The Long Term Investor

I do get jitters Emmett......but only if I drink too much coffee.

Yes....there is a poll.....the JITTERS SURVEY. It is a government economic indicator. It is at the highest level since 2008/2009.

Actually......"investors" are not the ones selling stocks and causing the market to drop. It is the traders and speculators and big banks playing the markets based on day to day news and other headline events..

 

There are some big numbers in this little real estate article.

Homebuyers are canceling deals at the highest rate since the start of the pandemic

https://www.cnbc.com/2022/07/11/hom...als-at-highest-rate-since-start-of-covid.html

(BOLD is my opinion OR what I consider important content)

"Key Points

• Americans are canceling deals to buy homes at the highest rate since the start of the Covid pandemic.
• The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to a new report from Redfin.
• Homebuilders are also seeing higher cancelation rates.

Americans are canceling deals to buy homes at the highest rate since the start of the Covid pandemic.

The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to a new report from Redfin. That is the highest share since early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago.

Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.

The average rate on the 30-year fixed mortgage started this year around 3% and then began rising steadily. It briefly shot above 6% in mid-June before settling in a narrow range around 5.75% now, according to Mortgage News Daily.

Higher mortgage rates have also caused some borrowers to no longer qualify for the loans they want. Lenders generally use a front-end debt-to-income ratio of about 28% as the ceiling for home loans. The costs of owning a median-priced home in the second quarter required 31.5% of the average U.S. wage, according to a report by Attom, a property data provider. That’s the highest percentage since 2007 and up from 24% the year before, marking the biggest jump in more than two decades.

Buyers are also seeing the once red-hot market turn around quickly and dramatically. They may no longer see the urgency in bidding for a home that they feel might depreciate in the coming year.

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” said Taylor Marr, Redfin’s deputy chief economist. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”

Homebuilders are also seeing higher cancelation rates. Even before the sharpest increase in rates in June, cancelations in May jumped to 9.3% in a survey of builders by John Burns Real Estate Consulting. That compares with 6.6% in May 2021.

“Buyer’s remorse and cancelations shortly after contract are increasing. Builders state buyers are nervous about a potential recession, struggling to get comfortable with higher payments, or expecting home prices to decline,” said Jody Kahn, senior vice president at JBREC. Kahn also noted that in her mid-June survey she continued to see cancelations on the rise.

Lennar, one of the nation’s largest homebuilders, said in its most recent quarterly earnings report that its cancelation rate did increase sequentially to 11.8% but was below its long-term historical average. It also reported increasing its incentives to make up for falling demand, due to rising interest rates.

“It seems that these trends will harden as the Fed continues to tighten until inflation subsides. While we can choose to fight against the trend, the reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments,” said Lennar Chairman Stuart Miller in the release."

MY COMMENT

YES......the real estate markets have changed in the past 2-4 weeks. I can see that it is slower here in my local area. Houses are siting on the market longer before going pending. In the $1MILLION and above market here locally....houses seem to be piling up.

Of course......summer around here tends to be slow. The 100+ degree days are not helping. I notice that many people are not out and about during the day.....probably due to the unrelenting heat we are getting ranging from 100 degrees to 110 degrees every day.

 

I have no plans to sell anything or do anything. As a long term....fully invested all the time investor......I will do nothing in response to the current short term events and environment.

AS USUAL.........HERE is my current PORTFOLIO MODEL.

I am once again posting my PORTFOLIO MODEL. My initial criteria to start the process to consider a business are.......BIG CAP, AMERICAN, DIVIDEND PAYING, GREAT MANAGEMENT, ICONIC PRODUCT, WORLD WIDE LEADER IN THEIR FIELD, LONG TERM HORIZON, etc, etc, etc.

PORTFOLIO MODEL

"Here is my "PORTFOLIO MODEL" for all accounts managed which is the basis for MUCH of my discussion in this thread. I am re-posting this since I often talk in this thread about my portfolio model. My custom in the past on this sort of thread was to re-post my portfolio model every once in a while since I will tend to talk about it once in a while. I "manage" six portfolios for various family including a trust. ALL are set up in this fashion. If I was starting this portfolio today, lets say with $200,000. I would put half the money into the stock side of the portfolio, with an equal amount going into each stock. The other half of the money would go into the fund side of the portfolio, with an equal amount going into each fund. As is my long time custom, I would than let the portfolio run as it wished with NO re-balancing, in other words, I would let the winners run. Over the LONG TERM of investing in this style (at least in my actual portfolios), the stock side seems to reach and settle in at about 59% of the total portfolio and the fund side at about 41% of the total portfolio over time. That is a GOOD THING since it tells me that my stock picks are generally beating the funds over the longer term. AND....since the funds in the account generally meet or beat the SP500, that is a VERY good thing.

