history that actually captured the past significant inflection point in 2015 & 2016. Members can read through posts from that time, see how out-sized returns were achieved, look at what is similar today, and try to apply those past learning lessons to today’s market environment.

Put simply, I really appreciate our group at The Contrarian, many members who I have come to respect, and I am optimistic that we are all going to do very well together in the year ahead, similar to 2016.

We are always looking for new members that can add profitable ideas, or challenge existing ones, so if you fit this criteria, consider signing up.  A fair warning, though, our group is like the Marines, only a few, only the strong, can survive.

Second, I have had quite a few requests for a lower-priced, curated research product, a stepping stone to The Contrarian (our goal is that you try our research at a lower price, make money, and then later upgrade to The Contrarian for the more in-depth, interactive experience), and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate the second official month of this research product, where the goal is deliver one deep-dive article a month via a PDF emailed report (and I believe there are a lot of once in a generation opportunities today), I am offering a 21% discount off of a much lower annual price point. To get this limited-time discounted price, simply use the coupon code “december”.

Ultimately, I think we are now at a major inflection point in the financial markets, highlighted by the price action in October of 2018, and November of 2018, which has been ongoing in slow motion for three years, but which could suddenly accelerate. Being different, being contrarian, has been extremely painful for over two years now, however, resilience and persistence, two necessary qualities for success in contrarian investing and in life in general, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

If you have any questions, send me a direct message at any time,

Travis

P.S. I have learned over my career that handling disappointment, and taking advantage of the resulting opportunity is a crucial skill for investors and speculators.  I cannot tell you how often I am disappointed in the investment markets with price action, yet stubbornness, persistence, and hard work often, but not always, result in a favorable situation, like most things in life.

P.S. II With everyone looking for a price dislocation similar to 2007-2009, look for something different to happen, including a potential pick up in inflation and interest rates, which very few are even considering.

Market Commentary 10/14/2018

This past week saw extremely volatile price action in the broader equity markets, though other market barometers behaved much more normally, including the U.S. Dollar Index, down -0.4% for the week, which is surprising price action in an environment where U.S. stocks and bonds have been the safe-haven’s for global capital flows for the past decade.

Commodities, the red-headed step child of the three major asset classes the past decade (stocks, bonds, and commodities), also performed surprisingly well, with copper prices up 1.4% on the week, gold prices (GLD) up 1.3% on the week, natural gas prices (UNG) higher for their fourth week in a row by 0.6%, and precious metals equities (GDX) and smaller precious metals equities (GDXJ) up 5.9%, and 6.1% respectively.

The notable exception in the commodity space was oil (USO), and energy equities, which both finished down sharply for the week, with oil prices lower by -4.0% ($WTIC), and -4.2% ($BRENT). Energy equities declined even more, with large-cap energy stocks (XLE) down -5.4%, smaller exploration and producers (XOP) down -5.7%, including a -14.8% loss in California Resources Corp (CRC), one of the leading performing energy equities in 2018, and oil service stocks (OIH) down -5.5% for the week.

Ironically, the energy sector had been a bright spot in the commodity space this year before the rout last week, and year-to-date returns for oil, and for some energy equities are still healthy. However, energy equities have generally lagged the rise in oil prices since their lows in 2016, and this still represents a material opportunity, from my vantage point.

To provide a bigger picture perspective, here are the following year-to-date returns through Friday’s close (October 12th, 2018).

Dow Jones Industrial Average (DIA) – Up 4.0%

Invesco QQQ Trust (QQQ) – Up 12.5%

S&P 500 Index (SPY) – Up 4.8%

iShares 20+ Year Treasury Bond (TLT) – Down -8.0%

iShares U.S. Real Estate (IYR) – Down -4.1%

MSCI EAFE (EFA) – Down -7.4%

Emerging Market Equities MSCI (EEM) – Down -13.9%

Chinese Large-Cap Stocks (FXI) – Down -12.0%

$WTIC Oil Prices – Up 18.1%

$BRENT Oil Prices – Up 20.5%

$NATGAS Prices – Up 7.0%

Large-Cap Energy Stocks (XLE) – Up 3.1%

Smaller-Cap E&P Energy Stocks (XOP) – Up 11.3%

Oil Service Stocks (OIH) – Down -7.0%

Copper Prices – Down -15.2%

Silver Prices – Down -14.6%

Gold Prices – Down -6.8%

Large-Cap Precious Metals Stocks (GDX) – Down -15.0%

Small-Cap Precious Metals Stocks (GDXJ) – Down -14.2%

Looking at the YTD performance of the various sectors selected above, the NASDAQ QQQ Trust, and crude oil prices are the winners, thus far, in 2018, while precious metals, and precious metals equities have been at the bottom of the performance metrics.

