Effect of Babies on the Stock Market

Or, “Did you print enough money to pay for those…?” (barrels, babies, wives, iPhones, container ships, 3D printers, fill-in-the-blank)

I have empirical proof that babies affect both portfolios and wives much more strongly than the Fed, possibly more than OPEC or Putin.  Perhaps this is because investors are babies who react to the same news (e.g. China is slowing, but not much… Iran will want to resume production before cutting, but of course and you would too…) over and over for a year and a half as if they never heard it before.  And there is the reaction to the inventory build today.  Duh, the inventory didn’t build “today” but last week and has no effect on Iran and Russia’s decision to begin limiting production.  (Full disclosure, I have long been long oil in case it wasn’t obvious)

Consider this chart which is utterly striking in the coincidence of life events and losses of net worth in one million dollar quanta…

money and family 2014-2015 sml

Frankly, nothing more needs to be said.  The correlation with OPEC comments is not nearly as sharp.  They announced March 11, 2014 there would be no production cuts at the June meeting (citation), which was the start of the rise of the bubble in the middle of the chart, not the end of it!  Certainly not the precipitous second slide that began with my Siberian wife’s first heat exhaustion episode on a late June afternoon in Houston.

Russia’s invasion of Crimea was 5 months before (citation) the crisp beginning of the slide.  But it began almost to the day of my son’s birth, which meant of course I was not exactly market-watching.

The risk to and from oil markets is not excess supply.  It is as one blogger put it, “…with no grown up in charge.  Spare capacity is wafer thin, despite the glut, and any upset could trigger an oil shock.” (citation, Fri. Feb. 19th, 2016, after oil reversed its “talk” rally and fell on the backward-looking inventory build)

But the Sheikhs and Tzars who cannot realize they would triple their revenue with a 5% production cut, are not the dumbest players in all this, which has affected financials, shipping (a long gone never-to-recover industry), and now even tech stalwarts.  It is the U.S. Fed which has no concept that money is required by people to buy things, and that if they stop QE3 in 6 months (coincident with the fall of oil, by the way), which was propping up 80% of the U.S. government financing, there will not be enough money to pay for what the Chinese factories can make and U.S. “tech stalwarts” can re-brand!

Not to mention stuff that lots of clever people figured out how to pump out of the ground without even exploring and drilling new wells.  And if the prices of stuff falls because there is not enough money to pay for it, people go bankrupt and banks get in trouble (European banks currently, but a myriad of bank-like lenders, BDCs, REITs, etc. are down more than my portfolio and headed into the fire sales as we speak.  Falling employment is a deeply lagging indicator.

5×5-year dividend analysis as of 2/2016

(and three BIG surprises and their lessons in my wife’s portfolio)

The chart shows 5 year price performance for 5 high dividend securities as of 2/16/2016.  Net price change is in kind of small print at the right on colored arrows.  Approximate 5 year total yield is indicated by addition of colored up-bars to account for dividends.  Rather than add up the details, which I have challenged my accountant-wife to someday do for us, I approximated them in one of several ways:

  • Unless otherwise noted, 5 times current yield times 0.6 to account for taxes (25%) and somewhat higher current than normal yields due to current low prices (15%).  I might should have multiplied by .5, but this varies and I’m only looking for a relative figure of merit.  Then subtract the current negative 5-year price change from that to get the posted (top) 5 year net performance.
  • For MORL used 25% to start with not the current 34% because it has only been that high about a year.
  • For BP I used .4 instead of .6 because its dividend was low for several years after the Gulf spill.

You can quickly reach four conclusions from this:

  1. HTGC, which is primarily NOT in real estate, is far and away the best.  Don’t go looking for other similar funds, like HRZN, as I have, and none of them are any good.  Caveat: if you bought HTGC in the peak bubble-like periods from mid ’13 to early ’15, you didn’t do so well with it.
  2. MORL is second best, and not nearly as bad as it looks because of very high dividends, but it returns some capital to make its dividends.  This is not in the available data.  You have to not only own it, but then sell it to see the “adjustments” your broker will make to your sales price.  It paid 24% in 2015 but 7% was return of capital, so really it paid 17%, still the highest available, and 2x the typical mortgage REIT just as advertised, such as those in KBWD.  But not 2x AGNC or HTGC.
  3. KBWD, which is sort of the unleveraged version of MORL, is third best but not worth investing in.  You can’t exactly say it captures the worst of the lot, even though it’s tied with AGNC for last place, because this group generally is the 5 best.  We’ll talk about two below that are terrible.  AGNC is not diving at the moment, but KBWD is.
  4. BP will probably recover as oil will probably recover, and will be decent if that happens, but it is not now, and if that happens, it will only have about a 6% dividend as it has historically.  Although, that is still as good as the leader HTGC when accounting for its volatility and capital losses, while BP offers potential cap gains.