As mentioned in a post in this thread, I include the funds in the portfolio as a counter-balance to my investing BIAS and stock picking BIAS and to add a top active management fund that often beats the SP500 (Fidelity Contra Fund) and a SP500 Index Fund to get broad exposure to the best 500 companies in AMERICAN business and economy. The funds also give me broad diversification as a counter-balance to my very concentrated 10 stock portfolio. At the same time the funds double and triple up on my individual stock holdings............that I consider the BEST individual businesses in the WORLD.

STOCKS:

Alphabet Inc
Amazon
Apple
Costco
Home Depot
Honeywell
Microsoft
Nike
Nvidia
Tesla

MUTUAL FUNDS:

SP500 Index Fund
Fidelity Contra Fund

CAUTION: This is a moderate aggressive to aggressive portfolio on the stock side with the small concentration of stocks and the mix of stocks that I hold and with the concentration of big name tech stocks. Especially for my age group. (72). So for anyone considering this sort of portfolio, be careful and consider your risk tolerance and where you are in your life and financial needs. I am able to do this sort of portfolio since my stock market account is NOT needed for my retirement income AND I have a fairly HIGH RISK TOLERANCE. In addition I am a fully invested, all the time, LONG TERM investor. (LONG TERM meaning many years, 5, 10, 20, years or more)"

MY COMMENT

This portfolio is HIGHLY CONCENTRATED on the big cap side of things. OBVIOUSLY between the funds and my ten stock holdings there is MUCH doubling and tripling up on the stocks. THAT is INTENTIONAL. I strongly subscribe to the view of Buffett and some others that TOO MUCH diversification kills returns. I do NOT believe in the current diversification FAD that most people seem to now follow.......or think they are following. I DO NOT do bonds and think the current level of bonds held by younger investors.....those under age 50.....is extremely foolish.I DO NOT do market timing or Technical Analysis.

#11122

 

Did not take me long to look at my account today. EVERY single position was DOWN today. I guess you could call that being in the..........red. I also got beat by the SP500 by 0.81%.

So much for Monday.

 

Here is the markets in hindsight today.

Stock market news live updates: Tech stocks tumble as earnings season approaches

https://finance.yahoo.com/news/stock-market-news-live-updates-july-11-2022-115053784.html

(BOLD is my opinion OR what I consider important content)

"U.S. stocks fell sharply Monday to start the week, led by losses in shares of technology companies as investors braced for the start of earnings season and fresh inflation data due out Wednesday.

The Nasdaq Composite shed 2.3%, and the S&P 500 slid 1.2%. The Dow Jones Industrial Average dipped 160 points, or 0.5%. Monday's moves follow an up week for stocks that saw all three benchmarks log weekly gains despite closing flat after Friday's jobs report.

Meanwhile, the euro tumbled lower, falling closer toward parity with the U.S. dollar. The currency dropped as much as 1.3% to $1.0057, the lowest in two decades, as investors considered the possibility of an energy crisis pushing Europe's economy into a recession.

Twitter (TWTR) was in focus on Monday after Elon Musk backed out of his $44 billion bid for the social media platform late last week. Musk cited "material" breaches of multiple provisions in the agreement in his decision to terminate the deal, including Twitter's recent decision to axe some of its recruiting team and failure to provide Musk with what he views as accurate count on "bots," or fake accounts. Shares closed down 11.3% to $32.65 per share.

“It really isn’t about the bots," Wells Fargo Senior Equity Analyst Brian Fitzgerald told Yahoo Finance Live on Friday. "This is Team Musk articulating for a lower price.”

Meanwhile, oil prices fell Monday amid renewed COVID fears in China that stoked worries around supply. West Texas Intermediate (WTI) crude futures declined by roughly $1, or 1%, to $103.70, partially reversing a 2% gain on Friday. Brent Crude Oil also dipped by roughly 0.3% to $106.71 per barrel.

Investors are in for a bevy of quarterly results this week as major companies kick off a new earnings season.

Early reporters include JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) among the big banks set to release results, as well as PepsiCo (PEP) and Delta Air Lines (DAL).

Wall Street has trimmed its second-quarter bottom-up earnings per share estimate for the S&P 500 by 1.1% between March 31 and June 30, according to recent data from FactSet.

Although the estimated 4.1% annual earnings growth rate for the benchmark index for the second quarter would mark the slowest since year-end 2020, the markdown by analysts is smaller than typically seen ahead of earnings season.

Later this week, investors will get the latest gauge on how quickly consumer prices are rising across the U.S. economy when the Bureau of Labor Statistics' releases its Consumer Price Index (CPI) for June on Wednesday. Economists surveyed by Bloomberg expect headline inflation rose 8.8% last month, an increase that would be the highest since December 1981 and the hottest reading of this current inflation cycle.

