May 2015 Entry

Hello Again,

 A couple of weeks ago, we reached the 6th birthday of this current bull market.  Prior to the 1929 crash, that bull had a 71 month run.  It is impossible to say how long this bull will keep on running. Since I started writing this letter, I have been careful not to add new recommendations for the simple reason that in this over-valued market, it is very difficult to find good values and furthermore in a bear market, most stocks, including the ones listed here would see a significant decline. The best defense is to keep about 50% of assets in cash even though the interest rate is close to zero. Losing a little for inflation is better than losing a lot in a bear market. With 50% cash, we will have a great opportunity to make money when the market finally goes in to a major correction. 

 In this week’s Barron’s, Ed Yardeni states, “ Valuation remains too high. However it could still go higher. I still see a 30% probability of a global stock market melt up as investors welcome bad news as good news”. When the global central banks take the punch bowl away and start increasing interest rates, we could see a major decline in asset prices. These major trend reversals could come with no prior warnings.  For example, a sudden increase in economic activity might increase the likelihood of the European Central Bank moving away from their current negative interest rates which might end the rapid increase in the dollar. Now through stocks ETFs (i.e. ticker symbol UUP), you can bet on the dollar.

 Right now the put option premiums on the UUP are so cheap because all the pundits see the dollar going up and not down. When the flow of money is reversed, the dollar would go down. At times, it is better to bet against the ‘herd’. I would not be surprised to see wage pressures driving up inflation in the US which would make the US Federal Reserve to increase rates. It is a historical fact that they wait too long to increase so they end up increasing rates more than previously expected. Certain sectors have gone through corrections.

 With respect to oil, it is too risky to get in to oil stocks. The big players will do okay but they seem over-valued.  The expected dividend per share paid out by most of the big oil companies would be less than their expected earnings per share (EPS). Some companies such as Exxon Mobil might not lower or eliminate the dividend but investing in such companies is risky at this time. Even though I do not list it here as a recommendation, I am investing in the commodity itself through the ETF ticker ‘OIL’(on WTI).  I purchased some shares at $10.40 and I doubled by holding when it dropped to $10.10. As some predict, if the WTI drops to $25, then one share of this ETF(OIL) would be worth about $5. If the price of WTI oil remain at $25 for a long time that would only signal a severe global depression and that is very unlikely so if WTI falls to $25 and thereby by the ETF(OIL) drops to $5, I would quadruple my holdings. I might have to wait a couple of years (worst case scenario) but the probability of making a substantial gain is very high.

 Now that we are approaching summer when money managers go on vacation and some believe in ‘sell in May and return in November’, I won’t be surprised to see a correction within the next 2 months. I always keep a few put options on the overall market but the best way to be prepared is to keep 50%of the portfolio in cash.

 Good luck!

 Fernando