The Wise Investor

"The time has come," the Walrus said, "To talk of many things: Of shoes--and ships--and sealing-wax-- Of cabbages--and kings-- And why the sea is boiling hot-- And whether pigs have wings." -Lewis Carroll A bit of whimsy to intrigue our reader this month, and some thoughts on the whimsical ways of the market.  »

Did Barney Frank hint that the U.S. Treasury might not stand behind the nearly $5 Trillion in FRE (Freddie Mac) and FNM (Fannie Mae) RMB bonds at some point in the future? Or was he hinting that the bond holders of roughly $1.6 Trillion of FRE and FNM "agency" debt might have to take a haircut and become the new stock holders? Was he just posturing? We think not. We think he is signaling to the market that it needs to get ready to scramble as the music is about to stop in the TARP debt musical chairs game that the Fed and the U.S. Treasury has been playing for the last year.  »

When you are at the gym, or training for physical competition you hear the phrase "NO PAIN, NO GAIN". The same is true with investing; if you are not willing to risk the pain of watching your portfolio go down you won't get the reward of watching it gain as the market goes up. The key to winning is to stick to a plan. Think of me as your personal financial trainer, and I'm here to keep you on track with your financial plan. I'm here to add discipline to your approach, and shout "BUY" in your ear when the market is going down, and "SELL" when it is going up.  »

So long 2009! In this months addition we will recap the good news we have for our clients, make some final comments on the fiscal disaster that caused so much turmoil in the markets over the last two years, and offer some thoughts on our outlook for 2010.  »

"There's gold in them there hills!" if the hills are the hills of the market. We can't help but note a surprising 20% spike in the last three months in the dollar value of the glittery stuff. Why?  »

Buongiorno d'Italia! For those who may not know, my family and I are lodging in a beautiful villa in Camucia di Cortona, Italy through the end of December. It offers me a unique opportunity to study the foreign markets for my clients and readers. True, there have been some long lunches under a warm Tuscan sun, enjoying the good food, wine, and hilltop vistas, but all strictly for research purposes. I have put my time to good use. I've hiked and searched these dry and dusty hills, leaving no Tuscan stone unturned; hunting through olive groves and grape vineyards to find some nugget of economic insight. The thought that consistently crossed my mind in addition to the scent of wild rosemary, lavender and sage was that the Federal Reserve and U.S. Treasury had finally found a way, after some 30+ years, to WIN (Whip Inflation Now) by letting the dollar deflate against other currencies.  »

August was a welcome gift. Sunny skies and a market that just wanted to go up was a tonic. For those at the beach the ocean was warm and receptive. But my bliss was often short lived as I could not help but think about the sharks that were likely patrolling the water just several hundred yards away in what used to be the shark free waters off Pleasant Bay.  »

Come see our new web site: the-wise-investor.com. It has a new look and feel and we've added three new sections "Investment Ideas", "Our Portfolio", and "Newsletters". In the "Investment Ideas" section we have provided a table of the stocks, ETFs, and mutual funds that we have covered in our monthly newsletter, along with our estimate of the fair value of these securities.  »

Everyone has become accustomed to living in an inflationary environment for so long that it is difficult to imagine what it is like to live through a deflationary period. Simply put, it is a period where the asset side of the national balance sheet shrinks relative to the liability side.  »

We're trying to put a fresh face on our web offerings and soon we will have a new web site. Our new site will offer a few more bells and whistles but more importantly it will have an index of all our newsletters so that you can follow our methodology, advice, and the performance of our model portfolio over time. This month we offer insight into how large investment funds build and manage a portfolio.  »

Large investors, pension funds, endowments, and the like determine the fair value for securities by setting a price that accounts for the possibility of loss. For example, a large fixed income fund with an expected return of 5% will look for a 6% average long term yield when constructing a portfolio of say 100 equally weighted investment grade bonds with an expected net average credit loss rate of 1% over the portfolios' lifetime.  »

The stock market continues to surprise even the most seasoned pros with its volatility. Market participants continue to be hostage to the policy and rhetoric coming out of Washington D.C., and as always the law of unintended consequences continues to cloud the outlook.  »

Undoubtedly, you are painfully aware the stock market has been off by as much as 20% from the beginning of this year and lower by almost 6% since our last letter. By historic measures, using a price/earning ratio constructed from the average of the last five years, the market looks cheap.  »

GE's triple-A credit rating is so important, especially now that it has been threatened by S&P, that it has overshadowed the company's earnings this morning. But really it's high time that GE (GE) lost the rating, which is a throwback to the pre-crisis era. Why?  »