"We're expecting another strong inflation print," Deutsche Bank Chief U.S. Economist Matthew Luzzetti told Yahoo Finance Live on Mnday. "For a market that's been dealing with certainly recession fears, I think this week will be renewed fears about elevated inflation.""

MY COMMENT

Here come earnings.......watch out below. Looks like investors are JITTERY and BRACING.

I noticed that......former......inflation hedges, gold and silver.........are way down from their highs right now. Silver is toward the low end of the $19 range and gold is down in the $1700's. BUMMER. But....does anyone hold metal anymore? I doubt it......Bitcoin is now the speculator vehicle of choice as a "pretend" inflation hedge.

 

This is an interesting......and......cautionary tale.

From $10 billion to zero: How a crypto hedge fund collapsed and dragged many investors down with it

https://www.cnbc.com/2022/07/11/how...ows-or-3ac-dragged-down-crypto-investors.html

(BOLD is my opinion OR what I consider important content)

"Key Points

• The bankruptcy filing from Three Arrows Capital (3AC) triggered a downward spiral that wrapped in many crypto investors.
• The hedge fund failed to meet margin calls from its lenders.
• “3AC was supposed to be the adult in the room,” said Nik Bhatia, professor of finance and business economics at the University of Southern California.

As recently as March, Three Arrows Capital managed about $10 billion in assets, making it one of the most prominent crypto hedge funds in the world.

Now the firm, also known as 3AC, is headed to bankruptcy court after the plunge in cryptocurrency prices and a particularly risky trading strategy combined to wipe out its assets and leave it unable to repay lenders.

The chain of pain may just be beginning. 3AC had a lengthy list of counterparties, or companies that had their money wrapped up in the firm’s ability to at least stay afloat. With the crypto market down by more than $1 trillion since April, led by the slide in bitcoin and ethereum, investors with concentrated bets on firms like 3AC are suffering the consequences.

Crypto exchange Blockchain.com reportedly faces a $270 million hit on loans to 3AC. Meanwhile, digital asset brokerage Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC couldn’t pay back the roughly $670 million it had borrowed from the company. U.S.-based crypto lenders Genesis and BlockFi, crypto derivatives platform BitMEX and crypto exchange FTX are also being hit with losses.

“Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” said Nic Carter, a partner at Castle Island Ventures, which focuses on blockchain investments.

Three Arrows’ strategy involved borrowing money from across the industry and then turning around and investing that capital in other, often nascent, crypto projects. The firm had been around for a decade, which helped give founders Zhu Su and Kyle Davies a measure of credibility in an industry populated by newbies. Zhu also co-hosted a popular podcast on crypto.

“3AC was supposed to be the adult in the room,” said Nik Bhatia, a professor of finance and business economics at the University of Southern California.

Court documents reviewed by CNBC show that lawyers representing 3AC’s creditors claim that Zhu and Davies have not yet begun to cooperate with them “in any meaningful manner.” The filing also alleges that the liquidation process hasn’t started, meaning there’s no cash to pay back the company’s lenders.

Zhu and Davies didn’t immediately respond to requests for comment.

Tracing the falling dominoes

The fall of Three Arrows Capital can be traced to the collapse in May of terraUSD (UST), which had been one of the most popular U.S. dollar-pegged stablecoin projects.

The stability of UST relied on a complex set of code, with very little hard cash to back up the arrangement, despite the promise that it would keep its value regardless of the volatility in the broader crypto market. Investors were incentivized — on an accompanying lending platform called Anchor — with 20% annual yield on their UST holdings, a rate many analysts said was unsustainable.





“The risk asset correction coupled with less liquidity have exposed projects that promised high unsustainable APRs, resulting in their collapse, such as UST,” said Alkesh Shah, global crypto and digital asset strategist at Bank of America.

Panic selling associated with the fall of UST, and its sister token luna, cost investors $60 billion.

“The terraUSD and luna collapse is ground zero,” said USC’s Bhatia, who published a book last year on digital currencies titled “Layered Money.” He described the meltdown as the first domino to fall in a “long, nightmarish chain of leverage and fraud.”

3AC told the Wall Street Journal it had invested $200 million in luna. Other industry reports said the fund’s exposure was around $560 million. Whatever the loss, that investment was rendered virtually worthless when the stablecoin project failed.

UST’s implosion rocked confidence in the sector and accelerated the slide in cryptocurrencies already underway as part of a broader pullback from risk.

3AC’s lenders asked for some of their cash back in a flood of margin calls, but the money wasn’t there. Many of the firm’s counterparties were, in turn, unable to meet demands from their investors, including retail holders who had been promised annual returns of 20%.

“Not only were they not hedging anything, but they also evaporated billions in creditors’ funds,” said Bhatia.