Last week provided a reversal in this performance ranking, with precious metals equities leading a rebound, while the broader U.S. stock market leaders sold off sharply.

Will this price action market a turning point?

It is too soon to tell right now, however, similar to late 2015/early 2016, or late 2008/early 2009, or in late 1999/early 2000, the price action in precious metals equities might be signalling that a capital rotation is imminent, out of winners of the past decade, and into more value-oriented opportunities, including commodities, or international equities.

Building on this narrative, despite the strength of oil prices since the secular bottom in commodity prices in 2016, which preceded the secular top in the bond market in 2016, commodities still represent a generational opportunity, especially relative to U.S. equities, as measured by the S&P 500 Index.

Looking at the chart above, at some point, there is going to be a massive reversion-to-the-mean trade in commodities versus U.S. equities, bigger than what we saw even after U.S. equities topped in 2000.

Meanwhile, U.S. stocks are poised to deliver their worst real returns in modern market history, according to data I tabulate from GMO (shown in the table below), and also according to other real return forecasts, including Goldman Sachs (GS), whose Bull/Bear Market Indicator of future returns is shown below the GMO table.

Wrapping everything up, a different Portfolio construction is going to be needed in the next 10 years, compared to the past 10 years.

Simply sitting out the market in cash is not a bad idea in my opinion, especially as short-term interest rates rise, though I believe there will be extraordinary opportunities in out-of-favor equities, specifically in commodity equities, and selected international equities, whom all have been thrown overboard on a absolute and relative return basis over the past decade.

Getting to these returns, however, has not been easy, as the broader financial markets are at major inflection points, including potentially the end of a 35+ year bull market in bonds, and potentially the end of an extraordinary bull market in U.S. equities, which has been fueled by investor distrust for a majority of the past decade.

The length of the prevailing market trends means that psychology and sentiment are uniquely ingrained, so in my opinion, this makes inflection points more volatile, and harder to navigate.

An alternative to simply sitting in cash, at least in my opinion, is for investors to have a significant part of their core asset allocation in a long/short portfolio.

Building on this narrative, since trend following has dominated equity market price action the past decade, fueled by passive index and ETF flows, as this comes to an end, it should be a golden age of opportunity for active investors.

In closing, the Contrarian All Weather Model Portfolio had a very good performance week, on both a relative and absolute basis, as the offsetting short positions in SPY finally paid some dividends, and several long positions, including RH (RH), which announced another stock buyback (I wish RH’s management could be ported over to SWN, RRC, AR, CHK, X, etc.), and Barrick Gold (ABX), which rose 9.0% and 8.7%, respectively.

On the negative side of the ledger, American Airlines (AAL), which I think is remarkably cheap, and an opportunity here, continued its free-fall, falling -15.2%, and shares of AAL are now down -40.2% YTD in 2018.

Union Pacific Corp (UNP), a previous bull market leader in 2018, also stumbled last week, with shares falling -6.8% for the week, though shares are still higher by 15.6% in 2018.  Sothebys (BID) also continued its move down, falling -4.1% last week, and shares of BID are down -16.6% in 2018.  I keep an eye on BID shares, as they have had a history of leading broader market moves.

Without further ado, the latest Contrarian All Weather Model Portfolio Update is presented below.

Steepening Of Yield Curve Is Bigger Now (Already) Than In 2016

  • The U.S. Yield Curve has been flattening for a long time, and after a brief rise in 2016, the flattening trend resumed in 2017, and for a majority of 2018.
  • A recent steepening in they yield curve is already bigger than it was in 2016.
  • What does this mean for asset prices?

I have been a longtime bear on U.S. equity prices, and global bond prices, though I am extraordinarily bullish on a subset of equities that I think are historically cheap.

With regard to the broader U.S. equity market, my bearishness has been wrong, thus far (more on this below).

