The Market Situation Report

Below are thoughts and ideas that I have either read over the past few weeks or ideas that have come to me and I quickly wrote them down. When I read these, I notice that they provide perspective. I wanted to make sure to share them with you.  

Enjoy. 

Together, we are growing and protecting your wealth,

rc_signature.jpg 
RC Peck, CFP 

Fearless Wealth | Investment Independence
Helping Individuals Reach Financial Independence Sooner, Faster, Safer.

 

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Financial disasters start with great investment ideas taken to illogical extremes. For example, what has been more beneficial to family wealth than home ownership? Yet, we recently witnessed a near collapse caused by residential real estate. Great investment ideas start with disasters. Liquidity disappears. Assets are marked to mayhem. Intangibles are written off. Companies with fixable problems become unusually cheap and again profitable. Yet, they remain hated for past sins and sell for less than assets minus liabilities, reported as book value. They have little, if any, investment risk.

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Imagination is more important than knowledge. Einstein

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Everything starts from and with the brain — thinking, diseases, genius, and idiocy. 

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A senior officer in the London Fire Rescue Service was quoted as saying, 'When people die in fires, it is not because of panic, it is more likely to be the lack of panic.'  The reality is that people generally look to their peers, waiting until the group panics, and by then it is too late.

While it may not quite be time to panic just yet, the survivors, and those who will prosper at the end of this great historic period in our financial affairs, should quietly be moving toward the exits and the safety of hard assets such as gold and silver."

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Gold's year-end price 2000 to 2012. Do you have the big picture right?

2000 — $273.60
2001 — $279.00
2002 — $348.20
2003 — $416.10
2004 — $438.40
2005 — $518.90
2006 — $638.00
2007 — $838.00
2008 — $889.00
2009 — $1096.50
2010 — $1421.40
2011 — $1566.80
2012 — ?

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The retail investment approach is inherently flawed. Standard advisors have not evolved their approach since 1972.

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During World War II, [Nobel laureate, Ken] Arrow was assigned to a team of statisticians to produce long-range weather forecasts. After a time, Arrow and his team determined that their forecasts were not much better than pulling predictions out of a hat. They wrote their superiors, asking to be relieved of the duty. They received the following reply, and I quote "The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes."
– David Stockton, FOMC Minutes Sep 2005

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It's more costly to miss the sign of a threat than to miss the sign of opportunity.

Evolution via natural selection shaped the human brain over millions of years to achieve a simple goal: stay alive long enough to reproduce and raise offspring. As a result, we react faster, stronger, and harder to threats and unpleasantness than to opportunities and pleasures. There's a red alert in our brain for bad things, but no green alert for equivalently good things. Sticks get our attention and carrots do not, because avoiding sticks is what mattered to staying alive.

Neuropsychologist Rick Hanson sums up this "negativity bias" nicely:

"To keep our ancestors alive, Mother Nature evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities, and underestimating resources (for dealing with threats and fulfilling opportunities)."

Overestimating risks and avoiding losses is a fine strategy for surviving dangerous environments, but not for thriving in a modern career. When risks aren't life threatening, you have to overcome your brain's disposition to avoid survivable risks. In fact, if you are not actively seeking and creating opportunities–which always contain an element of risk–you are actually exposing yourself to more serious risks in the long term.

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Grantham says there's nothing special about the forecasts… The real returns are about ignoring the crowd, working out simple ratios, and being patient." It's much harder to do than you might think. But it works…"Eventually, after breaking your heart and your patience, [the market] will go back to fair value. Your task is to survive until that happens."

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The more certain an investment, the more certain money will be separated from you. 

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The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority, either completely or partially, 'go with the flow'. This creates herding, or momentum, which drives prices far above or far below fair price.

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An average plan executed well enough trumps a lot of other stuff.

While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it.  – Ayn Rand, 1974

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All predictions are Financial Astrology

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We are more interconnected with each other at a fundamental level then people realize or even thought possible. Above all else we want to belong. The basis of nature is cooperation. Science shows us that we are all connected at a very deep level. We are geared at a very deep level to feel what others are feeling. 

The principles of the long-term ebb and flow of markets really do work wherever human beings are involved in investing, which is to say, everywhere.

Successful investing for the remainder of this decade will mean doing things differently from what people did so profitably in the 1980's and 1990's and from what Wall Street is still telling people to do.

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Question: if everyone "gives up" looking for work next week, will the US unemployment rate go to zero? We're asking – we'd like to know.

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I am a big believer in reason and facts and evidence and science and feedback.

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All assumptions have a cost. The key is pricing in your assumption.

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Apple's newest iPhone has twice the memory, a better camera, and other small improvements and carries the same price as the prior version. Government statisticians see an improved product at the same price and count it as a price cut, or deflation.

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  • Jamie Dimon, the Chairman and CEO of JP Morgan Chase, has served on the Board of Directors at the Federal Reserve Bank of New York since 2007. During the financial crisis, the Fed provided JP Morgan Chase with $391 billion in total financial assistance. JP Morgan Chase was also used by the Fed as a clearinghouse for the Fed's emergency lending programs.