Peter Smith, the CEO of Blockchain.com said last week, in a letter to shareholders viewed by CoinDesk, that his company’s exchange “remains liquid, solvent and our customers will not be impacted.” But investors have heard that kind of sentiment before — Voyager said the same thing days before it filed for bankruptcy.

Bhatia said the cascade hits any player in the market with significant exposure to a deteriorating asset and liquidity crunch. And crypto comes with so few consumer protections that retail investors have no idea what, if anything, they’ll end up owning.

Customers of Voyager Digital recently received an email indicating that it would be a while before they could access the crypto held in their accounts. CEO Stephen Ehrlich said on Twitter that after the company goes through bankruptcy proceedings, customers with crypto in their account would potentially receive a sort of grab bag of stuff.

That could include a combination of the crypto they held, common shares in the reorganized Voyager, Voyager tokens and whatever proceeds they’re able to get from 3AC. Voyager investors told CNBC they don’t see much reason for optimism."

MY COMMENT

The....."adult in the room"......became the elephant in the room. Of coarse they were also found out to be the emperor with no cloths......since practically NOTHING was hedged.

This is the trouble with "investing" in an illusory item that has nothing physical to back it up and does really exist. There is nothing in the way of a store of value in Crypto. To make things worse....you have funds like this one that are using extreme leverage to deal in an illusory asset. A recipe for disaster. These hedge fund guys are always so brilliant.......until they are not.

 

File this under......."Gee, who could have ever anticipated this".

Europe on high alert as Russia temporarily halts gas flows via major pipeline

https://www.cnbc.com/2022/07/11/eur...own-as-russia-halts-gas-flows-to-germany.html

"Key Points

• Operator Nord Stream AG confirmed the maintenance work, which is scheduled to run from Monday through to July 21, got underway as planned on Monday morning.
• Russian gas flows to Germany are expected to drop to zero later in the day.
• Klaus Mueller, the head of Germany’s energy regulator, believes the Kremlin may continue to throttle Europe’s energy supplies beyond the scheduled end of the maintenance works.

Europe is bracing for an extended shutdown of Russian gas supplies as maintenance work begins on the Nord Stream 1 pipeline that brings gas to Germany via the Baltic Sea.

Operator Nord Stream AG confirmed the work, which is scheduled to run from Monday through to July 21, got underway as planned Monday morning. Russian gas flows via the pipeline are expected to drop to zero later in the day.

The Nord Stream 1 pipeline is Europe’s single biggest piece of gas import infrastructure, carrying around 55 billion cubic meters of the fuel per year from Russia to Germany.

Europe fears the suspension of deliveries could be extended beyond the 10-day timeline, derailing the region’s winter supply preparations and exacerbating a gas crisis that has prompted skyrocketing energy bills for households and emergency measures from policymakers.

It comes as European governments scramble to fill underground storage with gas supplies to provide households with enough fuel to keep the lights on and homes warm during winter.

The EU, which receives roughly 40% of its gas via Russian pipelines, is trying to rapidly reduce its reliance on Russian hydrocarbons in response to President Vladimir Putin’s monthslong onslaught in Ukraine.

Klaus Mueller, the head of Germany’s energy regulator, believes the Kremlin may continue to throttle Europe’s energy supplies beyond the scheduled end of the maintenance work.

“We cannot rule out the possibility that gas transport will not be resumed afterwards for political reasons,” Mueller told CNBC last week.

Energy analysts agree that the risk of a temporary interruption is high, particularly as Russian gas flows have already dropped by about 60% in recent months.

Russia’s state-backed energy giant Gazprom has cited the delayed return of equipment serviced by Germany’s Siemens Energy in Canada for its reduced flows.

Canada said over the weekend that it would return a repaired gas turbine back to Germany for use in the Nord Stream 1 pipeline, while also expanding the sanctions against Russia’s energy sector.

Russia said last week that it would increase gas supplies to Europe if the turbine being serviced in Canada was returned. Kremlin spokesperson Dmitry Peskov also dismissed claims that Russia was using oil and gas to exert political pressure over Europe, Reuters reported.

‘Maximum economic warfare’

Analysts at political risk consultancy Eurasia Group said that if Putin orchestrated a total cutoff of gas supplies beyond the scheduled end of maintenance works on the Nord Stream 1 pipeline, Germany would likely be forced to move to level three of its three-stage emergency gas plan.

At this level, Germany’s regulator, Bundesnetzagentur, would need to decide how to distribute gas supplies nationwide.

Henning Gloystein, director of energy, climate and resources at Eurasia Group, told CNBC that such a move would represent a “maximum economic warfare” scenario.