However, specific to the bond market, my public writing has proven fairly accurate, with the iShares 20+Year Treasury ETF (TLT) down -9.1% this year, and down -14.9% since July 1st of 2016 (global sovereign bond yields made their secular lows in the Summer of 2016), as evidenced by the following sampling list of my public SA articles.

Is Everything A Bubble? – Published On June 12th, 2017

A Massive Detour On The Road To Inflation – Published On March 24th, 2017

The Bond Bubble Is Bursting – Published On October 7th, 2016

Are We At The Point Of Maximum Financial Risk For Bonds? – Published On August 26th, 2016 (behind paywall)

The Bond Bubble Is About To Burst – Published On August 9th, 2016

Central Bank Bubble Blowing: The Reflation Trade Is Alive – Published On July 15th, 2016

The Irrational Fear Of Deflation – Published On June 17th, 2016

The Stock Market And Bond Market Are Telling 2 Different Stories – Published On April 8th, 2016

Inflation Is Coming, Are You Prepared? – Published On March 11th, 2016

Looking at the articles above, the last linked article, the Inflation Is Coming, Are You Prepared article,the The Irrational Fear Of Deflation article, and the Central Bank Bubble Blowing: The Reflation Trade Is Alive article, are all not behind SA’s paywall, so this could be a good starting point for reading.

Clearly, I have been bearish on bonds, and U.S. equities too, though so far this has been very wrong with regard to the broader U.S. equity market, though I still think real returns going forward are going to be the worst in modern market history as shown by the table I regularly put together below using data from GMO (first table below), and corroborated by Goldman Sach’s (GS) Bull/Bear Market Indicator (second chart below).

What could cause these poor projected real returns?

One answer is rising interest rates, and ironically higher economic growth, as faster economic growth puts upward pressure on inflation and interest rates, particularly at the longer-end of the yield curve, which has remain stubbornly subdued compared to shorter-term interest rates, as shown by the chart of the spread between the 10-Year U.S. Treasury Yield and the 2-Year U.S. Treasury Yield.

Looking at the chart above, we are clearly early in the steepening of the yield curve. In fact, the upturn only looks like a blip. However, in percentage terms, we have already exceeded the steepening in late 2016, so there may be more to this developing story than meets the eye, especially with the correlated turn higher in longer-term interest rates across the world, including in the United States, Britain, Germany, and Japan.

“Lower for longer” has been a mantra for a long time applied to interest rates, but what if after nearly a decade of a flattening yield curve, longer-term interest rates rise more than almost everyone expects right now?

What would that do to current asset valuations?

Where are the risks in an environment where almost all investors have been chasing yield for over a decade?

Where are the opportunities?

In closing, it is my opinion, that there are many extremely crowded trades, not to dissimilar to past major inflection points in the market that we have collectively witnessed as market participants over the past two decades.

Active investors, particularly value investors, have been punished severely the past decade, however, this pain (and I have endured my fair share or more) is setting up an extraordinary opportunity as price discovery, long cast aside by the indexing/ETF wave, reasserts itself with a vengeance.

Best of luck to everyone,

WTK

 

It Is Not Easy To Be A Contrarian, Especially At Turning Points

  • The most rewarding trading and investment opportunities happen when everyone is crowded on the same side of the boat.
  • Trades appear extremely crowded today, similar to how they were in 2016, though to a bigger degree.
  • Reflecting on past opportunities, and the time, patience, and losses that had to be endured to get to the other side of the opportunity.

Roughly two weeks ago, I had dinner with a friend, somebody I have known for over 35 years, really ever since we were five years old.  After the dinner/meet-up, I started to write this piece, but tabled it until this afternoon/evening.  During the get together, we reflected on the current environment, the challenges of the past two years, and the opportunity today.

Since this gentleman knows me pretty well, I made an effort to be quiet, and listen more than usual, and what came out caught my attention.

His observation is that whenever I have felt the worst (and these past twenty one months have been at the top of my list for difficult stretches in an active 25 plus year investment career), the weight of sub-par returns, the weight of losses, that is when things usually turned.

This gentleman knows very little about the markets (other than our interactions over two plus decades investing, and longer than that as friends), and what he reads on his own accord.  He also knows very little about the investment business, though he is very smart in his own right.  Really, he is just a good lifetime friend of mine, through the ups and downs, and he has trusted me to manage his capital.