 

  • In March of 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. During the financial crisis, the Fed provided JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. The Fed also agreed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

 

  • Jeffrey Immelt, the CEO of General Electric, served on the New York Fed's Board of Directors from 2006-2011. General Electric received $16 billion in low-interest financing from the Federal Reserve's Commercial Paper Funding Facility during this time period.

 

  • Stephen Friedman. In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, who was chairman of the New York Fed at the time, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed's rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO. During the financial crisis, Goldman Sachs received $814 billion in total financial assistance from the Fed.

 

  • Sanford Weill, the former CEO of Citigroup, served on the Fed's Board of Directors in New York in 2006. During the financial crisis, Citigroup received over $2.5 trillion in total financial assistance from the Fed.

 

  • Richard Fuld, Jr, the former CEO of Lehman Brothers, served on the Fed's Board of Directors in New York from 2006 to 2008. During the financial crisis, the Fed provided $183 billion in total financial assistance to Lehman before it collapsed.

 

  • James M. Wells, the Chairman and CEO of SunTrust Banks, has served on the Board of Directors at the Federal Reserve Bank in Atlanta since 2008. During the financial crisis, SunTrust received $7.5 billion in total financial assistance from the Fed.

 

  • Richard Carrion, the head of Popular Inc. in Puerto Rico, has served on the Board of Directors of the Federal Reserve Bank of New York since 2008. Popular received $1.2 billion in total financing from the Fed's Term Auction Facility during the financial crisis.

 

  • James Smith, the Chairman and CEO of Webster Bank, served on the Federal Reserve's Board of Directors in Boston from 2008-2010. Webster Bank received $550 million in total financing from the Federal Reserve's Term Auction Facility during the financial crisis.

 

  • Ted Cecala, the former Chairman and CEO of Wilmington Trust, served on the Fed's Board of Directors in Philadelphia from 2008-2010. Wilmington Trust received $3.2 billion in total financial assistance from the Federal Reserve during the financial crisis.

 

  • Robert Jones, the President and CEO of Old National Bancorp, has served on the Fed's Board of Directors in St. Louis since 2008. Old National Bancorp received a total of $550 million in low-interest loans from the Federal Reserve's Term Auction Facility during the financial crisis.

 

  • James Rohr, the Chairman and CEO of PNC Financial Services Group, served on the Fed's Board of Directors in Cleveland from 2008-2010. PNC received $6.5 billion in low-interest loans from the Federal Reserve during the financial crisis.

 

  • George Fisk, the CEO of LegacyTexas Group, was a director at the Dallas Federal Reserve in 2009. During the financial crisis, his firm received a $5 million low-interest loan from the Federal Reserve's Term Auction Facility.

 

  • Dennis Kuester, the former CEO of Marshall & Ilsley, served as a board director on the Chicago Federal Reserve from 2007-2008. During the financial crisis, his bank received over $21 billion in low-interest loans from the Fed.

 

  • George Jones, Jr., the CEO of Texas Capital Bank, has served as a board director at the Dallas Federal Reserve since 2009. During the financial crisis, his bank received $2.3 billion in total financing from the Fed's Term Auction Facility.

 

  • Douglas Morrison, was the Chief Financial Officer at CitiBank in Sioux Falls, South Dakota, while he served as a board director at the Minneapolis Federal Reserve Bank in 2006. During the financial crisis, CitiBank in Sioux Falls, South Dakota received over $21 billion in total financing from the Federal Reserve.

 

  • L. Phillip Humann, the former CEO of SunTrust Banks, served on the Board of Directors at the Federal Reserve Bank in Atlanta from 2006-2008. During the financial crisis, SunTrust received $7.5 billion in total financial assistance from the Fed.

 

  • Henry Meyer, III, the former CEO of KeyCorp, served on the Board of Directors at the Federal Reserve Bank in Cleveland from 2006-2007. During the financial crisis, KeyBank (owned by KeyCorp) received over $40 billion in total financing from the Federal Reserve.

 

  • Ronald Logue, the former CEO of State Street Corporation, served as a board member of the Boston Federal Reserve Bank from 2006-2007. During the financial crisis, State Street Corporation received a total of $42 billion in financing from the Federal Reserve.

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Together, we are growing and protecting your wealth,

rc_signature.jpg 
RC Peck, CFP 

Fearless Wealth | Investment Independence
Helping Individuals Reach Financial Independence Sooner, Faster, Safer.

3 Comments

  • jak

    August 15, 2012

    great stuff, so what is the intrinsic value of Gold that has you so bearish on it… can't eat it, and it isn't even the best conductor /price/kg…. so isn't that just the final final financial bubble that will pop? Also, what is your take on silver vs. gold? what do you see in value investing in micro-caps vs. other equity assets? Thanks!

  • jak

    August 15, 2012

    sorry, mean to say you are 'bullish' on gold…

  • admin

    August 16, 2012

    Like you corrected later, I am bullish on gold. But I’m not bullish on gold. I’m simply following the long-term economic cycle of the investment world. And since 2000 this strategy (LTEC) has identified to be in gold and not stocks.