“Germany has become a hotspot for the entire EU,” Gloystein said. “Germany has Europe’s biggest population, it’s the biggest economy, it’s the biggest gas consumer, it’s the biggest single importer of Russian gas, and it has got nine land borders. So, whatever happens in Germany spills into the rest of Europe.”

Russia has cut off gas supplies to several European countries that refused to comply with Putin’s gas-for-rubles payment demand.

“That is actually why though … we think Russia will return a little bit,” Gloystein said. “They want a little bit of a bargaining chip in case the Europeans tighten the sanctions further so then the Russians can retaliate with that.”

A spokesperson for Germany’s Federal Ministry of Economics and Climate Action told CNBC last week that the government was closely monitoring the gas market situation ahead of the scheduled maintenance work.

“Security of supply is currently still guaranteed, but the situation is serious,” the spokesperson said.

“At present, the quantities can be procured on the market, albeit at high prices. Storage is also continuing at present. We are in close exchange on this with the traders, who are preparing for this date,” they added."

MY COMMENT

It is so simple......these people in Germany are....DELUSIONAL MORONS. They are getting exactly what they deserve. Will they wake up going forward.........NO. The EU with the exception of Poland and Hungary and perhaps a few others that embrace CAPITALISM......are a tired old joke.

 

Poor small business. They are took the brunt of the pandemic and now they are getting hammered by the jobs market, rising wages, and lack of workers willing to actually work. They are the DISRESPECTED guts to the USA economy.

US Small Business Sentiment Near 9-1/2-year Low

https://www.newsmax.com/finance/str...t-biden-administration/2022/07/12/id/1078356/

(BOLD is my opinion OR what I consider important content)

"U.S. small-business confidence dropped to the lowest level in nearly 9-1/2 years in June amid concerns about inflation, but demand for labor remained solid as businesses continued to grow their operations, a survey showed on Tuesday.

The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 3.6 points last month to 89.5, the lowest level since January 2013. Thirty-four percent of owners said that inflation was their biggest single problem in running their business, an increase of six points from May and the highest level since the fourth quarter of 1980.

Consumer prices are surging, driven by snarled global supply chains and massive fiscal stimuli from governments early in the COVID-19 pandemic, with the annual U.S. CPI increasing at a rate last seen in the early 1980s. The situation has been worsened by Russia's dragging war against Ukraine, which has caused a spike in food and fuel prices across the world.

Soaring inflation has forced the Federal Reserve to adopt an aggressive monetary policy, putting the economy on a recession watch. The U.S. central bank has raised its policy rate by 150 basis points since March. It is expected to hike its overnight interest rate by another 75 basis points this month.

The higher borrowing costs and worries about a recession have not slowed demand for labor.

The NFIB survey showed 50% of owners reported job openings they could not fill in June, down a point from May's reading, which tied the previous record high. The vacancies were for both skilled and unskilled labor, with worker shortages most severe in the construction, manufacturing and services industries.

"The persistence of record high levels of unfilled openings indicates that owners are still seeing opportunities to grow their business, in spite of their negative outlook for the future," said NFIB chief economist William Dunkelberg.

Solid demand for labor, which was underscored by stronger-than-expected job growth in June, raises hope that any economic downturn will be short and mild.

Despite concerns about an inventory bloat, small businesses are not done restocking, with the survey finding that "a significant amount of what they want sits frustratingly just off the coasts or in containers waiting for transport.""

MY COMMENT

As a small business owner for 20+ years I understand what these people are going through. My business was extremely successful allowing me to retire at a very young age. BUT.....the majority of small businesses are simply providing a living to the owners. I understand the small business world. Many small business owners are simply buying themselves a job. It is a tough way to make a normal living for most. The failure rate is spectacularly high.....even in the best of times.

At the same time these businesses are the real guts of the USA economy. It is a shame that the small businesses and their owners are so disrespected by the country.

 

HUMANS have an inherent ability to get sucked into fantasy in the investing world. We have a great capacity to fool ourselves. Here is some rare.....but.....very necessary advice for would-be investors.

On bullshit in investing

https://noahpinion.substack.com/p/on-bullshit-in-investing

(BOLD is my opinion OR what I consider important content)

"The epic crash in stocks and crypto has been the big financial story of 2022. When the Fed raised rates, it exposed a lot of bad investments — as Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked.” But it would be nice if investors could recognize the too-good-to-be-true stuff before the big crash, so as not to over-expose themselves in the first place.

Benn Eifert knows a bit about recognizing bullshit in the investing world. He’s the managing partner at QVR Advisors, a San Francisco-based hedge fund. Tweeting from his account at @bennpeifert, Benn has also recently become a star of financial Twitter (or “fintwit”, as it’s known), dispensing a mix of humor, technical knowledge, and criticism of popular investing hype. In this guest post, he focuses on the latter, sparing no criticism for the stars of the recent boom-and-bust.