Previously, I have lost significant amounts of money for him, and I have made him significant amounts of money (overall significantly net positive relatively, and absolutely, but he would be the first to tell you the ride has not always been smooth).  When things go badly, he trusts me, and when things go well, he trusts me too.  We have built up experience together that is invaluable.

Thinking about this dinner today with my friend, and thinking about this past week, and the past several years, starting with the founding of “The Contrarian” in December of 2015, it seems we are on the cusp of a significant inflection point.  Looking back, 2016 was the start, and while I have talked about how that year was not easy, it ultimately turned out to be a very good year for investment returns if you were willing to think different.

Besides being a good investment year for our fledgling group, though very few members were on board from the start (as most left earlier in 2016), 2016 saw a secular bottom in commodities early in the year, and then a secular bottom in the bond market, specifically a longer-term sovereign yields, which occurred in the middle of 2016.

Interestingly, the second half of 2016 looked a lot like today’s investing environment, with longer-term yields rising, U.S. commodity equities outperforming, and ironically the U.S. Dollar rising, though interestingly today, the U.S. Dollar Index is much lower than its previous peak in 2016, or really where it was from 2015-2017.

The inability of the U.S. Dollar Index to make a higher high is a big positive, in my opinion, especially for commodities, commodity equities, and international equities, which have lagged U.S. returns badly over the last decade.

2017, and a majority of 2018 clouded and obscured the picture that was painted so beautifully in 2016, yet after a long detour, we appear to be back on the road.

How will the rest of the inflection point play out?

The specific details, I do not know exactly (though I have my general road-map).  This is similar to past major inflection points.  Looking back, a lot of things that happened in 1996-2002, or in 2006-2010 surprised me, though having the bigger picture road-map/game plan proved invaluable.  Ultimately, if you are right, and able to stick to it, having a bigger thesis can be very rewarding.

Reflecting on the past opportunities, another thing that stands out to be is resilience.  For some of my best years/returns in the market, things did not always work out as planned.  Sometimes I endured significant losses before the turning point, sometimes I had to commit additional capital, and sometimes I just made, and still do make, mistakes.

However, being resilient, and sticking to something with perseverance, when you think you have an edge can payoff with rewards that are hard to imagine, if you are positioned correctly, and aggressively, which of course has risks, and which of course is not easy.

So, what should we stick to today?  What is our primary investment thesis today?  This linked article will summarize it nicely.

A further simplification can be explained in few sentences.  Specifically, bonds topped first (2016, and I believe this is confirmed now with the very recent steepening of the yield curve), stocks will top next (there is a contingent of smart investors that I interact with that believe this has happened already on global basis, though I am not in that camp yet), and then commodities last.

Over the past several weeks, we are seeing this thesis play out in real time, as longer-term sovereign yields are rising, led by U.S. yields, yield curves are steepening, and commodities are outperforming, with oil up four straight weeks to new highs being the most notable example, however, there are many other examples, including natural gas, which might be the most crowded trade in the market I see today (almost every market participant believes U.S. natural gas prices will be lower for longer, ironically while world natural gas prices surge).

In summary, the runway for commodity, and commodity equity out-performance should still be long, as we have not seen a capital rotation yet, though the seeds for this capital rotation have been planted.  Lower for longer is currently being challenged as interest rates normalize across the curve, first in the United States (and first at the short-end of the curve, but now at the longer-end), and soon the rest of the world will follow, as Europe and Japan are already both reducing their quantitative easing.

Keep this thought in mind, and keep repeating it.  Bonds will top first, then stocks, then commodities.

With equity markets in the U.S. poised for some of their worst real returns in modern market history, the relative and absolute opportunities should be every bit as big as they were in 2007-2010 or in 1999-2002.

In closing, stay resilient, keep developing your ability to think about the next opportunity after a success, or more importantly after a mistake, and keep your minds focused on enormous relative and absolute opportunities, which as the chart below shows are in commodities versus the S&P 500 Index (SPY), with commodity equities representing an even better opportunity, in my opinion.

I have a number of things I am working on research wise, including a new Top-Ten List.  After the turning point in April through June, July and August were a cruel return to purgatory, the proverbial “Lucy” taking the ball away from “Charlie Brown” one last time (hopefully one last time) as he prepared to kick it, and frankly, I couldn’t publish a new Top-Ten List, as it was just an open wound.  As painful as it is, there is going to be a time where all the suffering is worth it, and I am increasingly confident that we are closer to that point today,

Travis