Now for the surprises in my wife’s portfolio, which I viewed for the first time in over a year today:

  1. My wife warned me about DCIX a year ago, selling all their ships like they were going out of business.  I sold half mine, then bought it back, now it’s dead in the water.  But my wife did not sell any and held it all the way down.  I could have sworn she told me she sold it.
  2. My wife still had FSC, one of the “bad” financials omitted from the above group which I used to own, but which I abandoned a year ago and warned my friends to get out of.  It has declined steadily and now appears to be dying.
  3. My wife still had RUSL, a leveraged Russia oil/growth ETF that I had before the war in Ukraine and kept holding thinking they’d back off, then held all the way down as Russia balked at agreeing to production cuts and helped OPEC run down the price of oil at the expense of its own economy.  It didn’t seem rational to me.  Markets are NOT rational.  Neither are investors.  My wife, a recent Russian immigrant, held this all the way down also, even though she told me repeatedly they were stupid criminals and it would keep going down.

We both had lots of company on the losers, including some “bright” hedge fund managers on DCIX.  But few analysts recognize any value in MORL, and HTGC hardly ever makes the news as anything unusual.

What to do?  Sell FSC if you can.  Too late for DCIX.  I’m going to hold RUSL but not buy any, and same for MORL.  Accumulations will be in HTGC, since I own plenty of BP.  Write and tell me what you think of this analysis and if you have any better ideas.

P.S. One brilliant move in my wife’s portfolio.  She held on to UPRO, the leveraged version of the S&P 500.  It was up quite a bit despite recent downturn.  I was and am chicken to hold it since over a year ago.

If only terrorists have guns and babies . . .

Or, “The presidental candidates in a nutshell”:

It boils down to an election about who you blame for decline in the middle class:

  1. Sanders blames the rich people and will tax and redistribute (Obama on steroids).
  2. Trump blames foreigners and will erect a wall and an import tax.
  3. Bloomberg blames guns and babies and will try to get rid of both.

The consequences of each are also easy to figure out:

  1. No one will work (the poor people won’t need to, and the rich won’t see any point).  Soon Sanders will figure this out, he’s not stupid just misguided, and will “order” everyone to work.  This works pretty well.  My wife is from Russia and she liked communism better than what came after.  I work for the government so I take orders from them anyway.
  2. The wall and tariffs won’t keep everyone and everything out, but some things, and if you can’t get a job in the new factories that spring up to make whatever is necessary that we import (nothing that I can think of), then you can get a job guarding the wall or collecting the tariffs.
  3. If only terrorists and criminals have guns and babies … you finish the sentence.

While it’s pretty clear all three strategies are flawed, it’s also pretty clear no significant new choices are going to emerge, even if the candidate names change, because all the minor candidates just sort those same concepts in one way or another.

Here’s how the 3-way election will split the electorate:

a. Sanders and Bloomberg will split the Jewish vote.
b. Trump and Bloomberg will split the Billionaire vote (how many are there?).
c. Hispanics and blacks won’t vote for anyone if Hillary is not the nominee.  Sanders hasn’t figured out that foreign countries exist, so he doesn’t have a position on immigration.

It is pretty easy to do the math on that, but if I’m wrong and Bloomberg throws it into the House of Representatives (possibly by carrying New York), then the Tea Party will “do the math.”  Trump has made them mad, but Bloomberg is for gun control, and that will be the “math” that matters.  Don’t blame me.  I don’t own a gun.  Afraid I might shoot myself due to political induced depression.

People are always doing the opposite of what I tell them to do.  So, vote for Sanders.  If you can’t figure out who among the remaining two is the opposite of Sanders and who is like him in most respects, then you won’t be able to find where your polling place is, so don’t worry about it.  Someone competent will decide.  ; )

This post is not religious in nature and is in no way intended as an endorsement of Islamic views about guns and babies, and isn’t meant to imply Bloomberg is anti-Islamic.  But if we had an Islamic candidate who’d do away with LBGT marriage and substitute polygamy, the above analysis would change.  A mortgage banker on the phone today apologized, saying “the government requires that I ask this question,” and then proceeded to ask if I considered myself male or female, and whether my wife considered herself male or female.  It certainly suggests that Obama does not favor Islam.