The opinions expressed here do not necessarily reflect the opinions of QVR Advisors.

“What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short-sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that?” — Mark Baum, The Big Short

“Well of course they're trying to screw you! What do you think? That's what they do. They can make up anything; nobody knows! "Why, well you need a new Johnson rod in here." Oh, a Johnson rod. Yeah, well better put one of those on!” — George Costanza, Seinfeld

The investing industry is ridden with bullshit. The most common and insidious form is over-optimism: offers of tantalizing risk/reward that defy any notion of reality, often based on misinformation or deception. Less common but even more dangerous are outright frauds.

The problem is inherent to the product. Most consumer goods – apples, hotel rooms, laptop computers – are tangible objects or services that you can see, taste, feel, or experience, so you can judge how much they are worth to you. Investments represent claims about some future probability distribution of monetary outcomes which are not literally verifiable. The best an investor can do is form a reasonable judgment about the uncertainty around those claims, based on historical evidence and details about the mechanics of how those claimed outcomes are generated.

The packages can be familiar, fresh, or exclusive. Highly speculative futuristic investments are wrapped in ETFs or SPACs. Ponzi schemes are dressed up as sophisticated options strategies (Madoff) or technological revolution (Terra/Luna). Sophisticated institutional hedge funds masquerade as arbitrage when they simply sell catastrophe insurance. Both retail and institutional investors are targets.

The lines between over-optimism, deception, and fraud are not always bright, and investment schemes can move slowly between those categories over time. Common red flags include:

• Projected returns far above historical equity returns
• Claims of returns significantly exceeding bond yields with little or no risk
• Extrapolation of recent extreme investment performance into the future
• Overly complex investments with non-transparent sources of return
• Perverse incentives for the people selling the investment

Bad actors’ tactics are sophisticated and rooted in psychology. They dangle the prospect of wealth and riches (“phantom fixation”). They launder credibility: legitimization via the backing of authoritative figures. They use social consensus and group psychology to normalize ideas and narratives and pressure people to stop asking questions. They use scarcity or immediacy as a pressure tool (you’re about to miss the big returns; the fund is about to close; ngmi). These are just a few of the techniques uncovered by the Consumer Fraud Research Group undercover investigation of sales transcripts.[1] The FINRA Investor Education Foundation promotes basic diligence hygiene: learn to recognize red flags, know which questions to ask, and independently verify answers.

Over-optimistic, deceptive or fraudulent investments are over-concentrated in areas of new technology. New technologies are characterized by their uncertainty of success. This requires selling potential investors a narrative about future possibilities as opposed to visible cash flows. That is natural! By definition any novel disruptive technology lacks a track record. Investors who avoid innovative technologies altogether because of this ambiguity ignore the inevitability of change.

However, this inherently ambiguous futurism also lends itself to bad behavior. For example, mutual fund manager Cathie Wood claimed that ARKK’s research showed imminent breakthroughs in artificial general intelligence could accelerate GDP growth from 3-5% per year to 30-50% per year.[2] This is preposterous; the fastest sustained economic growth rates in any country in history are closer to 10%, or close to half that for advanced industrialized nations. Meanwhile, she projected compound rates of return over 50% for her portfolio of popular speculative technology companies, presumably in part based on research like that AGI bit. For a five-year period this implies a 7.6x gain, wildly implausible on an ex-ante basis. This is an example of wild over-optimism and misleading or deceptive investor information. Her mutual funds have generated hundreds of millions of dollars of risk-free fee income for herself while destroying billions of dollars of investor capital in abysmal dollar-weighted returns. Meanwhile, investor inflows into ARKK have continued at a rapid pace.

Another recent example is the explosion of special purpose acquisition vehicles (SPACs). These are perverse financial structures that enable their sponsors and bankers to sell a company to public market investors and walk away with millions of dollars from the promotion fee and merger fees, even if the investment itself performs terribly and the subsequent investors lose most or all their money. SPACs can merge with dubious companies like Nikola Motors, whose prototype electric truck was famously filmed rolling downhill in its promotional video, despite the CEO’s claims that it was fully functional.[3]

Importantly, SPACs allow their promoters to sell shares to investors without the onerous restrictions on making wild financial projections before a traditional IPO. Research published this year found that SPACs project revenue growth at three times the rate of similar IPOs and public companies, at the 97th percentile of actual realized growth among those comps, and then mostly stop making projections altogether after the merger.[4] Chamath Palihapitiya famously used SPACs as the exit liquidity vehicle for his venture capital investments, promoting them as “democratizing access to high-growth companies”. Meanwhile investors who provided the exit liquidity have lost most of their money as his post-merger SPAC share prices collapsed.

Add a new red flag to the list: use of anti-establishment language combined with selling something. This is a common tool used to manipulate ordinary investors who feel left out of Wall Street’s riches. Never trust a “democratizing X” investment pitch: they’re looking for new marks.

Speaking of [air quotes] democratization.

The nascent cryptocurrency industry is another area bursting with hype around interesting technologies. Again fertile ground for widespread deception and fraud. Algorithmic stablecoins paying eye-watering yields had all the classic red flags. TerraUSD offered 20% returns on a coin pegged to the dollar (and therefore optically low risk), via protocols like Anchor or startups like Stablegains. The protocols ostensibly created revenue to pay this yield via lending out the funds to eager borrowers. However, the demand for loans was much lower than the demand to invest at 20% yield, and the lending interest rate was much lower. In practice, the returns paid out to people exiting the protocol had to come from new inflows at an ever-increasing rate, in a classic Ponzi structure.

It should be self-evident that a 20% low-risk investment return cannot exist. The marketing machine around Terra/Luna deployed the standard playbook, on steroids. Widely followed financial promoters like Raoul Pal of RealVision described the protocol as essentially risk-free.[5] The white paper for the Anchor protocol was written by Marco Di Maggio, a Harvard Business School professor, who purported to use complex mathematical simulations to show how Anchor was robust.[6] Stablegains, a Silicon Valley startup that invested in DeFi tokens and stablecoins, was backed by Y Combinator, one of the most recognizable brands in technology.[7]

Countless other protocols have offered stratospheric yields explained by complex schematic diagrams. Understand this: yield has to come from somewhere. If you can’t understand in simple terms where yield comes from, what risk you are being compensated for bearing, then the yield is likely not sustainable. It rests on temporary venture capital subsidies or from inflows into the protocol from other investors. As the recent crypto crash reminds us, one common source of yield is lending at high interest rates to other crypto investors for leverage. This is “real”, but is it sustainable, or does it require extrapolating past explosive returns in crypto into the future?

Bullshit investments are not only pushed to retail. Large institutional investors have shown repeated vulnerability to slick pitches. The flavor of deception may vary since the diligence committees are more sophisticated, but the red flags are familiar, albeit more subtle, typically relying on complexity to obscure the fraud.

Madoff, the patron saint of audacious fraud, claimed to be involved in complex option-based arbitrage strategies. His stated returns were very consistent, around 20% per year, on tens of billions of dollars, completely unfathomable to any professional derivatives manager. The size and scale of his supposed trading activities were huge, yet no one on Wall Street was trading with his firm, nor custodying his assets. This type of outright Ponzi scheme became more difficult in the institutional landscape after Madoff, as investors increased their operational due diligence standards. Such deception and fraud, urges as reliable as the ocean’s tides, would find more subtle forms.

The Allianz Structured Alpha funds managed tens of billions of dollars of money on behalf of conservative pension funds and foundations. They ran a complicated option-selling investment strategy purported to produce equity-like returns with low risk, hedged against a market crash. The strategy generated considerably higher total returns than any comparable limited-loss option selling strategy like the CBOE CNDR Index. It turned out they were using leverage and simply lying about buying insurance against a market crash while providing doctored risk reports to investors and management. The fuse was lit. They blew up spectacularly in March 2020.[8] The key warning was a complex strategy delivering much better results than reasonably expected based on its description, without performance attribution data that could possibly have been reconciled. The most unsettling part of this horror story was how such a large scale deception could occur under the nose of trusted brand-name asset management firms.

InfinityQ is yet another recent example of sophisticated fund managers duping investors with complex, non-transparent strategies. The firm was involved in the trading of highly complex exotic derivatives with banks, and had both hedge fund and mutual fund products. The types of “risk transfer” trades the firm was known for in the derivatives community – geometric dispersion baskets, corridor variance swap spreads, skew locks – would have typically been expected to lose money during periods of market stress, but reported performance was always strong and consistent. Investors took comfort that David Bonderman’s family office had incubated the firm. It turned out that CIO James Velissaris manipulated computer code in internal valuation models, lied about independent third-party valuation, and forged documents for fund administrators and auditors to avoid discovery.[9] The funds were liquidated in 2021 at a massive loss to investors. Here the red flags were a highly complex and nontransparent investment strategy, which was understood by those in the space to have significant short volatility characteristics, with a track record that was far too consistent.

Bullshit in investing, be it wild over-optimism, deception or fraud, is as old as time, precisely because it is hard to resist the promise of easy returns and to tell the difference between innovation and make-believe.

• The first step in avoiding being taken for a ride is to recognize that you are a mark for people trying to get rich off your money.
• Burn the principle into your brain that financial markets are large and competitive and have a lot of smart people in them.
• Easy money-making opportunities are almost never real; professional mercenaries would have found and exploited them first.
• High returns with low risk explained away by complicated and nontransparent strategies deserve great scrutiny.
• On the institutional side, keep in mind that the world is a relatively small place and tremendous value can be gleaned by asking the views of people close to a particular market or strategy.
• Ask questions; be skeptical; do not assume that just because brand-name firms or authority figures are involved that all is well."

MY COMMENT

The investment landscape is littered with the bones of the next great thing. The human brain will try to trick you into fantasy and fraudulent schemes. Very smart people get sucked into these schemes all the time. No one is immune to this stuff.

My rule is......if you cant understand how the business or investment works and makes money.....DO NOT INVEST in it. If the returns are too good to be true....do not invest. If it seems too easy......do not invest.

This is why I dont invest in anything but the most ICONIC businesses in the world. Absolutely proven entities.

 

NICE......the Ten Year Yield is back below 3% today. And......the markets are mixed. After a day like yesterday......over the first six months of the year......we would no doubt see a badly down week. I consider the vaguely mixed markets today as a good sign.

It is also a good sign that.....with the expectations for a bad inflation report tomorrow.....the markets are trying to be positive today.

As has been the case often lately.......it will be about mid day when we find out what direction the markets are going to actually take.

All in all the market action that we have seen over the past 4 weeks is a nice early indicator that we....."might".....have reached the point where most of the big losses are over with. That does not mean that the bear market is over. I still see potential for another 10-15% on the down side. Compared to what we were seeing for the first six months of the year......that is STABILITY and a good thing.

 

On the same topic as the post just above.

Some beaten-down tech stocks are now 'outright cheap': JPMorgan

https://finance.yahoo.com/news/some...e-now-outright-cheap-jp-morgan-131138742.html

(BOLD is my opinion OR what I consider important content)

"Some battered tech stocks could finally be worth a nibble based on attractive valuations, strategists at JPMorgan argued in a recent note.

"On the price-to-sales metric, non-profitable tech is closer to outright cheap territory, as are payments, after being at record highs a year ago," JPMorgan strategist Mislav Matejka said in a new note to clients.

The call comes inside of a broader short-term — or "tactical," as JPMorgan refers to it as — view on beaten up growth stocks out of Matejka's team. Matejka thinks it's time, at least in the short-term, for growth stocks to show better performance relative to value pockets of the market.

"Bond yields could be more range bound from here over the next few months, rather than upward moving," Matejka wrote. "As the activity dataflow moves closer to contraction territory, the Fed could end up more balanced in their messaging, point of peak hawkishness would have been passed. We note that the gap between breakevens and bond yields has closed now. Unless oil price spikes again, inflation forwards could settle. The upward repricing of nominal bond yields, and the move in real rates from -100 basis points to +50 basis points, was a constraint for the valuations of the long duration part of the market, but that could temporarily ease."

To be sure, growthier areas of the market have been among the hardest hit amidst the bear market in stocks this year.

This reflects investors betting on higher interest rates from Federal Reserve, which has the corresponding effect of cutting valuations and discounting future growth.

The Vanguard Growth Index Fund — which counts growth companies such as Microsoft (MSFT), Amazon (AMZN), and Meta (META) among top 10 holdings — has dropped 28% year to date. By comparison, the S&P 500 is down 19% on the year.

Once growth darlings such as Netflix (NFLX) and Roku (ROKU) have plunged 70% and 61% on the year, respectively. Cathie Wood's ARK Innovation ETF (ARKK), is down over 50% this year.

Investors in turn have rotated into perceived value plays, or companies seen as having more predictable cash flows and relatively low valuations.

The Vanguard Value Index Fund — which has top value names Berkshire Hathaway (BRK-B) and JPMorgan (JPM) as its top two holdings — is only down 9% on the year amid the thirst for value.

Not everyone on the Street is on board with picking at beat-up growth stocks, however.

"I would say that you need to look at value-based equities, organizations generating cash flow closer to today versus out into the future,""

MY COMMENT

The drop in companies that are in the top 25 to 50 companies of the SP500 in market cap is way over-done. Companies like Microsoft, Amazon, Google, Nike, Apple, etc, etc, etc. These companies are the backbone of the economy of the entire world. It is just RIDICULOUS how these companies have been punished over the last six months. It is fantasy that these cash machines are subject to business turmoil due to raising interest rates.

I am invested all the time.....fully. BUT......if I was not......I would be glad to pour money into any of these types of ICONIC stocks for the long term at these cheap levels.

 

As I have been typing and reading I notice that now the markets have turned positive for the day. An amazing result considering the day we had yesterday and the economic inflation data that is going to release tomorrow. there is a lot of resistance to going down in the markets right now.....in spite of the general direction of the markets still being negative.